Supporting Business Environment Reforms: Practical Guidance for Development Agencies

Donor Committee for Enterprise Development Established in 1979 as the Committee of Donor Agencies for Small Enterprise Development The DCED works on: –Defining best practice in priority themes in participatory ways –Disseminating best practice and successful experiences –Increasing the effectiveness of development practitioners Previous donor guidance: –Small and micro-enterprise finance: Guiding principles for selecting and supporting intermediaries, 1995 (“Pink Book”) –Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention, 2001 Edition (“Blue Book”)

A multi-agency view: Member Agencies Bilateral Member Agencies Agence Francaise de Developpement (France) Australian Agency for International Development (Australia) Austrian Development Cooperation (Austria) Canadian International Development Agency (Canada) German Federal Ministry for Economic Coop. and Dev. (BMZ, Germany) / German Technical Cooperation (GTZ) International Development Research Centre (Canada) Ministère Francaise des Affaires Étrangères (France) Netherlands Ministry of Foreign Affairs (Netherlands) Norwegian Agency for Development Cooperation (Norad, Norway) Royal Danish Ministry of Foreign Affairs (Danida, Denmark) Swedish International Development Agency (Sweden) Swiss Agency for Development Cooperation (Switzerland) Multilateral Member Agencies Food and Agriculture Organization (Italy) International Fund for Agricultural Development (Italy) International Labour Office (Switzerland) Organisation for Economic Co-operation and Development (France) United Nations Industrial Development Organisation (Austria) World Bank Group - SME Department (USA)

Donor-Supported Business Environment Reform Business Environment Working Group established in 2001 Research: –2002: Enabling small enterprise development through a better business environment; donor experiences in supporting reforms in the business environment –2004: Donor approaches to improving the business environment for small enterprises Conferences: –International (Cairo 2005) –Regional, Asia (Bangkok 2006) –Regional, Africa (Accra 2007)

Practical guidance to improve support for business environment reforms in developing and transition countries in order to promote economic growth, job creation, poverty reduction and gender equality. Prepared for the international development community at headquarter and field levels –Programme partners should also find value in it.

Defining the “Business Environment” A sub-set of the broader investment climate and is comprised of three elements: –Policy and legal framework The policies, laws and regulations that affect business –Regulatory and administrative framework The ways in which policies, laws and regulations are enforced and managed –Institutional arrangements The ways in which government and business represent themselves and communicate with each other

Business Environment Policy and Legal Framework Regulatory and Administrative Framework Institutional Arrangements Sector-Specific Business Environment Regional, National and Sub-National Business Environment Investment Climate Infrastructure Open markets such as financial, labour, etc. Rule of law Political stability Economic predictability Equitable and efficient labour markets Skills and HRD

Reforming the Business Environment Development agencies support their programme partners (government and the private sector) in their efforts to reform the business environment. Business environment reform changes business behaviour in ways that are likely to increased levels of investment and innovation, and the creation of more and better jobs. This is done by: –Reducing costs –Reducing risks –Increasing competitive pressures

Levels of Business Environment Reform Regional National Sub-national Sectoral

Business Environment Reform at the Regional Level Key Programme Partners: –Regional development bodies (e.g., AU, ASEAN), regional economic communities (e.g., SADC), World Trade Organisation, OHADA Policy and Legal Framework: –Improving policies and harmonising laws and regulations that improve regional trade and investment Regulatory and Administrative Framework: –Improving the regulations that hamper regional trade and investment Institutional Arrangements: –Supporting member states of regional bodies to design and implement reforms; improving public-private dialogue at the regional level; supporting linkages and feedback mechanisms between sub- national PPD and PPD at national level.

Business Environment Reform at the National Level Key Programme Partners: –Parliament, political parties, national government ministries, regulators, private sector representatives, business membership organizations, business media, worker organisations, and consumer groups Policy and Legal Framework: –Improving national policies and laws that promote competition, open markets and the general conditions for private sector development Regulatory and Administrative Framework: –Improving national regulations that affect the establishment, operation and closure of private enterprises Institutional Arrangements: –Improving dialogue between national government and private sector representatives (e.g., PPD), as well as other regulatory governance issues and responsibilities; building the capacity of governmental institutions

Business Environment Reform at the Sub-National Level Key Programme Partners: –Sub-national legislatures, provincial, regional and local government authorities, local business associations, community-based organisations Policy and Legal Framework: –Improving local policies for private sector development Regulatory and Administrative Framework: –Improving the sub-national regulations or enforcement of national regulations by sub-national authorities Institutional Arrangements: –Supporting local structures and processes for sub-national public private dialogue

Business Environment Reform at the Sectoral Level Key Programme Partners: –Sector-specific business associations, regulators, government authorities, policies Policy and Legal Framework: –Sectoral policies and laws often deal with promotional interventions and ways to enhance the value chain Regulatory and Administrative Framework: –Improving business regulations that apply to specific industry sectors or sub-sectors Institutional Arrangements: –Building and supporting sectoral business membership organizations to participate in discussions with government agencies to improve the business environment; building the capacity of government sectoral bodies and improving regulatory governance

