Supporting Business Environment Reforms 2008

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practical guidance for development agencies

SUPPORTING BUSINESSENVIRONMENT REFORMS

PRACTICAL GUIDANCE FOR DEVELOPMENT AGENCIES

2008 Edition

Donor Committee for Enterprise Development

DCED


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Suppor ng Business Environment Reforms:Prac cal Guidance for Development Agencies

Donor Commi ee for Enterprise Development

www.Enterprise-Development.org

www.Business-Environment.org

August 2008


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This Guidance represents consolidated views of the members of the DonorCommi ee for Enterprise Development (DCED). Although every possiblee ort has been made to reach consensus on the text of the Guidance, itdoes not necessarily re ect the views of each and every agency-member of the DCED. Likewise, it does not necessarily re ect the formal view of themanagement and respec ve governing bodies of the development agencies-members of DCED or the governments they represent. The informa onprovided in this guidance is not intended to serve as legal advice.

Copying and/or transmi ng por ons or all of this work requires permissionfrom DCED. DCED encourages dissemina on of its work and will grantpermission promptly. All requests should be directed to the DCED Secretariat

by email: [email protected]

AcknowledgementsThis Donor Guidance has been produced by the Business EnvironmentWorking Group (BEWG) of the Donor Commi ee for Enterprise Development.Simon White, consultant to the BEWG, is the principal author. The followingBEWG members were closely involved in the produc on of the guidance:Andrei Mikhnev (Interna onal Finance Corpora on), Mar n Clemensson and

Graeme Buckley (Interna onal Labour Organisa on), Caroline Ramaekers(Netherlands Ministry of Foreign A airs), Corinna Ksel and Susanne Hartmann(German Development Coopera on), Dag Larsson and Chris an Fougner(Norwegian Agency for Development Coopera on), Lasse Mller and TheoIb Larsen (Danish Ministry of Foreign A airs), Richard Sandall, Tony Polatajko,Mavis Owusu-Gyam , Roger Nellist and Nick Godfrey (UK Department forInterna onal Development), MHamed Chrif (European Union), JuergenReinhardt and Zeynep Taluy (United Na ons Industrial Development

Organiza on), Sco Kleinberg and Wade Channel (USAID), Jonathan Brooks(United Na ons Development Programme) Love Theodossiadis (SIDA), andJim Tanburn (Donor Commi ee Secretariat). The BEWG acknowledges themany individual and agency contribu ons to the revision of various dra sof the guidance, including the par cipants of the Bangkok (2006) and Accra(2007) regional conferences. In addi on, many people contributed throughthe Donor Commi ee blog and various mee ngs over the last two years.


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List o Acronyms and Abbreviations

ASEAN: Associa on of South East Asian Na onsASMED: Agency for Small and Medium Enterprises Development

BEWG: Business Environment Working GroupCP: Co-opera ng PartnerDCED: Donor Commi ee for Enterprise DevelopmentHRD: Human Resources DevelopmentIFC: Interna onal Finance Corpora onLGU: Local Government UnitOECD: Organisa on for Economic Co-opera on and DevelopmentPSD: Private Sector Development

SADC: Southern African Development CommunitySIDA: Swedish Interna onal Development Co-opera on AgencySMEDSEP: Small and Medium Enterprises Development for SustainableEmployment ProgrammeUNIDO: United Na ons Industrial Development Organisa onUSAID: United States Agency for Interna onal Development


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Key Messages

i. A healthy business environment is essen al for growth and povertyreduc on. Business environment reform is needed where inappropriateregula on, excessive taxa on, lack of fair compe on, lack of voice and anunstable policy environment restrict investment and the development of markets, s e entrepreneurship and force many businesses to operate inthe informal economy.

ii. Business environment reform is complex , opera ng on many levels andinvolving a very wide range of stakeholders. Development agencies shouldtherefore ensure a thorough diagnos c analysis and maintain, as far aspossible, a systemic approach and an understanding of the broader causalpicture.

iii. Business environment reform is always poli cal and development agenciesshould therefore take care to analyse the poli cal context. They should havestrategies to build coali ons of support and to engage with those who wishto protect the status quo.

iv. Government should lead and own reform; donors should support them .The right balance between interna onal and local exper se must also be

found.v. Development agencies should ensure that the inputs and par cipa on

of all stakeholders , including poli cians, o cials, the formal and informalprivate sector, and civil society, are re ected in the reform process. Reforminterven ons should be designed to enhance stakeholder capacity forongoing and future reforms.

vi. Development agencies should ensure that systems are in place for donorcoordina on and take responsibility for the quality and consistency of theadvice and assistance they provide.

vii. Development agencies should sequence reforms according to context.Quick wins and taking advantage of ad hoc opportuni es such as changesof government, may build reform momentum. However, a long-termperspec ve is essen al to ensure sustainability.

viii. Development agencies should understand and manage the implementa ongap typically found between the adop on of regula on or principles, andchanging prac ce and enforcing regula ons on the ground.

ix. Development agencies should ensure the reform process has a strong

communica on programme so that all stakeholders are engaged and madeaware of the bene ts of reform.

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Table of Contents

Key Messages .............................................................................................. ivI Introduc on ............................................................................................... 1

Purpose of this guidance and intended readership ...................................... 1

De ning the business environment and the focus of the guidance ............. 2

Objec ves of business environment reform ................................................ 3

II Dimensions of business environment reform .......................................... 8

Levels of business environment reform ....................................................... 8

Suppor ng regional business environment reforms ........................... 10Suppor ng na onal business environment reform ............................. 10

Suppor ng sub-na onal business environment reform ...................... 12

Suppor ng sector-speci c business environment reform ...................14

Func onal areas and their various levels ................................................... 14

Programme-cycle phases in suppor ng business environment reform ..... 17

Phase 1: Diagnos cs: assessing the business environment ................ 18

Phase 2: Designing reform support programmes ................................ 19

Phase 3: Implemen ng reform support programmes ......................... 20

Phase 4: Monitoring and evalua ng reform support programmes ..... 21

III Principles of business environment reform support ............................ 22

Principle 1: Adopt a systemic approach to reform ..................................... 22

Principle 2: Understand and respond to the poli cal economy of reform ...... 22

Principle 3: Respond to and s mulate the demand for reform and driversof change ........................................................................................... 23

Principle 4: Ensure domes c ownership and oversight of reform e orts ..... 25

Principle 5: Strengthen the role and capacity of key stakeholders ............. 26

Principle 6: Focus on what the private sector needs throughpublic-private dialogue ...................................................................... 27

Principle 7: Focus on the binding constraints to business growth and

scope reforms accordingly ................................................................. 28

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Principle 8: Sequence business environment reforms and allow me ....... 29

Principle 9: Address the implementa on gap ............................................ 29

Principle 10: Formulate a communica on strategy and use

media strategically ............................................................................. 30Principle 11: Work with government as the lead agent ............................. 31

Principle 12: Align business environment reforms with na onaldevelopment plans ............................................................................ 32

Principle 13: Ensure good donor coordina on ........................................... 33

Principle 14: Balance interna onal and na onal exper se ........................ 35

Principle 15: Promote quality assurance in development agency support

of business environment reform ....................................................... 35IV Conclusion ............................................................................................. 36

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List o FiguresFigure 1: De ning the business environment ............................................... 2

Figure 2: Some examples of how business environment reform contributes

to achieving the Millennium Development Goals ........................................ 5Figure 3: Levels of business environment reform ......................................... 8

Figure 4: Phases of business environment reform support programmes .......... 18

List o Contested IssuesContested Issue 1: Can we measure the extent to which businessenvironment reform contributes to economic growth and poverty

reduc on? .................................................................................................... 3Contested Issue 2: Should business environment reform focus on enterprisesthat are owned and managed by poor people? .............................................. 7

Contested Issue 3: Should development agencies simply respond todemand for reform or should they also contribute to crea ng a demandfor reform? .................................................................................................. 25

Contested Issue 4: Should development agencies support individuals orins tu ons? ................................................................................................ 25

Contested Issue 5: Does support for the private sector interfere withpoli cal processes? .................................................................................... 28

Contested Issue 6: What role should government play in enterprisedevelopment? ............................................................................................ 32

