83410 Regional Profile: Latin America Doing Business 2014 LATIN AMERICA 2 © 2013 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org All rights reserved. 1 2 3 4 15 14 13 12 A copublication of The World Bank and the International Finance Corporation. This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Doing Business 2014: Understanding Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9615-5. License: Creative Commons Attribution CC BY 3.0 Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Additional copies of all 11 editions of Doing Business may be purchased at www.doingbusiness.org. Cover design: The Word Express Doing Business 2014 LATIN AMERICA 3 CONTENTS Introduction .................................................................................................................................. 4 The business environment .......................................................................................................... 5 Starting a business ..................................................................................................................... 12 Dealing with construction permits........................................................................................... 22 Getting electricity ....................................................................................................................... 30 Registering property .................................................................................................................. 37 Getting credit .............................................................................................................................. 45 Protecting investors ................................................................................................................... 50 Paying taxes ................................................................................................................................ 57 Trading across borders .............................................................................................................. 66 Enforcing contracts .................................................................................................................... 77 Resolving insolvency .................................................................................................................. 84 Data notes ................................................................................................................................... 90 Resources on the Doing Business website .............................................................................. 95 Doing Business 2014 LATIN AMERICA 4 INTRODUCTION Doing Business sheds light on how easy or difficult it is current as of June 1, 2013 (except for the paying taxes for a local entrepreneur to open and run a small to indicators, which cover the period January–December medium-size business when complying with relevant 2012). regulations. It measures and tracks changes in The Doing Business methodology has limitations. Other regulations affecting 11 areas in the life cycle of a areas important to business—such as an economy’s business: starting a business, dealing with construction proximity to large markets, the quality of its permits, getting electricity, registering property, infrastructure services (other than those related to getting credit, protecting investors, paying taxes, trading across borders and getting electricity), the trading across borders, enforcing contracts, resolving security of property from theft and looting, the insolvency and employing workers. transparency of government procurement, In a series of annual reports Doing Business presents macroeconomic conditions or the underlying strength quantitative indicators on business regulations and the of institutions—are not directly studied by Doing protection of property rights that can be compared Business. The indicators refer to a specific type of across 189 economies, from Afghanistan to Zimbabwe, business, generally a local limited liability company over time. The data set covers 47 economies in Sub- operating in the largest business city. Because Saharan Africa, 33 in Latin America and the Caribbean, standard assumptions are used in the data collection, 25 in East Asia and the Pacific, 25 in Eastern Europe comparisons and benchmarks are valid across and Central Asia, 20 in the Middle East and North economies. The data not only highlight the extent of Africa and 8 in South Asia, as well as 31 OECD high- obstacles to doing business; they also help identify the income economies. The indicators are used to analyze source of those obstacles, supporting policy makers in economic outcomes and identify what reforms have designing regulatory reform. worked, where and why. More information is available in the full report. Doing This regional profile presents the Doing Business Business 2014 presents the indicators, analyzes their indicators for economies in Latin America. It also relationship with economic outcomes and shows the regional average, the best performance recommends regulatory reforms. The data, along with globally for each indicator and data for the following information on ordering the Doing Business 2014 comparator regions: Caribbean States, East Asia and report, are available on the Doing Business website at the Pacific (EAP), European Union (EU), South Asia (SA) http://www.doingbusiness.org. and OECD High Income. The data in this report are Doing Business 2014 LATIN AMERICA 5 THE BUSINESS ENVIRONMENT For policy makers trying to improve their economy’s The ranking on each topic is the simple average of regulatory environment for business, a good place to the percentile rankings on its component start is to find out how it compares with the indicators (see the data notes for more details). regulatory environment in other economies. Doing The aggregate ranking on the ease of doing Business provides an aggregate ranking on the ease business benchmarks each economy’s of doing business based on indicator sets that performance on the indicators against that of all measure and benchmark regulations applying to other economies in the Doing Business sample domestic small to medium-size businesses through (figure 1.1). While this ranking tells much about their life cycle. Economies are ranked from 1 to 189 the business environment in an economy, it does by the ease of doing business index. For each not tell the whole story. The ranking on the ease of economy the index is calculated as the ranking on the doing business, and the underlying indicators, do simple average of its percentile rankings on each of not measure all aspects of the business the 10 topics included in the index in Doing Business environment that matter to firms and investors or 2014: starting a business, dealing with construction that affect the competitiveness of the economy. permits, getting electricity, registering property, Still, a high ranking does mean that the getting credit, protecting investors, paying taxes, government has created a regulatory environment trading across borders, enforcing contracts and conducive to operating a business. resolving insolvency. Figure 1.1 Where economies stand in the global ranking on the ease of doing business Source: Doing Business database. Doing Business 2014 LATIN AMERICA 6 THE BUSINESS ENVIRONMENT For policy makers, knowing where their economy stands regional average (figure 1.2). Another perspective is in the aggregate ranking on the ease of doing business is provided by the regional average rankings on the topics useful. Also useful is to know how it ranks compared with included in the ease of doing business index (figure 1.3). other economies in the region and compared with the Figure 1.2 How economies in Latin America rank on the ease of doing business *The economy with the best performance globally is included as a benchmark. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 7 THE BUSINESS ENVIRONMENT Figure 1.3 How Latin America ranks on Doing Business topics Regional average ranking Source: Doing Business database. Doing Business 2014 LATIN AMERICA 8 Figure 1.4 How far has Latin America come in the areas measured by Doing Business? Note: The distance to frontier measure shows how far on average a region is from the best performance achieved by any region on each Doing Business indicator since 2005, except for the getting electricity indicators, which were introduced in 2009. The measure is normalized to range between 0 and 100, with 100 representing the best performance (the frontier). The overall distance to frontier is the average of the distance to frontier in the first 9 indicator sets shown in the figure and does not include getting electricity. Data on the overall distance to frontier including getting electricity is available at http://www.doingbusiness.org/data/distance-to-frontier. See the data notes for more details on the distance to frontier measure. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 9 THE BUSINESS ENVIRONMENT Just as the overall ranking on the ease of doing more significant impact as measured by Doing business tells only part of the story, so do changes in Business. that ranking. Yearly movements in rankings can The absolute values of the indicators tell another part provide some indication of changes in an economy’s of the story (table 1.1). Policy makers can learn much regulatory environment for firms, but they are always by comparing the indicators for their economy with relative. An economy’s ranking might change because those for the lowest- and highest-scoring economies of developments in other economies. An economy that in the region as well as those for the best performers implemented business regulation reforms may fail to globally. These comparisons may reveal unexpected rise in the rankings (or may even drop) if it is passed strengths in an area of business regulation—such as a by others whose business regulation reforms had a regulatory process that can be completed with a small number of procedures in a few days and at a low cost. Table 1.1 Summary of Doing Business indicators for Latin America Lowest regional Best regional Best global Indicator Regional average performance performance performance Starting a Business 181 (Suriname) 25 (Panama) 121 1 (New Zealand) (rank) Procedures (number) 17 (Venezuela, RB) 5 (3 Economies*) 10 1 (New Zealand)* Time (days) 208.0 (Suriname) 6.0 (Mexico)* 45.2 1.0 (New Zealand) Cost (% of income per 107.7 (Suriname) 4.6 (Brazil) 34.7 0.0 (Slovenia) capita) Paid-in Min. Capital (% 19.6 (Guatemala) 0.0 (12 Economies*) 2.6 0.0 (112 Economies*) of income per capita) Dealing with 1 (Hong Kong SAR, Construction Permits 181 (Argentina) 16 (Belize) 90 China) (rank) 6 (Hong Kong SAR, Procedures (number) 24 (Argentina)* 8 (3 Economies*) 14 China) Time (days) 400.0 (Brazil) 54.0 (Colombia) 187.1 26.0 (Singapore) Cost (% of income per 414.9 (Guatemala) 10.7 (Suriname) 156.4 1.1 (Qatar) capita) Getting Electricity 167 (Venezuela, RB) 14 (Brazil) 87 1 (Iceland) (rank) Procedures (number) 8 (4 Economies*) 4 (3 Economies*) 6 3 (10 Economies*) Time (days) 158 (Venezuela, RB) 33 (Honduras) 72 17 (Germany) Cost (% of income per 1,133.7 (Venezuela, RB) 10.3 (Panama) 478.4 0.0 (Japan) capita) Doing Business 2014 LATIN AMERICA 10 Lowest regional Best regional Best global Indicator Regional average performance performance performance Registering Property 173 (Suriname) 22 (Peru) 100 1 (Georgia) (rank) Procedures (number) 14 (Brazil) 4 (Peru)* 7 1 (4 Economies*) Time (days) 107.0 (Suriname) 6.5 (Peru) 46.0 1.0 (New Zealand)* Cost (% of property 13.7 (Suriname) 0.8 (Guatemala) 4.3 0.0 (5 Economies*) value) Getting Credit (rank) 170 (Suriname)* 13 (Guatemala)* 86 1 (Malaysia)* Strength of legal 1 (Bolivia)* 8 (Guatemala)* 4 10 (10 Economies*) rights index (0-10) Depth of credit 5 (4 Economies*) 6 (12 Economies*) 6 6 (31 Economies*) information index (0-6) Public registry 14.1 (Bolivia) 80.2 (Uruguay) 31.6 100.0 (Portugal)* coverage (% of adults) Private bureau 8.6 (Guatemala) 100.0 (4 Economies*) 61.0 100.0 (22 Economies*) coverage (% of adults) Protecting Investors 186 (Suriname) 6 (Colombia) 114 1 (New Zealand) (rank) Extent of disclosure 0 (Honduras) 9 (Peru)* 4 10 (10 Economies*) index (0-10) Extent of director 0 (Suriname)* 8 (Colombia)* 4 10 (Cambodia) liability index (0-10) Ease of shareholder 2 (Venezuela, RB)* 8 (3 Economies*) 5 10 (3 Economies*) suits index (0-10) Strength of investor 2.0 (Suriname) 8.3 (Colombia) 4.5 9.7 (New Zealand) protection index (0-10) Paying Taxes (rank) 187 (Venezuela, RB) 48 (Belize) 127 1 (United Arab Emirates) Payments (number per 3 (Hong Kong SAR, 71 (Venezuela, RB) 6 (Mexico)* 28 year) China)* 12 (United Arab Time (hours per year) 2,600 (Brazil) 147 (Belize) 491 Emirates) Trading Across 173 (Venezuela, RB) 11 (Panama) 95 1 (Singapore) Borders (rank) Documents to export 8 (3 Economies*) 3 (Panama) 6 2 (Ireland)* (number) Time to export (days) 56 (Venezuela, RB) 10 (Panama) 18 6 (5 Economies*) Cost to export (US$ per 3,490 (Venezuela, RB) 625 (Panama) 1,454 450 (Malaysia) Doing Business 2014 LATIN AMERICA 11 Lowest regional Best regional Best global Indicator Regional average performance performance performance container) Documents to import 9 (Venezuela, RB)* 3 (Panama) 7 2 (Ireland)* (number) Time to import (days) 82 (Venezuela, RB) 9 (Panama) 22 4 (Singapore) Cost to import (US$ 3,695 (Venezuela, RB) 720 (Guyana) 1,639 440 (Singapore) per container) Enforcing Contracts 184 (Suriname) 47 (Nicaragua) 112 1 (Luxembourg) (rank) Time (days) 1,715 (Suriname) 400 (Mexico) 778 150 (Singapore) Cost (% of claim) 50.0 (Panama) 16.5 (Brazil)* 30.3 0.1 (Bhutan) Procedures (number) 51 (Belize) 30 (Venezuela, RB) 39 21 (Singapore)* Resolving Insolvency 165 (Venezuela, RB) 25 (Colombia) 103 1 (Japan) (rank) Time (years) 5.3 (Ecuador) 1.0 (Belize) 3.0 0.4 (Ireland) Cost (% of estate) 38 (Venezuela, RB) 6 (Colombia) 17 1 (Norway) Recovery rate (cents on 6.5 (Venezuela, RB) 70.3 (Colombia) 31.4 92.8 (Japan) the dollar) * Two or more economies share the top ranking on this indicator. A number shown in place of an economy’s name indicates the number of economies that share the top ranking on the indicator. For a list of these economies, see the Doing Business website (http://www.doingbusiness.org). Source: Doing Business database. Doing Business 2014 LATIN AMERICA 12 STARTING A BUSINESS Formal registration of companies has many WHAT THE STARTING A BUSINESS immediate benefits for the companies and for INDICATORS MEASURE business owners and employees. Legal entities outlive their founders. Resources are pooled as several shareholders join forces to start a company. Procedures to legally start and operate a Formally registered companies have access to company (number) services and institutions from courts to banks as Preregistration (for example, name well as to new markets. And their employees can verification or reservation, notarization) benefit from protections provided by the law. An Registration in the economy’s largest additional benefit