COMPARING REGULATION IN 21 CITIES AND 183 ECONOMIES
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COMPARING REGULATION IN 21 CITIES AND 183 ECONOMIES A PUBLICATION OF THE WORLD BANK AND THE INTERNATIONAL FINANCE CORPORATION THE INTERNATIONAL WORLD BANK AND THE OF A PUBLICATION ©2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, D.C. 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected]
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Additional copies of the Doing Business global reports: Doing Business 2010: Reforming through Difficult Times, Doing Busi- ness 2009, Doing Business 2008, Doing Business 2007: How to Reform, Doing Business in 2006: Creating Jobs, Doing Business in 2005: Removing Obstacles to Growth and Doing Business in 2004: Understanding Regulations, may be obtained at www. doingbusiness.org
About the Investment Climate Advisory Services of the World Bank Group
The Investment Climate Advisory Services of the World BankGroup helps governments implement reforms to improve their business environment, and encourage and retain investment, thus fostering competitive markets, growth and job creation. Funding is provided by the World Bank Group (IFC, MIGA, and the World Bank) and over fifteen donor partners working through the multi-donor FIAS platform. Contents
Doing Business in Colombia 2010 is the together with the National Depart- About Doing Business and second subnational report of the Doing ment of Planning and the Ministry of Doing Business in Colombia 1 Business series in Colombia. In 2007, Trade, Industry and Tourism and are Overview 7 quantitative indicators on business regu- the following: Armenia (Quindío), Bar- Starting a business 14 lations were created for 13 cities and ranquilla (Atlántico), Bogotá (Distrito Dealing with construction permits 19 departments. This year,Doing Business Capital), Bucaramanga (Santander), Cali Registering property 24 in Colombia 2010 expands the analysis (Valle del Cauca), Cartagena (Bolívar), to a total of 21 cities and documents Cúcuta (Norte de Santander), Ibagué Paying taxes 29 progress in the 13 cities previously mea- (Tolima), Manizales (Caldas), Medellín Trading across borders 34 sured. The data for Bogotá and the rest (Antioquia), Montería (Córdoba), Neiva Enforcing contracts 39 of the world are based on the indica- (Huila), Pasto (Nariño), Pereira (Risa-Risa- tors in Doing Business 2010: Reforming ralda), Popayán (Cauca), Riohacha (La Data notes 44 through Difficult Times, the seventh in Guajira), Santa Marta (Madgalena), Sin- a series of annual reports published by celejo (Sucre), Tunja (Boyacá), Valledu- Doing Business indicators 51 the World Bank and the International par (Cesar), Villavicencio (Meta). Regu- Indicator details 54 Finance Corporation. The indicators in lations affecting six stages of the life of a Paying taxes Doing Business in Colombia 2010 are also business are measured at the subnational Trading across borders comparable with the data in other subna- level in Colombia: starting a business, Enforcing contracts tional Doing Business reports. All Doing dealing with construction permits, reg- List of procedures 58 Business data and reports are available at istering property, paying taxes, trading Starting a business 58 http://subnational.doingbusiness.org. across borders and enforcing contracts. Dealing with construction permits 83 Doing Business investigates the reg- These indicators have been selected be- Registering property 104 ulations that enhance business activity cause they cover areas of local juris- Acknowledgments 121 and those that constrain it. The cities diction or practice. The data inDoing and departments covered in Doing Busi- Business in Colombia 2010 are current as ness in Colombia 2010 were selected of July 2009.
About Doing business regulation and institutions can petitiveness Council. Such collaboration support economic adjustment. Easy is part of the World Bank Group’s vision Business and entry and exit of firms, and flexibility of promoting the transfer of knowledge, in redeploying resources, make it easier in this case the project methodology for Doing Business to stop doing things for which demand Doing Business in Colombia. has weakened and to start doing new in Colombia things. Clarification of property rights WHAT DOING BUSINESS and strengthening of market infrastruc- IN COLOMBIA 2010 COVERS ture (such as credit information and collateral systems) can contribute to con- Doing Business in Colombia 2010 provides fidence as investors and entrepreneurs a quantitative measure of the national, look to rebuild. department and municipal regulations Until very recently, however, there for starting a business, dealing with con- were no globally available indicator sets struction permits, registering property, for monitoring such microeconomic fac- paying taxes, trading across borders, and tors and analyzing their relevance. The enforcing contracts—as they apply to In 1664 William Petty, an adviser to first efforts, in the 1980s, drew on per- domestic small and medium-sized en- England’s Charles II, compiled the first ceptions data from expert or business terprises. known national accounts. He made 4 surveys. Such surveys are useful gauges A fundamental premise of Doing entries. On the expense side, “food, hous- of economic and policy conditions. But Business is that economic activity re- ing, clothes and all other necessaries” their reliance on perceptions and their quires good rules. These include rules were estimated at £40 million. National incomplete coverage of poor countries that establish and clarify property rights income was split among 3 sources: £8 constrain their usefulness for analysis. and reduce the costs of resolving disputes, million from land, £7 million from other TheDoing Business project, launched rules that increase the predictability of personal estates and £25 million from 8 years ago, goes one step further. It looks economic interactions and rules that labor income. at domestic small and medium-sized provide contractual partners with core In later centuries estimates of coun- companies and measures the regulations protections against abuse. The objective try income, expenditure and material applying to them through their life cycle. is: regulations designed to be efficient, to inputs and outputs became more abun- Doing Business and the standard cost be accessible to all who need to use them dant. But it was not until the 1940s that model initially developed and applied in and to be simple in their implementa- a systematic framework was developed the Netherlands are, for the present, the tion. Accordingly, some Doing Business for measuring national income and ex- only standard tools used across a broad indicators give a higher score for more penditure, under the direction of British range of jurisdictions to measure the regulation, such as stricter disclosure re- economist John Maynard Keynes. As the impact of government rule-making on quirements in related-party transactions. methodology became an international business activity.1 Some give a higher score for a simplified standard, comparisons of countries’ fi- Doing Business in Colombia 2010 way of implementing existing regulation, nancial positions became possible. Today is the second subnational report of the such as completing business start-up the macroeconomic indicators in na- series in Colombia. In 2007, quantita- formalities in a one-stop shop. tional accounts are standard in every tive indicators were compiled regarding Doing Business in Colombia 2010 country. regulations on business activity and their encompasses 2 types of data. The first Governments committed to the eco- enforcement in 13 Colombian cities and come from readings of laws and regula- nomic health of their country and op- departments. Doing Business in Colom- tions. The second are time and motion portunities for its citizens now focus on bia 2010 expands the analysis to a total indicators that measure the efficiency more than macroeconomic conditions. of 21 cities and documents progress in in achieving a regulatory goal (such as They also pay attention to the laws, regu- the 13 cities previously measured. This granting the legal identity of a business). lations and institutional arrangements time, the World Bank Group worked Within the time and motion indicators, that shape daily economic activity. jointly with a national research center, cost estimates are recorded from official The global financial crisis has re- the Center for Strategy and Competitive- fee schedules where applicable. Here, newed interest in good rules and regu- ness at Universidad de los Andes, with Doing Business builds on Hernando de lation. In times of recession, effective the collaboration of the Private Com- Soto’s pioneering work in applying the 2 DOING BUSINESS IN COLOMBIA 2010 time and motion approach first used r Doing Business does not cover all reg- FOCUSED ON THE FORMAL SECTOR by Frederick Taylor to revolutionize the ulations, or all regulatory goals, in In defining the indicators,Doing Business production of the Model T Ford. De Soto any city. As economies and technol- in Colombia 2010 assumes that entrepre- used the approach in the 1980s to show ogy advance, more areas of economic neurs are knowledgeable about all regu- the obstacles to setting up a garment fac- activity are being regulated. For ex- lations in place and comply with them. tory on the outskirts of Lima, Peru.2 ample, the European Union’s body of In practice, entrepreneurs may spend laws (acquis) has now grown to no considerable time finding out where to WHAT DOING BUSINESS IN fewer than 14,500 rule sets. Doing go and what documents to submit. Or COLOMBIA 2010 DOES Business in Colombia 2010 measures they may avoid legally required proce- NOT COVER just 6 phases of a company’s life cycle, dures altogether—by not registering for through 6 specific sets of indicators. social security, for example. It is important to know the scope and The indicator sets also do not cover all Where regulation is particularly limitations of Doing Business in Colom- aspects of regulation in the particular onerous, levels of informality are higher. bia 2010 in order to interpret the results area. For example, the indicators on Informality comes at a cost: firms in of this report. starting a business do not cover all the informal sector typically grow more aspects of commercial legislation. slowly, have poorer access to credit and LIMITED IN SCOPE employ fewer workers—and their work- Doing Business in Colombia 2010 focuses BASED ON STANDARDIZED CASE ers remain outside the protections of SCENARIOS on 6 topics, with the specific aim of mea- labor law.3 Doing Business in Colombia suring the regulation and red tape rel- The indicators analyzed inDoing Busi- 2010 measures one set of factors that evant to the life cycle of a domestic small ness in Colombia 2010 are based on help explain the occurrence of informal- to medium-sized firm. Accordingly: standardized case scenarios with specific ity and give policy makers insights into assumptions, such as that the business is potential areas of reform. Gaining a fuller r Doing Business in Colombia 2010 does located in one of the 21 localities in Co- understanding of the broader business not measure all 10 indicators covered lombia. Economic indicators commonly environment, and a broader perspective in the general Doing Business report. make limiting assumptions of this kind. on policy challenges, requires combining The report covers only those 6 areas of Inflation statistics, for example, are often insights from Doing Business in Colombia business regulation where local differ- based on prices of consumer goods in a 2010 with data from other sources, such ences exist. few urban areas. Such assumptions allow as the World Bank Enterprise Surveys.4 r Doing Business in Colombia 2010 does global coverage and enhance compara- not measure all aspects of the busi- bility, but they inevitably come at the WHY THIS FOCUS ness environment that matter to firms expense of generality. Doing Business in Colombia 2010 func- or investors—or all factors that affect In areas where regulation is com- tions as a kind of cholesterol test for competitiveness. It does not, for exam- plex and highly differentiated, the stan- the regulatory environment for domestic ple, measure security, macroeconomic dardized case used to construct each businesses. A cholesterol test does not stability, corruption, labor skills of the Doing Business in Colombia 2010 indica- tell us everything about the state of our population, the underlying strength tor needs to be carefully defined. Where health. But it does measure something of institutions or the quality of infra- relevant, the standardized case assumes important for our health. And it puts us structure. Nor does it focus on regula- a limited liability company. This choice on watch to change behaviors in ways tions specific to foreign investment. is in part empirical: private, limited li- that will improve not only our cholesterol r Doing Business in Colombia 2010 does ability companies are the most prevalent rating but also our overall health. not assess the strength of the financial business form in most economies around One way to test whether Doing Busi- system or market regulations, both the world. The choice also reflects one ness serves as a proxy for the broader important factors in understanding focus of Doing Business: expanding op- business environment and for competi- some of the underlying causes of the portunities for entrepreneurship. Inves- tiveness is to look at correlations be- global financial crisis. tors are encouraged to venture into busi- tween the Doing Business rankings and ness when potential losses are limited to other major economic benchmarks. The their capital participation. indicator set closest to Doing Business in what it measures is the Organization ABOUT DOING BUSINESS AND DOING BUSINESS IN COLOMBIA 3 for Economic Co-operation and Devel- In this sense Doing Business values Doing Business in Colombia 2010 opment’s indicators of product market good rules as a key to social inclusion. It provides 2 approaches on the data it regulation; the correlation here is 0.75. also provides a basis for studying effects collects: it presents “absolute” indicators The World Economic Forum’s Global of regulations and their application. For for each city for each of the 6 regulatory Competitiveness Index and IMD’s World example, Doing Business 2004 found that topics it addresses, and it provides rank- Competitiveness Yearbook are broader in faster contract enforcement was associ- ings of cities, both by indicator and in scope, but these too are strongly corre- ated with perceptions of greater judicial aggregate. Judgment is required in inter- lated with Doing Business (0.79 and 0.72, fairness—suggesting that justice delayed preting these measures for any city and respectively). These correlations suggest is justice denied.6 in determining a sensible and politically that where peace and macroeconomic In the current global crisis policy- feasible path for reform. stability are present, domestic business makers face particular challenges. Both Reviewing the Doing Business rank- regulation makes an important differ- developed and developing economies ings in isolation may show unexpected ence in economic competitiveness. are seeing the impact of the financial results. Some cities may rank unexpect- A bigger question is whether the crisis flowing through to the real econ- edly high on some indicators. And some issues on which Doing Business focuses omy, with rising unemployment and cities that have had rapid growth or matter for development and poverty re- income loss. The foremost challenge for attracted a great deal of investment may duction. The World Bank studyVoices many governments is to create new jobs rank lower than others that appear to be of the Poor asked 60,000 poor people and economic opportunities. But many less dynamic. around the world how they thought they have limited fiscal space for publicly But for reform-minded local gov- might escape poverty.5 The answers were funded activities such as infrastruc- ernments, how much their indicators unequivocal: women and men alike pin ture investment or for the provision of improve matters more than their ab- their hopes above all on income from