List o Text BoxesBox 1: The process of business environment reform in Vietnam 2005 ......11

Box 2: Streamlining business permits and licensing procedures inOrmoc City, Philippines .............................................................................. 13

Box 3: Be er Regula on for Growth - improving the governanceframework for investment .......................................................................... 16

Box 4: Ukraine SME policy reform .............................................................. 30

Box 5: Donor coordina on in Africa ........................................................... 34

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I Introduction

Development agencies support the programmes of partner governments.While there are diverse views regarding the role development agencies canplay in reducing poverty through private sector development, much can begained by coming to agreement on key principles and prac ces. The DonorCommi ee for Enterprise Development has been facilita ng and documen ngthese kinds of agreements since its forma on in 1979 and, having producedguidance on nancial and business development services, now turns itsa en on to the business environment in which private rms operate. 1

Purpose o this guidance and intended readershipThis document provides prac cal guidance to development agencies toimprove their support for business environment reforms in developing andtransi on countries, which aim at economic growth, job crea on, povertyreduc on and gender equality. It provides generally applicable, prac calguidance for development sta in the design, implementa on and monitoringof their programmes. While there are many contested issues, a selec on of the most signi cant being highlighted in the text, as well as a great deal of trialand error in the eld of business environment reform, this guidance a emptsto provide good principles and prac ces based on lessons learned. Thisguidance has been prepared for the interna onal development communityat headquarter and eld levels, but it is hoped that programme partners willalso nd value in it.

Development agencies perform a unique and specialised func on whensuppor ng reform processes in developing and transi on countries one

that di ers from the func ons of governments, the private sector and othercivil society stakeholders. When performing these func ons, developmentagencies respond to the demand in the country and to interna onalcommitments and draw upon a number of resources. These include high-level policy frameworks that provide principles and guidance on howdevelopment programmes should operate, such as the Paris Declara onon Aid E ec veness: Ownership, Harmonisa on, Alignment, Results and Mutual Accountability . While there are resources available providing prac cal,

1 For the guidance on nancial and business development services go to:www.enterprise-development.org/resources/items.asp?cat=Guidelines


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SUPPORTING BUSINESS ENVIRONMENT REFORMS

Business Environment Policy and Legal Framework

Regulatory and Administrative Framework

Institutional Arrangements

Sector-Spe cific Business Environment

Regional, National and Sub-National Business Environment

Investment Climate

Infrastructure

Open financialmarkets,etc. Rule of law

Political stabilityEconomicpredictability

Skills andHRD Equitable

and efficientlabourmarkets

2

step-by-step advice on how to undertake speci c reforms, this documentprovides guidance on how to apply broad, high-level policy frameworkswhen designing and implemen ng business environment reform supportprogrammes.

Defning the business environment and the ocus o the guidance

For the purposes of this guidance the Donor Commi ee for EnterpriseDevelopment de nes the business environment as a complex of policy, legal,ins tu onal, and regulatory condi ons that govern business ac vi es. Itis a sub-set of the investment climate and includes the administra on andenforcement mechanisms established to implement government policy,as well as the ins tu onal arrangements that in uence the way key actorsoperate (e.g., government agencies, regulatory authori es, and businessmembership organisa ons including businesswomen associa ons, civilsociety organisa ons, trade unions, etc.). See Figure 1.

Figure 1: Defning the business environment

Along with other private sector development ini a ves, the businessenvironment a ects the performance of private enterprises in both theformal and informal economies. Business environment reform promotesthe development of markets that encourage compe on and enhance thee ec veness and sustainability of other development interven ons. A


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conducive business environment is one of the pre-requisites for economicgrowth and poverty reduc on (see Contested Issue 1). While povertyreduc on requires more than just economic growth, growth is an essen alingredient. However, in many developing and transi on countries, thebusiness environment is hos le to market-led growth; private enterprisessu er excessive regulatory barriers and in most respects regulatory costsare higher than in developed economies. 2 Poor business environmentsare also more likely to have a dispropor onal nega ve impact on women-owned businesses, which are more likely to remain informal. However, it isrecognised that good regula ons are necessary to secure bene ts, protectworkers, consumers and the environment, to promote the rule of law and forthe e cient func oning of market economies.

Contested Issue 1: Can we measure the extent to which business environmentreform contributes to economic growth and poverty reduc on?

While business environment reform contributes to economic growth and povertyreduc on, it is unclear how signi cant this link is and whether it can be measured.The World Bank claims that if a country reformed su ciently to move from thebo om quar le to the top quar le of the Doing Business ranking, it would add 2.3percent to the annual growth rate. However, others have contested the extent to

which such precision can be applied to this link, arguing that there is no simple,linear rela onship between growth, income and regula on. A low level of regula onis op mal for rich countries, and highly regulated middle-income countries canbene t from deregula on. However, it is argued, regulatory reform may not be theimmediate priority in some poor countries, nor for middle-income countries withlow levels of regula on. Moreover, considera on should be given to the quality of regula on not simply the volume and the e ect this has on rm behaviour.SOURCES: (1) Djankov, S. et al. (2006) Regula on and Growth , World Bank: www.doingbusiness.org/documents/growthpaper_03_17.pdf

Objectives o business environment re orm

Reforming the business environment is a priority for development agencies andgovernments because of the signi cant in uence the business environment hason the development of the private sector and therefore on economic growthand the genera on of livelihoods and jobs. Development agencies designbusiness environment reform support programmes in developing and transi oncountries so that businesses are able to change their behaviours in ways that2

Indigenous Private Sector Development and Regula on in Africa and Central Europe: A 10 Country Study,2002, by Bannock et al. www.businessenvironment.org/dyn/be/besearch.details?p_phase_id=35&p_lang=en&p_phase_type_id= 1


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lead to increased levels of investment and innova on, and the crea on of moreand be er jobs. This is done by:

reducing business costs: to increase pro ts (that may lead to increased.

investment) or increasing market share (and thereby output andemployment);

reducing risks: poor or frequently changing government policies, lawsb.and regula ons pose a risk for business, thus reducing the value of capital and the number of a rac ve investments in the market; and

increasing compe ve pressures through new entry: to s mulate the.e ciency and innova ng incen ves of the market.

Development agencies design programmes to support reforms in developingand transi on countries that improve the business environment by reducinglegal, ins tu onal and regulatory constraints for doing business and promo nga be er investment climate (Figure 1). They support governments and otherdevelopment partners (e.g., other state organs such as the legislature and the

judiciary, as well as the private sector and civil society organisa ons) in theire orts to make the business environment more conducive to the growth and

compe veness of the private sector. For development agencies, the principalobjec ve of a be er business environment is the reduc on of poverty and theincrease in produc ve employment opportuni es, especially for the poor. Figure2 provides some examples of how business environment reform can contributeto the achievement of speci c Millennium Development Goals.


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Figure 2: Some examples o how business environment re ormcontributes to achieving the Millennium Development Goals

Millennium DevelopmentGoals

Contribu ng Business EnvironmentReform

MDG 1:

THE ERADICATION OF EXTREMEPOVERTY AND HUNGER

Removing the constraints and barriers tobusiness establishment and growth so thatthe private sector can contribute more toeconomic growth and job crea on, as wellas removing the constraints and barriers topar cipa on by the poor in market-basedeconomic ac vi es.

MDG 3:THE PROMOTION OF GENDEReQualitY and empoWermentof Women

Reforming the business environmentaddresses many of the problemsexperienced by informal rms, themajority of which are owned and managedby women. Reforming the businessenvironment can also address gender-speci c regula ons and ins tu ons whichconstrain women who own and managetheir own businesses.

MDG 7:ENVIRONMENTAL SUSTAINABILITY

Improving compliance rates among privateenterprises and ensuring that soundenvironmental laws and regula ons areenforced.

MDG 8:

A GLOBAL PARTNERSHIP FORdevelopment

Integra ng na onal business environmentswith global trade and investmentopportuni es promo ng an open, rule-based, predictable, non-discriminatorytrading system, and a commitment to goodgovernance, development, and povertyreduc on.

