WP62284 © 2009 International Finance Corporation IFC/ The World Bank Group 2121 Pennsylvania Avenue, NW, Washington, DC 20433 Web Page: www.ifc.org All rights reserved. Printed in Lima, Peru A publication from International Finance Corporation (IFC) member of the World Bank Group First Edition: August 2009 Legal Deposit of the Biblioteca Nacional del Perú Nº 2009-08879 The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the World Bank Group or the governments they represent. The IFC does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of the IFC concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. 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Website Information Electronic version of this publication can be found on the Internet, at: http://www.municipalscorecard.org The attached CD has detailed information about the 176 municipalities that participated in the study. Index Foreword Acknowledgements Executive Summary I Introduction 1 Chapter 1: Operating Licenses 3 Chapter 2: Construction Permits 21 Chapter 3: Property Tax Payment 41 Chapter 4: Learning from Good Practices 51 Annexes 63 FOREWORD Foreword In Latin America, municipal level procedures and regulations are among the most complex and time consuming elements in the entire formal business licensing process. The time and costs incurred by firms to fulfill these processes, which can take more than 100 days in some municipalities, often represent a significant deterrent for business owners to move out of the informal economy. For this reason, it is essential to carry out actions that contribute to the improvement and simplification of municipal procedures, in order to facilitate the work of firms, reduce informality, and encourage investment and job creation. The International Finance Corporation (IFC), member of the World Bank Group, promotes sustainable economic growth and works to improve the business climate in developing countries through its Investment Climate Advisory Services (IC AS) program in Latin America and the Caribbean. The IC AS program, in its commitment to promote growth led by the private sector, supports municipal simplification initiatives throughout the Region. The improvement and simplification of municipal procedures are crucial to attract investment, create jobs, and at the same time promote, business development in the formal economy. From the initial pilot project in Bolivia in 2004, which had an active involvement of the municipality of La Paz, IFC has expanded its program to eight countries in the Region. IFC’s work in coordination with several public and private organizations and over 52 municipalities in Latin America has contributed to improving the business climate that resulted in the formalization of more than 50,000 firms in the Region. To complement these efforts, IFC launched the Municipal Scorecard in 2007, a study that is based on entrepreneurs opinion on municipal bureaucratic burdens faced by firms needing to obtain permits and licenses. The Municipal Scorecard is a benchmarking tool that measures the efficiency of processes for business regulation affecting the business sector at this level. The first study in this series was developed in 2007 and covered 65 municipalities in Bolivia, Brazil, Honduras, Nicaragua and Peru. In 2008, the Municipal Scorecard report was expanded to also include Colombia, Ecuador, El Salvador, Guatemala, and Mexico. This report explores the procedures that small and medium enterprises have to face when obtaining an operating license, a construction permit, and local property tax payment at the municipal level. This year, the Municipal Scorecard 2008 involved 176 municipalities that confirmed their interest by sending letters of commitment to participate in the study. While an effort was made to include all of them in the analysis of all the study variables, some municipalities were not able to participate in the ranking this year because of insufficient information gathered. On the other hand, sufficient information on operating licenses was gathered from firms and municipal officials in 143 municipalities. Data on construction permits came from 131 municipalities, while firms and officials from 159 municipalities contributed information on local property tax payments. Since the data was gathered from 10 countries, a different timeframe was allocated for processing data in each country. This study also identifies municipal good practices in granting these licenses and permits, and disseminates their successful experiences in the Region. With these tools, municipalities can improve their business environment in their own jurisdiction and eliminate barriers that discourage business owners to start a business or remain informal to avoid the costly and complicated entrance to the formal market. IFC in coordination with its donor partners, academic partners, and private sector partners, and national, state and municipal government entities has developed workshops to disseminate the results of this work and contributed to creating a dialogue to motivate reform. Through this report, IFC has made available a tool that will contribute to enhance the business climate throughout the LAC Region. Main Differences of the Municipal Scorecard Methodology and other World Bank Studies The Municipal Scorecard (MSC) is a study that measures firm and municipal official perception of the business climate conducted by the World Bank Group. The study measures the efficiency of the regulatory processes at the municipal level, from the time when a firm looks for information on a specific procedure, to the time the firm completes all processes. The World Bank Group also conducts other studies such as Doing Business (DB), Investment Climate Assessments (ICA), among others, that evaluate the time and costs for firms to comply with regulatory procedures. For instance, for business entry, the Subnational Doing Business study (SNDB) in Mexico and Colombia is applied on a standardized manner. It evaluates the complete process required for a firm to legally become a limited liability company. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with its relevant authorities at the federal, state, and municipal levels. However, the MSC is conducted with a different and unique methodology aimed to complement existing World Bank studies. Sub National Doing Business gathers opinions from experts on bureaucratic processes based on a case study from a fictitious firm. These experts include lawyers, business transaction experts, architects, accountants, construction firms, government officials, and professionals that advise businesses on regulatory or legal processes. In the case of the construction permit, the Mexico Subnational Doing Business study records all procedures required for a business in the construction industry to build a standardized warehouse. These procedures include submitting all relevant project-specific documents such as, building plans and site maps to the authorities; obtaining all necessary clearances, licenses, permits and certificates; completing all required notifications; and receiving all necessary inspections. Subnational Doing Business includes procedures for obtaining all utility connections and procedures necessary to register the property so later on it could be used as collateral or transferred. In the SNDB the survey divides the process of building a warehouse into distinct procedures and calculates the time and cost of completing each procedure in practice under normal circumstances. The MSC only evaluates the procedures related to obtaining the construction permit and not the procedure involving the national authorities. In the case of the MSC, the study collects information on time, costs, number of visits and percentage of rejected applications. Additionally, the study collects information on access to information, inspections, training, tools, customer service, and audits. The methodology used for the variables of cost and time in both studies is different and the results are not comparable, but can be seen as complementary. In summary, the major differences between Subnational Doing Business and the Municipal Scorecard are the following: Subnational Doing Business Municipal Scorecard UÊ /…iÊ ÃÌÕ`ÞÊ ˆÃÊ L>Ãi`Ê œ˜Ê >˜Ê iÝ>“ˆ˜>̈œ˜Ê œvÊ >ÜÃ]Ê UÊ /…iÊ ÃÌÕ`ÞÊ VœiVÌÃÊ ˆ˜vœÀ“>̈œ˜Ê vÀœ“Ê wÀ“Ã]Ê Ì…ˆÀ`Ê regulations and public information. This information party professionals acting on behalf of the firm, and is revised and validated by local experts and municipal municipal officials that are directly involved in the officials. processes covered by the Municipal Scorecard. UÊ /œÊ“>ŽiÊ̅iÊ`>Ì>ÊVœ“«>À>LiÊ>VÀœÃÃÊVœÕ˜ÌÀˆiÃÊ>˜`Ê̈“i]Ê UÊ /…iÊÃÌÕ`Þʈ˜ÌiÀۈiÜÃʏœÜÊÀˆÃŽÊwÀ“ÃÊ̅>Ìʅ>ÛiÊ>Ài>`ÞÊ the study uses a standardized case study with specific completed the procedures for a license or permit within assumptions (such as type of company, size, location, a specified period of time. The participating firms are type of commercial activity). selected based on those that most recently completed the procedures. UÊ /…iÊÃÌÕ`ÞÊ>ÃÃՓiÃÊ>ÊLÕȘiÃÃʅ>ÃÊ«iÀviVÌʈ˜vœÀ“>̈œ˜Ê on the processes and does not waste time acquiring UÊ /…iÊ ÃÌÕ`ÞÊ }>̅iÀÃÊ ˆ˜vœÀ“>̈œ˜Ê >LœÕÌÊ Ì…iÊ «iÀVi«Ìˆœ˜Ê information. In practice, completing a procedure can of firms and includes the time that firms spend in take a lot more time if the company lacks information acquiring information to complete the procedures. or is unable to dedicate time to completing certain This means that the information that the entrepreneur requirements. Alternatively, the company can decide has before the procedure is important. not to complete burdensome processes. This could explain the delays reported from firm surveys. UÊ /…iÊÃÌÕ`ÞÊÌ>ŽiÃʈ˜ÌœÊ>VVœÕ˜Ìʜ˜ÞÊ̅iʓ՘ˆVˆ«>Ê«>ÀÌʜvÊ the process required by firms to obtain a construction UÊ /…iÊÃÌÕ`ÞÊVœ˜Ãˆ`iÀÃÊ̅iÊ«iÀëiV̈ÛiʜvÊ̅iÊwÀ“]ÊÌ>Žˆ˜}Ê permit, operating license, or paying property taxes. into account the whole process for each indicator in all levels of government (federal, state, and municipal). ACKNOWLEDGEMENTS Acknowledgements I FC would like to thank all the business owners and municipal employees who patiently took the time to answer our questions and share their experiences. We thank Several organizations contributed to the design and implementation of the Municipal Scorecard 2008. The methodology was developed by the Latin American Center for their participation and wish to help in improving the business Competitiveness and Sustainable Development (CLACDS), climate in which they live and work every day. at the INCAE Business School, headed by its president Roy Zúñiga. INCAE’s team included Ana María Majano, Luis We wish to commend the mayors of the participating Rivera, Luis Reyes and Bernard Kilian. municipalities and their staff for allowing us to measure their processes, even when they were aware that they would not rank Benedikt Kronberger, Javier Patiño and the members of the among the best in their respective countries. This requires true Latin American Center for Competitiveness and Sustainable vision and will, and proofs of their great willingness to learn, Development (CLACDS), at the INCAE Business School, which is a crucial component of continued improvement. provided data analysis. The report was edited and translated by Sidney Evans. This study was possible thanks to the financial support of the State Secretariat for Economic Affairs of the Swiss The surveys in each country were conducted by the Government (SECO); the Department for International following local partners: Development of the United Kingdom’s (DFID) in Central America; the United Kingdom Foreign Office’s Strategic In Bolivia, Universidad Privada Boliviana (UPB), chaired Programmatic Fund (SPF), USAID in Peru through its “MYPE by Pablo Zegarra. UPB team members included Angélica Competitiva” project, Fitch Ratings Ltd in Mexico, FIDE Álvarez, Andrea Fernández, Rosa Angela Gallardo, Cristian (Inversion y Exportaciones) in Honduras, the National Institute Marca, Cecilia Pinedo, Teresa Polo, Marcela Quiroga, Teófilo for Federalism and Municipal Development (INAFED), the Quispe, Gabriela Sossa, Mary Isela Zambrana, Natalia Zegarra, Industry, Commerce, Tourism Chamber of Santa Cruz Bolivia and Martha Zuleta. (CAINCO), the National Council for Reactivation, Production and Competitiveness (CNPC) in Ecuador, and the National In Brasil, Fundacao de Emprendimientos Cientificos e Program for Competitiveness (PRONACOM) in Guatemala. Tecnologicos (FINATEC), from the University of Brasilia (UnB) under the direction of Henrique Carlos de Oliveira The Municipal Scorecard 2008 was managed by Arsala de Castro. The team was comprised of Tomás de Aquino Deane, IC AS Associate Operations Officer. The report was Guimarães, Maria Inez Machado Telles Walter, Neyla drafted by a technical team including Lya Mainé Astonitas, Vaserstein Jacobovicz, Moisés Villamil Balestro and Eduardo IC AS Program Analyst, and consultants Lorena López Raupp de Vargas. Ángel, Patricia Ritter, José Roldán Xopa, Horacio San Martín Prudencio and PricewaterhouseCoopers consultancy team. In Ecuador, Universidad Catolica Santiago de Guayaquil, Kristtian Rada, IC AS Program Officer, Alvaro Quijandría, under the direction of Olilia Carlier and the coordination of IC AS Program Manager, and Luke Haggarty, General María Eloisa Velásquez. The team included Eduardo Severino, Manager for IFC Advisory Services in Latin America and the Ernesto Serrano and Edgar López Moncayo, among others. Caribbean provided supervision and technical guidance in preparing the report. In El Salvador, Centro de Informacion de la Opinion Dr. Felipe González y González. The team included Marco Publica Salvadoreña (CIOPS) from the Universidad Tecnologica Iván Escotto Arroyo, Fernando Bárcenas Merlo, José Cruz de El Salvador (UTEC), led by Francisco Armando Zepeda, Ramos Báez, Irén Castillo Saldaña, Octavio Saucedo and José Director of CIOPS. The team included Marco Vela Nuila, Guillermo Gómez Torres. Mauricio Aguilar Vanegas, Nelson Deras, Rocío Ferrufino, Zaira Hernández, Jonathan Ochoa and Carlos Rodríguez. In Nicaragua, Universidad Americana (UAM), under the direction of Ana María Hernández. The team included Juan In Guatemala, Universidad Rafael Landívar (URL), Ramón Castillo Flores, and received support from Juan Ramón under the direction of Ana Victoria Peláez. The team included Castillo Barreto, Juan Andrés Castillo, Massiel Valenzuela and Oliver Aguilar, Óscar Grajeda, Andrés Huard, María José de Larry Valladares Barahona. León, Marta Peláez, Italia Pineda, María José Schaefer and Samuel Zapil. In Peru, Pontificia Universidad Católica del Peru, under the direction of David Sulmont. The team included Manuel Flores, In Honduras, Universidad José Cecilio del Valle (UJCV), Arturo Maldonado, Edwin Coahila, and Pryscilla Reque. under the direction of Carlos Alberto Ávila Molina. The team included Myriam Castro, Ingrid Chávez, María Elena Quan y At last, but certainly not least, we would like to thank the Aída Rodríguez. following peer reviewers who graciously dedicated their time to provide substantive observations and comments improving, In Mexico, Instituto Panamericano de Alta Direccion the Municipal Scorecard this year: Florentin Blanc, Mierta de Empresa (IPADE) and its Centro de Estudios para la Capaul, Thomas Haven, Peter Ladegaard, Andrei Mikhnev, Gobernabilidad Institucional (CEGI), under the direction of and Thomas Moullier. EXECUTIVE SUMMARY Executive Summary The Municipal Scorecard 2008 report is a benchmarking to understand what areas to improve and where they can tool that compares municipal level regulatory processes find good practices in municipal management of licenses efficiency for businesses to obtain a municipal operating and permits. While the rankings presented do not necessarily license or construction permit, and allows municipalities to capture all issues related to business climate, they provide compare themselves nationally and internationally. Despite an indication of potential problems and identify specific the challenges of implementing a perception study and using processes that may be ripe for reform. This report analyzes the findings to construct rankings, the Municipal Scorecard three municipal procedures: municipal operating licenses, has been perceived as a useful tool by municipalities wishing construction permits and payment of property taxes. Firm Perception: Only One Side of the Coin The Municipal Scorecard is based on firms and municipal officials perceptions on municipal regulatory processes that help firms formalize. The findings of the study should not be interpreted as an evaluation of efficiency or effectiveness of the regulatory framework. From the firms point of view, less time and costs to go through bureaucratic processes are always more favorable. From the point of view of the municipality, efficiency in time and cost should be balanced with regulatory compliance to be able to meet regulatory goals. The lowest scores for time and costs taken from firm perception should also be complemented with an evaluation of the effectiveness and efficiency of the regulatory framework. The latter requires more detailed analyses that could complement the findings of the Municipal Scorecard. In most countries, businesses need to register in a national for such regulatory purposes. However, the Municipal Scorecard government database and typically this is the only regulatory does not enter into this discussion. Rather it measures the requirement firms face to begin operations unless their regulatory barriers that such practices impose on the private activities are subject to sector-specific licensing. However, sector. municipalities in Latin America use operating licenses as the final step to formalize a business. Prior to this step, firms must A firm with an operating license means it operates legally complete several regulatory municipal and other government in a given jurisdiction and that the municipality has been able level procedures required to regulate economic activity. Many to conduct the necessary inspections prior to the firm starts municipalities use licensing as the last step to try to ensure operating. It means the firm has access to municipal services regulatory compliance, and to obtain better information about and has a reduced likelihood of harassment from inspectors.1 economic activities in their jurisdictions, make firms comply Municipalities use construction permits to ensure firms comply with local regulations on safety, environment, health and with construction plans and these adhere to safety and urban zoning, and improving their rules. Some municipalities use development standards. Once formalized, firms are expected the license as a way to improve their tax collection. It could to comply with various tax obligations at the municipal level, be argued that municipal granting licenses should not be used such as the property tax payment. 1 In Latin America firms are randomly visited by inspectors. These visits sometimes are accompanied by requests for extra-official payments. I According to the World Bank Study, Doing Business 2007, and permits.3 The overall regional ranking shows the position more than half of the countries in the Region require an of each participating municipality based on its respective score operating license at the central government level along with obtained through a factor analysis of the variables. one at the municipal level. Unfortunately, obtaining licenses in most of the municipalities in Latin America implies costly, The sample size includes firms that recently acquired slow, and in many cases ambiguous processes, affecting an operating license, construction permit or payed property investment climate which could be a factor to discourage tax. The firm is not operating in a protected zone or in any businesses formalization and property tax payment. Acquiring area designated as cultural heritage. The size of the firm does access to information is often complicated. Another problem not exceed 500m2 for the operating license or 800m2 for the is that requirements and forms that business owners should construction permit.4 fulfill are difficult to complete. Processes to complete one procedure may require a number of prior steps. Firms often Regional Ranking of the need to make long lines at the municipal office only to be told Operating License to come back another day. The municipalities that received the highest scores in the IFC launched the first Municipal Scorecard report in regional ranking for the operating license are the municipalities 2007 as a benchmarking tool that gauges, firm perception on of Chihuahua in Mexico, Esteli in Nicaragua, and Merida in the efficiency of municipal licenses and permits and gathers Mexico. These municipalities have implemented one stop information about good practice in municipal management shops to speed up the licensing process and provide more of these procedures. The Municipal Scorecard strives to create customer service oriented procedures. In Esteli the process to demand for reform so that municipalities eliminate the obtain an operating license takes one day and one visit. As a bottlenecks faced by firms when acquiring a license or permit. result, Esteli is ranked high in the performance index and is the The first study in this series, the Municipal Scorecard 2007, most efficient in the process index among the municipalities in was implemented in five countries: Bolivia, Brazil, Honduras, Nicaragua. Nicaragua and Peru and it was based on information collected from 65 municipalities. In the 2008 report, the Municipal Regional Ranking of the Construction Scorecard was expanded to a total of 10 countries, adding Permit Colombia, Ecuador, El Salvador, Guatemala and Mexico. Colombia is not part of the regional ranking because the The municipalities that scored high in the regional operating license process was eliminated. In Honduras the ranking for the construction permit also had good scores in report includes firms that renewed their licenses and obtained the performance index and the process index. A municipality new ones. This year’s report includes information from a total of can do well in one index and poorly in another, but to gauge 143 municipalities for operating license, 131 for construction the efficiency of the process both indices are used to rank the permits and 159 for payment of the property tax. municipality in the scorecard. From 131 municipalities in the regional ranking, Esteli in Nicaragua is in the first place The Municipal Scorecard 2008 identifies from the followed by Santa Catarina Pinula in Guatemala, and six entrepreneur perpective, best practices from participating Mexican municipalities that are in the top ten positions. Two municipalities to motivate municipalities to improve municipalities in Ecuador and one in Peru are in positions 10 administrative procedures. This report presents the results of to 15 in the regional ranking. two indices: the performance index and the process index. Performance index measures the time, cost and number of visits business owners make to municipal offices, and the percentage of rejected applications.2 The process index evaluates the information, training, customer service, tools, audits, and inspections municipalities use in processing licenses 2 The percentage of rejected applications is the gross percentage of firms to whom at least once their license was rejected when they applied for it. 3 Process variables are important because they measure the effectiveness of municipal administration on licenses and permits. It is important that municipalities grant licenses and permits quickly, however this should be done respecting regulatory standards. The process index measures these standards and also the available tools for municipalities to manage these procedures. 4 More information about the sample can be found in the methodology section in the Annex. II EXECUTIVE SUMMARY Property Tax Payment in the Region In sum, 54 percent of the municipalities that participated in both studies had a significant reduction in the number of For the property tax payment, the study did not include days to obtain a construction permit. Fifty six percent of the El Salvador and Brazil. In El Salvador there is no property municipalities show a reduction in costs. This reduction is tax and in Brazil, the majority of the firms pay the tax due mainly to the simplification projects implemented by through the Internet. For the other participating countries, the municipalities. most municipalities have favorable indicators measuring the efficiency of the property tax payment procedure. This While it is not possible to attribute these reforms to the may be due to the fact that municipalities have simplified Municipal Scorecard, it is important to note that 75 percent these procedures. As a result, the analysis focuses on good of the participating municipalities are planning to implement practices found in the Region. The study shows that the time reforms in the next two years, or are currently implementing required to pay the property tax is around four days.5 In them. Due to their interest in reforming, municipalities will general, firms did not find the payment too bureaucratic or be able to contribute positively to the business environment in the cost too high. the Region. Conclusions According to the results of the Municipal Scorecard 2008, the region would benefit from reforms in construction permits. A number of municipalities in Latin America have recently Eighty three of the participating municipalities have not simplified conducted reforms and others are in the process of implementing these processes and could improve their rankings. Only some reforms to simplify the operating license procedure. The first municipalities have begun the process of simplification. report, the Municipal Scorecard 2007, presented a ranking of 65 municipalities from five countries in Latin America. From this When a reform implies regulatory and organizational number, 57 municipalities are included in the second edition, changes, there is always a risk government departments may the Municipal Scorecard 2008. A significant percentage of these reject or delay such reforms. It is extremely important that municipalities has improved the time and costs required to reforms are designed in a sustainable way over time and are obtain an operating license. not subject to changes in staff due to election cycles. This can be done through the proper use of tools and adequate Out of the 57 municipalities that participated in both training of municipal officials. studies, 35 municipalities reduced the time required to obtain a license by an average of 33 days. Firm visits to the municipality Regulatory burden faced by firms has fueled a negative reduced to 2 visits in 20 municipalities. perception of services provided by municipalities which has encouraged informality in the Region. For this reason, it is In terms of cost, 40 out of the 57 municipalities reduced important that municipalities improve their administrative their costs to obtain an operating license. These costs were procedures and the perception that their constituents currently reduced by an average of 2.7 percent of GDP per capita. In hold. A collateral effect of excessive regulation is that firms general, 61 percent of the municipalities that participated in prefer to stay informal, particularly if they perceive taxes paid both studies show a significant reduction in the number of days do not lead to an improvement in the public services. To this to acquire a license and a 70 percent reduction in the cost to end, the policies that reduce regulatory burdens faced by the acquire a license. private sector and improve their quality of services do have a positive direct or indirect effect on tax collection, as more Thirty one out of the 57 municipalities that participated firms are encouraged to formalize. in both studies have reduced the time to obtain a construction permit by an average of 67 days. Thirty of these 57 Although many municipalities in the Region are municipalities have reduced the number of visits to 5. Thirty implementing simplification projects, there is still ample room two municipalities have reduced costs by approximately 9.6 for improvement. Some municipalities conducted reforms but percent of GDP per capita. these do not reflect an overall improvement in the ranking 5 Firms were asked to report on the most recent payment process they conducted for their land tax payment obligation. In some countries this payment is done annually, while in others it is done periodically in a year. III because the surveys took place during or prior to the reform receive a permit or license. The reforms should establish clear effort. On the other hand, some of these improvements are criteria to ensure regulatory compliance. The reforms must be not always perceived by business owners. Narrowing this designed in a way that is sustainable over time. At the same time, perception gap will require better communication channels periodic monitoring and evaluation of the procedures helps between the two sides. Moreover, actively involving the private keep them efficient. It is important to clarify that simplification sector in monitoring these reforms is fundamental to ensure does not mean deregulation. An effective simplification effort their sustainability over the long term and to build confidence should create an positive regulatory environment, which allows between the private and public sectors. regulatory compliance to be accomplished in a timely and efficient manner. The implementation of reforms should not only be limited to a reduction in time or number of processes for a firm to IV INTRODUCTION Introduction M ost Latin American governments have decentralized the management of business licenses, inspections and permits to the municipal level of government. Local authorities innovation. Firms that operate informally generally are subject to financial penalties and tend to remain small in size. now play an increasingly important role in regulating the Efficient regulations should create an enabling private sector in most countries throughout the Region. environment for firms that need to enter into the formal When a firm decides to become formal, the municipality is market. Unfortunately, obtaining a license or permit from most often the first government office entrepreneurs should attend Latin American municipalities involves a series of slow, costly to comply with business regulation. and murky processes. Firms face difficulties in acquiring basic information, and different municipal authorities repeatedly ask Business licenses and permits are often used as regulatory for the same information. Business owners face endless queues tools in most Latin American municipalities. Licenses and and are often asked to return the following day or week. permits allow governments to create a set of minimum standards for commercial activity, so that business activities In some municipalities firms are asked to pay extremely do not have adverse effects on a community. high fees for their licenses, worse still business owners report that some municipalities request additional payments to speed Operating licenses are used as the final step to set up up the paperwork. To avoid all these hassles, many business adequate standards for health, safety and zoning plans. owners choose to operate informally. Unfortunately, this Construction permits ensure that firms comply with safety codes implies increased difficulties with ensuring compliance of and that construction projects fit with city planning. Efficient zoning, health, environment or safety codes or that these are tax collection provides municipalities with the revenue needed to not considered and therefore, the community remains without improve public service delivery. These resources can be used for accurate protection. High levels of informality can result in less needed public projects, including roads, schools, and water and job creation to the detriment of the community. sewer systems. Regulations promote safety, encourage growth and citizen welfare, and contribute to better city planning and For the Municipal Scorecard 2008 11,783 business development. Obtaining an operating license at the municipal owners and 1,601 officials were interviewed. Firms were level is a requirement that is commonly established as the final asked to mention the main incentives to acquire a license in step prior to starting a business. The business complies with all their countries. Almost 45 percent of business owners said regulations from different levels of government before getting the “complying with the law” is the main reason to apply for an license.There is a debate about whether the operating license is operating license while 24.5 percent said they obtained their a useful instrument to regulate the private sector. The Municipal license to avoid fines. Another 28.9 percent said “having to Scorecard report does not intend to enter into this discussion; renew their operating license and related permits annually” is rather, it seeks to measure the bureaucratic obstacles that the one major incentive for business owners to operate informally. private sector faces in acquiring a license or permit. When asked about the main reasons to acquire a Complying with effective regulations protects businesses. construction permit, 41 percent of business owners said they Operating formally lends credibility to a business operation. acquired it “complying with the law”, while 16.2 percent Being part of the formal market helps firms grow, access credit, said they went through the procedures to avoid paying fines. increase productivity, and take advantage of technological Another 21.2 percent who went through the processes said 1 “having to go through the property titling processes” was by identifying the constraints faced by new business owners one of the disadvantages of trying to get a permit. wishing to join the formal market. Our findings shed light on the experience of firms in complying with these regulations Twenty five percent of firms surveyed on operating and the costs they face to acquire a municipal operating licenses and construction permits said that “having to pay license or permit. taxes” was a major disadvantage of obtaining a permit. The Municipal Scorecard 2008 presents the results of two To encourage companies to join the municipal formal variables: performance and process. These variables measure economy, governments need to make permits and license how the municipalities manage the administrative procedures processes more efficient. Municipalities need to reduce for the operating license, construction permit, and payment the time and cost of processes, and improve the quality of of the property tax. The performance variables measure the services rendered to license and permit applicants. time, cost, number of visits to government offices, and the percentage of rejected applications. The process variables The Municipal Scorecard is a perception study and a measure the information, training, customer service, tools, benchmarking tool used to compare relevant municipal audits, and inspections used by municipal governments to procedures affecting business. After a detailed analysis, handle these procedures. The ranking presents the position municipal operating licenses, construction permits and the of participating municipalities according to the different payment of property taxes were chosen as the three processes variables in the analyzed procedures. that were reported as fairly burdensome according to the Doing Business 2006 and 2007 reports.6 The Municipal Scorecard measures efficiencies involved in those processes What is new in this years is the report? UÊ /…ˆÃÊÞi>ÀÊ££]ÇnÎÊLÕȘiÃÃʜܘiÀÃÊ>˜`Ê£]Èä£Ê“Õ˜ˆVˆ«>ÊœvwVˆ>ÃÊÜiÀiÊÃÕÀÛiÞi`°ÊÊ̜Ì>ÊœvÊ£Î]În{ÊÃÕÀÛiÞÃʈ˜ÊÌi˜ÊVœÕ˜ÌÀˆiÃÊ were carried out, while last year 3,290 surveys were applied in five countries. UÊ /…ˆÃÊ i`ˆÌˆœ˜Ê ˆ˜VÕ`iÃÊ Ì…iÊ >˜>ÞÈÃÊ œvÊ Ì…iÊ «>ޓi˜ÌÊ œvÊ «Àœ«iÀÌÞÊ Ì>Ý]Ê ÌœÊ “i>ÃÕÀiÊ Ì…iÊ œLÃÌ>ViÃÊ Ì…>ÌÊ wÀ“ÃÊ v>ViÊ ÌœÊ ˆ˜ˆÌˆ>ÌiÊ >Ê business. When comparing the results of the participating municipalities in the Municipal Scorecard 2007 with the ones from the Municipal Scorecard 2008, 61% of them have significantly reduced the number of days to obtain an operating license and 54% to obtain a construction permit. This reduction is due to simplification projects. Although these reforms themselves cannot be attributed only to the Municipal Scorecard, it is important to emphasize that 87% of the surveyed municipalities have been motivated by the study and are planning to carry out reforms in the next years or are currently in implementation. To date, IFC has contributed with the implementation of 18 projects in over 50 municipalities in the Region. The objective of this study is not only to encourage Scorecard includes process variables in the process sub- municipalities to process operating licenses and construction index. permits in a shorter time frame and at lower costs for firms, but also that these procedures follow good practice in Chapters 1, 2 and 3 analyze operating licenses, processes management. For example, good practice involves construction permits, and tax payments respectively. Chapter using a risk management system that classifies businesses 4, Learning from Good Practices, describes experiences from according to economic activity or using an updated zoning municipalities that have embarked on reforms and have system. Because of this reason, the ranking of the Municipal reported lessons in implementation. 