publicly funded safety nets and social solute ranking. As cities develop, they their own business or wages earned in services. Reforms aimed at creating a strengthen and add to regulations to employment. Enabling growth—and en- better investment climate, including protect investor and property rights. suring that poor people can participate reforms of business regulation, can be Meanwhile, they find more efficient ways in its benefits—requires an environment beneficial for several reasons. Flexible to implement existing regulations and where new entrants with drive and good regulation and effective institutions, cut outdated ones. One finding ofDoing ideas, regardless of their gender or ethnic including efficient processes for start- Business: dynamic and growing econo- origin, can get started in business and ing a business and efficient insolvency mies continually reform and update their where good firms can invest and grow, or bankruptcy systems, can facilitate regulations and their way of implement- generating more jobs. reallocation of labor and capital. And ing them, while many poor economies Small and medium-sized enterprises regulatory institutions and processes still work with regulatory systems dating are key drivers of competition, growth that are streamlined and accessible can to the late 1800s. and job creation, particularly in develop- help ensure that, as businesses rebuild, ing countries. But in these economies up barriers between the informal and for- DOING BUSINESS—A USER’S to 80% of economic activity takes place mal sectors are lowered, creating more GUIDE in the informal sector. Firms may be pre- opportunities for the poor. vented from entering the formal sector by Quantitative data and benchmarking can excessive bureaucracy and regulation. DOING BUSINESS IN be useful in stimulating debate about Where regulation is burdensome COLOMBIA 2010 AS A policy, both by exposing potential chal- and competition limited, success tends BENCHMARKING EXERCISE lenges and by identifying where pol- to depend more on whom you know icy makers might look for lessons and than on what you can do. But where Doing Business in Colombia 2010, in cap- good practices. These data also provide regulation is transparent, efficient and turing some key dimensions of regulatory a basis for analyzing how different policy implemented in a simple way, it becomes regimes, can be useful for benchmark- approaches—and different policy re- easier for any aspiring entrepreneurs, ing. Any benchmarking—for individu- forms—contribute to desired outcomes regardless of their connections, to oper- als, firms or economies—is necessarily such as competitiveness, growth and ate within the rule of law and to benefit partial: it is valid and useful if it helps greater employment and incomes. from the opportunities and protections sharpen judgment, less so if it substitutes Seven years of Doing Business data that the law provides. for judgment. have enabled a growing body of research 4 DOING BUSINESS IN COLOMBIA 2010 on how performance on Doing Busi- mestic businesses. Most reforms relating who regularly undertake the transac- ness indicators—and reforms relevant to Doing Business topics were nested in tions involved. Following the standard to those indicators—relate to desired broader programs of reform aimed at en- methodological approach for time and social and economic outcomes. Some hancing economic competitiveness. The motion studies, Doing Business breaks 405 articles have been published in same can be said at the subnational level. down each process or transaction, such peer-reviewed academic journals, and The 13 cities covered in theDoing Busi- as starting and legally operating a busi- about 1,143 working papers are available ness in Colombia 2008 report introduced ness, into separate steps to ensure a bet- through Google Scholar.7 Among the reforms in at least one of the indicators. ter estimate of time. The time estimate findings: 8 In structuring their reform pro- for each step is given by practitioners grams, governments use multiple data with significant and routine experience r -PXFSCBSSJFSTUPTUBSUVQBSFBTTPDJ- sources and indicators. And reformers in the transaction. ated with a smaller informal sector. respond to many stakeholders and inter- The Doing Business approach to r -PXFSDPTUTPGFOUSZFODPVSBHFFOUSF- est groups, all of whom bring impor- data collection contrasts with that of preneurship, enhance firm productiv- tant issues and concerns into the reform enterprise or firm surveys, which capture ity and reduce corruption. debate. World Bank support to these often one-time perceptions and experi- r 4JNQMFSTUBSUVQUSBOTMBUFTJOUPHSFBUFS reform processes is designed to encour- ences of businesses. A corporate lawyer employment opportunities. age critical use of the data, sharpening registering 100–150 businesses a year judgment and avoiding a narrow focus will be more familiar with the process HOW DO GOVERNMENTS USE on improving Doing Business rankings. than an entrepreneur, who will register DOING BUSINESS? a business only once or maybe twice. A METHODOLOGY AND DATA bankruptcy judge deciding dozens of A common first reaction is to doubt cases a year will have more insight into the quality and relevance of the Doing Doing Business in Colombia 2010 covers bankruptcy than a company that may Business data. Yet the debate typically 21 cities, including Bogotá. The data undergo the process. proceeds to a deeper discussion explor- are based on national and local laws ing the relevance of the data to the and regulations as well as administrative DEVELOPMENT OF THE METHODOLOGY economy and areas where reform might requirements. For a detailed explanation make sense. of the Doing Business in Colombia 2010 The methodology for calculating each Most reformers start out by seeking methodology, see the Data notes section indicator is transparent, objective and examples, and Doing Business helps in at the end of this report. easily replicable. Leading academics col- this. For example, Saudi Arabia used the laborate in the development of the indi- company law of France as a model for re- INFORMATION SOURCES FOR THE cators, ensuring academic rigor. Seven DATA vising its own. Many countries in Africa of the background papers underlying look to Mauritius—the region’s stron- Most of the indicators are based on laws the indicators have been published in gest performer on Doing Business indi- and regulations. In addition, most of the leading economic journals. One is at an cators—as a source of good practices for cost indicators are backed by official fee advanced stage of publication. reform. In the words of Luis Guillermo schedules. Doing Business respondents Doing Business uses a simple averag- Plata, the minister of commerce, indus- both fill out written surveys and provide ing approach for weighting subindica- try and tourism of Colombia, references to the relevant laws, regu- tors and calculating rankings. Other ap- lations and fee schedules, aiding data proaches were explored, including using It’s not like baking a cake where you follow checking and quality assurance. principal components and unobserved the recipe. No. We are all different. But we For some indicators part of the components. The principal components can take certain things, certain key les- cost component (where fee schedules and unobserved components approaches sons, and apply those lessons and see how are lacking) and the time component turn out to yield results nearly identical to they work in our environment. are based on actual practice rather than those of simple averaging. The tests show the law on the books. This introduces a that each set of indicators provides new Over the past 7 years there has been degree of subjectivity. The Doing Busi- information. The simple averaging ap- much activity by governments in reform- ness approach has therefore been to work proach is therefore robust to such tests. ing the regulatory environment for do- with legal practitioners or professionals ABOUT DOING BUSINESS AND DOING BUSINESS IN COLOMBIA 5
IMPROVEMENTS TO THE web site also makes available all original METHODOLOGY AND DATA REVISIONS data sets used for background papers. Information on data corrections is The Doing Business methodology has provided in the Data Notes and on the undergone continual improvement over website. A transparent complaint proce- the years. Changes have been made dure allows anyone to challenge the data. mainly in response to country sugges- If errors are confirmed after a data veri- tions. In accordance with the Doing fication process, they are expeditiously Business methodology, all these changes corrected. were incorporated into Doing Business in Colombia 2008 and Doing Business in Colombia 2010. Doing Business in Colombia 2010 1. The standard cost model is a quantitative methodology for determining the admin- has made a methodological change for istrative burdens that regulation imposes how the trading across borders indi- on businesses. The method can be used cator is measured. In 2007 the report to measure the effect of a single law or of selected areas of legislation or to perform measured the time, cost and documents a baseline measurement of all legislation required to export and import from each in a country. of the cities through the closest port. 2. de Soto, Hernando. 2000. The Mystery This time, the trading across borders of Capital: Why Capitalism Triumphs in indicator measures the process to ex- the West and Fails Everywhere Else. New York: Basic Books. port and import from the capital city of 3. Schneider, Friedrich. 2005. "The Informal Bogotá through the four largest ports in Sector in 145 Countries." Department of Colombia—Barranquilla, Buenaventura, Economics, University Linz. Cartagena and Santa Marta. Because 4. http://www.enterprisesurveys.org. only the ports rather than the 21 cities 5. Narayan, Deepa, Robert Chambers, are benchmarked, trading across borders Meera Kaul Shah and Patti Pettesh. 2000. Voices of the Poor: Crying Out for Change. is not included in the aggregate ease of Washington, DC: World Bank. doing business index. 6. World Bank 2003. Doing Business in 2004: Doing Business in Colombia 2010 Understanding Regulation. Washington, also adds a new indicator—dealing with DC: World Bank Group. construction permits—which was not 7. http://scholar.google.com. included in the previous edition. This 8. Full citations available in World Bank. 2009. Doing Business 2010: Reforming area is predominantly determined at the through Difficult Times. Washington, DC: municipal level. World Bank Group. All the methodological changes are explained in the Data Notes section of this report and on the Doing Business in Co- lombia 2010 web page (www.doingbusi- ness.org/colombia). The web site also pro- vides data time series for each indicator and city, beginning with the first year the indicator or city was included in the re- port. To provide a comparable time series, the data set is back-calculated to adjust for changes in methodology and corrections resulting from the information received in the period covered since each report. The
TABLE 1.1 Overview Where is it easier to do business in Colombia—and where not?
RANK Easiest RANK Most difficult 1 Manizales, Caldas 12 Bogotá, Distrito Capital 2 Ibagué, Tolima 13 Riohacha, La Guajira 3 Pereira, Risaralda 14 Montería, Córdoba 4 Sincelejo, Sucre 15 Cúcuta, Norte de Santander 5 Valledupar, Cesar 16 Medellín, Antioquia 6 Santa Marta, Magdalena 17 Barranquilla, Atlántico 7 Armenia, Quindío 18 Bucaramanga, Santander 8 Popayán, Cauca 19 Villavicencio, Meta 9 Pasto, Nariño 20 Cali, Valle del Cauca 10 Tunja, Boyacá 21 Cartagena, Bolívar 11 Neiva, Huila Source: Doing Business database.
Nobody would question that Colombi- to capture these differences in 12 other services. On the other hand, these cities ans are entrepreneurial. International Colombian cities. This report updates the benefit from economies of scale and have studies confirm it.1 The development information presented in 2008 and tracks more resources at their disposal to invest of Colombia’s cut flower industry over the progress of the implementation of in administrative modernization than the last 4 decades is a telling example. reforms. It also expands the analysis their smaller neighbors. All in all, Neiva From virtually non-existent, the sector to 8 additional cities to provide a more made the most progress since 2008. After flourished, thanks to the efforts of local representative map of the ease of doing introducing reforms in business start- producers,2 and now cut-flower exports business in Colombia. The results of this up and property registration, it jumped bring in around US$ 1 billion per year.3 new 21-city comparison are presented from the bottom position to rank 11 out Colombia managed to sustain 5% annual here (table 1.1). Doing business is easi- of 21 cities. economic growth from 2002 to 2007, est in Manizales, Ibagué and Pereira and Much has changed in recent years. before it dropped to 2.5% in 2008, due to more difficult in Cali and Cartagena. This is not surprising. Colombia, rep- the global economic crisis.4 This growth Pereira and Manizales were already resented by Bogotá, has been one of was partly due to improved security con- at the top of the list in Doing Business in the top 10 reforming economies for 3 ditions in the formerly violence-prone Colombia 2008. Other cities—like Bu- consecutive years according to Doing nation. Safer conditions help entrepre- caramanga and Cali—dropped relative Business 2008, 2009 and 2010. With a neurs trust enough to do business with to their peers. Some of the changes can total of 24 reforms across the 10 Doing strangers. Also, more security offers op- be attributed to the addition of 8 new Business topics benchmarked annually, portunities to introduce new products cities—some of which have competitive Colombia has made it easier for firms to and services and expand operations to regulatory frameworks—and to changes start and operate, strengthened property new locations. In this context, the laws in the indicators that were measured in rights and improved bankruptcy proce- and regulations that govern business the final ranking. A new set of indica- dures (table 1.2). This consistent pace start-ups and operations become more tors, measuring the ease to deal with of reform allowed Colombia to move up critical than ever. construction permits, was added, while the ease of doing business ranking over Doing Business studies business reg- the trading across borders indicator for time. In the most recent report, Doing ulations from the perspective of a small- the 4 ports is no longer part of the Business 2010, Colombia ranks 37th of to medium-sized domestic firm. Bogotá aggregate ranking. Note that the rank- 183 economies—an improvement of 12 represents Colombia in the annual Doing ing may favor smaller cities where the positions from one year before. Within Business report that compares 183 econ- demand for business services is lower. Latin America, Colombia currently oc- omies globally. Yet, within Colombia, Government offices in large business cupies the number 1 position for its ease entrepreneurs face different local regula- centers—like Bogotá, Medellín, Cali or of doing business.5 tions and practices across cities. Doing Barranquilla—deal with a high volume Colombia’s start-up reforms have Business in Colombia 2008 was the first of operations, which can lead to bottle- cut 10 procedures and 40 days from the report to go beyond the capital, Bogotá, necks and higher costs for professional process to start a business in Bogotá, 8 DOING BUSINESS IN COLOMBIA 2010