Because business environment reform is a process and not a single event,another objec ve of development agency support is to make reformssustainable by building the capacity of key public and private stakeholders tomanage reforms over the long term. Emphasis should be given to suppor ngthe implementa on of reform and to improving the systems in which private

enterprises operate.


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Poor business environments provide incen ves for rms to operate informally orextra-legally. Thus, improvements to the business environment can contributeto reducing the size of the informal economy. 3 Development agencies shouldsupport ini a ves that examine the e ect the business environment has onthe informal economy and the rights of those who work there (e.g., iden fyingbarriers that prevent informal enterprises from gradua ng to the formaleconomy and iden fying the incen ves for formality and informality) andhow this varies between women and men. However, business environmentreform is not the only response required to the problem of informality. Becauseinformal rms o en experience substan al de cits in terms of skills, access toinforma on and access to nance, they can be less able to enjoy the bene tsof an improved business environment. Thus, private sector developmentprogrammes that address the concerns of the informal economy should includeac vi es that help these rms to be be er able to respond to emerging market-driven opportuni es.

While economic growth is an essen al prerequisite to poverty reduc on, therate of poverty reduc on is also determined by the pa erns of growth and itsemployment intensity. Speci c, carefully targeted interven ons are necessaryto enhance the impact business environment reform has on poverty reduc on.

This includes giving the poor greater opportuni es to par cipate in markets andreducing the risks and vulnerability poor people tend to experience at levelsgreater than others in the business environment. It is widely acknowledgedthat women are more severely a ected by poverty than men and that genderinequali es, especially in educa on and labour market par cipa on, result insubstan ve losses in terms of economic growth. Therefore, in order to e ec velyreduce poverty and s mulate pro-poor growth, interven ons and policies shouldbe designed in a gender-sensi ve manner and if required be complemented

by interven ons that speci cally target women in order to create an equitablesitua on for both genders. Addressing the challenges of poverty reduc onthrough business environment reform therefore entails two areas of focus:

ensuring the bene ts of economic growth created by business.environment reform are di used so that they bene t thepoor (e.g., by increasing the demand for employment); and

3 See for example: h p://www.csd.bg/news/bert/nenova.pdf and h p://rru.worldbank.org/documents/publicpolicyjournal/313Klapper.pdf


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ensuring the par cipa on of poor women and men in businessb.environment reform processes is increased. 4

Contested Issue 2: Should business environment reform focus onenterprises that are owned and managed by poor people?

While the reduc on of poverty is the ul mate purpose behind most developmentagencies support for business environment reform, not all agencies agree on howthis is best achieved. Some agencies argue that general reforms of the businessenvironment are not su cient and there is a need to focus reforms on the speci cbarriers that poor women and men experience directly when opera ng in thebusiness environment. Others argue that targeted approaches create addi onalbiases and market distor ons, and are not consistent with a systemic approachto business environment reform that improves the system for everyone. Theformer approach aims to address equity issues directly, while the la er approachhighlights the concern that by directly addressing equity, new market distor onswill be created that dampen the bene ts of an improved business environmenton economic growth. A related aspect to this issue concerns the emergence of a so-called bo om-of-the-pyramid approach to business environment reformwhere the primary focus for reform is on the markets in which poor women andmen purchase goods and services. In this approach, the poor are seen as resilient,crea ve entrepreneurs and value-demanding consumers. Development agenciesare advised to maintain a systemic approach to this issue. Whether or not theysupport business environment reforms that focus on the poor, they should assess

the impact that these reforms have on markets and the broader economy. Forfurther informa on see:OECD,Promo ng Pro-poor Growth: Policy Guidance for Donors :h p://www.oecd.org/dataoecd/33/54/36570936.pdf OECD,Promo ng Pro-poor Growth: Private Sector Development :h p://www.oecd.org/dataoecd/43/63/36427804.pdf OECD, Accelera ng Pro-poor Growth through Support for Private Sector Development : h p://www.oecd.org/dataoecd/53/21/34055384.pdf

4 Recent developments in the Making Markets Work for the Poor (M4P) are a good example of this emphasison pro-poor economic development. The M4P approach is a development objec ve and a broad approachto poverty eradica on based on the premise that well-func oning markets can help reduce poverty by

delivering a ordable products and services to poor people, o ering poor people be er return on their assetsand labour, and presen ng poor people with be er employment opportuni es. Key documents on thisapproach are available at: www.bdsknowledge.org


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II Dimensions of business environment reform

This chapter describes three key dimensions to suppor ng businessenvironment reforms. First, development agencies should recognise the fourlevels at which business environment reform can be supported (i.e., regional,na onal, sub-na onal and sectoral). Second, reforms can also address keyfunc onal areas that a ect business ac vity described later in this chapter.Third, there are four programme phases that can be used to guide developmentagencies in their support for business environment reform.

Levels o business environment re orm

There are various levels of the business environment that a ect how reforminterven ons are designed, managed and assessed. Figure 3 displays a matrixhighligh ng four levels of business environment reform. 5 The approachtaken to suppor ng business environment may vary according to the typeof government system that is in place (e.g., federal or unitary systems of government).

Figure 3: Levels of business environment reform

Func onal Areas of Business Environment Reform

Levels of Business Environment Reform

Regional Na onal Sub-Na onal Sectoral

KeyProgrammePartners

Regionaldevelopmentbodies (e.g.,AU, ASEAN),regionaleconomiccommuni es(e.g., SADC),World TradeOrganisa on

Parliament, poli calpar es, na onalgovernment ministries,regulators, privatesector representa ves,business membershiporganisa ons, businessmedia, workerorganisa ons, andconsumer groups

Sub-na onallegislatures,provincial,regional andlocal governmentauthori es,local businessassocia ons,community-basedorganisa ons

Sector- speci cbusinessassocia ons,regulators,governmentauthori es,policies

5The categories presented in this matrix are not mutually exclusive. It is likely that development agencies will

work at di erent levels and, for example, that sectoral reforms can have a regional, na onal and sub-na onalcharacter.


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DIMENSIONS OF BUSINESS ENVIRONMENT REFORM

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Policyand LegalFramework

Improvingpolicies andharmonisinglaws andregula onsthat improveregionaltrade andinvestment

Improving na onalpolicies and lawsthat promotecompe on, openmarkets and thegeneral condi onsfor private sectordevelopment

Improving localpolicies forprivate sectordevelopment

Sectoralpolicies andlaws o endeal withpromo onalinterven onsand ways toenhance thevalue chain

Tradepolicies,laws andregula ons

Compe on, tax,trade, labour policiesand laws

Sub-na onalpolicies forregionaldevelopment,local economicdevelopmentand privatesectordevelopment

Sectordevelopmentpolicies

RegulatoryandAdministrativeFramework

Improvingtheregula onsthat hamperregionaltrade andinvestment

Improving na onalregula onsthat a ect theestablishment,opera on and closureof private enterprises

Improving theregula onscreated bysub-na onalauthori es

Improvingbusinessregula onsthat applyto speci cindustrysectors orsub-sectors

Traderegula ons,customs

administra on

Business regula ons;tax laws andadministra on;

labour laws andregula on; traderegula ons; customsadministra on

Business start-up and licensingprocedures

Sectorlicensesand permits


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Ins tu onalArrangements

Suppor ngmemberstates of regionalbodies todesign andimplementreforms;improvingpublic-privatedialogue atthe regionallevel

Improving dialoguebetween na onalgovernment andprivate sectorrepresenta veagencies (e.g., public-private dialogue)

Suppor ng localstructures andprocesses forsub-na onalpublic-privatedialogue

Building andsuppor ngsectoralbusinessmembershiporganisa onsto par cipatein discussionswithgovernmentagencies toimprove thebusinessenvironment

Tradefacilita on

Capacitybuilding

RegulatoryGovernance

Capacity building

Capacitybuilding

Capacitybuilding

Supporting regional business environment re orms 6

Development agencies should work closely with regional ins tu ons (e.g.,Regional Economic Communi es in Africa, the African Union, Associa onof South East Asian Na ons, Asia-Paci c Economic Coopera on) in order tosupport harmonised reform e orts among their member states and be erintegra on of regional markets. Regional bodies play an important role ins mula ng the demand for reform among their member states and promo nggood prac ce and quality policies, laws and regula ons. Moreover, supportfor reforms through global ins tu ons, such as the World Trade Organisa on,should also be considered.

