Reforming the Business Environment :Current Thinking and Future Opportunities

www.Enterprise-Development.org Reforming the Business Environment: Current Thinking and Future Opportunities Thematic Overview of the Papers presented at the Cairo Conference, 29 Novembe

www.Enterprise-Development.org

Reforming the Business Environment:

Current Thinking and Future Opportunities

Thematic Overview of the Papers presented at

the Cairo Conference,

29 November to 1 December 2005

15 March 2006

Table of Contents

A Introduction 3

B Systemic approaches 3

B.1 Dimensions of the problem 3

B.2 The Process of Reform 4

B.3 Public-Private Dialogue (PPD) 5

B.4 Other systemic issues 5

C Radical Treatments 5

C.1 The Regulatory Guillotine 5

C.2 The Bulldozer Initiative 6

D Assessment Tools 6

D.1 Overview 6

D.2 Sectoral level, Value Chain Analysis 7

D.3 Regulatory Impact Assessment (RIA) 8

E Business registration and formalisation 8

F Tax Regimes for Small Business 9

G The Land Market and Investment 9

H Inspections 11

I Other outstanding issues 11

J Donor responses 11

K Conclusion 12

Annex A: List of Papers and Presentations, with hyperlinks 13

Annex B: Papers and Presentations focusing on particular countries 16

Annex C - Conference Communique 17

A Introduction

Most of the poor will only be able to work their way out of poverty if they can start and 'grow'their own businesses - or find employment in another, growing business In many developingcountries, however, these businesses face enormous regulatory barriers Developmentagencies have therefore become interested in ways to reform the business environment, sothat businesses and economies can grow; while various terms are in use, this Paper usesthe term 'business environment' to refer to both the policies, law and regulations, and theinstitutions, or 'rules of the game', that affect private sector development1

Given the current interest in this theme, the Donor Committee for Enterprise Development(www.enterprise-development.net) recently organised a Conference in Cairo, to reviewcurrent knowledge The Conference featured about 60 peer-reviewed Papers, presentedmostly in break-out sessions Since most speakers prepared both a presentation and aPaper, there are about 110 documents in all; these were provided to the participants on aCD-ROM, and have since been posted on www.businessenvironment.org

Given the importance (and volume) of such a body of knowledge, this Paper has beenwritten to index some of the learning points arising from the Cairo Conference; it is designed

to enable the reader to find materials of most interest to the individual, as quickly as possible.Each of the Cairo Papers and presentations have been referenced by the Session number inwhich they were presented, so the Session number is also given as a reference throughoutthis Paper (in parentheses), to enable readers to find the original material

A complete list of Papers and presentations is included as Annex A, with hyperlinks - againorganised by Session number Annex B lists the Papers that focus on particular countries.Annex C reproduces in full the final version of the Conference Communique, synthesising themessages coming out of the presentations and discussions in Cairo

Papers giving practical experience are referred to more in the text below than those outliningnew projects or future plans; it is a personal selection, and is not intended to be eithercomprehensive, or representative of any official viewpoint Indeed, the Conferenceessentially consisted of peer-reviewed submissions, so is not necessarily a comprehensiveoverview of the current 'state of the art' - there may be gaps Occasionally, therefore,references are given to other publications that are relevant

This report has been prepared by Jim Tanburn (Jim@Tanburn.com) Thanks go to theBusiness Environment Working Group, including particularly Martin Clemensson and SimonWhite, who were central to the Cairo Conference process; particular thanks also to SDC fortheir support for this Paper

B Systemic approaches

B.1 Dimensions of the problem

To quote from an earlier study, "modern

day business enterprises in Africa and

transition countries suffer regulatory

barriers which were largely absent in

18th and 19th Century Europe and North

America when these areas were

1 For a more detailed discussion of the term, see Emerging issues and debates in the reform of the business

environment for small enterprise development, by Simon White Small Enterprise Development Journal Volume

16 Number 4, December 2005 P 10-18.

Figure 1: Business Entry Costs as % of GDP/Capita

industrialising"2 A graphical illustration of this point is shown in Figure 1; it was used by bothWelch (2.1) and Waddington (3.4).

