BWorld 223, Ease of setting up and closing down business

* This is my article in BusinessWorld last June 18, 2018.

Last June 6, I attended the “Seminar on Protecting your Trademarks and Inventions Overseas” jointly organized by the Philippine Chamber of Commerce and Industry (PCCI) and the World Intellectual Property Organization (WIPO), held at the PCCI building in McKinley Hill, Taguig City.

The main audience of that seminar were entrepreneurs and companies big and small to help them be aware of existing intellectual property rights (IPR) rules and their protection, commercialization, licensing and dispute resolution. I do not represent any SME or big company but I was invited there by Jess Varela, Chairman of PCCI Committee on IPR.

The three important speakers that day were Dennis Broze and Peter Willimott of WIPO Office in Singapore and Atty. Allan Gepte, Commissioner of the Tariff Commission and former Director-General of the Intellectual Property Office (IPO).

Then last June 13, I attended the 6th Ease of Doing Business (EODB) Summit 2018 at the PICC, organized by the Department of Trade and Industry (DTI). It is an annual event sponsored by the DTI with one important goal — to raise or improve the Philippines’ global ranking in the World Bank’s (WB) Doing Business (DB) annual reports. The DB 2018 report was recently released and the Philippines’ global rank has worsened, compared to its ranking in the last two or three years.

This year, the EODB 2018 event is more optimistic because of the passage of the “Ease of Doing Business Act of 2018” or RA 11032 which was signed into law only last month. The DTI and various agencies including SEC, LRA, BIR, BOC, BFP, LGUs have adopted various measures to hasten the law’s implementation.

Among the important speakers in the EODB 2018 were DTI Secretary Ramon Lopez, who is also the Chairman, Ease of Doing Business and Anti-Red Tape Advisory Council; Senators Juan Miguel Zubiri and Aquilino “Koko” Pimentel III, and Mr. Guillermo Luz, former Co-Chairman of the National Competitiveness Council (NCC). Sen. Zubiri is the main author of the law in the Senate and also the Majority Leader while Sen. Pimentel is former Senate President and now Chairman of the Committee on Trade.

In both the PCCI-WIPO and DTI events, the over-riding subject is competitiveness of the Philippine economy and its businesses.

Below are results of three annual reports, the WB’s DB, World Economic Forum’s (WEF) Global Competitiveness Index (GCI), and WIPO, INSEAD and Johnson Cornell University’s Global Innovation Index (GII) annual reports.

Numbers in parentheses represent the number of countries and economies covered in that particular annual report.

While the results in global ranking vary among the three reports, one trend can be identified — the most competitive Asian economies are Singapore, South Korea, Hong Kong, Japan, Malaysia, and Thailand.

The Philippines is among the least competitive in the region, which is not good for us.

I have three wish lists on this matter.

One, the prioritization and signing into law of RA 11032 is among the very few measures of the Duterte administration that I support. I wish that he will do more ease of doing business policies, not the ease of closing businesses such as when he moved to close Boracay for six months or the ease by which the government over-taxed people via TRAIN.

Two, I wish there was a provision on the ease of closing a business in RA 11032. Among the best incentives to attract investment is a contestable market or free/easy entry, free/easy exit. If businesses see that government will bureaucratize and harass them if they decide to close shop someday, they will think twice about coming in.

Three, I wish there was another law mandating that work in government (local and national, elected and appointed, continuous or on-off) will only be a maximum 15 years, prompting officials and staff to go back to the private sector.

Since many officials intend to become regulators and bureaucrats until they retire, they tend to be more prohibitionist and extortionist since their over-regulations and taxation of business will not apply to them.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

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See also:

BWorld 211, Intellectual property, innovation, and prosperity, May 20, 2018 

BWorld 220, Trade imbalances, protectionism and rhetoric, June 15, 2018 

BWorld 221, Mindanao power development, reality vs illusion, June 16, 2018 

BWorld 222, Austrian thinkers and the G7 zero tariff challenge, July 8, 2018

BWorld 23, ASEAN trade bureaucracies and Doing Business 2016 Report

* This is my article in BusinessWorld last Thursday, November 04, 2015.

The most hard working, most efficient persons will not be able to produce all the goods and services that they need for themselves and their families. But there are always other people willing to produce these things or render these services in exchange for money, useful goods, and services.