Supporting national business environment re orm

Development agencies should work with the na onal legislature, reformagencies, parliamentarians, senior public o cials, na onal businessmembership organisa ons and workers organisa ons to help them be erreform current policies, laws and regula ons and to consider policy alterna ves

6 Support for regional business environment reforms is not considered in detail in this guidance, partlybecause the DCEDs conferences to date have only brie y surveyed donor ac vi es at this level. See paperspresented at Accra Conference 2007 Session 1.2: Priori es for Regional Economic Communi es: h p://www.businessenvironment.org/dyn/be/besearch.details?p_phase_id=148&p_lang=en&p_phase_type_id= 3


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and reform op ons. Na onal reform programmes can have a signi cantimpact on the business environment by improving compe on in na onalmarkets as well as access to foreign markets, improving the e ec veness of na onal organisa ons (public and private), strengthening the rule of law, andcrea ng a business-friendly regulatory framework.

Suppor ng na onal-level reforms also involves facilita ng and ins tu onalisingdialogue between the public and private sectors including special e orts toconsult with women, workers and informal rms. This is done to improve thequality of governance by providing the private sector with the opportunity tocomment on, review and oversee regulatory reforms, while promo ng greaterlevels of transparency and accountability.

Box 1: The process of business environment reform in Vietnam 2005

In 2003, the government of Vietnam announced that the exis ng legal framework forbusiness would be revised, combining four laws regula ng all types of businesses intotwo comprehensive laws aimed at harmonising the overall framework for investment andbusiness, elimina ng many dis nc ons between domes c and foreign investment, andensuring Vietnam complies with relevant interna onal agreements as it seeks to join theWorld Trade Organisa on. The two laws the Enterprise Law and Investment Law wereadopted in December 2005, and came into e ect following the issuance of implemen ng

decrees. Over the course of three years, the Interna onal Finance Corpora on, throughthe Mekong Private Sector Development Facility, partnered with government, thebusiness community and other development partners to provide comprehensive technicalassistance. This support had an explicit focus on policy reform processes and changingthe mindsets of the range of stakeholders: the business community, policy experts, themedia, and especially lawmakers (members of Na onal Assembly in par cular). Themul -faceted project spanned the en re legisla ve process, from helping to developthe guiding principles for the legal framework, providing ongoing advocacy un l the lawswere passed, providing technical assistance to develop implemen ng decrees of thelaws, and now that the laws have been passed, assis ng in the monitoring process.In a related move in 2005, the Vietnamese Government announced that it wanted todouble the number of registered private sector enterprises from 250,000 to 500,000 by2010, with the expecta on that these new enterprises would create 2.7 million new jobsand help increase the quan ty and quality of exports by the SME sector. With assistancefrom UNIDO, the Agency for SME Development (ASMED) in the Ministry of Planningand Investment, in a highly par cipatory and consulta ve process, prepared the SMEDevelopment Ac on Plan 2006-2010, which consisted of 45 speci c ac ons, 39 of whichaim at improving the regulatory and administra ve environment. ASMED designed ana onwide business registra on reform programme that would create a computerisedsingle-point business, tax and sta s cs registra on system to lower the cost of marketentry and doing business in the country. ASMED and 19 collabora ng ministries, agencies

and departments were further assisted in the establishment of the Government BusinessPortal (www.business.gov.vn).


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Supporting sub-national business environment re orm

With increasing regulatory power of sub-na onal authori es it isimportant to consider the varia ons that exist across sub-na onal business

environments (i.e., across provincial, regional and local jurisdic ons).While administra ve rela onships and powers between na onal and sub-na onal governments vary from country to country, the reform of localbusiness environments is a necessary systema c response to decentralisedgovernance. The decentralisa on of regulatory responsibili es to localgovernments may result in costly barriers to the opera on of internal markets.Strong compe on safeguards have to be put in place so that there is not anexplosion of super uous regulatory requirements at the sub-na onal level. Local

governments have to have the same good regula on capaci es and proceduresas na onal governments if they are to regulate to the same standards.

Sub-na onal business environment reforms should not be seen as simply alocal re ec on of the na onal situa on. In many countries, local governmentscan exert signi cant pressure for reform on the na onal poli cal process.Furthermore, sub-na onal reforms can be replicated from one locality toanother. See Box 2. Sub-na onal business environment reforms shouldrecognise and respond to local diversity in the business environment as wellas to the mandates and poli cal powers assigned to sub-na onal governmentauthori es. Sub-na onal reforms can complement other sub-na onaldevelopment processes, such as local economic development programmesand can be used to promote compe on among sub-na onal jurisdic ons(e.g., ci es), which can be a useful driver of reform. Development agenciesshould support sub-na onal reform e orts by building and strengthening localsystems, procedures, skills and ins tu ons in order to iden fy and removenew bo lenecks to business growth, reduce risk and improve compe on inlocal markets.


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Box 2: Streamlining business permits and licensing procedures inOrmoc City, Philippines

In order to improve the business environment in Local Government Units (LGUs), the

German Technical Coopera on and the Philippine Department of Trade and Industrythrough the Small and Medium Enterprises Development for Sustainable EmploymentProgramme (SMEDSEP), provided technical assistance to the LGU in Ormoc City tosimplify the citys business permits and licensing processes. The main objec ves of theproject were to: monitor and evaluate the improved business licensing procedures;recommend ways of further improving the current licensing procedures to achieveclient sa sfac on; and present the lessons learned to selected LGUs to encouragesimilar e orts. Assessment, planning, implementa on and evalua on took about 18months (December 2004 to April 2006). The reform reduced the process of businessregistra on from 17 steps to 5, and the me from 17 days to 2 days. This led to a 25percent increase in the number of registered businesses in Ormoc from 2005 to 2006.The Philippine Chamber of Commerce and Industry awarded Ormoc City the tle of Most Business Friendly City for Visayas in 2006. Other municipal and provincial LGUsin the region are reviewing their business licensing and permit systems guided by theprac cal Ormoc model. By the end of December 2007, it is expected that about 50percent or 21 more LGUs will have successfully streamlined their procedures.SOURCE: www.smedsep.p h

In some cases, development agencies have supported business environmentreforms at the local level because reform at the na onal level was deemed to

be too di cult or unsustainable. Poli cal instability, weak or ine ec ve na onalstructures, high levels of corrup on or a lack of good governance at the na onallevel have led many development agencies to work with sub-na onal structuresand jurisdic ons that have been more open to reform.

When working on business environment reform at the sub-na onal level,development agencies should engage local stakeholders to know their percep onof the business environment and to share their assessment results with

government and the private sector before publica on. Gender-speci c barriersshould be iden ed and adequately addressed at an early stage. It can be usefulto compare na onal assessment benchmarks (such as those in the World BankDoing Business reports) with local assessment results and collect and share storieson local business environment reform processes that sub-na onal governmentauthori es are already engaged in. 7

7 Useful examples of sub-na onal business environment assessments include the Philippine Ci es Compe -

veness Ranking Project (h p://www.aim.edu/home/announcementc.asp?id=72 1), the Vietnam ProvincialCompe veness Index (h p://www.vnci.org/Xportal/Upload/docs/PCI_2006_Summary_Report.pdf) and theMunicipal Scorecard for La n America (h p://www.municipalscorecard.com/).


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Supporting sector-specifc business environment re orm 8

Reforms are o en needed to address policy, legal and regulatory requirementsthat unnecessarily raise the cost of doing business, increase risks or reduce

compe on within speci c sector or industry categories. These approaches tobusiness environment reform allow for a deeper analysis within those sectorsthat are most strategic for na onal development or pro-poor economic growth.