6 Reports from the World Bank Group. According to Doing Business 2007, more than half of the countries in Latin America require a general operating license besides the commercial registration. The payment of the property tax was chosen as new indicator because it is the most significant tax collected by the munici- palities, and there is limited available information about its efficiency. 2 OPERATING LICENSES Chapter 1 Operating licenses Prior to 2006, starting a new business took approximately 45 days in Tegucigalpa. Thirty five of those days were spent obtaining the operating license in the municipality. The excessive time required to open a new business encouraged high informality in the capital of Honduras.7 Several problems can account for the lags and delays. The municipality lacked a risk-based classification system of firms. As a result, both high and low-risk businesses8 went through the same process. Procedures to conduct inspections were highly discretionary. In addition, the Municipal Scorecard 2007 revealed that Tegucigalpa provided poor quality information to those seeking a license. Municipal officials in charge of licenses were ranked low in training. Because of such problems, the municipality not only lost information and control over the economic activities within its jurisdiction, but also potential tax revenues. For firms, choosing to remain informal meant foregoing access to public services and other benefits derived from formalization. In 2006 the municipality of Tegucigalpa launched a program to simplify the processes to obtain an operating license. This program was comprised of three phases, firstly a diagnosis that identified the existing bottlenecks; secondly proposals were elaborated to make processes more efficient; and finally the implementation of a reform based on those proposals was initiated. The program improved the information available to firms, and created an efficient zoning and risk based categorization of economic activities. In addition, inspections were grouped under one single multidisciplinary inspection. New information technology improved process management. By the end of 2007, Tegucigalpa was able to report on the results of the reform. The time needed to obtain an operating license was reduced to one day for low-risk firms and four days for high-risk businesses. The number of visits dropped from 17 to 2 and the number of requirements fell from 28 to 4. In addition, the municipality of Tegucigalpa established a public-private advisory committee to monitor the results of the reforms and make them sustainable. In the first year after the reform, the number of licenses issued increased by 671 percent, saving firms more than two hundred and fifty thousand dollars and increasing the municipality’s tax revenues by US $5,105,919.9 Building on its successes, the municipality launched further reforms to improve the business climate, such as streamlining the construction permit. A nationwide plan is now replicating these reforms in five other Honduran municipalities. The Municipal Operating License in Latin reduce negative externalities and encourage free competition. However, poor regulation can have extremely adverse effects. America: An Significant Obstacle According to a World Bank publication, Regulation and Growth10, good business regulation is an important driver of Private sector regulation has always sparked healthy debate. growth and countries with excessive entry level regulations suffer Good regulations benefit society. They protect public goods, 7 Honduras has one of the highest informality rates in Latin America, close to 50 percent of GDP. See Schneider, F. and R. Klinglmair, Shadow Economies around the World: What Do We Know?, CESifo Working Paper 0403, CESifo, 2004. 8 A high risk business is defined as one that may have a negative impact on the environment and the safety and/or health of the citizens. 9 Data provided by the General Manager at the Central District (Tegucigalpa) municipality. 10 See Djankov, Simeon, Mc Liesh, Chárrale and Ramalho, Rita, Regulation and Growth, World Bank, 2006; and Djankov, Simeon, La Porta, Rafael, Lopez de Silanes, Florencio and Shleifer, Andrei, The Regulation of Entry, Quarterly Journal of Economics, 2002. 3 from higher levels of corruption, a larger informal sector, and location of the business’s facilities. After submitting this poor quality of private and public goods. According to Doing information, the firm should comply with ex-ante and/ Business 200911, procedures to obtain an operating license in or ex-post inspections. The municipality then reviews the Latin America require a significant amount of time. For instance, paperwork and inspection reports before processing the in Brazil, 96 percent (120 days) of the time needed to start a firm license. Unfortunately, many firms do not obtain operating is devoted to obtaining an operating license. In Peru, the figure licenses. While a license does not guarantee continued is 34 percent (21 days) while in Ecuador it reaches 22 percent adherence to regulatory standards, failure to obtain a license (30 days). in Latin America means at the start, the business is not adhering to health, environmental or safety standards or Operating licenses are used in Latin America to enforce passing municipal inspections. Municipalities can fix this zoning, health and environmental and safety standards. For by making regulations and processes more efficient and some municipalities, the license is used as a tool to create a accessible to firms, thus encouraging greater formality. larger tax base.12 Business owners often face a maze of cumbersome and To acquire an operating license, the following steps outdated regulations, inefficient processes, unnecessary and generally apply in most Latin American municipalities: a firm costly requirements, unclear information, and arbitrary must submit its articles of incorporation and registration, decisions. Firms also have to interact with poorly trained a certificate declaring the nature of the business, and the officials. Firms cite the following problems. What are the issues faced by business owners when opening a business? &  " # & !%! "  ! &  !  "" !  & ! !   ! %   $ # $# "  #" &  !  !"  $$#    &" ! $"  & !   "   ! $!!     &      %  ! $# !  &  $!  !  $  Figure 1.1 Informality exceeds 30% in a large number of Latin American countries (Informality as % of per capita GDP) 100% 80% 67.1% 59.9% 60% 49.6% 51.5% 45.2% 39.1% 39.8% 40% 34.4% 30.1% 19.8% 20% 15.4% 12.4% 0% New Canada Chile Mexico Ecuador Colombia Brazil Nicaragua Honduras Guatemala Peru Bolivia Zealand Source: Schneider, F. and R. Klinglmair, Shadow Economies around the World: What do we know? CESifo Working Paper 0403, CESifo, 2004 11 Doing Business 2009. Available on the Internet at: http://www.doingbusiness.org 12 These practices are generally not followed in other Regions, where licensing and permitting are not used for such regulatory or fiscal ends. 4 OPERATING LICENSES Burdensome government regulations, combined with regulations are quite efficient and transparent. Several a negative perception of the quality of public services, may municipalities are in the process of changing their encourage firms to stay informal. Poor implementation of procedures. While this is a step in the right direction, regulation discredits municipalities in the eyes of their citizens, the number of reforms underway continues to be small. who regard municipal officials as unable to impose order To significantly improve the business environment in Latin and to provide adequate public services. To reverse this poor America, a more coordinated effort is needed and should perception, municipalities should strive to improve public involve a much larger number of municipalities. perception of bureaucratic processes through simplification. Fortunately, not all municipalities suffer from these problems. There are examples of municipalities where Colombia: Would eliminating operating licenses solve the problem? Difficulties faced by firms in obtaining a municipal operating license and resulting problems of formalization, have led some governments to eliminate the license requirement altogether. Eliminating the operating license can reduce bureaucratic burdens for firms as long as the regulatory environment allows for adherence to safety measures. In Colombia, municipalities have done away with the municipal operating license but require inspections to ensure regulatory compliance. However, this may be as bureaucratic and inefficient as the operating license, if not more so. In Colombia, in 1995 Law No. 232 eliminated the compulsory municipal operating license for new businesses. Since the law was enacted, opening a business has become extremely easy. However, after the firm starts operating, it is subject to numerous, uncoordinated inspections from the Department of Health, the Department of the Environment, the Fire Department and local municipalities. All these agencies perform inspections that can come as a surprise to business owners due to poor communication by the municipality. Passing these inspections requires dealing with complex processes.13 Moreover, the regulations are subject to a high level of interpretation, depending on the official in charge. For instance, in Bogota it may take business owners 3 to 5 years to obtain the inspection certificates required to operate their businesses. Because this is a legal procedure, many of them must hire lawyers to represent them during these 3 to 5 years.14 These practices generate a high cost to firms and can encourage informality, limiting the municipalities effort to collect its fees for formal firms. In addition, in Colombia inspections are conducted as a result of complaints, rather than as the result of a risk assessment of the various types of economic activities. As a consequence, high-risk businesses may not be inspected at all, which may result in fires, pollution, poor construction and other hazards. Is it possible to substitute an operating license with an efficient inspection system? Eliminating operating licenses as a mandatory requirement to start operations may be appropriate, provided that efficient oversight (inspection systems) ensures compliance with safety standards and does not create more bureaucratic burdens to firms. Reforms such as the one underway in the municipality of Bogota should focus mainly on: (1) Establishing a multi- disciplinary inspection scheme that combines the four inspection systems into a single coordinated mechanism. (2) Planning inspections following a risk-based classification of businesses by type of economic activity, with priority given to inspections of high-risk activities, while low-risk firms are encouraged to self regulate and are only randomly inspected. (3) Publishing information so that firms know what to expect, and understand the inspections as soon as they register at the Chamber of Commerce. This reform will bring significant benefits to both firms and the municipality.15 13 An environmental, health or security license or approval. 14 Juan Carlos Rodriguez, Municipality of Bogota, presentation at the Workshop on Improvement to the Business Inspections’ System. Latin American Seminar, Bogota, Colombia. August 20-21, 2008. 15 According to initial figures provided by the municipality of Bogota, in June 2006 the inspection process took around 262 days. It has now dropped to 15 days. Cost savings 10 months after launching the project have been estimated at more than 42 million dollars. Source: Juan Carlos Rodriguez, Municipality of Bogota, Workshop on Improvement to the Business Inspections’ System. Latin American Seminar, Bogota, Colombia. August 20-21, 2008. 5 What are the benefits of implementing Business owners also benefit. Simplification allows them to obtain an operating license more easily and at a lower cost. Thus, a program to simplify the Operating they can work within the law and comply with basic standards to License procedures? mitigate business risk. They suffer less from the fear of being shut down or fined by the municipality, or having to pay illicit money Everyone wins with a simplification program, starting to corrupt officials. Once firms acquire a municipal operating with the municipality. To the extent that simplification license they are better positioned to be benefited from public reduces the difficulties and costs to firms, it also encourages services provided by the municipality and other governmental firm formality at the municipal level. Simplification helps agencies and improve their access to finance. municipalities manage risks and potential social costs associated with business activities. Municipalities also expand Many business owners are aware of these advantages. The their taxpayer base when the formal sector grows. With greater Municipal Scorecard 2008 asked 4,646 formal business owners tax revenues, municipalities can provide better services to their why they decided to obtain an operating license. The most communities. important reasons mentioned by firms include avoiding fines and complying with the law. Among the least significant reasons The Municipal Government of La Paz was among the first were improving their access to credit and to the judiciary to municipalities in Latin America to introduce business license have contract terms honored. Some regional differences exist. reforms in 2003, setting an example for other municipalities For instance, in Mexico and Bolivia, the most important in Bolivia and throughout the Region. As a result of the reason to acquire an operating license is compliance with the reform, in 2004 the number of licenses issued increased by law. In El Salvador, the least relevant reason is avoiding fines. 20 percent. Between 2003 and 2007, La Paz saw a 38 percent Nevertheless, firms are mostly concerned about fines and the increase in the number of licenses issued, and a consequent fear of being subject to harassment by authorities. As firms start rise in tax revenues. to expand and their operations become more sophisticated, access to credit and to the judiciary system rise in importance. Table 1.1 Number of Licenses Issued by the Municipality of La Paz (2003-2007) These advantages to business owners imply that, contrary to what some may believe, most business owners wish to 2003 2004 2005 2006 2007 operate with an operating license. However, business owners report that the cost and difficulty of acquiring such license La Paz 3361 4050 4384 4088 4632 continue to discourage them. As we saw in the preceding section, the municipal operating license is among the most Source: Municipality of La Paz. Prepared by the authors complex processes faced by business owners who wish to open a formal business. It may therefore be reasonable to The reform also resulted in a streamlined inspection expect that reducing the obstacles to obtain an operating process. Now, high-risk economic activities, such as restaurants, license would promote greater business formalization at the alcoholic beverage outlets and electronic games arcades, municipal level. are more regularly inspected. The municipality has a more organized database and a modern information technology The Municipal Scorecard 2008 is a useful benchmarking system in place. It has more control over its assets and, although tool that can be used as a guide to assess the time and costs for risk is not totally eliminated, it has certainly been mitigated. the entrepreneurs to obtain an operating license, as well as the Additionally, improved organization of its territory allowed the efficiency of the procedures in order to guarantee an a accurat municipality of La Paz to regulate economic activities within risk control of economic activities in different localities. This its jurisdiction more efficiently. It has created commercial, tool was constructed for second consecutive year including 143 industrial and other areas. Municipal officials also reported municipalities in Bolivia, Brazil, Ecuador, El Salvador, Mexico, being strongly motivated by training and having the tools to Nicaragua and Peru.17 The Municipal Scorecard provides a work more efficiently.16 comparative ranking of indicators for these municipalities 16 In the sub-section on training in the Municipal Scorecard 2008 Bolivia, La Paz, Santa Cruz, and Yacuiba tie for first place in training. Training is perceived as adequate at all Bolivian municipalities. 17 Honduras and Colombia participated in the study but are not part of the regional ranking. because not enough information was available. 6 OPERATING LICENSES and hopes to foster healthy competition as a result of the Table 1.2 Latin America (25 best and worst performers) benchmarking exercise. Operating License Index - Regional Ranking The Operating License ranking was obtained through factor analysis of Which municipalities are the most the following indices: Performance Index and Process Index. efficient in issuing Operating Municipality Regional Ranking* Licenses? Chihuahua (Mexico) 1 Esteli (Nicaragua) 2 Merida (Mexico) 3 Chihuahua in Mexico, Esteli in Nicaragua, and Merida in Riobamba (Ecuador) 4 Mexico rank at the top of the 2008 operating license scorecard. Ambato (Ecuador) 5 These municipalities have employed “one-stop shops”18 to La Palma (El Salvador) 6 Pachuca (Mexico) 7 speed up licensing of low-risk businesses, the largest pool of Granada (Nicaragua) 8 firms seeking licenses. Among the three top performers, Merida Ciudad Sandino (Nicaragua) 9 Sonsonate (El Salvador) also provides the best information and its licensing process is 10 San Miguel (El Salvador) 11 rated as the most efficient among all Mexican municipalities.19 La Libertad (El Salvador) 12 25 best In Nicaragua, Esteli is ranked as the one of the most efficient Ciudad Juarez (Mexico) 13 performers Cuenca (Ecuador) 14 municipalities; firms require only one visit to the municipal Santa Ana (El Salvador) 15 offices and the process takes one day. The municipalities of Managua (Nicaragua) 16 Arequipa, Peru, and Sao Paulo, Brazil, performed poorly in the Jinotepe (Nicaragua) 17 Soyapango (El Salvador) 18 ranking; however, this is expected to improve next year as they Culiacan (Mexico) 19 are currently implementing simplification projects.20 Zacatecas (Mexico) 20 Tulcan (Ecuador) 21 San Juan del Sur (Nicaragua) 22 Porto Alegre (Brazil) 23 Praia Grande (Brazil) 24 Jinotega (Nicaragua) 25 Yacuiba (Bolivia) 119 Quillacollo (Bolivia) 120 Ancon (Peru) 121 Vitoria (Brazil) 122 Puno (Peru) 123 El Alto (Bolivia) 124 Barranco (Peru) 125 Alto Selva Alegre (Peru) 126 Olinda (Brazil) 127 Lince (Brazil) 128 Curitiba (Brazil) 129 Recife (Brazil) 130 25 worst Rimac (Peru) 131 performers Sao Bernardo Do Campo (Brazil) 132 El Agustino (Peru) 133 Cusco (Peru) 134 Chiclayo (Peru) 135 Ate (Peru) 136 Ica (Peru) 137 Guarulhos (Brazil) 138 Tumbes (Peru) 139 Goiania (Brazil) 140 Mariano Melgar (Peru) 141 Arequipa (Peru) 142 Sao Paulo (Brazil) 143 * Of 143 Latin American municipalities Source: Municipal Scorecard 2008 Database 18 In the “One Stop Shop” system, users fill out a single form for all involved departments. They are then informed about the fees they have to pay, in one single stop at the cash registry. The user is told when and at what times the civil protection, health and urban development departments will inspect their businesses and how long it will take them to issue a decision. The process takes less than a day. 19 Best performer for the information sub-index and the inspection sub-index included in the process index for Mexico. Municipal Scorecard 2008 Reporte Mexico. 20 Arequipa has conducted a program in municipal simplification and it is expected that their scores will improve in the future. 7 The operating license ranking is made up of several could also reflect lack of knowledge of the municipal officials variables as explained in the methodology section (see on actual fees charged authorized by the municipality. In Annexes). A statistical analysis of the variables produced a some cases firm perception could include processes that are performance index and a process index, each composed of not municipal. In all these cases, more access to information different sets of variables. The performance index variables are and improved transparency would resolve these perception made up of quantitative indicators that reflect the efficiency gaps. of the processes firms go through to acquire a license, such as time, costs, number of visits and rejections. These indicators are Performance Index presented in figures 1.2 to 1.7. The process variables are made up of qualitative indicators that measure the internal processes The process index measures four different sub-indices: 1) of the municipality and effectiveness of these processes to grant a time, measured in days to acquire a license from the moment license. These include information, training, inspections, tools, that the forms are submitted to the municipality up to customer service and audits. Process variables are presented in the moment the license is emitted to the firm; 2) the cost, the tables 1.6-1.8. measured as a percentage of GDP per capita; 3) number of visits, measured by the number of times that the firm had to go To better understand the findings and to facilitate to the municipality during the process of acquiring a license; 4) comparisons among municipalities, the ranking looks at scores number of rejections, measured by the percentage of all of the for three sub-regions: the middle income countries of Mexico applications that were rejected in one year. In sum, these sub- and Brazil, the Andean countries and the Central American indices provide information on the efficiency of the procedures countries. The countries were divided into sub regions to that the municipality implements to grant licenses. facilitate comparisons among municipalities of the same income levels and size. Tables 1.9, 1.10 and 1.11 show the best Time performers by sub-region. This is the total time used to comply with the procedures, A more detailed analysis of each variable of the process measured as the time elapsed between the date when the and performance index is presented in this chapter. For an license or permit process started and the date when the understanding of how these indices are constructed please refer corresponding license or permit was issued. Since this is a to the Annex on Methodology. perception survey, it is important to note that the majority of the firms take into account the day they went to the Municipal officials and firms have differing perceptions municipality to ask for information about the license and the about the time and costs to acquire the license. The difference day they actually received the license from the municipality. is due to the differences that the firm experiences when going This does not necessarily coincide with the date that the through the procedures versus the experience of the municipal municipality emitted the license. For this reason, typically, official who processes licenses on a daily basis. Masaya, in firms report larger time in days than a municipal official. Nicaragua, is a noteworthy example of such perception gap: This does not invalidate the firm’s opinion, however it puts Municipal officials report that obtaining an operating license into perspective the information acquired by the firm. The does not involve any costs. However, business owners reported majority of the firms in the study do not use intermediaries costs above 2 percent of per capita GDP. This gap reflects to seek a license. Those who do use an intermediary do so to the differences in perception of time and costs as understood facilitate the process. by the firms, on the one hand, and the municipal officials charged with processing these permits on the other hand. The following best practices can help reduce the emission times for a license as well as number of visits that a firm must The differing perception between business owners and make to the municipality. officials may be taking into account other costs such as photocopies, transportation and other extra-official costs, UÊ ,ˆÃŽÊ >ÃÈwV>̈œ˜Ê -ÞÃÌi“Ê VVœÀ`ˆ˜}Ê ÌœÊ Vœ˜œ“ˆVÊ beyond the actual fee of the license. While municipal officials V̈ۈÌÞ\Ê Classification of firms by risk helps the only take into account the fees they charge to process the municipality prioritize its resources so that the majority permit or license. However, since the responses are based of the supervision is focused on high risk firms, those solely on the perception and no other data source, this gap that engage in activities that have an effect on health, 8 OPERATING LICENSES environment and safety. Low risk firms are generally the and transformation in all sectors of the economy, which larger percentage in the pool of firms seeking a license, has increased the number of firms soliciting an operating and should not be subject to the same regulatory scrutiny license. The number of firms requesting a license is above as high risk firms. 300, and sometimes has reached up to 900 per month. The municipality has not invested in the human resources and UÊ Zoning: The municipality should have a zoning plan infrastructure to handle such capacity. The large volume can that is updated and is clearly mapped. This information explain the increase in time for firms to acquire an operating should be available at no cost to firms, which enables the license in Vitoria. municipality to grant or reject the license immediately. Figures 1.2 to 1.4 shows the number of days that each municipality undertakes to grant an operating license. It is worth noting that the average days reported in the Andean countries and Mexico/Brazil is higher than the the Central America Group. There is a large dispersion among the Andean Group countries. For some municipalities, the time to issue a license is higher than expected, due to the fact that some municipalities have just now finished implementing reforms and are reporting lower times.21 The surveys were implemented before reforms; as a result some municipalities have not performed well in the Municipal Scorecard 2008. Municipalities show significant differences in regulating operating licenses. Most countries in the Region have given municipalities exclusive authority to grant operating licenses. Generally municipalities in Latin America have the mandate to create their own regulatory standards. However, in Peru and Honduras, nationwide regulatory standards establish the norm for all municipalities.22 The above figures show significant differences in the amount of time needed to obtain an operating license across Latin America. Top performers, such as Copan Ruinas, Choluteca San Lorenzo and Juticalpa in Honduras; Granada, Esteli and San Juan del Sur in Nicaragua, Ibarra and Tulcan in Ecuador, only take one day to grant an operating license. After a process of reforms, many municipalities now take less than 10 business days to grant a license. However, 59 percent of the municipalities included in the study still take more than 20 days to grant an operating license.23 The municipality of Vitoria last year had less amount of time in days and has increased in the number of days this year to acquire an operating license. This may be because the State of Espiritu Santo is in the process of an economic growth 21 These include La Paz, Oruro, Sucre, and Quillacollo in Bolivia; Sao Paulo in Brazil; Quito and Manta in Ecuador; and Arequipa, Ica, and Puno in Peru. 22 In 2007, Peru passed a “New Law for Operating Licenses”, which will be reviewed below. In Honduras, the Business Administrative Simplification Committee coordinates simplification initiatives nationwide. 23 The performance variables included 155 municipalities, assessing 12 municipalities in Honduras. However, Honduras is not part of the overall ranking and the process index. 9 Figure 1.2 Mexico/Brazil Figure 1.3 Andean Countries Operating License - Time (Days) (Firms Perception) Operating License - Time (Days) (Firms Perception) This variable makes reference to the total time that the process took, measured as the This variable makes reference to the total time that the process took, measured as the difference between the starting date and the issuing date for the Operating License. difference between the starting date and the issuing date for the Operating License. When no information was available for this item, the entrepreneur's estimate was used. When no information was available for this item, the entrepreneur's estimate was used. Porto Alegre (Br) 6 Tulcan (Ec) 1 Culiacan (Mx) 6 Ibarra (Ec) 1 Veracruz (Mx) 7 Portoviejo (Ec) 2 Chihuahua (Mx) 8 Manta (Ec) 2 Cuenca (Ec) 2 Juazeiro do Norte (Br) 11 Ambato (Ec) 2 Torreon (Mx) 11 Machala (Ec) 2 Riobamba (Ec) 3 Pachuca (Mx) 15 Babahoyo (Ec) 4 Benito Juarez (Mx) 15 Sucre (Bo) 4 La Paz (Bo) 4 Merida (Mx) 20 Loja (Ec) 5 Aguascalientes (Mx) 20 Santa Cruz (Bo) 8 Cochabamba (Bo) 8 Azcapotzalco (Mx) 21 Tarija (Bo) 8 Santos (Br) 23 Chimbote (Pe) 10 Zacatecas (Mx) 23 Juliaca (Pe) 13 Villa El Salvador (Pe) 13 Campo Grande (Br) 26 Baños de Inca (Pe) 13 Ciudad Juarez (Mx) 26 Yacuiba (Bo) 13 Los Olivos (Pe) 14 Toluca (Mx) 26 Quillacollo (Bo) 18 Tlalnepantla de Baz (Mx) 26 Villa Maria del Triunfo (Pe) 19 Wanchaq (Pe) 20 Praia Grande (Br) 28 San Martin de Porres (Pe) 25 Queretaro (Mx) 29 Quito (Ec) 25 Hermosillo (Mx) 29 San Sebastian (Pe) 29 San Juan de Miraflores (Pe) 30 Tuxtla Gutierrez (Mx) 30 Surco (Pe) 30 Naucalpan de Juarez (Mx) 30 Huancayo (Pe) 30 Pasco (Pe) 31 Tlaquepaque (Mx) 31 El Agustino (Pe) 31 Jose Azueta (Mx) 32 Cajamarca (Pe) 31 Surquillo (Pe) 32 Olinda (Br) 35 Trujillo (Pe) 32 Huixquilucan (Mx) 35 Bellavista (Pe) 33 Huaraz (Pe) 33 Aracaju (Br) 36 Jesus Maria (Pe) 33 Ecatepec (Mx) 37 Comas (Pe) 34 San Luis Potosi (Mx) 37 Victor Larco Herrera (Pe) 34 El Alto (Bo) 36 Sao Luis (Br) 38 Ancon (Pe) 37 Cuiaba (Br) 44 Pucallpa (Pe) 39 Puno (Pe) 41 Joinville (Br) 45 San Juan Bautista (Pe) 42 Duque de Caxias (Br) 48 Oruro (Bo) 42 Piura (Pe) 45 Zapopan (Mx) 52 San Borja (Pe) 45 Guarulhos (Br) 55 Santa Anita (Pe) 45 Cusco (Pe) 46 Florianopolis (Br) 57 Cayma (Pe) 48 Belo Horizonte (Br) 59 Yanahuara (Pe) 49 Sao Bernardo Do Campo (Br) 60 Castilla (Pe) 60 Ate (Pe) 63 Manaus (Br) 60 La Molina (Pe) 65 Recife (Br) 61 Callao (Pe) 65 Tumbes (Pe) 66 Guadalajara (Mx) 64 Miraflores (Pe) 73 Teresina (Br) 70 Breña (Pe) 73 Independencia (Pe) 77 Fortaleza (Br) 82 Barranco (Pe) 77 Guadalupe (Mx) 88 Rimac (Pe) 81 Arequipa (Pe) 82 Salvador (Br) 92 Ica (Pe) 84 Sao Paulo (Br) 96 Alto Selva Alegre (Pe) 90 Curitiba (Br) 109 Chiclayo (Pe) 92 San Miguel (Pe) 93 Piracicaba (Br) 120 Guayaquil (Ec) 93 Goiania (Br) 128 Lince (Pe) 95 Pueblo Libre (Pe) 96 Vitoria (Br) 140 Mariano Melgar (Pe) 130 0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140 Days Days Average of Group Average of Group Source: Municipal Scorecard 2008 Database Source: Municipal Scorecard 2008 Database 10 OPERATING LICENSES Figure 1.4 Central America Cost Operating License - Time (Days) (Firms Perception) This indicator measures the official cost or fee firms must This variable makes reference to the total time that the process took, measured as the difference between the starting date and the issuing date for the Operating License. incur to obtain a license. Good practice requires that the fees When no information was available for this item, the entrepreneur's estimate was used. charged for the license should be in par with the actual cost of administrating the license and the necessary investments to sustain San Lorenzo (Ho) 1 these functions in the future. Although this is required by law in Juticalpa (Ho) 1 some countries like Peru, in the practice, this regulation is very Copan Ruinas (Ho) 1 difficult to enforce. In some cases, municipalities are unable to Choluteca (Ho) 1 determine the cost incurred in issuing a license. The tables below San Juan del Sur (Ni) 1 show firm responses in estimating the official cost incurred at the Granada (Ni) 1 municipal level to acquire a license (see tables 2.12 to 2.14). Esteli (Ni) 1 Figure 1.5 Mexico/Brazil Managua (Ni) 2 Operating License - Cost (as % of per capita GDP ) Leon (Ni) 2 (Firms Perception) Jinotepe (Ni) 2 This variable refers to the entrepreneur's estimate for the total cost incurred at the municipality during the process, expressed as a percentage of the national GDP in US$. Rivas (Ni) 2 Chihuahua (Mx) 0.0% Jinotega (Ni) 2 Benito Juarez (Mx) 0.0% Praia Grande (Br) 0.0% Chinandega (Ni) 3 Merida (Mx) 0.0% Tlaquepaque (Mx) 0.1% Masaya (Ni) 3 Tlalnepantla de Baz (Mx) 0.2% Culiacan (Mx) 0.2% Ciudad Sandino (Ni) 3 Aguascalientes (Mx) 0.2% Acajutla (Sv) 3 Azcapotzalco (Mx) 0.2% Zacatecas (Mx) 0.2% San Salvador (Sv) 4 Zapopan (Mx) 0.3% Guadalajara (Mx) 0.3% Sonsonate (Sv) 5 Toluca (Mx) 0.3% Porto Alegre (Br) 0.4% La Palma (Sv) 5 Queretaro (Mx) 0.4% Juazeiro do Norte (Br) 0.5% Danli (Ho) 6 San Luis Potosi (Mx) 0.5% Santa Ana (Sv) 6 Huixquilucan (Mx) 0.5% Ecatepec (Mx) 0.5% San Miguel (Sv) 6 Campo Grande (Br) 0.6% Naucalpan de Juarez (Mx) 0.6% Comayagua (Ho) 7 Tuxtla Gutierrez (Mx) 0.6% Veracruz (Mx) 0.7% La Libertad (Sv) 7 Pachuca (Mx) 0.7% Ciudad Juarez (Mx) 0.7% Villanueva (Ho) 8 Torreon (Mx) 0.8% Teresina (Br) 0.8% La Union (Sv) 8 Zihuatanejo de Azueta (Mx) 0.9% Soyapango (Sv) 8 Belo Horizonte (Br) 1.2% Piracicaba (Br) 1.4% Antiguo Cuscatlan (Sv) 8 Guarulhos (Br) 1.4% Vitoria (Br) 1.4% Puerto Cortes (Ho) 9 Goiania (Br) 1.6% Fortaleza (Br) 1.7% Matagalpa (Ni) 14 Hermosillo (Br) 1.7% Sao Luis (Br) 2.0% Choloma (Ho) 15 Joinville (Br) 2.2% Santa Tecla (Sv) 18 Florianopolis (Br) 2.8% Duque de Caxias (Br) 3.0% Santa Rosa de Copan (Ho) 29 Sao Bernardo Do Campo (Br) 3.1% Recife (Br) 3.2% San Pedro Sula (Ho) 30 Olinda (Br) 3.3% Curitiba (Br) 3.3% La Ceiba (Ho) 31 Cuiaba (Br) 3.3% Guadalupe (Mx) 3.3% El Progreso (Ho) 33 Salvador (Br) 3.5% Distrito Central (Ho) 33 Sao Paulo (Br) 4.1% Santos (Br) 4.1% 0 5 10 15 20 25 30 35 40 Aracaju (Br) 4.5% Manaus (Br) 5.3% Days 0% 1% 2% 3% 4% 5% 6% Average of Group Cost as % of GDP per capita Average of Group Source: Municipal Scorecard 2008 Database Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. 