Shen (3.1) made a similar point by showing the cost of registering property, expressed both

in days and as a percentage of property value; at 14.4%, sub-Saharan Africa had by far thehighest registration cost, relative to property value, of any region As a result, much capitalremains informal and illiquid; in his Opening Speech, for example, President Mkapa of theUnited Republic of Tanzania noted that the informal, extra-legal economy in his country

"holds assets worth USD 29 billion, much more than what Tanzania has received over theyears in terms of FDI, aid or loans In other words, what the poor of Tanzania own, if madeliquid, is much more than what the outside world can ever give them!!"

Many presentations singled out a particular aspect of the overall system; for example,Messick (3.1) singled out the lack of means to enforce contracts, as the most importantsource of economic stagnation and under-development Hallberg (5.1) listed the aspects ofInvestment Climate reform that the World Bank Group gives most priority to: core themesinclude:

 judicial and other dispute resolution mechanisms

 legal institutions for a market economy

 personal and property rights

 corporate governance

 regulation and competition policy

Non-core Investment Climate themes for the Bank include:

 tax and policy administration

 infrastructure services for private sector development

 other financial and private sector development

 export development and competitiveness

 trade facilitation and market access

B.2 The Process of Reform

Some papers did consider the process of reform; Rodrigo (3.1) lists various types ofregulatory decision-making processes, and typical situations where they are commonly used:

 expert (typically using tools such as Regulatory Impact Assessment, or RIA)

 consensus (e.g Netherlands)

 political (most commonly in times of political crisis)

 benchmarking ( popular in smaller countries)

 empirical (often used in the United States - again with RIAs)

Court (4.3) gives an overview of the

literature and issues in political reform

processes, noting the 4 'I's in

influencing policy: Information,

Interests, Ideologies and Institutions

He also includes the diagram shown

here as Figure 2 on the Policy Cycle A

similar cycle is noted by Waddington

6 Evaluation

The Policy Cycle

Figure 2 from Young, E and Quinn, L., 2002, Writing Effective Public Policy Papers: A Guide To Policy Advisers in Central and Eastern Europe, Budapest: LGI (Court, 4.3)

Most presentations indicated that political will was of central importance, and somepresentations addressed the political economy aspects (especially Session 4.1, although thepresentations and Papers for that Session were not available at the time of writing) Indeed,the question of demand for reform remains challenging, since the countries most in need ofreform are not always the ones that are most enthusiastic to do so Also, whose demand ismost likely to lead to pro-poor growth in the longer term?

B.3 Public-Private Dialogue (PPD)

Public-private dialogue (PPD) can in principle enable the private sector and civil society togenerate pressure for reform, and several presentations focused on this theme; PPD waspresented as a structured consultation process between the public and private sectors, toimprove the business environment Herzberg presented experiences from 40 countries, whileGamser similarly presented DFID's experiences from many countries (both 2.4)

Both Papers give a wide range of experiences and insights, that allow readers to benefit fromachievements and lessons learned; for example, should partnerships should be restricted togovernment and business, or should they also include other stakeholders, such as labourunions, academics, NGOs and consumer groups? In general, a phased introduction ofadditional stakeholder groups is suggested Similarly, the issue of possible 'capture' of theprocess by larger firms is discussed

Session 4.4 included three additional presentations touching on the PPD theme; for example,Lamotte considered how to ensure that the voice of entrepreneurs is heard, outlining anumber of cases from ILO's experience; this included partnering with radio stations inUganda to provide a forum for advocacy and feedback, leading to reform of severalregulations and policies that had discriminated against small business

PPD, therefore, can generate demand for reform; anecdotally, the various benchmarkingexercises around the business environment have also generated some political will forreform from countries that find themselves low in the rankings Finally, a website has recentlybeen launched to develop the PPD theme further, at www.PublicPrivateDialogue.org; itmakes additional case study material available

