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UNDERSTANDING DOING BUSINESS 2014 REGULATIONS FOR SMALL AND CASE STUDIES MEDIUM-SIZE ENTERPRISES Table of Contents Why are minimum capital requirements a concern for entrepreneurs? 1 Where is the minimum capital requirement more prevalent? 1 Do minimum capital requirements fulfill their regulatory functions? 2 What is the economic relevance of minimum capital requirements? 3 Conclusion 5 Notes 5 What role should risk-based inspections play in construction? 6 What types of inspections are there? 7 How are risk-based inspections implemented? 7 Australia and France: Two examples of good practice 8 France: establishing insurance-driven building control and mandating risk-based inspections 8 Building classifications in Australia and France 8 What challenges have been faced? 9 What benefits have been realized? 10 Conclusion 11 Notes 11 Tackling high electricity connection costs: Trinidad and Tobago’s new approach 12 Utilities spread new connection costs between tariffs and connection fees 12 Utilities have to balance new connection costs between present and future requests 12 What has the getting electricity data shown? 13 Trinidad and Tobagos’s efforts to make accessing electricity fairer 13 Establishing a capital contribution working group helped 14 Recommendations from the capital contribution working group and final proposal by the regulated industries commission 14 Obstacles to implementing the new policy 14 The scheme is working 14 What worked well? 15 Notes 15 Implementing electronic tax filing and payments in Malaysia 16 Benefits of electronic tax filing and payment 16 Global experiences with and lessons from electronic filing 17 Malaysia’s Experience 17 Implementation Challenges 18 A change in strategy 18 Positive outcomes 18 Conclusion 19 Notes 19 Implementing trade single windows in Singapore, Colombia and Azerbaijan 20 Singapore 21 From vision to implementation 21 Overcoming obstacles 21 What’s next? 22 Colombia 22 Features and implementation 22 From resistance to endorsement 22 A work in progress 23 Azerbaijan 23 Choosing from global good practices 23 Implementing 24 Building on initial successes 24 Lessons 24 A single window system is a long-term commitment 25 Overcoming behavioral hurdles requires persistence 25 Collaboration with the private sector is essential 25 Legal basis must be established 25 Notes 25 Improving court efficiency: the Republic of Korea’s e-court experience 26 The computerization of Korean courts 26 Challenges when transitioning to e-courts 27 Functions of the E-court system 27 Benefits of e-courts 28 Cost and space savings 28 Security 28 Transparency 28 Access to justice 29 Sharing good practices through peer learning 29 Lessons 30 Notes 30 Why are minimum capital requirements a concern for entrepreneurs? Minimum capital requirements signifi- Denmark slashed its minimum capital re- cantly slow entrepreneurship.1 Such re- quirement for limited liability companies quirements also fail to serve their intend- from about $22,000 to about $14,000. ed purpose of protecting consumers and All of these changes lower the costs to creditors from hastily established and entrepreneurs to operate in the formal potentially insolvent firms. In recent years sector. The other 90 economies still re- • Across regions, minimum capital many governments have stopped requir- quire entrepreneurs to deposit capital be- requirements are lowest in Europe ing new businesses to deposit minimum fore registering a business. This amount and Central Asia. capital in banks or with notaries before varies greatly—from €1 in Germany to • Of the 189 economies studied in they can begin operations. more than $58,000 in Myanmar. Doing Business 2014, 99 do not have minimum capital requirements for What is a minimum capital requirement? firms. Some economies have never It is the share capital that must be depos- had them, while 39 have eliminated ited by shareholders before starting busi- WHERE IS THE MINIMUM them in the past seven years. ness operations. For the Doing Business CAPITAL REQUIREMENT MORE • Minimum capital requirements starting a business indicator the paid-in PREVALENT? are comparatively higher in low- minimum capital is usually the amount Across regions, minimum capital require- income economies. that an entrepreneur needs to deposit in ments are lowest in Europe and Central • Paid-in minimum capital is often a commercial bank or with a notary when, Asia, Latin America and the Caribbean a fixed amount that does not take or shortly after, incorporating a business, and OECD high-income economies (fig- into account firms’ economic even if the deposited amount can be ure 4.1). In Latin America and the Ca- activities, size or risk related to withdrawn soon after a company is cre- ribbean only 10 of 32 economies require their activity. ated.2 In most cases this required amount new businesses to deposit minimum • Higher minimum capital requirements are associated with is specified in an economy’s commercial capital, with the Dominican Republic im- less access to finance for small and code or company law.3 Research shows posing the most—almost half of income medium-size firms. that the existence of a minimum capital per capita, or about $2,500. Still, most • Higher minimum capital requirement directly hinders business de- of the 10 economies that had enforced requirements are associated with velopment and growth.4 capital requirements keep them low. In weaker regulations on minority Suriname it is about $30—0.4 percent investor protections and tend to Of the 189 economies studied in Do- of income per capita—and in Bolivia it is enable the informal economy. ing Business 2014, 99 have no minimum $40, equivalent to 1.8 percent of income capital requirements. Some economies per capita. And in the past 10 years other never required firms to deposit money economies in the region, such as Mexico, for incorporation, while 39 have eliminat- St. Kitts and Nevis, and Uruguay, have ed minimum capital requirements in the eliminated minimum capital require- past seven years. Armenia, Belarus, Bul- ments altogether. garia, Denmark, Kosovo, the Republic of Korea, the Kyrgyz Republic and the Unit- Among OECD high-income economies, ed Kingdom are among these economies Austria and Slovenia have the highest that have cut or eliminated such require- minimum capital requirements, asking ments. For instance, Belarus halved its entrepreneurs to commit more than 40% minimum capital requirement for private of gross national income per capita. In limited liability companies in 2008, then Sub-Saharan Africa 13 economies have abolished it a year later. In 2009 Bulgaria minimum capital requirements exceeding reduced its minimum capital requirement 200% of income per capita. An extreme by 99%, to less than $2. That same year, example is Niger, where the minimum 1 42 DOING BUSINESS 2014 compared with other regions. For in- FIGURE 4.1 Minimum capital requirements by region stance, in 2012/13, Sri Lanka was the only economy of 8 in those studied that sim- 150 plified business registration−compared 125.7 with 10 of 21 in Europe and Central Asia.5 min. cap. (% of GNI pc) 100 Minimum capital requirements are rel- atively higher in low-income economies 50 45.4 than in lower-middle, upper-middle and high-income ones. Among high-income 10.4 13.2 15.8 3.5 3.6 economies, 25% have a minimum capital 0 requirement ranging from 1.5% to 230% Europe & Central Asia Latin America & OECD high income East Asia & Pacific South Asia Middle East & North Africa Sub-Saharan Africa Caribbean of income per capita—from about $1,500 in Malta to more than $50,000 in Bahrain. Bahrain and Oman require new limited lia- bility companies to deposit the equivalent of more than 200% of income per capita Note: Myanmar is excluded from the sample as it is a significant outlier. in bank accounts to complete registration Source: Doing Business database. and commence business operations. Of the 34 low-income economies stud- capital requirement is equivalent to 528% $14,000 to less than $2. Similarly, in 2013, ied, 18 do not have minimum capital re- of income per capita—about $2,000. Morocco eliminated its minimum capi- quirements. Among the other 16, 11 are tal requirement for limited liability com- members of the Organization for the Globally, except in South Asia, minimum panies. Many economies in Europe and Harmonization of Business Law in Afri- capital requirements have been cut over Central Asia and the OECD high-income ca,6 which has fixed the minimum capital the past seven years. The biggest chang- region have also sharply cut or eliminated requirement at about $2,000. es have occurred in the Middle East and minimum capital requirements. North Africa, where the share of econo- mies with minimum capital requirements In South Asia only India and Maldives of less than 5% of income per capita fell still have minimum capital requirements. DO MINIMUM CAPITAL from over 60% in 2006 to 6% in 2013 In India it is about $1,900; in Maldives, REQUIREMENTS FULFILL THEIR (figure 4.2). In 2011 Jordan reduced its $135. In general, South Asia is lagging be- REGULATORY FUNCTIONS? minimum capital requirement from about hind on business entry regulatory reforms The minimum capital requirement finds its roots in continental Europe of the 20th century.7 Back then, the minimum paid- up capital was stipulated by law and its primary legislative purpose was to pro- FIGURE 4.2 Share of economies where the minimum capital requirement is less than 5% tect creditors and nurture confidence in of income per capita financial markets. Nowadays, despite the financial burden that minimum capital OECD high income 50.0 (30 economies) 30.0 requirements impose on potential entre- Europe & Central Asia 85.7 preneurs, some argue that they protect (22 economies) 23.8 investors and consumers from new firms South Asia 87.5 (8 economies) 75.0 that are set up carelessly, might not be Middle East & North Africa 62.5 financially viable and will likely close (16 economies) 6.3 soon after launching. Advocates of this Sub-Saharan Africa 51.1 (45 economies) 44.4 argument claim that minimum capital East Asia & Pacific 73.9 requirements enable prospective inves- (23 economies) 56.5 tors to consider investments more cau- Latin America & Caribbean 80.6 (30 economies) 67.7 tiously. 0 20 40 60 80 100 Percent But this regulatory fix does not adequate- DB2014 DB2006 ly address the problem. Paid-in minimum capital is often a fixed amount that does Note: The data sample for DB2006 (2005) includes 174 economies. The sample for DB2014 (2013) also includes not take into account firms’ economic ac- The Bahamas, Bahrain, Barbados, Brunei Darussalam, Cyprus, Kosovo, Liberia, Luxembourg, Malta, Montenegro, tivities, size or risks. In some cases it is Qatar and San Marino, for a total of 185 economies. DB2006 data have been adjusted for data revisions and changes in methodology and regional classifications of economies. the same for different types of companies Source: Doing Business database. as well. For instance, a small company 2 WHY ARE MINIMUM CAPITAL REQUIREMENTS A CONCERN FOR ENTREPRENEURS? 43 in the services industry with low start- freezing capital in a bank account may rules have lost virtually all of their value up capital has to pay as much as a large undermine a company’s growth. In Bo- for stockholders and creditors because manufacturing company with high initial livia and Ghana minimum capital can be better approaches have been developed. capital in Gabon, despite the difference withdrawn in full only after a company’s Today creditors must rely primarily on in business activity and size. Moreover, dissolution. Moreover, high minimum negotiated contractual protections, as funds tied up in minimum capital require- capital requirements can enable fraudu- stipulated in statutory and incorporation ments, particularly in economies where lent activities that they are supposed to agreements.21 the amount is sizable, could impose fi- prevent. Entrepreneurs eager to incorpo- nancial constraints on companies that rate companies but lacking the required A study of 5 EU economies shows that have other needs, such as hiring, buying funds, often falsify company incorpora- eliminating minimum capital require- equipment or developing services.8 tion forms or withdraw funds soon after ments makes it easier to start small and incorporation.15 medium-size enterprises. The number Others argue that minimum capital re- of registered businesses has increased quirements shield firms from insolvency If the capital requirement is too low, it in 4 of the economies studied that have and so protect creditors and investors.9 fails to screen out potentially unviable lowered or abolished minimum capital But lenders tend to base their decisions businesses. A low requirement does little requirements (France, Germany, Hungary on commercial risks rather than govern- to protect creditors if a company under- and Poland). Research also shows that, in ment-imposed minimum capital require- goes financial distress.16 In many econo- addition to significantly increasing the to- ments.10 Creditors usually prefer to eval- mies the requirement is merely symbolic tal number of limited liability companies, uate firms’ income statements, business because governments and company reg- such legal reforms have raised the num- plans and other representative indicators. istries cannot predetermine how much ber of new firms created.22 Thus, many economies have found oth- money might be needed to cover compa- er ways to protect investors, particularly nies’ liabilities if they become insolvent.17 Another study on the effects of deregula- with limited liability companies. For in- For example, France, Germany, Japan and tion of corporate laws on company incor- stance, Hong Kong SAR, China outlines Jordan have minimum capital require- poration shows that entrepreneurs have solvency safeguards in its Companies Act ments of less than $5. In addition, a min- taken advantage of recent rulings by the and does not require a specific amount imum capital requirement does not limit European Court of Justice allowing them of paid-in minimum capital for business company debt because once the capital to select the economy where they incor- incorporations. Furthermore, companies amount has been established, there are porate regardless of their initial location. have different probabilities of becoming usually no limits on the borrowing of For instance, cross-country incorporation insolvent. Even with a minimum capital companies.18 from businesses in other EU economies requirement there is no guarantee that a increased significantly in the United King- firm would not face insolvency because of Minimum capital requirements are espe- dom, driven by low capital requirements other factors such as poor management cially futile if funds can be withdrawn and and start-up costs.23 and decision making, bad business condi- possibly used to cover expenses unrelat- tions and market changes.11 ed to the business soon after a company is incorporated. For instance, in Estonia, If the enforced minimum capital require- Luxembourg and Thailand entrepreneurs WHAT IS THE ECONOMIC ment is too high, it might impede the can withdraw start-up capital immedi- RELEVANCE OF MINIMUM development of start-ups. It could block ately after incorporating a business—so CAPITAL REQUIREMENTS? potential entrepreneurs seeking to start minimum capital requirements provide Through the analysis of minimum capital businesses as alternatives to unemploy- no security to potential creditors.19 requirements it is possible to identify 2 ment.12 In Ethiopia the official unemploy- main types of correlations: one relating ment figure is more than 20%, yet the A better way to make markets more ef- minimum capital requirements to other minimum capital requirement is 184% of ficient and protect creditors would be types of regulations and another relat- income per capita. Though the minimum to enforce mandatory disclosure of in- ing minimum capital requirements with capital requirement alone does not ac- formation, such as mandatory filing of economic outcomes, such as the size of count for Ethiopia’s high unemployment, annual financial accounts in company the informal economy. All the results pre- it does hamper the development of small registries and enhancing the supervisory sented here are based on correlations and and medium-size formal businesses that role of company registries. Other forms of cannot be interpreted as causal. might be a source of employment.13 creditor protection already exist in many economies, including corporate gov- The analysis shows that minimum capi- Some researchers also argue that high ernance monitoring, setting of interest tal requirements are related to 2 types of minimum capital requirements distort rates and contractual provisions such as regulations: insolvency laws and its im- healthy competition by putting at disad- bond indentures and loan agreements.20 plementation and minority shareholder vantage entrepreneurs with less finan- The United States, for instance, once im- protection. The efficiency of insolvency cial capacity.14 A firm is expected to use posed significant requirements on how laws is measured by the Doing Business its financial resources to establish the much capital had to be contributed and recovery rate indicator. The regression business and day-to-day operations. So maintained in a corporation. But those analysis suggests that minimum capital 3 44 DOING BUSINESS 2014 requirements might not help creditors re- FIGURE 4.3 Higher minimum capital requirements are associated with weaker investor cover their investments. There is a strong protection negative association