1. Scott Kleinberg, USAID / EGAT/MD March 20, 2008
Business Enabling Environment and the Value Chain ‘The Path to Strategic Policy Reform’
Talking Points:
Background for this was the lack of integration between enabling environment programs within broader EG portfolios
Scott Kleinberg, USAID / EGAT/MD March 20, 2008

2. What is successful Policy Reform?
It is NOT changing laws
It is changing:
implementation of the laws
regulatory burdens
business relationships
incentives that determine business decisions
This is what we want from policy reform!
What can you do to achieve this? 
You can change the laws and not change the business environment.
Informality is an economic decision that responds to the business enabling environment
How to identify policy reforms that contribute to country strategies
How to choose among policy reform options to target binding constraints
How can your policy reform program support your other programs

3. Monitoring & Impact Assessment
How Does Business Enabling Environment (BEE) fit with Value Chain Analysis?
Critical to VC Selection
(Evaluate constraints)
Value Chain Selection
Monitor & assess BEE
Monitoring & Impact Assessment
Integral part of VC Analysis
(Detail policy constraints & develop list of options)
Value Chain Analysis
Talking Points:
Underscore how BEE is critical to VC selection; how BEE needs to be part and parcel of the VC analysis, and how it is key to any competitiveness strategy
Implementation
Design
Design strategy for policy reform
Key to any Design
(Identify where most effective to work)

4. The Value Chain can be a reform FRAMEWORK
Key benefits
more easily value impact of binding constraints on Value Chain
identify policy reforms that really matter to Value Chain participants
national policy studies might not reflect what issues most effect players in Value Chain
Value Chains have constituency who can advocate for change
Can use Value Chain as:
context for assessing policy barriers
framework for advocacy
Local / National
Business Enabling
Environment
Global Business Enabling Environment
Main Points:
4) VCs have constituency who can advocate for change: … if armed with data that can show comparisons!
Extensive repository of information could be obtained from, for example: FIAS study, Doing Business Indicators, Commercial and Regional Reform Analysis (CLIR)
Challenge for many countries is that they get a large shopping list of policy reforms BUT (1) not easy to calculate total costs of policy reform, (2) total benefit, and (3) how easy it is to achieve reform.
Could use Value Chain as:
- context for assessing policy barriers
- starting point for framing policy program
Notes to the Facilitator
Measures on Impact of Policy barriers on the Value Chain can be absolute or qualitative
FIAS = Foreign Investment Advisory Service

5. Typical Value Chain BEE Constraints
Policy Issues
Explicit trade barriers (especially inputs)
Customs, standards
Foreign Direct Investment constraints
Licensing restrictions
Government subsidies
Enforcement Issues
Unequal enforcement
industry policies
Taxes
Licensing, permits
Unequal access to land
Unequal access to public infrastructure
Unequal access to energy
Talking Points:
Explicit trade barriers (especially inputs): Also, protectionist barriers weaken sector competitiveness

6. BEE: Critical to Value Chain Selection
Does success in value chain depend on resolving certain constraints?
Is successful reform feasible within value chain activity time frame?
Do you or another donor have resources to resolve constraint?
Selection
Monitoring &
Impact
Assessment
Analysis
Implemen-
tation
Design
Talking Points:
Stress that there are sector constraints and economy wide constraints

7. BEE: Integral part of Value Chain Analysis
Selection
Design
Implemen-
tation
Monitoring &
Impact
Assessment
Value chain analysis permits informed decisions:
Impact
Cost
Time
Difficulty
Identification of complementary donor activities that support reforms