TABLE 1.2 Colombia,* a consistent reformer, 2006–2009 Dealing with Trading Starting a construction Employing Registering Getting Protecting Paying across Enforcing Closing a Doing Business report business permits workers property credit investors taxes borders contracts business DB 2005 DB 2006 DB 2007 DB 2008 DB 2009 DB 2010 * Represented by Bogotá Source: Doing Business database. which now takes 9 steps and 20 days. The for consumers by allowing them to ac- more than in the previous year. In Latin successful introduction of the one-stop cess and review their data. Minority America and the Caribbean, 19 of the 32 shops at the Chambers of Commerce shareholder rights were strengthened by economies reformed, up from just half (known as Centros de Atención Empre- a decree that clarified the duties of direc- (16) the previous year. Peru followed sarial or CAEs) and subsequent CAE up- tors and the ease of challenging transac- Colombia’s steps and reformed 6 areas grades account for much of this progress. tions harmful to the company in court.10 of regulation in 2008/09. Guatemala re- Also, the time and cost to start a business Finally, the Insolvency Law 1116 of 2006 formed in 4 areas, Mexico in 2. Such dropped, thanks to legal changes that and subsequent regulation is transform- reforms are timelier than ever. Firms in allow the creation of a company with a ing bankruptcy procedures in Colombia. developing economies have been affected private document, without a notary.6 In Colombia also modernized its sys- by lower demand for their exports and a 2008, the government also issued decrees tem to pay taxes and social security drop in capital flows and remittances. At to cut the number of mandatory com- contributions. Now businesses pay all so- the same time, businesses in low-income pany books and the cost of registering cial security contributions online using a economies still face twice as many regu- them.7 Last year, improvements in cus- single electronic form—instead of sepa- latory burdens as their counterparts in tomer service at the public pension fund rate payments to health care providers, high-income economies when starting (Instituto de Seguro Social) cut the time pension funds, professional risk insurers a business, transferring property, filing to register new employees by 2 weeks. and other welfare entities. As of 2008, taxes or resolving a commercial dispute Obtaining a construction permit in income and value added taxes can also through the courts. There is more work Bogotá became easier through a new risk be paid online. to be done. categorization of construction projects Thanks to multiple reforms, the and through the strict application of time to export a container from Bogotá REFORMS IMPLEMENTED AT THE time limits.8 The latest reforms build on through the port of Cartagena fell from LOCAL LEVEL a long process that has turned Colombia’s 34 days in 2006 to 14 in 2009, while curadores urbanos—private profession- the time to import dropped from 48 to Department and municipal governments als that review and approve construc- 14 days. Customs declarations are now in Colombia have been actively reforming tion permits—into a model now being submitted online. A new system to co- over the past 2 years. Doing Business in considered by other countries.9 An elec- ordinate simultaneous inspections was Colombia 2008 identified good practices tronic single window (Ventanilla Única implemented this year. Investments in in 13 cities, pointed out bottlenecks and de Registro, or, VUR) is easing the pro- road and port infrastructure also helped provided recommendations for reform. cess of transferring property by allowing cut delays for traders. Two years later, this report tracks the re- notaries online access to information Despite the hardships imposed by forms’ progress over time. The results are about the property and its tax status. the current economic crisis on busi- impressive. All 13 cities show improve- Access to credit is also improving. nesses globally, June 2008 to May 2009 ments in at least 1 of the areas measured, A new credit information law (Ley de was a record year for regulatory reforms. thanks to local-level reforms (table 1.3). Habeas Data) regulates credit informa- Doing Business 2010 recorded 287 re- Neiva, which ranked last in Doing tion sharing and introduces protections forms in 131 of 183 economies—20% Business in Colombia 2008, set up an OVERVIEW 9
“anti-red tape” committee that brings cut 3 procedures to start a business. High business volumes and demand for together the municipality, chamber of Also, the municipal government made professional services can drive up costs commerce, business associations and registering property easier by combining and make processes slower in this city. representatives of national agencies— 2 certificates into 1, while the depart- An example is registering the deed at the such as the police and the tax author- ment government eliminated the need Registry office, which takes 8 days—35% ity. This committee meets every month to get a stamp to confirm payment of the of the total time to register a property in to propose changes to the regulatory registration tax. Some of these reforms Medellín—making it slower than the av- environment and monitor progress. are reflected in the quality of services erage Colombian city. Another example Neiva launched a CAE (one-stop shop) rather than in higher scores. For exam- is the delay to approve local water and for business registration, which con- ple, a good practice in the municipality sewer grids for construction permits: nected the municipal and department of Medellín is the inspection of all new they take 56 days in Medellín, compared governments. As a result of its reforms, buildings to ensure compliance with the to 10 days in Bogotá. The final approval Neiva eliminated 11 procedures to start construction permit requirements. Few of new constructions in Medellín, while a business—including its sanitation and other cities in Colombia do that. The being a good practice, takes long—45 fire department certificates.11 Neiva also creation of new courts to process more days on average. Bucaramanga and Cart- eliminated 2 procedures to register prop- delegation orders is already felt in faster agena also suffer from similar delays and erty. Reforms in Manizales and Pereira, resolutions to commercial disputes— high costs despite recent reforms. This top ranked cities, also cut 4 procedures they now take approximately 2 years, report can point out some areas that are to start a business. compared to 3 to 4 years in Bogotá, Cali, ripe for reform. Smart regulatory re- Medellín is also a good example of a Barranquilla or Cartagena. forms can reduce the time and cost to do local government striving to apply exist- However, Medellín is the 4th most business and make regulations accessible ing regulations more efficiently while expensive city for starting a business to all who need them. eliminating outdated ones. For example, and obtaining construction permits and All cities benefited from the roll out Medellín’s more efficient CAE and its the 6th for contract enforcement—with of nation-wide start-up reforms sum- elimination of the land use certificate total costs above 40% of claim value. marized above, although results on the
TABLE 1.3 National and local reforms implemented in all cities benchmarked in 2007
City or departmental reforms Implementation of national reforms* Trading Starting a Registering Starting a Registering Paying Enforcing across City business property Paying taxes business property taxes contracts borders**
Barranquilla
Bogotá Bucaramanga
Cali
Cartagena
Cúcuta Manizales
Medellín
Neiva Pereira Popayán
Santa Marta Villavicencio
Local level National level * National reforms reflected inDoing Business in Colombia 2010 data by city ** This indicator also measures import and export procedures through the port of Buenaventura Note: The reforms took place between July 2007 and July 2009 Source: Doing Business database. 10 DOING BUSINESS IN COLOMBIA 2010 ground vary. One-stop shops (CAEs) to Trading across borders also ben- 30% in Neiva. The variation is due to start a business are now operating in the efitted from smart regulations and in- different registry tax rates and stamp du- 13 cities measured in 2008—and in 3 of vestments in infrastructure. Reforms ties levied by municipal or departmental the 8 additional cities. The 6 cities that in customs administration have helped governments. introduced a CAE after July 2007 cut the reduce the amount of time it takes to number of procedures by 5, on average, prepare documentation by over 60% for DEALING WITH CONSTRUCTION compared to the previous report. Af- exports and 40% for imports, compared PERMITS filiation to the health care plan and public to Doing Business in Colombia 2008. Im- Obtaining the approvals to build a ware- pension is now faster across Colombia— provements in the efficiency of the ports house and connect it to utilities is, on by 8 days and 13 days, respectively. How- have reduced port-handling times from 4 average, faster and cheaper in Colombia ever, enrollment time varies across cities. to 2 days in Buenaventura and from 3 to than elsewhere in Latin America, but Not all national level reforms have 2 days in Barranquilla since 2008. variations exist across Colombian cities. been implemented at the local level yet. Finally, the Supreme Council of the The number of procedures range from 11 For example, Decree 1879 of 2008 rein- Judicature has taken measures to address in Bogotá and Popayán to 19 in Cali—due forced the 2005 prohibition12 on request- the congestion in the civil municipal to the existence of certain pre-construc- ing local certificates and licenses to start courts. Enforcing contracts is becoming tion requirements and stamp duties in a business—such as the certificate of easier as a result. The most important some cities. The main delays often occur land use. Most of the 13 cities included measure was the dismissal of 43,948 when obtaining the construction permits in Doing Business in Colombia 2008 have inactive claims in civil courts (12.2% of and connecting to utilities. Time varies eliminated it. Yet, Cartagena, Villavicen- total inactive cases) through the appli- greatly—from 38 days in Popayán to 217 cio and 4 of the 8 cities benchmarked for cation of Law 1194 of 2008.13 Judges in days in Ibagué. Only a few cities carry the first time still require it. Santa Marta now refer in their writs to out the final inspection to ensure that Eleven of the 13 cities in both stud- the terms established in the law, urging the building conforms to the approved ies show improvements in property reg- plaintiffs to deliver summons to defen- construction permit, which seems like a istration. Medellín eliminated 2 proce- dants in a timely fashion. As a result, critical oversight. Reforms are needed to dures related to municipal certificates. Santa Marta cut its average filing time in improve the capacity of municipal govern- Bogotá, Cali, Cartagena and Neiva also half—from 60 to 30 days. Administra- ments to supervise construction projects. eliminated 1 procedure related to mu- tive measures—such as the creation of 2 nicipal certificates, while Bucaramanga additional courts in Medellín to process REGISTERING PROPERTY and Pereira cut their cost. Administrative administrative orders—also cut the time The number of procedures to register reforms at registry offices in Manizales, required to enforce contracts. Ongoing property ranges from 7 in Bogotá to 13 Neiva, Pereira, Santa Marta and Vil- reforms—such as the quashing (peren- in Barranquilla, Bucaramanga and Cú- lavicencio now allow for faster property ción) of enforcement procedures under cuta. Local requirements related to tax- registration. Also, in Manizales, Neiva Law 1285 of 2009—are expected to have payment certificates and stamp duties and Popayán, registry and cadastre of- even a larger impact. account for the differences in procedures fices now share information, sparing the across cities. Variations in time stem entrepreneur from having to visit the COMPARING REGULATIONS mainly from the efficiency of the regis- cadastre office in person. ACROSS CITIES try offices. In Manizales, Sincelejo and Reforms to tax payments are also Valledupar, registering property takes taking place at the municipal level. In STARTING A BUSINESS 2 weeks, compared with more than 1 2008, Barranquilla reduced the number The number of procedures to start a busi- month in Pasto and Cartagena. Costs of categories for the industry and com- ness varies from 8 to 15 across Colombia. vary from 1.9% of property value in Iba- merce (ICA) tax in order to simplify The requirement of the certificate of land gué to 4.0% in Barranquilla—mainly due the administrative burden on compa- use and other local certificates account to stamp duties and legal fees. nies. Bucaramanga revised and unified for most of the differences. An entrepre- its tax codes to provide clear and concise neur in Neiva can register a business in TRADING ACROSS BORDERS information regarding the number of just 8 days, but it would take her 43 days It is fastest to import to and export yearly payments, tax rates and payment to register the same business in Tunja. from Bogotá through the port of Santa options. Manizales and Medellín revised The cost to open a business varies from Marta—13 days to export and 11 days their municipal tax codes. 13.1% of income per capita in Pasto to to import. The ports of Barranquilla and OVERVIEW 11
Cartagena are not far behind—taking case will be resolved in 4 years. Some of in the study and the benchmarking ex- 14 days to import and export in Carta- the difference is due to a greater or lesser ercise was expanded to all 31 Mexican gena and 14 days to export and 15 days use of alternative resolution methods. states. With additional competition, the to import in Barranquilla. It takes the The resources and equipment available pace of reform accelerated. The latest longest time to trade through the port in cities’ courts also matter. Nevertheless, Doing Business in Mexico report showed of Buenaventura, 18 days to export and the main sources of delays are case back- reforms in 90% of states between 2007 19 days to import. This is largely due to logs and an increasing volume of filings, and 2009, up from 75% between 2005 the longer times for inland transporta- which include a significant percentage and 2007. Similarly, Doing Business in tion and the heavy port congestion for of constitutional protection actions (tu- India 2009 showed that 9 out of 10 Indian import inspections. Overall, the costs telas).16 There are also differences in the states benchmarked for the second time associated with trading across Colom- costs to enforce a contract. These range had introduced reforms. As a result of bia’s borders are high and regionally un- from 21% of the claim value in Manizales these reforms, the average time to start competitive. Exporting a container from to 52.6% in Bogotá and are mainly due to up a company dropped from 54 to 35 days Bogotá through the port of Barranquilla legal and expert fees. and the time to obtain a building permit costs US$ 1,600 (Colombia’s cheapest) was reduced by 25 days, on average. while it costs US$ 1,890 to do the same LEARNING FROM EACH OTHER In Colombia, the example of Neiva through Buenaventura (Colombia’s most highlights how reform-minded govern- expensive). Inland transportation repre- Benchmarking exercises like Doing Busi- ments can use Doing Business indicators sents the lion’s share of the costs. ness inspire governments to reform. They to motivate and sustain reform efforts. point out potential challenges and iden- The example shows that there is no need PAYING TAXES tify where policy makers can look for to reinvent the wheel: it is sufficient to The national government collects 58.4% good practices. Comparisons between start by introducing reforms success- of all the taxes paid by businesses. For cities within the same country are even fully implemented in other cities. In municipal taxes, the national govern- stronger drivers of reform as local gov- fact, Colombian cities have a lot to gain ment establishes the floor and ceiling for ernments have a hard time explaining from adopting the best regulations and tax rates and each municipality defines why doing business in their city may be practices that are working elsewhere in the actual rate within that range. Thus, harder than in neighboring cities. The the country. A hypothetical city adopting the variations in the effective municipal good news is that sharing a national legal all the best practices identified in this tax rates (ICA and property tax) create framework facilitates the implementa- report would rank 17th of 183 countries local variations in total tax burdens.14 In tion of existing good practices within a globally—20 places ahead of Colombia’s Pereira, entrepreneurs pay the equivalent country. National governments can also position in Doing Business 2010 (table of 6.01% of their commercial profits as use Doing Business data to monitor how 1.4).17 Reducing start-up procedures to ICA tax,15 while entrepreneurs in Santa changes in national regulations and ad- the 8 procedures and 8 days of Neiva Marta pay 17.68% for the same tax. The ministrative practices are implemented would make opening a business faster statutory property tax rate also varies by local branches of their agencies. In a than the OECD average. Fast approval of significantly from 0.0002% in Bogotá to world where locations compete against construction permits, like in Popayán, 0.2% for entrepreneurs doing business each other to attract investment, sub- would mean that dealing with construc- in Medellín. In addition to the tax rates, national Doing Business data allow local tion permits would be as speedy as it is in the number of tax payments also varies governments to review the conditions Finland (38 days). To register property, across cities facing entrepreneurs in their cities from only 12 days, like in Manizales, would be a comparative perspective. Subnational required—similar to the United States. ENFORCING CONTRACTS data are now available for almost 300 Fewer municipal tax payments, like in The number and type of procedures to locations in 41 countries. Armenia, would put the total number enforce a contract are the same across The example of Mexico is telling. of tax payments at 15—1 less than in all Colombian cities. However, the time After the first subnational Doing Busi- Germany. Importing a container to this and cost to resolve a commercial dispute ness report was published in 2005, the 12 hypothetical Colombian city would take through the courts vary greatly from city benchmarked states competed to reform. 