between such re- quirements as measured as a percentage of an economy’s income per capita and the recovery rate of creditors. The recov- ery rate for investors tends to be higher min. cap. (% of GNI pc) in economies that do not have minimum capital requirements.24 So, indeed, such requirements do not play a crucial role in safeguarding creditors against company bankruptcies. The negative correlation between min- imum capital requirements and the strength of investor protection index Strength of investor protection index (which measures legally required minori- ty shareholder protections provided by Source: Doing Business database. law) is also significant (figure 4.3).25,26 Economies that do not have minimum capital requirements or set them very low FIGURE 4.4 Higher minimum capital requirements are associated with less access to tend to better protect investors by being finance for small and medium-size enterprises more likely to promote transparency in corporate transactions, provide easy ac- cess to corporate information and have stricter director liability standards. With regards to economic outcomes, min. cap. (% of GNI pc) the analysis shows that in economies with high minimum capital requirements, small and medium-size firms have less access to bank financing.27 The analysis also reveals a strong correlation between the amount of minimum capital required and the percentage of small and me- dium-size enterprises that cite access Share of firms identifying access to finance as a major constraint to finance as a major constraint to their business operations (figure 4.4). Source: World Bank Enterprise Surveys, 2012. Furthermore, there is a strong positive association between minimum capi- tal requirements and the percentage FIGURE 4.5 Higher minimum capital requirements are associated with more informality of firms in economies who say that the informal economy severely constrains their growth (figure 4.5). If entry costs are prohibitively high, entrepreneurs might be disinclined to formalize their min. cap. (% of GNI pc) businesses. There is also a strong nega- tive relationship between the number of years that firms operate without formal registration and the burden of minimum capital requirements.28 Based on this relationship, higher minimum capital requirements are associated with lon- ger periods when firms operate without formal licenses. The less money that Share of firms competing against informal sector firms have to spend on minimum capital requirements, the less likely they are to Source: World Bank Enterprise Surveys, 2012. compete against informal businesses as 4 WHY ARE MINIMUM CAPITAL REQUIREMENTS A CONCERN FOR ENTREPRENEURS? 45 those firms have a greater incentive to 7. The German AktG of 1937 and the Italian become formally registered. Civil Code of 1942. NOTES 8. Chan 2009. This case study was written by Valentina Saltane 9. Miola 2005. There is also a strong negative association and Paula Garcia Serna. 10. Djankov 2009; Ewang 2007; Alonso Ledes- between minimum capital requirements ma 2007. and the number of new formal business- 1. vanStel, Storey and Thurik (2007); Blanch- 11. Mülbert 2006. es.29 This result supports the argument flower, Oswald and Stutzer (2001); Klapper 12. Hornuf and others 2011. that minimum capital requirements deter and Love (2011); Dreher and Gassebner 13. World Development Indicators 2012 and entrepreneurial activity, creating obsta- (2011). Doing Business database. cles for business development. 2. The paid-in minimum capital measured by 14. Chan 2009. the starting a business indicator represents 15. Chan 2009. the amount an entrepreneur needs to depos- 16. Miola 2005. it within 3 months of business incorporation. 17. Ewang 2007. CONCLUSION In the following sections it is referred to as 18. Alonso Ledesma 2007. minimum capital. 19. Miola 2005. Despite its shortcomings, minimum 3. For instance, in Belgium the required 20. Miola 2005. capital requirements remain a reali- minimum capital is defined in the Company 21. Booth 2005. ty for many economies, especially in Code, in Ecuador in the Companies Act and 22. Hornuf and others 2011. the Middle East and North Africa and in Togo in the Organisation pour l’Harmon- 23. Becht, Mayer and Wagner 2008. Sub-Saharan Africa. But every year more isation en Afrique du Droit des Affaires 24. The results are significant at the 5% level economies slash or eliminate how much (OHADA) Uniform Act on the General after controlling for income per capita. money entrepreneurs must deposit to Commercial Law. 25. The strength of the investor protection index start businesses. Governments can take 4. vanStel, Storey and Thurik (2007); Blanch- is the average of the extent of the disclosure various other steps to protect investors flower, Oswald and Stutzer (2001). index, the extent of the director liability index 5. Belarus, Bulgaria, Kazakhstan, Kosovo, and the ease of the shareholder suits index. and creditors, minimize risks of bank- Lithuania, FYR Macedonia, Romania, Serbia, The index ranges from 0 to 10, with higher ruptcy and safeguard consumers from Ukraine and Uzbekistan. values indicating more investor protection. potentially hazardous products. 6. OHADA members are Benin, Burkina Faso, 26. The results are significant at the 5% level Cameroon, the Central African Republic, after controlling for income per capita. Chad, the Comoros, the Republic of Congo, 27. The results are significant at the 5% level Côte d’Ivoire, the Democratic Republic of after controlling for income per capita. Congo, Gabon, Guinea, Guinea-Bissau, Mali, 28. The results are significant at the 5% level Niger, Senegal and Togo. after controlling for income per capita. 29. The results are significant at the 5% level after controlling for income per capita. 5 What role should risk-based inspections play in construction? Construction accounts for a large share of plant, such as the pollution it is expected GDP in most economies. In 2005, during to emit, which will affect how thorough- a period of high growth, it was the source ly it needs to be inspected. Accordingly, of at least 7% of GDP in Bangladesh, India there has been growing consensus in the and the United Arab Emirates. Govern- construction industry on the need for su- • Inspections during the construc- ments often use construction to stimulate pervisory bodies to consider the potential tion of buildings are crucial, but economic activity because of its benefits risks imposed by a building, rather than assessing the potential risks of a for people across socioeconomic strata.1 applying the same inspections standards building—such as its environmental From New York to Shanghai, economies to all buildings. Many economies are impact—is even more important. are competing to build the tallest, biggest, adopting innovative approaches to con- • Risk-based inspections, which focus most beautiful buildings. struction controls, with the focus shifting on what to inspect and when, have from random, systematic and untargeted become more popular in the past Ensuring safety in construction is not inspections to more targeted, selective decade. They are conducted to easy. A single structural failure can cause and risk-based inspections. ensure a building’s structural safety, an entire building to collapse, often lead- fire safety, worker safety and public ing to injuries and deaths. The collapse of Both developed and developing econo- safety. the Kihonge high-rise in Kenya in 2006, mies have implemented risk-based in- • In Australia risk management for a multistory Melcom department store spections, which take into account the construction emerged in 1999 but in Ghana in 2012 and the Rana Plaza varying risks for different types of build- not all aspects of the system were Building—a multiuse building including a ings. Since 2005, 18 economies have incorporated immediately. The garment factory—in Bangladesh in 2013 incorporated elements of risk-based in- 2005 Building Professionals Act show that strong regulation for building spection systems.2 For example, Germa- introduced the accreditation and construction and equally strong enforce- ny adopted a system similar to Australia’s regulation of private inspectors, ment of the law are essential for worker that makes private inspectors responsible creating competition between the and public safety. Furthermore, the mon- for ensuring buildings’ safety and thus public and private sectors. etary costs incurred by governments or responsible for conducting the required • France strengthened its liability private sector to replace the buildings or inspections based on the type of building. regimes and introduced a risk- fix the damages can be substantial. based inspections system based on Over the past three decades other govern- building classifications that already These incidents do not imply that these ments have also worked with the private existed in the law but were never countries do not officially require inspec- sector to develop risk-based inspections, implemented. tions. Ghana’s Building Inspectorate is resulting in new laws and regulations • Economies seeking to adopt risk- legally required to inspect buildings at 4 that make safety a central focus of the based inspections should consider stages before the official final inspection. construction industry while maintaining that successful implementation Similarly, Bangladesh’s City Development efficiency. Risk-based inspections, as op- requires strong legislation for Authority is supposed to conduct exca- posed to random, untargeted inspections, construction, strong enforcement vation and foundation inspections before allow governments to allocate resourc- institutions, conflict resolution conducting a final inspection. But such in- es where they are most needed without mechanisms, adequate resources spection requirements do not do enough compromising worker and public safety. and a liability and insurance regime. to guarantee worker and public safety. But their effectiveness depends on sev- eral factors, including strong oversight, Inspections during the construction of proper enforcement of legislation, suffi- buildings are crucial—but assessing po- cient resources and technical expertise. tential risks might be even more import- ant. For example, several factors must be Economies require inspectors to inspect taken into account when building a power buildings to ensure that builders comply 6 WHAT ROLE SHOULD RISK-BASED INSPECTIONS PLAY IN CONSTRUCTION? 47 with legal requirements for worker safety (construction inspections), structural in- TABLE 5.1 The United Kingdom requires a range of building inspections tegrity (building inspections) and fire safe- Phased inspections required for all buildings Inspections based on risk assessment ty. There can be too few inspections or too many; neither approach benefits the con- • Commencement of works In addition to key stage inspections, high- • Excavation of foundation risk sites must undergo extra inspections. struction industry or the public interest. • Superstructure, structural frame or components The assessment is adjusted accordingly • First fix (pre-plaster) during construction. In some economies obtaining a con- • In-situ testing, such as for drains, sound, air pressure, electrical and fire alarms struction permit requires dozens of pro- • Intermediate inspections when required cedures. It can take more than a year to • Pre-occupation issue of a completion certificate comply with these, and they can cost Source: http://www.teignbridge.gov.uk. several times annual income per capi- ta. Moreover, the process is often little more than a way to extract rents and so is associated with corruption. In contrast, based on factors such as geographical bodies to private engineers and inspec- countries such as France, New Zealand location.4 Thus both countries have im- tors. Private practitioners tend to have and the United Kingdom have created plemented hybrid systems that include the skills, expertise and experience to permit procedures that strike a much both phased and risk-based inspections. function without controls or with limited better balance, ensuring high levels of On the other hand, Bhutan inspects all controls.5 They are also held liable for the public safety while not burdening the buildings at 7 phases of construction, safety of buildings and subject to inde- private sector with excessive red tape. without additional risk-based inspections. pendent oversight. Builders in such economies are creating A phased inspection strategy demands simpler structures that are generally sub- that authorities have enough resources ject to less requirements and inspections to inspect every building at each required due to their lower risks. phase. An insufficient number of inspec- HOW ARE RISK-BASED tors can lead to missed, hurried or incom- INSPECTIONS IMPLEMENTED? plete inspections. Efforts to develop risk-based inspections must consider several elements, including: WHAT TYPES OF INSPECTIONS Risk-based inspections have become ARE THERE? more popular in the past decade, resolv- • Classifying and assessing buildings. Unannounced or unscheduled inspec- ing some of the issues from random and Building classifications and assess- tions are known as random inspections. phased inspections. Though many risk- ments are important for determining They can occur at any time and any stage based inspection systems include a min- the frequency and scope of inspec- of a construction project. There can be as imum number of phased inspections for tions. Not all buildings face the same many inspections as the building inspec- all buildings, they typically give priority to risks. Thus risk evaluation requires a tor deems necessary. For a 30-week con- buildings with high risks—such as envi- holistic approach, and understanding struction project—the model measured ronmental ones—and optimize the pro- the risks associated with different by Doing Business—several economies cess. For example, the United Kingdom types of buildings is essential for suc- have 1 random inspection, while the Lao has defined key stages of inspections for cessful risk-based inspections. Build- People’s Democratic Republic and Liberia all buildings, plus additional inspections ing classification is just as important have 12 and Guinea has 15.3 based on the building’s risk level (table when determining the necessary lev- 5.1). Hence risk-based inspections focus els of review for the building plans pri- Though random inspections can reveal on what to inspect and when. Risk-based or to construction, for construction of more instances of noncompliance with inspections are conducted to ensure a the building itself and for assessment building regulations than do phased in- building’s structural safety, fire safety, of the building after construction to spections, they also create more oppor- worker safety and public safety but in a ensure its compliance with safety tunities for graft. And requiring a lot of more efficient manner. Riskier buildings standards. inspections might not be necessary for face more inspections. Having fewer in- • Identifying who will conduct inspections. smaller buildings that do not pose serious spections for less risky buildings lowers Risk-based inspections rely on profes- environmental or hazardous risks. Still, costs without compromising safety, in- sional inspectors who are responsible having no inspections is a safety risk. creasing flexibility and enabling inspec- for ensuring that buildings are con- tors to move away from random and structed according to safety standards. Phased inspections occur during specific phased inspections. If violations occur, inspectors must phases of construction. They occur re- hold insurance to cover the loss of any gardless of a building’s size, location or In addition to defining the inspections structural damages. Accordingly, only use. Economies such as Canada and the that must take place for different types experts certified by the state or a legal United Kingdom recommend conducting of buildings, risk-based inspections sys- body should perform inspections. such inspections in 9 phases, but this tems have involved a growing shift in risk, • Identifying the responsibilities of those number might differ for other economies responsibility and liability from public authorities. Inspectors’ mandates must 7 48 DOING BUSINESS 2014 be clearly defined. In addition, a formal techniques developed by Standards France: establishing insurance- enforcement mechanism must be in Australia, an independent nonprofit con- driven building control and place to ensure compliance with regu- sidered the country’s leading nongovern- mandating risk-based inspections lations and administer penalties for vi- mental standard-setting body.7 Buildings France’s 1978 Spinetta Law provided olations, as well as a conflict resolution began being inspected by local councils, a legal framework for creating techni- mechanism in cases of disagreement and risk assessments by those councils cal control agencies and dramatically between inspectors and developers. determined the number of inspections modifying liabilities in construction needed, with standards varying by coun- works. 