11 Figure 1.6 Andean Countries Figure 1.7 Central America Operating License - Cost (as % of per capita GDP) Operating License - Cost (as % of per capita GDP) (Firms Perception) (Firms Perception) This variable refers to the entrepreneur's estimate for the total cost incurred at the This variable refers to the entrepreneur's estimate for the total cost incurred at the municipality during the process, expressed as a percentage of the national GDP in US$. municipality during the process, expressed as a percentage of the national GDP in US$. La Paz (Bo) 0.0% San Pedro Sula (Ho) 0.0% Cochabamba (Bo) 0.5% Pasco (Pe) 0.6% La Libertad (Sv) 0.2% Tulcan (Ec) 0.6% Cuenca (Ec) 0.6% San Miguel (Sv) 0.2% El Alto (Bo) 0.7% Yacuiba (Bo) 0.7% Antiguo Cuscatlan (Sv) 0.3% Loja (Ec) 0.8% Ibarra (Ec) 0.8% La Palma (Sv) 0.5% Baños de Inca (Pe) 0.9% Ambato (Ec) 1.0% Santa Ana (Sv) 0.5% Riobamba (Ec) 1.0% Guayaquil (Ec) 1.0% Granada (Ni) 0.6% Babahoyo (Ec) 1.0% Machala (Ec) 1.2% Santa Tecla (Sv) 0.6% Juliaca (Pe) 1.2% Sucre (Bo) 1.2% San Salvador (Sv) 0.6% Portoviejo (Ec) 1.2% Piura (Pe) 1.4% Leon (Ni) 0.7% Trujillo (Pe) 1.4% Santa Cruz (Bo) 1.4% Jinotega (Ni) 0.8% Manta (Ec) 1.6% Ciudad Sandino (Ni) 0.8% Huaraz (Pe) 1.6% Villa El Salvador (Pe) 1.7% Soyapango (Sv) 0.9% San Sebastian (Pe) 1.7% San Juan Bautista (Pe) 1.8% Jinotepe (Ni) 0.9% San Juan de Miraflores (Pe) 1.8% Oruro (Bo) 1.8% Santa Rosa de Copan (Ho) 0.9% Los Olivos (Pe) 1.9% Independencia (Pe) 1.9% Rivas (Ni) 1.0% Ancon (Pe) 1.9% Cajamarca (Pe) 1.9% La Union (Sv) 1.2% Yanahuara (Pe) 2.1% Castilla (Pe) 2.1% San Juan del Sur (Ni) 1.2% Víctor Larco Herrera (Pe) 2.2% San Martin de Porres (Pe) 2.2% Chinandega (Ni) 1.2% El Agustino (Pe) 2.2% Puno (Pe) 2.3% Managua (Ni) 1.4% Santa Anita (Pe) 2.4% Cayma (Pe) 2.5% Choloma (Ho) 1.6% Quillacollo (Bo) 2.5% Callao (Pe) 2.6% Matagalpa (Ni) 1.7% San Miguel (Pe) 2.8% Villa Maria del Triunfo (Pe) 2.8% Sonsonate (Sv) 1.8% Rimac (Pe) 2.8% Copan Ruinas (Ho) 2.0% Comas (Pe) 2.8% Wanchaq (Pe) 2.8% Comayagua (Ho) 2.0% Tarija (Bo) 3.0% Alto Selva Alegre (Pe) 3.1% Esteli (Ni) 2.0% Quito (Ec) 3.1% Mariano Melgar (Pe) 3.1% Villanueva (Ho) 2.5% Pueblo Libre (Pe) 3.3% Pucallpa (Pe) 3.4% Masaya (Ni) 2.5% Surco (Pe) 3.5% San Borja (Pe) 3.5% Juticalpa (Ho) 2.5% Bellavista (Pe) 3.5% Miraflores (Pe) 3.7% Puerto Cortes (Ho) 2.6% Breña (Pe) 3.7% Ate (Pe) 3.7% La Ceiba (Ho) 2.7% Huancayo (Pe) 3.7% Cusco (Pe) 3.7% Acajutla (Sv) 2.7% Chimbote (Pe) 3.7% La Molina (Pe) 3.9% Choluteca (Ho) 3.0% Arequipa (Pe) 4.4% Tumbes (Pe) 4.5% San Lorenzo (Ho) 5.0% Surquillo (Pe) 4.6% Jesus Maria (Pe) 4.6% El Progreso (Ho) 5.0% Lince (Pe) 4.9% Danli (Ho) 6.0% Chiclayo (Pe) 5.1% Ica (Pe) 5.1% Distrito Central (Ho) 6.0% Barranco (Pe) 6.0% 0% 1% 2% 3% 4% 5% 6% 0% 1% 2% 3% 4% 5% 6% Cost as % of GDP per capita Cost as % of GDP per capita Average of Group Average of Group Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. 12 OPERATING LICENSES Operating license fees in 41 percent of the municipalities The highest percentage of municipalities with strong exceed 2 percent of annual GDP per capita. Overall, performance indicators are in Nicaragua, Mexico, El municipalities in Bolivia and Nicaragua are the least Salvador and Ecuador. Seven of Nicaragua’s 12 participating expensive, while those in Brazil and Peru are the most costly. municipalities 50% and six of El Salvador’s 11 municipalities Unfortunately, the poorest municipalities report the highest 45% rank among the 25 top performing municipalities. In licensing costs. Significant cost differences are also found Nicaragua and El Salvador, the procedure is relatively simple. within the same country. In Peru, for instance, only one Few requirements, procedures and inspections are needed in municipality charges less than one percent of annual GDP these countries, cutting down on the time and number of per capita for an operating license, while 22 municipalities visits business owners need to make to obtain a license. Also, charge more than three percent of GDP per capita, regardless a significant number of municipalities in these two countries of whether they are located in the capital or in a remote have already introduced simplification processes.25 province. Presented below is the municipal ranking for the operating Number of visits license. This ranking compares municipalities across the Region. The ranking is made up of two indices: a performance Firms spend time visiting a municipality, which represents index and a process index, and each index is made up of several an opportunity cost.24 Firms report that more visits increase variables. the likelihood of extra-official payments to municipal authorities. Ideally, the number of visits should be limited to Table 1.3 shows the results of Mexico-Brazil. Six Mexican two for low-risk businesses. The first visit is needed to gather municipalities are in the top six places while fifteen Brazilian information, and the second to submit the application. municipalities are in the last places in this ranking. In the Some municipalities publish all their requirements on their regional ranking, eight Mexican municipalities are in the top web pages or provide them by phone, reducing the number ten positions. The municipality of Chihuahua is in the first of visits to just one. In the Peruvian municipalities of Ate place out of 143 municipalities in Latin America. For Brazil, and Rimac, a firm needs to visit the municipality 10 times to Porto Alegre is seventh in the regional ranking (see table 1.3). obtain an operating license. In Piracicaba in Brazil obtaining a license requires eight visits. The top five positions in the Andean countries are held by following municipalities in Ecuador: Riobamba, Ambato, Rejections Cuenca, Tulcan and Machala. Peru occupies the last 12 positions (see table 1.4). The percentage of rejections is one of the most controversial indicators in the Municipal Scorecard. Some In Central America (see table 1.5), Esteli in Nicaragua is municipalities that hold that a high percentage of rejections number two in the regional ranking out of 143 Latin American reflect a strict adherence to safety and environmental standards. municipalities and is in top place in Central America. La Union However, it is also clear that rejections could be significantly in El Salvador is number 63 in the regional ranking and in last reduced if municipalities provided clear information about place in Central America. the process.Thus, the number of firms submitting incomplete applications would be reduced. The percentage of rejections at a given municipality generally reflects information deficiencies, low productivity and/or insufficient review of applications at the reception desk. Firms reported that most rejections were due to the municipality’s failure to provide sufficient information or to thoroughly review the application documents at the reception desk. 24 In this case the opportunity cost is represented by the loss incurred by the business owner for having to visit the municipality instead of running his/her business. 25 In Nicaragua, the municipalities of Granada, Leon, Managua and Masaya have implemented simplification projects with the support of IFC. In El Salvador, simplification efforts are underway with the SIMTRA project which is sponsored by the National Foundation for Development (FUNDES International) with support from the Swiss Economic Cooperation Secretariat. This project was carried out in San Salvador’s District 1, District 3, District 4, District 5, District 6 and METROCENTRO municipalities. Improvements are currently underway in Antiguo Cuscatlan, Apopa, Santa Tecla, and San Marcos. 13 Table 1.3 Mexico/Brazil Table 1.4 Andean Countries Operating License - Regional and Group Ranking Operating License - Regional and Group Ranking The Operating License ranking was obtained through factor analysis of The Operating License ranking was obtained through factor analysis of the following indices: Performance Index and Process Index. the following indices: Performance Index and Process Index. Regional Group Regional Group Municipality Municipality Ranking* Ranking Ranking* Ranking Riobamba (Ec) 4 1 Chihuahua (Mx) 1 1 Ambato (Ec) 5 2 Merida (Mx) 3 2 Cuenca (Ec) 14 3 Pachuca (Mx) 7 3 Tulcan (Ec) 21 4 Ciudad Juarez (Mx) 13 4 Machala (Ec) 30 5 Culiacan (Mx) 19 5 Los Olivos (Pe) 32 6 Zacatecas (Mx) 20 6 Guayaquil (Ec) 34 7 Porto Alegre (Br) 23 7 Tarija (Bo) 35 8 Praia Grande (Br) 24 8 Ibarra (Ec) 41 9 Aguascalientes (Mx) 26 9 Villa Maria del Triunfo (Pe) 49 10 Zihuatanejo de Azueta (Mx) 27 10 Manta (Ec) 50 11 Tlaquepaque (Mx) 28 11 Quito (Ec) 52 12 Veracruz (Mx) 29 12 Portoviejo (Ec) 53 13 Benito Juarez (Mx) 33 13 Babahoyo (Ec) 54 14 Torreon (Mx) 36 14 Santa Cruz (Bo) 60 15 Azcapotzalco (Mx) 38 15 Loja (Ec) 61 16 Juazeiro do Norte (Br) 39 16 La Paz (Bo) 64 17 Huixquilucan (Mx) 42 17 San Juan Bautista (Pe) 65 18 Queretaro (Mx) 43 18 Surco (Pe) 66 19 San Luis Potosi (Mx) 47 19 San Martin de Porres (Pe) 69 20 Teresina (Br) 51 20 Baños de Inca (Pe) 70 21 Tlalnepantla de Baz (Mx) 56 21 Sucre (Bo) 71 22 Toluca (Mx) 58 22 Pucallpa (Pe) 73 23 Ecatepec (Mx) 59 23 Cajamarca (Pe) 76 24 Hermosillo (Mx) 62 24 Victor Larco Herrera (Pe) 77 25 Santos (Br) 67 25 Huaraz (Pe) 78 26 Manaus (Br) 68 26 27 Cochabamba (Bo) 79 27 Zapopan (Mx) 72 28 San Miguel (Pe) 80 28 Joinville (Br) 74 29 Juliaca (Pe) 82 29 Naucalpan de Juarez (Mx) 75 30 Yanahuara (Pe) 83 30 Tuxtla Gutierrez (Mx) 81 31 Miraflores (Pe) 84 31 Campo Grande (Br) 85 Guadalupe (Mx) 89 32 Breña (Pe) 86 32 Florianopolis (Br) 93 33 Piura (Pe) 87 33 Duque de Caxias (Br) 94 34 Bellavista (Pe) 88 34 Guadalajara (Mx) 95 35 Castilla (Pe) 90 35 Aracaju (Br) 96 36 Surquillo (Pe) 91 36 Piracicaba (Br) 100 37 Comas (Pe) 92 37 Sao Luis (Br) 102 38 Trujillo (Pe) 97 38 Fortaleza (Br) 104 39 Jesus Maria (Pe) 98 39 Cuiaba (Br) 106 40 Wanchaq (Pe) 99 40 Belo Horizonte (Br) 109 41 Callao (Pe) 101 41 Salvador (Br) 110 42 Chimbote (Pe) 103 42 Vitoria (Br) 122 43 Pasco (Pe) 105 43 Olinda (Br) 127 44 Cayma (Pe) 107 44 Curitiba (Br) 129 45 Oruro (Bo) 108 45 Recife (Br) 130 46 Huancayo (Pe) 111 46 Sao Bernardo Do Campo (Br) 132 47 San Juan de Miraflores (Pe) 112 47 Guarulhos (Br) 138 48 La Molina (Pe) 113 48 Goiania (Br) 140 49 Sao Paulo (Br) 143 50 * Of 143 Latin American municipalities * Of 143 Latin American municipalities Source: Municipal Scorecard 2008 Database Source: Municipal Scorecard 2008 Database 14 OPERATING LICENSES Table 1.5 Central America Independently, each of these sub-indices is made up of Operating License - Regional and Group Ranking several variables. Because a municipality may score higher in one variable and lower in another, it is important to refer to the The Operating License ranking was obtained through factor analysis of tables of sub-indices which provide disaggregated municipal the following indices: Performance Index and Process Index. scores and hence facilitate a more complete picture. Regional Group Municipality Ranking* Ranking The municipalities’ results by sub-index for the main Esteli (Ni) 2 1 operating license process indicators appear in tables 1.6 to 1.8 La Palma (Sv) 6 2 below. Granada (Ni) 8 3 Ciudad Sandino (Ni) 9 4 Sonsonate (Sv) 10 5 San Miguel (Sv) 11 6 La Libertad (Sv) 12 7 Santa Ana (Sv) 15 8 Managua (Ni) 16 9 Jinotepe (Ni) 17 10 Soyapango (Sv) 18 11 San Juan del Sur (Ni) 22 12 Jinotega (Ni) 25 13 Antiguo Cuscatlan (Sv) 31 14 Acajutla (Sv) 37 15 Matagalpa (Ni) 40 16 San Salvador (Sv) 44 17 Santa Tecla (Sv) 45 18 Masaya (Ni) 46 19 Chinandega (Ni) 48 20 Rivas (Ni) 55 21 Leon (Ni) 57 22 La Union (Sv) 63 23 * Of 143 Latin American municipalities Source: Municipal Scorecard 2008 Database Process Index The process index is made up of a set of variables that measure municipal process management and operational efficiency. The process index is composed of six different sub-indices that measure: 1) the quality, availability and management of information provided by the municipality to firms, 2) the quality of the facilities, equipment and technology used by the municipality to meet firm needs, 3) the use of appropriate planning, management and process evaluation tools, 4) the efficiency of inspection services, 5) the level of personnel training, and 6) the existence and frequency of internal and external audits. 15 Table 1.6 Operating License - Best and Worst Performing Municipalities in the Process Sub-indices within Mexico/Brazil Information Sub-index Tools Sub-index Best performers Worst performers Best performers Worst performers Brazil Brazil Piracicaba Sao Paulo Cuiaba, Manaus, Praia Grande, Olinda Santos, Sao Luis, Vitoria Mexico Mexico Merida Naucalpan de Juarez Aguascalientes, Pachuca, Huixquilucan Queretaro, Veracruz, Zapopan Training Sub-index Customer Service Sub-index Best performers Worst performers Best performers Worst performers Brazil Brazil Campo Grande, Duque de Caxias, Recife Piracicaba Curitiba Joinville, Juazeiro do Norte, Manaus Mexico Mexico Aguascalientes, Benito Juarez, Ciudad Juarez, Tuxtla Gutierrez Chihuahua Benito Juarez Ecatepec, Guadalupe, Pachuca, Toluca, Veracruz Inspections Sub-index Audits Sub-index Best performers Worst performers Best performers Worst performers Brazil Brazil Curitiba Sao Paulo Belo Horizonte Manaus Mexico Mexico Chihuahua Ecatepec Toluca Ciudad Juarez, Chihuahua, Merida, Torreon, Zapopan What variables does each Sub-index include? Information Sub-index Availability of forms, Simplicity of forms, Information, Sufficient information, Access to information and Consistency in the process. Training Sub-index Existence of user manuals, Training in internal processes, Training in customer service and Training for the officials in charge of inspections. Inspections Sub-index Number of inspections, Days of inspections, Rating of inspections and Transparency of the inspections. Tools Sub-index IT, Delegation of authority, Zoning, Categorization of business activities and industrial classification. Customer Service Sub-index Infrastructure of the municipality, Customer Service, Formal system for complaints/opinion and Front desk Audits Sub-index Internal audits and External audits. Source: Municipal Scorecard 2008 Database Information and clarity of the information provided by the municipality have an effect on the time and money firms need to invest in This sub-index measures the availability and clarity of obtaining their licenses and permits, a fact municipalities often information provided by the municipality. Firms report overlook. However, this investment affects firms decisions to whether the forms are easy to fill out, and whether the process engage in the formal licensing process. is coherent with the information provided. The availability 16 OPERATING LICENSES Table 1.7 Operating License - Best and Worst Performing Municipalities in the Process Sub-indices within the Andean Countries Information Sub-index Tools Sub-index Best performers Worst performers Best performers Worst performers Bolivia Bolivia Tarija Yacuiba Oruro, Santa Cruz, Sucre, Tarija Yacuiba, Cochabamba Ecuador Ecuador Riobamba Loja Ambato, Cuenca, Guayaquil, Ibarra Loja Peru Peru El Agustino Arequipa Chimbote, Arequipa, Cajamarca, Villa El Salvador Bellavista, Cusco, Wanchaq, Barranco, Tumbes, San Miguel, San Martín de Porres Training Sub-index Customer Service Sub-index Best performers Worst performers Best performers Worst performers Bolivia Bolivia La Paz, Santa Cruz, Yacuiba Quillacollo Tarija Quillacollo Ecuador Ecuador Guayaquil Babahoyo Guayaquil Machala Peru Peru Alto Selva Alegre, Mariano Melgar, Huaraz Pasco Chiclayo Cajamarca, Bellavista, Cusco, Ica, Trujillo, Breña, El Agustino, Lince, Miraflores, Pueblo Libre, Rimac, Surco, Surquillo, Pasco, Piura, Puno, Tumbes, Pucallpa Inspections Sub-index Audits Sub-index Best performers Worst performers Best performers Worst performers Bolivia Bolivia Santa Cruz Cochabamba El Alto La Paz Ecuador Ecuador Guayaquil Manta Portoviejo Guayaquil Peru Peru Pucallpa Arequipa Yanahuara Mariano Melgar, Baños de Inca, Callao, Barranco, Pueblo Libre What variables does each Sub-index include? Information Sub-index Availability of forms, Simplicity of forms, Information, Sufficient information, Access to information and Consistency in the process. Training Sub-index Existence of user manuals, Training in internal processes, Training in customer service and Training for the officials in charge of inspections. Inspections Sub-index Number of inspections, Days of inspections, Rating of inspections and Transparency of the inspections. Tools Sub-index IT, Delegation of authority, Zonification, Categorization of business activities and industrial classification. Customer Service Sub-index Infrastructure of the municipality, Customer Service, Formal system for complaints/opinion and Front desk Audits Sub-index Internal audits and External audits. Source: Municipal Scorecard 2008 Database Tools frequent and continued personnel training, despite personnel turnover and regulatory changes. The variables in this sub-index include the use of information technology, delegation of signing authority, Training zoning, categorization of business activities and industrial classification. As a good practice, simplification projects The training sub-index measures the availability of include the design of information tools (software) to training and tools for capacity building for municipal streamline processes. Municipalities need to assess the quality personnel. This includes availability and usefulness of of IT systems to find adequate IT solutions. These costs could procedural manuals, the training the staff receive on vary from municipality to municipality given the quality procedures, training on inspections, and the training on of infrastructure. Quito’s reform initiatives resulted in an customer information and service. It is particularly important investment in a new IT system. It also took into consideration to disseminate manuals and familiarize employees with the need to assure the sustainability of the reforms through standards and establish continuous training programs on continuous training. Significant efforts were made to provide both processes and customer service, due to high turnover 17 among municipal staff (particularly when administrations should be able to improve compliance with legal obligations change). If the municipality can accomplish these goals, it while maintaining high quality services. Table 1.8 Operating License - Best and Worst Performing Municipalities in the Process Sub-indices within Central America Information Sub-index Tools Sub-index Best performers Worst performers Best performers Worst performers El Salvador El Salvador La Palma La Union Soyapango Sonsonate Nicaragua Nicaragua Esteli Rivas Managua Rivas Training Sub-index Customer Service Sub-index Best performers Worst performers Best performers Worst performers El Salvador El Salvador La Palma, La Union, Santa Tecla, San Salvador La Palma La Union Sonsonate, Soyapango Nicaragua Nicaragua Chinandega, Ciudad Sandino, Esteli, Rivas Esteli Chinandega Granada, Jinotega, Managua, Matagalpa, San Juan del Sur Inspections Sub-index Audits Sub-index Best performers Worst performers Best performers Worst performers El Salvador El Salvador San Miguel Santa Tecla Antiguo Cuscatlan Sonsonate Nicaragua Nicaragua Granada Chinandega San Juan del Sur Rivas What variables does each Sub-index include? Information Sub-index Availability of forms, Simplicity of forms, Information, Sufficient information, Access to information and Consistency in the process. Training Sub-index Existence of user manuals, Training in internal processes, Training in customer service and Training for the officials in charge of inspections. Inspections Sub-index Number of inspections, Days of inspections, Rating of inspections and Transparency of the inspections. Tools Sub-index IT, Delegation of authority, Zonification, Categorization of business activities and industrial classification. Customer Service Sub-index Infrastructure of the municipality, Customer Service, Formal system for complaints/opinion and Front desk Audits Sub-index Internal audits and External audits. Source: Municipal Scorecard 2008 Database Inspections Inspections do not necessarily have to be performed before a license is awarded to a firm. This is particularly This sub-index is comprised of the following variables: true for businesses engaging in low-risk economic activities. number of inspections, days of inspections, transparency of Not all businesses need to be inspected prior to the issuance the inspection process (from the business owner’s perspective) of the license; rather, regular inspections should focus on and whether or not the applicant felt the inspections were firms engaging in high-risk economic activities. Finally, and reasonable. As we will see below, the efficiency of the inspection what is perhaps more important, the entire process should process is critical for fast and effective operating license be transparent. Firms must be previously informed about procedures. Generally, good practice requires just one multi- their rights and duties, and controls and sanctions should be disciplinary inspection which should include health, safety or enforced without exception. environmental inspections. 18 OPERATING LICENSES Audits opportunities for improvement. The objective of audits is to examine the quality of the processes to issue licenses, Internal and external process audits ensure that processes both externally and internally, which requires a high level of function as expected and help identify irregularities and transparency. Peru: Is a law to simplify municipal operating license processes enough? At the beginning of 2007, Peru’s Congress passed the “New Law for Operating Licenses”. This was a major effort to standardize operating license regulations throughout Peru. It is worthwhile underscoring that this is one of the most comprehensive legislative initiatives on operating licenses in Latin America, and an initiative to encourage several good practices. It may be a useful example for other countries throughout the region. Among the good practices this law encourages is the 15 business day limit to issue an operating license. It also lists the number and type of requirements, the categories of fees, and the type of information that must be available to users. Furthermore, three types of procedures are presented, depending on the size of the firm and the risk associated with the economic activities involved. It also eliminates prior inspections for low-risk and small businesses, and introduces a single safety inspection for all other businesses. Unfortunately, passing a law is not enough to accomplish true reform. In fact, in August 2008, more than one year after the law had been adopted, only 6 percent of Lima’s 49 municipalities had published the documents required by article 16 of the Operating License Law on their websites26 and 53 percent of municipalities were in partial compliance, while 41 percent had failed to publish these documents, as shown by data published by the National Institute for the Defense of Competition and Intellectual Property27. Streamlining processes is not an easy task and requires financial resources, the staff ’s commitment and the corresponding authority’s political will. Moreover, to prevent sanctions for failure to comply with the law, municipalities may grant licenses in the time and at the cost established, but only at the expense of lower quality processes that leave citizens unprotected. Governments and other organizations interested in creating a better business climate must engage in complementary activities to promote comprehensive simplification reforms. What can be done to complement a law? A law is useful because it allows standardizing procedures and regulating good practices. However, it must be backed by technical assistance and a dissemination program to support the decision to launch reforms which, ultimately, can be implemented only if each municipality shows political will. For instance, to support the new Law in Peru, several municipalities have launched a simplification program called Tramifacil. The program provides municipalities the technical assistance they need to comply with the law. In sum, the program supports 39 Peruvian municipalities. Some of the program’s results are reflected in the findings of the Municipal Scorecard 2008. Figure 1.8 shows that the municipalities that are most Cuscatlan in El Salvador, Jinotega in Nicaragua, and Yacuiba in efficient, are in the upper right quadrant. These municipalities Bolivia obtained high scores in performance indicators despite have high ranking in both perfomance and process indexes. their low process scores. The municipalities in the lower left quadrant have the lowest scores in both indexes In other words, these municipalities do not charge high fees for operating licenses nor do they take too long to grant As shown in the following figure the municipalities of them, but the information they provide or the tools available Chihuahua in Mexico, Esteli in Nicaragua, and Merida in to them are not adequate, resulting in high rejection ratios. Mexico score higher in both performance and process indices, Poor process indicators reveal a lack of efficient municipal and therefore are the best regional performers. In general, management and supervision. Good performance indicators most municipalities showing high process indicator scores mean speedier procedures for firms. However, when coupled also score well for performance. However, some exceptions with poor processes, it demonstrates that a municipality is not are noteworthy. For instance, Riobamba and Guayaquil in implementing its regulatory mandate. Efficient processes and Ecuador and Sonsonate in El Salvador obtained high scores poor performance variables indicate that municipalities may for their processes but not for their performance and must still have all the supervision in place, but it is often implemented strive to reduce times and costs. On the other hand, Antiguo poorly, causing much delay in processing applications. 26 Zoning plan and zoning change procedures that may be underway, land use index, cost structure for the paperwork for obtaining an operating license, applications or forms required for the operating license paperwork. 27 Report No. 014-2008/INDECOPI/CAM, published in Lima, Peru on August 13th, 2008 19 Figure 1.8 Operating License - Process Index vs. Performance Index 4 3 2 Guayaquil Chihuahua Merida Pachuca Esteli Aguascalientes Riobamba Zapopan 1 Piracicaba Surco Tlalnepantla de Baz Sonsonate SantaAna Process Index San Borja Guadalajara Teresina Tulcan Pucallpa Santos SanSalvador Rimac Salvador 0 Yanahuara Loja -4 -3 -2 Ate -1 Vitoria Oruro 0 1Paz La 2 3 4 Curitiba Juliaca Cusco Cochabamba Ica Ancon Pasco Mariano Melgar Recife -1 Villa El Salvador Tumbes El Alto Arequipa Yacuiba Goiania ElAgustino -2 Guarulhos Sao Paulo -3 -4 Performance Index Source: Municipal Scorecard 2008 Database Sixty one percent of the municipalities that participated such as time and cost, and a process index which measures in both the Municipal Scorecard 2007 and Municipal Scorecard variables such as the existence of zoning, or the classification 2008 witnessed a significant reduction in the number of days of economic activity according to risk, which are important for a firm to obtain an operating license. Seventy percent regulatory processes that are part of the operating license. of these municipalities have reduced the cost to acquire an operating license. While it is not possible to attribute In sum, municipalities interested in reform should not these improvements to the Municipal Scorecard, 87 percent limit themselves to reducing the number of processes or the of the municipalities that participated in the Municipal time to acquire an operating license. The municipality should Scorecard 2007 have reported that they are in the process of establish clear criteria for the processes and implement an implementing reforms or are planning to reform in the next efficient regulatory system that is sustainable over time. It is two years. important to also create a monitoring and evaluation system to make sure that the processes are conducted effectively and It is important to note that the objective of this study is not efficiently. In conclusion, simplification does not mean de- only to encourage municipalities to reduce the time and costs regulation. A simplification process should create an efficient incurred by firms to process operating licenses, but to process regulatory compliance system. In other words, the regulatory licenses in a way that reflects good practice and assures that goals should be fulfilled in a rapid and reasonably efficient regulatory goals are met. As a result, the Municipal Scorecard amount of time. incorporates a performance index which measures variables 20 CONSTRUCTION PERMITS Chapter 2 Construction Permits Prior to 2006, acquiring a construction permit would take 66 days in Granada, Nicaragua. Granada was ranked 47 out of 65 countries in the Municipal Scorecard 2007. The city also suffered from high levels of informality28. The municipality did not have a clear and regulatory framework. Firms complained of a high number of requirements and complex processes all distributed among different municipal departments. Poor inter-institutional coordination among municipal offices and different levels of government also delayed the procedure. According to the Municipal Scorecard 2007, firms reported that Granada had a large number of visits to the municipality, high costs associated with the process, and the largest percentage of rejected applications in a period of one year in Nicaragua. The excessive administrative burden discouraged private investment and the entry of new firms to the formal economy. A number of government studies that were conducted for the program on reform and modernization of the government highlighted the procedures for the construction permit and operating license as priority areas of reform29. The municipality of Granada in conjunction with the Association of Municipalities of Nicaragua (AMUNIC) recognized the need to elaborate a program for reform that would encourage private investment and initiated a simplification project for municipal procedures. This project had three phases: diagnostic, proposal, and implementation. The program improved aspects such as information for investors, standards processes, and standard requirements for each type of construction, standard forms, and customer service offices. Information was published and distributed at no cost on the requirements, costs and forms. Maximum time limits were established for the processing of the permit according to type of construction. IT tools were used to better manage the procedures. The impact of these reforms resulted in the permit going from 189 to 56 processes, and 23 to 12 requirements, and 12 to 5 visits that firms had to make to the municipality. The time to acquire the permit went from 31 to 5 days. The simplification program results in a positive change in customer service, resulting in better relations between the state and private sector and helped create a public private alliance to implement municipal simplification projects at the national level to improve the business climate and accomplish regulatory goals that ensured the appropriate technical and safety standards. The Municipal Construction Permit in and should adhere to local development and zoning plans. Formal construction benefits from urban services and Latin America: A Significant Obstacle owners pay taxes, contributing to the local tax base and hence to government revenues. Formal construction projects Formal construction is regulated by the government. are protected by national and provincial laws. Formal Properties are built on a titled lot and registered in the construction assures a certain level of quality because builders municipal cadastre so that taxes will be paid on the property. must comply with the regulatory construction standards. Properties must adhere to certain infrastructure standards 28 Nicaragua has a high level of informality, reaching up to 45 percent of its GDP. Schneider, F. and R. Klinglmair, Shadow Economies around the World: What do We Know? Working Paper no. 2004-03. 