11 days, comparable to Spain, and ex- to city. In Armenia and Montería, it takes One year later, 75% of them had imple- porting would take 13 days, similar to less than 1 year to enforce a contract, mented reforms, a subsequent report Taiwan, China. Finally, resolving a com- while in Barranquilla and Pasto, the same found. More states asked to be included mercial dispute would be as speedy as it 12 DOING BUSINESS IN COLOMBIA 2010 is in Armenia (293 days), faster than in duce that rate over the years. Regulatory ample, studies show that when the cost France and the United States. reforms can help create the conditions of entry is low, firms benefit the most A recent study showed that only and incentives for formalization. from trade openness.19 Third, consistent 17% of new companies—started within The reform strategy in Colombia reformers are inclusive, involving all rel- the previous 42 months—operate in the follows the pattern of consistent reform- evant actors and institutionalizing the re- formal sector in Colombia. This number ers globally. First, they follow a long-term form effort. Finally, they stay focused by is low, but it’s better than the 13.9% seen agenda and continually push forward. setting specific goals and regularly moni- in 2007. For those companies older than The top ranked economy on the ease of toring progress. The national and local 42 months, the rate of formality is 48%.18 doing business, Singapore, introduces governments in Colombia can continue Programs undertaken by the national and reforms every year. Second, the reforms to follow similar strategies to further im- local governments, as well as the cham- are comprehensive, thus increasing the prove their regulatory environment. bers of commerce, have contributed to re- chances of success and impact. For ex-
TABLE 1.4 Best practices in Colombia, compared internationally Global ranking (183 economies) Number of procedures to start a business: 93 Armenia, Pereira, Neiva (8 procedures) Days to start a business: 29 Neiva (8 days) Cost to start a business: 90 Pasto (13.1% of income per capita) Number of procedures to build a warehouse: 13 Bogotá, Popayán (11 procedures) Days to build a warehouse: 3 Popayán (38 days) Cost to build a warehouse: 60 Valledupar (79.7% of income per capita) Number of procedures to register property: 114 Bogotá (7 procedures) Days to register property: 24 Manizales (12 days) Cost to register property: 37 Ibagué (1.9% of the property value) Days to export: 38 Bogotá - Santa Marta (13 days) Cost to export: 139 Bogotá - Barranquilla (USD 1,600) Days to import: 25 Santa Marta - Bogotá (11 days) Cost to import: 120 Santa Marta - Bogotá (USD 1,562) Total tax rate: 166 Sincelejo (66.1 % of the profit) Tax payments: 48 Armenia, Sincelejo (15 payments per year) Days to enforce a contract: 18 Armenia (293 days)
Cost to enforce a contract: 50 Manizales (21.4% of the claim value)
Source: Doing Business database. OVERVIEW 13
1. Global Entrepreneurship Monitor. 2008. 14. The fuel tax rate, while collected by the Reporte Anual Colombia 2008. http:// municipalities, is the same across the 21 www.gemcolombia.org/doc/GEM- benchmarked cities. Colombia08.pdf; IMD. 2009. World Com- 15. Following the Doing Business meth- petitiveness Yearbook. Lausanne. odology, the tax rate described here is 2. Mendez, Jose A. 1991. “The Development designed to provide a comprehensive of the Colombian Cut Flower Industry.” measure of the cost of the ICA tax a busi- Policy Research Working Paper Series ness bears. It differs from the statutory 660. World Bank. Washington DC. tax rate, which merely provides the factor 3. National Statistics OfficeDepartamento ( to be applied to the tax base. For more Administrativo Nacional de Estadística, information, see the detailed description or DANE). http://www.dane.gov.co/ of the standard case in the Data notes daneweb_V09/index.php?option=com_c section. ontent&view=article&id=76&Itemid=56 16. The tutela is regulated in Art. 86 of the 4. World Bank. World Development Indica- Constitution, which determines a fast- tors. track and preferential procedure for the protection of fundamental rights. 5. Doing Business rankings are recalculated every year to account for the inclusion of 17. This calculation is based on Doing Busi- new countries and changes in methodol- ness 2010 data under the assumptions ogy. that data for all other economies remain unchanged. 6. Law 1014 of 2006 and, more recently, Law 1258 of 2008. 18. Global Entrepreneurship Monitor. 2008. Reporte Anual Colombia 2008. http:// 7. Decree 1868 of May 29, 2008 and Decree www.gemcolombia.org/doc/GEM-Co- 1878 of May 29, 2008. lombia08.pdf. 8. Decree 1272 of April 16, 2009. 19. Chang, Roberto, Linda Kaltani and Nor- 9. Espinosa, Alejandro. 2009. Private Help man Loayza. 2009. “Openness Can Be for a Public Problem. Doing Business Re- Good for Growth: The Role of Policy form Case Study. http://www.doingbusi- Complementarities.” Journal of Develop- ness.org/reformers/CS09-Colombia.aspx ment Economics 90:33-49; Helpman, 10. Decree 1925 of May 28, 2009. Elhanan, Marc Melitz and Yona Rubin- stein. 2008. “Estimating Trade Flows: 11. Acuerdo 003 de 2008 and Decreto 00233 Trading Partners and Trading Volumes.” de 2008; Convenio de Cooperación Inter- Quarterly Journal of Economics 123 (2): institucional No. 275 of 2007. 441-87; Freund, Caroline and Bineswaree 12. Law 962 of 2005. Bolaky. 2008. “Trade, Regulation and In- 13. Superior Council of the Judicature (CSJ). come.” Journal of Development Economics 87: 309-21. TABLE 2.1 Starting a Where is it easier to start a business—and where not? RANK Easiest RANK Most difficult business 1 Armenia, Quindío 12 Cali, Valle del Cauca 2 Pereira, Risaralda 13 Sincelejo, Sucre 3 Manizales, Caldas 14 Valledupar, Cesar 4 Pasto, Nariño 15 Bucaramanga, Santander 5 Santa Marta, Magdalena 15 Villavicencio, Meta 6 Bogotá, Distrito Capital 17 Riohacha, La Guajira 6 Neiva, Huila 18 Popayán, Cauca 8 Ibagué, Tolima 19 Montería, Córdoba 9 Cúcuta, Norte de Santander 20 Cartagena, Bolívar 10 Medellín, Antioquia 21 Tunja, Boyacá 11 Barranquilla, Atlántico Note: The ease of starting a business is a simple average of the city rankings on the number of procedures, the associated time and cost (% of GNI per capita) required at the start of the business. See the data notes for details. Source: Doing Business database.
Cecilia loves cooking. She used to bake ously part of the informal economy. presarial or CAEs) in 6 cities, new firm bizcochos de achira for her family in their Business registration is the first con- registration increased by 5.2%.2 These hometown of Neiva. Eventually, Cecilia tact a new entrepreneur has with govern- findings are confirmed by additional turned her baking passion into an in- ment regulators. In some countries, the studies in other countries.3 formal business and brought in her son process is straightforward and afford- Business registration also relates to Sergio, who delivered the goodies. Cecilia able, while in others it is so cumbersome informality and productivity. Requiring had not thought of formalizing her activ- that entrepreneurs either bribe officials fewer procedures to start a business is as- ity because registering a business in Neiva to speed up the process or simply run sociated with a smaller informal sector.4 used to be a complicated affair. In July their business informally. In addition, formally registered busi- 2007, it took 19 procedures, 32 days and Research shows that the number nesses grow larger and more productive cost the equivalent of 38% of income per of new firms increases and employment than informal ones. In a recent study on capita to open a new business. Thanks to grows when starting a business becomes informality in São Paulo, entrepreneurs several reforms passed during the past easier. In Mexico, after the introduction reported that they could double opera- two years, Cecilia registered her business of a one-stop shop for business registra- tions after registering.5 Upon formal in August 2009 with just 8 procedures tion, the number of new firms increased registration, entrepreneurs could access over 8 days (figure 2.1). Now her bakery by 5% and employment grew by 2.8%.1 courts and credit, supply more impor- stands near the Cathedral. It pays taxes In Colombia, after the introduction of tant customers and avoid harassment and employs 3 people who were previ- one-stop shops (Centros de Atención Em- from government inspectors or the po- lice. Reforms that ease new firms’ entry FIGURE 2.1 are relatively simple and inexpensive to Introduction of a one-stop shop speeds starting a business in Neiva implement,6 and often do not require Time (days) 30 major legislative changes. New Zealand is the top performer in Before reform starting a business among the 183 econo- mies ranked by Doing Business. It takes 20 only 1 procedure, 1 day and a cost of US$ Time cut 112 (or 0.4% of income per capita) to start from 32 days to 8 operating a business. Other economies in
10 North America and the Caribbean are not far behind: in the United States, it takes 6 procedures and 6 days to start a business, Procedures cut from 19 to 8 After reform while in Jamaica opening a business can 0 be accomplished in 8 days. 18 19 Procedures While there is no minimum capital Source: Doing Business database. STARTING A BUSINESS 15
What is measured? time, an all-star Colombian city, which one-stop shops (CAEs) for business reg- Doing Business records all procedures that are would include the best practices found istration. CAEs simplified considerably officially required for an entrepreneur to start among the 21 cities, would require 8 pro- the requirements to open a business. and formally operate a business. These include cedures, 8 days, costing 13.1% of income Typically, officials within a CAE provide obtaining the necessary licenses and permits and completing all required notifications, veri- per capita and it would rank 43rd among advice to entrepreneurs who want to fications and registrations with the relevant the 183 economies. open a new business. They also handle authorities for the company and its employ- It is easier to start a business in business registration for the Registry ees. The standard company analyzed by the Armenia than in any other Colombian of Commerce, let entrepreneurs register report is small- or medium-sized and performs general industrial or commercial activities. See city measured in this report (table 2.1): their accounting books and company the detailed description of the standard case in it only takes 8 procedures, 12 days, and statutes and issue the certificate of ex- the Data notes. a cost equivalent to 14% of income per istence and legal representation. CAEs capita. By contrast, in Tunja it takes connect the business registration pro- 15 procedures, 43 days, and it costs cesses of municipal, departmental and requirement, starting a business in Co- equivalent to 15.4% of income per capita. national agencies in order to save the lombia is still a relatively burdensome Despite a national legislative framework entrepreneur from visiting each agency process compared to other countries that regulates business registration across personally. For example, local CAEs (figure 2.2). Among the 21 Colombian Colombia, there are marked differences connect with the national tax author- cities studied, starting a business takes, across cities. These differences stem from ity (DIAN, for its initials in Spanish7) on average, 10 procedures, 20 days and the performance levels of local branches to provide entrepreneurs with the Tax costs 16.3% of the national income per of national agencies as well as variations Identification Numbers. capita. An average Colombian city would in departmental taxes and fees. By July 2007, CAEs operated within rank 80th among the 183 economies In 2001, the Chamber of Commerce the Chambers of Commerce of 6 Colom- measured by Doing Business. At the same of Bogotá launched an initiative to open bian cities: Barranquilla, Bogotá, Bucara- manga, Cali, Cartagena and Medellín. FIGURE 2.2 Time and cost to start a business in Colombia Currently, CAEs operate in 16 of the 1 21 cities analyzed in this report—the 5 New Zealand 0.4 excluded are Montería, Riohacha, Sin- United States 0.7 6 celejo, Tunja and Valledupar. In 2009, 8 5.3 Jamaica Tunja started the implementation of the Neiva 8 30.0 Manizales 10 15.1 CAE. In theory, all regional CAEs oper- 10 15.5 ate the same way. In reality, CAEs oper- Santa Marta Time (days) Pereira 11 15.1 ate with varying degrees of integration Armenia 12 14.0 with municipal agencies. For example, Medellín 12 16.4 Cost in Cúcuta entrepreneurs still need to pay Malaysia 13 14.7 (% of income per capita) Cali 13 15.3 the departmental registry tax separately. Cúcuta 13 15.6 In all other cities where a CAE operates, Barranquilla 17 15.7 the entrepreneur is allowed to pay de- Ibagué 17 15.0 partmental taxes directly at the CAE. In Pasto 17 13.1 Ibagué and Popayán, entrepreneurs will Villavicencio 17 18.4 go to the municipal finance officeSecre- ( Montería 19 15.8 Bogotá 20 15.1 taría de Hacienda Municipal) to register Sincelejo 20 15.2 the company for local taxes. In the other Valledupar 24 15.0 cities, the CAE will notify the municipal- Cartagena 27 20.2 ity without requiring a visit. Chile 6.9 27 The introduction of CAEs cut Popayán 28 15.6 Bucaramanga 16.4 38 start-up procedures at an accelerated Riohacha 15.4 38 pace. In fact, cities that introduced a CAE Tunja 15.4 43 after July 2007 removed an average of 5 Latin America 62 36.6 procedures, compared to the Doing Busi- and Caribbean Average time Average cost 20 days 16.3% of income per capita ness in Colombia 2008 results (table 2.2). Source: Doing Business database. 16 DOING BUSINESS IN COLOMBIA 2010
TABLE 2.2 All 13 cities measured in 2007 reformed starting a business
Mainstreamed Accelerated Accelerated the Eliminated the Lowered cost use of private the Accelerated the affiliation to Eliminated the requirement for for registering documents affiation to affiliation to Family Completed the Combined requirement Lowered Fire company for companies health care public pension Compensation implementation procedures for land use stamp Department books constitution plan fund Fund of CAE into CAE certificate duty certificate
Barranquilla Bogotá Bucaramanga Cali Cartagena Cúcuta Manizales Medellín Neiva Pereira Popayán Santa Marta Villavicencio
Reforms making it easier to do business Reform making it more difficult to do business National level Local level
Note: The reforms took place between July 2007 and August 2009. Source: Doing Business database.