11 Until then it was unclear who Different economies have taken different cil. But the 2005 Building Professionals was responsible for inspecting build- approaches to risk-based inspections. In Act allowed for accreditation and regu- ings during construction. The govern- the 1990s Austria introduced three class- lation of private inspectors.8 By opening ment had limited involvement in the es of construction so not every building to the private sector, Australia intro- construction industry. Builders and ar- requires a building permit, as had been duced competition to a system that had chitects were simply required to have the case: primarily been the responsibility of local 10-year warranty insurance for damag- councils. Furthermore, in 2005 Australia es caused by a building collapse. Fur- • First class. For small expansions or amended its Building Code to introduce thermore, while previous legislation had other small construction works ex- a risk-based categorization system for stipulated various categorizations of empt from building permits and plan- buildings that inspectors had to follow buildings, it had never stipulated what ning and zoning reviews. (see next section for more details on the types of inspections should be conduct- • Second class. For construction works categorization). ed for each category. up to 20 square meters that do not require building permits and technical In addition, in 2010 changes were made Under the Spinetta Law only private, reviews. But these projects are subject to the Building Professionals Board, which state-licensed technical control agen- to planning reviews, and signatures had been the sole body authorized to cies can inspect construction sites.12 must be obtained from neighbors to accredit private inspectors, regulate the Technical controllers cannot be direct- ensure they have no objections to the profession and enforce disciplinary and ly involved in construction-related ac- project. legal actions against private inspectors. tivities. They must be accredited for • Third class. These projects require Now principal certifying authorities can 5-year terms based on requirements building permits with third-party re- accredit professionals from various back- defined by a state decree, including for view of all crucial elements. A sub- grounds—including engineers, planners technical competence and profession- category in the third class known as and building and land surveyors—to serve al conduct.13 Technical control agencies the “light procedure” requires little as inspectors. In addition, the board be- must verify buildings’ strength, safe- or no independent review of building came responsible for accrediting, regulat- ty and compliance with building reg- design and construction. In Vienna a ing and enforcing actions against certified ulations, including standards for seis- structural review is the only require- inspectors.9 mic construction and accessibility for ment for this subcategory. Though the disabled. In addition, all parties in- notifications to the relevant agency As a result principal certifying authori- volved in construction—such as con- are required once certain stages of ties can retain both private and council tractors, builders, and technical con- construction are completed, inspec- inspectors, who report back during and trol agencies—must obtain insurance tions are the exception rather than the after construction. By law, principal cer- covering defects in construction. Com- rule under the light procedure.6 tifying authorities must be designated to pliance with regulations has improved conduct the mandatory inspections at dramatically since the Spinetta Law Economies that have been using risk- the critical stages (stipulated in the En- was implemented.14 based inspections the longest, such as vironmental Planning and Assessment Australia and France, have comprehensive Act), manage inspections and decide if classifications of building categories and additional inspections are needed based Building classifications in Australia risks based on size and use. Their systems on a building’s risk level. The principal and France have proved quite successful over the certifying authority must also issue the A building’s risk level is based on its clas- years. Thus the case study has focused on certificate of construction (a mandatory sification, use and height. Volume 1 of the experiences of these two countries. certificate that must be obtained prior the 2005 Building Code of Australia con- to the commencement of construction siders all buildings low risk regardless of works) and certify the safety of the build- their class if they are less than 4 stories ing upon completion of construction. The except class 9 (table 5.2).15 Class 9 build- AUSTRALIA AND FRANCE: TWO principal certifying authority is held liable ings are considered high risk due to their EXAMPLES OF GOOD PRACTICE if any issues arise related to the building uses and regardless of their height. More- construction.10 However, inspectors must over, some buildings are considered high Australia: privatizing inspections obtain an annual professional insurance risk because of their importance as class In Australia risk management for con- up to a minimum of AUD 1,000,000 in 3 or 4 buildings. Class 3 buildings house struction emerged in 1999 based on order to be retained in their position. more than 250 guests, motels or guest 8 WHAT ROLE SHOULD RISK-BASED INSPECTIONS PLAY IN CONSTRUCTION? 49 • Category L (Legal aspects—excluding TABLE 5.2 What building classifications does Australia use? seismic risk level): This type of control Building class Use Risk level focuses on the structural strength, the foundation, the framing, the roofing 1 Standalone residence n.a. and the mandatory equipment to be 2, 3, 4 Residential Low for up to three stories used for each step. Medium for more than three stories but less than • Category S (Safety): This category 25 meters concerns the safety of the workers on High for more than 25 meters the construction site. 5, 6, 7 Office building for commercial Low for up to three stories Depending on a building’s class and type, purposes Medium for more than three stories but less than the safety control agency conducts either 25 meters category L or S inspections. High-risk High for more than 25 meters buildings have both types of inspections. 8 Laboratory Low for up to three stories A special category, category PS (Paraseis- mic), is applied to zones prone to seismic Medium for more than three stories but less than 25 meters activity. In this case, all three categories of High for more than 25 meters inspections are mandatory. 9 Building of a public nature High 10 Other domestic utilities n.a. WHAT CHALLENGES HAVE BEEN Note: Buildings in any class with a risk level of 3 or 4 are considered high-risk buildings. n.a. = not applicable. FACED? Source: 2005 Building Code of Australia. Economies seeking to adopt risk-based inspections can face several challenges. houses. Class 4 is the residential part of First, economies with weak legal insti- buildings classified under classes 5, 6, 7, TABLE 5.3 What building classifications tutions will find it nearly impossible to 8 or 9. For example, if an office building does France use for ERP? implement such a complex system. It has one floor with residential apartments, Number of Mandatory requires passing legislation that, among that floor is classified as class 4. people the inspection other things, clearly stipulates catego- Classification building houses required? rization of buildings, identifies qualifi- Risk levels and building classes enable Category 1 More than 1,500 YES cation and licensing requirements for principal certifying authorities to de- private practitioners, calls for strong velop inspections that protect public Category 2 701–1,500 YES oversight mechanisms and calls for the safety. For example, 2 buildings might Category 3 301–700 YES establishment of agencies that are well- be considered low risk because of their equipped and trained to ensure the safe- height. But depending on their uses, 1 Category 4 300 YES ty standards of buildings. Having clear might require more inspections because Category 5a 300 or fewerb NO zoning and land regulations is also key. of the complexity of its construction. In In some economies implementing risk- Note: In addition to ERP, residential buildings up to addition to the risk-based inspections 50 meters high are also classified according to the based inspections has been a challenge that principal certifying authorities deem 5 categories above. because authorities do not know if the necessary, several critical inspections are a. Includes only visitors. building that will be constructed is in a set by law for each building class, includ- b. Refers to small construction works with or without high-risk zone (such as a zone prone to ing standalone residences (class 1) and sleeping quarters. flooding or seismic activity, has natural garages and parking lots (class 10). For Source: 2009 Building and Housing Code of France. reserves, is a historical heritage site, or classes 1 and 10, 7 inspections are re- the like). quired, compared with just 3 for class 7 warehouses.16 (table 5.3). For categories 1 to 4 the Second, enforcement of the legal frame- threshold includes both employees and work is essential to ensuring its success- In France building classifications are visitors, while only visitors are considered ful implementation. The relevant agen- mainly based on occupancy and use, for category 5 (which has more lenient cies must be independent enough to though height also plays a role. Only safety regulations). enforce the law and exercise their right nonresidential buildings that receive vis- to conduct any needed oversight. For itors—such as malls, office buildings or Mandatory inspections are required for example, they must establish mecha- movie theaters (établissement recevant du categories 1 to 4 and are classified into 2 nisms whereby clients can submit com- public, or ERP) and residential buildings main categories: L and S. Each category plaints about their dissatisfaction with up to 50 meters tall are categorized. The has sub-categories that relate to a spe- an inspector, then investigate the case 5 categories for these buildings are based cific part of the building such as framing, and take disciplinary actions against on the number of people they can house roofing or thermal performance. the inspector if the case is confirmed. 9 50 DOING BUSINESS 2014 Corruption can be reduced as well in Ciudad de Guatemala issued a new tech- public authorities. This has greatly ben- these cases; without the proper en- nical manual on construction permits efited clients because if they choose a forcement mechanisms, it becomes that introduced a risk-based approach to private inspector, they can involve the easier to engage in paying bribes to the inspections conducted during construc- inspectors at an earlier stage of the pro- inspectors. Economies with successful tion. Low-risk projects—buildings smaller cess (meaning, before construction even risk-based inspections have strong le- than 3,000 square meters with 3 floors or begins). A public inspector is only in- gal institutions and solid enforcement fewer—were exempted from inspections volved during construction. In 2012, 60 mechanisms. during construction but remain subject to or so private inspectors—including sev- a final inspection. Before, random inspec- eral large corporate inspection firms— Consider Brazil, where the construction tions for low-risk projects occurred about handled 30% of building control work. industry has expressed strong and grow- once a month. Introducing a private alternative to pub- ing demand for risk-based inspections. lic building control has made the process But because of a weak legal framework Finally, economies implementing risk- more efficient and expedited services.22 and poor dissemination of a risk assess- based inspections must develop liability Inspections in the United Kingdom are ment methodology, only São Paulo was and insurance systems. Doing so helps not free of charge, so by having clients able to implement risk-based inspec- hold building inspectors and enforcement choose private inspectors, local public tions—and the system remains limited. agencies accountable and deters them authorities are losing revenue and thus Many practitioners lacked sufficient from delaying the issuance of permits. have an incentive to compete with the knowledge and were not well-trained to Building inspectors in those economies, private sector. properly identify the various types of risk such as Australia, France and the United involved in the different types of build- Kingdom, hold insurance regimes that But much of the success of these econ- ings.17 guarantee compensation in case of de- omies has also been a result of strong fects. But in most developing economies implementation and oversight of the pri- Establishing a conflict resolution mech- implementing such a regime can be a vatized systems. First, a robust system of anism can also be challenging. It entails challenge since insurance systems are qualification and licensing requirements establishing a system where entities not readily available.19 exists for private inspectors. Inspectors in adversely affected by permitting author- these economies have extensive technical ities’ decisions can appeal them. Like expertise, which results in higher compli- the enforcement mechanisms, conflict ance with building codes.23 And enforce- resolution mechanisms can only be suc- WHAT BENEFITS HAVE BEEN ment agencies operate with considerable cessful if there is technical competence, REALIZED? independence and can hold private prac- procedural safeguards and transparent Implementing risk-based inspections can titioners accountable for wrongdoing. processes. For example, Canada’s Build- present enormous challenges, but the Without these necessary safeguards, the ing Code Commission members have the benefits are greater. After France imple- effectiveness of a privatized system can appropriate technical expertise and are mented its Spinetta Law, construction-re- remain limited. appointed from both the regulatory and lated conflicts and litigation fell, protec- industry sectors. The commission’s deci- tion improved for owners and contracting For example, the former Yugoslav Re- sions are binding and hearings on tech- authorities, and building safety, quality public of Macedonia privatized its design nical issues almost never exceed 6 to 8 and compliance with building standards and construction reviews process. Many weeks.18 increased. The reforms also lowered re- requirements and documentation were pair costs.20 streamlined or eliminated. In just one year Another main challenge is securing ad- the time needed to obtain a construction equate resources. Developing a sound Indicators of construction quality—as permit was cut by 22 days and the num- risk management system to implement measured by the percentage of buildings ber of procedures required by 10 as mea- risk-based inspections requires investing for which insurance claims are filed and sured by Doing Business. For inspections, time and money. Risk-based inspections related repair costs relative to the cost FYR Macedonia introduced two catego- involve identifying and assessing the of the building—have also improved. For ries of buildings: those of national impor- risks of every building. Such efforts are instance, repair costs as a percentage of tance and those of local importance, such time-consuming and require staff with construction costs fell from more than as commercial warehouses. The 5 phased technical expertise. Thus sufficient fi- 4% in the 1990s to 3.6% for buildings inspections previously required by the nancial resources have to be allocated to completed after 2001. That these figures State Inspectorate for Construction and training. And to allocate these resources are both low and declining reflects the Urban Planning for buildings of local im- wisely, agencies must be run by individ- system's effectiveness.21 portance were eliminated, and construc- uals who are technically competent and tion oversight can now be performed by can act independently. In 1984 the United Kingdom began independent professionals hired by inves- modernizing its building regulation. As tors. But licensing requirements for engi- Still, economies can start with small- in Australia, builders can now choose neers are not yet robust and oversight of er steps that do not require extensive whether to have inspections conducted their work remains weak. resources. In 2012 the municipality of by licensed private inspectors or local 10 WHAT ROLE SHOULD RISK-BASED INSPECTIONS PLAY IN CONSTRUCTION? 51 10. Environmental Planning and Assessment Act (EPAA) 1979. These classes are 1 CONCLUSION NOTES (standalone houses) and 10 (other domestic This case study was written by Marie Lily Delion utilities such as garages). Introducing risk-based inspections is and Joyce Ibrahim. 11. While technical control agencies are primari- challenging. Among the many prereq- ly responsible for the inspection of buildings, uisites are sound legislation, accurate 1. World Bank, https://openknowledge. they also play a role at the outset with the categorization of buildings and effective worldbank.org/bitstream/han- design and plans of the building. agencies with sufficient resources, well- dle/10986/7671/416300PK.txt?se- 12. Building and Housing Code of France (Code trained workers and legal mandates to quence=2); http://siteresources.worldbank. de la construction et de l’habitation), Arti- conduct inspections. Economies that org/SOUTHASIAEXT/Resources/Publica- cles L111-23 to L111-26, 2009. have successfully implemented such sys- tions/448813-1202436185914/ch4PIIC.pdf. 13. Law on Liability and Insurance System (Loi tems have seen more efficient inspections 2. World Bank Group 2013b. The economies sur l’assurance-construction), Article 10, of their construction industries without are Australia, Austria, Republic of Congo, 1978. Czech Republic, Denmark, Finland, Germany, 14. World Bank Group 2013b. compromising the safety of workers, the Iceland, Ireland, Kenya, Mali, Mauritius, the 15. Building Code of Australia, Volume 1, 2005. public or buildings. Netherlands, New Zealand, Portugal, Slovak 16. Clause 162A of the Environmental Planning Republic, Spain and the United Kingdom. and Assessment Act 1979 addresses Australia privatized its inspection system, 3. Doing Business database. the critical inspections required for each while France strengthened and clarified its 4. http://www.rbwm.gov.uk/web/bc_nine_ category. liability regime. Technical controllers must stages_of_work.htm.; http:/ /ottawa.ca/en/ 17. Martins and others 2011. be licensed, and technical control agencies residents/laws-licenses-and-permits/build- 18. World Bank Group 2013b. are held accountable for building safety. ing-and-renovating/building-inspections 19. World Bank Group 2013b. And while Australia categorizes buildings 5. World Bank Group 2013b. 20. World Bank Group 2013b. based on their uses, France categorizes 6. World Bank Group 2013b. 21. World Bank Group 2013b. 7. Baccarini 2000. 