29 Vallecillos & Associates and Central Government of Nicaragua. 21 From an economic standpoint, fewer and simpler procedures informal and do not comply with construction regulations. In to grant licenses and conduct inspections encourage builders to Quito, Ecuador, this figure is up to 75 percent according to the create formal construction, whether industrial or commercial, Ministry of Urban Development and Housing. In Peru, Ministry and can save governments money. of Construction, Housing and Sanitation figures show 80 percent of all housing and business construction projects are unlicensed. Citizens who build using a permit can enjoy greater access to credit, ensure safer personal assets, avoid fines, benefit from Construction is one of the main economic activities in any higher property values, access subsidies, and demonstrate country. The construction sector’s contribution to a country’s compliance with the city’s planning process. By promoting formal economy varies according to the country’s relative development. construction, the municipalities ensure an organized, balanced The construction industry accounted for 5.7 percent of Latin and sustainable process that adheres to their urban development America’s GDP in 2006, with a significant multiplier effect on plans. Building projects are required to comply with zoning as each nation’s economic growth. Since 1995, construction has well as other regulations that deal with land development, density, experienced growth, and expanded 22 percent in the last ten use of soil, and construction standards that apply to specific areas years. such as historic sites or protected areas. Table 2.1 shows us the importance of the construction Informal constructions are typically erected without municipal sector, which plays an important role in the economic growth of authorization, and disregard building code standards. These countries. Undoubtedly construction is an economic driving force buildings lack access to public services and are not part of the urban and the main source of jobs in many Latin American countries. planning process. Such informal construction frequently occurs Construction stimulates the creation of fixed capital and new jobs. around big cities where low income families build their homes. Private investment in the construction industry is an important For example, according to Nicaragua’s Ministry of Transportation source of employment. and Infrastructure, 50 percent of the buildings in Managua are Table 2.1 The Latin American Construction Sector Occupied Country GNP population Bolivia 9.6% 2.5% Mexico 7.8% 5.1% Brazil 7.5% 7.6% Honduras 7.1% 4.1% Guatemala 6.8% 1.5% Ecuador 6.7% 9.3% El Salvador 5.9% 4.5% Colombia 5.5% 5.4% Peru 5.2% 5.7% Nicaragua 4.9% 6.1% Source: ECLAC, Statistical Yearbook for Latin America and the Carribbean 2006 Why should Construction Permit Depending on the nature of the construction, some Procedures be Improved? requirements must be fulfilled before the actual construction is authorized, such as requests to change zoning, construction The construction permit process generally starts with parameters or land use. Zoning changes may be requested when the submission of a construction design and ends with the the property is located in an area which is incompatible with registration of the building in public records offices. The process the intended use of the property. If for instance, the property also identifies the property and its owner, negotiated contracts is located in a rural area, a request may be filed to connect the and designing a project that fits urban and construction property to urban water, power and public services grids. parameters. Other steps may include negotiations with private sector parties and complying with various state or national Once construction finishes, the municipality verifies that administrative procedures. the building has been constructed according to plans, before 22 CONSTRUCTION PERMITS the builder can register the building under his/her name in unsafe and hazardous construction projects, and result in tax the public records office, hence obtaining legal recognition for evasion or illicit commercial activities. When the standards the construction. Registration increases the property’s value for construction, safety and zoning activities are not followed, and allows the full exercise of the owner’s rights before third society is left without adequate protection. parties. Thus, those who comply with legal requirements benefit from the law. The regulatory framework to obtain a construction permit in most Latin American countries is burdensome and Table 2.2 shows that in the nine countries that were complex. Many regulations are antiquated and incoherent, analyzed in this study, 80 percent of the time needed to making it almost impossible for the investor to obtain a formalize a construction is spent on procedures at the permit or authorization as established by law. Investors face municipal level, and the remaining 20 percent of the time is regulations that are predominantly restrictive and above all needed to register the property in the public records office. centered around ex ante control mechanisms. The number In Brazil and Ecuador, about 91 percent of the time required of conditions they have to comply with is distressing. Endless to complete the process is spent in the municipality and requirements, some of which are redundant or not applicable to only 9 percent is needed for actual property registration at the requesting firm, are difficult and expensive to follow. Some the records office. On the other hand, in Nicaragua and in municipalities, such as Managua, require that an owner and Mexico, 64 percent of the time is used for registration while construction company obtain a reliability certificate. Lima’s 49 the remaining 36 percent is used to obtain the construction municipalities require a certificate of compliance with urban permit at the municipality. and construction parameters. Table 2.2 Time required to formalize a construction project Municipal procedures often do not distinguish between building types, size or use. Construction permitting usually Construction Cadastre requires all applicants to conduct the following processes Country Permit (%) registration (%) to complete the procedure: submission of building plans Brazil 91% 9% records, cadastre update, metropolitan regulation report, Ecuador 91% 9% Guatemala 88% 12% compatible land use report, environmental studies, and a fire Peru 86% 14% department report. Some civil servants use their discretion Honduras 84% 16% and ad hoc criteria to approve projects. It may take the El Salvador 83% 17% Bolivia 73% 27% municipality several months to issue a construction permit, Nicaragua 64% 36% making it extremely burdensome for investors because of the Mexico 65% 35% financial costs and resulting loss of profits. As a result, formal Source: Elaborated based on Doing Business 2009 private investment is negatively impacted. The process is further complicated by the fact that civil servants that review Is There Too Much Regulation In and approve the projects do not follow standard criteria; the The Construction Permit Procedure? process is managed by several departments of the municipality that do not necessarily communicate with one another, and Municipalities that strive for efficient construction permit the process often requires authorizations from additional sub- procedures must put in place clear and precise regulations. national and national agencies. Reducing or eliminating unnecessary requirements, decreasing the number of steps and procedures, and cutting down the time Understandably, most investors find the current involved in obtaining an authorization will encourage private procedures, the excessive requirements, the timeframes investment. Efficient regulation allows the establishment of an and bureaucracy unacceptable, feeling thus encouraged to organized urban planning process. It increases tax collection, evade rather than comply with regulations, and construct stimulates formal construction activities, and encourages informally. more regulatory compliance, allowing the business sector to be more efficient and productive. Good regulation provides Table 2.3 shows the different construction activities, works a stable climate that encourages local economic development or projects that require a permit or license. and growth. On the other hand, poor regulation can lead to inappropriate use of the land, damage the environment, create 23 Table 2.3 Construction Activities and Licenses in Selected Countries Nicaragua Peru El Salvador Bolivia Colombia Mexico Construction Permit or License needed New Building       Expansion       Remodeling     Demolition    Repairs   Modification   Minor Works  Reinforcement  Structural changes  Modification  Repairs  Dismantling  Explicit request and/or simple communication Demolition     Fencing   Minor Repairs   Fitting Out  Refurbishment  Remodeling  Minor Modifications  Replacement  Nonetheless, certain types of construction may only building less than 50 m2 does not require a prior request. In require filling some simple conditions prior to obtaining the Bolivia, demolition and fencing can proceed simply by sending building permit. Compliance may be reported through a simple an explicit request to the municipal government. In Mexico, letter certifying the project meets building code standards or replacements, repairs and demolitions can be done without any by sending a letter of request to the local government. For type of request or license, and may proceed by simply giving example, in El Salvador, construction and demolition of a advance notice to the local police station. Excessive Regulation to Obtain a Construction Permit in Mexico City, Federal District Current procedures to obtain a Construction Permit in Mexico City follow two procedures: 1) a Special Construction License and 2) a Statement of Construction Activity Type A, B or C, depending on the type of project. Submitting the Statement to one of the 16 local “delegations” in Mexico City suffices to begin the building, but the delegation reserves the right to review and approve the documentation in order to approve or reject the permit. Obtaining a license requires a number of procedures and payment of fees to several agencies such as the Fine Arts National Institute, the History and Anthropology National Institute, power and water utilities, the organization that manages Geographic Information Systems, the Housing and Urban Development Department, the Environmental Department, and the corresponding delegation. A number of local and federal regulations govern the construction permit process. These laws include the Public Administration Organic Act, the Administrative Procedural Act, the Urban Development Act, the Human Settlements General Act, the Environmental and Territorial Zoning Organic Act, the Environmental Act, the Water Act, the Notary Act, the New Criminal Code, the Financial Code, the Constructions Regulations, the Public Administration Internal Regulations, the Urban Development Act’s Regulations, the Zoning Regulations, the Regulations for Property Public Registration, a decree approving the Urban Development General Program, and the Agreement to Modify the Single Delegation Offices. In Mexico City, to begin a formal construction an investor faces 250 days but in most cases (when there is no need for land use, environment, or historic preservation authorizations), the time to acquire a permit takes 120 days. Mexico City has launched a simplification project to reform processes of the Housing and Urban Development Department, the water utilities, the Environmental Department and the delegations. The time to process a permit has already been reduced by 20 percent. Once the project is finalized the process times should be reduced by 60 percent. Source: Diagnostic Report on the procedures required to obtain a construction permit in México City, D.F. Sepsa/IFC. 24 CONSTRUCTION PERMITS Which Municipalities Are More Table 2.4 Latin America (25 best and worst performers) Efficient In Providing Construction Construction Permit - Regional Ranking Permits? The Construction Permit ranking was obtained through factor analysis of the following indices: Performance Index and Process Index. The construction permit ranking was calculated by Regional Municipality conducting a factor analysis of two indices, the performance Ranking* index and the process index. performance index measures Esteli (Nicaragua) 1 the time, cost, number of visits and rejections. process index Santa Catarina Pinula (Guatemala) 2 measures information, infrastructure, tools, inspections, Chihuahua (Mexico) 3 Jinotepe (Nicaragua) 4 customer service, audits, and training. We will analyze these Veracruz (Mexico) 5 indices further in this chapter. Merida (Mexico) 6 Ciudad Juarez (Mexico) 7 Table 2.4 shows the results of the 25 top and bottom Pachuca (Mexico) 8 San Juan del Sur (Nicaragua) 9 municipalities included in the construction permit regional Zihuatanejo de Azueta (Mexico) 10 ranking. Municipalities from Nicaragua, Guatemala and Riobamba (Ecuador) 11 Mexico score the highest, while the municipalities from Peru Ambato (Ecuador) 12 25 best and Brazil fill the bottom positions. In Central America, Esteli Los Olivos (Peru) 13 performers Aguascalientes (Mexico) 14 in Nicaragua and Santa Catarina Pinula in Guatemala were the San Salvador (El Salvador) 15 best performers in the ranking. The Mexican municipalities Rivas (Nicaragua) 16 of Chihahua, Veracruz, Merida, Ciudad Juarez, Pachuca and Granada (Nicaragua) 17 Zihuatanejo de Azueta are in the 10 top positions. Managua (Nicaragua) 18 Sonsonate (El Salvador) 19 Ciudad Sandino (Nicaragua) 20 Ten Mexican municipalities and eight in Nicaragua ranked Zacatecas (Mexico) 21 among the 25 top positions in the Municipal Scorecard, thanks Vitoria (Brazil) 22 to their relatively simple construction permit processes. At the Culiacan (Mexico) 23 Masaya (Nicaragua) 24 other end, 14 Peruvian municipalities are among the 25 worst Toluca (Mexico) 25 performers. There the procedures to obtain a construction Naucalpan de Juarez (Mexico) 107 permit suffer from too many requirements, steps and Wanchaq (Peru) 108 inspections. Cuiaba (Brazil) 109 Ate (Peru) 110 Chimbote (Peru) 111 Victor Larco Herrera (Peru) 112 Independencia (Peru) 113 Teresina (Brazil) 114 Duque de Caxias (Brazil) 115 Belo Horizonte (Brazil) 116 Quillacollo (Bolivia) 117 La Molina (Peru) 118 25 worst Castilla (Peru) 119 performers Sao Bernardo Do Campo (Brazil) 120 Arequipa (Peru) 121 Campo Grande (Brazil) 122 Recife (Brazil) Oruro (Bolivia) 123 Piura (Peru) 124 Juliaca (Peru) 125 Guarulhos (Peru) 127 El Agustino (Peru) 128 Mariano Melgar (Peru) 129 Puno (Peru) 130 Huancayo (Peru) 131 * Of 131 Latin American municipalities Source: Municipal Scorecard 2008 Database 25 The municipalities that scored higher on the Municipal The municipality of Esteli in Nicaragua is in the top Scorecard generally scored well in the performance index position out of 131 municipalities in Latin America, followed and the process index, demonstrating good management by Santa Catarina Pinula in Guatemala and six Mexican procedures. In practice, however, a municipality can perform municipalities that are among the top ten. None of the well in one index and badly in the other. This is because a Andean countries municipalities are in the top ten. Only municipality for example could have speedy procedures and three municipalities of Ecuador and Peru are in the top 10-15 receive a high ranking in the performance indicator, but positions in the regional ranking. Huancayo in Peru is in the have poor process rankings due to inadequate supervision last position. Peruvian and Bolivian municipalities are in the and regulatory controls. Or the opposite could be true, bottom ten positions in the ranking. a municipality could have supervision systems in place, however; such systems do not lend themselves to efficiency in processing times. Both indicators must be taken into account when measuring the general efficiency of the construction permit process. 7…>ÌÊ>ÀiÊ̅iÊ œ˜ÃiµÕi˜ViÃʜvʘvœÀ“>Ê œ˜ÃÌÀÕV̈œ˜Êˆ˜Ê>̈˜Ê“iÀˆV>¶ Informality in the construction sector takes different forms. Some firms do not adhere to safety regulations. They use inadequate construction materials, do not report workers, or excessively sub-contract unlicensed or informal workers, making it difficult to track down offenders. These problems often result in accidents at construction sites. For example: UÊ ˜Ê >Ê «œœÀÊ ˜iˆ}…LœÀ…œœ`Ê ˆ˜Ê >˜>}Õ>Ê >˜Ê >VVˆ`i˜ÌÊ ÀiÃՏÌi`Ê ˆ˜Ê ÌÜœÊ `i>̅ÃÊ `ÕiÊ ÌœÊ ˆ˜ÃÕvwVˆi˜ÌÊ ÃÕ«iÀۈȜ˜]Ê «œœÀÊ allocation of resources for the construction and the lack of compliance with construction regulations. These are a few reasons that result in buildings collapsing, putting the citizens’ lives at risk. To reduce costs, developers fail to build earthquake resistant structures, save on t-bars, and disregard the type of soil they build on or the quality of the materials they use. Poor quality water pipes lead to leaks that quickly damage the subsoil and the building’s foundations. UÊÊ ˜Ê>ÊVœ““iÀVˆ>Ê`ˆÃÌÀˆVÌʈ˜Ê ˆ“>]Ê̅iÊLÀi>V…ÊœvÊLՈ`ˆ˜}ÊÌiV…˜ˆV>ÊÀi}Տ>̈œ˜ÃÊÀiÃՏÌi`ʈ˜Ê̅iÊÌÀ>}ˆVÊVœ>«ÃiʜvÊ>Ê concrete wall over nine construction workers. Experts said the wall collapsed because uneven bricks were used that did not meet minimum safety and technical specifications required in the National Construction Code. Worse still, the municipality found out the contractor had used a counterfeit construction permit. Most construction accidents happen in informal constructions. In many cases, unskilled workers carry out risky activities ignoring minimum safety measures. Some of the main causes for construction accidents are imprudence, haste, distraction, failure to wear protective gear, poor work organization and lack of signaling. Most Latin American construction workers do not wear protective equipment (hardhats, boots, and adequate clothes) nor are they protected by insurance against work-related accidents. A large portion of the problems that arise in construction is due to poor planning. A well planned organized and supervised construction assures more safety. Advance planning is essential. however, one continues to find construction being carried out in an unplanned and haphazard manner, leading to accidents and fatalities. When a natural disaster strikes, the neediest, most vulnerable citizens are always hardest hit. Several reasons contribute to the high vulnerability of these city dwellers to natural hazards, including accelerated and disorderly city sprawl and unsafe housing. Regulations governing land use are often lacking, and weak institutions are unable to enforce regulations, if any. Social and economic pressures drive the growth of informal land development in vulnerable neighborhoods or in areas unfit for city expansion. Informal land development also occurs in areas that do not meet minimum technical specifications to resist an earthquake. 26 CONSTRUCTION PERMITS The perception gap between businesses and municipal For comparative purposes we grouped Mexico and Brazil governments regarding the time needed to obtain a together as they are both middle income countries in the construction permit may also encourage firms to construct Region. Most of the municipalities showing shorter process informally. Municipal employees report that the permit times are in Mexico, while the Brazilian municipalities take process takes only a few days, while business owners claim that the longest. For example, Merida and Culiacan in Mexico take it takes much longer. Occasionally the perception gap can be 7 days to grant a construction permit, while in Guarulhos in extremely wide. In Castilla, Peru, and in Quillacollo, Bolivia Brazil the waiting period is approximately a year. In Veracruz there is more than a month’s difference; in Florianopolis and and Benito Juarez it takes 15 days to obtain a construction Belo Horizonte, Brazil there is a difference of 58 and 108 permit, and in the municipalities of Sao Paulo and Teresina it days respectively. takes 184 and 202 days, respectively (see figure 2.1.) Another important factor that may encourage informal There are five Mexican municipalities that take less than construction is the high cost of obtaining a construction 15 days to grant a construction permit, while no Brazilian permit. When comparing the cost as a percentage of per municipality can meet that timeframe. At the other end of the capita GDP to obtain the permit reported by business owners scale, nine Brazilian municipalities take more than 100 days and the costs reported by the municipal employees, the to deliver a construction permit. No Mexican municipality perception gap is wide in many cases, as in the case of the takes that long. Central District in Honduras, and Villa El Salvador in Peru. This is due to the insufficient information provided by the Andean countries show significantly varying results. The municipalities on permit fees and other expenses incurred by municipalities of Los Olivos and San Miguel in Peru and business owners. For the municipalities reviewed in this study, Manta in Ecuador are the most efficient in terms of granting the firms generally report that costs are much higher than the construction permit. A business owner in Los Olivos and municipal officials. This could be partly explained by other in Manta can expect to obtain a construction permit in 5 costs that firms incur, such as fees paid to intermediaries, or days, and in San Miguel the wait is only 2 days longer. In to architects and other technical experts. the municipalities of La Molina, Juliaca, and Puno in Peru, obtaining a construction permit can take between 239 and Performance Index 275 days. In the municipality of Juliaca, it may take 247 days, which is 50 times longer than in Los Olivos and in Manta (see The performance index is comprised of four sub-indices: figure 2.2.) time, cost, number of visits and rejections. Time measures the number of days needed to complete the process. Cost Process times also vary from one large city to another. measures the total expenses incurred by the user at the While obtaining a construction permit takes less than 15 days municipality (as a percentage of the country’s GDP per to in the municipality of Quito in Ecuador, it takes more than capita). Visits are the total number of firm owner visits to a month in La Paz in Bolivia. In 10 municipalities it takes less municipal offices. And lastly, the rejection percentage was than 15 days to grant a construction permit while in another calculated based on the surveyed business owners who had 14 municipalities delivering a construction permit may take their application for a construction permit rejected at some between three and nine months. point. Altogether, this sub-index gives us a broad picture of the efficiency in granting construction permits. They are In the Central American countries, the municipalities analyzed individually below. taking less time to obtain a construction permit are the ones of Santa Tecla and San Miguel in El Salvador; Juticalpa, El Time Progreso, and Choluteca in Honduras; and Esteli Nicaragua. In Santa Tecla and San Miguel constructors can obtain a For this sub-index, time is measured as the number of construction permit in two days, while in San Lorenzo in days it takes to obtain a construction permit. This reflects the Honduras, San Juan del Sur and Granada in Nicaragua, and total time from the beginning of the process, when investors San Salvador in El Salvador, the waiting time is only one day file their application for a construction permit, and ends with longer. In other municipalities however, business owners the inspection process and the permit award. must face burdensome red tape and paperwork to obtain the same permit. For example, in the municipalities of 27 Guatemala in Guatemala City and Antiguo Cuscatlan in El Figure 2.1 Mexico/Brazil Salvador obtaining a construction permit can take between Construction Permit - Time (Days) (Firms Perception) 69 and 372 days, which is 180 times longer than in Santa Tecla and San Miguel. Understandably, many investors feel This variable makes reference to the total time that the process took, measured as the difference between the starting date and the issuing date for the Construction Permit. discouraged when faced with such long waiting periods, When no information was available for this item, the entrepreneur's estimate was used. and drift to informality (see figure 2.3). Merida (Mx) 7 Culiacan (Mx) 7 In 38 municipalities obtaining a construction permit Chihuahua (Mx) 10 takes less than ten days. Most of the fastest municipalities Veracruz (Mx) 15 are in El Salvador, Honduras and Nicaragua. Only 22 Benito Juarez (Mx) 15 Pachuca (Mx) 16 municipalities take between 10 and 20 days to process a Piracicaba (Br) 17 construction permit. Juazeiro do Norte (Br) 22 Zacatecas (Mx) 22 Aguascalientes (Mx) 22 Jose Azueta (Mx) 24 Ciudad Juarez (Mx) 25 Hermosillo (Mx) 27 Tlalnepantla de Baz (Mx) 28 Tuxtla Gutierrez (Mx) 30 Ecatepec (Mx) 30 San Luis Potosi (Mx) 32 Olinda (Br) 36 Toluca (Mx) 37 Tlaquepaque (Mx) 40 Huixquilucan (Mx) 43 Sao Bernardo Do Campo (Br) 45 Guadalajara (Mx) 48 Vitoria (Br) 51 Fortaleza (Br) 54 Zapopan (Mx) 55 Queretaro (Mx) 60 Naucalpan de Juarez (Mx) 62 Salvador (Br) 63 Aracaju (Br) 63 Goiania (Br) 70 Manaus (Br) 74 Praia Grande (Br) 79 Guadalupe (Mx) 90 Joinville (Br) 91 Duque de Caxias (Br) 91 Campo Grande (Br) 92 Florianopolis (Br) 93 Curitiba (Br) 106 Santos (Br) 107 Cuiaba (Br) 121 Porto Alegre (Br) 151 Belo Horizonte (Br) 166 Recife (Br) 177 Sao Paulo (Br) 184 Teresina (Br) 202 Guarulhos (Br) 300 0 50 100 150 200 250 300 Days Average of Group Source: Municipal Scorecard 2008 Database 28 CONSTRUCTION PERMITS Figure 2.2 Andean Countries Figure 2.3 Central America Construction Permit - Time (Days) (Firms Perception) Construction Permit - Time (Days) (Firms Perception) This variable makes reference to the total time that the process took, measured as the This variable makes reference to the total time that the process took, measured as the difference between the starting date and the issuing date for the Construction Permit. difference between the starting date and the issuing date for the Construction Permit. When no information was available for this item, the entrepreneur's estimate was used. When no information was available for this item, the entrepreneur's estimate was used. Los Olivos (Pe) 5 Juticalpa (Ho) 1 Manta (Ec) 5 El Progreso (Ho) 1 San Miguel (Pe) 7 Choluteca (Ho) 1 Surquillo (Pe) 8 Jinotepe (Ni) 1 Sucre (Bo) 9 Esteli (Ni) 1 Portoviejo (Ec) 10 Rivas (Ni) 2 Callao (Pe) 14 Trujillo (Pe) 15 Jinotega (Ni) 2 Quito (Ec) 15 Ciudad Sandino (Ni) 2 Machala (Ec) 15 Santa Tecla (Sv) 2 Baños de Inca (Pe) 17 San Miguel (Sv) 2 Ica (Pe) 20 San Lorenzo (Ho) 3 Barranco (Pe) 23 San Juan del Sur (Ni) 3 Babahoyo (Ec) 23 Granada (Ni) 3 Ambato (Ec) 23 San Salvador (Sv) 3 Ibarra (Ec) 27 Comayagua (Ho) 4 Cajamarca (Pe) 28 Cuenca (Ec) Chinandega (Ni) 4 28 Pasco (Pe) 30 Puerto Cortes (Ho) 5 Independencia (Pe) 30 Masaya (Ni) 5 Riobamba (Ec) 32 Matagalpa (Ni) 5 San Juan Bautista (Pe) 33 Managua (Ni) 5 La Paz (Bo) 35 Villanueva (Ho) 6 Cusco (Pe) 36 Copan Ruinas (Ho) 6 Tulcan (Ec) 39 Santa Rosa de Copan (Ho) 7 Ate (Pe) 40 Santa Catarina Pinula (Gu) 8 Loja (Ec) 40 La Palma (Sv) 8 Tumbes (Pe) 41 Huaraz (Pe) 45 Sonsonate (Sv) 9 Yacuiba (Bo) 48 Villa Nueva (Gu) 10 Tarija (Bo) 54 Santa Ana (Sv) 10 Castilla (Pe) 55 Acajutla (Sv) 11 Villa El Salvador (Pe) 56 Leon (Ni) 12 Jesus Maria (Pe) 60 Soyapango (Sv) 12 San Sebastian (Pe) 61 Mazatenango (Gu) 14 Huancayo (Pe) 63 La Ceiba (Ho) 15 Quillacollo (Bo) 66 La Libertad (Sv) 15 Lince (Pe) 75 El Alto (Bo) 76 San Pedro Sacatepequez San Marcos (Gu) 17 Arequipa (Pe) 77 La Union (Sv) 18 Cochabamba (Bo) 77 Amatitlan (Gu) 22 Pucallpa (Pe) 87 Distrito Central (Ho) 25 Wanchaq (Pe) 92 Choloma (Ho) 26 Guayaquil (Ec) 92 Quetzaltenango (Gu) 27 El Agustino (Pe) 99 Retalhuleu (Gu) 28 Piura (Pe) 101 Coban (Gu) 29 Oruro (Bo) 104 Danli (Ho) 30 Santa Anita (Pe) 110 Chiclayo (Pe) 110 San Pedro Sula (Ho) 35 Victor Larco Herrera (Pe) 120 Guatemala (Gu) 69 Mariano Melgar (Pe) 120 Antiguo Cuscatlan (Sv) 372 Santa Cruz (Bo) 120 0 50 100 150 200 250 300 350 400 Chimbote (Pe) 127 Days Puno (Pe) 239 Average of Group Juliaca (Pe) 247 Source: Municipal Scorecard 2008 Database La Molina (Pe) 275 0 50 100 150 200 250 300 Days Cost Average of Group Measured as a percentage of per capita GDP, the cost Source: Municipal Scorecard 2008 Database variable accounts only for the official cost of the permit. The 29 per capita GDP was calculated using the World Development Figure 2.4 Mexico/Brazil Indicators (WDI, 2007) provided by the World Bank. Construction Permit - Cost (as % of per capita GDP ) (Firms Perception) Fees to obtain a construction permit should reflect the This variable refers to the entrepreneur's estimate for the total cost incurred at the costs the municipality incurs in providing the service. In most municipality during the process, expressed as a percentage of the national GDP in US$. cases, the high costs of the construction permits are attributed Merida (Mx) 0.2% to the cost of hiring specialized personnel who design the Vitoria (Br) 0.6% plans of the building project and create other technical Piracicaba (Br) 0.7% specification documents. Municipalities should limit raising Tlalnepantla de Baz (Mx) 1.3% municipal fees so small businesses will not be discouraged Cidudad Juarez (Mx) 1.3% Campo Grande (Br) 1.4% from joining the formal sector. Guarulhos (Br) 1.6% Toluca (Mx) 1.9% In Mexico and Brazil, nine municipalities charge under Curitiba (Br) 1.9% 2 percent of per capita GDP in fees, and 17 municipalities Pachuca (Mx) 2.1% range between 2 percent and 5 percent of annual per capita Porto Alegre (Br) 2.1% GDP. There are still some substantial cost fluctuations, even Goiania (Br) 2.1% within the same country. For example, Guadalajara in Mexico Zacatecas (Mx) 2.2% Recife (Br) 2.5% shows the highest costs (27.4 percent) and Merida has the Manaus (Br) 2.5% lowest (0.2 percent). The same happens in Brazil where the Joinville (Br) 3.1% municipality of Salvador has the highest costs (41 percent) Benito Juarez (Mx) 3.1% and Vitoria has the lowest (0.6 percent) (see figure 2.4). Aguascalientes (Mx) 3.3% Juazeiro do Norte (Br) 3.4% Some Peruvian municipalities charge the highest fees for Ecatepec (Mx) 3.5% Veracruz (Mx) 3.6% construction permits. The cost in Villa El Salvador in Peru Praia Grande (Br) 3.9% reaches 125.1 percent of annual per capita GDP and in Mariano Olinda (Br) 4.1% Melgar and Los Olivos it fluctuates between 23.6 percent and Fortaleza (Br) 4.9% 27.8 percent of per capita GDP. At the other extreme, in the San Luis Potosi (Mx) 4.9% municipalities of Manta, Ambato and Cuenca in Ecuador, this Zihuatanejo de Azueta (Mx) 5.0% cost fluctuates between 1.0 percent and 1.8 percent of annual Tuxtla Gutierrez (Mx) 5.2% per capita GDP. Other 18 municipalities charge rates less than Guadalupe (Mx) 5.5% Cuiaba (Br) 5.7% 4 percent of annual per capita GDP; 24 municipalities charge Teresina (Br) 5.8% rates between 4 percent and 10 percent, and 12 municipalities Tlaquepaque (Mx) 7.7% charge between 10 percent and 27 percent (see figure 2.5). Chihuahua (Mx) 8.8% Belo Horizonte (Br) 9.0% In Central America, Honduran municipalities charge the Zapopan (Mx) 9.8% most to grant a construction permit. In some municipalities, Queretaro (Mx) 10.4% Naucalpan de Juarez (Mx) 11.0% including San Pedro Sula and La Ceiba, this cost can reach the Sao Bernardo Do Campo (Br) 11.1% equivalent of 165.4 percent and 155.5 percent of annual per Florianopolis (Br) 11.5% capita GDP. In the municipality of Soyapango in El Salvador, Aracaju (Br) 12.3% and in Santa Catarina Pinula in Guatemala, it is 0.9 and 1 Duque de Caxias (Br) 13.1% percent of per capita GDP respectively. In 27 municipalities Culiacan (Mx) 13.1% rates are under 4 percent of annual per capita GDP. Seven Hermosillo (Mx) 13.4% municipalities charge rates between 4 percent and 10 percent; Huixquilucan (Mx) 15.3% Guadalajara (Mx) 27.4% eight municipalities charge rates between 10 percent and 26 Salvador (Br) 41.0% percent, and the remaining municipalities charge between 48 0% 5% 10% 15% 20% 25% 30% 35% 40% percent and 165 percent (see figure 2.6). Cost as % of GDP per capita Average of Group Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. 