On the macro level, no country or economy can prosper quickly without trade. And that includes countries that incur frequent trade deficits (in which their imports exceed their exports). Imported machines, vehicles, and computers become inputs for several activities used for the production of goods and services in the domestic economy.

Since trade is a very useful human endeavor, trade should be left as free as possible, with the least or minimum regulations and taxation by governments. The only traded goods that need heavy government regulations and inspections are guns, ammunition, bombs, poisonous substances, and other products harmful to public health and security.

In the Association of Southeast Asian Nations (ASEAN), a handful of countries impose few trade regulations while the others, including the Philippines, impose more.

Below is the result of the World Bank’s (WB) “Ease of Doing Business 2015” Report on International trade.

Covering 189 countries, the report shows the global rankings of ASEAN members. New comers to the ASEAN, Cambodia-Laos-Myanmar-Vietnam (CLMV) were at the bottom.

Based on the report, it would take around three weeks for an exporter to finally move his containers out of CLMV, versus less than one week in Singapore and around two weeks for exporters in Malaysia and Thailand. (See Table 1)

The Philippines was midway among the 10 countries in the ASEAN in terms of global ranking, but the cost to export and import were third-highest in the region, trailing Laos and Cambodia. That is not the right way to treat our exporters and importers.

The WB recently released the “Ease of Doing Business 2016” Report. The categories in “Trading across borders” have changed from the 2015 Report.

Emphasis was given to time and cost to export and import and hence, countries that are contiguous to each other in a single market ranked high. Thus, those jointly occupying the #1 global rank are 17 countries in the European Union (EU): Austria, Belgium, Croatia, Czech Republic, Denmark, Estonia, France, Hungary, Italy, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia and Spain.

Why? For these countries to send their goods abroad, only one hour is spent for documentary compliance, zero hours for border compliance, only 2 hours for domestic transport, and so on.

Other industrial countries that rank high but not in the top 30 are: South Korea, 31; US, 34; Germany, 35; UK, 38; Switzerland, 40; Canada, 44; Hong Kong, 47; Japan, 52. For the ASEAN countries, here are the numbers. (See Table 2)

We can interpret the above ranking like this: If those 17 EU countries were not included in the ranking and Singapore has dropped from #1 (rank in the 2015 Report) to 11th with South Korea the new #1, the following would be the new global rank of the other 9 ASEAN countries out of 172 countries covered: Malaysia, 18th; Thailand, 25th; Philippines, 64th; Cambodia, 67th; Vietnam, 68th; Indonesia, 74th; Laos, 77th; Brunei, 90th; and Myanmar, 109th.

Under this formulation,not much has changed in the global rank of the Philippines and other ASEAN countries compared to the 2015 Report.

The Philippines in particular needs to reduce the cost of international trade. Philippine exporters pay the highest, at $456, in border compliance and another $381 in domestic transport, among the ASEAN.

Our importers also pay the highest in border compliance, at $580, and second highest (next to Cambodia) in domestic transport and pay $381.

Trade is beautiful and useful.

Imposing higher costs owing to various government taxes through fees and fines is unwise. Governments should allow trade to be as free and less costly as possible.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, Inc., and a Fellow of the South East Asia Network for Development (SEANET).

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See also:
BWorld 19, Taxation and regulations in PH mining industry, September 24, 2015 
BWorld 20, DOE Circular to raise electricity prices, October 25, 2015 
BWorld 21, More internet use means lesser corruption?, October 31, 2015 
BWorld 22, WESM, PEMC and search for competitive electricity prices, November 05, 2015

Free Trade 53, TPP "final push" this September + paper by Dr. Clarete, September 19, 2015 

Free Trade 54, Eco-protectionism at APEC 2015 meeting, September 28, 2015 

Free Trade 55, TPP Agreement, finally, October 06, 2015

Business Bureaucracy 10, WB's Doing Business 2016 Report

The World Bank (WB) recently released its Doing Business (DB) 2016 Report. Before discussing it, here are two previous DB 2010 and 2015 Reports.

In DB 2009 Report, the Philippines ranked 141st out of 183 countries covered. In the DB 2010 Report, below, the country ranked 144th/183. The main bottlenecks are in (a) starting a business, and (b) closing a business. Relatively good rank in (a) trading across borders, and (b) registering property.