Cities that already had a CAE in 2007 plicitly named in the previous laws.10 current one. Manizales and Medellín re- removed an average of 3 procedures over Since then, Santa Marta has eliminated duced the time required to register a the 2 years between reports. In Neiva an 3 procedures connected to the certificate business by 36 days. entrepreneur had to go through 19 pro- of land use. At the same time, Popayán Three national reforms contributed cedures that took 32 days to open a busi- eliminated 2 procedures connected with to the reduction of time: (1) the intro- ness in July 2007. The municipal govern- the same certificate. duction of a new public-private health- ment passed a reform the year after that Post-registration procedures con- care provider (called Nueva Entidad Pro- introduced a CAE8 and connected it with tribute heavily to the final number of motora de Salud, or, Nueva EPS) that the Department of Huila for the payment requirements in Colombia. Currently, an replaces the old public healthcare service of the departmental registration tax.9 entrepreneur has to visit up to 6 differ- provider (called the Instituto de Seguro As a result, 11 start-up procedures were ent agencies to register employees to the Social, or, EPS-ISS); (2) an easier process removed and the process takes now 24 social security system.11 In 2004, an in- to sign up with the public pension sys- fewer days. tegrated form for online social contribu- tem; and (3) procedural changes within While the red-tape reducing Law tion payments known as PILA facilitated Colombia’s Family Compensation Funds 232 of 1995 (Ley Antitrámites) clearly de- payments to all these agencies12 but the (Cajas de Compensación Familiar). fined the certificates and documents that affiliation to each agency still needs to be Aiming to offer more efficient can be requested from an entrepreneur done separately. healthcare, Nueva EPS began operat- during business registration, many cities The time to open a business varies ing in August 2008, after transferring still require redundant certificates—such from 8 days in Neiva to 43 days in Tunja. affiliates from the old EPS-ISS.13 The as a certificate for land use, a permit to In Tunja, obtaining the required certifi- new agency operates like a traditional operate from the fire department and a cate from the fire department alone takes insurance company, without its own clin- sanitary inspection from the municipal- 20 days, and obtaining the certificate for ics, but using those existing within the ity. In response to this practice, the na- land use takes another 9 days. The good network of the old EPS-ISS. The Nueva tional government passed a new decree news is that the average time to open a EPS reduced the average time required in 2008 prohibiting any authority from business was cut by more than half—or, to sign up employees to a compulsory requesting certificates that were not ex- 23 days—from the 2008 report to the healthcare plan by almost 8 days. In STARTING A BUSINESS 17
Cartagena, Cúcuta, Medellín, Pereira and to 30% in Neiva. Sixteen cities show just a Court,14 entrepreneurs now establish Santa Marta, it used to take 14 to 15 days, small variation from the national average their companies through a private deed on average, to enroll. Now it takes only 1 cost of COP$ 1,675,989 (or US$ 761). In 3 and the identity is certified at the time to 2 days in those cities. cities, however, start-up costs are signifi- of registration, thus saving precious time Enrolling employees in the public cantly higher than average. In Neiva, for and money. No notary is required. pension system through the Institute for example, the departmental registration The recent introduction of a new Social Security (ISS) has also consider- tax is 0.7% of the initial capital of the com- “simplified stock company” (Sociedad ably improved since the last report. In pany, in alignment with the national aver- por Acciones Simplificada, S.A.S.) is rap- fact, the time required for registering age. However, the Department of Huila idly changing the way that entrepreneurs employees to the ISS dropped by 13 days, requires an additional 1.5% of the initial register their small- and medium-sized on average. In Barranquilla, Cúcuta and capital of the company for the payment of enterprises. Law 1258 of December 2008, Medellín, where affiliation used to take 4 duty stamps. As a result, the cost of busi- which created this new type of company, 30 days, it now takes only 1 to 5 days. ness registration is almost 130% higher in allows entrepreneurs greater flexibility In March 2008, Colombia’s Superinten- Neiva than it is in Pasto. Villavicencio and in starting their business: companies can dency of Finance authorized the creation Cartagena have start-up costs over 40% now be created by a private deed and of a new tool to enable pre-enrollment higher than those in Pasto. they can have an undefined corporate through the ISS website. A year earlier, in In 2008, the national government purpose. This reform does not directly February 2007, the ISS had outsourced its introduced 2 decrees that substantially impact the Doing Business start-up indi- enrollment to a third-party service, au- reduced costs and simplified require- cator, but it does represent an important tomating and improving forms submis- ment for accounting books across the change in Colombian company law. sions and standardizing other enrollment country. Decree 1868 of 2008 lowers the features. In this area, the differences be- cost to register accounting books at the WHAT TO REFORM? tween cities are now due to the irregular Chamber of Commerce to 1.74% of the implementation of the ISS’s changes, in minimum daily wage, which is approxi- COMPLETE THE IMPLEMENTATION OF CAE addition to varying technical and human mately COP$ 8,600 for each book (about capacities in local branches of the ISS. US$ 4). Decree 1878 of 2008 establishes The municipalities of Montería, Riohacha, Also, a “silence is consent” rule govern- the specific accounting books needed for Sincelejo, Tunja and Valledupar should ing applications is unevenly followed by a commercial company—the inventory accelerate the implementation of the CAE. Colombian cities. and balance sheet book, the minutes Tunja has been working on the implemen- The Family Compensation Funds book and the shareholders book (libro tation for several months now. The intro- now offer a faster registration process. de balance, libro de actas and libro de duction of a one-stop shop for business After the 2004 introduction of the inte- socios). This new decree is far from being registration is associated with increased grated payment form, the Funds started applied uniformly: entrepreneurs regis- entrepreneurship and employment. to accept every new business requests ter 3 to 6 accounting books depending on for enrollment, provided they paid the the city where they operate. UNIFY THE AFFILIATION TO SOCIAL SECURITY AGENCIES family subsidy and complied with the In July 2007, starting a business in legal minimum monthly wage regula- all Colombian cities required submitting The introduction of a single online sys- tion and its statutes. Now the Funds will the new company’s statute to a notary tem for paying all social security contri- only issue an official notice if a request is before registration could occur. This bur- butions reduced paperwork for firms. A rejected. As a result, the average time to densome process required 3 to 7 days and similar type of reform could allow an en- register employees decreased by 3 days. cost COP$ 21,094 (almost US$ 10). While trepreneur to enroll employees in all so- Differences are considerable among cit- Law 14 of 2006 explicitly allowed the cial security agencies through a unified, ies: in Armenia, Barranquilla, Bogotá, creation of companies with fewer than standardized form. The different entities Bucaramanga, Cartagena, Cúcuta, Pasto 10 employees through a private deed, would then share the information—and and Sincelejo it takes an average of 10 the practice persisted that entrepreneurs 6 procedures would be combined into days to complete the registration, while first visited a notary to legally certify the 1. The government has already rallied in Cali, Santa Marta, Tunja and Villavi- owners’ signatures. But thanks to a suc- ample support for the proposed reform cencio it takes only 1 day. cessful public campaign carried out by from both public and private providers The cost to start a business varies local Chambers of Commerce, in addition of social benefits. That support should from 13.1% of income per capita in Pasto to a 2007 decision by the Constitutional accelerate its approval and acceptance. 18 DOING BUSINESS IN COLOMBIA 2010
CENTRALIZE REGISTRATION registration fee and receive the certifi- 6. The introduction of a fast-track system After unifying enrollment with the social cate of incorporation via the Internet. In to start a business in Portugal cut the time by 46 days in 2006. The reform was security agencies, entrepreneurs could addition, Colombia’s government could implemented in 5 months and cost USD submit this standardized form directly allow entrepreneurs to keep electronic 350,000. World Bank. 2005. Doing Busi- to the CAE during the registration pro- accounting books, instead of requiring ness 2006: Creating Jobs. World Bank, Washington, DC. cess, and the CAE could then submit the the purchase of paper-based books. In 7. Dirección de Impuestos y Aduanas Nacio- application form to all the agencies. In Colombia, where only 38% of the popula- nales. 15 Neiva, Armenia, and Pereira—where it tion currently has access to the Internet 8. Municipal Agreement 003 and Decree currently takes 8 procedures to start a CAEs would do well to offer Internet sta- 233 of 03/10/2008. business—an entrepreneur could start tions where entrepreneurs would go and 9. Convenio de Cooperación Interinstitucio- up with only 2 procedures: registering expedite the procedures online. nal 275 of 2007. the company at CAE and opening a bank 10. Decree 1879 of 05/29/2008. account. 11. These agencies are: Family Compensation Fund (Caja de Compensación Familiar); the Government Learning Service (Servi- PUBLICIZE REFORMS 1. Bruhn, Miriam. 2008. “License to Sell: cio Nacional de Aprendizaje, SENA); the The Effect of Business Registration The law explicitly states that entrepre- Colombian Family Institute (Insitituto Reform on Entrepreneurial Activity Colombiano de Bienestar Familiar, ICBF); neurs should not be required to submit in Mexico.” Policy Research Working the Administrator of Professional Risks certificates or inspections like the certifi- Paper 4538, World Bank, Washington, (Administradora de Riesgos Profesionales, DC. Bruhn obtained the results after cate of land use, the certificate of sanitary ARP); the Institute of Social Security controlling for GDP per capita, number (Instituto de Seguro Social, ISS) or a pri- conditions or undergo inspections from of economic establishments per capita, vate pension fund; Health Care Provider the fire department. Nevertheless, entre- fixed assets per capita, and investment (Entidad Promotora de Salud, EPS); and a preneurs in many cities still go through per capita in the benchmarked mu- severance fund (fondo de cesantía). nicipalities. Kaplan et al. (2007) found a these procedures during business regis- smaller effect on new firms’ registration. 12. Planilla Integrada de Liquidación tration due to their lack of knowledge of See Kaplan, David, Eduardo Piedra and de Aportes (PILA): Decree 3667 of 11/08/2004. recent changes in the law. Municipalities Enrique Seira. 2007. “Entry Regulation and Business Start-Ups: Evidence from 13. Nueva EPS was initially authorized should better publicize reforms once new Mexico.” Policy Research Working Paper by the Decrees 055 (01/15/2007), 781 decrees are enacted. 4322, World Bank, Washington, DC. (03/13/2007) and 2713 (07/16/2007); it 2. Cardenas, Mauricio, and Sandra Rozo. was subsequently established by Resolu- PROMOTE ELECTRONIC SERVICES 2007. “La informalidad empresarial y tion 371 (04/03/2008) of the National sus consecuencias: ¿Son los CAE una Health Superintendence. Its initial capital Decree 1151 of 2008 promotes the use solucion?” Documento de Trabajo 38, was COP$ 100 million and its sharehold- of electronic services and establishes Fedesarrollo. Bogotá, Colombia. ers include various family compensation funds (Cafam, Colsubsidio, Compensar, guidelines to further Colombia’s infor- 3. See, for example: Fisman, Raymond and Confandi, Comfenalco Antioquia and mation and communication technolo- Virginia Sarria-Allende. 2004. “Regula- Comfenalco Valle) with 50% of the shares tion of Entry and the Distortion of Indus- gies (ICT) agenda within government plus one, and the public sector through trial Organization,” NBER Working Paper La Previsora Vida S.A. that holds the re- agencies. Entrepreneurs can now go W10929, Cambridge, MA. maining shares. online (www.crearempresa.com.co) to 4. Djankov, Simeon, Rafael La Porta, Flor- 14. Judicial Decision C-392 of the Colombian review requirements for opening a busi- encio López-de-Silanes, and Andrei Shle- Constitutional Court (05/23/2007). ifer. 2002. “The Regulation of Entry.” The ness and download forms. The reform Quarterly Journal of Economics 117 (1): 15. International Telecommunication Union could go further by offering all CAE ser- 1-37, MIT Press. (2009). vices online—including payment of the 5. Bertrand, Marianne, Simeon Djankov, departmental tax. New Zealand offers Sendhil Mullainathan, and Phillip an online one-stop shop: entrepreneurs Schnabl. 2006. “Who Runs Informal Businesses in São Paulo?” Harvard Uni- file all necessary information, pay the versity, Department of Economics, Cam- bridge, MA. TABLE 3.1 Dealing with Where is it easier to deal with construction permits—and where not? construction RANK Easiest RANK Most difficult 1 Popayán, Cauca 10 Neiva, Huila 2 Valledupar, Cesar 13 Armenia, Quindío permits 3 Santa Marta, Magdalena 14 Pereira, Risaralda 3 Tunja, Boyacá 15 Medellín, Antioquia 5 Montería, Córdoba 16 Cartagena, Bolívar 6 Riohacha, La Guajira 16 Ibagué, Tolima 7 Bogotá, Distrito Capital 18 Cúcuta, Norte de Santander 8 Barranquilla, Atlántico 19 Bucaramanga, Santander 8 Sincelejo, Sucre 20 Cali, Valle del Cauca 10 Manizales, Caldas 21 Villavicencio, Meta 10 Pasto, Nariño Note: The ease of dealing with construction permits is a simple average of the city rankings on the number of procedures, and the associ- ated time and cost to build a warehouse. See the Data notes for details. Source: Doing Business database.