30 CONSTRUCTION PERMITS Figure 2.5 Andean Countries Figure 2.6 Central America Construction Permit - Cost (as % of per capita GDP ) Construction Permit - Cost (as % of per capita GDP ) (Firms Perception) (Firms Perception) This variable refers to the entrepreneur's estimate for the total cost incurred at the This variable refers to the entrepreneur's estimate for the total cost incurred at the municipality during the process, expressed as a percentage of the national GDP in US$. municipality during the process, expressed as a percentage of the national GDP in US$. Manta (Ec) 1.0% La Palma (Sv) 0.2% Ambato (Ec) 1.2% Santa Ana (Sv) 0.4% Cuenca (Ec) 1.8% Antiguo Cuscatlan (Sv) 0.4% Yacuiba (Bo) 1.8% Sucre (Bo) 1.9% La Libertad (Sv) 0.5% El Alto (Bo) 1.9% Acajutla (Sv) 0.6% La Molina (Pe) 2.8% San Miguel (Sv) 0.7% Surquillo (Pe) 3.2% 0.7% San Salvador (Sv) Babahoyo (Ec) 3.2% Esteli (Ni) 0.8% San Juan Bautista (Pe) 3.3% Cochabamba (Bo) 3.4% Ciudad Sandino (Ni) 0.8% San Sebastian (Pe) 3.5% Soyapango (Sv) 0.9% Tarija (Bo) 3.5% Santa Catarina Pinula (Gu) 1.0% Pasco (Pe) 3.7% Leon (Ni) 1.1% Ica (Pe) 3.7% Santa Tecla (Sv) 1.2% Callao (Pe) 3.7% Rivas (Ni) 1.4% Guayaquil (Ec) 3.9% Juliaca (Pe) 3.9% Comayagua (Ho) 1.5% Jesus Maria (Pe) 4.3% Coban (Gu) 1.5% Puno (Pe) 4.4% Jinotega (Ni) 1.7% Huaraz (Pe) 4.5% Santa Rosa de Copan (Ho) 2.0% Portoviejo (Ec) 4.6% Masaya (Ni) 2.2% Castilla (Pe) 4.6% Barranco (Pe) 4.6% Granada (Ni) 2.4% Cusco (Pe) 4.6% Copan Ruinas (Ho) 2.5% Quillacollo (Bo) 5.1% Sv Progreso (Ho) 2.6% Chiclayo (Pe) 5.1% Managua (Ni) 2.8% Riobamba (Ec) 5.6% Chinandega (Ni) 2.8% Tumbes (Pe) 5.6% El Agustino (Pe) 5.6% Matagalpa (Ni) 3.3% Trujillo (Pe) 5.6% Amatitlan (Gu) 3.4% Baños de Inca (Pe) 5.6% Mazatenango (Gu) 3.6% Wanchaq (Pe) 6.3% Villa Nueva (Gu) 4.2% Tulcan (Ec) 6.7% Quetzaltenango (Gu) 5.5% Ibarra (Ec) 6.8% Piura (Pe) 6.9% Retalhuleu (Gu) 5.9% Ate (Pe) 7.2% Jinotepe (Ni) 5.9% Chimbote (Pe) 7.4% La Union (Sv) 6.5% San Miguel (Pe) 8.3% San Juan del Sur (Ni) 6.6% Pucallpa (Pe) 9.3% San Pedro Sacatepequez San Marcos (Gu) 8.8% Cajamarca (Pe) 9.3% Arequipa (Pe) 9.4% Sonsonate (Sv) 10.5% Machala (Ec) 11.4% San Lorenzo (Ho) 11.6% Quito (Ec) 11.7% Guatemala (Gu) 12.8% Santa Anita (Pe) 13.0% Danli (Ho) 14.9% Loja (Ec) 13.0% Choluteca (Ho) 15.5% Lince (Pe) 13.9% Victor Larco Herrera (Pe) 13.9% Choloma (Ho) 17.7% Huancayo (Pe) 13.9% Puerto Cortes (Ho) 19.8% Santa Cruz (Bo) 15.4% Villanueva (Ho) 26.8% Oruro (Bo) 16.2% Juticalpa (Ho) 48.8% La Paz (Bo) 20.3% Distrito Central (Ho) 66.2% Mariano Melgar (Pe) 23.6% La Ceiba (Ho) 155.5% Los Olivos (Pe) 27.8% Villa El Salvador (Pe) 125.1% San Pedro Sula (Ho) 165.4% 0% 20% 40% 60% 80% 100% 120% 0% 30% 60% 90% 120% 150% 180% Cost as % of GDP per capita Cost as % of GDP per capita Average of Group Average of Group Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. 31 Number of Visits reflect the absence of building codes, or clear and predictable technical and administrative requirements across the board. The number of times a business owner has to visit the Or such codes are too cumbersome and hence ignored. The municipality in order to obtain a construction permit is rejection could also indicate the level of expertise of engineers, one of the most important indicators of the municipality’s architects and their level of knowledge of the details of the performance. These visits a business owner needs to make and process in a given jurisdiction. the municipality’s performance and efficiency are inversely related, so the fewer the visits, the greater the municipality’s In Mexico and Brazil, no rejections were reported in 12 efficiency. Brazilian municipalities. In Mexico the municipality with the lowest rejection rate, rejected 5% of the applicants. Five In the municipality of Aracaju in Brazil, in Mexico/ municipalities from Mexico and one from Brazil have rejection Brazil, the business owner has to make only one visit, while rates above 50 percent. In Guarulhos, in Brazil, business owners in Teresina, Porto Alegre and Campo Grande; they need to face a higher probability (67 percent) of having an application make 15 to 18 visits. Twelve municipalities require between rejected because the municipality did not provide clear two and three visits, 22 municipalities require between four information about the processes, but such high rates are not and nine visits, while the other municipalities required more found in Santos, Porto Alegre, Olinda, and Campo Grande. than 10 visits before granting the construction permit. In the Andean countries, surveyed business owners In the Andean countries, among the worst 18 reported that 15 municipalities do not reject construction municipalities, 17 are Peruvian. One municipality is from permit applications. On the other hand, in nine Peruvian Bolivia. In three municipalities from Ecuador and two from municipalities the rejection rate is above 50 percent. Peru the business owners reported they had to visit the municipalities twice. In 33 of the reviewed municipalities, In the Central American pool of countries, 10 the number of visits in order to obtain a construction permit municipalities report no rejections, while in La Libertad in El ranges between three and seven. While in Tulcan, Ecuador, Salvador and Quetzaltenango in Guatemala, rejection rates are a business owner must visit the municipality only once, in 50 percent and 46 percent, respectively. Huancayo, Peru the number increases to 30. It is obvious that business owners who have to visit the municipality 20 Rejection rates in seven municipalities fluctuate between times during the construction permit process, as in Lince and 5 and 10 percent, while 10 show rates between 10 and 18 Mariano Melgar, in Peru, and Oruro, in Bolivia, will find the percent. The remaining 10 had rejection rates ranging from process burdensome. Such slowness in granting the permits 20 to 50 percent. Municipalities in Honduras, Guatemala and also increases the likelihood that firms may be requested El Salvador reported high number of rejections. This could be unofficial payments to expedite the processes. improved by providing better information about the process and requirements so that firms do not get rejected because of In 14 Central American municipalities business owners incomplete applications. must visit the municipality twice, while four other municipalities require five visits. Other municipalities need between 3 and 4 Presented in this section are the sub regional rankings visits to obtain a permit. Meanwhile, two visits are enough for the construction permit. The evaluation is based on two in Comayagua, Esteli and San Salvador, and between four indexes: the performance and process index, which are each and five visits suffice in Quetzaltenango, San Pedro Sula and composed of different sub variables. Antiguo Cuscatlan. Table 2.6 shows the results of the municipalities in Rejections Mexico and Brazil. The Mexican municipalities hold the top eight positions and the Brazilian municipalities the last eight The percentage of rejections is a variable included in the positions of this group. Six Mexican municipalities are among performance index. A high percentage could signal different the regional ranking’s top ten positions. Chihuahua ranks types of inefficiencies. For instance, it could mean unclear or third out of the 131 Latin American municipalities. Vitoria insufficient information provided to applicants. It could also which is 22nd in the regional ranking is the only Brazilian point to cumbersome and opaque processes. For example, it can municipality among the best 40 performers Region-wide. 32 CONSTRUCTION PERMITS Four municipalities from Ecuador –Riobamba, Ambato, Table 2.6 Mexico/Brazil Portoviejo and Quito- and one from Peru -Los Olivos- are Construction Permit - Regional and Group Ranking among the five top scorers in the Andean Countries. On the The Operating License Index was obtained through factor analysis of other hand, the last ten positions in the sub-regional ranking the following indices: Performance Index and Process Index. are taken by Peruvian municipalities and Oruro, in Bolivia Regional Group Municipality (see table 2.7.) Ranking* Ranking Chihuahua (Mx) 3 1 For the municipalities from Central America, the table Veracruz (Mx) 5 2 2.8 shows the municipality of Esteli in Nicaragua ranks Merida (Mx) 6 3 Ciudad Juarez (Mx) 7 4 at the top of the regional ranking of 131 Latin American Pachuca (Mx) 8 5 municipalities. It is also first in the sub-regional ranking, Zihuatanejo de Azueta (Mx) 10 6 while Quetzaltenango in Guatemala ranks 100th and last Aguascalientes (Mx) 14 7 in the Region. The municipalities of Santa Catarina Pinula Zacatecas (Mx) 21 8 in Guatemala, Jinotepe and San Juan del Sur in Nicaragua Vitoria (Br) 22 9 are the sub-region’s top scorers and among the ten best in Culiacan (Mx) 23 10 the regional ranking. Meanwhile, Coban and San Pedro Toluca (Mx) 25 11 Huixquilucan (Mx) 30 12 Sacatepequez San Marcos in Guatemala, and Santa Tecla in San Luis Potosi (Mx) 32 13 El Salvador scored the lowest in the sub-regional ranking and Ecatepec (Mx) 35 14 are three of the 52 worst in the regional ranking. Hermosillo (Mx) 39 15 Curitiba (Br) 42 16 Piracicaba (Br) 52 17 Manaus (Br) 55 18 Salvador (Br) 57 19 Benito Juarez (Mx) 58 20 Juazeiro do Norte (Br) 60 21 Tuxtla Gutierrez (Mx) 61 22 Queretaro (Mx) 65 23 Guadalajara (Mx) 66 24 Praia Grande (Br) 68 25 Tlalnepantla de Baz (Mx) 69 26 Fortaleza (Br) 70 27 Joinville (Br) 71 28 Goiania (Br) 72 29 Aracaju (Br) 84 30 Santos (Br) 85 31 Guadalupe (Mx) 86 32 Sao Paulo (Br) 88 33 Olinda (Br) 91 34 Porto Alegre (Br) 93 35 Zapopan (Mx) 94 36 Florianopolis (Br) 95 37 Tlaquepaque (Mx) 97 38 Naucalpan de Juarez (Mx) 107 39 Cuiaba (Br) 109 40 Teresina (Br) 114 41 Duque de Caxias (Br) 115 42 Belo Horizonte (Br) 116 43 Sao Bernardo Do Campo (Br) 120 44 Campo Grande (Br) 122 45 Recife (Br) 123 46 Guarulhos (Br) 127 47 * Of 131 Latin American municipalities Source: Municipal Scorecard 2008 Database 33 Table 2.7 Andean Countries Table 2.8 Central America Construction Permit - Regional and Group Ranking Construction Permit - Regional and Group Ranking The Operating License ranking was obtained through factor analysis of The Operating License ranking was obtained through factor analysis of the following indices: Performance Index and Process Index. the following indices: Performance Index and Process Index. Regional Group Regional Group Municipality Municipality Ranking* Ranking Ranking* Ranking Riobamba (Ec) 11 1 Esteli (Ni) 1 1 Ambato (Ec) 12 2 Santa Catarina Pinula (Gu) 2 2 Los Olivos (Pe) 13 3 Portoviejo (Ec) 27 4 Jinotepe (Ni) 4 3 Quito (Ec) 28 5 San Juan del Sur (Ni) 9 4 Tulcan (Ec) 33 6 San Salvador (Sv) 15 5 Trujillo (Pe) 36 7 San Miguel (Pe) 38 8 Rivas (Ni) 16 6 San Juan Bautista (Pe) 44 9 Granada (Ni) 17 7 Callao (Pe) 46 10 Managua (Ni) 18 8 Ibarra (Ec) 47 11 Surquillo (Pe) 48 12 Sonsonate (Sv) 19 9 Manta (Ec) 49 13 Ciudad Sandino (Ni) 20 10 Cochabamba (Bo) 50 14 Jesus Maria (Pe) 54 15 Masaya (Ni) 24 11 San Sebastian (Pe) 59 16 Soyapango (Sv) 26 12 Sucre (Bo) 63 17 Villa Nueva (Gu) 29 13 Cuenca (Ec) 64 18 Guayaquil (Ec) 67 19 La Palma (Sv) 31 14 Babahoyo (Ec) 75 20 Matagalpa (Ni) 34 15 Machala (Ec) 76 21 La Union (Sv) 37 16 Cajamarca (Pe) 77 22 Yacuiba (Bo) 78 23 Mazatenango (Gu) 40 17 La Paz (Bo) 80 24 Chinandega (Ni) 41 18 Chiclayo (Pe) 81 25 Baños de Inca (Pe) 87 26 Amatitlan (Gu) 43 19 Tarija (Bo) 89 27 Leon (Ni) 45 20 Loja (Ec) 90 28 Santa Ana (Sv) 51 21 Pucallpa (Pe) 92 29 Tumbes (Pe) 96 30 Antiguo Cuscatlan (Sv) 53 22 Villa El Salvador (Pe) 98 31 Jinotega (Ni) 56 23 Pasco (Pe) 99 32 Guatemala (Gu) 62 24 Lince (Pe) 101 33 Cusco (Pe) 102 34 Retalhuleu (Gu) 73 25 Santa Cruz (Bo) 103 35 Acajutla (Sv) 74 26 Huaraz (Pe) 104 36 Ica (Pe) 105 37 San Pedro Sacatepequez San Marcos (Gu) 79 27 El Alto (Bo) 106 38 Santa Tecla (Sv) 82 28 Wanchaq (Pe) 108 39 Coban (Gu) 83 29 Ate (Pe) 110 40 Chimbote (Pe) 111 41 Quetzaltenango (Gu) 100 30 Victor Larco Herrera (Pe) 112 42 Independencia (Pe) 113 43 * Of 131 Latin American municipalities Quillacollo (Bo) 117 44 Source: Municipal Scorecard 2008 Database La Molina (Pe) 118 45 Castilla (Pe) 119 46 Arequipa (Pe) 121 47 Process Index Oruro (Bo) 124 48 Piura (Pe) 125 49 Juliaca (Pe) 126 50 The process variables comprise a number of indicators El Agustino (Pe) 128 51 that assess internal operations, and the way these impact the Mariano Melgar (Pe) 129 52 quality of the construction permit’s application process. The Puno (Pe) 130 53 Huancayo (Pe) 131 54 municipalities receive a higher process index score when they a) provide adequate, accurate and accessible information to * Of 131 Latin American municipalities the users; b) continuously train their staff; c) enforce adequate Source: Municipal Scorecard 2008 Database inspection processes; d) use process management tools; e) rely 34 CONSTRUCTION PERMITS on adequate infrastructure to address the users’ needs; and f ) an essential component for good service, as well as an efficient audit the quality of their processes. Tables 2.9 to 2.11 show mechanism to reduce the number of rejections. the municipalities with high and low scores in the process and construction permit sub-indices in the Central American, A municipality wishing to encourage formal construction Andean and Mexico/Brazil groups. Each of the five sub-indices must provide specific and clear information. Given the is also analyzed briefly. technical nature of the procedure, simplicity is crucial. Information for investors must synthesize the components of Information the city’s urban development plan, local plans, and the urban development and building specifications that determine the With this sub-index, the Municipal Scorecard measures the construction’s characteristics availability and quality of the information provided, whether or not the forms were comprehensible, if the process is coherent with Training the provided information, and if the firms received information regarding the inspection process. This sub-index measures the availability and usefulness of manuals, staff training on the process, and customer service The municipalities of Santa Ana in El Salvador, Rivas in training. Adequate training of municipal employees helps Nicaragua, Yacuiba in Bolivia, Arequipa in Peru, and Naucalpan to ensure processes will be well managed, and standards will de Juarez in Mexico received low scores in this sub-index. The be adequately enforced. Managua in Nicaragua, Coban in reasons for their low scores range from unclear construction Guatemala, La Molina in Peru, Quillacollo in Bolivia, and permit information, through complicated forms, to incoherence Recife in Brazil received low scores in the training sub-index. between the process and the information the municipality The municipal employees reported that they receive very little initially provides. On the other hand, the municipalities of or no training on internal processes, customer service and Santa Catarina Pinula in Guatemala, Esteli in Nicaragua, Sucre construction permit inspections. Esteli in Nicaragua, Antiguo in Bolivia, and Piracicaba in Brazil received high scores for Cuscatlan in El Salvador, Guayaquil and Quito in Ecuador, the accuracy and consistency of their information to business and Guadalajara and Toluca in Mexico received the highest owners and the actual processes. Providing clear information is scores for their training efforts. 35 Table 2.9 Construction Permit - Best and worst performing municipalities in the Process Sub-indices within Mexico/Brazil Information Sub-index Tools Sub-index Best performers Worst performers Best performers Worst performers Brazil Brazil Piracicaba Sao Bernardo Do Campo Belo Horizonte, Curitiba, Manaus, Aracaju Praia Grande, Salvador, Santos Mexico Mexico Chihuahua Naucalpan de Juarez Benito Juarez, Chihuahua, Zapopan Tlalnepantla de Baz, Tlaquepaque, Veracruz Training Sub-index Customer Service Sub-index Best performers Worst performers Best performers Worst performers Brazil Brazil Campo Grande, Guarulhos, Manaus Joinville, Recife Victoria Sao Bernardo Do Campo Mexico Mexico Aguascalientes, Chihuahua, Zapopan Chihuahua Naucalpan de Juarez Culiacan, Guadalajara, Guadalupe, Toluca Inspections Sub-index Audits Sub-index Best performers Worst performers Best performers Worst performers Brazil Brazil Curitiba Guarulhos Cuiaba Goiania Mexico Mexico Chihuahua Naucalpan de Juarez Zacatecas Aguascalientes. Chihuahua, Guadalajara, Naucalpan de Juarez, Queretano What variables does each Sub-index include? Information Sub-index Availability of forms, Simplicity of forms, Information, Sufficient information, Access to information and Consistency in the process. Training Sub-index Existence of user manuals, Training in internal processes, Training in customer service and Training for the officials in charge of inspections. Inspections Sub-index Number of inspections, Days of inspections, Reasonable Inspections and Transparency of the inspections. Tools Sub-index IT, Delegation of authority, Zonification, Categorization of business activities and industrial classification. Customer Service Sub-index Infrastructure of the municipality, Customer Service, Formal system for complaints/opinion and Customer Service Modules. Audits Sub-index Internal audits and External audits. Source: Municipal Scorecard 2008 Database Inspections received the lowest scores, while the municipalities of Esteli in Nicaragua, Santa Catarina Pinula in Guatemala, Efficient and transparent inspections are a necessary Cochabamba in Bolivia, and Chihuahua in Mexico scored component of streamlined processes and also serve the the highest. function of protecting communities from poor construction that does not adhere to safety, environmental and health standards. Timely inspections are even more important for construction permits because typically firms face six to seven mandatory inspections (depending on the nature of the construction). The municipalities of Ciudad Sandino in Nicaragua, Huancayo in Peru, and Guarulhos in Brazil 36 CONSTRUCTION PERMITS Table 2.10 Construction Permit - Best and worst performing municipalities in the Process Sub-indices within the Andean Countries Information Sub-index Tools Sub-index Best performers Worst performers Best performers Worst performers Bolivia Bolivia Sucre Yacuiba Sucre Quillacollo Ecuador Ecuador Riobamba Guayaquil Guayaquil, Tulcan, Quito Babahoyo, Loja Peru Peru Castilla Arequipa San Sebastian Victor Larco Herrera Training Sub-index Customer Service Sub-index Best performers Worst performers Best performers Worst performers Bolivia Bolivia Yacuiba Quillacollo Cochabamba El Alto Ecuador Ecuador Guayaquil, Manta, Tulcan, Quito Babahoyo Portoviejo Tulcan Peru Peru Jesus Maria, Los Olivos Castilla, La Molina Villa El Salvador Castilla Inspections Sub-index Audits Sub-index Best performers Worst performers Best performers Worst performers Bolivia Bolivia Cochabamba Oruro Quillacollo La Paz Ecuador Ecuador Portoviejo Loja Manta Riobamba Peru Peru Los Olivos Huancayo Ica Chiclayo, Jesus Maria, San Miguel What variables does each Sub-index include? Information Sub-index Availability of forms, Simplicity of forms, Information, Sufficient information, Access to information and Consistency in the process. Training Sub-index Existence of user manuals, Training in internal processes, Training in customer service and Training for the officials in charge of inspections. Inspections Sub-index Number of inspections, Days of inspections, Rating of inspections and Transparency of the inspections. Tools Sub-index IT, Delegation of authority, Zoning, Categorization of business activities and industrial classification. Customer Service Sub-index Infrastructure of the municipality, Customer Service, Formal system for complaints/opinion and Customer Service Modules Audits Sub-index Internal audits and External audits. Source: Municipal Scorecard 2008 Database Tools delays or to the discretion of municipal staff; d) delegation of signing authority to reduce bottlenecks created when an The Tools sub-index measures the existence and use official is unavailable. of tools to improve process management. It includes the following variables: a) clear zoning rules that make it easy The municipalities of Jinotega in Nicaragua, Victor Larco for investors to understand where constructions are allowed; Herrera in Peru, Quillacollo in Bolivia, and Aracaju in Brazil b) a risk-driven classification system that differentiates received low scores in this sub-index. The municipalities of between firms by type of risk according to economic and Soyapango in El Salvador, San Juan del Sur in Nicaragua, industrial activities (so that low-risk companies are exempt Guayaquil in Ecuador, Sucre in Bolivia and Manaus and from inspections that apply to high-risk firms); c) the use Belo Horizonte in Brazil received the best scores. Clear and of technology to make the process faster and less prone to accurate explanations of the territorial planning and the 37 clasification of economic activities are key factors to ensure that of a customer opinion system. Good customer service is usually business owners will observe the building code and construction critical for building trust between the citizens and the municipal will proceed formally. government. In this sub-index the municipalities of Sonsonate in El Salvador, Esteli in Nicaragua, Villa El Salvador in Peru, Customer Service Cochabamba in Bolivia, and Vitoria in Brazil received the highest scores. The municipalities of Santa Tecla in El Salvador, This sub-index looks at the physical infrastructure for Retalhuleu in Guatemala, El Alto in Bolivia, and Naucalpan de customer service, the quality of customer service, the existence Juárez in Mexico, received the lowest scores. Table 2.11 Construction Permit - Best and worst performing municipalities in the Process Sub-indices within Central America Information Sub-index Tools Sub-index Best performers Worst performers Best performers Worst performers El Salvador El Salvador Sonsonate Santa Ana Soyapango La Palma Guatemala Guatemala Santa Catarina Pinula Guatemala Guatemala Mazatenango Nicaragua Nicaragua Esteli Rivas Ciudad Sandino, San Juan del Sur Jinotega Training Sub-index Customer Service Sub-index Best performers Worst performers Best performers Worst performers El Salvador El Salvador Acajutla, Antiguo Cuscatlan Santa Ana Sonsonate Santa Tecla Guatemala Guatemala Villa Nueva Coban Santa Catarina Pinula Retalhuleu Nicaragua Nicaragua Ciudad Sandino, Esteli, Jinotepe Managua Esteli Jinotega Inspections Sub-index Audits Sub-index Best performers Worst performers Best performers Worst performers El Salvador El Salvador Acajutla Antiguo Cuscatlan Santa Tecla Acajutla, Sonsonate, Soyapango Guatemala Guatemala Santa Catarina Pinula Quetzaltenango Coban Santa Catarina Pinula Nicaragua Nicaragua Esteli Ciudad Sandino Chinandega, Jinotega, Leon, Matagalpa Jinotepe, San Juan del Sur What variables does each Sub-index include? Information Sub-index Availability of forms, Simplicity of forms, Information, Sufficient information, Access to information and Consistency in the process. Training Sub-index Existence of user manuals, Training in internal processes, Training in customer service and Training for the officials in charge of inspections. Inspections Sub-index Number of inspections, Days of inspections, Rating of inspections and Transparency of the inspections. Tools Sub-index IT, Delegation of authority, Zoning, Categorization of business activities and industrial classification. Customer Service Sub-index Infrastructure of the municipality, Customer Service, Formal system for complaints/opinion and Customer Service Modules Audits Sub-index Internal audits and External audits. Source: Municipal Scorecard 2008 Database 38 CONSTRUCTION PERMITS Audits A comparison of the performance and the process scores of participating municipalities revealed that Esteli in Nicaragua Internal and external audits are fundamental in ensuring and Merida in Mexico (see figure 2. 7, quadrant 1) received high that the processes function properly and are transparent. Santa scores for both indices compared to the other municipalities. Tecla in El Salvador, Coban in Guatemala, Manta in Ecuador, Acajutla in El Salvador and Villa El Salvador in Peru, received Ica in Peru, Cuiaba in Brazil and Zacatecas in Mexico ranked top scores in the process index. However, Villa El Salvador among the top positions. could definitely reduce the time it takes to grant a construction permit, and thus improve its performance index. One municipality can outperfom in one index while under performing in the other. Figure 2.7 demonstrates this The municipalities of Manta in Ecuador and Aracaju point. The vertical axis measures the process index and the in Brazil are examples of municipalities that have achieved horizontal axis measures the performance index. Most of the high scores in the performance index but need to improve municipalities that received high scores for their processes did their process index components. In the following quadrant, so as well for their performance. The municipalities ranked the municipalities of Huancayo and Puno in Peru are clear above the line received better scores in the process index than examples of municipalities that have to improve their internal in the performance index, while the ones below received better management (process index) and efficiency (performance scores in the performance index than in the process index. index). Figure 2.7 Construction Permit - Process Index vs. Performance Index 4 3 Chihuahua 2 Merida Esteli Acajutla Aguascalientes Hermosillo Pachuca Salvador 1 Toluca Villa El Salvador Jesus Maria Vitoria Process Index Guayaquil Tulcan Sao Paulo Sucre Leon Teresina Naucalpan de Juarez 0 La Palma Santos Joinville Manta -4 -3 Mariano Melgar -2 -1 Ate 0 1 2 3 4 Fortaleza Juliaca Duque de Caxias Coban -1 Loja Aracaju Piura Recife La Molina Huancayo Guarulhos Oruro Pasco Puno Campo Grande Quillacollo Ica Arequipa -2 El Agustino -3 Sao Bernardo do Campo -4 Performance Index Source: Municipal Scorecard 2008 Database In conclusion the municipalities in the higher right U Request sworn statements from firms that have legal quadrant are those that have performed well in each index. weight after the license process is complete. Those that are in the lower left quadrant have the lowest performance in both indices. U Develop guides and information manuals that can be accessed for free from the website. The following are considered good practices in municipal management of construction permits: U Incorporate separate inspections into a one-time multi disciplinary inspection process. U Improve quality of services to the client: this can be achieved by revising the fees and rates applied to the U Improve the efficiency of municipal services. permit that reflect the actual cost to process the permit. 39 U Integrate the different areas of the municipality so that the A detailed diagnostic is paramount for identifying the permit process is streamlined. bottlenecks and problem areas when trying to initiate a reform program. A baseline should be created with basic indicators that U Avoid manual processes and automate as many processes measure time, costs, and processes. Evaluating all the processes, as possible. interviewing the officials, looking at the paperwork and archives and simulating the processes should be part of the diagnostic. U Widen the tax base with new tax payers and update the value of the land. An integrated reform effort should be implemented when initiating reform. This includes training civil servants, securing U Use electronic signatures. the participation of the private sector, and reducing costs, time and steps to acquiring the license. When initiating a reform U Improve the work climate for municipal civil servants. process it is important to get the timing right. Timing the effort around electoral cycles and other political processes will help U Identify the personnel, profile and skills necessary for deter unforeseen delays. specific tasks such as inceptions. U Define responsibilities of the different areas of the municipal processes and establish rules of the game for decision making and all processes. 40 PROPERTY TAX PAYMENT Chapter 3 Property Tax Payment On the first day of the property tax payment, a large queue had formed in and around the municipal offices of Portoviejo. Many tax payers arrived two hours early before the office opened. After several hours of waiting, they were not provided with assistance at none of the five customer service windows in the municipality. Although the tax had not increased considerably in Portoviejo, the director of the Cadastral department explained why the tax had risen. Due to the new constructions in some of the neighborhoods of cobblestone, sidewalks, curbs, street lights, asphalt, roads, and general improvements, the tax payers had to pay an additional fee called a "special contribution for construction." This new fee was introduced as a tax for conservation and ranged between one and eight American dollars. Complaints like these are heard more often in municipalities This explains the relationship between taxes and other permits across Latin America. They are a clear indication of the and licenses. Plans to improve the processes to grant licenses municipalities’ efforts to update the cadastre-based value of the and construction permits to new firms must take into account properties, a major source of municipal revenues. that streamlined processes can also help to better assess and manage property taxes. In addition to monitoring the performance of operating licenses and construction permits, the Municipal Scorecard 2008 Ideally, authorities should be able to collect their taxes from explores the efficiency of procedures related to property taxes that a large tax base which needs only minimum oversight at a low business owners pay to municipalities. This analysis identifies cost. Taxpayers expect, among other things, clear regulations, the factors that increase costs to business owners when paying equitable and easy-to-pay taxes, a stable legal environment and taxes, and identifies the reasons that may lead to tax evasion. fair treatment for their investments. It is worthwhile highlighting the relationship between In practice, frequent changes in regulations and tax rates, paying property taxes and obtaining an operating license or a as well as complex procedures represent substantial obstacles. construction permit. Good practice indicates that governments As a consequence, some municipalities have introduced expect firms to comply with fiscal obligations. When an various measures to optimize tax collection and, to the extent entrepreneur decides to start a business on his or her property, possible, have adopted modern tools to make oversight more he must obtain an operating license and construction permit. efficient, including using the Internet for queries about tax During the process to obtain the license or permit many payments. municipalities check to make sure that the firm has fulfilled its fiscal obligations. In this scenario, appropriate regulation Main Municipal Business Taxes and simple processes would benefit both the tax authorities and business owners. Throughout the region, property taxes are calculated by applying a rate to the value of the good, generally without any Good regulation provides municipalities with the allowances (some countries, like Nicaragua allow a central information they need for better supervision. Simplified deduction on the tax rate). Location of the property (whether processes help to determine with greater accuracy the amount urban or rural), size, state of repair and number of occupants, of tax to pay, thus avoiding excessive or insufficient payments. are factored in when figuring out the rate or tariff. Efficient 41 tax calculation practices suggest taxes should be calculated as Inadequate information about taxes leads to miscalculation a function of the services provided. of taxes due. In most of the countries in this study, getting a tax rebate can take very long. In the municipality of Sao Paulo in Some municipalities also allow certain tax exemptions. Brazil, it can take up to 6 months to get a rebate for excessive In Ecuador, the main exceptions are: a) up to 2 years for payment. In En Salvador, no tax rebates are allowed at all. industrial buildings; b) for hotels, for a period of 5 years, Instead, authorities grant a fiscal credit against other taxes. starting on the date when construction ended; and c) between 2 and 10 percent discount for regular tax payers Table 3.1 shows a list of the main municipal taxes who pay their tax in advance. Another example is in Bolivia, by country. Property taxes are among the most common where Quillacollo, Sucre, Tarija and Yacuiba grant certain municipal taxes. exemptions to the property tax, including: a) a discount on the total amount for early payments, and b) various rates of discount on the total amount for timely payment. Tabla 3.1 Main Municipal Taxes by Country Tax on extraction Tax on Tax on Income Property Vehicle Corporate and exploitation Tax on Country spectacles, Fuel tax propertya Construction Other income* tax tax usage tax tax of natural livestock gambling, raffles disposal/ transfer resources Bolivia            Brasil            Colombia            Ecuador            El Salvador            Guatemala            Honduras            Mexico            Nicaragua            Perú            *Data from municipal taxes. "Other income" mostly consists of registration fees, fees and patent fees, various services, municipal arbitrations and advertising Source: PricewaterhouseCoopers Municipal tax collection and they are generally used to improve local living standards. Nevertheless, several obstacles prevent governments from Tax collection is distributed among the different levels efficiently collecting taxes to accomplish this goal. of government. For instance, in Bolivia the constitution classifies government revenues as national, departmental and Scope of the Municipal Scorecard 2008 municipal. Each of these levels of government is authorized to collect revenues from various sources. Generally, most taxes Most participating municipalities across Latin America are collected at the national level but municipal governments obtain a significant source of revenue from municipal taxes. have the power to raise taxes to finance their expenses.30 The following table shows the property tax as a percent of total taxes collected by municipalities. As mentioned above, property taxes are among the main sources of income of municipal governments. On average, the property tax, taxes on vehicles, sales taxes, and earmarked duties, account for about 50 percent of municipal revenues in the countries analyzed in this study. Municipal taxes are levied only on individuals and firms living or doing business within the municipality jurisdiction, 30 Constitution of Bolivia, Article 200, Section II, and Article 202 Section I. 42 PROPERTY TAX PAYMENT Tabla 3.2 The Property Tax is an Important Source of Income for Municipalities Income through Property tax as % of the total of Country Other income Total tax levies tax income Bolivia 36% 64% 100% 28% Brazil N/A N/A N/A 32% Colombia 45% 55% 100% 46% Ecuador 65% 35% 100% 45% El Salvador 88% 12% 100% N/A Guatemala 25% 75% 100% 65% Honduras 91% 9% 100% 49% Mexico 48% 52% 100% 59% Nicaragua 83% 17% 100% 10% Peru 12% 88% 100% 71% N/A: Not available Source:PricewaterhouseCoopers The main Municipal Scorecard 2008 indicators are time, that it takes four days to pay the property tax. On average cost, number of visits. Most surveyed municipalities obtained they visited municipal offices only once (see figures 3.1 and good scores for their property tax indicators, probably because 3.231). The cost to pay taxes is also minimum according to they have already reformed their processes. Most business firms. Other major findings are presented below. owners generally consider the time spent and cost involved to pay the property tax as reasonable. Firms report on average Figure 3.1 Property Taxes - Average Time and Number of Visits (Firms Perception) Number of visits to the municipality Average time (days) 7 7 6 5 5 4 4 4 3 3 2 2 2 2 2 2 1 1 1 1 1 - Ecuador Bolivia Nicaragua Guatemala Honduras Mexico Peru Source: Municipal Scorecard 2008 Database The surveys applied for the Municipal Scorecard 2008 such as transportation expenses and photocopies (see figures show important results in other indicators. Other expenses from 3.2 to 3.4.) It stands out that especially in the countries besides the official tax payment exist which the businessman with less income, this expense is a significant percentage incurs to pay the property tax, such as the administrative of the per capita GDP, as in the case of the municipalities expenses in the municipality. These include the cost of forms, of Nicaragua, Ecuador and Honduras, in which the cost professional service charges like bookkeepers, lawyers and surpasses the equivalent of 1 to 2% of the annual per capita architects; and finally, the indirect or transaction expenses GDP. 31 Firms were asked to report on the most recent payment process they conducted for their land tax payment obligation. In some countries this payment is done annually, while in others it is done periodically in a year. 43 Figure 3.2 Administrative Cost to Pay the Property Tax in the Municipality as % of per Capita GDP (Firms Perception) Guatemala 0.1% Mexico 0.4% Bolivia 0.8% Peru 0.9% Ecuador 2.5% Nicaragua 3.7% Honduras 5.7% 0% 1% 2% 3% 4% 5% 6% Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. Figure 3.3 Cost of professional services to pay the property tax as % of per capita GDP (Firms Perception) Guatemala 0.0% Honduras 0.0% Peru 0.3% Ecuador 0.3% Bolivia 0.5% Mexico 0.6% Nicaragua 1.0% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% Source: Municipal Scorecard 2008 Database. GDP from WDI 2007. Figure 3.4 Indirect costs to pay the property tax as % of per capita GDP (Firms Perception) Guatemala 0.0% Honduras 0.1% Mexico 0.1% Peru 0.1% Bolivia 0.2% Nicaragua 0.2% Ecuador 0.2% 0.0% 0.1% 0.2% 0.3% Source: Municipal Scorecard 2008 Database. GDP from WDI 2007 Business owners usually personally pay the property being used in Latin America to pay property taxes, in tax at the municipalities, even if there are other available particular in Brazil, Mexico, Bolivia, and Guatemala (see options (see figure 3.5.) Brazil is the exception to the rule, figures 3.6 and 3.7.) When presented with the choice of as 89 percent of business owners do not pay their taxes at a paying at a bank or somewhere other than the municipality, municipal office. In fact, electronic means are increasingly most business owners chose this option. 