Last year's DB 2015 Report, the Philippines ranked 95th out of 189 countries with an overall distance to frontier (DTF) score of 62.08. Bottlenecks in (a) starting a business, and (b) protecting minority investors; good ranks in (a) getting electricity, and (b) trading across borders.

This year, DB 2016 Report, the PH slipped 8 positions and went down to global rank of 103rd out of the same 189 countries.

Ok, the 2016 Report shows that business bureaucracies in the Philippines have worsened compared to the previous year. But compared to the previous administration, based on DB 2009 and  2010 Reports (PH global rank of 141st and 144th, respectively), current ranking is better. Fine, but it is something that we cannot really be proud of. Why would PH bureaucrats, local and national, continue to impose lots of permits, taxes and fees, to people who create jobs, who expand the production of goods and services in the country?

Entrepreneurship and job creation is not a crime. Heavy bureaucratism is, because it contributes to higher unemployment, higher corruption, and higher prices of goods and services. Which tend to affect the poor more than  the  rich and middle class. BIG Government, its size, bureaucracies and taxes, must shrink.
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See also:

Business Bureaucracy 6: Presentation at Rotary Club of Manila Bay, February 01, 2013 

Business Bureaucracy 7: Penalizing Small Businesses, February 01, 2013 

Business Bureaucracy 8: Exchanges at Imperium et Populi (Philippines), June 12, 2013 

Business Bureaucracy 9, Land title registration, July 29, 2015 

Pilipinas Forum 9: Corruption's Deep Root, September 16, 2011

Business 360-24: Reducing Construction and Electricity Permits, April 18, 2015

Business 360 5: Reducing Construction and Electricity Bureaucracies

* This is the article I sent to B360 for their March 2013 issue, published in Kathmandu, Nepal.
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Reducing various business bureaucracies is one important policy by any government, local or national, to encourage more entrepreneurship and job creation and hence, effectively fight poverty and high unemployment.

One good source to measure the extent of business bureaucracies worldwide is the annual Doing Business reports (www.doingbusiness.org) jointly published by the World Bank and the International Finance Corporation. The latest is the Doing Business 2013: Smarter Regulations for Small and Medium Size Enterprises published in October 2012.

The annual report covers several areas of entrepreneurship like starting a business, getting construction permit, getting electricity, registering property, getting credit, protecting investors, paying taxes, international trade, enforcing contracts, resolving insolvency. It shows the number of procedures to get certain permits, how many days or hours, and the cost to enterprises in complying with those taxes and permits.

For brevity purposes, we chose only two areas, (a) dealing with construction permits and (b) getting electricity as Nepal continues to endure long hours of power blackouts everyday.

To compare the data with Nepal, we chose two Asian countries: Malaysia because it has a similar population size as Nepal,  about 29.6 million and 27 million, respectively, and Hong Kong because it is a good free market model for many economies around the world. And here is the result:

In dealing with construction permits, Nepal and Malaysia have similar global rank, 97 and 96, respectively. Shorter procedures but high cost in Nepal, equivalent to 654 percent of per capita income,  while longer procedures but lower cost (17.5 percent of per capita income) in Malaysia. In Hong Kong, the procedures are short and the cost is low, for a company to get a construction permit.

In getting electricity, not only that it takes long but it is also very costly in Nepal, requiring the equivalent of 1,763 percent of the per capita income. Compare that with just 54 percent in Malaysia and 1.6 percent in Hong Kong.

These data, freely available online worldwide, are good benchmark to prod certain government agencies to do something to improve things for all – ordinary citizens, private companies, and the government. Highly bureaucratic governments tend to get low esteem not only from their own citizens but also from other people abroad. Reducing these bureaucracies therefore, would greatly improve public perception and esteem of such governments.

For Nepal in particular, reducing the bureaucracies in building new power plants, transmission lines,  electricity distribution network and offices of these companies would encourage more private enterprises to slowly enter the power sector and its sub-sectors. In the process, frequent power blackouts and electricity rationing can be slowly addressed.