Policies and ins tu ons that are sector-speci c are important drivers of economicperformance; by assessing speci c sectors it is possible to iden fy causal linksbetween the business environment and rm performance. 9 Furthermore,support for sectoral business environment reforms can complement and enhancethe impact of other sector and sub-sector development ini a ves such as thepromo on of industry clusters. The pro-poor impacts of a focus on the businessenvironment in agriculture, in par cular, are likely to be substan al. 10

Functional areas and their various levels

Within the levels of business environment reform iden ed above there are anumber of func onal areas that have a direct impact on se ng the environmentfor private enterprise opera on. Manuals have now been published on many of these func onal areas, for example, describing how to streamline registra onprocesses at the na onal and sub-na onal levels. 11 Func onal areas of businessenvironment reforms include:

simplifying business registra on and licensing procedures;.

improving tax policies and administra on;b.

enabling be er access to nance;.

improving labour laws and administra on;d.

8 Sectoral reform issues are not considered in detail in this guidance, partly because of their diversity, andpartly because the DCEDs conferences to date have not included extensive materials on the topic.9 See for example: www. as.net/ifcext/ as.nsf/A achmentsByTitle/IndustryLevelAnalysis/$FILE/Industry+level+analysis+-+the+way+to+iden fy+binding+constraints+to+growth.pdf mckinsey.com/mgi/rp/CSProduc vity10 See for example: www.d d.gov.uk/pubs/ les/growth-poverty-report.pdf and www.povertyfron ers.org www.oecd.org/dac/poverty . 11 For example of na onal level resources see: h p://www.businessenvironment.org/dyn/be/besearch.details?p_phase_id=139&p_lang=en&p_phase_type_id=2 and sub na onal level: h p://www.businessenvironment.org/dyn/be/besearch.details?p_phase_id=96&p_lang=en&p_phase_type_id=2 f

example of sub-na onal level resources see: www.businessenvironment.org/dyn/be/besearch.details?p_phase_id=96&p_lang=en&p_phase_type_id=2 and www.businessenvironment.org/dyn/be/docs/65/GTZRedTapeFacilitatorsManualV1-1.pdf


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improving the overall quality of regulatory governance;e.

improving land tles, registers and administra on;f.

simplifying and speeding up access to commercial courts and tog.alterna ve dispute-resolu on mechanisms;

broadening public-private dialogue processes with a par cularh.focus on including informal operators, especially women; and

improving access to market informa on.i.

A en on should be given to removing bo lenecks (i.e., reforming the current

stock of policies, laws and regula ons), as well as the way governmentaddresses the delivery of public func ons (i.e., the ow of regula ons). SeeBox 3. In most countries, businesses face hundreds of regula ons. Indeed,the true count is o en not known and substan ally underes mated.Development agencies can help their partner governments to simplify andstreamline those business regula ons that are a major barrier to businessgrowth and formalisa on. They should increase the awareness of the needfor gender-responsive business environment reforms and support partner

governments with the design of appropriate policies. However, the challengeof sustainable reform is not to pick a handful of licenses out of thousands orto streamline exis ng regula ons. While these can be useful rst steps, it isnecessary to reform the system of business registra on and to change theincen ves that o en drive governments to regulate as a way of raising newfees and revenues.


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Box 3: Be er Regula on for Growth improving the governanceframework for investment

The Be er Regula on for Growth programme supports high-quality, low-

cost and low-risk business regula on in developing countries by adap ng andcommunica ng best prac ces on regulatory simpli ca on and systemic regulatoryreform. Programme products cover: crea ng an e ec ve regulatory managementsystem; building the ins tu ons to carry out good regula on; upgrading thequality of exis ng regula ons; and improving the quality of new regula ons. Theprogramme deals with three aspects of regulatory reform:

(i) The immediate bo lenecks the stock of exis ng regula ons;(ii) The way that government works when considering new policies, laws,

regula ons and delivery of public func ons (i.e., the ow of regula ons);and

(iii) The ins tu ons responsible for preparing and ve ng dra regula on,and for driving the regulatory reform agenda.

Development agencies need to nd the right ins tu onal host for managingregulatory reform one that dedicates sta to these ac vi es and displaysa sustained commitment to reform. Reform programmes should work withkey support agencies, such as local management training ins tu ons, todeliver basic regulatory best prac ce training to members of parliament and

technical sta who have a cri cal role to play in the dra ing and scru nisingof new laws and regula ons.

When proposing reforms in speci c func onal areas the linkages betweenenvironmental, social and economic aspects, including the impact of gender,must be factored in and the trade-o s examined. Concerns about socialand environmental costs and bene ts are just as important as the impacton business. Furthermore, business environment reforms a ec ng labourand labour-related laws must balance the need to reduce compliance costswith the need to safeguard and, where appropriate, improve protec on forworkers, including their right to social protec on.

Development agencies are advised to consider the ways in which they cansupport the introduc on or upgrading of informa on and communica onstechnology (ICT) to improve regulatory processes and provide a moree ec ve communica ons channel to cons tuent businesses. The poten albene ts arising from the e ec ve use of ICT, as part of a larger regulatorysimpli ca on ini a ve, can include some or all of the following:


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increased e ciency of the reformed regulatory processes;.

reduced scope for o cial corrup on;b.

improved informa on availability and transparency;.

reduced obstacles to formality;d.

increased tax compliance and government revenue genera on;e.and

improved facilita on of new investment projects.f.

Programme-cycle phases in supporting business environment re orm

Many business environment reform support programmes can be categorisedinto four programme-cycle phases (see Figure 4). These phases systema sedevelopment considera ons in the design of short, medium and long-terminterven ons in line with the various challenges and priori es found indeveloping and transi on countries. The links between each of these life-cycle phases are cri cal: for instance, the outcomes of business environmentassessments inform the design of reform programmes. However, it should be

recognised that the conceptual model presented here does not necessarilyre ect the process of reform in all cases: the sequence of steps may slightlychange or two phases may be undertaken simultaneously.


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required in order to achieve meaningful results. Mapping out the currentprocess from beginning to end allows stakeholders to see addi onal realimpediments and to be er understand the broad scope of the reformsrequired.

Development agencies should support and build the capaci es in partnercountry governments, the private sector and civil society organisa ons tocarry out their own assessments of the business environment. Local exper sefrom research centres, consul ng rms and universi es should be used asmuch as possible. The ndings of business environment assessments shouldbe publicised. However, it is important to work closely with the governmentin this process and to ensure government o cials have me to consider the

results of the assessment and their response to these results. If managedproperly, this process can ensure that government o cials (who may ini allyresent or disagree with unfavourable assessment results) become partners ina process through which iden ed problems with the business environmentare discussed and addressed through reform programmes.

Phase 2: Designing re orm support programmes

Development agencies should make good use of local knowledge when

designing reform support programmes to gain stakeholder con dence andrespect. Not only sharing best interna onal prac ce, but also iden fyingspeci c problems based on local experience is cri cal in building a case forreform and a solu on strategy. Iden fying speci c local regulatory problemsand their consequences provides key stakeholders with ammuni on tosupport their reform e orts.

When designing reform support programmes it is important to an cipatethe poten al outcomes of reform, whether desired or not. These shouldbe included in the design of a proper monitoring and evalua on systemthat iden es key measurable outputs, outcomes and impact indicators.This includes social outcomes as they a ect female-owned enterprises andworkers, as well as environmental outcomes as they a ect the use of naturalresources.


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Phase 3: Implementing re orm support programmes

Reform support programmes should be implemented in a exible manner andwith the capacity to respond to new requests and changing circumstances.

Because business environment reform is a con nuous process it is importantto ensure that reforms are sustained over the long term. Sustainabilityrefers to the ability of programme partners (e.g., government and theprivate sector) to con nue ongoing reforms, ini ate the next genera on of reforms, and be able to monitor the progress and manage reforms oncedevelopment agency support has been withdrawn. Sustainability of reformprogrammes results from:

building the capacity and capability of relevant organisa ons.(e.g., government ministries, business membership organiza ons,regulatory agencies);

ensuring that local programme partners have ownership of theb.reform agenda and processes;

increasing public dialogue and debate on the demand for reform .this includes, but is not limited to, public-private dialogue;

changing a tudes and mind-sets so that key stakeholders have ad.greater appe te for reform of the business environment;

improving transparency in public administra on;e.

enhancing accountability by the government towards keyf.stakeholders; and

crea ng a nancial plan to ensure adequacy of resources in the future.g.The best way to ensure sustainability in business environment reform is toins tu onalise some form of business environment monitoring or watchdogfunc ons that involve representa ves from the public and private sectors.Organisa ons of this kind can regularly assess the businesses environment;monitor reform outcomes and impacts; iden fy the demand for futurereforms; and provide training, advice and informa on to governmentagencies and other stakeholders in the design and implementa on of reformprogrammes.