comes with limited liability business city companies. These limit the financial liability of company owners to their investments, so personal Postregistration (for example, social security assets of the owners are not put at risk. registration, company seal) Where governments make this process easy, more Time required to complete each procedure entrepreneurs start businesses in the formal sector, (calendar days) creating more good jobs and generating more Does not include time spent gathering revenue for the government. information What do the indicators cover? Each procedure starts on a separate day (2 procedures cannot start on the same day). Doing Business measures the ease of starting a Procedures that can be fully completed business in an economy by recording all online are an exception to this rule. procedures officially required or commonly done in practice by an entrepreneur to start up and Procedure considered completed once final document is received formally operate an industrial or commercial business—as well as the time and cost required to No prior contact with officials complete these procedures. It also records the paid-in minimum capital that companies must Cost required to complete each procedure deposit before registration. The ranking on the (% of income per capita) ease of starting a business is the simple average of Official costs only, no bribes the percentile rankings on the 4 component No professional fees unless services required indicators: procedures, time, cost and paid-in by law minimum capital requirement. Paid-in minimum capital (% of income To make the data comparable across economies, per capita) Doing Business uses several assumptions about the business and the procedures. It assumes that all Funds deposited in a bank or with a notary before registration (or within 3 months) information is readily available to the entrepreneur and that there has been no prior contact with • Conducts general commercial or industrial officials. It also assumes that the entrepreneur will activities. pay no bribes. And it assumes that the business: • Has a start-up capital of 10 times income per • Is a 100% domestically owned limited liability capita and has a turnover of at least 100 times company, located in the largest business city. income per capita. • Has between 10 and 50 employees. • Does not qualify for any special benefits. • Does not own real estate. Doing Business 2014 LATIN AMERICA 13 STARTING A BUSINESS Where do the region’s economies stand today? How easy is it for entrepreneurs in economies in Latin suggest an answer (figure 2.1). The average ranking of America to start a business? The global rankings of the region and comparator regions provide a useful these economies on the ease of starting a business benchmark. Figure 2.1 How economies in Latin America rank on the ease of starting a business Source: Doing Business database. Doing Business 2014 LATIN AMERICA 14 STARTING A BUSINESS The indicators underlying the rankings may be more cost and the paid-in minimum capital requirement revealing. Data collected by Doing Business show (figure 2.2). Comparing these indicators across the what it takes to start a business in each economy in region and with averages both for the region and for the region: the number of procedures, the time, the comparator regions can provide useful insights. Figure 2.2 What it takes to start a business in economies in Latin America Procedures (number) Doing Business 2014 LATIN AMERICA 15 STARTING A BUSINESS Time (days) Doing Business 2014 LATIN AMERICA 16 STARTING A BUSINESS Cost (% of income per capita) Doing Business 2014 LATIN AMERICA 17 STARTING A BUSINESS Paid-in minimum capital (% of income per capita) Source: Doing Business database. Doing Business 2014 LATIN AMERICA 18 STARTING A BUSINESS What are the changes over time? Economies around the world have taken steps making stages—and often as part of a larger regulatory reform it easier to start a business—streamlining procedures program. Among the benefits have been greater firm by setting up a one-stop shop, making procedures satisfaction and savings and more registered simpler or faster by introducing technology, and businesses, financial resources and job opportunities. reducing or eliminating minimum capital requirements. What business registration reforms has Doing Business Many have undertaken business registration reforms in recorded in Latin America (table 2.1)? Table 2.1 How have economies in Latin America made starting a business easier—or not? By Doing Business report year DB year Economy Reform With the full implementation of the one stop shop, DB2008 Guatemala procedures and time for new company registration were reduced. Honduras made starting a business faster by simplifying the DB2008 Honduras municipal licensing procedures. Paraguay made starting a business faster by creating a one- DB2008 Paraguay stop shop and linking multiple agencies to the one-stop shop. Online company registration was introduced and other registration formalities were simplified including the DB2009 Colombia certificates and the books resulting in time, cost and number o procedures reduction. Tax registration records and company books were digitalized DB2009 Costa Rica resulting in considerable time reduction. A new commercial code reduced the minimum capital DB2009 El Salvador requirement, simplified the legalization of accounting books and eased publication requirements The introduction of the on-line system for company creation DB2009 Panama reduced the time to obtain business license tremendously. DB2009 Uruguay Minimum capital requirement was abolished. Argentina no longer requires registration at the private DB2010 Argentina pension and the publication process is expedited, thus easing the process of business start-up. Brazil eased the process of starting a business by removing the requirement to obtain a fire brigade license and DB2010 Brazil inspection before obtaining an operational license from the municipality Doing Business 2014 LATIN AMERICA 19 DB year Economy Reform Colombia eased the business start-up process by establishing a new public-private health provider (Nueva EPS) that enables DB2010 Colombia faster affiliation of employees, and also set up a tool to pre- enroll online with the ISS (Social Security). Guyana eased the process of starting a business by applying a flat registration fee for all companies, regardless of their capital amount. It also removed the duty payable upon DB2010 Guyana incorporation, and streamlined the registration with the tax authorities with the introduction of a unique Tax Identification Number (TIN) system. Honduras simplified business start up by improving the efficiency of the registration process at the one stop shop, DB2010 Honduras improving the registration for tax process and eliminating the need for lawyer services in order to obtain a municipal license. Mexico eased the business start-up process by establishing an electronic platform for company registration, reducing the DB2010 Mexico number of days for registration substantially, and by removing the requirement to register with the statistical office. Peru simplified business start up by allowing submission of DB2010 Peru electronic payroll books online at no cost and making the company forms available on line. Brazil eased business start-up by further enhancing the DB2011 Brazil electronic synchronization between federal and state tax authorities. Colombia eased the process of Starting a Business by DB2011 Colombia reducing the number of days to register with the Social Security System. Ecuador made starting a business easier by introducing an DB2011 Ecuador online registration system for social security. Guyana eased business start-up by digitizing company DB2011 Guyana records, which speeded up the process of company name search and reservation. Mexico launched an online one-stop shop for initiating DB2011 Mexico business registration. Panama eased business start-up by increasing efficiency at DB2011 Panama the registrar. Peru eased business start-up by simplifying the requirements DB2011 Peru for operating licenses and creating an online one-stop shop for business registration. República Bolivariana de Venezuela made starting a business DB2011 Venezuela, RB more difficult by introducing a new procedure for registering a company. Doing Business 2014 LATIN AMERICA 20 DB year Economy Reform Colombia reduced the costs associated with starting a DB2012 Colombia business, by no longer requiring upfront payment of the commercial license fee. Guyana eased the process of starting a business by reducing DB2012 Guyana the time needed for registering a new company and for obtaining a tax identification number. Panama extended the operating hours of the public registry, DB2012 Panama reducing the time required to register a new company. Peru made starting a business easier by eliminating the DB2012 Peru requirement for micro and small enterprises to deposit start- up capital in a bank before registration. Uruguay made starting a business easier by establishing a DB2012 Uruguay one-stop shop for general commercial companies. Colombia made starting a business easier by eliminating the DB2013 Colombia requirement to purchase and register accounting books at the time of incorporation. Costa Rica made starting a business easier by streamlining DB2013 Costa Rica the process of obtaining a sanitary permit from the authorities for low-risk activities. Mexico made starting a business easier by eliminating the DB2013 Mexico minimum capital requirement for limited liability companies. República Bolivariana de Venezuela made starting a business DB2013 Venezuela, RB more difficult by increasing the cost of company incorporation. Argentina made starting a business more difficult by DB2014 Argentina increasing the incorporation costs. Costa Rica made starting a business easier by creating an online platform for business registration, reducing the time to DB2014 Costa Rica register with social security and simplifying the legalization of company books. Guatemala made starting a business easier by creating an DB2014 Guatemala online platform that allows simultaneous registration of a new company with different government agencies. Nicaragua made starting a business easier by merging the procedures for registering with the revenue authority and DB2014 Nicaragua with the municipality and by reducing the time required for incorporation. Panama made starting a business easier by eliminating the DB2014 Panama need to visit the municipality to obtain the municipal taxpayer number. Suriname made starting a business easier by reducing the DB2014 Suriname time required to obtain the president’s approval for the registration of a new company. Doing Business 2014 LATIN AMERICA 21 DB year Economy Reform República Bolivariana de Venezuela made starting a business DB2014 Venezuela, RB more costly by increasing the company registration fees. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 22 DEALING WITH CONSTRUCTION PERMITS Regulation of construction is critical to protect the WHAT THE DEALING WITH CONSTRUCTION public. But it needs to be efficient, to avoid PERMITS INDICATORS MEASURE excessive constraints on a sector that plays an important part in every economy. Where complying with building regulations is excessively costly in Procedures to legally build a warehouse (number) time and money, many builders opt out. They may pay bribes to pass inspections or simply build Submitting all relevant documents and illegally, leading to hazardous construction that obtaining all necessary clearances, licenses, puts public safety at risk. Where compliance is permits and certificates simple, straightforward and inexpensive, everyone Submitting all required notifications and is better off. receiving all necessary inspections What do the indicators cover? Obtaining utility connections for water, sewerage and a land telephone line Doing Business records the procedures, time and cost for a business in the construction industry to Registering the warehouse after its obtain all the necessary approvals to build a simple completion (if required for use as collateral or commercial warehouse in the economy’s main city, for transfer of warehouse) connect it to basic utilities and register the Time required to complete each procedure property so that it can be used as collateral or (calendar days) transferred to another entity. Does not include time spent gathering The ranking on the ease of dealing with information construction permits is the simple average of the Each procedure starts on a separate day. percentile rankings on its component indicators: Procedures that can be fully completed online procedures, time and cost. are an exception to this rule. To make the data comparable across economies, Procedure completed once final document is Doing Business uses several assumptions about the received business and the warehouse, including the utility No prior contact with officials connections. The business: Cost required to complete each procedure (% of income per capita) • Is a limited liability company operating in Official costs only, no bribes the construction business and located in the largest business city. • Will be connected to water, sewerage (sewage system, septic tank or their • Is domestically owned and operated. equivalent) and a fixed telephone line. • Has 60 builders and other employees. • The connection to each utility network will be The warehouse: 10 meters (32 feet, 10 inches) long. • Is a new construction (there was no • Will be used for general storage, such as of previous construction on the land). books or stationery (not for goods requiring special conditions). • Has complete architectural and technical plans prepared by a licensed architect or • Will take 30 weeks to construct (excluding all engineer. delays due to administrative and regulatory requirements). Doing Business 2014 LATIN AMERICA 23 DEALING WITH CONSTRUCTION PERMITS Where do the region’s economies stand today? How easy it is for entrepreneurs in economies in Latin with construction permits suggest an answer (figure America to legally build a warehouse? The global 3.1). The average ranking of the region and rankings of these economies on the ease of dealing comparator regions provide a useful benchmark. Figure 3.1 How economies in Latin America rank on the ease of dealing with construction permits Source: Doing Business database. Doing Business 2014 LATIN AMERICA 24 DEALING WITH CONSTRUCTION PERMITS The indicators underlying the rankings may be more of procedures, the time and the cost (figure 3.2). revealing. Data collected by Doing Business show what Comparing these indicators across the region and with it takes to comply with formalities to build a averages both for the region and for comparator warehouse in each economy in the region: the number regions can provide useful insights. Figure 3.2 What it takes to comply with formalities to build a warehouse in economies in Latin America Procedures (number) Doing Business 2014 LATIN AMERICA 25 DEALING WITH CONSTRUCTION PERMITS Time (days) Doing Business 2014 LATIN AMERICA 26 DEALING WITH CONSTRUCTION PERMITS Cost (% of income per capita) * Indicates a “no practice” mark. See the data notes for details. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 27 DEALING WITH CONSTRUCTION PERMITS What are the changes over time? Smart regulation ensures that standards are met while building safety while keeping compliance costs making compliance easy and accessible to all. reasonable, governments around the world have Coherent and transparent rules, efficient processes and worked on consolidating permitting requirements. adequate allocation of resources are especially What construction permitting reforms has Doing important in sectors where safety is at stake. Business recorded in Latin America (table 3.1)? Construction is one of them. In an effort to ensure Table 3.1 How have economies in Latin America made dealing with construction permits easier—or not? By Doing Business report year DB year Economy Reform Guatemala made obtaining construction permits less time DB2008 Guatemala consuming by accelerating the issuance of the favorable decision. Honduras made obtaining construction permits easier by implementing administrative reform that reduces the time to DB2008 Honduras obtain an environmental license from SERNA and decreased the time to obtain approval for a phone line. Colombia made obtaining construction permits easier by fully adopting the "silence-is-consent" that reduces the total DB2009 Colombia time to deal with building permits by 32 days, and a new unified application form for building permits eliminated 1 procedure. Colombia has eased the process of dealing with construction permits with a new construction decree that categorizes DB2010 Colombia building projects based on risk and allows electronic verification for certain documents Guatemala eased the process of dealing with construction permits with a new land management plan that simplified DB2010 Guatemala the process of approval based on a risk assessment scheme, and mixed zoning regimes made the process of approval much faster. Honduras eased the process of dealing with construction permits through various administrative reforms within the DB2010 Honduras Construction Control Department that led to a reduction of 19 days from the process. DB2010 Panama Panama eased the process of dealing with construction Doing Business 2014 LATIN AMERICA 28 DB year Economy Reform permits by reducing and simplifying some of the procedures. Colombia eased construction permitting by improving the DB2011 Colombia electronic verification of prebuilding certificates. Mexico improved construction permitting by merging and DB2011 Mexico streamlining procedures related to zoning and utilities. Paraguay made dealing with construction permits easier by DB2011 Paraguay creating a new administrative structure and a better tracking system in the municipality of Asunción. Peru streamlined construction permitting by implementing DB2011 Peru administrative reforms. Mexico made dealing with construction permits faster by DB2012 Mexico consolidating internal administrative procedures. Paraguay made dealing with construction permits easier by DB2012 Paraguay implementing a risk-based approval system and a single window for obtaining construction permits. Costa Rica streamlined the process for obtaining DB2013 Costa Rica construction permits by implementing online approval systems. Guatemala made dealing with construction permits easier by DB2013 Guatemala introducing a risk-based approval system Panama made dealing with construction permits easier by reducing the fees for a permit from the fire department’s DB2013 Panama safety office and by accelerating the process at the building registry for obtaining a certificate of good standing and for registering the new building. Peru made obtaining a construction permit easier by DB2013 Peru eliminating requirements for several preconstruction approvals. Costa Rica made dealing with construction permits easier by eliminating procedures, improving efficiency and launching DB2014 Costa Rica an online platform that streamlined the building permit process by integrating different agencies’ approval processes. DB2014 Guatemala Guatemala made dealing with construction permits easier by streamlining procedures through the creation of a one-stop Doing Business 2014 LATIN AMERICA 29 DB year Economy Reform shop, backed by agreements between institutions and agencies involved in the permitting process. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 30 GETTING ELECTRICITY Access to reliable and affordable electricity is vital WHAT THE GETTING ELECTRICITY for businesses. To counter weak electricity supply, many firms in developing economies have to rely INDICATORS MEASURE on self-supply, often at a prohibitively high cost. Whether electricity is reliably available or not, the Procedures to obtain an electricity first step for a customer is always to gain access by connection (number) obtaining a connection. Submitting all relevant documents and What do the indicators cover? obtaining all necessary clearances and permits Doing Business records all procedures required for Completing all required notifications and a local business to obtain a permanent electricity receiving all necessary inspections connection and supply for a standardized Obtaining external installation works and warehouse, as well as the time and cost to possibly purchasing material for these works complete them. These procedures include Concluding any necessary supply contract and applications and contracts with electricity utilities, obtaining final supply clearances from other agencies and the external and final connection works. The ranking on the Time required to complete each procedure ease of getting electricity is the simple average of (calendar days) the percentile rankings on its component Is at least 1 calendar day indicators: procedures, time and cost. To make the Each procedure starts on a separate day data comparable across economies, several assumptions are used. Does not include time spent gathering information The warehouse: Reflects the time spent in practice, with little • Is located in the economy’s largest follow-up and no prior contact with officials business city, in an area where other Cost required to complete each procedure (% warehouses are located. of income per capita) • Is not in a special economic zone where Official costs only, no bribes the connection would be eligible for subsidization or faster service. Excludes value added tax • Has road access. The connection works involve the crossing of a road or roads but are carried out on public land. • Is 150 meters long. • Is a new construction being connected to • Is to either the low-voltage or the medium- electricity for the first time. voltage distribution network and either • Has 2 stories, both above ground, with a overhead or underground, whichever is more total surface of about 1,300.6 square common in the economy and in the area meters (14,000 square feet), and is built on where the warehouse is located. The length a plot of 929 square meters (10,000 square of any connection in the customer’s private feet). domain is negligible. The electricity connection: • Requires crossing of a 10-meter road but all the works are carried out in a public land, so • Is a 3-phase, 4-wire Y, 140-kilovolt-ampere there is no crossing into other people's (kVA) (subscribed capacity) connection. private property. Doing Business 2014 LATIN AMERICA 31 • Involves installing one electricity meter. The monthly electricity consumption will be 0.07 gigawatt-hour (GWh). The internal electrical wiring has been completed. Doing Business 2014 LATIN AMERICA 32 GETTING ELECTRICITY Where do the region’s economies stand today? How easy is it for entrepreneurs in economies in Latin average ranking of the region and comparator regions America to connect a warehouse to electricity? The provide a useful benchmark. global rankings of these economies on the ease of getting electricity suggest an answer (figure 4.1). The Figure 4.1 How economies in Latin America rank on the ease of getting electricity Source: Doing Business database. Doing Business 2014 LATIN AMERICA 33 GETTING ELECTRICITY The indicators underlying the rankings may be more time and the cost (figure 4.2). Comparing these revealing. Data collected by Doing Business show what indicators across the region and with averages both for it takes to get a new electricity connection in each the region and for comparator regions can provide economy in the region: the number of procedures, the useful insights. Figure 4.2 What it takes to get an electricity connection in economies in Latin America Procedures (number) Doing Business 2014 LATIN AMERICA 34 GETTING ELECTRICITY Time (days) Doing Business 2014 LATIN AMERICA 35 GETTING ELECTRICITY Cost (% of income per capita) Source: Doing Business database. Doing Business 2014 LATIN AMERICA 36 GETTING ELECTRICITY What are the changes over time? Obtaining an electricity connection is essential to safety in the connection process while keeping enable a business to conduct its most basic connection costs reasonable, governments around the operations. In many economies the connection world have worked to consolidate requirements for process is complicated by the multiple laws and obtaining an electricity connection. What reforms in regulations involved—covering service quality, general getting electricity has Doing Business recorded in Latin safety, technical standards, procurement practices and America (table 4.1)? internal wiring installations. In an effort to ensure Table 4.1 How have economies in Latin America made getting electricity easier—or not? By Doing Business report year DB year Economy Reform Guyana made getting electricity more expensive by tripling DB2012 Guyana the security deposit required for a new connection. In Mexico the distribution utility made getting electricity easier by streamlining procedures, offering training DB2013 Mexico opportunities to private contractors, using a geographic information system (GIS) to map the electricity distribution network and increasing the stock of materials. Colombia made getting electricity easier by opening a one- DB2014 Colombia stop shop for electricity connections and improving the efficiency of the utility’s internal processes. Ecuador made getting electricity easier by dividing the city of Quito into zones for the purpose of handling applications for DB2014 Ecuador new connections—a change that improved the utility’s customer 162 Doing Business 2014 service—and by reducing the fees to obtain Mexico made getting electricity easier by increasing the efficiency of the utility’s internal processes and by enforcing a DB2014 Mexico “silence is consent” rule for the approval of the feasibility study for a new connection. Nicaragua reduced the time required for getting electricity by increasing efficiency in granting approval of the connection DB2014 Nicaragua design and by informing the customer in advance what the amount of the security deposit will be. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 37 REGISTERING PROPERTY Ensuring formal property rights is fundamental. WHAT THE REGISTERING PROPERTY Effective administration of land is part of that. If INDICATORS MEASURE formal property transfer is too costly or complicated, formal titles might go informal Procedures to legally transfer title on again. And where property is informal or poorly immovable property (number) administered, it has little chance of being accepted as collateral for loans—limiting access to Preregistration procedures (for example, finance. checking for liens, notarizing sales agreement, paying property transfer taxes) What do the indicators cover? Registration procedures in the economy’s Doing Business records the full sequence of largest business city procedures necessary for a business to purchase Postregistration procedures (for example, filing property from another business and transfer the title with the municipality) property title to the buyer’s name. The transaction Time required to complete each procedure is considered complete when it is opposable to (calendar days) third parties and when the buyer can use the property, use it as collateral for a bank loan or Does not include time spent gathering resell it. The ranking on the ease of registering information property is the simple average of the percentile Each procedure starts on a separate day. rankings on its component indicators: procedures, Procedures that can be fully completed online time and cost. are an exception to this rule. To make the data comparable across economies, Procedure considered completed once final several assumptions about the parties to the document is received transaction, the property and the procedures are No prior contact with officials used. Cost required to complete each procedure (% The parties (buyer and seller): of property value) • Are limited liability companies, 100% Official costs only, no bribes domestically and privately owned. No value added or capital gains taxes included • Are located in the periurban area of the economy’s largest business city. • Have 50 employees each, all of whom are nationals. • Has no mortgages attached and has been under the same ownership for the past 10 • Perform general commercial activities. years. The property (fully owned by the seller): • Consists of 557.4 square meters (6,000 square • Has a value of 50 times income per capita. feet) of land and a 10-year-old, 2-story The sale price equals the value. warehouse of 929 square meters (10,000 square feet). The warehouse is in good • Is registered in the land registry or condition and complies with all safety cadastre, or both, and is free of title standards, building codes and legal disputes. requirements. There is no heating system. The • Is located in a periurban commercial zone, property will be transferred in its entirety. and no rezoning is required. Doing Business 2014 LATIN AMERICA 38 REGISTERING PROPERTY Where do the region’s economies stand today? How easy is it for entrepreneurs in economies in Latin suggest an answer (figure 5.1). The average ranking of America to transfer property? The global rankings of the region and comparator regions provide a useful these economies on the ease of registering property benchmark. Figure 5.1 How economies in Latin America rank on the ease of registering property Source: Doing Business database. Doing Business 2014 LATIN AMERICA 39 REGISTERING PROPERTY The indicators underlying the rankings may be more the time and the cost (figure 5.2). Comparing these revealing. Data collected by Doing Business show indicators across the region and with averages both what it takes to complete a property transfer in each for the region and for comparator regions can economy in the region: the number of procedures, provide useful insights. Figure 5.2 What it takes to register property in economies in Latin America Procedures (number) Doing Business 2014 LATIN AMERICA 40 REGISTERING PROPERTY Time (days) Doing Business 2014 LATIN AMERICA 41 REGISTERING PROPERTY Cost (% of property value) * Indicates a “no practice” mark. See the data notes for details. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 42 REGISTERING PROPERTY What are the changes over time? Economies worldwide have been making it easier for buyers to use or mortgage their property earlier. What entrepreneurs to register and transfer property—such property registration reforms has Doing Business as by computerizing land registries, introducing time recorded in Latin America (table 5.1)? limits for procedures and setting low fixed fees. Many have cut the time required substantially—enabling Table 5.1 How have economies in Latin America made registering property easier—or not? By Doing Business report year DB year Economy Reform Guatemala reduced the time to register property by allowing DB2008 Guatemala registrars to submit electronic signatures. Registering property has become easier; the creation of time DB2008 Honduras limits on certain procedures has sped up the process. A new notary fee schedule was issued which reduced the DB2008 Mexico costs of registering property. Venezuela, RB made registering property faster by DB2008 Venezuela, RB implementing time limits at several agencies. Argentina made it more difficult to register property by DB2010 Argentina adding a new requirement to declare all transactions over AR$ 300.000 Colombia has made it easier to register property by making DB2010 Colombia available on-line required certificates, as well as standard preliminary sale agreements free of charge. Guatemala has eased the process of registering property by DB2010 Guatemala centralizing more procedures at the cadastral, reorganizing operations, and making greater use of electronic services The certificate of good standing from the Tax agency can now DB2010 Panama be obtained online, reducing total time to transfer property in Panama DB2010 Peru Registering property in Peru is now easier with faster electronic processing times, and the tax agency (SAT) is Doing Business 2014 LATIN AMERICA 43 DB year Economy Reform connected with notaries through the Internet facilitating the payment of (Alcabala) municipal taxes. Suriname implemented new valuation requirements to insure DB2010 Suriname proper tax payments at the Land Registry which increased procdures, cost and time to register property. New online procedures make it easier to transfer property in Uruguay, while a new law established preemption rights to DB2010 Uruguay the Municipality of Montevideo, adding one procedure to property transfers. Panama made it more expensive to transfer property by DB2011 Panama requiring that an amount equal to 3% of the property value be paid upon registration. Peru introduced fast-track procedures at the land registry, DB2011 Peru cutting by half the time needed to register property. In Uruguay the Municipality of Montevideo made registering DB2011 Uruguay property easier by eliminating the need to obtain a mandatory waiver for preemption rights. Argentina made transferring property more difficult by DB2012 Argentina adding a requirement that the notary obtain the tax agency’s reference value for property before notarizing the sale deed. Costa Rica made transferring property easier and quicker by DB2012 Costa Rica making property certificates available online through a single website. In Guyana transferring property became slower because of a DB2012 Guyana lack of personnel at the deed registry. Nicaragua made transferring property more efficient by DB2012 Nicaragua introducing a fast-track procedure for registration. Brazil made transferring property more difficult by DB2013 Brazil introducing a new certificate on good standing on labor debts, adding to the number of due diligence procedures. DB2013 Ecuador In Ecuador property transfers became more time consuming Doing Business 2014 LATIN AMERICA 44 DB year Economy Reform as a result of implementation problems in transferring authority over property records to the municipality of Quito. Panama made property transfers faster by increasing working DB2013 Panama hours at the registry and reorganizing the caseload of its staff. Panama made transferring property easier by connecting the DB2014 Panama land registry with the cadastre. Suriname made transferring property easier by increasing DB2014 Suriname administrative efficiency at the land registry. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 45 GETTING CREDIT Two types of frameworks can facilitate access to WHAT THE GETTING CREDIT INDICATORS credit and improve its allocation: credit information MEASURE systems and the borrowers and lenders’ rights in collateral and bankruptcy laws. Credit information Strength of legal rights index (0–10) systems enable lenders to view a potential borrower’s financial history (positive or negative)— Protection of rights of borrowers and lenders valuable information to consider when assessing through collateral laws risk. And they permit borrowers to establish a good Protection of secured creditors’ rights through credit history that will allow easier access to credit. bankruptcy laws Sound collateral laws enable businesses to use their assets, especially movable property, as security to Depth of credit information index (0–6) generate capital—while strong creditors’ rights Scope and accessibility of credit information have been associated with higher ratios of private distributed by public credit registries and sector credit to GDP. private credit bureaus What do the indicators cover? Public credit registry coverage (% of adults) Doing Business assesses the sharing of credit Number of individuals and firms listed in information and the legal rights of borrowers and public credit registry as percentage of adult lenders with respect to secured transactions population through 2 sets of indicators. The depth of credit information index measures rules and practices Private credit bureau coverage (% of adults) affecting the coverage, scope and accessibility of Number of individuals and firms listed in credit information available through a public credit largest private credit bureau as percentage of registry or a private credit bureau. The strength of adult population legal rights index measures whether certain features that facilitate lending exist within the applicable collateral and bankruptcy laws. Doing Business uses case scenarios to determine the scope of the • Has up to 100 employees. secured transactions system, involving a secured • Is 100% domestically owned, as is the lender. borrower and a secured lender and examining legal The ranking on the ease of getting credit is based on restrictions on the use of movable collateral. These the percentile rankings on the sum of its component scenarios assume that the borrower: indicators: the depth of credit information index and • Is a private, incorporated, limited liability the strength of legal rights index. company. • Has its headquarters and only base of operations in the largest business city. Doing Business 2014 LATIN AMERICA 46 GETTING CREDIT Where do the region’s economies stand today? How well do the credit information systems and suggest an answer (figure 6.1). The average ranking of collateral and bankruptcy laws in economies in Latin the region and comparator regions provide a useful America facilitate access to credit? The global rankings benchmark. of these economies on the ease of getting credit Figure 6.1 How economies in Latin America rank on the ease of getting credit Source: Doing Business database. Doing Business 2014 LATIN AMERICA 47 GETTING CREDIT Another way to assess how well regulations and particular score on the strength of legal rights index. institutions support lending and borrowing in the Figure 6.3 shows the same thing for the depth of credit region is to look at the distribution of its economies by information index. Higher scores indicate stronger their scores on the getting credit indicators. Figure 6.2 legal rights for borrowers and lenders and more credit shows how many economies in the region received a information. Figure 6.2 How strong are legal rights for borrowers Figure 6.3 How extensive—and how accessible—is and lenders in economies in Latin America? credit information in economies in Latin America? Number of economies in region with each score on strength Number of economies in region with each score on depth of of legal rights index (0–10) credit information index (0–6) Note: Higher scores indicate that collateral and bankruptcy Note: Higher scores indicate the availability of more credit laws are better designed to facilitate access to credit. information, from either a credit registry or a credit bureau, Source: Doing Business database. to facilitate lending decisions. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 48 GETTING CREDIT What are the changes over time? When economies strengthen the legal rights of lenders credit information, they can increase entrepreneurs’ and borrowers under collateral and bankruptcy laws, access to credit. What credit reforms has Doing and increase the scope, coverage and accessibility of Business recorded in Latin America (table 6.1)? Table 6.1 How have economies in Latin America made getting credit easier—or not? By Doing Business report year DB year Economy Reform Access to credit was facilitated by allowing borrowers to access their data and obtain a free credit report once a year. DB2008 Honduras In addition, parties to a security agreement can agree to enforce a security out of court by using a notary to take care of the out-of-court enforcement of collateral agreements. Guatemala enacted a new Secured transactions law; creating a new form of pledge over movable assets and a registry for these pledges. (The registry was not yet in operation at the time of publication.) Under the new law, accounts receivable DB2009 Guatemala and inventory can be described in general terms when they are used as collateral and parties may agree to out-of court- enforcement of the security right when the security agreement is signed. Colombia improved its access to credit by passing a new credit information law that guarantees the rights of borrowers DB2010 Colombia to inspect their own data and by introducing new rules making it mandatory for credit providers to consult and share information with credit bureaus. DB2010 Ecuador Ecuador starts to distributed historical data Guatemala strengthened its credit information system with a new decree on Access to Public Information which guarantees the rights of borrowers to inspect their own data in any public institution. In addition, Guatemala strenthened access to DB2010 Guatemala credit and the regime for secured transactions with a new movable asset registry that applied to all movable assets and all types of creditors and debtors, and is also searchable by debtor name. DB2010 Honduras Honduras passed a resolution that enhances the operations of the public credit bureau; it classifies debtors into several Doing Business 2014 LATIN AMERICA 49 DB year Economy Reform categories by history and is meant to help banks manage risk. Guyana enhanced access to credit by establishing a regulatory framework that allows the licensing of private DB2011 Guyana credit bureaus and gives borrowers the right to inspect their data. Brazil improved its credit information system by allowing DB2012 Brazil private credit bureaus to collect and share positive information. Honduras strengthened its secured transactions system through a new decree establishing a centralized and DB2012 Honduras computerized collateral registry and providing for out-of- court enforcement of collateral upon default. Mexico strengthened its secured transactions system by DB2012 Mexico implementing a centralized collateral registry with an electronic database that is accessible online. Paraguay improved its credit information system by DB2012 Paraguay establishing an online platform for financial institutions to exchange information with the public credit registry. Uruguay improved its credit information system by DB2012 Uruguay introducing a new online platform allowing access to credit reports for financial institutions, public utilities and borrowers. Costa Rica improved access to credit information by DB2013 Costa Rica guaranteeing borrowers’ right to inspect their personal data. El Salvador improved access to credit information through a DB2013 El Salvador new law regulating the management of personal credit information. República Bolivariana de Venezuela improved access to credit DB2014 Venezuela, RB information by starting to collect data on firms from financial institutions. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 50 PROTECTING INVESTORS Protecting investors matters for the ability of WHAT THE PROTECTING INVESTORS companies to raise the capital they need to grow, INDICATORS MEASURE innovate, diversify and compete. If the laws do not protect minority shareholders, investors may be Extent of disclosure index (0–10) reluctant to provide funding to companies through the purchase of shares unless they become the Approval process for related-party controlling shareholders. Effective regulations define transactions related-party transactions precisely, promote clear Disclosure requirements in case of related- and efficient disclosure requirements, require party transactions shareholder participation in major decisions of the company and set detailed standards of accountability Extent of director liability index (0–10) for company insiders. Ability of minority shareholders to file a direct or derivative lawsuit What do the indicators cover? Ability of minority shareholders to hold Doing Business measures the strength of minority interested parties and members of the shareholder protections against directors’ use of approving body liable for prejudicial related- corporate assets for personal gain—or self-dealing. party transactions The indicators distinguish 3 dimensions of investor Available legal remedies (damages, protections: transparency of related-party disgorgement of profits, fines, imprisonment transactions (extent of disclosure index), liability for and rescission of the transaction) self-dealing (extent of director liability index) and minority shareholders’ access to evidence before and Ease of shareholder suits index (0–10) during (ease of shareholder suits index). The ranking Access to internal corporate documents on the strength of investor protection index is the (directly or through a government inspector) simple average of the percentile rankings on these 3 indices. To make the data comparable across Documents and information available during trial economies, a case study uses several assumptions about the business and the transaction. Strength of investor protection index (0–10) The business (Buyer): Simple average of the extent of disclosure, extent of director liability and ease of • Is a publicly traded corporation listed on the shareholder suits indices economy’s most important stock exchange (or at least a large private company with multiple shareholders). • The price is higher than the going price for used trucks, but the transaction goes forward. • Has a board of directors and a chief executive officer (CEO) who may legally act on behalf of • All required approvals are obtained, and all Buyer where permitted, even if this is not required disclosures made, though the specifically required by law. transaction is prejudicial to Buyer. The transaction involves the following details: • Shareholders sue the interested parties and the members of the board of directors. • Mr. James, a director and the majority shareholder of the company, proposes that the company purchase used trucks from another company he owns. Doing Business 2014 LATIN AMERICA 51 Doing Business 2014 LATIN AMERICA 52 PROTECTING INVESTORS Where do the region’s economies stand today? How strong are investor protections against self- related to the protection of minority investors, a higher dealing in economies in Latin America? The global ranking does indicate that an economy’s regulations rankings of these economies on the strength of offer stronger investor protections against self-dealing investor protection index suggest an answer (figure in the areas measured. 