Jaime is a young entrepreneur who owns Tunja. In contrast, if he set up a ware- to get a construction permit than in the a fashion boutique in Bogotá. He is plan- house in Cúcuta, Bucaramanga, Cali or average OECD country (where it would ning to open more stores across the Villavicencio, he’d spend a lot more time take an average of 157 days). However, country. As a first step, he decided to and money (table 3.1). Colombia’s permits are more expensive visit different cities, in order to find out As a whole, construction require- relative to earnings: the average OECD where it is cheapest and fastest to build ments in Colombia tend to be less onerous country’s permits cost just 56.1% of in- a warehouse to store clothes. He asked than those found in other Latin American come per capita. construction professionals for advice and countries. Doing Business found that an Finding the right balance between they recommended taking into account entrepreneur in Colombia needs an aver- safety and efficiency is important in a the different regional requirements— age of 109 days, 14 procedures and an sector like construction. Good, smart such as building permits, inspections, investment of COP$17,393,160 (169.6% regulations ensure both public safety and local taxes and utility connections. of income per capita) to build a ware- revenues for the government, while mak- After six months of intensive re- house and connect it to public utilities, ing the process easier for entrepreneurs search in 21 Colombian cities, Jaime according to regulations. In the average like Jaime. A complex and confusing discovered that it would be easiest to deal country in Latin America, it would take regulatory framework hurts businesses with construction permits and utility 225 days, 17 procedures and cost 210.8% and can be a seedbed for corruption. connections for warehouses in 4 cities: of income per capita (figure 3.1). In fact, Instead of promoting public safety, overly Popayán, Valledupar, Santa Marta and in the average Colombian city, it is faster rigid rules and regulations may push BOGOTÁ 403 construction into the informal economy, FIGURE 3.1 undermining their intent. According to a Some cities have more efficient construction permits approval process recent survey of countries belonging to LAC the Asia Pacific Economic Cooperation PERU AVERAGE LAC Range AVERAGE (APEC), the time and procedures for in Colombia IBAGUÉ 217 PERU CALI 19 dealing with construction permits are CHILE OECD 170 considered the “biggest regulatory im- LAC CHILE pediment” to doing business.1 Also, the AVERAGE MEXICO Colombia PERU World Bank Enterprise Surveys found OECD 109 21-city MEXICO average 14 that firms perceive higher levels of cor- CHILE ruption in countries where dealing with MEXICO VALLEDUPAR 80 construction permits is more difficult BOGOTÁ 11 POPAYÁN 38 POPAYÁN OECD (figure 3.2). The ease of obtaining construc- Procedures Time Cost tion permits in Popayán is remarkable (days) (% of income Note: LAC denotes the Latin America and Caribbean region. per capita) enough to rank it higher than 94% of the Source: Doing Business database. 20 DOING BUSINESS IN COLOMBIA 2010
What is measured? tax), 5) connecting to public utilities and bian norms. After construction, the law Doing Business looks at construction permits 6) passing inspections. Yet regional vari- mandates a final inspection by municipal as an example of the licensing regulations that ations are significant. In Popayán, Jaime authorities to determine if the building is businesses face. This indicator measures the would have to complete 11 procedures in full compliance with all requirements. procedures, time and cost to build a commer- cial warehouse, hook it up to basic utilities and for his warehouse; in Cali, he would have However, in most cities, this final inspec- register it. The recorded procedures include: to complete 19 for the same project. tion is random or absent due to a lack submitting project documents (building The regional differences are mainly of administrative capacity. Within our plans, site maps), obtaining clearances and due to special inspections, land-use cer- sample, Medellín was the only city where permits, passing inspections and obtaining connections from electricity, water, sewerage tificates and local stamp duties (which the municipal government could review and telephone providers. The time and cost need to be paid separately) that are re- all projects and coordinate with the local to complete each procedure under normal quired in certain cities and not others. utility companies to verify the soundness circumstances are calculated. All official fees associated with completing the procedures are For example, in Cali, an entrepreneur of the project. Yet, the approval of the included. It assumes that the warehouse will would have to undergo an inspection final construction takes on average 45 be used for storage of nonhazardous goods by the local fire department, obtain an days, and public service connections may and is located in the peri-urban area of the benchmarked city. See the detailed description additional land-use-authorization cer- be suspended during that time. While of the standard case in the Data notes. tificate and pay special stamp duties—on ensuring the compliance of the final top of the standard taxes and fees—in construction with building regulations is order to build. On the other hand, in important, the inspection and approval 183 economies ranked by Doing Business Barranquilla and Bogotá, a simple con- should be fast and with clear criteria. worldwide. That is to say, Colombia’s struction project, like the one analyzed On average, Colombian business stand-out city of Popayán would rank by Doing Business, does not require an owners may spend 109 days to obtain all 11th among 183 economies on the ease inspection from the fire department. the approvals for warehouse construction of dealing with construction permits— Furthermore, “urban curators”—that is, projects, as measured by Doing Business. ahead of such OECD countries as the private professionals who review and ap- But our subnational study found that a United Kingdom and France. prove construction permit applications boutique owner like Jaime could save Some procedures are common in Colombia—can put through an online about two months by going through the across most Colombian cities. These permit application with the certificate of process in Popayán or Santa Marta (mea- include: 1) obtaining land ownership existence and legal representation and sured at 38 and 43 days, respectively). If documents, such as the certificate of free evidence that there are no outstanding he set up his warehouse in Ibagué, he transferability and evidence of property property tax payments, among other pre- might have to double the time allotted to tax payment, 2) obtaining a certificate of construction requirements.2 Since 2009, the project, because there it could take existence and legal representation, 3) ob- this electronic filing has been mandated up to 217 days (figure 3.3). taining a construction license, 4) paying by law in all cities with over 500,000 Obtaining a building permit and the urban alignment tax (or construction inhabitants and it is gradually being utility connections are the main causes implemented. As a result, the number of of delays. But, once again, regional varia- FIGURE 3.2 required procedures should fall in cities tion is significant. For example, Jaime Difficulty in dealing with construction permits is associated with corruption with populations above 500,000 in the would need just 20 days to obtain the Share of firms that expect to give gifts next two years. building permit in Popayán or Santa in exchange for construction permits (%) Most inspections of public utilities Marta, compared to 60 days in Ibagué. 30 and building construction are mandated The minimum time required in any city by national laws, so little to no regional is 12 days, which is the time the urban 20 variation is found here. In fact, inspec- curators must allow to inform neighbors tions of electricity, water and sewerage about new construction. The time to issue 10 are strictly implemented. Moreover, there the building permit is also related to the
0 is a mandatory electricity inspection construction volume—small cities like Least Most made by a private company certified by Popayán and Riohacha have lower levels difficult difficult the national government. This company of construction activity. In fact, due to its Economies ranked by ease of dealing with construction permits, quintiles checks internal electrical wiring instal- small size, Riohacha is the only city in Note: Relationships are significant at the 1% level and remain lations and issues the so-called “RETIE”3 the subnational study without urban cu- significant when controlling for income per capita. Source: Doing Business database; World Bank Enterprise certificate if they comply with Colom- rators. There, the Local Planning Office Survey database. DEALING WITH CONSTRUCTION PERMITS 21
FIGURE 3.3 the private domain. Private professionals Dealing with construction permits—Popayán is the fastest and Valledupar the least costly known as “urban curators” (curadores Popayán 38 85.5 urbanos) became responsible for the Santa Marta 43 125.5 complete and timely review of building Riohacha 48 106.1 permit applications. By 1996, the system Bogotá 74 402.8 of private urban curators was up and 75 Montería 116.2 running and today, with the exception of 141.5 85 Sincelejo Time (days) Tunja 104.9 86 Riohacha, all the cities analyzed in this Valledupar 79.7 89 study have it. Barranquilla 91 186.9 Cost Before this reform, construction (% of income per capita) Cúcuta 96 208.1 companies dealing with the Planning Manizales 98 209.6 Office rarely interacted with the authori- Cartagena 107 293.7 Pereira 171.6 121 ties reviewing their cases. If documents Armenia 122.0 123 were missing, or if something needed to Neiva 112.8 127 be corrected, the wait could be daunting. Pasto 147.2 140 In contrast, builders in cities like Bogotá Cali 175.1 146 and Medellín can now submit documents Villavicencio 269.0 151 and then follow up on their progress on- Bucaramanga 126.8 160 Medellín 231.3 181 line. There is a case management system Ibagué 144.8 217 to keep customers up-to-date on the status of their permit. In 1995, obtain- Source: Doing Business database. ing a building permit in Bogotá took on issues building permits. Meanwhile, the Colombian cities (figure 3.4). On aver- average 1,080 days—or, approximately 3 time required to get utility connections age, the building permit represents 61% years. By 2009, this wait dropped to just depends on the availability and proxim- of total costs across the 21 cities. The 33 days—less than 1/17th of the old wait. ity of inspectors at the local public utility building permit cost is calculated accord- The average time savings: about 2 years companies. For instance, in Valledupar, ing to a formula established by national and 10 months.4 the time required for electricity inspec- law that includes a local factor—depend- Recently, more improvements and tions is up to 30 days because approval ing on the size and income level of the innovations have taken place. Colombia’s from the electricity company offices over city—which accounts for the regional Decree 1272 of 2009 categorizes con- in Santa Marta is required. variations seen above. Meanwhile, the struction projects based on their com- Small business owners like Jaime construction tax is determined by mu- plexity and risk. With this regulation, also care how much money they must nicipal governments and varies greatly. In a simple warehouse like the one used spend on construction permits. On aver- Bogotá for example, the construction tax by Doing Business would have a faster age, entrepreneurs need to pay 169.6% of rate is 2.6% of the building costs, which approval process than a more complex the country’s average income per capita. accounts for 53% of the total cost. In con- building. Prior to the decree, there was This cost places Colombia 97th out of trast, Valledupar does not have such a tax no distinction between a skyscraper and 183 economies globally. If Jaime looked at all. Another important source of cost a simple warehouse; both types of struc- for the cheapest place within Colombia differences is the existence of additional tures had a legal approval time of 45 in our study, he would decide to build local taxes and stamp duties. In cities working days. In contrast, today simpler in Valledupar—where construction per- like Pereira, Villavicencio, Cúcuta and structures have a legal approval time of mits cost just 79.7% of income per cap- Cartagena such taxes represent between just 25 working days. Bogotá already im- ita. Jaime would probably want to avoid 20% and 40% of total costs. plemented this faster procedure. Cities the most expensive cities—Cartagena, Colombia has been a pioneer in like Bucaramanga, Cali and Cartagena at 293.7% of income per capita, and Latin America on construction regula- are working towards this goal. Bogotá Bogotá, at 402.8% of income per capita tions; it became the first country in the also cut 10 days from the time to obtain (figure 3.3). region to privatize its building-permit the water connection by introducing a The building permit and the urban review process. In 1995 it moved the new process that includes performance- alignment or construction tax are the administration of building permits out based payments to the providers that main source of cost differences among of the state-run Planning Offices into install the connection. 22 DOING BUSINESS IN COLOMBIA 2010
FIGURE 3.4 for a construction project, Denmark re- Taxes account for over half of construction permit costs in Bogotá quires only one. This does not imply that Valledupar buildings in Denmark are less safe. In Popayán Colombia, a critical factor today is that Tunja Permit Other Construction the final inspection is absent or random Riohacha fees tax in most municipalities. Colombia should Neiva Montería implement reforms to guarantee that at Armenia least one inspection is performed. One Santa Marta way to make inspections more efficient Bucaramanga is to change from a system of random Sincelejo inspections to risk-based assessments, in Ibagué Pasto which inspections are performed at criti- Pereira cal phases of the construction process. Cali In addition, local planning and building Barranquilla offices should increase and adapt the ca- Cúcuta pacity of their staffs to ensure quality of Manizales service, reduce waiting times and enforce Medellín Villavicencio time limits. Cartagena Another popular approach among Bogotá the best-performing economies is the 0 100 200 300 400 privatization of the inspection process. Cost Source: Doing Business database. (% of income per capita) The Czech Republic adopted this method, creating a new and independent profes- WHAT TO REFORM? sion: authorized inspectors. In Colombia, information and information regarding there is already an example of private ALLOW ONLINE APPLICATIONS FOR application procedures. As a next step, electricity inspections. While these pri- BUILDING PLAN APPROVAL AND UTILITIES CONNECTIONS making it possible for individuals and vate inspectors can speed up the process, firms to apply online for new connections they tend to be more expensive than the In Singapore, builders submit permit ap- would save time for both applicants and inspections made by the local electric- plications electronically. Developers in utility companies. ity provider. In any case, these private Austria, Denmark, Iceland, Malaysia, inspectors should be complemented with Norway and the United States also com- RATIONALIZE TAXES AND SHARE BEST strong governmental regulation and en- plete their applications online. In Co- LOCAL PRACTICES forcement. lombia, a recent law mandates that the Municipalities should do a cost-benefit urban curators verify some requirements analysis of their local taxes and stamp du- INVOLVE STAKEHOLDERS IN THE online in cities over 500,000 inhabitants. ties to assess how much is collected versus REFORM PROCESS However, in most of the country building the administrative costs of these proce- In dealing with construction permits, applications are still processed manu- dures. The findings could be shared with there are a great number of stakehold- ally. In the future, the system could be other municipal governments to arrive at ers involved—namely, the national and further computerized, so that building in- best practices. In addition, electronic tax local governments, urban curators, the formation would be easily accessible and filing and payment, which have been suc- chambers of commerce, the public utili- new permit applications could be cross- cessfully implemented in Bogotá, would ties providers and private inspectors. checked for ownership, compliance, per- benefit other areas. There is also room Some municipalities—like Bogotá, Bar- mits and inspections. A first step would for improvement regarding construction ranquilla, Bucaramanga, Cali, Cartagena, be to offer application forms online. Sev- tax: It could be more homogeneous and Medellín, and Neiva—have created con- eral municipalities have websites in place, transparent across the country. sulting boards for stakeholders to discuss but they do not offer services related to new reforms and improve the system’s ac- building permits online. Utility providers RATIONALIZE INSPECTIONS countability. These boards could be set up also have well-established websites where While Colombian municipal and na- across the country in order to share best an entrepreneur can easily access contact tional laws require several inspections practices and promote new reforms. 23 DOING BUSINESS IN COLOMBIA 2010 DEALING WITH CONSTRUCTION PERMITS 23
STRENGTHEN THE URBAN CURATOR SYSTEM The introduction of the urban curators system has been a success, but improve- ments in oversight and accountability could strengthen the system further. A robust governance structure for profes- sional oversight should be developed. Currently, supervision is scattered among a number of local and national entities (e.g., it may be the Procuradoría, Con- traloría or Personería) and citizens may not know where to go with a complaint. The creation of a construction board or commission could help define and coor- dinate governance issues. Liability rules should also be further clarified and risks should be appropriately covered through insurance schemes. As it stands now, urban curators are liable for negligence or misconduct, but they often pay penal- ties with their own resources.
1. Singapore Business Federation. 2009. “Key Findings from ABAC ‘Ease of Doing Business’ Survey.” Presentation at the Singapore Business Federation session, “Removing Barriers for business growth in APEC,” Singapore, July 9, 2009. 2. Decree 1272 of April 16, 2009. 3. Reglamento Técnico de Instalaciones Eléc- tricas. 4. Espinosa, Alejandro. 2009. Private Help for a Public Problem. Doing Business Re- form Case Study. http://www.doingbusi- ness.org/reformers/CS09-Colombia.aspx. TABLE 4.1 Registering Where is it easier to register property—and where not? property RANK Easiest RANK Most difficult 1 Ibagué, Tolima 12 Neiva, Huila 2 Manizales, Caldas 13 Cali, Valle del Cauca 3 Sincelejo, Sucre 13 Pasto, Nariño 4 Valledupar, Cesar 15 Popayán,Cauca 5 Pereira, Risaralda 16 Villavicencio, Meta 6 Bogotá, Distrito Capital 17 Bucaramanga, Santander 7 Tunja, Boyacá 18 Montería, Córdoba 8 Riohacha, La Guajira 19 Cúcuta, Norte de Santander 9 Armenia, Quindío 20 Barranquilla, Atlántico 10 Santa Marta, Magdalena 21 Cartagena, Bolívar 11 Medellín, Antioquia
Note: The ease of registering property is a simple average of the city rankings on the number of procedures, and the associated time and cost (as % of property value). See the Data notes for details. Source: Doing Business database.