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See also:
Busiiness 360 1: Nepal and the Philippines, November 26, 2012
Business 360 2: Free market means free individuals, December 28, 2012
Business 360 3: Fiscal Cliff and Government Irresponsibility, January 23, 2013
Business 360 4: Brownouts and Power Deregulation, February 26, 2013
Business Bureaucracy 7: Penalizing Small Businesses, February 01, 2013

Business Bureaucracy 6: Presentation at Rotary Club of Manila Bay

Last night, I was the guest speaker of the Rotary Club of Manila Bay, RI District 3810, held at Astoria Plaza in Ortigas. Thanks to a friend way back in UP, Bobby Galvez, who is the club President-Elect (PE), for inviting me.

Below is my 24-slides presentation.












I introduced the second topic, Bureaucracies, with this note: In a free society, everything is allowed except a few things like killing, stealing, rape, abductions, etc. In an unfree society, it's the reverse: everything is not allowed unless given permits, usually by the government.

So many government units have taken the habit of declaring, "Do not move, do not start anything, unless you get permits from us." And the "us" range from the barangay captain, city health and sanitation office, city building official, city mayor, etc., all the way up to the SSS, BIR, DTI, SEC bureaucracies.

Thank also to Club Pres. Francis "Pankoy" Santaromana for the warm welcome and nice Certificate of Appreciation. Later in the evening, Sen. Koko Pimentel, one of their active club members, came. 

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See also:
Business Bureaucracy 1: Avoiding government: Egyptian experience, March 12, 2007
Business Bureaucracy 2: We don't need a new DICT bureaucracy, July 13, 2010
Business Bureaucracy 3: Their Rules and Life,July 15, 2011

Business Bureaucracy 4: How to Reduce It, January 27, 2012

Business Bureaucracy 5: Doing Business 2012 Report, August 28, 2012

Business Bureaucracy 5: Doing Business 2012 Report

The WB-IFC's "Doing Business 2012 Report was released several months ago. and the result for the Philippines was as ugly as in previous years: Long procedures to start and continue a business, lots of taxes and mandatory contributions to pay. The Country Tables are available here,
http://doingbusiness.org/reports/global-reports/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-Chapters/Country-Tables.pdf

Singapore, Hong Kong and New Zealand took the 1st, 2nd and 3rd places, respectively. To start a business: Number of procedures, number of days, minimum capital: 3, 3, 0 for Singapore and HK, 1, 1, 0 for NZ. For the Philippines? 15, 35, 5.2 percent of per capita income.

In paying taxes: number of payments per year, number of hours, percent of profit: 5, 84, 27.1 for Singapore; 3, 80, 23.0 percent for HK; and 8, 172, 34.4 percent for NZ. For the Philippiines? 47, 195, 46.5 percent.

Then S. Korea, Australia and Thailand also got high ranks, meaning their business bureaucracies are not that complicated or parasitic.

To enforce contracts: number of procedures, number of days, cost (percent of claim): 33, 230, 10.3 percent for Korea; 28, 395, and 21.8 percent for Australia; and 36, 479, 12.3 percent for Thailand. For the Philippines? 37, 842, 26.0 percent.

Also Malaysia, Japan and Taiwan. In resolving insolvency, number of years, cost (percent of estate), recovery rate (cents on the dollar):  1.5, 15, 44.6 for Malaysia;  0.6, 4 percent, 92.7 for Japan; and 1.9, 4 percent and 82.1 for Taiwan. For the Philippines? 5.7, 38 percent, 4.7!

Rule of Law 1: Entrepreneurship and Government Permits

The World Bank and International Finance Corporation (WB-IFC) conducts an annual report, “Doing Business” and its 2009 Report was released last week. The goal of such report is to assess the 181 countries (178 countries in the 2008 Report) included in the survey on how easy or how bureaucratic they are for entrepreneurs and businessmen – who create jobs, who buy and produce various goods and services in society. It is a complex and delicate procedure, involving the inputs of top business consulting, auditing, legal and other companies in the countries surveyed.

After assessing the countries through assignment of a certain score, it ranked all the 181 countries. For this year, the 10 factors considered and measured in coming up with a composite score and where rankings are made, of “Ease in Doing Business” were: (1) Starting a business, (2) Dealing with construction permits, (3) Employing workers, (4) Registering property, (5) Getting credit, (6) Protecting investors, (7) Paying taxes, (8) Trade across borders, (9) Enforcing contracts, and (10) Closing a business.

So, how did the Philippines fare?