7.1). While the indicator does not measure all aspects Figure 7.1 How economies in Latin America rank on the strength of investor protection index Source: Doing Business database. Doing Business 2014 LATIN AMERICA 53 PROTECTING INVESTORS But the overall ranking on the strength of investor shareholder suits indices may also be revealing (figure protection index tells only part of the story. Economies 7.2). Higher scores indicate stronger investor may offer strong protections in some areas but not protections. Comparing the scores across the region others. So the number of economies in Latin America on the strength of investor protection index and with that have a certain score recorded on the extent of averages both for the region and for comparator disclosure, extent of director liability and ease of regions can provide useful insights. Figure 7.2 How strong are investor protections in economies in Latin America? Strength of investor protection index (0–10) Source: Doing Business database. Doing Business 2014 LATIN AMERICA 54 PROTECTING INVESTORS Extent of disclosure index (0–10) Extent of director liability index (0–10) Number of economies in region with each score on extent of Number of economies in region with each score on extent of disclosure index (0–10) director liability index (0–10) Note: Higher scores indicate greater disclosure. Note: Higher scores indicate greater liability of directors. Source: Doing Business database. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 55 PROTECTING INVESTORS Ease of shareholder suits index (0–10) Number of economies in region with each score on ease of shareholder suits index (0–10) Note: Higher scores indicate greater powers of shareholders to challenge the transaction. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 56 PROTECTING INVESTORS What are the changes over time? Economies with the strongest protections of minority reasonable time. So reforms to strengthen investor investors from self-dealing require detailed disclosure protections may move ahead on different fronts—such and define clear duties for directors. They also have as through new or amended company laws, securities well-functioning courts and up-to-date procedural regulations or revisions to court procedures. What rules that give minority shareholders the means to investor protection reforms has Doing Business prove their case and obtain a judgment within a recorded in Latin America (table 7.1)? Table 7.1 How have economies in Latin America strengthened investor protections—or not? By Doing Business report year DB year Economy Reform Colombia strengthened investor protections by requiring DB2008 Colombia greater disclosure requirements in the annual report in case of related-party transactions. Colombia amended the Company Law that strengthened DB2010 Colombia investor protections by making it easier to sue directors in cases of prejudicial transactions between interested parties. El Salvador strengthened investor protections by allowing DB2012 El Salvador greater access to corporate information during the trial. Peru strengthened investor protections through a new law DB2012 Peru allowing minority shareholders to request access to nonconfidential corporate documents. Peru strengthened investor protections through a new law regulating the approval of related-party transactions and DB2013 Peru making it easier to sue directors when such transactions are prejudicial. Panama strengthened investor protections by increasing the DB2014 Panama disclosure requirements for publicly held companies. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 57 PAYING TAXES Taxes are essential. They fund the public amenities, WHAT THE PAYING TAXES INDICATORS infrastructure and services that are crucial for a MEASURE properly functioning economy. But the level of tax rates needs to be carefully chosen—and needless Tax payments for a manufacturing company complexity in tax rules avoided. According to in 2012 (number per year adjusted for Doing Business data, in economies where it is more electronic or joint filing and payment) difficult and costly to pay taxes, larger shares of economic activity end up in the informal sector— Total number of taxes and contributions paid, including consumption taxes (value added tax, where businesses pay no taxes at all. sales tax or goods and service tax) What do the indicators cover? Method and frequency of filing and payment Using a case scenario, Doing Business measures the taxes and mandatory contributions that a Time required to comply with 3 major taxes medium-size company must pay in a given year as (hours per year) well as the administrative burden of paying taxes Collecting information and computing the tax and contributions. This case scenario uses a set of payable financial statements and assumptions about Completing tax return forms, filing with transactions made over the year. Information is proper agencies also compiled on the frequency of filing and Arranging payment or withholding payments as well as time taken to comply with tax laws. The ranking on the ease of paying taxes is Preparing separate tax accounting books, if the simple average of the percentile rankings on required its component indicators: number of annual Total tax rate (% of profit) payments, time and total tax rate, with a threshold 1 being applied to the total tax rate. To make the Profit or corporate income tax data comparable across economies, several Social contributions and labor taxes paid by assumptions about the business and the taxes and the employer contributions are used. Property and property transfer taxes • TaxpayerCo is a medium-size business that Dividend, capital gains and financial started operations on January 1, 2011. transactions taxes • The business starts from the same financial Waste collection, vehicle, road and other taxes position in each economy. All the taxes and mandatory contributions paid during • Taxes and mandatory contributions include the second year of operation are recorded. corporate income tax, turnover tax and all labor taxes and contributions paid by the • Taxes and mandatory contributions are company. measured at all levels of government. • A range of standard deductions and exemptions are also recorded. 1 The threshold is defined as the highest total tax rate among the top 15% of economies in the ranking on the total tax rate. It is calculated and adjusted on a yearly basis. The threshold is not based on any economic theory of an “optimal tax rate” that minimizes distortions or maximizes efficiency in the tax system of an economy overall. Instead, it is mainly empirical in nature, set at the lower end of the distribution of tax rates levied on medium-size enterprises in the manufacturing sector as observed through the paying taxes indicators. This reduces the bias in the indicators toward economies that do not need to levy significant taxes on companies like the Doing Business standardized case study company because they raise public revenue in other ways—for example, through taxes on foreign companies, through taxes on sectors other than manufacturing or from natural resources (all of which are outside the scope of the methodology). This year’s threshold is 25.5%. Doing Business 2014 LATIN AMERICA 58 PAYING TAXES Where do the region’s economies stand today? What is the administrative burden of complying with information for assessing the tax compliance burden taxes in economies in Latin America—and how much for businesses (figure 8.1). The average ranking of the do firms pay in taxes? The global rankings of these region and comparator regions provide a useful economies on the ease of paying taxes offer useful benchmark. Figure 8.1 How economies in Latin America rank on the ease of paying taxes Note: For all economies with a total tax rate below the threshold of 25.5% applied in DB2014, the total tax rate is set at 25.5% for the purpose of calculating the ranking on the ease of paying taxes. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 59 PAYING TAXES The indicators underlying the rankings may be more as well as the total tax rate (figure 8.2). Comparing revealing. Data collected by Doing Business show what these indicators across the region and with averages it takes to comply with tax regulations in each both for the region and for comparator regions can economy in the region—the number of payments per provide useful insights. year and the time required to prepare and file taxes— Figure 8.2 How easy is it to pay taxes in economies in Latin America—and what are the total tax rates? Payments (number per year) Doing Business 2014 LATIN AMERICA 60 PAYING TAXES Time (hours per year) Doing Business 2014 LATIN AMERICA 61 PAYING TAXES Total tax rate (% of profit) Source: Doing Business database. Doing Business 2014 LATIN AMERICA 62 PAYING TAXES What are the changes over time? Economies around the world have made paying taxes concrete results. Some economies simplifying tax faster and easier for businesses—such as by payment and reducing rates have seen tax revenue consolidating filings, reducing the frequency of rise. What tax reforms has Doing Business recorded in payments or offering electronic filing and payment. Latin America (table 8.1)? Many have lowered tax rates. Changes have brought Table 8.1 How have economies in Latin America made paying taxes easier—or not? By Doing Business report year DB year Economy Reform Colombia made it more costly for company to pay taxes by increasing the social security contribution rate. Time to DB2008 Colombia comply was reduced, though, by the spreading of electronic facilities Mexico reduced the tax burden for companies by reducing DB2008 Mexico the corporate income tax rate DB2008 Uruguay No impact on Doing Business 2008 indicators. Venezuela made it more difficult to pay taxes by introducing DB2008 Venezuela, RB three new taxes Electronic forms for tax payments integrated and unified., and DB2009 Colombia electronic payment now mandatory for companies with more than 30 employees. Electronic filing and tax payment commonly used in DB2009 Honduras Honduras. A new flat tax was introduced effective January 1, 2008, and the asset tax was abolished as from the same date.A new DB2009 Mexico withholding tax on cash deposit interest will be implemented by July 1, 2008. New reporting rules were introduced in 2007 for VAT. Effective 1 July 2007, a new tax law was introduced, COFIS (a DB2009 Uruguay 3% sales tax) was abolished and VAT was reduced from 23% to 22%. Doing Business 2014 LATIN AMERICA 63 DB year Economy Reform Since 1 November 2007 the Tax on Financial Transactions is DB2009 Venezuela, RB levied at a rate of 1.5% on payments made to third parties Brazil reduced the tax burden on firms by abolishing the tax DB2010 Brazil on check transactions. Colombia has eased the burden of paying taxes on DB2010 Colombia businesses with electronic filing and payment of taxes, and reducing some payments. The Guatemalan government has eased payment of and filing for VAT and corporate income tax by increasing electronic DB2010 Guatemala compliance thresh holds and extending the electronic system to most banks Mexico has eased the paying of taxes by introducing DB2010 Mexico electronic payment systems for payroll tax, property tax and social security taxes. Peru has made paying taxes easier with software, freely distributed, for VAT payments. Peru has also eased the DB2010 Peru cashflow of business by reducing the check tax and with new accelerated depreciation. Venezuela introduced two new taxes, increasing the tax DB2010 Venezuela, RB burden on businesses. Mexico increased taxes on companies by raising several tax rates, including the corporate income tax and the rate on DB2011 Mexico cash deposits. At the same time, the administrative burden was reduced slightly with more options for online payment and increased use of accounting software. Nicaragua increased taxes on firms by raising social security contribution rates and introducing a 10% withholding tax on DB2011 Nicaragua the gross interest accrued from deposits. It also improved electronic payment of taxes through bank transfer. Panama reduced the corporate income tax rate, modified DB2011 Panama various taxes and created a new tax court of appeals. DB2011 Venezuela, RB República Bolivariana de Venezuela abolished the tax on Doing Business 2014 LATIN AMERICA 64 DB year Economy Reform financial transactions. Belize made paying taxes easier for firms by improving DB2012 Belize electronic filing and payment for social security contributions, an option now used by the majority of taxpayers. DB2012 Bolivia Bolivia raised social security contribution rates for employers. Colombia eased the administrative burden of paying taxes for DB2012 Colombia firms by establishing mandatory electronic filing and payment for some of the major taxes. In Costa Rica online payment of social security contributions DB2012 Costa Rica is now widespread and used by the majority of taxpayers. Honduras made paying taxes costlier for firms by raising the DB2012 Honduras solidarity tax rate. Mexico continued to ease the administrative burden of paying taxes for firms by ending the requirement to file a DB2012 Mexico yearly value added tax return and reduced filing requirements for other taxes Nicaragua made paying taxes easier for companies by DB2012 Nicaragua promoting electronic filing and payment of the major taxes, an option now used by the majority of taxpayers. Paraguay made paying taxes more burdensome for DB2012 Paraguay companies by introducing new tax declarations that must be filed monthly. Peru made paying taxes easier for companies by improving electronic filing and payment of the major taxes and DB2012 Peru promoting the use of the electronic option among the majority of taxpayers. República Bolivariana de Venezuela made paying taxes DB2012 Venezuela, RB costlier for firms by doubling the municipal economic activities tax (sales tax). DB2013 Costa Rica Costa Rica made paying taxes easier for companies by implementing electronic payment for municipal taxes— Doing Business 2014 LATIN AMERICA 65 DB year Economy Reform though it also introduced a registration flat tax. DB2013 El Salvador El Salvador introduced an alternative minimum tax. Panama made paying taxes easier for companies by enhancing the electronic filing system for value added tax DB2013 Panama and simplifying tax return forms for corporate income tax— though it also began requiring companies to pay corporate income tax monthly rather than quarterly. Uruguay made paying taxes easier for small and medium-size companies by fully implementing an online filing and DB2013 Uruguay payment system for capital, value added and corporate income taxes and by improving the online facilities for social security contributions. República Bolivariana de Venezuela made paying taxes more DB2013 Venezuela, RB costly and difficult for companies by introducing a sports, physical activities and physical education tax. El Salvador made paying taxes more costly for companies by DB2014 El Salvador increasing the corporate income tax rate. Guatemala made paying taxes easier for companies by DB2014 Guatemala introducing a new electronic filing and payment system. Guyana made paying taxes easier for companies by reducing DB2014 Guyana the corporate income tax rate. Panama made paying taxes easier for companies by changing the payment frequency for corporate income taxes from DB2014 Panama monthly to quarterly and by implementing a new online platform for filing the social security payroll. Paraguay made paying taxes easier for companies by making DB2014 Paraguay electronic filing and payment mandatory for corporate income and value added taxes. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 66 TRADING ACROSS BORDERS In today’s globalized world, making trade between WHAT THE TRADING ACROSS BORDERS economies easier is increasingly important for INDICATORS MEASURE business. Excessive document requirements, burdensome customs procedures, inefficient port operations and inadequate infrastructure all lead to extra costs and delays for exporters and importers, Documents required to export and import stifling trade potential. Research shows that (number) exporters in developing countries gain more from Bank documents a 10% drop in their trading costs than from a Customs clearance documents similar reduction in the tariffs applied to their products in global markets. Port and terminal handling documents What do the indicators cover? Transport documents Doing Business measures the time and cost Time required to export and import (days) (excluding tariffs and the time and cost for sea Obtaining, filling out and submitting all the transport) associated with exporting and documents importing a standard shipment of goods by sea transport, and the number of documents necessary Inland transport and handling to complete the transaction. The indicators cover Customs clearance and inspections procedural requirements such as documentation Port and terminal handling requirements and procedures at customs and other regulatory agencies as well as at the port. They also Does not include sea transport time cover trade logistics, including the time and cost of inland transport to the largest business city. The Cost required to export and import (US$ per container) ranking on the ease of trading across borders is the simple average of the percentile rankings on its All documentation component indicators: documents, time and cost Inland transport and handling to export and import. Customs clearance and inspections To make the data comparable across economies, Port and terminal handling Doing Business uses several assumptions about the business and the traded goods. Official costs only, no bribes The business: • Do not require refrigeration or any other special environment. • Is of medium size and employs 60 people. • Do not require any special phytosanitary or • Is located in the periurban area of the environmental safety standards other than economy’s largest business city. accepted international standards. • Is a private, limited liability company, • Are one of the economy’s leading export or domestically owned, formally registered import products. and operating under commercial laws and regulations of the economy. • Are transported in a dry-cargo, 20-foot full container load. The traded goods: • Are not hazardous nor do they include military items. Doing Business 2014 LATIN AMERICA 67 TRADING ACROSS BORDERS Where do the region’s economies stand today? How easy it is for businesses in economies in Latin across borders suggest an answer (figure 9.1). The America to export and import goods? The global average ranking of the region and comparator regions rankings of these economies on the ease of trading provide a useful benchmark. Figure 9.1 How economies in Latin America rank on the ease of trading across borders Source: Doing Business database. Doing Business 2014 LATIN AMERICA 68 TRADING ACROSS BORDERS The indicators underlying the rankings may be more documents, the time and the cost (figure 9.2). revealing. Data collected by Doing Business show what Comparing these indicators across the region and with it takes to export or import a standard container of averages both for the region and for comparator goods in each economy in the region: the number of regions can provide useful insights. Figure 9.2 What it takes to trade across borders in economies in Latin America Documents to export (number) Doing Business 2014 LATIN AMERICA 69 TRADING ACROSS BORDERS Time to export (days) Doing Business 2014 LATIN AMERICA 70 TRADING ACROSS BORDERS Cost to export (US$ per container) Doing Business 2014 LATIN AMERICA 71 TRADING ACROSS BORDERS Documents to import (number) Doing Business 2014 LATIN AMERICA 72 TRADING ACROSS BORDERS Time to import (days) Doing Business 2014 LATIN AMERICA 73 TRADING ACROSS BORDERS Cost to import (US$ per container) Source: Doing Business database. Doing Business 2014 LATIN AMERICA 74 TRADING ACROSS BORDERS What are the changes over time? In economies around the world, trading across borders systems. These changes help improve their trading as measured by Doing Business has become faster and environment and boost firms’ international easier over the years. Governments have introduced competitiveness. What trade reforms has Doing tools to facilitate trade—including single windows, Business recorded in Latin America (table 9.1)? risk-based inspections and electronic data interchange Table 9.1 How have economies in Latin America made trading across borders easier—or not? By Doing Business report year DB year Economy Reform Brazil eased trading across borders by updating its electronic DB2008 Brazil data interchange system for customs. Colombia eased trading across borders by extending customs DB2008 Colombia and port operating hours. Costa Rica eased trading across borders by improving its DB2008 Costa Rica electronic data interchange system and allowing for electronic submission of cargo manifests before arrival. El Salvador eased trading across borders by establishing a DB2008 El Salvador one-stop shop for importers. Guatemala eased trading across borders by implementing a DB2008 Guatemala new EDI system, training of customs staff, and improvements to the risk-based system for inspections. Venezuela made exporting more difficult by introducing new DB2008 Venezuela, RB requirements for registration of export transactions. Implementation of EDI system SISCARGA and SISCOMEX CARGA, a risk-based management system, and an increase in DB2009 Brazil the banking sector have led to a decrease in time for export and import. Due to improvements in the banking sector, implementation DB2009 Colombia of e-payments, EDI, and risk management procedures export and import time decreased Doing Business 2014 LATIN AMERICA 75 DB year Economy Reform Due to improvements at the port infrastructure, and the DB2009 Ecuador banking sector, as well as the abolishment of documentation, export and import time decreased. Modernization of its customs system and physical inspections, increased traffic control, implementation of a DB2009 El Salvador single window, and improvements in the banking sector, export and import time decreased Consular legalization for trade documents was abolished DB2009 Honduras which led to a reduction of one document for import Implementation of EDI and improvement of the banking DB2009 Uruguay sector led to a decrease of export and import time. Colombia implemented MUISCA, an electronic declaration DB2010 Colombia system, and sped up the customs clearance process. Due to implementation of the electronic declaration system DB2010 Guyana the customs clearance time for export and import in Guyana was reduced. Paraguay saw an improvement in trading time with the DB2010 Paraguay implementation of the export electronic system and the improvement of the risk-based inspection system. Peru sped up its port and terminal handling activities due to DB2010 Peru additional cranes. Guyana improved its risk profiling system for customs DB2011 Guyana inspection, reducing physical inspections of shipments and the time to trade. Nicaragua expedited trade by migrating to a new electronic data interchange system for customs, setting up a physical DB2011 Nicaragua one-stop shop for exports and investing in new equipment at the port of Corinto. Peru made trading easier by implementing a new web-based DB2011 Peru electronic data interchange system, risk-based inspections and payment deferrals. Doing Business 2014 LATIN AMERICA 76 DB year Economy Reform Honduras made trading across borders faster by DB2012 Honduras implementing a web-based electronic data interchange system and X-ray machines at the port of Puerto Cortes. Argentina increased the time, cost and number of documents needed to import by expanding the list of products requiring DB2013 Argentina nonautomatic licenses and introducing new preapproval procedures for all imports. Belize reduced the time to export and import by DB2013 Belize implementing the ASYCUDA World electronic data interchange system. Suriname increased the time to export by involving more DB2013 Suriname customs departments in clearing exports. Uruguay reduced the time to import by improving port DB2013 Uruguay efficiency and introducing electronic payment and predeclaration systems for customs. Argentina reduced the number of documents necessary for DB2014 Argentina importing by eliminating nonautomatic license requirements. El Salvador made trading across borders easier by developing DB2014 El Salvador a one-stop shop for exporting and by implementing electronic data interchange systems. Mexico made trading across borders easier by implementing DB2014 Mexico an electronic single-window system. Uruguay made trading across borders easier by implementing DB2014 Uruguay an electronic customs declaration system. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 77 ENFORCING CONTRACTS Effective commercial dispute resolution has many WHAT THE ENFORCING CONTRACTS benefits. Courts are essential for entrepreneurs INDICATORS MEASURE because they interpret the rules of the market and protect economic rights. Efficient and transparent Procedures to enforce a contract through courts encourage new business relationships the courts (number) because businesses know they can rely on the courts if a new customer fails to pay. Speedy trials Steps to file and serve the case are essential for small enterprises, which may lack Steps for trial and judgment the resources to stay in business while awaiting the Steps to enforce the judgment outcome of a long court dispute. What do the indicators cover? Time required to complete procedures (calendar days) Doing Business measures the efficiency of the Time to file and serve the case judicial system in resolving a commercial dispute before local courts. Following the step-by-step Time for trial and obtaining judgment evolution of a standardized case study, it collects Time to enforce the judgment data relating to the time, cost and procedural complexity of resolving a commercial lawsuit. The Cost required to complete procedures (% of ranking on the ease of enforcing contracts is the claim) simple average of the percentile rankings on its Average attorney fees component indicators: procedures, time and cost. Court costs The dispute in the case study involves the breach Enforcement costs of a sales contract between 2 domestic businesses. The case study assumes that the court hears an expert on the quality of the goods in dispute. This distinguishes the case from simple debt enforcement. To make the data comparable across economies, Doing Business uses several assumptions about the case: • The seller and buyer are located in the economy’s largest business city. • The dispute on the quality of the goods requires an expert opinion. • The buyer orders custom-made goods, then fails to pay. • The judge decides in favor of the seller; there is no appeal. • The seller sues the buyer before a competent court. • The seller enforces the judgment through a public sale of the buyer’s movable assets. • The value of the claim is 200% of income per capita. • The seller requests a pretrial attachment to secure the claim. Doing Business 2014 LATIN AMERICA 78 ENFORCING CONTRACTS Where do the region’s economies stand today? How efficient is the process of resolving a commercial the ease of enforcing contracts suggest an answer dispute through the courts in economies in Latin (figure 10.1). The average ranking of the region and America? The global rankings of these economies on comparator regions provide a useful benchmark. Figure 10.1 How economies in Latin America rank on the ease of enforcing contracts Source: Doing Business database. Doing Business 2014 LATIN AMERICA 79 ENFORCING CONTRACTS The indicators underlying the rankings may also be procedures, the time and the cost (figure 10.2). revealing. Data collected by Doing Business show what Comparing these indicators across the region and with it takes to enforce a contract through the courts in averages both for the region and for comparator each economy in the region: the number of regions can provide useful insights. Figure 10.2 What it takes to enforce a contract through the courts in economies in Latin America Procedures (number) Doing Business 2014 LATIN AMERICA 80 ENFORCING CONTRACTS Time (days) Doing Business 2014 LATIN AMERICA 81 ENFORCING CONTRACTS Cost (% of claim) Source: Doing Business database. Doing Business 2014 LATIN AMERICA 82 ENFORCING CONTRACTS What are the changes over time? Economies in all regions have improved contract periodic reviews to clear inactive cases from the docket enforcement in recent years. A judiciary can be and by making procedures faster. What reforms improved in different ways. Higher-income economies making it easier (or more difficult) to enforce contracts tend to look for ways to enhance efficiency by has Doing Business recorded in Latin America (table introducing new technology. Lower-income economies 10.1)? often work on reducing backlogs by introducing Table 10.1 How have economies in Latin America made enforcing contracts easier—or not? By Doing Business report year DB year Economy Reform DB2008 Brazil Brazil updated and streamlines its civil procedure rules. DB2008 Guatemala Guatemala updated its claim thresholds. Costa Rica has improved contract enforcement with new modes of service delivery, and auction procedures were DB2010 Costa Rica simplified by authorizing the publication of a single auction notice. Peru has eased contract enforcement by introducing deadlines for filing evidence and for contesting enforcement DB2010 Peru procedures. Further, electronic judicial notices are permissible in lieu of publication in the Official Gazette. Honduras adopted a new civil procedure code that modified DB2012 Honduras litigation procedures for enforcing a contract. Nicaragua raised the monetary threshold for commercial claims that can be brought to the Managua local civil court, DB2012 Nicaragua leaving lower-value claims in the local courts, where proceedings are simpler and faster. Brazil made enforcing contracts easier by implementing an DB2013 Brazil electronic system for filing initial complaints at the São Paulo civil district court. Colombia made enforcing contracts easier by simplifying and DB2014 Colombia speeding up the proceedings for commercial disputes. Mexico made enforcing contracts easier by creating small DB2014 Mexico claims courts, with oral proceedings, that can hear both civil and commercial cases. Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Doing Business 2014 LATIN AMERICA 83 Source: Doing Business database. Doing Business 2014 LATIN AMERICA 84 RESOLVING INSOLVENCY A robust bankruptcy system functions as a filter, WHAT THE RESOLVING INSOLVENCY ensuring the survival of economically efficient INDICATORS MEASURE companies and reallocating the resources of inefficient ones. Fast and cheap insolvency proceedings result in the speedy return of Time required to recover debt (years) businesses to normal operation and increase Measured in calendar years returns to creditors. By improving the expectations of creditors and debtors about the outcome of Appeals and requests for extension are insolvency proceedings, well-functioning included insolvency systems can facilitate access to finance, Cost required to recover debt (% of debtor’s save more viable businesses and thereby improve estate) growth and sustainability in the economy overall. Measured as percentage of estate value What do the indicators cover? Court fees Doing Business studies the time, cost and outcome Fees of insolvency administrators of insolvency proceedings involving domestic entities. It does not measure insolvency Lawyers’ fees proceedings of individuals and financial Assessors’ and auctioneers’ fees institutions. The data are derived from survey Other related fees responses by local insolvency practitioners and verified through a study of laws and regulations as Outcome well as public information on bankruptcy systems. Whether business continues operating as a The ranking on the ease of resolving insolvency is going concern or business assets are sold based on the recovery rate, which is recorded as piecemeal cents on the dollar recouped by creditors through reorganization, liquidation or debt enforcement Recovery rate for creditors (cents on the (foreclosure) proceedings. The recovery rate is a dollar) function of time, cost and other factors, such as Measures the cents on the dollar recovered lending rate and the likelihood of the company by creditors continuing to operate. Present value of debt recovered To make the data comparable across economies, Official costs of the insolvency proceedings Doing Business uses several assumptions about the are deducted business and the case. It assumes that the Depreciation of furniture is taken into company: account • Is a domestically owned, limited liability Outcome for the business (survival or not) company operating a hotel. affects the maximum value that can be recovered • Operates in the economy’s largest business city. • Has 201 employees, 1 main secured • Has a higher value as a going concern—and creditor and 50 unsecured creditors. that the efficient outcome is either reorganization or sale as a going concern, not piecemeal liquidation. Doing Business 2014 LATIN AMERICA 85 RESOLVING INSOLVENCY Where do the region’s economies stand today? How efficient are insolvency proceedings in economies benchmark for assessing the efficiency of insolvency in Latin America? The global rankings of these proceedings. Speed, low costs and continuation of economies on the ease of resolving insolvency suggest viable businesses characterize the top-performing an answer (figure 11.1). The average ranking of the economies. region and comparator regions provide a useful Figure 11.1 How economies in Latin America rank on the ease of resolving insolvency Source: Doing Business database. Doing Business 2014 LATIN AMERICA 86 RESOLVING INSOLVENCY The indicators underlying the rankings may be more Comparing these indicators across the region and with revealing. Data collected by Doing Business show the averages both for the region and for comparator average time and cost required to resolve insolvency regions can provide useful insights. as well as the average recovery rate (figure 11.2). Figure 11.2 How efficient is the insolvency process in economies in Latin America Time (years) Doing Business 2014 LATIN AMERICA 87 RESOLVING INSOLVENCY Cost (% of estate) Doing Business 2014 LATIN AMERICA 88 RESOLVING INSOLVENCY Recovery rate (cents on the dollar) * Indicates a “no practice” mark. See the data notes for details. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 89 RESOLVING INSOLVENCY What are the changes over time? A well-balanced bankruptcy system distinguishes change. Many recent reforms of bankruptcy laws have companies that are financially distressed but been aimed at helping more of the viable businesses economically viable from inefficient companies that survive. What insolvency reforms has Doing Business should be liquidated. But in some insolvency systems recorded in Latin America (table 11.1)? even viable businesses are liquidated. This is starting to Table 11.1 How have economies in Latin America made resolving insolvency easier—or not? By Doing Business report year DB year Economy Reform Argentina amended its bankruptcy legislation with the goal of DB2008 Argentina providing greater protection to labor claims and to free commercial courts from labor actions. Bolivia suspended applications for voluntary restructuring. DB2009 Bolivia The only option left is an unwieldy bankruptcy procedure that typically takes years. Colombia introduced 2 new insolvency proceedings: a reorganization procedure to restructure insolvent companies and a mandatory liquidation procedure. Before, the term DB2009 Colombia allowed to negotiate reorganization agreements was 6 months, with a possible extension of 8 months. The new law limits the term to 4 months, with only a 2-month extension. Mexico amended its bankruptcy law to make reorganization more accessible. Now debtors and creditors may enter into a DB2009 Mexico reorganization agreement at any stage of the insolvency procedure. Colombia passed several decrees continuing its efforts to DB2010 Colombia regulate the profession of insolvency administrators. Uruguay enacted a new insolvency law that aims at keeping DB2010 Uruguay distressed companies operating as a going concern. Colombia amended regulations governing insolvency DB2012 Colombia proceedings to simplify the proceedings and reduce their time and cost Note: For information on reforms in earlier years (back to DB2005), see the Doing Business reports for these years, available at http://www.doingbusiness.org. Source: Doing Business database. Doing Business 2014 LATIN AMERICA 90 DATA NOTES The indicators presented and analyzed in Doing rounds of verification, leading to revisions or Business measure business regulation and the expansions of the information collected. protection of property rights—and their effect on businesses, especially small and medium-size domestic firms. First, the indicators document the complexity of ECONOMY CHARACTERISTICS regulation, such as the number of procedures to start a business or to register and transfer commercial property. Second, they gauge the time and cost to Gross national income per capita achieve a regulatory goal or comply with regulation, such as the time and cost to enforce a contract, go Doing Business 2014 reports 2012 income per capita through bankruptcy or trade across borders. Third, as published in the World Bank’s World Development they measure the extent of legal protections of Indicators 2013. Income is calculated using the Atlas property, for example, the protections of investors method (current U.S. dollars). For cost indicators against looting by company directors or the range of expressed as a percentage of income per capita, assets that can be used as collateral according to 2012 gross national income (GNI) in U.S. dollars is secured transactions laws. Fourth, a set of indicators used as the denominator. GNI data were not documents the tax burden on businesses. Finally, a set available from the World Bank for Afghanistan, The of data covers different aspects of employment Bahamas, Bahrain, Barbados, Brunei Darussalam, regulation. The 11 sets of indicators measured in Djibouti, the Islamic Republic of Iran, Kuwait, Libya, Doing Business were added over time, and the sample Myanmar, New Zealand, Oman, San Marino, the of economies expanded. Syrian Arab Republic, West Bank and Gaza, and the Republic of Yemen. In these cases GDP or GNP per The data for all sets of indicators in Doing Business 2 capita data and growth rates from other sources, 2014 are for June 2013. such as the International Monetary Fund’s World Economic Outlook database and the Economist Intelligence Unit, were used. Methodology Region and income group The Doing Business data are collected in a standardized way. To start, the Doing Business team, Doing Business uses the World Bank regional and with academic advisers, designs a questionnaire. The income group classifications, available at questionnaire uses a simple business case to ensure http://data.worldbank.org/about/country- classifications. The World Bank does not assign comparability across economies and over time—with regional classifications to high-income economies. assumptions about the legal form of the business, its For the purpose of the Doing Business report, high- size, its location and the nature of its operations. income OECD economies are assigned the “regional” Questionnaires are administered to more than 10,200 classification OECD high income. Figures and tables local experts, including lawyers, business consultants, presenting regional averages include economies accountants, freight forwarders, government officials from all income groups (low, lower middle, upper and other professionals routinely administering or middle and high income). advising on legal and regulatory requirements (table Population 21.2). These experts have several rounds of interaction with the Doing Business team, involving conference Doing Business 2014 reports midyear 2012 calls, written correspondence and visits by the team. population statistics as published in World For Doing Business 2014 team members visited 33 Development Indicators 2013. economies to verify data and recruit respondents. The data from questionnaires are subjected to numerous The Doing Business methodology offers several advantages. It is transparent, using factual information 2 The data for paying taxes refer to January – December 2012. Doing Business 2014 LATIN AMERICA 91 about what laws and regulations say and allowing reasons the time delays reported in Doing Business multiple interactions with local respondents to clarify 2014 would differ from the recollection of potential misinterpretations of questions. Having entrepreneurs reported in the World Bank Enterprise representative samples of respondents is not an issue; Surveys or other perception surveys. Doing Business is not a statistical survey, and the texts This year Doing Business completed subnational of the relevant laws and regulations are collected and studies in Colombia, Italy and the city of Hargeisa answers checked for accuracy. The methodology is (Somaliland) and is currently updating indicators in inexpensive and easily replicable, so data can be Egypt, Mexico and Nigeria. Doing Business also collected in a large sample of economies. Because published regional studies for the g7+ and the East standard assumptions are used in the data collection, African Community. The g7+ group is a country- comparisons and benchmarks are valid across owned and country-led global mechanism established economies. Finally, the data not only highlight the in April 2010 to monitor, report and draw attention to extent of specific regulatory obstacles to business but the unique challenges faced by fragile states. The also identify their source and point to what might be member countries included in the report are reformed. Information on the methodology for each Afghanistan, Burundi, the Central African Republic, Doing Business topic can be found on the Doing Chad, the Comoros, the Democratic Republic of Business website at Congo, Côte d’Ivoire, Guinea, Guinea-Bissau, Haiti, http://www.doingbusiness.org/methodology. Liberia, Papua New Guinea, Sierra Leone, the Solomon Islands, South Sudan, Timor-Leste and Togo. Limits to what is measured The subnational studies point to differences in business regulation and its implementation—as well as The Doing Business methodology has 5 limitations that in the pace of regulatory reform—across cities in the should be considered when interpreting the data. First, same economy. For several economies subnational the collected data refer to businesses in the economy’s studies are now periodically updated to measure largest business city (which in some economies differs change over time or to expand geographic coverage from the capital) and may not be representative of to additional cities. This year that is the case for all the regulation in other parts of the economy. To address subnational studies published. this limitation, subnational Doing Business indicators were created (box 21.1). Second, the data often focus on a specific business form—generally a limited Changes in what is measured liability company (or its legal equivalent) of a specified size—and may not be representative of the regulation The methodology for 2 indicator sets—trading across on other businesses, for example, sole proprietorships. borders and paying taxes—was updated this year. For Third, transactions described in a standardized case trading across borders, documents that are required scenario refer to a specific