B.4 Other systemic issues

Reinprecht (1.3) touched on the influences of local cultures on the reform process; sheproposed a series of culturally-specific factors that can enhance business environmentreform, and others that can impede it She also reviewed a range of tools and methodologiesfor analysing cultural features, and for facilitating the cultural aspects of the reform process.Other systemic issues, however, remain to be addressed more thoroughly in future Forexample, few presenters discussed the theme of corruption in any detail3; one exception wasthe presentation on the BEEPS survey findings in transition countries (Fankhauser, 1.1).Similarly, little mention was made of other possible pre-requisites for good reform processes,such as the need to attract and retain talented staff in the Ministries of reforminggovernments

It is generally easier to create new legislation, than to abolish or simplify existing legislation;President Mkapa recommended in his opening speech, for example, that "if it is notabsolutely necessary to make a law, it is absolutely necessary not to" Similarly,implementation of reformed legislation is often a challenge in developing countries Therewas some discussion, therefore, of alternatives to regulation, particularly for disputeresolution (Messick, 3.1) In addition, some initiatives cut through the 'Gordian knot' of themany regulations; these more radical treatments are outlined in the following Section

3 For an interesting discussion of this theme, as it relates to the World Bank in particular, see The World's Banker,

by Sebastian Mallaby; Yale University Press, 2005 Chapter 7.

C Radical Treatments

C.1 The Regulatory Guillotine

In 1984, the Government of Sweden found that it could not compile an official list of all theregulations in force; there were too many, spread across multiple authorities It thereforegave all of the relevant authorities one year in which to list the current regulations, afterwhich time any regulations not listed would not have any force Some screening was alsoapplied, to ensure that those regulations which were listed met some basic quality standards

In education alone, apparently, 90% of the rules were eliminated

This experience in simplifying regulations was later disseminated by the OECD, and usedwith success in Hungary, Mexico and Korea Jacobs and Associates(www.regulatoryreform.com) has trademarked the term Regulatory Guillotine, and helped toimplement the approach in Kenya, Moldova and Ukraine (Jacobs, 4.2) The reviews lasted2-6 months, during which time many regulations were eliminated For example, Moldova had

67 Inspectorates with over 1,100 regulations for business After review, it was decided that:

 426 formal acts met the criteria of review and should be included in the Registry

 285 formal acts (or 35 % of those relevant to businesses) should be amended

 99 formal acts (or 12 % of those relevant to businesses) should be discarded (many of

these had not been published or authorized by higher level laws)

Similarly, Kenya was found to have over 1,300 business licenses (including 600 by localauthorities) and fees imposed by 178 State bodies, with more being added all the time 35licenses were eliminated in 2005, and more reviews are now planned In Ukraine, 15,000regulations were identified, of which 4,900 were repealed during 2005

C.2 The Bulldozer Initiative

A similar approach was adopted in the Bulldozer Initiative in

Bosnia and Herzegovina (Herzberg, 2.4) A commitment to

implement 50 reforms in 150 days created a sense of urgency

and momentum, leading to 'ignition' Social marketing was

used extensively to reach out to people in all areas, who were

invited to propose specific reforms; the process was therefore

highly participatory, and an example of Public-Private

Dialogue It did benefit from the rather special political

conditions prevailing at the time, though, including particularly

the support of the High Representative Nonetheless, the

achievements of this initiative were impressive

D Assessment Tools

D.1 Overview

The Sections above have briefly addressed the political economy aspects of businessenvironment reform; development agencies, however, seek methodologies that can bereplicated in many countries In particular, they generally prefer to start with assessmenttools, and so an overview of assessment tools was presented early in the Conference bySilva Leander (1.1) She summarised 30 survey instruments, including both public andprivate-sector organisations, and mostly available on the internet The summary proposestypologies of survey, based on the following categories:

 quantitative (measurable) vs qualitative (perceptions of business people)

 aggregated at national-level to compare between countries vs disaggregated to uncover variations within countries, especially large ones (e.g World Bank in India, IMD in China)