Functional Areas of Reform Simplifying business registration and licensing procedures Improving tax policies and administration Enabling better access to finance Improving labour laws and administration Improving the overall quality of regulatory governance Improving land titles, registers and administration Simplifying and speeding up access to commercial courts and to alternative dispute resolution mechanisms Broadening public-private dialogue processes with a particular focus on including informal operators, especially women Improving access to market information

1. DIAGNOSTIC PHASE Define purpose and objectives Identify main stakeholders Get the commitment Mobilize funding Analyze constraints Analyze capacity Collect baseline data 2. SOLUTION DESIGN PHASE Design high-level structure Engage stakeholders Agree overall design Develop implementation plan 4. EVALUATION AND SUSTAINABILITY Conduct programme evaluation Ensure recommendations are incorporated in new procedures Prepare programme reports Conduct impact assessments (usually done beyond the programme cycle) 3. IMPLEMENTATION PHASE Provide technical assistance Train civil servants Launch reform procedures Information campaign Fine-tune reforms based on user feedback Phases in Business Environment Reform

Key Messages

A healthy business environment is essential for growth and poverty reduction. Reform is needed where inappropriate regulation, excessive taxation, lack of fair competition, lack of voice and an unstable policy environment restrict investment and the development of markets, stifle entrepreneurship and force many businesses to operate in the informal economy. Business environment reform is complex, operating on many levels and involving a very wide range of stakeholders. Development agencies should ensure a thorough diagnostic analysis and maintain, as far as possible, a systemic approach and an understanding of the broader causal picture.

Business environment reform is always political and development agencies should therefore take care to analyse the political context. They should have strategies to build coalitions of support and to engage with those who wish to protect the status quo. Government should lead and own reform; donors should support them. The right balance between international and local expertise must also be found.

Development agencies should ensure that the inputs and participation of all stakeholders, including politicians, officials, the formal and informal private sector and civil society, are reflected in the reform process. Reform interventions should be designed to enhance stakeholder capacity for ongoing and future reforms. Development agencies should ensure systems are in place for donor coordination and take responsibility for the quality and consistency of the advice and assistance they provide.

Development agencies should sequence reforms according to context. “Quick wins” and taking advantage of ad hoc opportunities such as changes of government, may build reform momentum. However, a long-term perspective is essential to ensure sustainability. Development agencies should understand and manage the implementation gap typically found between the adoption of regulation or principles, and changing practice and enforcing regulations on the ground. Development agencies should ensure the reform process has a strong communication programme so that all stakeholders are engaged and made aware of the benefits of reform.

Principles

Principle 1:Adopt a systemic approach to reform Principle 2:Understand and respond to the political economy of reform Principle 3:Respond to and stimulate the demand for reform and drivers of change Principle 4:Ensure domestic ownership and oversight of reform efforts Principle 5:Strengthen the role and capacity of key stakeholders

Principle 6:Focus on what the private sector needs through public-private dialogue Principle 7:Focus on the binding constraints to business growth and scope reforms accordingly Principle 8:Sequence business environment reforms and allow time Principle 9:Address the implementation gap Principle 10:Formulate a communication strategy and use media strategically

Principle 11:Work with government as the lead agent Principle 12:Align business environment reforms with national development plans Principle 13:Ensure good donor coordination Principle 14:Balance international and national expertise Principle 15:Promote quality assurance in development agency support of business environment reform

Contested Issues in Supporting Business Environment Reform

Contested Issue 1: Can we measure the extent to which business environment reform contributes to economic growth and poverty reduction? While business environment reform contributes to economic growth and poverty reduction, it is unclear how significant this link is and whether it can be measured. Others argue there is no simple, linear relationship between growth, income and the volume of regulation –consideration should be given to the quality of regulation

Contested Issue 2: Should business environment reform focus on enterprises that are owned and managed by poor people? YES:Because general reforms of the business environment are not sufficient to reduce poverty NO:Because targeted approaches create more biases and market distortions and are not consistent with a systemic approach Development agencies should adopt a systemic approach – they should assess the impact proposed reforms have on markets and the broader economy

Contested Issue 3: Should development agencies simply respond to demand for reform or should they also contribute to creating a demand for reform? Development agencies experience a tension between responding to demand and supporting initiatives that create a demand. They should work with programme partners to help them see the broader economic impact business environment reforms can create

Contested Issue 4: Should development agencies support individuals or institutions? While there are dangers in supporting one or two reform-minded government officials instead of the broader institution in which these officials work, there may be instances where these individuals can champion reform efforts.

Contested Issue 5: Does support for the private sector interfere with political processes? Does support for private sector organisations interfer with domestic politics? When supporting private sector organisations, donors should take care to ensure this support is not directed toward any single issue, political agenda or political party.

Conference Debates Cairo 2005: Is firm size relevant for the reform of the business environment? Bangkok 2006: Business Environment Reform is THE key element in the reduction of poverty Accra 2007: Business environment reforms have little impact on poverty reduction in Africa

Donor Committee for Enterprise Development