22. World Bank Group 2013b. its buildings based on their occupancy. 8. Independent Commission Against Corrup- 23. World Bank Group 2013b. Though the two countries took different tion Act, Section 3, 1988. approaches, both emerged with far more 9. Building Professionals Board, http://www. efficient construction inspection systems. bpb.nsw.gov.au. 11 Tackling high electricity connection costs: Trinidad and Tobago’s new approach Access to electricity is essential for firms. areas. Alternatively, if a  large share of Yet many entrepreneurs around the world the costs is recovered through tariffs struggle with high costs to connect to rather than through advance lump sum electricity grids. In 2013 the cost to con- payments, new customers enjoy a  sig- nect a single warehouse to a power sup- nificant benefit at the expense of other • Around the world, high connection ply ranged from an average of $19,112  in customers. costs are a barrier to getting South Asia to $38,500  in Sub-Saharan electricity. The getting electricity Africa. Globally the average was $29,134 indicator shows that connection (figure 6.1). Self-supply is much more costs for entrepreneurs are highest costly—often prohibitively so.1 Moreover, UTILITIES HAVE TO BALANCE in Sub-Saharan Africa. high electricity connection costs often go NEW CONNECTION COSTS • The most effective regulatory hand in hand with high transmission and BETWEEN PRESENT AND systems govern connection costs distribution losses.2 FUTURE REQUESTS in a way that is cost effective for Many studies have focused on the bal- utilities and fair for customers. Experts contacted by Doing Business iden- ance between connection costs and tar- • Studies often focused on the tified high connection costs as the main iffs. This case study highlights one way of balance between connection costs barrier to accessing electricity in their striking the right balance between costs and consumption tariffs. But when countries (figure 6.2). That was the case for new and future connection requests. analyzing connection costs, few for all income groups except low-income studies assessed cost allocation economies, for whom a lack of generation Costs for electricity connections are usu- between new customers requesting capacity is the main barrier. ally set by distribution companies and connections and future customers often reviewed by regulators when such who might benefit from them, agencies exist. Because utilities allocate which is the focus of this case costs for new connections between exist- study. UTILITIES SPREAD NEW ing and prospective customers, they also • Trinidad and Tobago lowered CONNECTION COSTS BETWEEN have to balance economic efficiency and connection costs by introducing TARIFFS AND CONNECTION FEES fairness. But it is often difficult to distin- a capital contribution scheme to guish between capital works for specific Every electricity utility has to recoup the resolve the “free rider” issue (which customers and those needed for project- costs of a generation plant, transmission occurs when first customers fund ed growth or safety and reliability. That and distribution networks and to foster the entire construction works, to leaves room for new customers to pay for income for future expansion. One way of the benefit of future customers). investments in the network that will ben- doing so is by levying network costs to • The new scheme was implemented efit other customers as well. new customers, in the form of an advance through extensive collaboration lump sum payment to facilitate infra- among multiple stakeholders, Consider a customer who wants to con- structure works for an electricity supply. including the regulator, electricity nect a warehouse to electricity. The cus- This lump sum is called customer’s cap- utility and entrepreneurs. tomer’s premises could get connected to ital contribution. an existing transformer with sufficient If a customer is not near the existing net- spare capacity, or the utility could install work or the network is already fully used a new transformer. This latter case could and new capacity is required, the cost of happen because a transformer is required extending the network might be high. In for the customer but it could also be that such cases customers have to pay all or the utility has development plans and part of the capital cost—which might be wants to connect future customers to this a  significant barrier to obtaining a  new transformer. Transformers are expensive. connection, especially in low-income Customers can end up paying for more 12 TACKLING HIGH ELECTRICITY CONNECTION COSTS: TRINIDAD AND TOBAGO’S NEW APPROACH 53 FIGURE 6.1 The average cost to connect to electricity varies by region FIGURE 6.2 High connection costs are the main barrier to accessing electricity 45,000 40,000 Others Complicated 35,000 connection High connection 30,000 procedures costs Cost (US$) 25,000 13% 20,000 6% 15,000 11% 42% 10,000 5,000 0 28% Sub-Saharan Africa Middle East & North Africa World average OECD high income Latin America & Caribbean Europe & Central Asia East Asia South Asia & Pacific Poor quality of supply Lack of generation capacity Source: Doing Business database. Source: Doing Business database. than is needed for connection requests, utility has a payment scheme that allows 2006  T&TEC—Trinidad and Tobago’s subsidizing future customers. Explicit customers to pay capital contributions public, regulated electricity utility—got rules on the allocation of costs are essen- in monthly electricity bills. complaints about the costs of connect- tial for fairness to customers. ing to electricity. The most controversial The indicator shows that costs can usu- issue was the capital contribution. Where In addition, connection costs are not fully ally be divided into 2 categories: a clearly the distance of the customer was far from transparent in many economies. Utilities regulated connection fee based on a for- the network or the network was fully used often present customers with individu- mula or set as a fixed price, and variable and new capacity was required, extending al budgets instead of regulated capital costs for the connection that take into the network would increase the overall contribution policies aimed at spreading account the labor and material required. cost. the fixed costs of expanding networks. It Where a  new connection can be made makes it even more difficult for custom- directly to the low-voltage network, reg- Customers paid for extensions (less the ers to assess how connection costs are ulated and fixed fees represent a  larger offset of revenues from the connection spread among their requests and possibly share of the connection cost in high-in- in the third year) required to connect to reinforce the electricity network. come economies. In general, the higher the system. If another customer sought the income per capita is in an economy, a connection the new customer would be the higher is the share of regulated fees in able to use the assets funded by the first the total cost. customer. So a  free-rider problem arose. WHAT HAS THE GETTING There was no mechanism to reimburse ELECTRICITY DATA SHOWN? Sweden is among those that provide clear customers that had funded connection While there are many datasets on en- regulation of fees. For the 140-kilovoltam- assets shared by others whose emer- ergy demand and supply quality, pre- pere (kVA) connection assumed in the gence was not anticipated at the time of viously no global dataset existed on getting electricity case study, costs are original application. benchmarking connection costs across fixed and based on an average for similar economies. The getting electricity indi- projects in the area. Information on fees The legal basis for the capital contribution cator offers an annual comparison of the also tends to be more easily accessible in imposed by T&TEC arose from the T&TEC procedures, time and cost of obtaining higher-income economies—in a  regula- Act, Chapter 54:70 which states that cli- an electricity connection in 189  econo- tion, on a website or through a brochure ents had to pay for new electricity con- mies, with data going back to 2009. Of or board at a customer service office. nections if they were more than 60  feet the 3  indicators, costs vary most. This away from the existing grid. T&TEC pre- study aims to identify bottlenecks and sented individual quotes to customers good practices about calculating costs who had no basis to contest them should for new customers. Economies have TRINIDAD AND TOBAGO’S they want to. A  customer requesting tackled high connection costs in differ- EFFORTS TO MAKE ACCESSING a new connection of 140 kVA for a ware- ent ways. In Japan, it costs nothing for ELECTRICITY FAIRER house located 150 meters away from the an entrepreneur to connect a warehouse Trinidad and Tobago’s strategy for lower- existing network had to pay more than to electricity—the costs of expanding ing electricity connection costs focused $8,000 in Port of Spain in 2009. the distribution network are covered by on finding a fair scheme to allocate costs electricity tariffs. Papua New Guinea’s between new and future customers. In 13 54 DOING BUSINESS 2014 customers paying only for the assets re- more than what it would cost to be quired to connect to a system, excluding commercially viable. This approach ESTABLISHING A CAPITAL the costs of extending and reinforcing the allows a  balanced allocation of costs CONTRIBUTION WORKING distribution system. A  third option fol- because a  new connection is also GROUP HELPED lowed by a  few service providers, where a  source of future revenue. But large Trinidad and Tobago’s regulator, the Reg- the costs of assets for a new connection industrial customers still bear the full ulated Industries Commission (RIC), are deemed part of the general system capital costs of connecting to the net- recognized that the capital contribution and so are recoverable from all users work, and connection costs are small was contentious because the calculation through tariffs or system charges. relative to the company’s turnover. of connection costs was complex and • Involving the private sector. Customers somewhat subjective. In 2006  the RIC can use T&TEC employees or con- established a  working group to review tractors for conducting connection capital contributions. The group was RECOMMENDATIONS FROM works. But T&TEC should prepare comprised of representatives from non- THE CAPITAL CONTRIBUTION a  list of prequalified contractors for governmental organizations, the Cham- WORKING GROUP AND FINAL customers, specify technical criteria ber of Industry and Commerce, Bureau of PROPOSAL BY THE REGULATED and inform customers about the av- Standards, Ministry of Legal Affairs, Elec- INDUSTRIES COMMISSION erage costs of works in various areas. tricity Commission and the RIC. The chair The Capital Contribution Working Group Many economies have opened their of the group was a  representative from submitted its report to the Regulated In- electricity markets to prequalified the Network of NGOs of Trinidad and To- dustries Commission in early 2007, and contractors—offering more options to bago for the Advancement of Women. the report was widely circulated to stake- customers and helping utilities meet holders and the public.3  The document the demand for new connections in The group adopted a comprehensive ap- was finalized in 2008  and implemented a timely, cost-effective way. proach that examined procedures and by T&TEC in 2009/10, making connec- acts regulating capital contributions and tion costs fairer and more transparent. looked into what utilities in other econo- The groups also made 3 main recommen- mies were doing. Their research focused dations for Trinidad and Tobago that have OBSTACLES TO IMPLEMENTING on whether there was a  clear, formal been implemented: THE NEW POLICY capital contribution policy¸ the issues ad- As with any new policy, there was some dressed in the policy (such as for exemp- • Introducing a  reimbursement scheme. resistance from the party administering tions, reimbursement and dispute resolu- To ensure that connection costs are the changes. T&TEC initially found it diffi- tion) and the methods used to determine more widely spread across different cult to get its staff to support the new pol- the capital contribution. users, assets eventually shared by icy. Workers considered reimbursement customers connecting later must be the most burdensome issue because it The group found that globally, service reimbursed to initial customers by required keeping records of the first cli- providers give users different ways to T&TEC (figure 6.3). ent and subsequent ones, along with the connect to electricity networks. One in- • Setting connection costs with revenue works concluded for each. The task is volves customers paying the total costs from electricity supply. T&TEC is re- tedious, as a detailed break-down of the incurred as a result of connecting a new quired to show that a connection is not works and associated costs is needed to load to the system, including the costs of commercially viable without a capital identify future parts that benefit custom- network reinforcement. Another involves contribution and that it should be no ers connected later. T&TEC upgraded its system to track new connections with the required details and provided training to implement the policy. The Regulated Industries Commission also extensively FIGURE 6.3 How does the reimbursement of capital contribution work? publicized the new policy in major news- papers and met repeatedly with T&TEC leadership and distribution staff. First customer paid for 1 the construction of the connection THE SCHEME IS WORKING Utility reimburses customers Later, new customers By 2013  T&TEC had implemented the 3 who paid for the construction 2 request connection to utility. regulator’s recommendations. When in- of the electricity line They can be connected to the line already constructed stalling new connections, the electricity company’s engineers clearly mark the installed equipment and materials and link them with the customer’s records in the utility’s database. If new customers 14 TACKLING HIGH ELECTRICITY CONNECTION COSTS: TRINIDAD AND TOBAGO’S NEW APPROACH 55 request connections, the utility person- Caribbean found that Trinidad and well-informed recommendations and nel inspect the location and verify if the Tobago’s Regulated Industries Com- decisions. surrounding network has been marked mission ranks highest in electrici- • Clearly communicating about the re- earlier. Based on this information, T&TEC ty governance.4  The commission’s form. The Regulated Industries Com- staff calculates how much should be re- strong push for reform of the capital mission conducted a thorough public imbursed to previous customers. contribution policy made it work. relations campaign—including tele- • Involving stakeholders from the start. vision, radio and newspapers—to This reform has allowed for a  broader Bringing in stakeholders from the explain the new policy. People could distribution of connection costs in Trini- beginning and getting the utility on call in during television and radio pro- dad and Tobago. It has also lowered the board was a  good idea. The utility grams to ask questions, an approach cost for connecting a standardized ware- was part of the working group, and that was highly appreciated. Most of house as measured by the getting elec- its views were taken into account at the questions were about reimburse- tricity indicator. After the reform the cost all stages. Public consultations were ment and contestability. of a  connection for a  small warehouse conducted by the Regulated Indus- dropped by more than eight times, to less tries Commission on the Working than $1,000 in 2013. Group’s report and enabled people to NOTES contribute to the process. This case study was written by Maya Choueiri, • Learning from other utilities. The Reg- Caroline Frontigny and Jayashree Srinivasan. ulated Industries Commission and WHAT WORKED WELL? T&TEC conducted extensive re- 1. Foster and Steinbucks 2009. • Having an active regulator. A study of search on reform and learned from 2. Geginat, Gonzalez and Saltane 2012. regulators in Latin America and the global good practices—and so made 3. Regulated Industries Commission 2008. 4. World Bank 2009. 