Figure 3: Bulldozer Initiative logo

 studies of specific features: regulation (Doing Business), corruption (Transparency International), economic freedom / civil liberties (Heritage Foundation, Freedom House, World Bank Governance)

 studies of specific sectors (e.g MIGA in Asia) or firm sizes (e.g FIAS informal economy studies in Rwanda and Sierra Leone)

"If readers are looking for studies that consider many aspects of the investment climate, andthen aggregate them to create a single index, then the World Economic Forum’s GlobalCompetitiveness Report [www.weforum.org] and the International Institute for ManagementDevelopment’s (IMD) World Competitiveness Scoreboard [www.imd.ch] are the ones toconsult."

"For country investment climate (IC) surveys, the [DFID] Team recommends The WorldBank’s Investment Climate Surveys [www.worldbank.org/research/PICS/] Theircomprehensive and in-depth analysis makes them ideal for facilitating dialogue betweengovernments, the private sector and civil society For a lighter comparative approach wesuggest the Commonwealth Business Council’s Business Environment Surveys (BES) Boththe ICAs and BESs are repeated at 4-yearly and 2-yearly intervals respectively, therebyhelping to shed light on how investment climates are changing over time."

The order in which countries are ranked varies, according to the methodology used; Krylova(4.3) points out that Uganda scores more highly than China in economic freedom andregulatory burden, yet attracts rather less FDI Other Papers describing experiences withassessment tools included Reissner in the SADC region (1.1), Anh and Baan using an ILOmethodology in Lao PDR (1.4) and Palmade at the sectoral level (1.1); the latter is outlined inmore detail in the next Section

D.2 Sectoral level, Value Chain Analysis

Palmade (1.1) argued that many binding constraints on productivity are actually sectoral innature; he drew on evidence from many countries (particularly India) and on the work ofMcKinseys in this area4 Taking the wax print textile sector in Nigeria as a specific example,

he showed that the inputs were twice as expensive as in China, and utility costs were threetimes as much Labour costs were 60% higher than in China

The CD-ROM received by participants in the Conference also received a draft Paper bySubramanian (who could not be at the Conference herself), outlining a more detailed manualbeing prepared in FIAS for applying value chain analysis Since it was marked as a draft, ithas not been posted on www.businessenvironment.org However, Figure 4 belowsummarises the key steps envisaged in the methodology

The Donor Committee for Enterprise Development has another Working Group devoted toLinkages and Value Chains, and indeed there is a large body of knowledge alreadydeveloping in this field (see for example www.sdc-valuechains.ch,www.ids.ac.uk/globalvaluechains and www.mmw4p.org)

4 http://mckinsey.com/mgi/rp/CSProductivity

Figure 4: Elements of the Value Chain Analysis (FIAS)

D.3 Regulatory Impact Assessment (RIA)

Rodrigo (3.1) described the application of Regulatory Impact Assessment (RIA) in OECDcountries and several middle-income countries (e.g Mexico, Czech Republic, Hungary) Shenotes that RIA is technically demanding, since it looks at both costs and benefits ofregulations; quality control can be a challenge, even in wealthy countries Pre-conditions forsuccessful RIA include a high level of expertise and good access to information; "many lowand middle-income countries do not yet meet these pre-conditions" She also notes that RIAmethods are not yet fully developed, and there is not yet full agreement on a number ofimportant points, such as establishing a social discount rate for benefit-cost analysis, valuingintangible benefits and dealing with risk and uncertainty

Nonetheless, other presenters did touch on the application of RIAs in transition anddeveloping countries, including Ladegaard (3.4) Drawing on experiences in Serbia,Macedonia and the Slovak Republic, he concludes that two years are required, for the designand launch of an RIA system The methodology may still need adaptation by donors to bemore 'pro-poor'; training courses are also needed, with both local and international content,

to provide access to the necessary skills

Waddington (3.4) reports on the use of RIA in Uganda, and Binh (5.3) in Vietnam; bothoutline the experience and the application of the framework, rather than giving the results orthe tool in any detail Waddington concludes that "core RIA frameworks systems need littleamendment for the developing country context resource constraints should not be abarrier" However, the impact will be limited unless RIA is part of a wider reform process