set of issues and may not purely for purposes of preferential treatment are no represent the full set of issues a business encounters. longer included in the list of documents (for example, Fourth, the measures of time involve an element of a certificate of origin if the use is only to qualify for a judgment by the expert respondents. When sources preferential tariff rate under trade agreements). For indicate different estimates, the time indicators paying taxes, the value of fuel taxes is no longer reported in Doing Business represent the median included in the total tax rate because of the difficulty values of several responses given under the of computing these taxes in a consistent way across all assumptions of the standardized case. economies covered. The fuel tax amounts are in most cases very small, and measuring these amounts is Finally, the methodology assumes that a business has often complicated because they depend on fuel full information on what is required and does not consumption. Fuel taxes continue to be counted in the waste time when completing procedures. In practice, number of payments. completing a procedure may take longer if the business lacks information or is unable to follow up In a change involving several indicator sets, the rule promptly. Alternatively, the business may choose to establishing that each procedure must take at least 1 disregard some burdensome procedures. For both day was removed for procedures that can be fully Doing Business 2014 LATIN AMERICA 92 completed online in just a few hours. This change business and the distance to frontier measure. The affects the time indicator for starting a business, ease of doing business ranking compares economies dealing with construction permits and registering with one another, while the distance to frontier property. For procedures that can be fully completed measure benchmarks economies to the frontier in 3 online, the duration is now set at half a day rather than regulatory practice, measuring the absolute distance to a full day. the best performance on each indicator. Both measures can be used for comparisons over time. The threshold for the total tax rate introduced in 2011 When compared across years, the distance to frontier for the purpose of calculating the ranking on the ease measure shows how much the regulatory environment of paying taxes was updated. All economies with a for local entrepreneurs in each economy has changed total tax rate below the threshold (which is calculated over time in absolute terms, while the ease of doing and adjusted on a yearly basis) receive the same business ranking can show only relative change. ranking on the total tax rate indicator. The threshold is not based on any economic theory of an “optimal tax Ease of doing business rate” that minimizes distortions or maximizes efficiency The ease of doing business index ranks economies in the tax system of an economy overall. Instead, it is from 1 to 189. For each economy the ranking is mainly empirical in nature, set at the lower end of the calculated as the simple average of the percentile distribution of tax rates levied on medium-size rankings on each of the 10 topics included in the index enterprises in the manufacturing sector as observed in Doing Business 2014: starting a business, dealing through the paying taxes indicators. This reduces the with construction permits, getting electricity, bias in the indicators toward economies that do not registering property, getting credit, protecting need to levy significant taxes on companies like the investors, paying taxes, trading across borders, Doing Business standardized case study company enforcing contracts, and resolving insolvency. The because they raise public revenue in other ways—for employing workers indicators are not included in this example, through taxes on foreign companies, through year’s aggregate ease of doing business ranking. taxes on sectors other than manufacturing or from natural resources (all of which are outside the scope of Construction of the ease of doing business index the methodology). This year the threshold is 25,5%. Here is one example of how the ease of doing business index is constructed. In Denmark it takes 4 procedures, 5.5 days and 0.2% of annual income per capita in fees Data challenges and revisions to open a business. The minimum capital requirement Most laws and regulations underlying the Doing is 24% of annual income per capita. On these 4 Business data are available on the Doing Business indicators Denmark ranks in the 12th, 11th, 1st and website at http://www.doingbusiness.org. All the 79th percentiles. So on average Denmark ranks in the sample questionnaires and the details underlying the 25th percentile on the ease of starting a business. It indicators are also published on the website. Questions ranks in the 21st percentile on getting credit, 19th on the methodology and challenges to data can be percentile on paying taxes, 27th percentile on submitted through the website’s “Ask a Question” enforcing contracts, 5th percentile on resolving function at http://www.doingbusiness.org. insolvency and so on. Higher rankings indicate simpler regulation and stronger protection of property rights. Ease of doing business and distance to The simple average of Denmark’s percentile rankings frontier on all topics is 17th. When all economies are ordered Doing Business 2014 presents results for 2 aggregate by their average percentile rankings, Denmark stands measures: the aggregate ranking on the ease of doing at 5 in the aggregate ranking on the ease of doing business. 3 For getting electricity the rule that each procedure must take a minimum of 1 day still applies because in practice there are no More complex aggregation methods—such as cases in which procedures can be fully completed online in less than principal components and unobserved components— a day. For example, even though in some cases it is possible to yield a ranking nearly identical to the simple average apply for an electricity connection online, additional requirements mean that the process cannot be completed in less than 1 day. Doing Business 2014 LATIN AMERICA 93 4 used by Doing Business. Thus, Doing Business uses 58 on enforcing contracts, 116 on dealing with the simplest method: weighting all topics equally and, construction permits and 145 on getting electricity. within each topic, giving equal weight to each of the Variation in performance across the indicator sets is topic components. not at all unusual. It reflects differences in the degree If an economy has no laws or regulations covering a of priority that government authorities give to specific area—for example, insolvency—it receives a particular areas of business regulation reform and the “no practice” mark. Similarly, an economy receives a ability of different government agencies to deliver “no practice” or “not possible” mark if regulation exists tangible results in their area of responsibility. but is never used in practice or if a competing Distance to frontier measure regulation prohibits such practice. Either way, a “no practice” mark puts the economy at the bottom of the A drawback of the ease of doing business ranking is ranking on the relevant indicator. that it can measure the regulatory performance of economies only relative to the performance of others. The ease of doing business index is limited in scope. It It does not provide information on how the absolute does not account for an economy’s proximity to large quality of the regulatory environment is improving markets, the quality of its infrastructure services (other over time. Nor does it provide information on how than services related to trading across borders and large the gaps are between economies at a single getting electricity), the strength of its financial system, point in time. the security of property from theft and looting, macroeconomic conditions or the strength of The distance to frontier measure is designed to underlying institutions. address both shortcomings, complementing the ease of doing business ranking. This measure illustrates the Variability of economies’ rankings across topics distance of an economy to the “frontier,” and the Each indicator set measures a different aspect of the change in the measure over time shows the extent to business regulatory environment. The rankings of an which the economy has closed this gap. The frontier is economy can vary, sometimes significantly, across a score derived from the most efficient practice or indicator sets. The average correlation coefficient highest score achieved on each of the component between the 10 indicator sets included in the indicators in 10 Doing Business indicator sets aggregate ranking is 0.38, and the coefficients (excluding the employing workers indicators) by any between any 2 sets of indicators range from 0.18 economy. In starting a business, for example, Canada (between getting electricity and getting credit) to 0.58 and New Zealand have achieved the highest (between trading across borders and resolving performance on the number of procedures required (1) insolvency and between trading across borders and and on the time (0.5 days), Denmark and Slovenia on getting electricity). These correlations suggest that the cost (0% of income per capita) and Chile, Zambia economies rarely score universally well or universally and 99 other economies on the paid-in minimum badly on the indicators. capital requirement (0% of income per capita) (table 22.2). Consider the example of Canada. It stands at 19 in the aggregate ranking on the ease of doing business. Its Calculating the distance to frontier for each economy ranking is 2 on starting a business, 4 on protecting involves 2 main steps. First, individual indicator scores investors, and 8 on paying taxes. But its ranking is only are normalized to a common unit: except for the total tax rate, each of the 31 component indicators y is rescaled to (max − y)/(max − min), with the minimum 4 See Simeon Djankov, Darshini Manraj, Caralee McLiesh and Rita Ramalho, “Doing Business Indicators: Why Aggregate, and How to value (min) representing the frontier—the highest Do It” (World Bank, Washington, DC, 2005). Principal components performance on that indicator across all economies and unobserved components methods yield a ranking nearly identical to that from the simple average method because both since 2003 or the first year the indicator was collected. 5 these methods assign roughly equal weights to the topics, since the For the total tax rate, consistent with the calculation of pairwise correlations among indicators do not differ much. An alternative to the simple average method is to give different weights to the topics, depending on which are considered of more or less 5 Even though scores for the distance to frontier are calculated from importance in the context of a specific economy. 2005, data from as early as 2003 are used to define the frontier Doing Business 2014 LATIN AMERICA 94 the rankings, the frontier is defined as the total tax rate Economies that improved the most across 3 or at the 15th percentile of the overall distribution of more Doing Business topics in 2012/13 total tax rates for all years. Second, for each economy Doing Business 2014 uses a simple method to calculate the scores obtained for individual indicators are which economies improved the most in the ease of aggregated through simple averaging into one doing business. First, it selects the economies that in distance to frontier score, first for each topic and then 2012/13 implemented regulatory reforms making it across all topics. An economy’s distance to frontier is easier to do business in 3 or more of the 10 topics indicated on a scale from 0 to 100, where 0 represents included in this year’s ease of doing business ranking. 6 the lowest performance and 100 the frontier. Twenty-nine economies meet this criterion: Azerbaijan, The maximum (max) and minimum (min) observed Belarus, Burundi, Côte d’Ivoire, Croatia, Djibouti, values are computed for all economies included in the Gabon, Guatemala, Guinea, Italy, Kosovo, Latvia, the Doing Business sample since 2003 and for all years former Yugoslav Republic of Macedonia, Malaysia, (from 2003 to 2013). To mitigate the effects of extreme Mauritius, Mexico, Moldova, Mongolia, Morocco, outliers in the distributions of the rescaled data (very Panama, the Philippines, the Republic of Congo, few economies need 694 days to complete the Romania, the Russian Federation, Rwanda, Sri Lanka, procedures to start a business, but many need 9 days), Ukraine, Uzbekistan and the United Arab Emirates. th the maximum (max) is defined as the 95 percentile of Second, Doing Business sorts these economies on the the pooled data for all economies and all years for increase in their distance to frontier measure from the each indicator. The exceptions are the getting credit, previous year using comparable data. protecting investors and resolving insolvency Selecting the economies that implemented regulatory indicators, whose construction precludes outliers. In reforms in at least 3 topics and improved the most in addition, the cost to export and cost to import for each the distance to frontier measure is intended to year are divided by the GDP deflator, so as to take the highlight economies with ongoing, broadbased reform general price level into account when benchmarking programs. The criterion for identifying the top these absolute-cost indicators across economies with improvers was changed from last year. The different inflation trends. The base year for the deflator improvement in ease of doing business ranking is no is 2013 for all economies. longer used. The improvement in the distance to The difference between an economy’s distance to frontier measure is used instead because under this frontier score in any previous year and its score in measure economies are sorted according to their abs- 2013 illustrates the extent to which the economy has olute improvement instead of relative improvement. closed the gap to the frontier over time. And in any given year the score measures how far an economy is from the highest performance at that time. Take Colombia, which has a score of 70.5 on the distance to frontier measure for 2014. This score indicates that the economy is 29.5 percentage points away from the frontier constructed from the best performances across all economies and all years. Colombia was further from the frontier in 2009, with a score of 66.2. The difference between the scores shows an improvement over time. The distance to frontier measure can also be used for comparisons across economies in the same year, complementing the ease of doing business ranking. For example, Colombia stands at 63 this year in the ease of doing business ranking, while Peru, which is 6 Doing Business reforms making it more difficult to do business are 29.3 percentage points from the frontier, stands at 42. subtracted from the total number of those making it easier to do business. 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