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Phase 4: Monitoring and evaluating re orm support programmes

A sound monitoring and evalua on system is essen al for the success of business environment reform support programmes. Such a system should

exhibit well-de ned indicators that measure programme outputs andoutcomes and clearly connect an cipated programme outputs with outcomesand their impact on poverty reduc on.

By de ni on, business environment reform support programmes are notreform programmes in their own right they support the reform e ortsof programme partners. Thus, it is necessary to consider the performanceof a programme in terms of its in uence on programme partners to assessthe business environment, and design and implement reforms. Monitoringbusiness environment reforms speeds up the learning process in governmentsby clarifying the reasons for success and failure. Development agencies canhelp partner governments to become more results-oriented and improve theaccountability and transparency of their reform e orts through the use of monitoring systems.

Special a en on should be given to assessing the impact of businessenvironment reform. This includes assessing the impact business environmentreform has on enterprise development, employment and pro-poor growth

as well as on special groups such as informal rms and women-ownedenterprises. This should be done in partnership with government and theprivate sector in order to increase transparency and accountability amongall par es. In many cases it is impossible to measure the impact of a singlebusiness environment reform support programme on poverty reduc onbecause there are so many other factors that a ect this ul mate goal. However,development agencies can be precise about the impacts they an cipate theirprogrammes will achieve and how these contribute to broader developmentgoals. See Contested Issue 1.


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III Principles of business environmentreform support

Principle 1: Adopt a systemic approach to re ormAs far as possible, development agencies should adopt a systemic approach tobusiness environment reform. They should consider the whole system, includingall the relevant formal and informal ins tu ons, the rules of the game, culturaland social norms, and other key elements, such as the exis ng stock of regula onsand the processes of reform in each case. 14 It is important to recognise that thereare bene ts as well as costs associated with regula ons and that safeguards arenecessary to protect the environment and workers, for example. In an interac vesystem of reform change in one area in uences the possibili es of reform in otherareas. Reform is not a one-o act, but a process of adap ng to new challengesand changes. Such reform includes rela vely speci c or narrowly focusedreforms, those that involve a degree of trial and error (e.g., pilot reforms), as wellas more comprehensive reforms of a grander scale. There is o en pressure ondevelopment agencies to reform one part of this system in order to achieve rapidand measurable outcomes, yet in reality, other parts of the system may be justas important. The implementa on and enforcement of reforms is an importantelement that is o en not emphasised enough in support programmes. Whiledevelopment agency support for reforms that achieve quick wins can be useful tobuild support for larger reforms, these piecemeal e orts are wasted if they do nottake into account a systemic and integrated approach. Success and sustainabilityin reform is o en the product of an integrated approach to dealing with theproblems faced by the private sector.

Principle 2: Understand and respond to the political economy o re orm

Business environment reform processes are in mately connected with thepoli cal economy of change. This includes the system of accountability andgovernance exercised within and on the state, the extent to which the stateis open or captured, and the extent to which its policy-making processes areopen to in uence. Because business environment reform is fundamentally aprocess of poli cal contesta on, there are no formulas that may be importedfrom elsewhere. Each society needs to determine the poli cal se lement thatbest accommodates its compe ng interests and then nd the appropriate

14 See www.businessenvironment.org/dyn/be/docs/71/Session1.3ReinprechtDoc.pdf for a discussion of thein uence of culture in reform processes.


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technical solu on that suits that poli cal se lement. Development agenciescan support these processes with lessons from other countries that canbe adapted, as well as by encouraging the process to be transparent (i.e.,no secret policy making), evidence-based and equitable so that those whorepresent the interests of the poor are able to in uence it as much as thosewho represent the interests of the rich and powerful.

There will be mes when key local stakeholders resist proposals for reformbecause they do not understand the bene ts of the proposed reform, are usedto things as they are and fear change, or because they bene t from the statusquo. Thus, the challenge of the reform is building e ec ve reform coali onsto get the best possible reform past that opposi on. Development agencies

can respond to resistance to reform by understanding where the resistancecomes from and why; raising awareness and promo ng the bene ts of reform;recognising that those who are doing well in a poor business environment(e.g., where compe on is reduced) may have something to lose; promo ngcoali ons of those who support reform that is building cons tuencies forchange; using regional organisa ons to support change; and promo ngbroader and deeper levels of public-private dialogue. Ac vi es to discuss anddesign reforms should be seen in the wider context of the poli cal economy

they release reform energies and reinforce a growing demand for reform.These kinds of changes help developing and transi on country governmentsto overcome governance bo lenecks. While development agencies cannotchange the poli cal economy of a country, a be er understanding of theseissues will improve the design and execu on of reform programmes.

Principle 3: Respond to and stimulate the demand or re orm anddrivers o change

Development agencies respond to domes c demand for reform by adding valueto reform processes through technical assistance, nancing, training and otherforms of skills transfer, as well as informa on and experience sharing. They can alsoin uence the direc on and pace of change by mobilising and exploi ng drivers of change. These are forces that expand the opportunity for reform within the poli caleconomy of the country. Drivers of change include strong poli cal leadership, theemergence of poli cal or economic crisis, the processes of globalisa on, and thedemand for increasing compe veness. In most cases, there is a mix of drivers

that contribute to change and not a single event. The strategic exploita on of successive drivers of change is key to the success of sustainable reform.


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Reform support programmes should maximise the opportuni es that stemfrom broader calls for reform, such as when a new government has beenelected. Indeed, poli cal change and some forms of poli cal crisis canprovide opportuni es to push through bold business environment reforms.However, there are mes when this demand is not apparent or weak. In sucha situa on, development agencies can s mulate a demand. However, theymust be careful not to be too prescrip ve or imposing. Some of the moste ec ve ways of s mula ng a greater demand for reform include:

commissioning research and assessments of the business.environment and facilita ng broad public discussion of the results;

benchmarking and comparing business environments acrossb. countries as well as across sub-na onal areas (e.g., ci es) crea nga compe ve environment that highlights the need for reform;

building the capacity of domes c stakeholders such as private-.sector representa ve organisa ons, consul ng rms and researchagencies to iden fy priori es for reform in the business environmentand advocate for change;

iden fying the economic impact of business environment defects cand.add tremendous leverage to informing the policy dialogue process,while suppor ng the priori sa on of the policy reform agenda;

helping policy makers to learn from the experiences of other countriese.through study tours, training programmes, regional networking andthe exchange of informa on;

crea ng opportuni es for public-private dialogue that allow thef.business community to get across their experiences of the businessenvironment; and

crea ng opportuni es for foreign investors to present their experienceg.of the business environment to government policy makers.

It is o en necessary for development agencies to recognise the importanceof individuals as change agents, whether they are representa ves of the

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government or the private sector. Working with individuals who can mo vateand mobilise reform e orts is important, but it is advisable to broaden andins tu onalise this engagement as quickly as possible.

Contested Issue 3: Should development agencies simply respond todemand for reform or should they also contribute to crea ng a demandfor reform?

In a perfect world, development agencies would only respond to the demandsof their programme partners. Instead, development agencies are engaged in adynamic tension between responding to demand and suppor ng ini a ves thatcreate a demand for business environment reform. Not all development agenciesare comfortable with this tension and not all agree on where the limits to s mula ng

a demand for reform lie. Development agencies are advised to work closely withtheir programme partners to help them see the broader economic impact businessenvironment reforms can create. They should iden fy the pros and cons to reformand help their partners to iden fy reforms that are within their reach in technical,poli cal and ins tu onal terms. Development agencies can help their partners toask the right ques ons about the kinds of reforms that are needed, rather thanprescribing the answers to those ques ons.

Contested Issue 4: Should development agencies support individuals orins tu ons?