15 Implementing electronic tax filing and payments in Malaysia Taxation is essential for sustainable eco- allows for the collection of required taxes nomic development, and tax administra- at minimum cost. A tax authority engag- tion is a basic function of a successful es in many activities, such as processing state. Taxation also helps make a govern- returns and related information from tax- ment accountable to its citizens. When payers, entering tax return data into a da- • By 2012, 76 of the economies governments spend taxpayers’ money, tabase, matching returns against filing re- measured by Doing Business had they are more accountable to make bud- quirements, processing tax payments and implemented electronic tax filing get decisions transparent and accessible. matching them against assessments, and (e-filing) and electronic payment issuing assessments and refunds. One (e-payment) systems. By 2012, 76 of the economies measured way to boost a tax authority’s efficiency • In 2004 Malaysia’s Inland Revenue by Doing Business had implemented elec- is by expanding its use of information Board (IRB) launched e-filing and tronic tax filing and payment systems. and communication technology. Such e-payment for income taxes. This case study examines Malaysia’s ex- technology can facilitate a broad range of • IRB encountered several perience with modernizing manual tax fil- services, including registering taxpayers, implementation challenges, key ing and payment and moving to a paper- filing returns, processing payments, is- among them the public’s initial less online system. Malaysia shows the suing assessments and checking against reluctance to use the new system. opportunities that technology can pro- third-party information. So IRB increased its promotion vide to taxpayers and governments—as efforts, upgraded the system and well as the challenges that may emerge E-filing systems increase the quality and hired staff to show taxpayers how during the transition. quantity of information available to tax to use it. officers, enabling them to complete trans- • The number of individuals and In 2004 Malaysia’s Inland Revenue Board actions faster and more accurately. Re- companies using e-filing jumped (IRB) spearheaded an initiative to imple- turns filed electronically have much lower from 5% of active taxpayers in ment a system for filing and paying taxes error rates than paper returns and sub- 2006 to 37% in 2012. that would promote electronic, paperless stantially cut the need to impose penal- • The time that businesses need transactions. IRB’s goal was to become ties and other punitive measures to foster to comply with Malaysia’s tax a global leader in tax administration. It compliance. The more efficient handling regulations fell from 190 hours in sought to shift from the conventional way provided by electronic returns allows tax 2004 to 133 in 2012 as measured by of submitting paper forms to earn the officers to issue assessments and refunds Doing Business. public’s trust and confidence. more quickly, and taxpayers know right away if their returns have been accepted Tax systems in developing economies, like by the tax authorities.2 E-filing lowers the those in more developed ones, face both cost of handling returns—allowing ad- new challenges and new possibilities as a ministrative resources to be reallocated result of technological change. Malaysia’s to other tasks such as auditing, customer ongoing reform of its electronic tax filing services and tracking non-compliance. and payment system shows how and un- der what conditions technology can ben- The benefits of e-filing and e-payment efit both tax authorities and taxpayers.1 systems extend to other electronic pro- cesses in the tax authority. E-filing and e-payment allow for better, safer data storage that can be used to implement a BENEFITS OF ELECTRONIC TAX risk management system for auditing and FILING AND PAYMENT enforcement. Automation helps estab- The goal of any tax authority is to estab- lish a good system for tracking case files, lish a system of tax administration that which is essential for effective auditing 16 IMPLEMENTING ELECTRONIC TAX FILING AND PAYMENTS IN MALAYSIA 57 and increases the speed and quality of Chile’s Internal Revenue Service was the e-filing, the time savings partly offset the data provided to auditors.3 In addition, country’s first public agency to adopt on- costs of processing the still-large volume e-filing systems are usually complement- line technology—well before most other of signed paper documents.10 In 1999 the ed by software that standardizes and fa- public services. Electronic methods were IRS introduced an electronic option to cilitates processes for taxpayers, making intended to facilitate tax compliance and replace signed paper documents. In addi- compliance easier. decrease direct interaction with taxpay- tion to lowering processing costs, e-filing ers. Chile is one of the few economies has cut the time required to get refunds— Finally, well-designed electronic systems that have managed to approach nearly making more taxpayers willing to file re- can lower corruption by reducing face-to- 100% use of electronic systems. Online turns electronically.11 face interactions. To ensure that taxes are tax returns were submitted for the first collected efficiently and reduce opportu- time in 1998.7 nities for corruption, a generally accepted principle is that tax authorities should not Chile faced several barriers at the outset MALAYSIA’S EXPERIENCE handle money directly. Ideally, tax offi- of e-filing. Taxpayers had limited Internet Seeking the benefits of electronic tax cials should have little direct contact with access, and tax preparers were reluctant systems and reflecting the government’s taxpayers and so less discretion in decid- to use the new system because they vision of leveraging online technology, ing how to treat them. were unfamiliar with the technology and Malaysia’s Inland Revenue Board (IRB) saw it as a threat to their profession. In launched its electronic system for taxes E-filing is also easy, flexible and con- addition, the revenue service’s informa- in 2004. IRB aimed to increase revenue venient for taxpayers. E-filing makes it tion technology system could not han- collection by improving taxpayer ser- possible to file returns from a taxpayer’s dle the huge congestion of tax returns, vices. The goal was to cut time and cost home, library, financial institution, work- especially in the few days just before the and to allow taxpayers to comply with tax place, tax professional’s business or even deadline. So Chile continuously upgraded obligations more easily, enabling IRB to stores and shopping malls. With an in- its electronic system and offered prefilled maintain a good reputation with taxpay- tegrated e-filing and e-payment system, electronic forms to simplify the process ers even as it widened its tax base. taxes can be filed and paid online from for taxpayers. The tax authority also in- any place.4 troduced ambitious initiatives to over- With the new system, taxpayers can come connectivity shortages by creating complete forms and provide needed pay- a public-private network of more than ment details online instead of sending 880 e-filing centers, providing more than them by mail or taking them to a tax of- GLOBAL EXPERIENCES 30,000 connectivity points. In addition, fice. The online system was developed by WITH AND LESSONS FROM it made arrangements with internet cafes IRB’s information technology department. ELECTRONIC FILING so that taxpayers could use their equip- IRB implemented a roaming public key in- Singapore was one of the first economies ment for free and trained operators at frastructure system that gives users se- to adopt electronic systems in its public access points. It even developed a mobile cure access to sensitive information from administration. In 1992 the Inland Rev- training and awareness unit that traveled any location without having to carry dig- enue Department was replaced by the to different parts of the country to help ital identification. The electronic system Inland Revenue Authority of Singapore, people file taxes online.8 integrated tax filing and payment on one which developed an integrated, comput- server—a major advantage over manual erized tax administration system.5 The use of technology to foster tax com- procedures. pliance by the United States Internal Rev- The authority’s first step was shifting enue Service (IRS) shows that more de- For every tax filing or payment, taxpay- from a hard-copy filing system to pa- veloped economies also face challenges ers have to log in, select and complete perless imaging. Going electronic made in increasing the use of e-filing. The IRS the appropriate forms, sign and submit administrative processes more efficient introduced e-filing of federal tax returns them digitally. An acknowledgment is by freeing staff from unproductive pa- in 1986. Though this system predated received immediately. The e-filing sys- per shuffling, enabling better taxpayer Singapore’s, it was initially less compre- tem automatically calculates the nec- service. The time needed to issue as- hensive. In fact, even though the number essary payment details. It also limits sessments dropped from 12–18 months of electronic returns filed increased over deductions that taxpayers are entitled to 3–5 between 1992 and 2000.6 This time, the potential savings from that in- to based on deduction rules—enabling change allowed staff to work more on crease were partly offset by the ongoing taxpayers to avoid mistakes that would auditing and investigation. Automated use of paper filings for complex returns. result in penalties. standard taxation procedures also made But by 2012 the IRS achieved 80% e-filing the system less dependent on the sub- of major returns.9 In addition, prefilled online tax returns jective expertise of individual tax officers, have been available since 2006, starting reducing the potential for corruption. Re- Initially, e-filing was not entirely paper- with taxpayers basic information and lat- turn processing, auditing and payment less. Until 1999 electronic filers still had to er extended to include their incomes and functions were separated, and officials’ submit signed paper documents. The IRS reliefs. In 2012 IRB enhanced its e-filing attitudes toward taxpayers improved. realized that when taxpayers switched to system by introducing smartphone filing 17 58 DOING BUSINESS 2014 for individual taxpayers. That same year, incentives and services to encourage it introduced organizational e-filing for e-filing. For example, IRB offers a grace company managing directors to enable A CHANGE IN STRATEGY period of 15 days from its official dead- companies to use their digital certificates Because of the low initial participation in line if returns are filed electronically.15 to file returns electronically. Previously, the electronic system, in 2008 IRB ex- In addition, if a tax return is submitted directors had to use their personal certif- panded its promotion efforts, sponsoring late, the IRB penalty is 5% less if the re- icates. seminars, talks and television advertise- turn was submitted electronically. The ments and distributing flyers and pam- charter for IRB clients was redrawn to In addition, IRB introduced automatic re- phlets. IRB also set up booths at con- include a pledge to refund any excess funds. Due to the big number of refund ventions and held roadshows to promote taxes within 30 working days from the cases and to expedite refunds, refunds the electronic system and raise public date of receipt if the returns were filed were directly credited to taxpayers’ ac- awareness, using the slogan “as easy as electronically. counts through electronic fund trans- 1, 2, 3.” IRB also realized the importance fers—reducing the number of unclaimed of involving the private sector and asked IRB continues to encourage taxpayers to checks12. professional bodies such as tax prepar- file online. Among its latest initiatives, it ers and accountants to share ideas on is offering to do presentations at compa- how to enhance the online system. IRB nies with at least 200 employees who also gathered feedback from taxpayers use the service. The use of the online IMPLEMENTATION CHALLENGES through its customer care centers and system has picked up dramatically: by IRB encountered several challenges im- branches. 2012, 37% of active taxpayers filed elec- plementing e-filing and e-payment, key tronically.16 among them is the public’s readiness to At first some taxpayers and tax preparers use it. When the system was introduced reported that the server was slow and in 2004, both Malaysian and non-Ma- often failed. Authorities responded with laysian citizens could choose to file their several upgrades to make it accessible POSITIVE OUTCOMES tax returns manually or electronically. with different browsers. IRB also installed Malaysia’s efforts are showing results. The private sector was not involved in the computers in its offices so that taxpayers Between 2006 and 2011 the share of in- development of the project. Its feedback could file electronically, and hired workers dividuals and companies filing electroni- was sought later. to train taxpayers on how to use the sys- cally increased from 5% to 34% (figure tem. And it launched a program to help 7.1). Over the same period, tax collections Two years into the project, few Malay- taxpayers during the peak filing season. increased from 14.5% of GDP to 15.3%.17 sians were using e-filing. Though tax- Special counters with extended operating Further analysis would be needed to fully payers and tax preparers recognized its hours at all branches were made avail- understand the link between e-filing and benefits, the number of taxpayers using able for the public to submit their returns revenues. the e-filing system remained far below through e-filing. expectations, with individuals and firms IRB’s ongoing efforts to improve its elec- using e-filing accounting for just 5% of A tax authority gains the most benefits tronic tax system have lowered the ad- the taxpayer population in 2006.13 There from e-filing when it achieves 100% ministrative burden of complying with may be many reasons for this initial use of the online system for filing and corporate tax obligations as measured by lack of enthusiasm. When tax systems paying taxes. Accordingly, IRB provided Doing Business. In 2006 it took 24 fewer change, taxpayers and tax authorities take time and incur costs adapting to and adopting them. FIGURE 7.1 Since 2006 e-filing usage has jumped among individuals and companies in Malaysia The low use of the electronic system was mainly due to the initial reluctance 40 of Malaysian taxpayers to abandon pa- 35 33.9 32.2 per-based processes. Studies were con- 28.9 30 ducted to analyze taxpayers’ intentions 25 23.4 to file electronically and their willingness to do so.14 Uncertainty about the security 20 14.5 15.2 14.7 14.9 15.3 15 14.3 13.8 and privacy of information transmitted online was one of the reasons for low use 10 5.0 of e-filing. The new system also created 5 anxiety for users uncomfortable with the 0 technology. Returns had to be complet- 2006 2007 2008 2009 2010 2011 ed online; users could not complete soft Tax revenues (% of GDP) Number of e-filers (% of total taxpayers) copies of their returns offline and upload them to IRB. Source: World Bank, World Development Indicators database; Malaysia Inland Revenue Board data. 18 IMPLEMENTING ELECTRONIC TAX FILING AND PAYMENTS IN MALAYSIA 59 FIGURE 7.2 Malaysia’s electronic filing system has eased compliance with tax obligations for businesses NOTES This case study was written by Joanna Nasr. 200 190 190 40 166 180 Payments (number per year) 35 1. Bird and Zolt 2008. Time (hours per year) 160 35 35 145 145 145 2. Edwards-Dowe 2008. 133 133 133 30 140 35 3. Bird and Zolt 2008. 120 25 4. Edwards-Dowe 2008. 100 20 5. World Bank 2000. 80 15 6. World Bank 2000. 60 13 13 13 7. Alvarez Voullième, Capdevila de la Cerda, 12 12 12 10 40 5 Flores Labra, Foxley Rioseco and Navarro 20 Haeussler 2006. 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 8. Dohrmann and Pinshaw 2009. 9. Electronic Tax Administration Advisory Time Payments Committee 2012. 10. GAO 2002. Source: Doing Business database. 11. Kopczuk and Pop-Eleches 2005. 12. Malaysia Inland Revenue Board data. 13. IRB data. This is the percentage of taxpayers who used e-filing but did not necessarily pay hours to file taxes than in 2005 (figure taxes electronically. 7.2). By 2007 far more small and medi- 14. Abdul Aziz and Idris 2012; Azmi and Ka- um-size companies were filing electron- CONCLUSION marulzaman 2010. ically, further reducing time to comply Electronic systems for filing and paying 15. Malaysia Inland Revenue Board website. with corporate income and labor taxes taxes, if implemented well and used by For corporate taxpayers, the due date is 7 obligations from 166 hours in 2006 to most taxpayers, benefit both tax au- months from the closing of account. If a 145 in 2007. In 2010 tax preparers de- thorities and taxpayers. Malaysia’s ex- company’s accounting period ends with the ployed new software linked to IRB’s e-fil- perience has shown the opportunities calendar year (which is usually the case), the deadline for manual submission is the end of ing system. In addition, IRB improved its that technology can provide as well as July, with an additional 15 days if filings are e-filing system and introduced online fil- the challenges that may emerge as the submitted electronically. ing of tax estimates. These improvements users are phasing in the change over 16. Malaysia Inland Revenue Board data. cut compliance time to 133 hours a year. time. 17. World Bank, World Development Indicators database. 