Regulatory burden: Agencies attempt to slice through thicket of red tape

The state of São Paulo has belatedly started to grapple with its bloated and unwieldy bureaucracy through a dedicated agency whose task is to cut red tape for businesses and citizens.

The move is welcome, as the state is a surprisingly poor location to run a business; and this hostile reception risks jeopardising its emergence as a business hub for Latin America.

The state of São Paulo had been a laggard in improving its business climate. It was ranked 11 out of 13 Brazilian states covered in the International Finance Corporation’s Doing Business in Brazil report of 2007.

That is even worse, considering that Brazil itself is situated firmly in the bottom half of countries in the IFC’s Doing Business 2010 report, coming 129th out of 181 nations.

Within Brazil, São Paulo scored below much poorer states as well as its main regional rivals, Rio de Janeiro and Minas Gerais. In some categories, it was rock-bottom.

São Paulo came last in the IFC report as a place to start a business – it takes a whopping 159 days – and was an abysmal 149th out of 155 on a comparison with other global cities overall.

The state of São Paulo has a dismal record on everything from opening companies to registering property and granting credit, says José Ricardo Roriz, director of the department of competitiveness and technology at the Federation of Industries of the State of São Paulo.

To bring about change, the government created an agency in 2006. The State Programme of Debureaucratisation (PED) used the Doing Business reports to identify what was wrong, says the head of the programme, Guilherme Afif Domingos.

The state’s civil service was set up to demand enormous amounts of formal documentation from companies. Yet once registered, the state did not bother to check if the company was complying with contractual obligations.

“There was a culture of not believing, not trusting, not enabling and not overseeing. That had to change,” Mr Afif Domingos says.

The PED started by looking to facilitate the life of the small and micro entrepreneur. São Paulo has some 3.4m such businesses, equivalent to the population of Uruguay, and some 80 per cent of them have been operating in the informal economy, says Mr Afif Domingos.

The PED overhauled taxation for individuals and firms billing up to R$36,000 (US$21,000) a year and set a token, flat tax payment of R$1-R$5 a month, according to sector. Once registered, these companies have access to credit. To encourage sign-up rates, the state offers free help from accountants.

The second issue is the pot pourri of permits that are required. Companies need to register separately with municipalities for property title, land use and zoning permits and with the state for environmental and health and safety permits.

Now, the state is implementing a one-stop shop for all these permits. Moreover, for the vast majority of companies operating in low-risk sectors, permission will be automatically granted with the state getting six months to check.

“This is the first time we’ve put the burden of the deadline on the state rather than on businessmen,” Mr Afif Domingos notes. The simplification will free time to deal with more complex, higher risk cases and larger companies.

A second new state agency is helping investors navigate their way round São Paulo’s bureaucracy.

Investe São Paulo, which promotes the state, identified five key areas – tax and legislation; environmental law; setting up a business and dealing with municipalities; energy; and labour issues – as covering some 80 per cent of investors’ concerns in doing business in the state, says Dr Mário Mugnaini Junior, the newly appointed president who arrived in June.

Investe São Paulo helps investors pick where to base themselves in the state by working closely with the most business-friendly municipalities, advises investors on taxes, and works to make state agency policy coherent.

The agency sees its priorities as: keeping the state’s leadership in auto and auto parts, where São Paulo accounts for 50 per cent of domestic production; stimulating semiconductors, high-tech and IT; and maintaining the dominance in ethanol, where the state accounts for 70 per cent of production.

Brazil will receive some $30bn in foreign direct investment in 2009 and estimates suggest that next year the figure will reach $32bn-$38bn. “We want to ensure that São Paulo continues to receive some 40 per cent of that,” Mr Mugnaini says.

São Paulo is clearly on the path to permanent reforms and is reshaping the relation between government and business, says João Gerado Piquet Carneiro, ex-secretary of administration of the federal district and president of the Helio Beltrão institute, which specialises in looking at federal red tape. It already offers some of the best staff in the federation, he says.

However, there are limits to how much the state can achieve, thanks to the heavy hand of the federal government in setting taxes and in ensuring states do not compete for business through tax reductions, Mr Piquet notes.

If São Paulo can transform the way it operates, it may just inspire other states and the federal government to ape its example.

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