Not all development agencies are clear about whether investment in reformleadership should include individuals as well as organisa ons. There are dangers insuppor ng one or two reform-minded government o cials instead of the broaderins tu on in which these o cials work. However, there may be instances wherethese individuals can champion reform e orts within their organisa ons and thiscan be an important strategy when the organisa on does not display a willingnessto undertake reforms. There can also be danger in inves ng in the training and

awareness of government o cials who eventually move to a di erent, unrelatedagency and are no longer able to par cipate in reform ac vi es.

Principle 4: Ensure domestic ownership and oversight o re orm e orts

Development agencies should be unbiased brokers that bring togethervarious stakeholders in the reform of the business environment. Domes cstakeholders should take full responsibility for the design and management of business environment reform programmes. While development agencies will

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support and work with these stakeholders, they should refrain from leadingreform e orts themselves or usurping the responsibility of their programmepartners. To ensure sustainable results in the long run, it is important that thena onal government and private sector have full ownership of the businessenvironment reform process.

Organisa onal oversight is key to ensuring domes c ownership of reforme orts. While the presence of a high-level o cial at the centre of governmentor a high-level commi ee accountable to the centre has proved to be asuccess factor for business environment reform, it is also important thatthe designated oversight and management authority cuts across the wholeof government. Involving representa ves of the private sector (including

representa ves of businesswomen) and other key stakeholders in oversightstructures and processes is also important.

Principle 5: Strengthen the role and capacity o key stakeholders

Recognising local stakeholders and developing their capacity to par cipate inbusiness environment reform is cri cal for successful and sustainable reforms.This can include strengthening the role and capacity of state agencies, theprivate sector, workers organisa ons and other civil society structures, as well

as suppor ng be er dialogue and advocacy, and building the capacity or abilityof state agencies to manage reform programmes. While capacity developmentamong state agencies can be a legi mate and useful response to the situa onscreated by failed or weak states, working with other programme partnerssuch as the private sector is equally important. Similarly, overly strong andinterven onist states o en require a counter-balance that is created by theprivate sector and other civil society groups. It is o en necessary to supportthe embedding of regulatory reform processes into the systems of government

or parliament. However, while capacity development is important, agenciesshould not support the reform of state agencies that ar cially subs tuteself-regulatory market-based mechanisms (e.g., accredita on, cer ca on,membership of professional bodies). Development agencies should supporta change in the culture in which business reforms occur, such as throughthe introduc on of a client-oriented culture that encourages public agenciesto treat their private sector clients in a more professional, accountable andtransparent manner.

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When building local capacity, development agencies need to disseminaterelevant informa on on the developmental experiences from economicallyadvanced countries so that developing countries can draw upon historicalevidence to make more informed choices about policies and organisa ons.Development agencies can also learn from the experiences of other agenciesand other programme partners located abroad. However, it is always importantto remember that solu ons that work in one context need to be adapted tosuit another.

Principle 6: Focus on what the private sector needs throughpublic-private dialogue

Reform programmes should focus on the private sector, since they can createdemand for reform and can contribute to the design of reform programmesand provide feedback on proposed reforms (e.g., through regulatory impactassessments); they can also provide technical exper se, and organisa onal andmanagement support. Many private rms express their views through theirrepresenta ve organisa ons. However, these representa ve organisa ons rarelyrepresent the en re private sector and are predominately made up of larger, formalenterprises. Small and/or informal rms, including women-owned enterprises,are o en less involved in these kinds of structures; consequently, their viewsare o en systema cally neglected. Development agencies can support private-sector representa ve organisa ons and workers organisa ons, includingthrough strengthening social dialogue, in their e orts to reform the businessenvironment, but care should be taken not to interfere directly in domes cpoli cs (see Contested Issue 5). They can also make use of formal facili esestablished to make possible the involvement of various development agenciesand the private sector in the support of business environment reforms. 15

Public-private dialogue is an essen al ingredient of e ec ve and sustainedbusiness environment reform. 16 The quality and depth of e ec ve businessenvironment reform is related to the intensity and ins tu onalisa on of public-private dialogue. While many developing and transi on countrieshave li le tradi on of construc ve dialogue and coopera on between thegovernment and the private sector, such dialogue changes the poli caleconomy by empowering allies of reform and enlarging the reform space

15Examples of these facili es include the Public Private Infrastructure Advisory Facility (www.ppiaf.org) and

the Investment Climate Facility for Africa: www.icfafrica.org16 For more informa on on public-private dialogue and detailed guidance go to: www.publicprivatedialogue.org

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by increasing awareness of the scope and depth of the problem. Whiledialogue can take both formal and informal forms, it is important for dialogueto be linked to speci c reform agendas. 17 In its early stages, public-privatedialogue takes me to develop. It is important to build trust and con dencein the process and all par es need to see the bene ts of regular, structureddialogue. Development agencies should support public-private dialogue, butshould not drive the process.

It is par cularly important for development agencies to help small and informalenterprises to nd a voice in the processes that support public-privatedialogue. Public-private dialogue processes that are facilitated or supportedby development agencies should include a wide range of the private sector

representa ves and, where possible, endeavour to obtain the views of theless organised business sector.

Contested Issue 5: Does support for the private sector interfere withpoli cal processes?

Development agencies can support the private sector organisa ons and workersorganisa ons to par cipate more e ec vely in business environment reformby enhancing their capacity to assess the business environment (e.g., throughresearch) and to advocate for change. However, because business environmentreform is a poli cal process, this kind of support can be seen as interference withdomes c poli cs. Because many private-sector organisa ons are weak, especiallythose dealing with small, informal, rural or women-owned enterprises, they requiresupport to become more capable of engaging e ec vely in reform processes, butcare should be taken to ensure that this support is not directed toward any singleissue, poli cal agenda or poli cal party.

Principle 7: Focus on the binding constraints to business growth andscope re orms accordingly

The success of business environment reforms is not only determined byhow well the government does in delivering just outputs of reforms suchas adop ng a law, but also by the e ect reforms have on the behaviour of exis ng and poten al businesses. Steady focus is needed if rms are actuallyto see material changes in their environment that induce more risk-taking,more investment, more innova on, and other desirable behaviours. Because

17 Indeed, care should be taken to ensure that dialogue occurs around speci c policy issues; otherwise it canlead to consulta on fa gue (see h p://www.oecd.org/document/10/0,3343,en_2649_33731_39517642_1_1_1_1,00.html).

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there may be many areas of the business environment that require reform, theimpact of reform is enhanced by assigning a high priority to those that havea strong bearing on the cost of doing business and the e ec ve func oningof markets. These priori es vary from country to country, as well as acrosslocal business environments within the same country and between men andwomen. The greatest impact of reform will come from focusing on the mostbinding constraints to business ac vity. Development agencies o en focuson the symptoms the instruments themselves of bad regulatory systemsonly to nd that the system is resilient, and adjusts and reverses the reformin a myriad of ways. If the same problems are created over and over again,development agencies should take a broad approach that changes wrongincen ves facing governments and businesses. Governments that exhibita pa ern of poor regula on require changes to the system of producingregula on, whereas governments that are doing generally well, but haveisolated and signi cant problems, could bene t from narrow or one-o reforms in those areas.

Principle 8: Sequence business environment re orms and allow time

While a focus on the binding constraints to business growth is essen al, thedesign of reform support programmes may not necessarily begin with these.It is o en important to consider rst-stage reform support programmes thatbuild experience and con dence among reform stakeholders by focussingon those reforms that are the easiest or have the most immediate impacton the business environment and the performance of the private sector. If properly selected and designed, these reforms will demonstrate how reformcan create improvements for business, while building competencies andcon dence among programme partners. Development agencies should acceptthat systemic reform takes a long me. They need to be realis c when se ng

targets and me frames for business environment reforms, par cularly in acountry context where the understanding and capacity for good governanceare limited.

Principle 9: Address the implementation gap

O en, business environment reforms focus on policies, laws and regula ons,but overlook the speci c challenges associated with ensuring that reformsare enforced and implemented. Development agencies should emphasise the

importance of implementa on. This includes a commitment to developingthe competencies and capaci es of development agencies and their partners

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to make reforms work emphasising the need to address the o en morecomplex issues associated with poor governance, organisa onal weaknessesand corrup on.