19 Implementing trade single windows in Singapore, Colombia and Azerbaijan An economy’s competitiveness is driven enables consignments to be categorized by many factors, including how quickly, more easily based on the associated risk reliably and cost-effectively the private by allowing creation of trader profiles, sector can trade goods. Today’s manufac- limiting physical inspections to risky turers and agricultural producers operate cargo and potentially making trade pro- • Trade single window systems can in a global supply chain. Thus an efficient cedures more secure and efficient. By cut trade times and costs by making international trade system can increase combining a portal where up-to-date in- information flows more efficient economic opportunities and improve live- formation on tariffs and other legal and and streamlining trade procedures. lihoods—especially in poor economies procedural requirements are available • Implementing a single window with small domestic markets. and by integrating a payment system, du- system involves many stakeholders ties and other charges can be paid more and requires long-term But in many parts of the world, interna- quickly and accurately, raising govern- commitment from government tional traders must spend a lot of time ment revenues. and business. preparing and submitting information to • Systems must fit the environment government offices ranging from customs Today 73 economies have single window and level of development where to port authorities, each with its own systems of varying complexity.2 Export- they operate. rules and form requirements. These re- ing and importing a standardized cargo • Singapore’s TradeNet system, in porting requirements are often confusing, container is faster in such economies. In operation since 1989, has evolved overlapping and onerous. In Madagascar addition, fewer documents are required into a highly integrated virtual the government offices involved in trade for importing, but the impact is smaller platform. span 350 kilometers, and hard copies of than the impact on time—an average of • Colombia’s Single Window for forms had to be submitted to each until 6.6 documents in economies with single Foreign Trade, launched in 2005, an electronic platform introduced in 2011 window systems compared with 7.8 in has adopted a gradual approach, transformed the document submission those without—underscoring the point adding functions and integrating process and reduced delays (see the that single window systems are mainly agencies over time. chapter on trading across borders). making submission of information more • Azerbaijan has sought to learn efficient (figure 8.1). from other economies while A single window system can improve implementing its single window Using a single window to lodge informa- information flows by sharing needed system. tion can even fight corruption by reduc- information with all parties involved in trade, including private participants such ing interactions between traders and au- as banks and insurance companies and thorities. And it can make the clearance public agencies such as immigration and process more predictable and enhance vehicle registration authorities. The key transparency. Among the 73 economies concept for an effective system is to en- with single window systems, 86% make able traders to submit standardized infor- information on duties and tariffs publicly mation and documents through a single available, while only 54% of the other 110 gateway, eliminate redundant processes economies measured by Doing Business by traders and government agencies and do so. improve coordination and cooperation be- tween authorities.1 Reducing multiple data Though a single window system brings submissions to different agencies helps considerable gains, implementation is a minimize errors during data entry too. major undertaking involving many stake- holders and requiring long-term com- Single window systems have other bene- mitment from multiple players in gov- fits. One that collects data systematically ernment and business.3 Implementation 20 IMPLEMENTING TRADE SINGLE WINDOWS IN SINGAPORE, COLOMBIA AND AZERBAIJAN 61 From vision to implementation FIGURE 8.1 Economies with single window systems spend less time preparing documents Singapore’s government created a steer- and clearing customs ing committee for TradeNet to oversee the conceptualization of a national elec- 14 tronic data interchange system for trade declarations and permits. Three subcom- 8 8 mittees—1 each for sea shipping, air ship- 7 ping and government agencies—were 4 2 then formed to improve exporting and importing processes, and to specify func- Import Import Import tional requirements and propose data time time documents standards. Before TradeNet some clear- Document preparation Customs clearance (number) (days) (days) ances were done manually and no overall Economies with no single window system Economies with single window system computer system coordinated them. Ev- ery subcommittee developed profiles of essential trade documentation activities Source: Doing Business database. and cut the more than 20 forms used in international trade to a single online form for nearly all trade. This form was the core takes many years and might have to be of the new computerized system. done in phases. Though their overarching goals are the same, single window sys- SINGAPORE The government created a private com- tems differ greatly, highlighting the need Singapore’s single window for trade—Tra- pany to manage TradeNet, which in to adapt them to each economy—taking deNet, which began operating in 1989— 1988 led to the formation of Singapore into account the computerization of us- began as an electronic data interchange Network Services, now known as Crim- ers, internet connectivity and the capacity system that allows computer-to-com- sonLogic. Though funded by government of implementing bodies. puter exchange of structured trade agencies, the company is structured as a messages between the government private, for-profit firm. The government This case study describes the experiences and members of Singapore’s trading reasoned that this approach would not of Singapore, Colombia and Azerbaijan. In community.4 require it to bear the cost of operating a the late 1980s Singapore became one of nationwide network of infrastructure and the first economies to embrace the single After experiencing a recession in the services. Each account user pays $20 a window concept, and it has evolved into 1980s, Singapore’s government estab- month and less than $3 per transaction or a highly integrated virtual system, recog- lished a high-level committee to review permit. The first transaction on TradeNet nized as global good practice. Colombia’s the weaknesses of the economy and was a shipping application submitted on single window was launched in 2005 and develop strategies to improve economic January 1, 1989. By the end of that year has also developed in stages. Today the competitiveness. One of the commit- TradeNet handled 45% of documentation system links 21 trade entities and is contin- tee’s recommendations was to increase for sea and air shipments in Singapore. uously adapting its system to make things the use of information technology in more efficient for traders and government. trade. Azerbaijan’s single window is the newest Overcoming obstacles covered in this chapter and provides a The government had previously estab- Early on, the main challenge was to con- revealing contrast to Singapore’s mature lished a 2-day standard for normal pro- vince users to switch to electronic trade system. Azerbaijan launched its system cessing of trade documents. But traders declaration. Singapore adopted a phased in 2009 and so is still in the early stages wanted quicker turnaround for just-in- approach to minimize the efforts involved of implementation. But the government is time inventory management and deemed in making the change. First it implemented leveraging its position as a latecomer by that waiting 2 days for normal processing electronic processing and approval of trade learning from other economies. (which could extend to 4 days for permit permit applications for noncontrolled and approvals) was too long. nondutiable goods, later extended to con- By choosing 3 economies in different trolled and dutiable goods. In the initial regions with different degrees of single So the government embarked on a phase the system was piloted on 50 users. window implementation, this case study large-scale effort to streamline the reg- Even after the system was extended, using aims to show the various approaches that ulatory processes involved in approving it was voluntary for more than 2 years and governments take and the challenges trade permits. Committees of senior did not become mandatory until 1991. encountered of pursuing effective single government officials and business lead- windows. The case study does not aim to ers were created to ensure sufficient Singapore also launched a nationwide promote a particular type of single win- backing for using technology to reengi- campaign to promote the system and dow system nor endorse the experiences neer and improve trade regulations and smooth the transition to it. Even today, of these economies. processes. when the government rolls out major 21 62 DOING BUSINESS 2014 changes to the system, it deploys mass Unica de Comercio Exterior (VUCE) in Features and implementation marketing and communication programs Spanish—in the early 2000s.7 After The single window connects 21 public to raise awareness and prepare users. years of financial crises and economic agencies involved in foreign trade—mostly slowdowns, in 2002 the new administra- ministries and health and safety entities— While promoting the new electronic tion made modernizing public agencies and 3 private companies that provide system, the government recognized the and services a high priority. As part of a e-signature certificates and legal informa- challenges facing some businesses. Some wide-ranging e-government initiative, tion on registered traders. The single win- companies were more computerized, so the Ministry of Commerce, Industry and dow links them with importers, exporters, adjustments and burdens imposed by Tourism introduced the single window for customs agents and brokers through an the new system differed. The govern- foreign trade with the support of the Min- online platform that allows users to re- ment provided training and assistance istry of Information and Communications quest procedures, approvals, authoriza- for operations. Singapore Customs con- Technologies. tions and other certifications needed to ducted courses, and public terminals import and export goods. In addition, tax were installed for small companies. And The push for new technology in the pub- identification and business registration to encourage companies to switch, man- lic sector came at a time when Colombia records are available to the agencies con- ual processing fees were raised to S$10 was becoming increasingly integrated nected to the system. a document, while TradeNet users paid with global trade markets. Negotiations S$6.5 Thanks to such initiatives, today for a free trade agreement with the Unit- The single window is being implemented TradeNet handles more than 30,000 dec- ed States began in 2003 and went into in stages. The first involved the import larations a day, processes 99% of permits force in 2012, while other accords were module, which handled import regis- in 10 minutes and receives all collections negotiated with the European Union, tration requests and import licenses for through interbank deductions.6 Israel, Japan, the Republic of Korea and certain products. By November 2006, af- Turkey, among many others. The public ter the module’s gradual rollout, all such and private sectors agreed on the need to requests were made electronically. That What’s next? address the bureaucratic, uncoordinat- same year the government introduced the Since 2007 Singapore has been pushing ed, inefficient nature of significant parts export module for export authorizations. to extend aspects of TradeNet to com- of the public administration. The gov- The third component, the single foreign mercial transactions in the trade commu- ernment also wanted better information trade form module, went online in 2008 nity through TradeXchange. This system systems. and integrates registers of domestic pro- includes trade-finance transactions (for ducers and handles some export quota example, cargo insurance applications Many ministries and public agencies in- requests. and supporting documents for factoring volved in foreign trade were working in applications) and commercial documents isolation, sharing little or no information Existing laws and regulations offered the (including commercial invoices and way- on trade procedures despite requiring es- legal basis for using electronic signatures bills). The government envisions achieving sentially the same information from users and payments, though implementation a more seamless flow of information along and each other. Depending on the type of was not always easy. For example, some the supply chain. But as in other econo- good exported or imported, traders had to banks and companies were initially un- mies with similar initiatives—u-TradeHub visit and complete similar procedures at prepared to conduct payments online. in the Republic of Korea, the Digital Trade the different agencies in charge of issuing & Transportation Network in Hong Kong permits and approvals—such as the Co- In 2010 a fourth module of simultaneous SAR, China—the system is yet to be em- lombian Agricultural Institute, National inspection was launched. Key among its braced by the business world at large. Institute for the Surveillance of Drugs and features is a system to facilitate exchange Food and Ministry of Commerce, Industry of information among control entities and Singapore is an active member of the and Tourism. This led to duplicated pro- anti-narcotics agencies so that inspec- Association of Southeast Asian Nations cesses, inefficient controls and reduced tions can be conducted simultaneously. (ASEAN), a regional body that has em- transparency in public administrations. The current scope is for containerized braced the concept of single window For traders it increased delays and trans- maritime exports. systems and has an ambitious goal to es- actions costs. tablish an ASEAN-wide single window by 2015. Plans call for integrating members’ After consulting with stakeholders, re- From resistance to endorsement national single windows so that a single viewing the process and identifying bot- At first, users and the officials in charge submission of information suffices for all tlenecks, Colombia’s government estab- of processing requests resisted switching ASEAN members. lished an action plan and created a task from the paper-based system. But their force to lead efforts to harmonize re- resistance eased thanks to the staged quirements, procedures and documents implementation of the modules, each among the entities involved in foreign featuring transition periods and training COLOMBIA trade. That led to the creation of the sin- and outreach for all the parties involved. Colombia began developing its single win- gle window for foreign trade, which be- Officials also educated and trained users dow system for foreign trade—Ventanilla came operational in early 2005. through conferences, workshops, official 22 IMPLEMENTING TRADE SINGLE WINDOWS IN SINGAPORE, COLOMBIA AND AZERBAIJAN 63 communications and e-learning soft- for export and import through a separate Furthermore, a logistic module to link ware. Moreover, the private sector tested system. Furthermore, though the single public and private users to facilitate the electronic procedures through the single window allows traders in Colombia to information exchange at ports and air- window before they were fully operation- conduct processes related to approvals ports will be developed. al, making evident the advantages of the and authorizations electronically, reliance system from an early stage. on paper and manual procedures during importing and exporting persists, creat- The single window has provided benefits ing processing delays that slow the flow AZERBAIJAN to entities involved in trade, increasing of trade transactions. The government of Azerbaijan has long efficiency and cutting times and costs. considered establishing a single window According to government sources, the The government recognizes these con- system a key step toward modernizing system streamlined 135 procedures and straints and is examining how to ensure customs services and improving the trade 35 forms needed for importing into 1 step that all agencies involved in trade reach environment. The desire for a single win- for traders, eliminating the need to visit the desired levels of efficiency. A 2012 de- dow has been further motivated by the agencies, reducing reliance on messen- cree established time limits for the agen- need to simplify and expedite exchanges ger services and minimizing the use of cies linked to the single window. Between of information between the public and hard copies. The average response time 2012 and early 2013 that decree helped to private sectors and to increase transpar- has dropped by about 5 days for requests cut response times for import registration ency in trade.11 With these goals in mind, made at territorial offices that require ap- requests at the Ministry of Commerce, in 2008 the president of Azerbaijan made proval from an agency linked to the single Industry and Tourism by more than 95% the State Customs Committee the lead window.8 In addition, it takes 30% less (figure 8.2). authority for controlling goods and trans- time to issue a license requested through portation crossing state borders.12 the system.9 In addition, Colombia’s single window system is being reengineered to opti- The system has enhanced the safety and mize business processes. In addition to Choosing from global good integrity of trade transactions and gener- enhancing data management, the effort practices ated more reliable data on foreign trade aims to standardize the information in As a first step, the State Customs Com- procedures and volumes for customs and line with international standards. As a re- mittee analyzed the process for inspect- other government agencies. There have sult some functions of the single window ing goods and transportation passing also been gains for the entities linked to were made inactive in late 2012 and will through border checkpoints. It also stud- the single window for foreign trade. Be- not become operational again until 2014. ied global good practices for implement- sides better coordination and lower costs, ing a single window and researched inter- the system has enabled agencies to ex- The Colombian government is working national norms and standards. pand their geographic reach and increase to include new functionalities for the 4th users. Updated equipment and electronic module of simultaneous inspection sys- The government considered 3 types of systems are helping agencies improve tems for exports and to develop a similar common single windows. The first is internal processes as well—a benefit not system for imports. A risk management based on the principle of a single au- originally anticipated. The system has in- module for reviewing and approving im- thority, where customs authorities are creased use of e-payment systems and port requests according to established responsible for exercising or coordinat- e-signatures for procedures that go be- criteria is planned for launch in 2014. ing all border control functions for other yond foreign trade. According to an index that assesses e-government, Colombia ranks 43rd in the world, second only to Chile among Latin American and Carib- FIGURE 8.2 Response times for import registration requests plummeted at Colombia’s bean economies.10 Ministry of Commerce, Industry and Tourism between 2012 and early 2013 1.5 A work in progress 1.2 Despite all the improvements, Colombia’s move toward a fully integrated single win- 0.9 Days dow system is still a work in progress, and challenges remain. The speeds at which 0.6 the different entities linked to the single 0.3 window have implemented electronic and streamlined procedures internally 0.0 Jan–12 Feb–12 Mar–12 Apr–12 May–12 Jun–12 Jul–12 Aug–12 Sep–12 Oct–12 Nov–12 Dec–12 Jan–13 Feb–13 Mar–13 Apr–13 have varied. For example, the Colombi- an National Tax and Customs Authori- ty (DIAN) is electronically linked to the single window but handles declarations Source: Colombia Ministry of Commerce, Industry and Tourism. 