8. How Can We identify Reforms?
Target of opportunity
Government expresses interest in particular area, such as business registration reform
Barrier in programming
Program identifies barrier to achieving results
Previous successful experience
Mission Director did successful banking reform in previous country so start focus there
Talking Points:
Reforms can be opportunistic – 85% of reforms happen in the first 100 days of an administration – the IFC
BEE has different context to ED and FS programs:
Often the entry point is more unclear. Number of entry points much broader than in the case of Enterprise Development / Financial Sector work.
In FS and ED programs the target group is often already identified.
(but maybe not most important barrier or one project / Mission should focus on)
Facilitator Notes:
This slide provides a background to how policy reform is usually conducted, rather than representing good practice for the audience to replicate.
You may want to ask the audience which of the selection methods they might identify with most for their own projects. To emphasize that this is indeed how selection of starting points for policy reform occurs in reality.
But:
Is it strategic?
Does it reach

9. BUT IS IT STRATEGIC? Target of opportunity Barrier in programming
Value Chain
Analysis
Target of opportunity
Government expresses interest in particular area, such as business registration reform
Barrier in programming
Program identifies a particular issue that is barrier to achieving results
Previous successful experience
Mission Director did successful banking reform in previous country so start focus there
BUT IS IT STRATEGIC?
Facilitator Notes:
Selection of the point of entry for policy reform should be far more strategic.
Challenge: How do we generate questions that give you a good point of origination? … To know which policies to focus on.
How do you sustain reforms if legitimacy and leverage depend on a single minister –
Reforms may not be strategic if there is no thought in how it fits into a broader reform strategy.
Emphasize that most people don’t even ask question on how to find a good starting point

10. Making Strategic Choices – Value Chain Reform Assessment & Selection
Reform of Shrimp Feedstock Import Constraint
Impact
Removing constraint reduces feedstock cost by 50%
Cost
Will require parliamentary action – significant education, analysis of impact and advocacy involved
Time
Parliament could pass it in one year
Difficulty
There is little current support outside of industry
No lead firms appears willing to champion this
Current licensee holds significant sway in parliament
Example:
I. Cotton in Zambia: Significant exchange rate problem effecting profitability of cotton. An advocacy group could take this on. Depends on size of sector and ability to effect policy.
II. Egypt: (Chemonics / World Bank project) – make entire process transparent, rather than changing regulation law)
Talking Points:
How can policy reform assist you in achieving broader economic growth results in enterprise development, jobs creations, etc?
Narrower reforms may be more likely to succeed and easier to identify negative impacts  E.g. Local policy barriers are often lower cost and easier to change than national barrier
Reforms with broad impact may be easy to achieve within an opportunistic window but more difficult to identify negative impacts  E.g. Sweeping electoral changes or crisis may provide key officials with a short mandate to effect a few important changes
How do you choose?
Consider Impact of Policy Reform against Ease of Change
It’s not a tradeoff – you want to maximize both
- Local and Regional policy barriers - Often lower cost and much easier to change; could be significant constraint to business and is easier to change than a national law or policy e.g. if it is how the law is implemented in a region rather than how the law is written
- National policy barriers - Could be more important
Small window of time principal: Very relevant to post conflict / disaster areas where much opportunity for reform but people often focus on relief – but this is when governments often have most flexibility to change
Best practice says that domestic advocacy matters for long run success
Local ownership of the reform process is essential to long term success: If serious about policy reform and really want results, need to know who is going to advocate for, support, and monitor.
Identify barriers BALANCED WITH who is going to advocate for reform
E.g. An issue could be a high barrier but do not know who is going to advocate for it
In face of opposition to reform, there is room for creativity e.g. relax labor law in particular region and see what happens
Challenge: time frame for reform is long so can help to get initial successes under belt; BUT working with business does show ST economic response therefore VC link can make sense because in one season can see change in competitiveness of that product because price is going to drop
E.g. banking reform could be important … but then taking away from Value Chain related policy reform – which could be fine, but this does need to be a conscious choice
Positive
Negative

11. Reform Assessment & Selection
Vary by sector / geography
Impact
Removing constraint reduces feedstock cost by 50%
Cost
Will require parliamentary action – significant education, analysis of impact and advocacy involved
Time
Parliament could pass it in one year
Difficulty
There is little current support outside of industry
no lead firms appears willing to champion this
Current licensee holds significant sway in parliament
Don’t Forget:
“Who will lose?”
“Who will oppose?”
Talking Points:
While advocacy is important, it isn’t the only determinant of success … it’s important to consider those who will lose in the process …