Isidro is a rice trader from Ibagué. Rice modern registration system was first es- moving up 27 places in the global study. is one of the most important staple foods tablished in 1790 during Spanish colo- Currently, it takes 7 procedures, 20 days for Colombians. With a comfortable level nization. After winning independence and costs 2% of the underlying property of reserves from last year’s sales and from Spain in 1819, the Colombian value to register a property in Bogotá. promising crop predictions, Isidro has government began adjudicating public However, registering a property is not great expectations for the season ahead. lands. In the early stages, titling was easy everywhere in the country. Pro- As a result, he wants to open up a whole- costly—it involved hiring lawyers and cedures, time and cost vary substan- sale rice store in Ibagué to expand his surveyors, putting up fencing and more. tially among the 21 Colombian cities in business. Unfortunately, his savings are Only the wealthiest Colombians were this report—due to local regulations, not sufficient to fulfill his plans. How- able to register public lands, thus turn- municipal administrative practices and ever, a local bank accepts his house as ing themselves into powerful landown- local taxes.6 Registering a property is collateral for a loan. ers. Indeed, land prices skyrocketed over easier in Ibagué, Manizales and Sincelejo Entrepreneurs, like Isidro, are aware the next century, due to the high prices and harder in Cúcuta, Barranquilla and that an efficient property registration of primary products as world markets Cartagena (table 4.1). Despite some great system has real benefits. In fact, property expanded from 1870 up to early 20th reforms, challenges remain. registration should be a priority in every century.3 In order to take full advan- As a starting point, Colombia’s top society. When there’s a formal deed, en- tage of the business opportunities offered performing cities provide good examples trepreneurs have an incentive to invest by the global markets, titling became a from which other cities in the country in their properties and can use their must for agricultural producers. There could learn. If all cities were to adopt the immovable assets to obtain credit and were several occasions when terrains al- existing best practices found in these 3 grow their businesses. A recent study in ready occupied by peasants were claimed cities, Colombia would move up 8 posi- Peru suggests that property titles are as- by somebody wealthier. Consequently, tions to 43rd out of 183 economies on sociated with a 10% increase in loan ap- the “unfair” land allocation system and proval rates for construction materials.1 weakness in property rights enforcement What is measured? Indeed, banks in countries lacking ad- led to agrarian conflicts and legal dis- Doing Business records the sequence of pro- equate creditor information prefer land putes4 over land between peasant settlers cedures, time and costs necessary to transfer titles as collateral since land is difficult to and landowners up to the 1940s.5 a property title from one local business to another, when a company purchases land 2 move or hide. Property registration also Isidro´s country, Colombia, repre- and a building. All procedures are recorded benefits governments, as more property sented by Bogotá, ranked 51st of 183 until the buyer can house his business in registered translates into greater prop- economies on the ease of registering the property, sell the property to another company, or use the property as collateral to erty tax revenues. property in Doing Business 2010. It also obtain a loan. It is assumed that the property The importance of securing prop- ranked 6th (out of 17 countries) in Latin is registered and free of title dispute. See the erty rights was recognized early on in America. Between 2008 and 2009, Co- detailed description of the standard case in the Data notes section. the “New World.” In fact, Colombia’s lombia has been an important reformer, REGISTERING PROPERTY 25
FIGURE 4.1 of Commerce.9 Some cities have more efficient property registration In contrast, some local initiatives BARRANQUILLA BUCARAMANGA add steps and expenses. For example, CÚCUTA 13 MEXICO LAC LAC AVERAGE local stamp duties (estampillas) increase AVERAGE Colombia 11 MEXICO the number of procedures in cities like 21-city OECD average Barranquilla, where an entrepreneur BARRANQUILLA 4.0 must first obtain an invoice for the stamp LAC PERU BOGOTÁ 7 AVERAGE duty (which goes to financing public hos- PASTO 38 CHILE CHILE pitals) at the municipal finance office and MEXICO 2.3 OECD OECD IBAGUÉ 1.9 22 then the next step is to pay it at a com- PERU CHILE mercial bank. In addition, in 9 cities— MANIZALES 12 PERU Barranquilla, Bucaramanga, Cartagena, Cúcuta, Montería, Pereira, Sincelejo, Procedures Time Cost (days) (% of property value) Santa Marta, and Villavicencio—it is still Note: LAC denotes the Latin America and Caribbean region. common practice for an entrepreneur to Source: Doing Business database. personally notify the local cadastre office the ease-of-registering-property ranking history; 2) the certificate of property (Instituto Geográfico Agustín Codazzi, or worldwide. tax payment (Certificado de Paz y Salvo IGAC) about a change in ownership, de- The number of procedures required Predial) stating that the municipal prop- spite the fact that, in theory, the registry ranges from 7 in Bogotá to 13 in Barran- erty taxes were duly paid to the Urban accomplishes the same thing. quilla, Bucaramanga and Cúcuta. Natu- Development Institute (IDU) and 3) the The overall time it takes to register rally enough, local requirements account certificate declaring the payment of other a property varies considerably across for the differences in procedures across taxes related to increases in the value of the 21 cities. In Manizales, Sincelejo cities (figure 4.1). For instance, during the property due to constructions, roads and Valledupar—the 3 fastest cities—the October 2007, the national government or the like (Certificado de Paz y Salvo de process takes about two weeks. This span launched an electronic single window for Valorización). In addition, in Bogotá, it is similar to the United States, but still 6 registries—known as “VUR” for Venta- is also possible to access the certificate times longer than in Saudi Arabia or New nilla Única de Registro. The first VUR was that confirms the legal existence and Zealand (where it takes only 2 days). In located in Bogotá. By accessing the VUR7 representation of the buyer and seller of contrast, in Pasto or Cartagena an en- website, notaries can now download, the property (Certificado de Existencia y trepreneur must wait over a month—38 free of charge, 3 necessary documents: Representación Legal) at the website of and 33 days, respectively. 1) the certificate of free transferability Bogotá’s Chamber of Commerce.8 These Although the time to register the (Certificado de Libertad y Tradición), reforms made 2 procedures easier and public deed is regulated by a national de- which displays 20 years of ownership eliminated 2 others altogether. cree that set a 3-business-day time limit, Other cities have taken measures not every city abides by this rule.10 In FIGURE 4.2 to improve efficiency and save money. fact, only 7 of the 21 cities comply with Registry offices: the main bottleneck In Manizales, the latest property tax re- this limit. In the other cities, the main Time to register property 38 Total days ceipt is sufficient proof of payment—no bottleneck continues to be the registry separate certificate is required. In Ibagué, offices, despite some improvements. This once the entrepreneur pays the property procedure takes, on average, 35.4% of 55% Registry office tax, she receives the corresponding cer- the total time required to complete a title 22 tificates showing that the property is up transfer (figure 4.2). Regional delays are to date on municipal taxes (Certificado caused by the lack of qualified person- 35% 12 de Paz y Salvo Predial y Valorización), nel, inadequate or outdated data, and/or 25% free of charge. In April 2009, Riohacha’s increasingly high transaction volumes. municipal authorities signed an agree- A major cause of delays within the ment with the local Chamber of Com- registry offices, as mentioned in Doing Manizales Colombia Pasto merce to allow an entrepreneur to obtain Business Colombia 2008, has been, par- 21-city average the local registration tax invoice and pay adoxically, the implementation of the it in a single procedure at the Chamber System of Registry Information (Sistema Source: Doing Business database. 26 DOING BUSINESS IN COLOMBIA 2010 de Información Registro, or SIR), which (3.8%) and Paraguay (3.5%). In Bar- erty registration over the past 2 years intends to create a single electronic data- ranquilla, the municipal stamp duty to (table 4.2). Nine cities have eliminated base of registered property titles for the finance public hospitals (estampilla pro- at least 1 procedure, with the top 3 re- nation. Since 2007, improvements have hospitales) accounts for 1.5% of the un- formers—Bogotá, Medellín and Neiva— been made to the system. At the moment, derlying property value alone. In Neiva, each eliminating 2. The best practices 52 registry offices around the country are high costs are due to a 1.5% stamp duty seen for the simplification of procedures linked online, allowing an entrepreneur levied to finance the expansion of the are: 1) accepting the latest property tax to obtain the certificate of free transfer- electricity grid, public universities and receipt (Impuesto Predial) as sufficient ability/ownership history (Certificado de cultural and developmental activities. proof of payment, as seen in Cartagena Libertad y Tradición) which displays a Stamp duties make property regis- and Pereira; 2) issuing a single certificate registered property’s ownership history tration costly in Colombia. Departments including the information found in both for the past 20 years in any office con- and cities take advantage of this tool to tax certificates Paz( y Salvo Predial and nected to the SIR. boost regional or municipal tax revenues Paz y Salvo de Valorización), as seen in Ibagué has the lowest cost to reg- when they may face fiscal imbalances or Medellín; 3) obtaining the tax certificates ister property—totaling just 1.9% of when there is a perceived need to pro- in a single window office, as seen in the underlying property value—due to mote local investments. In addition to Cali and Neiva; and 4) allowing the pre- relatively low lawyers’ fees charged there Barranquilla, Armenia and Santa Marta liminary deed to be prepared by notaries for the study of the property title and also charge stamp duties to finance public instead of lawyers, as seen in Pereira and for the preparation of the preliminary hospitals at 0.5% and 0.35% of property Barranquilla. deed. Ibagué entrepreneurs like Isidro value, respectively. Moreover, in Cúcuta From all 13 cities measured in our also benefit from the absence of addi- an entrepreneur incurs an extra local 2 studies, 10 reduced the time to register tional local taxes—such as stamp duties cost (COP$ 2,100) above and beyond the property. Neiva, Pereira, Manizales and (estampillas). For costs, Ibagué performs national fee (COP$ 3,500) when obtain- Santa Marta each cut at least 7 days from almost as well as Canada (where registra- ing the certificate confirming the legal the registration process. The most com- tions cost an average of 1.8% of property existence and representation of the buyer mon administrative improvement was value). Barranquilla and Neiva are the and seller at the Chamber of Commerce. the modernization of the local registry cities where registering property is most Looking back to Doing Business in offices, which included updating com- expensive—at 4.0% and 3.4% of prop- Colombia 2008, we find that 11 out of puter systems and hiring skilled staff. erty value, respectively. These cities costs the 13 cities assessed in 2007 have im- Manizales, Neiva, Pereira, Santa Marta are similar to those found in Nicaragua proved at least 1 aspect related to prop- and Villavicencio were among the cities to modernize their registry offices. In TABLE 4.2 addition, cities like Manizales, Neiva and Combining procedures for tax compliance certificates—the most popular reform Popayán effectively linked their registry Improved the Combined or cut administrative Linked the Property procedures for offices to their local cadastre offices. efficiency of the Registry and the Ca- Cut fees and/or special Property Registry dastre rates certificates Meanwhile, some municipal au- Barranquilla thorities are now housing several prop- erty registry services under one roof to Bogotá improve tax collection, reduce taxpayers Bucaramanga commuting costs, fight corruption and Cali remove the need to hire external inter- Cartagena Cúcuta mediaries (tramitadores) to run between Manizales offices. For instance, in Cali there are the SiCali offices, where an entrepreneur may Medellín pay stamp duties and request certificates Neiva Pereira of property tax payment in one stop. Popayán In addition, competition between Santa Marta local notaries has spurred efficient and Villavicencio expanded services—including payment of the registration tax. Notaries in Bar- National level Local level Note: The reforms took place between July 2007 and August 2009. ranquilla and Cúcuta cut the time to pre- Source: Doing Business database. REGISTERING PROPERTY 27 pare the public deed from 6 and 8 days in notaries or lawyers. In Barranquilla, no- example, in 2008, Egypt adopted a re- 2007, respectively, to just 3 days a piece taries can access the City Tax Informa- duction in property registration fees. The in the 2010 report. Notaries in Cúcuta in- tion System (Sistema de Información y reform paid off: property registration creased staff and upgraded equipment in Tributario Distrital) online to obtain the and local revenues rose 6 months after order to serve growing lists of clients. In property tax certificate.12 implementation.14 Pereira and Barranquilla, notaries began providing free legal assistance to entre- COMBINE PROCEDURES AND ALLOW IMPROVE THE IMPLEMENTATION FOR ELECTRONIC PAYMENTS OF THE SYSTEM FOR REGISTRY preneurs preparing their public deeds, INFORMATION (SIR) AND EXTEND THE reducing their need to hire lawyers. Some cities—like Barranquilla, Ibagué, SINGLE WINDOW FOR REGISTRIES Medellín and Pereira also reduced Santa Marta and Villavicencio—have (VUR) TO OTHER CITIES costs by simplifying the procedures combined the departmental registry tax The SIR and the VUR must continue to mentioned previously. In addition, Bu- and the registration fee into a single improve and expand. During the next caramanga reduced the fee for the 2 tax payment. Government agencies can also few months, 39 registry offices will be certificates Paz( y Salvo Predial and Paz link their systems to exchange informa- linked to the SIR. In 2011, all 192 reg- y Salvo de Valorización).11 tion and create online portals in order istry offices in Colombia are expected to make certificates and their payments to be part of the information-sharing WHAT TO REFORM? available online. Guatemala, for example, system. The VUR results in Bogotá are is linking its land registry to its munici- outstanding: it simplified 2 procedures ELIMINATE THE NEED FOR SPECIAL palities in order to automatically update and eliminated 2 others. In light of this CERTIFICATES (SUCH AS PAZ Y SALVO PREDIAL AND PAZ Y SALVO property value and ownership. Another good experience, the VUR should extend DE VALORIZACIÓN) OR MAKE THEM time-saving alternative is to implement its services to other cities in the country. ELECTRONICALLY AVAILABLE fast-track procedures, which speeds up In the future, the VUR’s services are Making property registration simple, fast service for an extra fee. The Mexican expected to include 1) a single payment and cheap allows entrepreneurs to focus state Michoacán implemented this sys- unifying registry taxes and registration on their businesses. Moreover, cutting tem and the total time to register a prop- fees, 2) a preliminary deed format avail- unnecessary procedures not only reduces erty fell from 1 month to 2 weeks. able online (Minuta Virtual) and 3) all delays but also discourages corruption. payments centralized with the notaries. Eliminating the requirement to obtain INTRODUCE LOW, FIXED FEES AND a formal certificate that the property is TRY REDUCING MUNICIPAL STAMP IMPROVE THE EFFICIENCY OF DUTIES REGISTRY OFFICES AND LINK THEM up to date on property tax payments TO THE CADASTRES (Paz y Salvo Predial) and the separate Stamp duties tied to transactions are not certificate that declares that there are necessarily the best choice for financing Extra work is required now in order no outstanding contributions owed re- the expansion of a local electricity grid to reduce the time it takes to register a garding property value increases due to or other basic public goods. Transactions public deed over the long term. In some public infrastructure works (Paz y Salvo are unpredictable; hence, their revenue is cities, registration takes more than the de Valorización) would cut, on average, 2 also unpredictable. Municipalities would statutory 3 days—the legal time limit set procedures per city. The receipts issued have a hard time to plan for long-term by law. Efficiency is increasing in some once the property tax and contributions projects based on these funds. Besides, cities. For example, in Bogotá, Cali and are paid should be sufficient as proof. high stamp duties charged on a per- Medellín, once a property is registered Manizales already eliminated these pro- centage of property value can encourage at the registry office, its new ownership cedures. Alternatively, allowing online fraudulent declarations of the property is automatically updated in the cadastre. access to certificates and other informa- value. Furthermore, in some cases, the However, this does not occur immediately tion is an effective way to reduce the time management costs of collecting munici- in 9 cities. In those cities, an entrepre- and costs. Bogotá serves as a positive ex- pal stamp duties may turn out to be neur, perhaps doubting the communica- ample of a city with certificates available higher than the total tax revenues.13 Re- tion between agencies, often personally through its VUR website. In the global ducing stamp duties—or replacing them visits the local cadastre himself to update context, out of 72 economies that have with a fixed fee—makes registration information. Keeping cadastres updated electronic records for encumbrances, 14 more attractive. Moreover, the rise in and linked with the registry office gives of them (including France) only allow registrations may offset the municipal- governments more accurate information access to authorized parties—such as ity’s financial loss due to duty cuts. For and also helps increase tax collection. 28 DOING BUSINESS IN COLOMBIA 2010
1. De Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books. 2. World Bank. 2009. Doing Business 2010: Reforming through Difficult Times. Wash- ington, DC: World Bank Group. 3. O’Rourke, Kevin and Jeffrey Williamson. 1999. Globalization and History: The Evo- lution of a Nineteenth-Century Atlantic Economy. Cambridge, MA: MIT Press. 4. One, 69, 137 and 241 agrarian conflicts were registered between 1827-1869, 1870-1900, 1901-1917 and 1918-1931, respectively, according to LeGrand, Cathe- rine.1988. Colonización y Protesta Campe- sina en Colombia: 1850–1930. Bogotá D.C: Universidad Nacional de Colombia. 5. Sánchez Fabio, Antonella Fazio, María del Pilar López. 2008. “Land Conflict, Property Rights, and the Rise of the Ex- port Economy in Colombia, 1850-1925.” Faculty of Economics, Universidad de los Andes, Documento CEDE 16. 6. World Bank 2007. Doing Business in Colombia 2008. Washington, DC: World Bank Group. 7. www.registratupropiedad.com. 8. http://serviciosenlinea.ccb.org.co/ 9. More information at: http://www. camaraguajira.org/comunication/ bolprensa/2009/ABRIL/29.htm. 10. According to Article 22, Decree 1250 of 1970. 11. In Bucaramanga the Paz y Salvos fee was reduced from COP$ 28,000 to 14,500. 12. The on line access to the city tax informa- tion system can be found at www.barran- quilla.gov.co. 13. World Bank. 2007. Doing Business 2008. Washington, DC: World Bank Group. 14. When Egypt adopted the reduction in property registration fee, 90% properties were either not registered or declared undervalued. World Bank. 2007. Doing Business in Egypt 2008. Washington, DC: World Bank Group. TABLE 5.1 Paying Where is it easier to pay taxes –and where not? RANK Easiest RANK Most difficult taxes 1 Sincelejo, Sucre 12 Manizales, Caldas 2 Ibagué, Tolima 12 Valledupar, Cesar 3 Cúcuta, Norte de Santander 14 Montería, Córdoba 4 Pereira, Risaralda 15 Barranquilla, Atlántico 5 Pasto, Nariño 16 Medellín, Antioquia 5 Tunja, Boyacá 17 Riohacha, Guajira 7 Popayán, Cauca 17 Santa Marta, Magdalena 8 Bucaramanga, Santander 19 Bogotá, Distrito Capital 8 Neiva, Huila 20 Cali, Valle del Cauca 10 Armenia, Quindío 21 Cartagena, Bolívar 11 Villavicencio, Meta
Note: Rankings are the average of the city rankings on the number of payments, time and total tax rate. See the Data notes for details. Source: Doing Business database.