44 PROPERTY TAX PAYMENT Figure 3.5 Percentage of Entrepreneurs who Pay the Property Tax at the Municipality 100% 96% 92% 92% 90% 87% 80% 78% 60% 55% 40% 20% 6% 0% Peru Ecuador Mexico Nicaragua Guatemala Honduras Bolivia Brazil Source: Municipal Scorecard 2008 Database Figure 3.6 Percentage of Entrepreneurs who Pay the Property Tax by Electronic Means 10.0% 7.5% 5.0% 3.4% 2.5% 0.8% 0.7% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% Brazil Mexico Bolivia Guatemala Peru Ecuador Nicaragua Honduras Source: Municipal Scorecard 2008 Database Figure 3.7 Percentage of Entrepreneurs who Pay at a Bank or Elsewhere 100% 86% 80% 60% 45% 40% 20% 16% 12% 8% 7% 4% 4% 0% Brazil Bolivia Honduras Guatemala Nicaragua Mexico Ecuador Peru Source: Municipal Scorecard 2008 Database A large number of business owners reported that they did 3.9.) However, this did not prevent them from paying their not know how the property tax was calculated. Although in taxes. Not surprisingly, municipal authorities figure out the Ecuador, for instance, only 3 percent of tax payers reported amount due and notify tax payers, as shown in figure 3.8. they were aware of how they were calculated (see figure 45 Figure 3.8 Who Calculates the Property Tax (% of Entrepreneurs who Said the Municipality) 100% 100% 96% 95% 95% 94% 92% 91% 90% 90% 89% 85% 80% Brazil Peru Nicaragua Ecuador Bolivia Honduras Guatemala Mexico Source: Municipal Scorecard 2008 Database Figure 3.9 Do You Know How the Property Tax is Calculated? (% of Entrepreneurs Who Said Yes) 50% 40% 36% 30% 30% 28% 27% 20% 17% 17% 9% 10% 3% 0% Nicaragua Guatemala Brazil Honduras Peru Bolivia Mexico Ecuador Source: Municipal Scorecard 2008 Database A good example of a good practice in Peru is that these objectives require clear tax regulations, taxes that are most municipalities provide adequate information in a easy to calculate, and easy to pay. Tax payers need access to reasonable amount of time. When a firm registers in the all necessary information to pay their taxes (see figure 3.10 cadastral database, the municipality simultaneously reviews and table 3.3). the ownership documents, the title and deed, and provides for free the documents that calculate the tax. Then the Figure 3.10 municipality automatically adds the property in the cadastral The Municipality Provides Information on How to Pay the Property Tax (% of Entrepreneurs who Said Yes) database. Using this process in conjunction with modern IT tools, Peru has increased the tax payer base by 86 percent between 2004 and 2007. 100% 88% 83% 78% 77% 80% 72% Municipal Tax Management 70% 66% 61% 60% Good municipal tax management matters to authorities 40% and tax payers for a number of reasons. It increases revenues and provide better services to residents and owners to encourage 20% Nicaragua Ecuador Bolivia Brazil Honduras Peru Mexico Guatemala entrepreneurship. It contributes to better tax oversight and collection, and expands the number of registered tax payers. It encourages business owners to make new investments. All Source: Municipal Scorecard 2008 Database 46 PROPERTY TAX PAYMENT Table 3.3 Means of Communication Used by Municipalities to Advertise Available Ways to Pay Taxes (% of Entrepreneurs who Said Yes, More than One Answer Possible) Electronic Descriptive Country Leaflets Internet Telephony Service desk means publications Bolivia 34% 13% 18% 14% 39% 74% Brazil 43% 40% 53% 20% 50% 53% Ecuador 12% 7% 10% 5% 15% 45% Guatemala 20% 3% 4% 2% 19% 40% Honduras 26% 11% 11% 7% 25% 58% Mexico 43% 14% 15% 6% 28% 48% Nicaragua 32% 3% 6% 6% 38% 49% Peru 73% 10% 13% 9% 43% 62% Source: Municipal Scorecard 2008 Database In the past, Bolivia, Brazil, Colombia, Ecuador, El Salvador, Brazil, municipal taxes are paid electronically, while in the rest Guatemala, Mexico, Nicaragua, and Peru have often changed of municipalities, they are paid at bank offices. the rules for tax calculation. Rates and requirements vary even among municipalities within the same country. In Nicaragua, The Importance of Efficient rates and fines expire every two years and are recalculated. Property Tax Payment Procedures Constant changes in the rule for calculating taxes can hamper business planning. Tax collection is vital to cover municipal current expenses and provide funds for investments in infrastructure citizens Some municipalities have launched programs to encourage need. However, tax payers (whether individuals or companies) timely tax payments. These programs typically give tax payers demand fair and simple ways to calculate and pay taxes, as a discount for paying their entire tax debt at the beginning of well as transparent, efficient and well regulated terms and every year. Other programs include tax amnesties or surcharges documents for payment. for past due tax payers, or installment payments on owed taxes. Although this may increase tax revenues automatically, it can Yet the procedures tax payers must undergo to pay their also create a perception that late tax payers are being unfairly taxes can be complex and slow. Worse still, they may be rewarded. Business owners and individual tax payers might subject to frequent changes, despite the acknowledged fact feel encouraged not to pay their property taxes on time, and that firms should be able to determine the involved cost when eventually wait to pay later without surcharges or penalties. they decide how, when and where to make their investments. For instance, if a firm plans to buy a property, it should be able Procedures for the payment of taxes vary from modern and fast, to cumbersome and slow. In some cases, tax payers must to choose its location by taking into account the municipal visit the municipal cadastre office and fill in a form. Then, they taxes charged in the locality where they plan to invest, the are given a file number. Next, they need to visit the liquidation local property tax, and the comparative costs of operating in a office where the official in charge will check the tax payer files to different municipality. Evidently, taxation will have an impact calculate the taxes due. Obviously, this procedure is extremely on the firm’s business plans. time consuming and discourages tax payers to pay their taxes at all. Improving tax collection Alternatively, in places like Mexico City, tax payers receive No tax system is perfect because there is always room their tax returns by mail. Tax payers can pay via the Internet, for improving processes and procedures, among the many without any need to visit a municipal office. This not only components of a tax system. However, modern and improved saves time but also reduces the likelihood of non-official tools, equipments and systems with numerous practical payments, because there is no direct relationship between the applications are surfacing constantly, including more tax authorities and tax payers. There are also differences among efficient and suitable information management tools. All the municipalities within the same country. In Sao Paulo, these improvements can be used for better tax management, 47 resulting in processes that business owners can use more registration, and for municipal tax collection. They include easily. This study revealed a strong relationship between the the following: tax payers’ level of satisfaction and the number of places where they can pay their property tax. If tax payers have a. Discount for early and timely payment. In Mexico City, tax options to pay their taxes at several places, including banks, payers who pay their property tax in January receive a seven the Internet or supermarkets, they are more satisfied, even if percent discount. Advance payments in February receive most payments are still made at the municipality. a four percent benefit. This measure creates incentives for tax compliance and also provides early access to funds According to responses from firms, no significant municipalities may use for priority projects. In addition, difference was found in the average time for payment at business owners and tax payers at large benefit from going municipal offices or through other locations. In other words, through the procedures in just one step, instead of making having more places to pay results in higher user satisfaction, periodical payments. In addition, they benefit from tax although the average time to pay did not decrease32. rebates. In many cases, another incentive implemented by municipalities is that if a payment is delayed, the tax Likewise, there are several areas of opportunity for payer can pay interest on debt. Different incentives can be increasing the efficiency of tax payer identification and observed in the following table. Table 3.4 Incentives for paying Property Taxes (% of entrepreneurs who said Yes, more than one option possible) Early payment, Early payment, Payment on time, Payment on time, Exemptions or Country discount on the amount possibility to pay on discount on the possibility to pay on incentives avaible to pay payable installments amount payable installments taxes Bolivia 40% 17% 80% 23% 57% Brazil 58% 54% 36% 42% 0% Ecuador 46% 12% 68% 20% 44% Guatemala 1% 5% 0% 4% 14% Honduras 51% 32% 32% 32% 24% Mexico 76% 19% 67% 16% 25% Nicaragua 44% 51% 33% 46% 9% Peru 36% 54% 28% 49% 22% Source: Municipal Scorecard 2008 Database b. Using satellite photography to check firm characteristics and of their properties, eliminating the uncertainty that size. This is an example of how modern technology can be surrounds tax calculation. Moreover, starting in 2010, all used to support tax collection systems. By helping to identify property tax collection procedures will be carried out via properties in detail, these technologies help inspectors target the Internet33. their efforts and assure more efficient oversight. c. Providing insurance coverage against property damage For instance, in 2008 the government of Mexico City, through an additional payment included in the property tax. in Mexico, started a program to update the information available to local authorities about the properties in that d. Reducing the time to register properties. Approximately 52 city. The satellite photographs’ error margin is 1 cm for percent of sampled business owners register their properties every 100 km. Satellite photographs will help calculate the (see figure 3.11), but registering the properties takes longer correct property tax. Once the property tax accounts are than paying the property tax itself (see figure 3.12.) updated, a virtual, Web-based cadastre office will allow tax payers to know the exact size and mapping characteristics 32 A Chi-Square test determined whether or not there existed a significant difference between average time spent in paying municipal taxes at the municipal offices or elsewhere. 33 Cuenca, Alberto, Updating Cadastral Data bases with aerial photography, El Universal Daily March 27, 2008, Available on the Internet at: http://www. eluniversal.com.mx/notas/vi_493187.html. 48 PROPERTY TAX PAYMENT Figure 3.11 Did you Have to Register in Order to Pay Property Taxes? (% of Entrepreneurs who Said Yes) 100% 80% 69% 69% 61% 60% 55% 41% 40% 38% 34% 20% 0% Honduras Bolivia Nicaragua Guatemala Ecuador Peru Mexico Source: Municipal Scorecard 2008 Database Figure 3.12 Duration of the Registration Process in Working Days 20 17 15 15 14 13 10 7 7 5 5 - Guatemala Mexico Peru Bolivia Ecuador Honduras Nicaragua Source: Municipal Scorecard 2008 Database The analysis shows that, in general the time, cost, and visits to pay the property tax are reasonable as seem by firms. Some municipal management procedures are complex and slow. For instance, in Brazil, tax payers who file an application to get a rebate for excessive payments must produce several documents. A review of all such requirements and documents may be warranted to determine if they are truly needed to authorize the tax rebate. In addition, modern IT systems, off the shelf or customized software and the Internet could be used to speed up processes. Although it is true that local municipalities sometimes lack the human or financial resources needed to improve tax collection using modern technologies, agreements with national tax administrations could provide support in tax collection and oversight. Table 3.5 shows the main taxes paid by tax payers and areas for improved tax administration. 49 Table 3.5 Tax obligations Fiscal requirement or obligation Improved procedure Obtaining a tax payer number Use the same tax number for certain municipal and federal taxes, as with sales taxes. Publishing the different alternatives Publicizing the available location to pay the tax is important because most firms according to this report continue to pay the tax to pay their taxes at the municipality. Payment via Internet, at banks and supermarkets. Option to pay using alternative means of payment, such as Payment of municipal taxes credit cards. Municipalities can calculate the tax to be paid and send a notice to tax payers by post or electronic mail. This Tax calculations streamlined, user-friendly process could further be improved by attaching a detailed tax calculation sheet, encouraging faster payment. Tax payment schedules Providing options for early, annual payments or payments in monthly installments. Introducing deadlines for paying tax rebates and pay interest when municipalities miss their deadlines to pay Tax rebates rebates. What Remains to be Done? Greater publicity does not ensure business owners will immediately start using alternative ways to pay but could Through the Municipal Scorecard study the following areas help in modifying entrenched cultural practices and lack of for improvement have been identified: trust in financial entities, in particular in view of past and present financial crises. UÊ Update cadastre values so the right tax will be paid and business owners enjoy the legal certainty that property taxes UÊ Provide more information to business owners about their will not change constantly. property tax obligations, including methods for calculation, deadlines, facilities and incentives. UÊ Provide more options to pay. In addition to paying taxes at municipal offices, they could be paid at shops or through UÊ Reduce the administrative and indirect cost of property tax the Internet. It should also be possible to use credits cards payments. and other means of payment. UÊ Reduce the cost of registration to pay property taxes. UÊ Given that many business owners reported they still pay their taxes at municipal offices, municipalities that already To the extent a municipality introduces such good practices, offer several alternative options to pay could advertise them tax collection will be more efficient and ultimately, business and demonstrate that these services are safe and reliable. owner satisfaction will increase for the benefit of all involved. 50 LEARNING FROM GOOD PRACTICES Chapter 4 Learning from Good Practices M unicipalities can significantly contribute to a better business climate by improving procedures that businesses need to fulfill to operate formally. By reducing Municipalities that Have Embarked on Reform the number of procedures, providing better information, Laws on Operating Licenses: Are They and improving customer service, more firms may be Effective? encouraged to operate, build or pay taxes as participants in the formal market. As previously mentioned, some countries have implemented large nationwide simplification projects that Providing business owners with better service implies include the majority of municipalities. In these countries, changing the internal processes of the municipal offices, governments have passed a national law that sets out guidelines which may result in business sector growth. In some cases, for processes, standards, and requirements that municipalities municipalities would need to embark on structural reforms should follow to manage permits and licenses. In the case that modify processes and roles. If a municipality embarks of Peru and Brazil, both countries introduced national level on such adjustments, it needs to define indicators to measure legislation that spells out the framework for a municipal intended benefits. operating license. The purpose of this chapter is to share lessons learned In Peru’s case, the “New Law on Operating Licenses” and good practices from the region’s municipalities that have tries to set regulatory standards and procedures for all simplified municipal procedures, especially those related to municipalities. There are both advantages and disadvantages the operating license and construction permit. Such good to Peru’s experience. The law granted municipalities a 180 practices have resulted in greater process efficiency, as well business day period to align their old procedures with the as an improvement in the way in which municipal officials new law, implying that after this term, the old regulations and manage internal procedures, creating better incentives for procedures are rendered null. This enabled standardization firms to formalize. We hope that these practices provide useful across municipalities and expedited the operating license examples to other municipalities interested in embarking on procedure for small firms. Inspections are conducted after the similar reforms. license is granted. It is worth noting that some governments launch Another relevant aspect of the Law was introducing a ambitious nationwide programs to jumpstart reform. Others single procedure for a prior evaluation of the application. It prefer to start small, with a pilot project in a major city that grants positive administrative silence after 15 business days and can then be replicated in other municipalities. Every country requires affidavit formats for firms under 100 square meters. needs to assess which approach better suits its needs and This xpedites the operating license procedure for small firms, resources and what combination of reforms lead to a better whose businesses are inspected after the license is granted. climate for business. The main disadvantage is that, although citizens begin to demand compliance with the law, many municipalities have failed to implement the law. Several of them have yet 51 to standardize forms according to the standard administrative UÊ Requirements: Over 90 documents were required. forms (TUPA) set out in the law. While some municipalities Now a registration process only requires submitting the have focused on reducing the days and costs incurred by firms documents once for all the government offices, and the to acquire an operating license, not all municipalities have firm is given a single identification number for his or her conducted the re-engineering of processes to improve customer application. service, access to information, zoning plans, simplification of forms, simplification of internal processes and training for In general terms, the Brazilian law simplifies, streamlines their staff. Few municipalities have created a monitoring and and standardizes the criteria and procedures used by the evaluation system to track their progress. different governmental bodies, increasing efficiency in the procedure and the Operating License process. The challenge In December 2006, Brazil introduced a federal law for Brazil is encouraging the implementation of the law which for regulating differentiated treatment for micro and small has been uneven to date. businesses. The law requires that all three levels of government coordinate to register and formalize firms. The law establishes While the law is an important step in the right direction, the guidelines and procedures for simplifying and reducing it is important that municipalities receive capacity building the costs, registration and formalization process through the and technical assistance. The lack of know-how on new National Network for the Simplification of the Registration procedures can diminish the impact of the law. Peru has been and Formalization of Firms and Businesses (known by its able to achieve results in some municipalities due to the law acronym, REDESIM). The network aims at integrating the and a public-private dialogue. processes of different institutions responsible for registration and formalization through in-house information systems. The promotion of national level laws to simplify processes To formalize a firm through REDESIM, the firm must that mean change for three levels of government requires a provide, online, the name of the company, type of activity national level consensus. The greatest challenge is to ensure and contact information. A provisional permit is issued that change is implemented in all levels of government. through the Internet. Following inspections, the firm receives final documents through the Internet. The law tries to limit Development of Public-Private duplicative procedures among the three levels of government Programs to establish simplified and create a more predictable process for firms. procedures at the national level An important clause in the legislation is the introduction Several Latin American countries have embarked on large of a risk based classification system. The law streamlines simplification projects to improve the business climate. In the processes related to sanitary, safety, fire prevention, and some countries, a top-down political reform effort has resulted environmental standards. Additionally, the law states that in the implementation of a large simplification program. In inspections should focus on economic activities that are others, municipalities have embarked on their own reforms. In considered high risk. many cases, the creation of a public-private dialogue has been the impetus for reform. It is too early to report on the impact of the reforms; however, the following reforms are envisioned: In Mexico, the Rapid Business Opening System (SARE) has attempted to implement simplification nationwide. This UÊ Õ̅œÀˆâ>̈œ˜Ã°Ê œÀÊ œ«i˜ˆ˜}Ê >Ê LÕȘiÃÃ]Ê >Ê wÀ“Ê …>`Ê Ìœ system simplifies the process of obtaining an operating license be registered in over 10 offices in three levels of government. for low-risk economic activities. On January 28, 2002, a Through a one-stop process, registration can be done in all Presidential Agreement introduced SARE, which entered three governments simultaneously through REDESIM. into force on March 1, 2002. The SARE system is supposed to provide a license within 48 hours, and is mainly aimed at UÊ /ˆ“i°ÊÌÊ̜œŽÊÕ«Ê̜ʣxÓÊ`>ÞÃ°Ê œÜ]Ê̅œÃiʓ՘ˆVˆ«>ˆÌˆiÃÊ̅>ÌÊ micro, small and medium businesses, as these firms usually participate in REDESIM can issue the provisional operating engage in low-risk activities and represent 80% of Mexico’s license immediately, except for high-risk activities. economic activity34. 34 Available on the Internet at: http://www.cofemer.gob.mx/index.asp?tipo_nav_bar=2&contenido=2&content_id=137&menu_id=17&submenu_id=37. 52 LEARNING FROM GOOD PRACTICES To date 136 municipalities have implemented SARE. operating license. The toolkit consolidates good practices in According to the Commission for Regulatory Improvement - simplifications. The technical assistance offered by Tramifacil COFEMER, SARE has led to the creation of 381,984 jobs and included starting with a diagnostic, coming up with proposals 132,675 new businesses. Of the 25 surveyed municipalities, 19 for reform, implementation, and monitoring of results. have implemented SARE35. In a second stage, Peru’s National Plan embraced the The SARE system is an important step forward; however, provincial municipalities of Ica, Piura, Arequipa, Trujillo, it could be improved in the following ways: Chiclayo, Huaraz, Chimbote and Huarmey. Significant results were obtained in reducing the number of days for issuing an UÊ iÌÌiÀÊ iÛ>Õ>̈œ˜Ê œvÊ “Õ˜ˆVˆ«>Ê iÛiÊ ˆ“«i“i˜Ì>̈œ˜\Ê operating license in these municipalities. These municipalities Once the system is installed, COFEMER assumes that were able to reduce time, costs, procedures and number of municipalities are implementing the system. However, regulations. They introduced a risk based classification system some municipalities do not follow COFEMER criteria according to economic activity, standardized processes, better and deviate from the program’s objectives. This could be information systems, and delegation of signing authority. One resolved through evaluations made by the Commission way of starting reforms is to begin with a municipality and itself or by third parties that certify its proper operation. replicate the effort in other municipalities that have similar characteristics. It is also important that the reform effort be UÊ *ÀœÛˆ`iÊViÀ̈wV>ÌiÃÊ̜Ê̅œÃiʓ՘ˆVˆ«>ˆÌˆiÃÊ̅>ÌÊ>ÀiÊVœÀÀiV̏ÞÊ accompanied by a monitoring and evaluation system that allows implementing SARE to ensure better quality control. frequent supervision and measurement of results and impact. UÊ 7…ˆiÊ-, ʅ>Ãʅi«i`Êܓiʓ՘ˆVˆ«>ˆÌˆiÃʈ“«ÀœÛiÊ̅iÊ Common Aspects for the operating license, the next step would be to apply it to other Implementation of Simplification permits, licenses and inspections ex-ante and ex-post. Programs at the Municipal level Other countries, such as Bolivia, Honduras and Nicaragua Programs have implemented National Plans with IFC support to simplify operating licenses and in some cases, construction permits. Operating Licence The objectives of these plans are to reduce the time and costs incurred by firms to acquire such permits and create better Learning by Doing: Training internal municipal processes and management. The goal is to create good practices in larger cities so that the country has Training is a critical component in introducing reform, models for simplification that can be replicated. and gains importance as changes to processes need to be implemented by government offices that usually suffer from In terms of sequencing, these plans have generally started high personnel turnover. Municipal officials that lack adequate with the implementation of reform in one municipality. The training, and new systems and regulatory changes make it experience of this municipality is then shared and replicated complicated for them to provide efficient services to business in other municipalities. It is critical for a good monitoring and owners. evaluation system to be in place to ensure successful replication of experiences. Improving human capital is paramount. Training should cover an overview of relevant regulations and procedure Peru implemented the National Plan for the Simplification management, and should set minimum service standards. of Administrative Procedures (Plan Nacional de Simplificacion Introducing new technologies also requires extensive training de Tramites Administrativos), Tramifacil, which is a so that employees do not under-use new systems or revert back coordinated effort including municipalities, the private to prior inefficient practices. sector, the central government, donors and non-governmental organizations (NGOs). Tramifacil helped create a toolkit that The experience of Queretaro in Mexico, is a good example. provides guidelines for simplifying processes related to the Any time a change is made to the regulations or the information 35 According to the Commission for Regulatory Improvement, the municipalities that have implemented SARE are: Culiacan, Veracruz, Chihuahua, Torreon, Pachuca, Aguascalientes, Merida, Zacatecas, Ciudad Juarez, Tlalnepantla de Baz, Hermosillo, Queretaro, Naucalpan de Juarez, Tuxtla Gutierrez, Tlaquepaque, San Luis Potosi, Zapopan, Guadalajara and Guadalupe. 