12. BEE Constraints in the Value Chain
Examples:
Kenya agrochemical regime - cotton to garment value chain
Kenya Coffee value chain
Nigeria Export Processing Zone
Talking Points:
Kenya agrochemical regime - cotton to garment value chain
Regulations discourage local reformulation of agrochemicals and delay the import of new formulations
Poor quality raw cotton also leads to higher waste and poor quality yarn
Kenya imparts 3x the cotton it exports – there is a domestic market sufficient for increased production
In Kenya, it costs smallholders 2.5 times more to process coffee through cooperatives that it costs large estates
The cooperatives can also take from 6-9 months to pay the farmer
Imported agrochemicals account for over 90% of spraying costs – the low yield for kenyan coffee is in part due to the suboptimal application of pesticide and fertilizer
Agrochemical distorts costs, constrains production – only 40k/340k ha. in production
Also reduces staple length and quality
Kenya Coffee value chain
Cost structure distorted by government licensing and taxes
Illegal for exporters to purchase directly from farmers
All smallholders must process through coop
Again … agrochemicals
Nigeria Export Processing Zone
Does not achieve its purpose
Conflicting regulatory interpretation
Failure of customs to grants exemptions
Affects shrimp processing and leather industries
Key to any Competitiveness Strategy:
The key to competitiveness is rising productivity
Critical constraint to rising productivity in Africa is the enabling environment
Sectoral approach may provide a good entry point to accomplishing key policy reforms

13. BEE: Design & Implementation – Principles & Guidelines
Selection
Know where you’re going – have a strategy for reform
Start with smaller, manageable reforms that build credibility
Avoid high risk strategies
Information (usually from the donor) supports effective dialogue
Ownership is important
Do not advocate
Monitoring &
Impact
Assessment
Analysis
Implemen-
tation
Design
So if you agree with this, then you’ll have a realtively clear understanding of the nature of the binding constraints by the time you have seelected a value chain for support and development
You need a strategy to avoid falling into the one-off solution trap. It may be easy to develop a quick solution that only addresses the immediate problem, but leave you at zero when you need to address the next constraint. How do you build the dialogue, advocacy, trust, momentum, necessary to accelerate reform or at least make it easier to attack larger issues. How does this fit with a broader reform process.

14. Using Value Chain as Strategic Point of Entry
Reform at the value chain level may be more achievable within program timeframes
Constituencies may be fewer and more closely aligned
Advocacy groups may be more coherent
Existing program relationships
Complementarity to other program objectives

15. Using Value Chain as Strategic Point of Entry
Selecting policy targets
… that would achieve the most impact on your enterprise program
… for which you have a strong constituent or advocacy group
Facilitator Notes:
Selecting policies that most benefit your other programs
Need to leverage / benefit other programs
Question: Do you want to work on policy reform projects that are most important and beneficial to the overall economy OR on policy reform projects that would also achieve the most impact for other programs that you are working on
This would be achieve leverage for these and support greater success for the other things that you are working on
As a program officer you may want to work on policies that are most beneficial to the other programs that you are working on
These often exist in conjunction with one another …
If you are working on policies that are most beneficial to your other programs
Then you already have
(1) identified a local advocacy group
(because know players & can leverage their knowledge of other people & resources)
Critical to successful policy reform
Most effective policy reform happens when constituent locally supporting
Is there a domestic constituency for change or are you going to have to create one? (If you have a Minister who is largely into reform, the Minister is the constituency (but could lose them if they go away))
(2) identified what the relevant costs are
because you have already evaluated the sector
(3) easier access to feed into relevant conversations / dialogues (e.g. think tank studies) so can support policy dialogues more
USAID often has local governance projects / issues that could link to e.g. if local governance programs running where VC is operating, can use other USAID programs as entry pts – because know players – can leverage their knowledge of people and other resources
identified local advocacy group
(2) identified what relevant costs are
(3) easier access to feed into relevant dialogues