Rank in Ease of Doing Business, 2008

1. Singapore
4. Hong Kong
12. Japan
13. Thailand
20. Malaysia
23. Korea
61. Taiwan
83. China
88. Brunei
92. Vietnam
122. India
129. Indonesia
135. Cambodia
140. Philippines
165. Lao PDR

Again, for the nth time, the Philippines proved to be among the most bureaucratic of all supposedly “emerging economies”, ranking 140th out of 181 countries included in the survey! What pulled down its ranking were its scores on the procedures in Starting a business, also in Closing a business.

The top 10 countries with easiest procedures in starting a business – New Zealand, Canada, Australia, Georgia, Ireland, United States, Mauritius, United Kingdom, Puerto Rico and Singapore – only have one, at most 6 or 7, procedures to register and start a business, and each procedure does not take long to complete, and the fees are not plenty and high. In addition, the local governments hardly have any part in business registration procedures.

In contrast, the Philippines requires at least 15 procedures: 3 with the Securities and Exchange Commission (SEC); 4 with the barangay/village and city/municipality; 6 with the Bureau of Internal Revenue (BIR); 1 with the Social Security System (SSS); and 1 with PhilHealth. Registration with Pag-IBIG maybe optional, but most firms are required or advised to do so. Ask any serious entrepreneurs around, and most likely they will pinpoint at the local governments and the BIR that really give them difficulty if not hell.

The empowerment of local government units (LGUs) after the enactment of the Local Government Code (1991) was supposed to make the LGUs more responsive to the needs of the people in the locality. What happened in many cases, was the lives of hard-working and entrepreneurial people became more complicated, the less-responsible and less hard-working people were placated and subsidized, and personnel of the barangay/municipal/city halls were expanded and often pampered. Political decentralization and devolution did not mean less government but on the contrary, more government, as both national government agencies (NGAs) and LGUs take turns in slapping new regulations, new taxes and fees, to entrepreneurs who are deemed to have less political clout to the incumbent set of politicians.

The BIR will remain to be the nest of wastes and inefficiencies, if not large-scale corruption, because of the various powers and authority, whether transparent or arbitrary, given to that agency by various revenue laws sought by the Executive branch and granted to them by the Legislative branch.

Then there are many other NGAs that also require their own set of requirements, regulations and fees, on top of regulations, taxes and fees imposed and collected by the above-mentioned NGAs and LGUs. If a firm is manufacturing or distributing various food products, drinks, medicines and related products, it will have to get a license from the Bureau of Food and Drugs (BFAD) and/or the Department of Health (DOH). A friend of this writer who likes cooking produced different sauces for different type of barbeques. He invented around 20 different sauces, had his own packaging, already set up the marketing channels with selected local restaurants, shops, supermarkets, even a few outlets in the US. Six months have passed, 10 months, a year, and he still never got his BFAD license despite having submitted various samples for testing and re-testing. This experience plus some family concerns pushed him to abandon his business plan and migrated to the US instead.

If a firm is dealing with minerals extraction, it will have to go through a very long and complicated process in getting an Environmental Clearance Certificate (ECC) and other environmental permits with the Department of Environment and Natural Resources (DENR) and LGUs.

Friedrich Hayek observed in his book, The Constitution of Liberty, that government regulations “will always limit the scope of experimentation and thereby obstruct what may be useful developments. They will normally raise the cost of production or reduce overall productivity” (Chapter 15, Economic Policy and the Rule of Law). More regulations, more restrictions. Although such regulations may mean more revenues and more power for any national or local government body, they definitely kill certain innovative spirit and outcomes that some entrepreneurs may produce and develop.

The Rule of Law philosophy explicitly limits the arbitrary power of governments to create and enact too many rules, too many regulations and restrictions. Entrepreneurship and job creation is not a crime and harmful to people, especially those who need jobs, those who need new products and services. What often results with more restrictions, is that more ways and schemes are invented – and allowed in exchange for bribes – to circumvent and avoid those restrictive rules. This results in high levels of what are known as “informal” or “underground” economies.

For entrepreneurship and rule of law in the economy to flourish, the number of business regulations have to be drastically cut and reduced. Then entrepreneurship and job creation will be rewarded with freedom and prosperity, not penalized with endless regulations and taxation.