53 system, the three government departments involved in the that is dedicated to provide services to firms seeking permits. The operating license process receive training. These courses are held procedure takes place at a single location and the municipality’s with the Municipal Training Institute, which in turn offers on- Economic Development Commission is responsible for going personal training for employees and basic IT training. coordinating approvals from all departments such as the Civil Protection Unit and the General Urban Development Directorate. Within the framework of the National Plan, Oruro, Potosi, The procedure used to be slow. No one tracked the approval Sucre, Quillacollo and Yacuiba in Bolivia introduced a strategy process as it made its way to different departments. Thus, the of “learning by doing” and similar approaches were implemented response time was always delayed. When the documents provided in Ecuador, Nicaragua, and Honduras. This strategy developed by the firm failed to comply with the requirements, the approval the administrative capacity of municipal employees involved process stalled and had to start all over again. The new business in implementing reform, and provided them with training to window redesigned the procedure and created a coordinated carry out the change process by themselves. approvals structure that increases efficiency and faster response time for construction permit applicants. During the execution of this strategy, municipal personnel participated in workshops on process re-engineering. Topics The new system has enabled a number of efficiency covered in the workshops included general awareness raising improvements. Coordination, supervision and response time on the roles and functions of municipal personnel involved in has improved. The information is archived in the municipal licensing processes, overview of institutional agreements and cadastre and urban development program databases. Firms can responsibilities, and monitoring and evaluation of results. conduct inquiries electronically with frontline municipal staff. In these workshops, municipal officials had the Improved customer service modules are also used to opportunity not only to obtain information about other improve licensing procedures. Such is the case for the citizen municipalities’ procedures, but also to participate directly service unit in San Salvador, where users can submit any query in institutional assessment and discussion of reengineering during the procedure. The queries are followed up by the proposals before implementation. As a result, the municipal corresponding departments. officials own the change process and actively contribute to internal dissemination activities. The creation of offices closer to the user is also a good practice, as the users do not have to go to central offices, Training is an important part of municipal simplification saving them time and transportation costs. In Queretaro, projects. Frequent training, particularly right after reforms this was implemented through municipal delegations which, are introduced, is critical so that municipal officials are ready in turn, hold a “Miercoles Ciudadano” twice a month. This to provide services when requested. initiative assists the public about different procedures of the municipality. Implementation of One Stop Shops One stop shops are a good way to reduce regulatory hassles The creation of one stop shops or “single windows” has for low-risk firms. Unfortunately, one stop shops or single improved customer service in some municipalities. They windows can also be implemented quite poorly. In some cases, have been implemented in Manta and Guayaquil in Ecuador municipalities have grouped different departments into one for operating licenses, in Managua in Nicaragua for the office space. However, none of them actually communicate construction permit, and in numerous municipalities in with each other, thus the firm has to spend time presenting its Mexico, such as Toluca, which has launched a Business Service application at each “window” even though they are going to Center. Successful one stop shops usually require an investment one physical location. This does not save time to the firm. in training on customer service, management, new procedures and regulations, and IT systems. The creation of easy- to-use Attending Information levels and Customer manuals makes it possible for frontline staff to provide a fast Service response to license and permit applicants. Another good practice is to improve user satisfaction, In the case of Hermosillo in Mexico, the municipality by making it easier for firms to interact with municipal launched a construction permit business development center officials virtually or once in the municipality. To improve 54 LEARNING FROM GOOD PRACTICES user satisfaction, a municipality could facilitate access to (e.g. new premises, new equipment, etc.) If the cost is based on information by introducing self-service desks or informative the investment amount and not the cost of administrating a panels in the offices that help the citizen understand where to license, then the municipality is collecting a fee rather than go for help. The municipality can also use IT tools to enable an providing a service. In such instances, it is worth examining if applicant to track the different stages of his or her application a municipality is charging excessive fees for the sole purpose of electronically (by e-mail or SMS), or by telephone hotlines, collecting revenue. and making payment possible through electronic means. Creating transparency and information access increases Accordingly, there should be complaint and suggestion boxes firms confidence and prevents municipal officials from charging physically located in the offices, or ways in which feedback can discretionary fees. It is important that citizens know the be sent through the Internet or by telephone. These complaints amount and type of public revenue these fees represent to the should be attended by a municipal official within a reasonable municipality (tax or non-tax revenue), and how this revenue amount of time. In Manaus, Brazil, all complaints are subject translates into better service delivery. to an administrative review to analyze whether the complaints warrant a change in the procedure. The complainant may track The costs should be defined with predictability. If they fall this review process through the web site. Ninety percent of the into the category of tax revenue, legislation should set forth complaints undergo this administrative review. the pricing. If the decision is taken by the municipality, a local law should set out fees and eliminate discretionary behavior. Municipalities in Bolivia, Ecuador, Honduras, Nicaragua Different practices in cost structures are presented below: and Peru that are part of national simplification plans have made an effort to keep their websites updated, offering information UÊFree licenses about their services. They have created a user process guide that In Mexico City, firms engaging in low-risk economic provides firms with information for each municipal procedure, activities do not need to pay a fee. They only need to send reducing the time needed to physically visit municipal offices a declaration of intent to start an economic activity. Another to seek information. Some websites allow users to track the example is the free operating pre-license in Queretaro, progress of their applications. Mexico, which is valid for 180 days and is used for low-impact commerce and services. This system was created to support By providing these tools to firms, the municipality ensures micro-enterprises to help them become operational and to that firms have all the information needed to embark on a protect their initial investment from being affected by long formal process for obtaining a license. This information, when bureaucratic processes. Operating licenses are granted free of available through different mediums, significantly helps reduce charge in La Paz, Bolivia, San Luis Potosi, Tuxtla Gutierrez, the bureaucratic burden faced by firms. and Hermosillo in Mexico36. Constantly Revise Costs and Make them UÊCost reduction Transparent Cost reduction lowers the burden on the business owner and is sometimes used to create incentives to encourage certain economic The cost incurred by firms to acquire operating licenses activities. It is important that such measures are implemented is one of the elements that deter firms to acquire a permit or impartially and are not subject to discretion. Barranco, San Borja license. It is seen as good practice to provide predictability, and Coronel Portillo in Peru reduced costs from US$381.558 transparency and fairness in pricing fees and costs. (1200 soles) in 2007 to US$164 (516 soles 37). The costs and fees for operating licenses should be clear UÊFixed fee and easy to understand. Cost differentiation should be based The cost may also be established through fixed fees. In on the actual cost of administering a license plus necessary the municipality of Managua, Nicaragua, firms pay C$250.00 overheads needed for any other functions to support the or US$12.88 for the operating license. The advantage is cost municipal licensing department (e.g. room cleaning, couriers, standardization, but the disadvantage is that it does not take etc.) and for investments to sustain these functions in the future into account the differences in public services provided by 36 It is usually not advisable to issue a license free of charge as this service from the municipality should be sustained and have a fee. 37 Exchange rate calculated as of December 8, 2008. Available on the Internet at: http://www.xe.com/ucc/convert.cgi. 55 the municipality. These costs could vary depending of type resources. This helps create minimum standards for development of service rendered or cost of providing services according to for a municipality. Such systems can help municipalities better different geographical locations. regulate economic activity within their jurisdiction. Municipalities should also make it easy for firms to pay Development and Implementation of the fees. Providing many alternatives for payment methods is Monitoring and Evaluation tools a good practice. Municipalities can offer payment options in governmental offices, banks, through transfers, or credit cards For any reform project, tools that track changes in to help to facilitate the procedure. performance are critical for policy makers and users of public services. An interesting exercise is being conducted in the We can observe that providing predictability to the fee state of Guerrero for several municipalities. An evaluation and structure, clarity on how the cost is calculated, and disseminating performance system is currently being implemented to allow this information can limit discretionary behavior. Such good municipalities to monitor and evaluate simplification projects. practices help create more public confidence in the licensing process. The model below incorporates basic indicators and specifies the information source, the data collection process and Implement and Update Zoning and Classification the frequency. This model also identifies which department is Systems responsible for tracking and reporting on the indicators. Urban planning is crucial for municipalities wishing to manage a functional and orderly economy in their jurisdiction. Zoning rules enable municipalities to regulate land use. Soil use and the availability of natural resources (water) or services such as electric power, street lighting, drainage, and roads play a role in determining what zones should be used for housing, commerce or industry or delegated as protected areas. Clear and easily accessible zoning plans are important tools for the development of a municipality. Such plans enable an efficient distribution of public services and goods in a community. Good zoning can also encourage formalization for certain economic sectors. Effective zoning can also help define prohibited, conditional and permissable economic activities within a certain jurisdiction. Each economic activity presents a level of risk. A risk assessment should determine the intensity of regulation. Lower risk activities should have lighter regulation, speeding up the opening of a business. Higher risk activities require more intensive regulations. Even though the general term used in this survey is “operating license”, there are a number of administrative instruments that also formalize economic activity. Each of them depends on a classification of risk, such as the declaration or notice of business operation, registration, or pre-license. Clear classifications systems help improve urban planning, zoning, the distribution of public services and the use of natural 56 LEARNING FROM GOOD PRACTICES Table 4.1 Control Panel Evaluation and Perfomance System, implemented in Municipalities of the Guerrero State, Mexico Impact Variables Objective/Activity Indicator Baseline Goal Source Responsible party Frequency Percentage increase in the Statistical report Department of Opened Nº. of Businesses number of Incremental % from the system Operating Bimonthly businesses opened in (year): economic units database Licenses opened per year General Results Reduction of time Department of in municipal authorization Average time per 3 days RB, 10 Statistical report Operating Lower average for Operating Licenses and type of days RM, 20 days from the system Licenses and Bimonthly time in Nº. of days Construction authorization RA database Urban Permits Development Reduction of time Department of in municipal authorization Average Nº. of Average Nº. of Statistical report Operating No. exceeds the for Operating Licenses steps per type of steps for the last from the system Licenses and Bimonthly previous term and Construction authorization term Period database Urban Permits Development Support Components A) Information and Dissemination Formalization a) Events held, Department of events in b) Effectiveness Nº. of events, Statistical report on Municipal commercial areas (attendees vs. N/A Bimonthly effectiveness % events held Economic through customer service submitted Development modules requests) Website Report on a) Updates, b) Nº. Nº. of bimonthly Municipal IT implementation and N/A updates and site visits Bimonthly of visits to the site updates Department updates statistics a) Nº. of a) Monthly report a) Monthly report, Information distributed reports, Nº. of reports to be N/A statistics, Single window b) Bimonthly distribution b) Customers’ distributed b) Opinion surveys survey satisfaction level a) Implementation Implementation of Project Municipal IT Inquiries heard N/A report, b) statistical Monthly hot line implementation Department report on inquiries B) Single Window a) Nº. of users served for all types a) Statistical report of procedures, of persons served for all types of a) Monthly, Operating and b) Customers’ Single Window procedures in the b)Bimonthly, maintaining the satisfaction level, N/A Single Window implementation System, b) opinion c)Bimonthly, One-stop-shop c) Average waiting surveys, c) Report d)Bimonthly time before service, on complaints per d) Nº. of complaints on reason service C) Training Department of Training and capacity Training events Report on events N/A Nº. of events held Municipal Bimonthly building of officials held held Economic Development Regulation and Process Components A) Procedures a) Statistical report on registered a) Registered applications vs. released applications vs. applications per released Annual percentage type of procedure, applications, increase (%) of b) Statistical report a) Bimonthly, b) Released Maintaining registered on production per b)Bimonthly, applications per N/A One-stop-shop efficient procedures applications type of procedure response type, c)Bimonthly, c) Reasons for and response, d)Bimonthly rejection, c) Statistical report d) Submitted per reason for complaints rejection, d) Report on complaints per reason B) Inspections a) Statistical report a) Total Nº. of on inspections per Civil Protection, inspections per Inspections carried decision, Municipal Health a) Monthly, Inspection decision, b) Time out within the term b) Statistical report on N/A and Urban b)Bimonthly, operation delay, c) Reasons established by average delay, Development for c)Bimonthly for negative type of risk c) Statistical report on a), b) and c) decisions reasons for negative decisions Source: Created with information provided by the state of Guerrero. 57 This type of model permits better monitoring of project system permits almost immediate access to information, faster performance. It enables municipalities to change course if they document exchange, and saves time on internal processes. are showing poor performance in some areas. It can also serve Firms can complete the procedures in a single location. By as a tool to promote public accountability. If the municipality archiving all information electronically in a database, both publishes progress on these indicators on its web site, citizens municipal officials and firms may exchange documents and can better evaluate municipal performance. Such practices information38. increase transparency and create more citizen confidence in the municipality. The system creates an electronic file for the applicant which has reduced duplicate documentation in the different Efficient use of Information Technologies (IT) municipal departments. Changes to an application are carried out almost in real time, allowing a faster process time. One When initiating a reform process for simplifying further advantage of this system is that it provides responses in licensing procedures, it is often necessary to evaluate whether a timely manner to applicant queries, and permits monitoring information technologies will be needed to carry out such bottlenecks that may occur during the process. simplification. IT proposals should focus on making the process more efficient, to ensure significant reduction in In summary, the advantages of this type of system process time, a decrease in the number of requirements and include: savings in time, reduced requirements, more efficient reduction in visits to municipal offices. The challenge for information archiving, and monitoring performance in municipalities is to finance the technological investment real time. The system starts working when the users fill out and often, municipalities do not have the resources to make the documents required by the delegation (a sub district of such an investment. Financial constraints have an impact in Mexico City), to start the procedure. The data is entered into determining the right IT solution for the municipality. the system and corresponding fees are generated for utilities. The delegation begins to process other requirements, which When a municipality has a limited budget and urgent may include zoning and land use certificates. The information needs, it is a priority to maximize the available resources and exchange between the different offices takes place entirely invest in resources that will make it possible to reduce costs, through the electronic system. A single ID is generated for generate more income and operate more efficiently. The use of the application, diminishing duplicative review by different IT is an important tool to accomplish this. Training provided agencies and offices. to officials on IT systems is also important. Therefore, it is advisable to train at least two officials per function, in order Managing information using such IT tools significantly to guarantee proper operation. At the same time, manuals improves the performance of municipalities. A potential should be created to facilitate capacity building to train new disadvantage of IT tools is that they represent high investment personnel that join the municipality. costs. Municipalities need to carefully review their budgets to invest in such tools. Sometimes state of the art IT systems are An investment in IT which increases the efficiency of not required. The advantages of IT systems are that municipal decision-making processes, quality of information, creation of officials can share information more easily and the time needed databases, and improved communication between departments for a municipal officer to consult and process documents is and citizens, is fundamental for a municipality’s operation. reduced. If implemented well, IT systems can also reduce costs. This investment depends on the circumstances and particular Time savings could improve budgetary investment for the context of each municipality, but one example seems worthy municipality and could reduce costs for storing paper archives of note. and clear space for other activities in the municipality. CRM Systems: Since 2006, Mexico City or the Federal Public-Private Dialogue for Reform District has implemented a Single Management System Implementation (Sistema Unico Gerencial, SUG) that involves the creation of a CRM system (Custom Relationship Management) that Communication and concerted action between the private enables efficiency of processes for opening a business through and public sector is a useful way to motivate municipalities an electronic data transmission and processing interface. This to reform. Private sector actors have participated in tracking 38 Information on IFC project was provided by Santalo Estudios y Proyectos, S.A. de C.V. (SEPSA). 58 LEARNING FROM GOOD PRACTICES progress of reforms using monitoring and evaluation systems or a construction of a large factory. Good practices have that reveal improvement or lack thereof. For example the demonstrated that municipalities can reduce paperwork and Chamber of Industry and Commerce (CAINCO) of Santa regulatory burdens by conducting inspections according to Cruz de la Sierra in Bolivia performs such a monitoring a clear risk based classification system. This could diminish and evaluation role. In some cases, private sector actors are the costs for the municipality and result in a more efficient invited to participate in planning reform processes. They are distribution of work among inspections and frontline staff. also asked to provide feedback on the design of the IT system for the transactions related to the license and the elaboration Some municipalities combine the criteria above. of reports for monitoring and evaluation. The private sector Hermosillo, Mexico uses construction purpose and surface also participates in dissemination and training activities. This area to determine costs. In Bolivia the cost is fixed through a significantly improves communication and confidence with fee based on the project surface area and construction type. In the public sector. Portoviejo, Ecuador, it is based on the total value and square meters of the construction, while in Babahoyo, Ecuador, it is Municipalities sometimes consult with commerce based on the total value, square meters, cadastre sector, and and industry chambers to provide the municipality with construction end date. first hand feedback on bottlenecks that firms face in going through licensing or permit processes. This may be useful In other municipalities the cost is determined according for municipalities to know the business owners’ needs and to basic rendered services and additional services that the objectives, to better tailor improvements. municipality would need to provide to authorize the permit. The latter services may indeed have a more direct relationship Construction Permit to the cost incurred by the municipality to approve the permit, rather than a revenue raising purpose. One example of a good The construction permit is a legal document that is practice is the case of Manaus, where a payment is made at generally required to start a construction project. Different each stage in relation to the type of municipal service rendered types of works require that municipalities grant different classes such as the provision of a technical information certificate, of permits. Such differentiation in requirements is important formalization of the finished construction, and finalization of for efficient management of construction permits. Sometimes, the technical visit. too many requirements, particularly for simple works, can deter firms from wanting to construct formally. When conducting reforms it is important to take the other costs into account as well, such as approval of the Revise costs frequently and make them plans by third parties (architect associations, civil and electric transparent engineers, topographers, etc.) The cost should not be simply passed on to firms. A good practice to reduce user costs has High fees or costs for a construction permit, lack of been used in Santa Catarina Pinula, Guatemala, where staff transparency of fee structures, and unclear classification of is dedicated to provide advice to prepare building plans. In those costs according to construction type, can discourage Nicaragua, costs are quite low, and the building plan review firms from formally starting new construction. In this costs are not transferred to the user, as the municipalities have section, we present different ways in which municipalities their own professional staff. can establish efficient cost structures. These include costs according to risk-based classification systems, costs to finance Another possible increase in fees could be linked to the public services, and differentiation in costs according to social term of the permit. In Guatemala, for example, the permit and demographic criteria. expires after six months, thus firms need to pay for renewing the license after six months. Similarly, Ecuadorian municipalities Firms usually have to pay fees to different levels of such as Quito, Cuenca, Ambato, Ibarra, Tulcan, Riobamba, government. At the municipal level, these costs can become Loja and Portoviejo demand a guarantee equivalent to 1 significant if the municipality conducts all inspections percent of the work project, which increases costs, as this regardless of type of construction. If inspections are conducted amount is withheld and is not available for the user. This may without regard to risk or size of the work, municipal officers cause a loss of profits that would have been obtained if such face the same level of effort issuing a permit for remodeling amounts had been available as capital. 59 We can conclude that diverse practices to determine fees UÊ Quick Licenses” (“Licencias Rapiditas”) in Villa Nueva, each have advantages. Some municipalities can even combine Guatemala, are granted for constructions under 36 m2 and them to improve their results. A framework for fee structures are issued in one day. should be published in standard legal publications (such as the municipal gazette, the fiscal code or any other relevant legal act) Other municipalities have various types of construction and should be disseminated widely. It should clearly establish permits that have reduced processing times. Chihuahua is a how the fees will be used by the municipality; if they are used useful example. The municipality issues a permit in five days for for revenue generating purposes or are directly related to the “self-construction” (for residents of low-income neighborhoods payment of services incurred by the municipality to manage who want to construct using family labor.) Chihuahua also the permit process. issues minor construction permits (“licencias de construccion como tramite menor”) with different requirements depending Define Urban and Building Parameters on construction type, including a) room expansion and remodeling from 11 to 60 m2, b) new construction from Municipalities also establish standards and guidelines for 11 to 60 m2, or c) construction or expansion of commercial building parameters. Parameters are determined by urban plans premises from 11 to 60 m2. All of them expire in 30 calendar or zoning plans for different districts. This information should days and take 72 hours to approve. The “major construction be available at no cost and include all pertinent regulations and permit” (“licencias de construccion como tramite mayor”) is technical information. granted for construction works over 60 m2, and also takes 72 hours following submission of all documentation. Most municipalities always require permits for new buildings. However, not all of them require permits for certain types of As seen above, it is important that municipalities create constructions such as expansion, refurbishment, demolition, plans for urban and building parameters. Such standards repairs, modifications, minor works, reinforcement, structural should be easily accessed by firms wishing to embark on any changes, alterations, disassembly, fence placement, perimeter type of construction. wall construction, conditioning, remodeling and replacements. For construction that is not a new building, simple notifications Implement and Update Classification Systems or communications to the authority suffice. For example, in and Zoning Mexico City, replacement, repair or demolition works only require notifying the delegation. Other municipalities have Good practice also includes regulating permits according differentiated permits, for example: to a risk based classification system that differentiates between different types of works and determines the requirements UÊ Permit for minor construction: In Yacuiba, Bolivia, that firms need to comply with. Similarly, the classification this permit is given for constructing one or two rooms, of construction according to type of economic activity and expansions and remodeling. It is issued in a single day. type of industry is also considered good practice. In addition, different construction types can be regulated based on the UÊ Provisional permits: In Riobamba, Ecuador, a provisional different zones of municipalities, the differentiation of risks construction permit is granted before the construction and use of specific geographic location, the impact on the begins, and when the foundations and columns have population and environment, and available public services in been built, the definitive permit is granted. Likewise, in the area. Chihuahua, Mexico, a provisional permit is granted for 15 business days, to allow project initiation, when a person Good practices include determining clear classification cannot, for reasons outside his or her control, present all the criteria and ensuring that the rules are transparent and documents required at the municipality. It takes 72 hours are disseminated widely. This may be accomplished by to grant this permit. publishing and making available specific regulations such as development plans. These plans should be published along UÊ Licenses under the UNO program in Aguascalientes, with building plans and maps, so that they are freely available Mexico: Permits are granted immediately for works that to users. In Manaus, Brazil, this is done through a geo- pose no environmental risk or fall under a non-regulated referential cartographic database and a system to address any category. The license is granted in one day. discrepancies. In Ciudad Juarez, Mexico, citizens can visit the 60 LEARNING FROM GOOD PRACTICES Integral Information and Urban Development Center, send licenses and permits could also be shared with the office of in their queries and access information through its website. the municipal cadastre. This is vital for municipalities that need to improve tax collection. It also helps municipalities Municipalities should also identify types of construction determine differential fees for taxes according to tax breaks that may or may not be permitted in high risk areas. for special groups. Accordingly, some municipalities have created organizations that focus on such issues. For example, San Salvador created Municipalities should also inform taxpayers about their a specialized department called Geographical System of fiscal obligation and the ways in which payment can be made. Municipal Information (Sistema Geografico de Informacion Clear and timely information helps taxpayers fulfill obligations. Municipal, SGIM.) It also prevents the need for intermediaries. Better information reduces overall transaction costs and limits informality. For works larger than 3000 m2, Queretaro, Mexico has created a monitoring system through a risk based matrix. This Another incentive that could facilitate tax payment is system classifies works by construction height, environmental the creation of many alternatives for payment. Bank systems, risk, nature conservation for cases that need environment impact electronic mediums, self service markets or the Internet can be studies. This classification system is also tied to zoning plans. useful options to provide the taxpayer. Such choices eliminate Classification according to level of risk is important because it the need to visit the municipality. The municipality should means that some construction may be subject to more rigorous widely communicate these options so that firms find it easy to inspections and have different requirements to fulfill. pay taxes. Payment of Property Tax Conclusions As mentioned before, the Municipal Scorecard 2008 This report offers a myriad of examples on how to improve also surveyed firms that paid the property tax. Unlike the the management of licenses and permits. What is clear is that data obtained for the operating license and the construction there is no magic formula in simplification. Each municipality permit, processes for paying the property tax are not a has to define a path to pursue. Decentralization in Latin America significant barrier to access the formal market. This is because has allowed for diversity in regulations, municipal management the costs to make such payments are relatively low or non and resulted in regional and in-country variations. existent in some cases. A few interesting examples and good practices are presented for municipalities wishing to improve Some basic issues to keep in mind to improve municipal in this area. performance in these processes are listed below. In Mexico City, firms report no costs associated with UÊ *œˆÌˆV>Ê ܈Ê ˆÃÊ iÃÃi˜Ìˆ>Ê vœÀÊ >˜ÞÊ ÀivœÀ“Ê ivvœÀÌ°Ê /…ˆÃÊ fulfilling payment obligations. Payment forms are mailed to commitment should also ensure that civil servants taxpayers and they can pay online, at a bank or self-service participate and are on board with reform projects. Public- stores. This spares firms the need to travel to a municipality or private dialogue should be encouraged during design and hire a tax specialist to calculate the tax obligation. implementation of reforms. For some municipalities it is politically difficult to update UÊ *ÀˆÛ>ÌiÊÃiV̜ÀÊ«>À̈Vˆ«>̈œ˜Ê>ÃœÊ…i«ÃÊÀivœÀ“iÀÃÊ՘`iÀÃÌ>˜`Ê the value of land in the land registry or cadastre. It is equally in more detail what issues are important for reform that are complicated for municipalities to collect the land tax. In the of most concern for businesses. case of Guatemala, the national government assesses which level of government can more efficiently collect the land tax. UÊ ,i‡i˜}ˆ˜iiÀˆ˜}Ê«ÀœViÃÃiÃʈÃÊÛiÀÞʈ“«œÀÌ>˜Ìʇ‡ÊwÀÃÌÊ̜ʓ>«Ê In some municipalities it may be feasible, while where it is existing processes, then to redesign them with a view towards difficult, the national government collects the tax. higher efficiency. It clarifies the steps that municipal officials need to take to process permits and licenses. Sharing databases between departments allows better municipal management of information, particularly for tax UÊ /À>ˆ˜ˆ˜}ʈÃÊ>˜Êˆ“«œÀÌ>˜ÌÊii“i˜ÌʜvÊ>˜ÞÊV…>˜}i°Ê՘ˆVˆ«>Ê purposes. In this regard, information collected for other officials need to know their roles, understand how to 61 manage new procedures, and become acclimated to a new The good practices presented in this study are examples of way of conducting business. what municipalities in the Region have done. The examples should not be taken as a roadmap that can be applied UÊ >ÃÈwV>̈œ˜ÊÃÞÃÌi“ÃÊL>Ãi`ʜ˜ÊÀˆÃŽÊ>˜`ÊÌÞ«iʜvÊiVœ˜œ“ˆVÊ directly. activity can streamline key procedures such as inspections, determining fees, number of required processes, and The unique circumstances of a municipality should be number of visits. taken into account when designing a reform program. The Municipal Scorecard provides examples of how reforms can UÊ Ê “œ˜ˆÌœÀˆ˜}Ê >˜`Ê iÛ>Õ>̈œ˜Ê ÃÞÃÌi“Ê i˜>LiÃÊ be initiated and the kinds of roles that the public and private municipalities and citizens track progress of reforms and sectors can play in reform efforts. impact. It also helps municipalities change course if certain measures show poor outcomes. 