16. Implementation of Laws Makes a Difference
Can make huge impact on policy without changing any laws
Implementing well matters as much as passing new laws
Example:
The provincial implementation of the national framework varies broadly
 if work in a particular sector that is in only in one region of the country, better to work on only that one region’s policy level rather than nationally
Bac Ninh
Hai Phong
Binh Dinh
# of Steps 98 70 51
# of Requirements 13 6 7
# of Days 28 24 11
# of Visits Needed 10
Facilitator Notes:
Examples:
Bosnia: Bulldozer Process “Guillotine” – got rid of all laws if could not give reason for them.
Vietnam: Table on slide: Overall comparison between 3 provinces, Source: International Finance Corporation (IFC)
Mozambique, Kenya
It’s not just changing laws – you can improve implementation of current laws and make a big difference
The most significant policy reform is sometimes not in creating new laws or policies, but instead changing or improving the implementation of existing laws or policies.
Improving implementation is also policy reform – say it twice!
A common impulse is to rewrite the legal policy framework but this will often not make as much of a difference on the ground as an improvement in implementation would.
Implementation can often act as a small step towards reforming policy, as can demonstrate improvement and make the case for then changing laws too. Also, if the implementation cannot be improved first, then it may not be beneficial to add more laws anyway.

17. Keep in mind: Local Governments Matter
Local governments enforce both national and local laws, regulations, and decrees
Transaction costs
Incentives to formalize
Affects business relationships and upgrading
Talking Points:
Developing BE reform support functions: which sustainably help local BE reformers to function effectively. For example, programs encourage
the media to better cover businesses, link stakeholders to specialist service providers for services such as IT or research and analysis, and strengthen local institutions such as universities to conduct BE-related work.

18. Keep in mind: Success may require creativity
Institutional incentives matter
Example:
Egypt business registration reform replaced incentives for corruption with incentives for efficient behavior through transparency and performance awards T:
Mention that a standard indicator for policy reform is the Number of Laws Drafted. This indicator does not measure the Number of Laws actually Passed, as so many do not get passed. For this reason too, Policy Reform cannot only entail advocacy and laws passed, etc.

19. Successful reform programs include:
How do you get there?
Successful reform programs include:
Building advocacy capacity
Public private dialogue
Building the capacity of local governments
Develop Business Environment reform support functions
Changing institutional incentives – implementation matters
Advocacy capacity
joint studies on specific BE iissues
Advocacy training
fund advocacy initiatives
Link value chain to businesses or institutions that could support reform
PPD
often starts as consultation on a particular issue – this permits a more organic development of the dialogue
Some programs have been successful in developing formal committees composed of public and private members – but critical in these cases that the public and private sector drive the agenda and that small and informal enterprises have voice in the process.
Build capacity of local gov’ts
local gov’t have benefitted and been burdened by decentralization. Result is sometimes poor practices in supporting private sector growth.Training, facilitating dialogue between local gov’t agencia sn and private sector associations or representatives
Develop BE reform support structures (sustainable structures)
Encourage media to cover BE issues
Link stakeholders to specialist service providers, like research and analysis
strengthen local institutions, such as universities, to do BE-related work and research

20. Success Story
Tanzania coffee chain developed a premium brand
Analysis revealed high taxes compared to “peer” countries and sales channel constraints
Coffee Board and key industry stakeholders presented findings to Government
Ministry reduced taxes, levies and local fees by 21%
Coffee Board permitted growers to sell directly to specialty buyers, and negotiate directly with roasters

21. Key Lesson: You Need to Build Momentum
Small successes lead to support for broader reforms
Value chains can provide the opportunity for quick reforms and often respond quickly to the reform of binding constraints
LESSONS LEARNED : START SMALL AND WORK UP
manageable, successful reforms are often a good way to begin.
It’s easier to build on success than be muddled in a process -
unsuccessful or prolonged reforms close doors

22. THANK YOU!
Please visit for seminar presentations and papers
Scott Kleinberg March 20, 2008