E Business registration and formalisation

The time required to register a new business is one of the most popular yardsticks amongdevelopment agencies, to quote when illustrating the urgent need for business environmentreform; this is partly because it illustrates the difficulty for people with small businesses whowould like to join the formal economy While they stay in the informal economy, they cannotenjoy the full benefits and protections that would normally be theirs; similarly, the governmentcannot regulate and tax them in the way it would normally like to do Welch (2.1) exploresthese issues in some depth, in a study commissioned by USAID for the DAC Network onPoverty Reduction; the Paper also includes some practical recommendations to reducebarriers to formalisation

Mikhnev (2.2) outlined a toolkit for building the capacity for business registration reform at thesub-national level, which has since been placed on the web5 He illustrates the potential tosimplify reform processes with simplified flowchart reproduced as Figure 5, below Thehorizontal line illustrates a similar registration process, after streamlining Mikhnev's Paperincludes Annexes with case studies from Canada, Kosovo and Turkey.

Vignjevic (2.4) described how a new Business Registration Law in Serbia had reducedregistration time from 105 days to 5 days, and introduced a 'silence is consent' rule Haggerty(4.2) presented reforms to the municipal operating license and construction permitprocedures in Peru and Nicaragua He reported various improvements as a result of reform;for example, the number of days to obtain an operating license in Lima had reduced from 60

to 1.6 Omran and Waly (2.3) reported on a reform that reduced registration time in Egyptfrom 366 days to 15 days

While reductions in the registration process can make it easier to formalise, there may still bestrong disincentives to do so For example, Engelschalk (3.2) noted that small businesses inthe formal economy are subject to many different taxes; special tax regimes have generallyonly considered a few of these taxes Indeed 75% of sole traders in Ukraine were found tohave stayed outside the formal economy, one year after the introduction of a special taxregime Another dis-incentive to formalisation relates to the ease of exit; bankruptcy law may

be as important as registration procedures

Figure 5: Simplified flowchart showing process of business registration (Mikhnev)

Finally, for many businesses, registration is seen as a problem that occurs only once; it maytherefore not be given priority, for example in PPD processes

F Tax Regimes for Small Business

In Session 3.2, Coolidge presented experiences with tax regimes for small business inGeorgia, Ukraine, Russia and Albania; the Paper associated with her presentation waswritten by Engelschalk Stern presented experiences with tax regimes in South Africa,Zambia and Zambia Gondwe spoke from the perspective of a tax authority (in that case,South Africa)

These Papers explore the advantages and disadvantages of the various formats for taxingsmall businesses: a turnover tax, a presumptive tax or a patent (operating license) Sternnotes that a special tax regime must lower the Marginal Effective Tax rate (METR), but not be

5 http://rru.worldbank.org/PapersLinks/Open.aspx?id=6749 (2.1 Mb)

so low as to create a growth trap; ease of compliance is as important as the rates andinstruments.

Engelschalk notes: "Taxpayers and tax administrations have different expectations regardingthe potential benefits of simplified systems From a taxpayer point of view, stability and clarity

of the tax system and a reduction of the compliance as well as the tax burden should be themost important outcome of presumptive systems The main interest of tax administrationslies in the revenue yield of the system ["negligible" from small businesses in "most cases"],the reduction of administrative costs, and an increase in voluntary compliance."