23 64 DOING BUSINESS 2014 agencies. The Netherlands and Sweden responsible for controlling and checking that 29 customs checkpoints at the state use such a system. The second type is a all required permits and certificates for border are to follow the single window single system, which collects standard- goods crossing the borders. While traders principle—meaning that the single win- ized data from traders, then processes no longer interact directly with relevant dow covers all of the country’s customs and distributes it to all agencies involved agencies (veterinary, phytosanitary and posts.17 in international trade. The United States quarantine agencies), these agencies still uses such a system. The third type is monitor the clearances performed by cus- an automated system, where traders toms on their behalf. This approach has Building on initial successes submit a single electronic declaration helped to eliminate duplication of control The efforts to implement a single win- to relevant authorities for processing function at the border and has simplified dow were well received by the private and approvals and these agencies send document processing. sector, and even in its initial phases the users electronic releases and approvals. single window system helped reduce Mauritius and Singapore use this type of Introduction of the single window has also waiting times for customs procedures at single window.13 led to the development of a central data- the border from 2 to 3 hours to 15 to 20 base used by various government authori- minutes.18 Azerbaijan chose to implement the ties. It gathers information on the types of single authority model, which involved goods and transportation crossing the bor- Most small and medium-size enterprises, transferring certain responsibilities from der, the exchange of electronic certificates however, still physically submit customs relevant agencies to the Customs Com- among relevant ministries, pre-arrival in- declarations and supporting documents mittee. formation for declared goods and pre-ar- for customs clearance. In May 2011 the rival notices for transportation crossing president signed a decree requiring gov- the border, reports on violations of cus- ernment agencies to introduce electronic Implementation toms rules, financial reports of traders and services as a first priority.19 Plans are to Before the introduction of single window reports on savings in foreign currency.15 mainstream electronic submission of all the same documents had to be submit- documents for customs clearance, intro- ted multiple times to various authorities Azerbaijan’s single window system is duce e-signatures and e-payments and operating at the border. Each authority fully financed by the government. As a integrate information systems of other (such as veterinary, phytosanitary and first step, an automated customs clear- state agencies such as the railway, air- quarantine agencies) relied on their local ance system was implemented at inland ports and Caspian seaports by 2016. databases, which were not connected border crossings on January 1, 2009 and electronically. Such lack of coordination became available to users free of charge. hindered control and coordination at the Implementation continued through 2011 border as well as caused delays for the in Baku and Sumgayit.16 In addition, an ar- LESSONS traders. ticle on the single window was included in Single window systems can benefit the the new customs code that entered into entire trading community, public and pri- To prepare for the transition to the single force on January 1, 2012. It establishes vate, by streamlining complex systems of window, the Customs Committee estab- lished a commission to implement the new system. The government identified the main authorities to be integrated into the single window system as the Cus- toms Committee, Ministry of Agriculture, BOX 8.1 United Nations recommendations for establishing trade Ministry of Health, Ministry of Internal single window systems Affairs, Ministry of Taxes, Ministry of Transport, Central Bank, State Road Po- The UN has identified key factors for successful implementation of single lice, State Committee on Standardiza- windows: tion, Metrology and Patents, a state sea • Political will administration and a state nuclear and • Strong lead agency radiological agency under the Ministry of • Partnership between government and trade community Emergency Situations. Among the chal- • Establishment of clear project boundaries and objectives lenges for the State Customs Committee • User friendliness and accessibility was to prepare its staff to work with the • Enabling legal environment new system. The government improved • International standards and recommendations the staffing of local customs authorities • Identification of possible obstacles and developed hardware and software for • Appropriate financial model for the system the system.14 • Communications, promotion and marketing Upon the single window implementa- Source: UN/CEFACT 2005. tion, the Customs Committee became 24 IMPLEMENTING TRADE SINGLE WINDOWS IN SINGAPORE, COLOMBIA AND AZERBAIJAN 65 intertwined and duplicative data submis- Overcoming behavioral hurdles 1. UN/CEFACT 2005. sion. The need to make trade more effi- requires persistence 2. Doing Business database, based on infor- mation from local experts. Eighteen have cient is greater in a globalized economy, The 3 economies studied show that mov- a single window system that links relevant where fast and cheap delivery of goods ing from a paper-based to an electron- government agencies electronically, 55 a is essential. Governments considering ic system requires behavioral changes system that does so partially. the implementation of such systems can among users in both government and the 3. UN/CEFACT 2005. look to other economies to learn what has trading community. People used to writ- 4. This section is based on Koh Tat Tsen 2010; worked well and what had to be overcome ing information in a paper-based system UNECE 2010; Crown Agents 2012, and input for a smooth transition to a new system. must be trained to enter it on a computer, from Singapore Customs. and may feel that it takes longer to do so. 5. Neo and Long 1994. Though the overarching principles and Moreover, the switch might require ad- 6. All fees, taxes and duties are computed au- motivations for implementing single win- ditional investments, such as computer tomatically and deducted from the traders’ bank accounts. dow systems are the same, the systems purchases and internet connections. For 7. This section is based on WTO 2011; Crown in Azerbaijan, Colombia and Singapore developing economies adequate elec- Agents 2012; Fuentes 2010; Rodriguez 2011; differ enormously. The maturity and lev- tricity supply might also be a large con- Ulloa Urritia and Constain 2012; UNECE el of integration of these systems vary, straint. Thus the authority in charge of 2009. partly because of differences in when implementation must have the patience 8. Ministerio de Comunicaciones, Republica de they started being implemented. As im- and persistence to ensure sufficient time, Colombia 2008. portant, these economies have learned training and outreach. 9. World Bank Group 2013a. from their peers and developed systems 10. UNDESA 2012. adapted to the environment and level of 11. Customs Committee of the Republic of development where they operate. Collaboration with the private Azerbaijan. 2007. “Decree of the President of Azerbaijan #1925 from February 1, 2007 sector is essential establishing a State program on develop- Still, Azerbaijan, Colombia and Singapore The business community must be fully on ment of customs system in the Republic of offer some common lessons. To success- board with the move to a single window Azerbaijan during 2007–2011." Available at fully implement single window systems system, and its needs properly addressed. http://www.customs.gov.az/ru/abr11.html economies must do so through strong Businesses must be involved from the 12. Customs Committee of the Republic of political will and commitment. Moreover, design stage through implementation. Azerbaijan. 2008. “Decree of the President to sustain momentum for reform over Moreover, they should have opportunities of Azerbaijan # 12 from November 11, 2008 many years and move things forward, it to provide feedback. Colombia used sat- on the implementation of the principle of is crucial to have a lead agency as well as isfaction surveys to identify issues, and single window when checking goods and collaboration between government and Singapore provided facilities for online methods of transportation crossing the borders of the Republic of Azerbaijan the trade community (box 8.1). inquiries to maintain open, positive rela- 13. Mirzoev 2009. tions between the government and users 14. State Customs Committee of the Republic of of its single window system. Azerbaijan, 2013. A single window system is a long- 15. UNECE 2011. term commitment 16. Ahundov, A. “Azerbaijan Customs Extends Singapore’s single window system is Legal basis must be established the Application of the Single Window Princi- more than 20 years old and still evolving. Single window systems require changes pal.”Trend, September 12, 2011, http://www. Yet there are many nonperforming sin- to procedures in customs agencies and trend.az/capital/business/1930232.html. gle windows around the world. A single affect many other authorities. To ensure 17. Customs Code of the Republic of Azerbaijan. window is analogous to a complex piece a smooth transition, a clear and compre- 18. State Customs Committee of the Republic of Azerbaijan. 2013. These efforts were recog- of machinery with many moving parts: hensive legal basis must be established nized in the Doing Business 2010 report. it only needs 1 faulty part to derail the for implementation of the new system. 19. Customs Committee of the Republic of entire system.20 Perhaps some projects Azerbaijan. 2011. “Decree of the President were too ambitious or expensive, lacked of the Republic of Azerbaijan # 429 from high-level government commitment or May 23, 2011 on some measures in the funding, or were poorly managed. As NOTES area of electronic services provided by the seen in Colombia, some governments This case study was written by Mikiko Imai government." take an incremental approach—adding 20. UNESCWA 2011. Ollison, Iryna Bilotserkivska and Robert Murillo. functions and integrating more entities over time. 25 Improving court efficiency: the Republic of Korea’s e-court experience Fair, speedy trials are essential for small enterprises embroiled in disputes. If business disputes take months or even THE COMPUTERIZATION OF years for courts to resolve, small firms KOREAN COURTS might not have the financial strength For Korea efforts to achieve well-func- • Korea was a pioneer in using to stay in business that long, regardless tioning e-courts started in the late 1970s, electronic features to streamline of trial outcomes.1 In such cases justice when visionary judges sought to create court processes, launching delayed is justice denied. Though small an orderly database of cases flowing electronic case management in the and medium-size enterprises usually try through courts. After a group of judges mid-1980s. to avoid going to trial, effective contract started recording some cases on floppy • The electronic case filing enforcement systems matter for them.2 disks, in 1979 the judiciary contacted the system—which allows for Efficient courts and enforcement reduce Korea Institute of Science and Technol- electronic filing of civil, informality, improve access to credit and ogy to study the feasibility of electronic commercial, administrative and increase trade.3 judicial proceedings. Convinced of the family-affairs cases and will soon benefits of using information technology integrate insolvency cases—began E-government has been adopted by pol- in courts, judges started creating more operating in 2010, and by June icy makers around the world to increase advanced databases and developing case 2013 almost half of civil cases were efficiency. Korea ranks first in the world management software. e-filed. on the E-Government Readiness Index, a • E-court solutions in Korea mainly composite measure of the capacity and Before word processing software was encompass features to help judges, willingness of economies to use e-govern- introduced in the early 1980s, Korean facilitate the filing of cases for ment for development.4 judges faced challenges such as writing litigants and inform the public judgments by hand and otherwise deal- about case outcomes. ing with a paper-based system. Though An e-court is a suite of services that • Savings from the implementation some judges lacked basic information entails minimum use of paper from the of e-court systems can be technology skills, Korea decided to start moment a case is filed until its disposal. substantial and result from a streamlining court processes through With e-courts, information is captured reduction in the use of paper, the computerization. Efficient processes, in- and passed on digitally, data exchange time spent in court, the need for creased transparency and better acces- is not fragmented and case histories are storage space, as well as easier sibility sought to increase public trust in complete and ready on demand, case archiving of documents and a the judiciary. management is automated, correspon- general streamlining of processes dence is exchanged electronically, fee and services. In 1986 the case management system payments are dealt with through dedi- cated websites and forms that simplify was launched. This platform enabled in- and streamline court proceedings are ternal court users such as clerks and judg- available to court users online. In Seoul es to search all civil cases in the database. attorneys and litigants can file lawsuits It was not easy to convince court users electronically. Lawsuits are automatical- to change how they worked. But the new ly registered through the electronic case system had the potential to help judges filing system, and then assigned to a deal with their caseloads more efficiently. judge who can access the corresponding Korea invested considerable resources in files, organize and schedule cases and making the system as efficient and user start processing claims. friendly as possible. 