Business leaders are sharpening their scissors in hopes of cutting down the mounting mess of red tape involved in starting a business in Costa Rica.
A recent World Bank report that revealed Costa Rica has put up more barriers to new businesses than other Central American country during the past year is prompting industry advocates to battle bureaucratic and regulatory costs for businesses.
“How much does it suck to start a business? It took me three months just to get my company’s name,” said Josh Butler, a U.S. citizen who recently moved to Costa Rica to start up his English-language institute, ButlerAcademy, in Heredia, north of San José.
“There’s no central office in which to get information on everything you have to order. So you have to stand in long lines to ask someone if they know. I probably spent 30% of my time for the first three months trying to get those things in order,” he told The Tico Times.
Last week, in a response to the World Bank report, Costa Rican government officials and business leaders met at the Hotel Radisson in San José to put their heads together in an attempt to reduce costs for new businesses and trade.
The World Bank’s “Doing Business 2007,” released in September of last year, had some eye-opening observations on what businesses must go through to get legal in Costa Rica.
Though it takes no more than 39 days on average to start up a business in El Salvador, Guatemala and Nicaragua, in Costa Rica the average business must go through 11 steps to start up, which takes an average of 77 days and costs a business the equivalent of one-fourth of what the average Costa Rican earns in a year.
The report ranked 175 countries for the regulatory costs they present to businesses.
Costa Rica ranked 105, a slip from its 2005 ranking of 99 (TT, Sept. 22, 2006). Costa Rica trails behind other Central American countries such as Nicaragua, El Salvador and Panama.
“The point isn’t to eliminate controls (on businesses), but to make the controls more intelligent,” said Marcela Brooks, legal director for the Foreign Trade Promotion Office (PROCOMER), at the March 5 Radisson meeting.
At the event, Vice-Minister of Economy Jorge Woodbridge called the Costa Rican state “bothersome” for businesses. The Ministry of Economy, Industry and Commerce has made steps to simplify bureaucracy for businesses, particularly in the construction industry, he said.
In the World Bank report, Costa Rica also ranked 160 of 175 for its ability – or lack thereof – to collect taxes. At the meeting, industry leaders pointed to barriers to opening a business as a key cause of Costa Rica’s informal economy.
“The excessive quantity of trámites become incentives for many businesses to stay in the informal sector due to fear caused by not understanding the tax system. That affects the quality of jobs as much as tax collection,” said Sylvia Solf, a World Bank official who helped author the report and attended the recent meeting.
Brooks said simplifying regulatory processes would benefit the state by giving informal businesses incentive to formalize, thus injecting more cash flow into the state’s coffers. It could also help attract more foreign investors seeking to start businesses here.
Late last year, the Economy Ministry launched a new Web site to simplify bureaucratic processes for the booming construction industry (TT, Dec. 3, 2006). The site, tramiteconstruccion.go.cr, lays out all the necessary processes for those wishing to build, and allows them to take care of some of them online. The group of about 50 industry leaders at the Radisson meeting recommended pushing for a system where most processes could be taken care of online.
A slew of other reforms were suggested, including creating a single office where all the processes to create a new company would be handled; increasing inter-institutional integration; having a single agency do all inspections instead of having multiple institutions inspect a new business; and a massive cost-benefit analysis of which bureaucratic processes have value added and which don’t.
“There needs to be some kind of guide to starting up a business. Maybe an organization for those starting new businesses or something like that,” said Butler, who came to Costa Rica soon after wrapping up his college degree. The 24-year-old entrepreneur said bureaucracy in public institutions and at banks in Costa Rica is complicated enough to “break young businesses,” especially foreign-owned ones like his.
Bureaucratic hurdles have also affected his company’s ability to hire teachers.
Fed up with what he calls excessive bureaucracy and a lack of information on how to navigate through the required trámites, Butler – like many entrepreneurs in Costa Rica – opened his business before it received all the proper operating permits.He said it took a year from the time he began the paperwork until his language school was operating legally.
“You waste time and you waste tax money. I don’t think people realize how complicated it is until they try,” he said.