Principle 10: Formulate a communication strategy and use mediastrategically

Business environment reform processes should include an assessmentof the role communica on plays when a new way of doing things is beingadopted. Planning a communica on strategy requires answers to three keyques ons: Why is the work important? Which people should be made awareof it? What are the issues that need to be tackled? A sound communica onstrategy is crucial to developing and maintaining public awareness of businessenvironment reforms and relevant issues. Communica on should focus on thebene ts of change, rather than on the costs of the status quo; a clear visionof the future system should be presented. Special a en on should be givento working with the media. Print and electronic media can become powerfulallies for development agencies in their e orts to raise awareness of the needfor business environment reform and communicate the broader purpose of reform programmes (See Box 4.)

Box 4: Ukraine SME policy reform

IFCs Ukraine SME Policy Project worked with the Ukrainian government to improveprivate-sector regula on as a means of promo ng investment. The project lobbieda reform of the system of business permits in order to bring Ukrainian prac ce intoline with contemporary European standards. By the end of 2004, IFC had assistedthe government to dra a law aimed at improving the permits system by abolishingabout 1,000 unnecessary permits, and leaving in place only key permit proceduresfor poten ally hazardous rms and ac vi es. The challenge was to promoteadop on of the law and assure implementa on of the law by Ukraines regulatoryagencies. The media proved to be an important stakeholder to engage in thisprocess. IFC ini ated a na onal media campaign on the need for business permitreform. In 2005, this campaign resulted in 220 media appearances on the topic of permits reform (94 press ar cles, 33 instances of coverage by na onal television,23 radio news stories and 46 Internet spots). As a result, the awareness of theneed for reform of the permits system among both o cials and media sourcesincreased.SOURCE: IFC,Lessons of experience in technical assistance , July 2006

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Principle 11: Work with government as the lead agent

Unlike other private sector development interven ons, government is aprimary actor in the process of business environment reform. Government

and the other organs of the state enact laws and regula ons that governthe behaviour of the private sector. It protects the interests of consumers,workers, owners of property, providers of nance, other businesses, and theenvironment; and it is responsible for discharging the rule of law and raisingtaxes to invest in public goods. The rela onship that is formed betweengovernment and the private sector is of cri cal interest in business environmentreform, as is the way government goes about regula ng business ac vi es.It can do this in ways that are transparent, predictable and equitable while

reducing the burden on business.

Successful reform support requires a close working partnership withgovernment in which development support adds value to government reforme orts. Development agencies should provide exible support, informa onand guidance, and encourage government to take full ownership of reforme orts. This is consistent with the Paris Declara on on Aid E ec veness:Ownership, Harmonisa on, Alignment, Results and Mutual Accountability . Insitua ons where government leadership is weak or unresponsive, it may benecessary to support processes that encourage leaders to pay more a en onto reform, such as through the support of government think tanks or public-private dialogue.

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Contested Issue 6: What role should government play in enterprisedevelopment?Governments are required to create a level playing eld in the business

environment in which all rms regardless of whether they are large or small,rural or urban, domes c or foreign, or owned by women or men operate onan equal foo ng. Levelling the playing eld is a constant process for na onal andsub-na onal governments. Not all development agencies agree on the role of government in enterprise development. Some argue for a so-called minimalist rolein which government limits its role to reducing the regulatory burden on businessand reducing the cost of doing business. Others suggest that governments need tointervene more broadly in the economy with supply-side programmes to producethe social, economic and equity outcomes they desire.Whatever posi on they take on this issue, development agencies should workwith governments to help them to design reforms to the business environmentthat reduce costs, reduce regulatory risks and boost market compe on. Theyshould support the use of systemic approaches to enterprise development andbusiness environment reform wherever possible and cau on governments againstinterven ons that further distort the role of markets.

Principle 12: Align business environment re orms with nationaldevelopment plans

Development agencies should align private sector development with broadereconomic, social and environmental policies and include business environmentreforms in their e orts to promote private sector development, economicgrowth, gender equity, and poverty reduc on. Similarly, support for reform of thebusiness environment should be integrated into na onal planning instruments,development policies and global agendas (e.g., Poverty Reduc on Strategy Papers,Private Sector Development Strategies, and the Millennium Development Goals).However, care should be taken when applying generic programme planningframeworks as many of these are based on broad poverty reduc on perspec vesthat can be limited in terms of the role of the private sector and the importanceof the business environment. Moreover, reform packages that are supported bydevelopment agencies should support the integra on of policy, legal, regulatory,ins tu onal, procedural, and technological and social solu ons. Addressing oneelement alone (e.g., a new policy) is rarely good enough. While it is not possibleto change all elements of the system at once, careful a en on must be givento the ways in which changes in one area (e.g., the review of labour laws andregula ons) will a ect other areas (e.g., the role of regulatory authori es).

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Principle 13: Ensure good donor coordination

Development agencies should avoid duplica on of reform e orts and coordinatetheir programmes with other development agencies. Collabora on among

development agencies engaged in business environment reform shares risks andprovides access to a larger pool of exper se. Even small steps, such as informa onsharing, can contribute to the more e ec ve delivery of development resources.Where possible, mul -agency mechanisms should be used to support businessenvironment reform and to promote agency coordina on. 18 Key elements tosuccessful coordina on are:

a commitment by all par es to coordina on and collabora on;.

recogni on at headquarter level of the importance of coordina onb.in the eld to allow country o ces to par cipate meaningfully inlocal coordina on processes;

regular processes and mechanisms for informa on sharing;.

leadership and facilita on this can be provided by the hostd.government or by a nominated development agency;

iden fying agency competencies and capabili es, and using thesee.as a basis for a clear division of agency responsibili es; and

repor ng on experiences in the eld successes, challenges,f.emerging lessons.

Developing and transi on country governments can work with the developmentcommunity to support, enhance and, where necessary, lead coordina on and

collabora on e orts. In some countries, a high-level government ministryconvenes and chairs a development coordina on commi ee; in other countriesthis role is rotated amongst members. In addi on, development agenciesshould recognise the importance of suppor ng regional organisa ons.These organisa ons demonstrate the value of regional coordina on andinforma on sharing that can be used to enhance na onal reform e orts.

18 For further informa on on country-level coordina on in private sector development go to: h p://www.enterprise-development.org/groups/group.asp?groupid= 9


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Box 5: Donor coordina on in Africa

A number of countries in Africa display increasing e orts to improve donorcoordina on and harmonisa on with government in the elds of private sectordevelopment and business environment reform. This includes improving transparencyand accountability, while strengthening the links between development agencies,governments and the private sector.

In Ghana in January 2004, the government approved the Na onal Medium-TermPrivate Sector Development Strategy and Ac on Plan 2005-2009. The goal of thePSD Strategy is: sustainable, equitable and widespread private sector-led growththroughout Ghana, while its purpose is to enhance the compe veness of the privatesector. Based on the agreed strategy a number of development partners formeda Memorandum of Understanding with the government to establish a frameworkwithin which their support for private-sector development would be provided.Development partners work through the Development Partners (DP) Group andthe PSD Strategy Working Group to assist government in the implementa on of thestrategy. The PSD Working Group contains representa ves of the private sector andoversees the work of all actors, including 17 government ministries, departmentsand agencies. Progress within the PSD Strategy is reviewed by the PSD WorkingGroup twice a year and a joint monitoring and evalua on framework has beenestablished. In addi on, a number of development partners contribute support tothe PSD Strategy through a Pooled Fund.

In Tanzania, donor coordina on and collabora on with the government is outlinedin the Joint Assistance Strategy for Tanzania (JAST) of November 2006. The JASTrepresents a na onal medium-term framework for managing development co-opera on between the government and development partners so as to achievena onal development and poverty reduc on goals. It also outlines the role of non-state actors to the extent that they contribute to the successful implementa onof the strategy. Few development agencies have also combined their nancialand knowledge resources to support the Business Environment Strengthening forTanzania programme.

In Zambia in 2006, the government signed a Memorandum of Understandingwith the private sector and eight development agencies (known as coopera ng

partners or CPs) on the coordina on of the PSD reform programme. With someten ministries involved, the

Documents

Supporting Business Environment Reforms 2008