Last year, María Elena started a shoe and pay taxes in Bogotá (208 hours a and Sincelejo to 26 in Cartagena, Vil- manufacturing company in Bogotá. Now year) than in the average Latin Ameri- lavicencio and 4 other cities. Seven cit- that the young business is up and run- can country (the regional average is 385 ies, including Barranquilla, Bogotá and ning, the stressful time has come to pay hours a year). In contrast, the region’s Neiva sit in the middle with 20 payments taxes. María Elena knows it is important total tax rate, an average of 48.3% of a year (figure 5.1). to support government, as it provides profits, remains significantly below Bo- The size of the tax burden on for infrastructure, education and other gotá’s 78.7%.1 To compare, Ireland col- businesses matters for investment and amenities that are key to achieving the lects 26.5% of companies’ gross profit in growth. Where taxes are high and cor- common goal of a prosperous, functional just 9 payments per year.2 responding gains seem low, the incentive and orderly society. The good news, for María Elena for businesses to opt out of the formal While acknowledging her obligation and other entrepreneurs, is that tax re- sector increases. A recent study shows to pay taxes for society overall, María quirements are not equally cumbersome that higher tax rates are associated with Elena is concerned about having to part in all Colombian cities. It is easier for lower private investment and fewer for- with 78.7% of her company's profits on taxpayers to comply with tax require- mal businesses. A 10 percentage point 20 different payments to comply with all ments in Sincelejo, Ibagué and Cúcuta— increase in the effective corporate tax tax requirements in Bogotá. Her coun- especially when compared to Bogotá, rate is associated with a reduction in try, Colombia, ranked 115th out of 183 Cali and Cartagena (table 5.1). Why such the ratio of investment to GDP of up to economies on the ease of paying taxes in differences? two percentage points and a decrease in Doing Business 2010. She wonders what Some cities require fewer payments the business entry rate of about one per- the situation would be like if she were than others. Most taxes are collected by centage point.3 Other research suggests doing business elsewhere. Indeed, taxes the national government, but some— that a one percentage point increase in are lower and less cumbersome in other like the industry and commerce (ICA), the statutory corporate tax rate would countries around the world—and even in property or fuel tax—are levied at the reduce the local profits of existing invest- other cities around Colombia. local level. Even municipalities with the ments by 1.31 percentage points on aver- Paying taxes in some of Colombia’s same municipal tax rate may require age4 and lead to an 18 percentage point neighboring countries would be easier different numbers of payments. For ex- increase in average debt-to-asset ratios and cheaper for María Elena. In Mexico, ample, in the city of Armenia, the ICA is (part of the reason for the lower reported she would spend, on average, 51% of her paid once a year; in Bucaramanga, it’s 3 profits).5 A one percentage point increase company’s profits on just 6 payments times a year; in Barranquilla, it’s 6 times in effective corporate tax rates reduces over the course of a year. If she were a year and, in Cartagena, the ICA is paid the likelihood of establishing a subsid- doing business in Chile, she would spend on a monthly basis—12 times a year. iary in an economy by 2.9 percentage just 25.3% of her company’s profits on Due to local fiscal structures and varied points.6 10 payments. Even though 20 payments tax requirements, the total number of In addition to the taxes paid, there are required, it is faster to prepare, file payments ranges from 15 in Armenia are costs associated with complying with 30 DOING BUSINESS IN COLOMBIA 2010
FIGURE 5.1 paying taxes easy tend to focus on lower What is measured? The number of tax payments varies across Colombian cities tax rates accompanied by wider tax Doing Business records all taxes and mandatory bases, simpler and more efficient tax contributions that a medium-sized company Tax payments (number per year) administration and one tax per tax base. had to pay in fiscal year 2008. It also measures Latin America the administrative burden of paying these & Caribbean average They also tend to provide electronic fil- taxes and contributions. In doing so, Doing ing and payment systems, which reduce 30 Business goes beyond the traditional definition the tax burden for firms while lightening of a tax: as defined for the purposes of govern- their administrative requirements. ment national accounts, taxes include only compulsory, unrequited payments to general Since April 2008, national taxes— government. Doing Business differs from Cali, Cartagena, Manizales, Montería, the corporate income tax, the value added this definition because it measures imposed Riohacha, Villavicencio tax and social security contributions— charges that affect business accounts, not gov- ernment accounts. The main differences relate can be prepared, filed and paid online to labor contributions and value-added tax. via predefined online forms, saving en- Doing Business measure includes government- 20 trepreneurs around 50 hours per year.8 mandated contributions paid by the employer Barranquilla, Bogotá, Neiva, Pereira, to a requited private pension fund or workers’ Santa Marta, Tunja, Valledupar In contrast, most municipal taxes are insurance fund. It excludes value-added taxes Medellín prepared manually and paid in person at because they do not affect the accounting Bucaramanga, Cúcuta, Ibagué profits of the business—that is, they are not Pasto, Popayán the treasury offices of each municipality. reflected in the income statement. See the Armenia, Sincelejo On average, entrepreneurs spend 208 detailed description of the standard case in the hours a year in order to meet their fiscal Data notes. obligations in Colombia.9 10 The time to prepare, file and pay Chile, Brazil taxes across municipalities is also depen- dent upon the availability of account- Elena would pay the equivalent of 66.0% ing software, the reach and sophistica- of her commercial profits in taxes and Mexico tion of the local banking system, the labor contributions, compared to 78.4% information available to taxpayers and in Armenia.11 Drilling down to the local the number of forms to be filled out. numbers, in Pereira, entrepreneurs pay 0 In Armenia and Barranquilla, entrepre- the equivalent of 6.01% of their com-
Source: Doing Business database. neurs are encouraged to pay at their mercial profits as ICA tax, while entre- local banks; in Ibagué, the municipal preneurs in Santa Marta pay 17.67% for government introduced online tax filing the same tax.12 The local property tax tax and of managing the revenue author- and enabled payments by direct transfer rate varies from 0.0002% in Bogotá to ity. Worldwide, on average, a standard from the company´s checking account 0.2% for entrepreneurs doing business in small to medium sized business still (or by check at a local bank). In Bucara- Medellín (figure 5.2). spends three working days a month com- manga, the local tax authority provides The administrative complexity of plying with tax obligations as measured free courses to teach entrepreneurs how municipal taxes can also add to entre- by Doing Business. Where tax compliance to fill out and file forms efficiently. The preneurs’ burdens, depending on the imposes heavy burdens of cost and time, major bottleneck in most cities is created city. For example, the ICA tax rate may it can create a disincentive to investment by the local ICA tax, which requires, in depend upon the activity of the busi- and encourage informality.7 Particularly many municipalities, frequent payments ness. Specifically, in Cúcuta, Ibagué and in developing countries, like Colombia, and multiple forms. For example, to file Pereira, entrepreneurs pay different tax large informal sectors contribute to the and pay the ICA tax every year, 27 forms rates depending on their activity, while creation of an uneven playing field for must be filled out in Cúcuta, compared to in Manizales, Popayán and Santa Marta, formal small and medium sized enter- 108 forms in Villavicencio. the same ICA tax rate applies to all prises, squeezed between smaller infor- Although the national govern- activities. Furthermore, local property mal competitors and larger competitors ment has the sole authority to create tax rates vary depending on land use whose greater resources can help win or eliminate local taxes, municipalities and if the property has a building or a more effective audience with govern- set the local tax rates.10 As a result, not. For instance, in Bucaramanga, the ment and thus greater tax concessions. variations in cities’ tax burdens are ob- statutory property tax rate for a commer- Worldwide, economies that make served. For example, in Sincelejo, María cial building is 0.0084% of the property PAYING TAXES 31
FIGURE 5.2 Since 2007, Colombia has imple- Tax burden among Colombian cities National Industry and Property Fuel mented several important tax reforms. It National tax tax Commerce tax tax tax 58.4% reduced tax rates: the corporate income Sincelejo tax rate was cut from 35% to 33% while Ibagué the equity tax rate was cut from 1.2% Pereira to 0.6%. Following Ireland’s example, Tunja Cúcuta Colombia simplified the process of pay- Manizales ing taxes by unifying all contributions Villavicencio to social security into a single payment Montería (called PILA, for Plantilla Integrada de Neiva Liquidación de Aportes). That reform re- Pasto Popayán duced the number of payments by 35; Riohacha labor risk insurance and welfare security Bucaramanga (so called “aportes parafiscales”) are now Valledupar paid jointly with social security contribu- Cali tions. It also upgraded and improved its Barranquilla Cartagena electronic filing and payment of national Medellín taxes (with a system called MUISCA, Santa Marta that stands for Modelo Unico de Ingresos, Armenia Servicio y Control Automatizado.) Bogotá Reforms have also been made at the 50 60 70 80 Total tax rate (% of profit) municipal level. In 2007, Ibagué reduced Source: Doing Business database. the number of ICA payments required annually. In 2008, Barranquilla limited value while the property tax rate for a izales, the local authorities established the number of tax categories for ICA piece of land is 0.033% of the property an exemption from the ICA back in 2001 in order to simplify tax payment and value. In Cartagena, property tax rates that was renewed in August 2008. To administration. In 2008, Bucaramanga are 0.0105% for a commercial building benefit from the tax holiday, Manizales and Manizales revised and unified its and 0.0255% for a piece of land. firms are required to create a minimum tax codes to provide clear and concise In addition to money, businesses in of 5 jobs and maintain them until 2018.15 information about the number of yearly Colombia spend a lot of time complying In Sincelejo, new companies that create payments, tax rates and payment op- with tax regulations. Complex tax rules and maintain more than 15 new jobs get tions. Also in 2008, Medellín and Pasto for businesses are unlikely to bring more a 50% discount on ICA.16 In contrast, reduced their ICA tax rates,18 while Sin- revenue—quite the opposite. “The Co- Cartagena eliminated its tax exemption celejo reduced the number of ICA pay- lombian municipal tax laws are obscure, on ICA for firms founded in or relocated ments to just one per year. Table 5.2 complicated and sometimes contradic- to this municipality. summarizes the reforms undertaken by tory,” says a local tax expert in Medellín. Some municipalities are also offer- the 13 cities benchmarked in Doing Busi- “For instance, cities charge different ICA ing discounted rates to foster growth in ness in Colombia 2008. tax rates for the same activity. Why?” the critical sectors. Armenia reduced some Municipalities are also innovating expert asked rhetorically. International of its ICA tax rates to encourage tex- with incentives to encourage tax pay- evidence shows that having a clear tax tiles, tourism and shoe manufacturing ment. Medellín, Montería, Pasto and code increases tax revenue by 6% on businesses. Ibagué is offering an 80% Valledupar are offering entrepreneurs average.13 discount on the property tax for new that pay 100% of their fiscal debts up to A number of exemptions apply to buildings. Montería reduced its property 50% off late fees. Sincelejo went a step businesses in certain locations. Ibagué, tax rates to compensate for increasing further to encourage payments. It cre- Manizales and Sincelejo offer tax exemp- property values. Finally, Sincelejo estab- ated the “Plan Papayaso” that offers up tions to help promote employment. In lished a 90% discount on its property to 100% off late fees to entrepreneurs Ibagué, entrepreneurs that create and tax to companies building new com- that pay the total of their debts with the maintain up to 100 new jobs are entitled mercial facilities; the discount is valid municipal tax authority.19 to a 70% discount on the ICA.14 In Man- until 2018.17 32 DOING BUSINESS IN COLOMBIA 2010
TABLE 5.2 Cities revised their tax codes, eliminated and consolidated taxes and simplified the process in 2007–9
Reduced Consolidated labor Simplified profit tax Introduced online taxes and social Consolidated Lowered property process of Simplified tax rates payment contributions tax code tax rates paying taxes rates
Barranquilla Bogotá
Bucaramanga Cali
Cartagena Cúcuta
Manizales
Medellín Neiva Pereira Popayán Santa Marta Villavicencio