In practice, special tax regimes have increased the number of small businesses registered,but have not generally improved compliance substantially This may be partly because, inmost countries, tax systems remain complex; the simplified regime only applies to certaintaxes Also, these simplified systems have often been through frequent and fundamentalchanges, in many transition countries; it has therefore been difficult to tell what the impactshave actually been The presenters concluded by recommending the improvement of theregular business tax regime, before any special regimes for small business arecontemplated

G The Land Market and Investment

Shen (3.1) presented a Paper on Improving Access to Land and Buildings by Investors,noting the four main issues: Access, Security, Use, and Consistency of Treatment.McKinseys has found that land market issues are major barriers to investment andcompetition in more than half of all economic sectors, including retail, housing and tourism.The World Bank estimates that 80% of the countries in its most recent Doing Businesssurvey prohibit or restrict foreign ownership of land

"In a situation typical of much of Africa, less than 4 percent of the land in Mozambique hasbeen surveyed, and even less registered Even where property is registered, investors maystill face big delays in recording land transactions In Nigeria an entrepreneur seeking to buyproperty free of dispute and officially recorded must complete 21 procedures—a process thattakes a staggering 274 days and requires official fees amounting to 27 percent of theproperty value It need not be so In Norway the same process takes only a day and requirespayment only of a registration fee and 2.5 percent of the property value in stamp duty."Similarly, Figure 6 illustrates the process of registering land for business use in one Russiancity

Figure 6: Flowchart of the procedure for allocation of land plot for business use (Nizhny Novgorod)

There have been successes in reforming these hurdles; in Peru, for example, the titleregistration process was reduced from 7 years to 45 days, with the cost of title coming downfrom $2,156 to $49 This led to 1.3m titles being registered between 1996 and 2002 Whilecomprehensive land reforms seem to take 10-15 years, not enough experience has yet beenaccumulated, for many firm conclusions to be drawn There are relatively few cases at themoment on each aspect of land reform, and these are mostly still pilot interventions.Interesting questions remain, for example around how to ensure that the poor benefit (or atleast do not lose) during the formalisation process.

For example, Lozansky and Khashimov (4.2) outlined experiences to streamline inspections

in Uzbekistan They found that inspectors were able to close operations down, or imposehigh fines; they were allowed to keep part of the fines collected Tax, sanitary and fire serviceinspections were targeted for streamlining, and the average number of days being spent bySMEs on inspections was brought down from 14 to 2 The estimated $21m p.a savingscame mainly from reductions in shutdowns, as a result of the more enlightened inspectionregime

On the other hand, unofficial payments were made during 36% of inspections after thechange, compared to only 9% before, with inspectors focusing on the largest and mostsuccessful enterprises One might speculate that some of the inspectors may have borrowedmoney in order to purchase their position in the first place, and felt the need to continue togenerate revenue for themselves, in spite of the changes

I Other outstanding issues

Ellis (1.2) presented findings of a survey in Uganda on the extent to which women inbusiness experience the business environment differently; for example, 43% of female-headed enterprises reported that government officials had interfered with their business,relative to 25% for all enterprises In general, though, there did not seem to be manyexperiences (yet) on implementing reforms that benefit women in smaller and more ruralbusinesses

Joshi (4.3) argued that labour laws were often too complex, and needed to be simplifiedrather than abolished; deregulation was not necessarily the best solution Manypresentations, however, focused on streamlining and reducing administrative burdens forbusiness - even though relatively little information was presented on what differences thesereforms had made, in practice, to the lives of the poor and under-privileged Clearly, this is aproblematic field; some of the impacts are likely to appear only in the longer term Besides,one can intuitively conclude that reductions in administrative burdens, and increased access

to titles and rights, will benefit poor people - not least through enabling economic growth

As an illustration of current thinking, Omran and Waly (2.3) presented the results of a survey

of the SME donor sub-group in Egypt; it found that the majority were interested in reform ofthe business environment in order to increase international trade and supportcompetitiveness, rather than to alleviate poverty directly Similarly, the most commonly-citedfuture direction was related to modernisation (competitiveness, exports etc.) Presumably,though, the pressure to demonstrate the links between modernisation and poverty alleviation(or at least pro-poor growth) can only grow, so additional data in this area will be welcome