26 IMPROVING COURT EFFICIENCY: THE REPUBLIC OF KOREA’S E-COURT EXPERIENCE 67 A master plan for creating e-courts was are registered with the system—but only Korean judiciary, $180 million went to in- then conceived and the case management 20%, or approximately 2,500 attorneys formation and communication technology. system expanded and shifted from a client use it regularly. In 2012 lawyers filed just and server system (a centralized server over a third of the nearly 1 million cases The return on investment from comput- accessible only in specific locations) to a electronically. Every month more attor- erizing the judiciary cannot be quantified web-based system (accessible through a neys are using the new system, attracted in a single way. Research on courts in the web browser), allowing external users to by its convenience, including: U.S. state of New York found that reduc- search the database of cases. In addition, ing the need to travel to a courthouse electronic signatures and digital certifi- • 24/7 access to registries and court and eliminating the requirement to serve cates (for safety) were added to the sys- documents. the opposing party could save $75–95 tem and—thanks to a nationwide informa- • Easier, faster access to information for each document.7 Given the number tion network—immediate national data on that no longer requires a trip to court. of cases e-filed per year, the savings are court activities became available, allowing • Increased transparency because liti- significant. E-courts can also help level for better resource allocation in courts. gants can also access the system. the playing field between small and large • Document security, guaranteed by law firms, especially because small firms E-filing of cases ensures better record- a high-tech information technology have fewer staff and benefit more from ing and faster processing. In 2010 Korea system. not having to visit courthouses.8 launched the electronic case filing sys- tem, which enables electronic submis- Convincing users to transition to e-filing sion, registration, service notification and requires training and adjustment on both access to court documents. To implement sides of the electronic platform. It might FUNCTIONS OF THE E-COURT this system, Korea had to modernize its also require financial incentives. For ex- SYSTEM information technology infrastructure ample, Korea recently cut court fees by Approaches to e-courts vary by economy and amend laws and regulations to shift 10% for lawyers who use e-filing. An elec- depending on the priorities of the judi- to paperless approaches. The system al- tronic docket viewer that allows lawyers ciary. The tools available to court users lows for e-filing of civil, commercial, ad- to manage multiple lawsuits in different in Korea have regularly expanded (table ministrative and family-affairs cases, and jurisdictions was also implemented. 9.1). The system now mainly encompass- will soon integrate insolvency cases. It es features dedicated to help judges (case enables some judges to adjudicate up to Another challenge was to secure funding management system and judge support 3,000 cases a year, manage up to 400 a to maintain and enhance the system. Ko- system), facilitate the filing of cases for month and hear up to 100 pleas a month.5 rea invested about $20 million in devel- litigants (e-filing) and inform the public oping the e-court system, and about as (publication of cases). much will be needed to integrate new fea- tures by 2015. Maintenance fees and data In the two months after the launch of the CHALLENGES WHEN preservation cost about $30 million a year. e-filing system for civil cases approxi- TRANSITIONING TO E-COURTS In 2012, of the $1.8 billion budget for the mately 5% were filed electronically. This The popularity of a new system depends on its user friendliness, and it is some- times difficult to anticipate the needs of TABLE 9.1 Korea’s courts have a range of features and support systems users at the design stage—in this case, if technicians are not familiar with legal pro- Case Management System E-courts System ceedings or if judges are not well-versed • Docket System ECF E-Courtroom in information technology. According to a • Case Allocation System Korean judge, “The users are the heart of • Case Filing System • Electronic Money • Standard any judicial [information technology] sys- • Calendaring System Claim E-Courtroom tem; to develop any such system efficient- • Service System • Electronic Entrusting • Audio Video ly you must know what the people want, • Payment System Recording, Video- what they need.”6 In other words, a step- • Deposit System • Electronic Property Conferencing • Case Files Archiving Inquiry by-step approach should gradually imple- • Common Service System ment the desired system. Korea did not go paperless immediately; it started with Judge Support System Public Information Service paper-on-demand to allow users to adapt • Case Workflow System • Court Homepage and then moved to a paperless system. • Groupware • Case Information • Decision Support System • Certificate Issuance Despite the system’s sophistication, • Law Search • Law Search Korea has a long way to go in changing • Self Help Center the mindset of lawyers and court users. Information Exchange Among Korea’s 50 million inhabitants Note: ECF means Electronic Case Filing. are about 12,500 lawyers, 40% of whom Source: Presentation from the Supreme Court of the Republic of Korea. 27 68 DOING BUSINESS 2014 number almost decupled in 18 months (figure 9.1). In fact, two years later, in June FIGURE 9.1 Civil cases filed under Korea’s e-litigation system jumped between May 2011 2013, that share had soared to more than and December 2012 45%. 100,000 90,000 To further streamline procedures, a sys- 80,000 tem facilitates payment of all submission Number of cases 70,000 fees electronically using credit card or 60,000 wire transfers at the time of filing. In ad- 50,000 dition, users are notified by e-mail or text 40,000 message of any submission of additional 30,000 documents by the opposing party. And 20,000 after the case allocation system assigns 10,000 0 cases, the designated judge and the at- May June July August September October November December January February March April May June July August September October November December torneys can view all their cases online, including PDFs of all documents filed in a given lawsuit. 2011 2012 Paper filing E-filing Online help centers featuring frequently asked questions and tools for pro se liti- Note: Refers to first instance cases. gants were also created to allow the pub- Source: Supreme Court of the Republic of Korea database. lic to get fast answers on questions about the Supreme Court and its processes.9 One of the most important components of these help centers is the self-repre- By comparison, a 150 gigabyte hard drive sented litigation homepage, which pro- costs less than $100 and has storage ca- BENEFITS OF E-COURTS pacity equivalent to 70 filing cabinets. vides information and templates needed to file a case and respond to claims of Research in the United States has found That many filing cabinets, with the floor counterparties without the help of a cer- that more than 80% of judges consider space required, cost $22,000.14 The U.S. tified lawyer. e-filing superior to paper-based filing.10 National Center for State Courts offers E-courts make claim processing faster, tools to estimate savings from e-courts.15 For judges, the support system includes more reliable and convenient, minimize four main features: courthouse visits and reduce record stor- age and reproduction costs. Security • The case management system, Computerized court systems also make which allows judges to organize their archives more secure. Risks such as doc- work based on the status of pro- Cost and space savings ument loss, files being stolen and archive cedures and to separately manage The implementation of Korea’s e-court destruction can be significantly reduced or cases for which special measures are system resulted in savings of $221 per eliminated. E-filing minimizes the costs of needed. e-filing.11 These savings result from a re- these risks, especially because paper doc- • “My case history,” which allows judg- duction in the use of paper, the time spent uments can be misfiled or stolen. Though es to track cases they have disposed in court, cheaper service of process, lower it is possible to recreate court files from and the final determination of the transportation costs, easier archiving of litigant copies, this approach is inefficient. cases. documents, and easier payment of fees. • A scheduling system to organize cas- Electronic storage reduces these risks. For es by day, week or month that is inte- In terms of space savings, in 2008 in instance, an e-filing system can improve grated with the court registry. Chicago, Illinois a paper document filing file security and confidentiality by making • A writing support system with fea- took up to 5 days for a circuit court clerk it easier to restrict access to case files or tures such as automatic document to process, whereas e-filing took just 4 documents sealed by court order. In ad- formatting, multiple judgment editing seconds.12 And given that courthouses dition, electronic files can be encrypted, in small cases and collaborative deci- are expensive storage spaces, eliminating providing additional security.16 sion writing in panel cases. This sys- several miles of archives can save a lot of tem automatically creates a draft of money. A courthouse can cost $300 or the final judgment after the relevant more per square foot to construct, and Transparency case and desired template have been maintenance can be expensive too.13 In E-courts can also enhance transparency. selected. Once completed, judges en- the United States it costs $360,000 to By making judicial decisions more trans- ter a digital signature and register the build and $18,000 a year to heat, cool parent, more trade and investment is decision in a searchable database of and maintain a 20 by 60 foot file room— likely, fostering economic growth.17 Pub- judgments. assuming a low maintenance cost of 5%. lishing the cases rendered in a jurisdiction 28 IMPROVING COURT EFFICIENCY: THE REPUBLIC OF KOREA’S E-COURT EXPERIENCE 69 allows attorneys and court users to better and costs 10% of the claim—making Ko- equipment and launched an e-filing sys- understand case law and increases legal rea the runner-up in Doing Business’s ease tem and electronic case management predictability. Making decisions available of enforcing contracts ranking. By con- system that automated manual process- to the public online also helps make judg- trast, it takes 400 days, 36 procedures es, provided courts with registries of case es more accountable because anyone and 29% of the value of the claim in Viet- filings and events and introduced modules can comment on and assess the quality nam; 842 days, 37 procedures and 26% to handle e-filing, schedule hearings and of decisions. In the United States case of the value of the claim in the Philippines the like. The new equipment is expected information, including docket sheets and and 622 days, 38 procedures and 35% of to expedite hearings and reduce back of- filed documents, are provided online for the value of the claim globally. Contract fice processing.21 viewing and downloading by attorneys enforcement is faster in economies with and the public at any time from locations e-filing (figure 9.2). Rwanda and Tanzania, two countries with other than the courthouse. income per capita below $1,000, have also Concerns about budget and technology started computerizing their courts. Tanza- In some countries e-filing systems can limitations are among the most common nia’s project received funds from several also fight corruption. If formal procedures reasons for not implementing e-court fea- donors and provided the judiciary with are streamlined and attorneys are no lon- tures.20 That should not prevent less devel- modern information technology—includ- ger required to file claims in person, there oped economies from looking into e-courts. ing computers and digital court record- is less traffic in courthouses—reducing E-courts can be implemented with donor ing equipment—and training for judges opportunities for bribery.18 assistance, and reforms can be inspired by and staff. Computerization has had many peer learning from leading economies. benefits, such as improving the quality of research by judges.22 Rwanda’s Strategic Access to justice Malaysia, with an income per capita half Plan of the Supreme Court has recruited E-court services significantly extend the that of Korea’s, has been implementing an new court officers well trained in the use availability of justice, as with a 24/7 sys- ambitious upgrade of the computeriza- of information technology. Thanks to do- tem for filing, registration and auctions.19 tion of its courts. In late 2008, with the nor funds, the country now has an e-filing Moreover, providing remote access to appointment of a new chief justice, Ma- system, electronic records management judges makes the system convenient and laysia initiated reforms targeting judicial system and legal information portal.23 Ac- efficient. Most systems employ extensive delays and court backlogs that included cording to data collected for Doing Business security to mitigate tampering with the two information technology contracts 2014, Rwanda and Tanzania are top per- integrity of files. Singapore’s system, in totaling $43 million. The program intro- formers in Sub-Saharan Africa in the ease addition to providing full remote access duced court recording and transcription of enforcing contracts ranking. to judges, has a “pack and go” feature that allows court files to be transferred to CD-ROMs or USB memory devices for offline use. FIGURE 9.2 Globally, contract enforcement is faster in economies with e-filing E-courts can also aid cases where geo- graphic distance makes it difficult for par- 1,600 1,402 ties to attend, making videoconferencing 1,400 1,296 a pragmatic solution. While some trials 1,185 Time (calendar days) 1,200 last only about 30 minutes, advocates 1,010 1,000 842 often must spend a lot of time traveling. 731 800 Thus videoconferencing saves time and 635 642 600 524 money. In the United States, it was esti- 456 mated that about $900 could be saved 400 230 195 230 per trial by not having to pay for trans- 200 150 port fares, accommodations and relat- 0 Korea, Rep. Egypt, Arab Rep. Italy Singapore Philippines Uzbekistan Serbia Brazil Guatemala United Arab Emirates Rwanda Angola With e-filing Without e-filing ed allowances. In other economies poor infrastructure makes it difficult to travel between cities, justifying an investment in such information technology. OECD EAP ECA LAC MENA SSA Globally SHARING GOOD PRACTICES THROUGH PEER LEARNING Note: OECD = OECD high income; EAP = East Asia and the Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub- According to Doing Business, in Seoul re- Saharan Africa. solving a standard contract enforcement Source: Doing Business database. dispute takes 230 days, 33 procedures 29 70 DOING BUSINESS 2014 Through its involvement in the Asia-Pa- should take into account costs of data document and 4 million cases filed elec- cific Economic Cooperation forum, Korea preservation and system maintenance. tronically each year, would save the private has helped improve the region’s business • Users should receive adequate training. sector and government hundreds of millions regulations.24 Korea, named a “champion” • Cases covering various subject mat- of dollars a year. in judicial reform by APEC, has invested ter should be integrated. 8. Pfau 2011. significant resources to help countries • Systems in other economies can offer 9. Pro se legal representation means advo- such as Indonesia, Peru, the Philippines useful guidance. cating on one’s behalf rather than being and Thailand improve contract enforce- represented by a lawyer. ment. A Korean delegation visited partner 10. The National Judicial College, Judicial economies in 2011 to review systems and Survey: Electronic Filing in U.S. State Trial procedures for enforcing contracts and Courts. proposed reforms based on its experi- NOTES 11. This amount is the result of calculations ence in expediting court proceedings. In provided to the Doing Business team by the addition, peer-learning events were held This case study was written by Julien Supreme Court of Korea. to focus on improving such systems. To- Vilquin and Erica Bosio. 12. Chicago Bar Association Task Force on gether these events attracted more than Green Courts Initiative for the Circuit 200 participants, including judges, at- 1. Kingston 2000; Doing Business 2012, enforc- Court of Green County 2008. torneys, professors and government offi- ing contracts chapter. 13. Ibid. cials. In addition, in 2011 the Korean gov- 2. Kingston (2000) found that only about 14. McMillan, Pettijohn and Berg 2012. ernment brought together legal experts 20% of the responding small and medi- 15. National Center for State Courts 2013. and high-level policy makers to discuss um-size enterprises using courts to defend http://www.ncsc.org/information- the future of those economies’ systems their patents actually went to trial. and-resources/budget-resource-center/ for enforcing contracts. 3. Dabla-Norris and Inchauste Comboni calculators.aspx. 2008; Safavian and Sharma (2007), in 16. McMillan 2010. a study on Eastern Europe, found that 17. Hayo and Voigt 2008. in economies with slower courts, firms 18. Djankov, La Porta and others 2003. tend to have less bank financing for new 19. Horowitz and Zorza 2006; Mapp 2008. LESSONS investments. Duval and Utoktham (2009) 20. The National Judicial College, Judicial Experiences with e-courts in Korea and found that simplifying contract enforcement Survey: Electronic Filing in U.S. State Trial elsewhere show that: procedures increases bilateral trade. Courts. 4. UNDESA 2012. 21. World Bank 2011a. • The system must be user friendly and 5. Interview with Korean Judge Hoshin Won, 22. Ramadhani 2010. adapt in response to comments from who has been active in promoting e-courts. 23. International Records Management Trust users; a thorough needs analysis is 6. Ibid. 2011. required. 7. Pfau 2011. A conservative estimate for 24. See the case study on APEC economies in • The information technology budget New York, with $40 in savings for each World Bank Group (2012). 30