62 Annexes METHODOLOGY Methodology del Municipal Scorecard Sources of information Some of the municipalities were eliminated from the study because they could not provide such information. Two instruments were applied to collect quantitative and qualitative information for the Municipal Scorecard (MSC). Firms The first was a survey of key municipal officials, who are directly involved in managing operating licenses, construction The municipalities were requested to provide a database permits and property tax. The team surveyed a total of 1601 of businesses that had carried out the procedures during the municipal officials in 10 countries. last two years. It was observed that few municipalities have an updated registry of the businesses in their jurisdiction. The The second instrument was a survey of firms who have databases provided by the municipalities were not enough made the procedures and operate within the jurisdiction of to complete the number of surveys. For this reason door to certain municipality. The sample selection of firms focused on door visits were done in some municipalities to secure firm those who made the procedure in the past two years, starting participation and make sure that these firms comply with the with the most recent. A total of 11,783 firms were surveyed established criteria in order to be part of the sample. Other in 10 countries. In summary, 13,384 surveys were conducted criteria used to select the firms were the following: for the Municipal Scorecard 20081. UÊ The firm obtained a license or permit and had payed its Sample Selection and Fieldwork property tax. Municipalities UÊ For the operating license the firm operates in a physical space of no more than 500m2, in the case of the A sample of at least eight municipalities was chosen in each construction permit the firms operates in a physical space of the countries participating in the MSC2. Efforts were made of no more than 800m2 and for property taxes, the firm to have political and geographical diversity. The following does not exceed 500m2. criteria were applied. Efforts were made to meet all the criteria although this was not possible in some cases. UÊ The firm is not located in a protected zone or prohibited area such as a place of cultural heritage. UÊ*œ«Õ>̈œ˜ Most of the municipalities were required to have a population UÊ The firm is 100% domestically owned and does not belong above 1% of the national total. to an international chain. UÊ*œˆÌˆV>Ê7ˆ UÊ The firm does not need any special license to conduct its The political will of mayors was a prerequisite for activity, such as an environmental license. participating. To garner this support, letters of commitment signed by the corresponding mayors were obtained from each UÊ The firm is in operation at the time of the survey. participating municipality. Interviews were conducted with firms that had completed UÊÛ>ˆ>LˆˆÌÞʜvʘvœÀ“>̈œ˜ the procedures within a maximum period of two years prior Municipalities had to make available information about the to the interview. Random selection was used to guarantee processes and provide the team with access to their databases representative sample size in selecting firms in each municipality. on firms registering for licenses and permits or paying taxes. The data was obtained from municipal databases listing firms 1 For operating licenses the surveys were applied to firms that obtained a new license. In Honduras, firms interviewed included those that received new licenses and renovations. For the construction permit, firms interviewed included those that received the permit for new constructions, remodeling, expansion, or renovations. 2 See next Annex to find the list of participating municipalities. 65 with a formal operating license or construction permit, or that year and municipal officials of the following departments had paid taxes in the period between January 31, 2008 and July Urban Development, Territorial Planning and Cadastral 1, 2005. From this list the team selected the firms that had most Evaluation. Business owners and municipal officials were recently completed the procedures so that the data gathered interviewed to to obtain data that reflects the reality of these could be as up to date as possible. An intentional sampling procedures. In the sample 68% were men and 55% of the was conducted rather than random sampling; as a result, the firms’ employed between one and three workers. The firms sample size cannot be considered statistically representative. interviewed conduct the following types of activities: general For operating licenses, a total of 30 firms were interviewed per services, product sales, construction and groceries. municipality. For construction permits, a total of 20 firms were interviewed per municipality. For taxes, a total of 30 firms were Property Tax Payment intereviewed per municipality. For the sample of business owners surveyed, 79% Before conducting the field work, a pilot activity fine-tuned employed between one and three workers because the analysis the survey instruments in each country. The survey instruments focused on identifying the impact of taxes on small and micro were tested in face to face interview to reformulate questions business. Also the 4,189 business respondents reported that and take into account local language considerations. Once the their main activity is the provision of services. survey instruments were modified to reflect these changes, they were used by local universities to begin the field work. Methodology for the Analysis of Description of the Sample Operating Licenses and Construction Permits Operating License The MSC 2008 analyses the procedures to obtain an To calculate the operating license ranking a total of 4,646 operating license (OL) or a construction permit (CP) and is firms’ surveys were used, the activities developed by their constructed using two sets of variables: 1) process variables, businesses are: general services, products sales and restaurants, and 2) performance variables. Quantitative and qualitative among others. In the sample, the gender of business owners is information was obtained from firms’ and municipal official distributed evenly between men and women (50% men and surveys that have applied for either of the two procedures. 50% women.) According to these results women who own a business, included in this study, face no entry barriers according To compute the results for each variable, as a general rule, to gender. In other words, according to this study women and the medians were used for the performance variables. For the men in Latin America face the same barriers to obtain an process variables, the averages for the responses were used operating license, which is not the same in other regions where for the qualitative variables5; the medians were used for the such barriers are based on gender and are widespread3. Seventy quantitative data. The results derived from the quantitative data nine percent of the participating firms employed between one were converted to a 1-to-5 scale, to provide comparable data6. and three workers. The median was used to minimize the impact of outliers in the data. Averages were used when the distribution of data was not Construction Permit asymmetric. For the variables which answers were Yes or No, these were converted to a 1 to 5 scale for comparison with the For this edition the report included 131 municipalities in rest of the variables that were already in a 1 to 5 scale7. ten countries in Latin America4 (Bolivia, Brazil, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Performance Variables Nicaragua and Peru.) To measure the efficiency with which municipalities process a building permit, surveys were applied Performance variables are a set of quantitative indicators to business owners who obtained the permit in the previous that reflect the experience of firms in fulfilling procedures to 3 Normally the entry barriers in other regions include barriers to acquire land, property titles, trade credits and education or training. 4 Of the total number of surveys conducted in 176 municipalities, some were eliminated for not having enough samples to make a robust statistical analysis. 5 Variables were rescaled and ranked on a scale from 1 to 5, 1 representing the lowest and 5 representing the highest possible score. 6 The results from each municipality for all the variables are found in the preceding chapters. National averages were used when no municipal data was available. 7 1 equivalent to No and 5 equivalent to Yes. 66 METHODOLOGY obtain an operating license or a construction permit. These UÊ,iiV̈œ˜ÃÊ*iÀVi˜Ì>}i variables are detailed below. This variable represents the percentage of the total firms interviewed at each municipality that had been refused a license Information for the following variables is derived from or permit8 at least once. surveys completed by firms: After having obtained the values for performance variables UÊ/ˆ“i for each of the municipalities, and before proceeding to the This is the total time used to comply with the procedures, factor analysis, we recalculated the observations on a scale from measured as the time elapsed between the date when the 1 to 5, using the formula below9: license or permit process started and the date when the t t0 corresponding license or permit was issued. Once the value 4* X qc minc ( x q ) Valor = 6 +1 for each observation was determined, the median value (max ( x c t0 q t0 ) minc ( xq )) was calculated and the final value for each municipality computed. Only the time required to obtain the municipal Process Variables operating license or construction permit was asked to firms. The way the question was posed made it explicit that only Process variables are a set of qualitative indicators describing municipal level procedures should be considered in the various aspects of the municipalities’ internal management and calculation. how they impact the process to obtain a license or permit. These variables are detailed below. UÊ œÃÌÊ>ÃÊ>Ê*iÀVi˜ÌʜvÊ *Ê*iÀÊ >«ˆÌ> This variable is the total official cost incurred to undertake Information on the following variables was obtained from the process, as reported by firms. This value in US dollars surveys completed by firms: (US$) is a percentage of each country’s Gross Domestic Product per capita in U.S. dollars. Once the value for each UÊ Õ“LiÀʜvʘëiV̈œ˜Ã observation had been obtained, the median was computed This variable looks at the total number of on site to arrive at the final figure for each municipality. The official inspections made by municipal officials during the process cost means any fees that are levied by the municipality to to obtain a license or permit. This variable includes visits to acquire the permit or license. It does not include costs such comply with other necessary requirements in order to obtain as intermediaries, transportation or other costs. Information licenses or permits. is gathered from business owners that reported costs in local currency. The local currency figures were recalculated in UʘëiV̈œ˜Ê >Þà U.S. dollars for this study and are presented as a percentage This variable refers to the total number of days that of GDP per capita. This indicator provides a more exact municipal inspectors took to complete the inspections. This understanding of the costs that firms face according to local variable includes all visits to fulfill requirements. GDP. Once information was gathered from each survey the median was computed for each municipality. UÊVViÃÃÊ̜ÊœÀ“à This variable relates to the availability of forms or UÊ6ˆÃˆÌà application sheets needed to comply with the license or permit This variable is the number of visits each business owner process. If the business owner’s answer is Yes, a score of 5 is made to the municipal offices during the process to obtain assigned. Otherwise, a score of 1 is assigned. The figure for the license or permit. This variable includes all visits needed each municipality is based on an average. to fulfill the requisites to obtain the license or permit, such as the procedures for land use or water intake. Once the value for UÊ >ÃiʜvÊœÀ“à each observation was obtained, the median was calculated to This variable examines the user-friendliness of the forms arrive at a final figure for each municipality. and complexity of the application. The answers are rated on 8 Officials were asked about the percent of refusals in their municipalities in the last two years. This information was not used this year to compute the above- mentioned variable. Only responses were used from firms. 9 This formula serves to change the scale using the variable of interest, which is calculated using the difference of six and the sum of a quotient and one. In the numerator of the quotient the difference between the data of the survey “i” and the minimum of the entire sample is multiplied by four. The numerator is divided by the difference between the maximum and the minimum of the sample. 67 a 1-to-5 scale. The figure for each municipality is based on UÊ/À>˜Ã«>Ài˜VÞʜvʘëiV̈œ˜Ã an average. Firms rated the perceived transparency during the inspection process. The answers are rated on a scale from 1 to 5 UʘvœÀ“>̈œ˜ and each municipality’s score is computed as an average. This variable indicates whether or not the municipality provided the business owner with information about the UÊVViÃÃÊ̜ʘvœÀ“>̈œ˜ processes. If the firm’s answer is Yes, a score of 5 is assigned. This variable examines whether firms have easy access Otherwise, the score is 1. The figure for each municipality is to municipal information. The answers are rated on a scale based on an average. from 1 to 5 and each municipality’s score is computed as an average. UÊ-ÕvwVˆi˜ÌʘvœÀ“>̈œ˜ This variable examines whether or not the business UÊ œ˜ÃˆÃÌi˜VÞʜvÊ*ÀœViÃÃÊ܈̅ʘvœÀ“>̈œ˜ owner thinks the information provided by the municipality A variable examining if all the steps in the formal process are was sufficient to undertake the processes. The answers are consistent with the information provided by the municipality ranked on a 1-to-5 scale. The municipal score is based on (whether verbal, written, web-based, etc.) at the beginning of an average. the process. The answers are rated on a scale from 1 to 5 and each municipality’s score is computed as an average. UʘvÀ>ÃÌÀÕVÌÕÀi This variable determines whether or not the municipal The information on the following variables was obtained facilities are appropriate, including information boards and from the surveys completed by municipal officials: clear signs that help firm owners when they visit the municipal offices. The answers are ranked on a scale from 1 to 5. The UÊÛ>ˆ>LˆˆÌÞʜvÊ>˜Õ>Ã municipal score is based on an average. Officials were asked if their municipality had procedures manuals describing licensing or permit procedures. If the UÊ ÕÃ̜“iÀÊ-iÀۈVi answer is Yes, a score of 5 was given. Otherwise, the score is This variable examines if the municipality’s customer 1. The figure for each municipality is an average of all answers service is adequate as perceived by the business owners. received by municipal officers. The answers are rated on a scale from 1 to 5 and each municipality’s score is computed as an average. UÊ1ÃiʜvʘvœÀ“>̈œ˜Ê/iV…˜œœ}Þ This variable examines whether or not the municipality UÊ"«ˆ˜ˆœ˜Ê>˜`Ê œ“«>ˆ˜ÌÊ-ÞÃÌi“ uses information technology, such as databases and Does the municipality have a formal system for electronic processing, to process the licensing and permitting acknowledging the user opinions and complaints, for procedures. Municipal employees first indicate whether or instance through surveys, or suggestion boxes. If the firm’s not information technology is available. If Yes, a score of 5 answer is Yes, the municipality gets a score of 5. Otherwise, was awarded, otherwise the score is 1. The score for each the score is 1. The figure for each municipality is computed municipality is an average. as an average. UÊ ii}>̈œ˜ÊœvÊ-ˆ}˜ˆ˜}ÊÕ̅œÀˆÌÞ UÊ ÕÃ̜“iÀÊ-iÀۈViÊ iÎ Municipal employees were asked if the municipality This variable examines whether or not the municipality employs a system of decision making authority to speed up has a customer service desk to help users applying for a license operating license or construction permit formalities. If the or permit. If the firm answer is Yes, a score of 5 was awarded to answer is Yes, a score of 5 was awarded. Otherwise, the score is the municipality. Otherwise, the score is 1. The figure for each 1. The score for each municipality is an average. municipality is based on an average. UÊ<œ˜ˆ˜} UÊ,i>ܘ>LiʘëiV̈œ˜Ã This variable measures the existence of zoning or land use This variable relates to the overall inspection process. The regulations, for the various types of economic activities. If the answers are rated on a scale from 1 to 5 and each municipality’s answer is Yes, a score of 5 was awarded. Otherwise, the score is score is computed as an average. 1. The score for each municipality is an average. 68 METHODOLOGY UʘÌiÀ˜>ÊÕ`ˆÌà group performance and process variables: a) correlations Municipal employees were asked if they performed internal among the variables; b) factor analyses (principal component audits on the quality of the process for obtaining licenses analysis); c) IFC expert judgment based on prior experience or permits. If the answer is Yes, a score of 5 was awarded. in municipal performance. Otherwise, the score is 1. The score for each municipality is an average. The following considerations should be noted regarding factor analysis. UÊ ÝÌiÀ˜>ÊÕ`ˆÌà Municipal employees were asked if external audits on the UÊ Factor analysis was used to group the variables with similar quality of the process of licenses and permits were conducted characteristics and explanatory power. The variables were by independent companies or consultants. If the answer is Yes, grouped by “similarities” (based on their factor loading). a score of 5 was awarded. Otherwise, the score is 1. The score In some instances, one group comprises several sub-groups for each municipality is an average. because of identified peculiarities in an independent variable and similar explanatory power of some variables. UÊ/À>ˆ˜ˆ˜}ʜvʘëiV̜Àà Municipal employees were asked if inspectors receive UÊ ii) Once the groups were identified and designated, training. If the answer is Yes, a score of 5 was awarded. municipalities were assigned a score by type (performance Otherwise, the score is 1. The score for each municipality is and process) and group (information, training, an average. inspections, tools, customer service, audits). To do so, our analysis used the scores obtained through factor UʘÌiÀ˜>Ê*ÀœViÃÃÊ/À>ˆ˜ˆ˜} analyses, as those are the result of a linear combination of Do officials receive training on internal procedures? If the the variables in each group and sub-group. The results are answer is Yes, a score of 5 was awarded. Otherwise, the score is standard values. Lastly, a final scoring and ranking using 1. The score for each municipality is an average. factor analysis is computed based on the performance and process outcomes, through which a final scorecard UÊ ÕÃ̜“iÀÊ-iÀۈViÊ/À>ˆ˜ˆ˜} for each municipality is derived. This variable examines whether or not the employees who directly assist business owners applying for a license or permit receive any customer service training. If the answer is Yes, a score of 5 was awarded. Otherwise, the score is 1. The score for each municipality is an average. UÊ >ÃÈwV>̈œ˜ÊœvÊ Vœ˜œ“ˆVÊV̈ۈ̈ià Does the municipality have a classification of economic activities for municipal zones? If the answer is Yes, a score of 5 was awarded. Otherwise, the score is 1. The score for each municipality is an average. Uʘ`ÕÃÌÀˆ>Ê >ÃÈwV>̈œ˜ Has the municipality classified companies by type of industry? If the answer is Yes, a score of 5 was awarded. Otherwise, the score is 1. The score for each municipality is an average. Criteria for Selecting and Grouping Variables Figure I describes the Municipal Scorecard 2008 structure for the elaboration of the operating license and construction permit ranking. Three criteria were enforced to select and 69 Figure I Structure of the Municipal Scorecard for Operating License and Construction Permit Time Cost Visits Performance Rejections Access to forms Ease of forms Information Information Sufficient Information Access to Information Consistency of Process with Information provided Availability of Manuals Final Ranking Internal Process Training Training Customer Service Training Training of Inspectors Number of Inspections Days of Inspections Inspections Reasonable Inspections Transparency of inspections Use of Information Technology Process Delegation of Signing Authority Tools Zoning Classification of Economic Activities Industrial Classification Infrastructure of the Municipality Customer Service Customer Service Desk User Opinion and Complaint System Overall Quality of Customer Service Internal Audits Audits External Audits Methodology for Property indicators of cost, time, visits and medians for other relevant indicators obtained from firm surveys. Tax Payments A different methodology was used from that of operating Face to face interviews with firms that had paid property license and construction permit because procedures for property tax payments from June 30, 2005 to January 31, 2008. tax are very different within the participant municipalities. In For property taxes the methodology includes quantitative evaluating the payment of property taxes, the study used similar and qualitative data and is based on simple averages for the indicators as in the other procedures; however, a factor analysis 70 METHODOLOGY was not conducted because the data showed no significant The variables that were evaluated for tax payments included: difference in municipal management of taxes. Firms generally registration for the payment, time (working days required to considered the steps as reasonable and therefore a ranking was complete the payment), number of visits, costs (direct and not seen as a useful way of measuring inefficiencies or problems. indirect), as a percentage of GDP per capita, among others. Not all the variables are presented in the chapter on taxes, only those that shed light on the challenges or issues faced by the Table I shows the variables used for property tax private sector in tax compliance. payment. Table I Variables analyzed for tax payment processes Group Variable 1 Time (average business days) 1 Municipal administrative costs as percentage of GDP per capita (average in dollars) 1 Cost of professional services as percentage of GDP per capita (average in dollars) Performance Variables 1 Indirect costs as percentage of GDP per capita (average in dollars) 1 Amount of tax (average in dollars) 1 Number of visits (average) 1 Length of visits (average in minutes) 1 Registration process to pay tax (median) 1 Business days needed to register (average in labor days) Process Variables – Registration and Cadastre Value Adjustment 1 Information about cadastre-based property value 1 Adjustment of cadastre-based value 1 Tax reductions for early or punctual payments, discount, option to make Process Variables – Tax Payment Incentives installment payments 1 Payment exemptions or incentives 1 Alternative ways to pay taxes 1 Tax calculations and information 1 Tax office facilities Process Variables – Infrastructure and Participation 1 Private sector participation in initiatives to improve tax systems 1 Formal opinion and complaint reception system 1 Taxpayer customer service 1 Zoning 1 Sufficient information (median) 1 Access to information (median) Information 1 Use of communication media to provide information on taxes 1 Tax payer service windows 1 Main source of information during the process, other than municipal officials (home delivery, paperwork intermediaries, information materials, web page, etc.) Difference between Other Benchmarking who most recently accomplish any of the three procedures. Studies and the MSC The MSC assumes that the firm operates under imperfect information conditions. The sample size of firms interviewed The MSC generates information on solely municipal is taken from municipal databases that list the firms that have procedures that are significant constraints for firms, and collects received a license or permit in a specific period of time (2 years.) data directly from users: from firms who have used municipal Municipalities sign up to participate in the MSC through an administrative services, and municipal officials involved official letter of interest, demonstrating political commitment in managing administrative services. Firms surveyed were to the project. Such political commitment involves accepting selected from a list, provided by municipal authorities, of those the results and also providing access to their databases. 71 This is different from the Doing Business methodology, through municipal licensing, permit processes and paying a World Bank report, which interviews intermediaries such as property taxes and reports on firm experiences to complete lawyers and accountants according to assumptions of a case such processes. study. The case also assumes that the business has full information available and does not waste time acquiring forms and information. Changes to the Methodology from It is important to note that Doing Business includes municipal procedures as well as state and federal procedures. Municipal Scorecard 2007 al Municipal Scorecard 2008 The World Bank Group also publishes Investment Climate Assessments (ICAs) to evaluate the state of the private sector, Because the MSC 2008 aims at assessing the burden of identify the key constraints to increasing firm productivity, local regulations faced by business, this year’s version has placed and evaluate how competitive firms in a particular country greater emphasis on survey replies by business owners, compared are with respect to their neighbors or firms in other regions to responses from municipal officials. For this report, 62% of of the world. The methodological approach consists of the variables are from the business owners answers; whereas last conducting a survey of firms in the manufacturing (and other year it was only 24%. Likewise, in an attempt to present a more sectors). About 400 firms are surveyed from the population of accurate view of the hurdles faced by firm owners, this edition firms per country. The sample size and the focus of the ICAs includes new variables and excludes others. The following differ from the MSC which focuses on firms that have gone tables describe these changes (see tables II and III.) Table II Variables in the Operating License and Construction Permit Processes Variables MSC2007 Variables MSC2008 Source of Information MSC 2007 Source of Information MSC 2008 Access to Information Access to Information Municipal Officials and Business Owners Business Owners n.a. Customer Service Not Included Business Owners External Audits External Audits Municipal Officials Municipal Officials Internal Audits Internal Audits Municipal Officials Municipal Officials Compliance with Inspections Inspections Business Owners Business Owners n.a. Training for Inspectors Not Included Municipal Officials Customer Service Training Customer Service Training Municipal Officials Municipal Officials Process Training Internal Process Training Municipal Officials Municipal Officials Categorization of Economic Activities Categorization of Economic Activities Municipal Officials and Business Owners Municipal Officials Clarity of Information n.a. Municipal Officials and Business Owners Not Included Industrial Categorization Industrial Categorization Municipal Officials Municipal Officials Knowledge of Inspection Criteria n.a. Business Owners Not Included Process Consistency Process Consistency Business Owners Business Owners Delegation of Authority Delegation of Authority Municipal Officials Municipal Officials n.a. Days of Inspection Not Included Business Owners n.a. Availability of Forms Not Included Business Owners Availability of Manuals Existence of Manuals Municipal Officials Municipal Officials Complexity of Forms Simplicity of Forms Business Owners Business Owners n.a. Information Not Included Business Owners n.a. Sufficient Information Not Included Business Owners Municipal Infrastructure Municipal Infrastructure Municipal Officials and Business Owners Business Owners Number of Inspections Number of Inspections Municipal Officials and Business Owners Business Owners Zoning Zoning Municipal Officials and Business Owners Municipal Officials Private Sector Participation n.a. Municipal Officials Not Included n.a. Customer Service Desk Not Included Business Owners System of Complaints / Opinion System of Complaints / Opinion Municipal Officials and Business Owners Business Owners IT IT Municipal Officials Municipal Officials Transparency of Inspections Transparency of Inspections Business Owners Business Owners n.a.: Not Available Source: Municipal Scorecard 2007 and 2008 Database 72 METHODOLOGY Table III Performance Variables for the Operating License and Construction Permit Variables Source of information MSC2007 Source of information MSC2008 Cost as % of GDP Per Capita Municipal Officials and Business Owners Business Owners Rejections (% of Total) Municipal Officials Business Owners Time Business Owners Business Owners Visits Municipal Officials and Business Owners Business Owners Source: Municipal Scorecard 2007 and 2008 Database Time and percent of rejections experienced the greatest Another major departure from last year’s methodology is changes in this year’s survey. Time was still calculated as that this year’s version did not give specific weights to the sub- the difference between the beginning and ending dates of indexes and indexes (i.e., in last year’s version, performance procedures. This year, however, whenever enough data was not index = 1/4 x time + 1/4 x cost + 1/4 x number of visits + available to determine the time elapsed between the two dates 1/4 x rejections.) Instead, this year’s version applied factorial (for example, if the start or emission date were missing),the analysis to a smaller number of variables to compute the sub- business owners’ perception data was used instead of municipal indexes and indexes and obtain a single score value. The current figures. With regard to the percent of rejections, instead of methodology has the advantage that the values obtained obtaining the rejections data directly from municipal sources, (scores) reflect the real factorial burden of each set of data the MSC 2008 survey tallied the percent of business owners because the sub-index and index weights were not obtained that reported that their license or permit application had been in an arbitrary manner, but based on available information. rejected, and compared it to the total submitted applications at As a result, the sub-index and index composition varies from the surveyed municipality. one year to another. 73 ANNEXES List of Participant Municipalities10 Regional Country Bolivia Regional Country Colombia Regional Country Guatemala 1 1 Cochabamba 35 1 Bogota D.C. 67 1 Amatitlán 2 2 El Alto 36 2 Bucaramanga 68 2 Cobán 3 3 La Paz 37 3 Cartagena de Indias 69 3 Guatemala 4 4 Oruro 38 4 Ibagué 70 4 Mazatenango 5 5 Quillacollo 39 5 Manizales 71 5 Quetzaltenango 6 6 Santa Cruz 40 6 Medellin 72 6 Retalhuleu 7 7 Sucre 41 7 Pereira 73 7 San Pedro Sacatépequez San Marcos 8 8 Tarija 42 8 Santa Marta 74 8 Santa Catarina Pinula 9 9 Yacuiba 43 9 Santiago de Cali 75 9 Villa Nueva Regional Country Brasil Regional Country Ecuador Regional Country Honduras 10 1 Aracaju 44 1 Ambato 76 1 Choloma 11 2 Belo Horizonte 45 2 Babahoyo 77 2 Choluteca 12 3 Campo Grande 46 3 Cuenca 78 3 Comayagua 13 4 Cuiabá 47 4 Guayaquil 79 4 Copán Ruinas 14 5 Curitiba 48 5 Ibarra 80 5 Danlí 15 6 Duque de Caxias 49 6 Loja 81 6 Distrito Central 16 7 Florianópolis 50 7 Machala 82 7 El Progreso 17 8 Fortaleza 51 8 Manta 83 8 Juticalpa 18 9 Goiania 52 9 Portoviejo 84 9 La Ceiba 19 10 Guarulhos 53 10 Quito 85 10 Puerto Cortés 20 11 Joinville 54 11 Riobamba 86 11 San Lorenzo 21 12 Juazeiro do Norte 55 12 Tulcán 87 12 San Pedro Sula 22 13 Manaus 88 13 Santa Rosa de Copán Regional Country El Salvador 23 14 Olinda 89 14 Villa Nueva 24 15 Piracicaba 56 1 Acajutla 25 16 Porto Alegre 57 2 Antiguo Cuscatlán 26 17 Praia Grande 58 3 La Libertad 27 18 Recife 59 4 La Palma 28 19 Salvador 60 5 La Unión 29 20 Santos 61 6 San Miguel 30 21 Sao Bernardo do Campo 62 7 San Salvador 31 22 Sao Luis 63 8 Santa Ana 32 23 Sao Paulo 64 9 Santa Tecla 33 24 Teresina 65 10 Sonsonate 34 25 Vitória 66 11 Soyapango 10 To elaborate this report both municipal officens and firms were interviewed in over 180 municipalities. However, because the required sampe could not be completed in all the municipalities, the analysis included 143 munipalities for operating licence, 131 for construction permit, and 159 for property tax payment at the municipal level. For the analysis of the operating license procedure the municipalities of Guatemala were not included, since this procedure does not exist at the municipal level. The municipalities of Honduras and Santa Anita in Peru are not included in the operating license ranking because of poor nformation provided by the municipalities. For the analysis of the construction permit procedure the following municipalities were not included: Sao Luis in Brazil; La Li bertad and San Miguel in El Salvador; Azcapotzalco and Torreon in Mexico; Alto Selva Alegre, Ancón, Barranco, Bellavista, Breña, Cayma, Comas, Miraflores, Pueblo Libre, Rimac, San Borja, San Juan de Miraflores, San Martin de Porres, Santa Anita, Surco, Villa Maria del Triunfo, Yanahuara in Peru; and Salcaja in Guatemala because of poor information provided by the municipalities. For the analysis of the property tax payment procedure the municipalities of El Salvador were not included, since this procedure does not exist in these municipalities. Neither those of Honduras or Salcaja in Guatemala because their municipal officials did not provide enough information. 75 Regional Country México Regional Country Perú Regional Country Perú 90 1 Aguas Calientes 127 1 Alto Selva Alegre 166 40 San Sebastián 91 2 Azcapotzalco 128 2 Ancón 167 41 Santa Anita 92 3 Benito Juárez 129 3 Arequipa 168 42 Surco 93 4 Ciudad Juárez 130 4 Ate 169 43 Surquillo 94 5 Chihuahua 131 5 Baños del Inca 170 44 Trujillo 95 6 Culiacán 132 6 Barranco 171 45 Tumbes 96 7 Ecatepec 133 7 Bellavista 172 46 Víctor Larco Herrera 97 8 Guadalajara 134 8 Breña 98 9 Guadalupe 135 9 Cajamarca 99 10 Hermosillo 136 10 Callao 100 11 Huixquilucan 137 11 Castilla 101 12 José Azueta 138 12 Cayma 102 13 Mérida 139 13 Chiclayo 103 14 Naucalpan 140 14 Chimbote 104 15 Pachuca 141 15 Comas 105 16 Querétaro 142 16 Cusco 106 17 San Luis Potosí 143 17 El Agustino 107 18 Tlalnepantla 144 18 Huancayo 108 19 Tlaquepaque 145 19 Huaraz 109 20 Toluca 146 20 Ica 110 21 Torreón 147 21 Independencia 111 22 Tuxtla Gutiérrez 148 22 Jesús María 112 23 Veracruz 149 23 Juliaca 113 24 Zacatecas 150 24 La Molina 114 25 Zapopan 151 25 Lince 152 26 Los Olivos Regional Country Nicaragua 153 27 Mariano Melgar 115 1 Chinandega 154 28 Miraflores 116 2 Ciudad Sandino 155 29 Pasco 117 3 Estelí 156 30 Piura 118 4 Granada 157 31 Pucallpa 119 5 Jinotega 158 32 Pueblo Libre 120 6 Jinotepe 159 33 Puno 121 7 León 160 34 Rímac 122 8 Managua 161 35 San Borja 123 9 Masaya 162 36 San Juan Bautista 124 10 Matagalpa 163 37 San Juan de Miraflores 125 11 Rivas 164 38 San Martín de Porres 126 12 San Juan del Sur 165 39 San Miguel 76 References Djankov, Simeon, Mc Liesh, Charrale and Ramalho, Rita. 2006. 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