Guidance to business environment reforms

A common feature for many countries is that they are building their economic development and poverty reduction strategies by focussing efforts on expediting and expanding reforms to improve their business climate environments. Given the complexity of prevailing situations and established practices, such broad reforms can be difficult to implement in a sustainable way across the entire public administration in the medium and long term. Even some of the most successful countries which have carried out business climate reforms are encountering challenges in maintaining the improved business environment but still making their way ahead. Very often, the implementation of reforms are highly tributary to the people, the team and leaders involved in the process. Reforms often encounter massive resistance, both passive and organised, that delay implementation or undermine their objectives. Appropriate strategies and resources used to carry out change are often insufficient. Even if a government decides to move forward, weak political leadership, lack of vision, poor coordination, fragmented policy jurisdictions, low skill levels, and limited accountability make successful reform extremely difficult. As a result, reformers often tackle the easiest or most isolated issues, with marginal, short term and unsustainable results. For these reasons many attempts at reform have been disappointing. Results have usually failed to match expectations, leaving reformers exhausted and disillusioned. Reformers often underestimate or are intimidated by the scale of problems. Isolated, one-off reforms usually do not produce lasting benefits for the private sector. In countries with legacies of instability, rent-seeking behaviours, excessive government intervention and weak public institutions, the efficiency of the private sector requires better performance of the public sector also. The way through which the government relates to the private sector through its legal and regulatory functions also impacts on the private sector’s performance. Reforms often face technical and administrative constraints at all levels of government, especially state and local administrations (usually strong bureaucratic power bases) which carry the burden of implementation. Implementing reforms therefore require new leadership, as existing managers often find it difficult to reinvent themselves, are resistant to proposed changes or suffer from a lack of credibility with stakeholders. Business climate reforms usually cut across different agencies and levels of government and, as a result suffer from lack of oversight and coordination. The lower-level organizations and their officials responsible for implementing reforms tend to have interests and objectives that differ from those of the policymakers who designed the reforms. Local governments and civil servants who generally have weak capacity to carry out reforms often revert to old practices once the political pressure for change has subsided. In order to succeed, reforms must overcome vested interests, resistance to change and change related complexities/uncertainties in dynamic economic and social environments. Success factors to reforms: • Active support and management of the reform process are essential, primarily through dedicated, day-to-day leadership in the public administration. Governments that have strengthened capacities for promoting, monitoring, encouraging, and assisting reforms across the entire administration have been more successful in implementing and sustaining business climate change. • It is imperative to identify and implement strategies that will maximise the chances for continued success in environments hostile to reforms. Successful implementation is also dependent on making timely and appropriate changes. • Transformation of the public sector goes beyond changing policies and legal mechanisms, because the role and style of regulation in each country are deeply embedded in traditions, capacities, interests, and the distribution of power. Making extensive change to the regulatory function stretches from legal instruments to government institutions, processes, and capacities—and even further, to the rule of law and changing relationships between government, markets, and society. Governments that have managed to effect meaningful reforms have reaped the benefits. Countries that have succeeded in managing broad reform programs over several years, even over several administrations, have shown the fastest changes and greatest gains in economic development.

The business environment consists of a complex interplay of policy, legal, institutional, and regulatory conditions that govern business activities. It is a sub-set of the investment climate and includes the administration and enforcement mechanisms established to implement government policy, as well as the institutional arrangements that influence the way key actors operate (e.g. government agencies, regulatory authorities, private sector organisations, business associations, civil society organisations, trade unions, NGOs, etc.) Implementing and sustaining business climate reforms is a critical part of the reform cycle. And, reforms are most likely to succeed in a supportive political climate. Creating such a climate is a central challenge of the reform process. It requires understanding the attitudes and influence of different stakeholder groups. It also requires the painstaking process of building coalitions for reform. And that requires strategies to leverage and mobilize supporters, while diffusing resistance, especially from influential interest groups. Strong and influential proponents of reform can be easily identified and mobilized to become champions for reform. Developing small reform teams with staff that are recruited on a meritocratic basis and including the core group of technocrats who helped design the reforms in the first place is another way to bring in the expertise needed to implement them. Many business climate reforms are ongoing and crosscutting, involving many different departments and levels of government. Sustaining reforms can therefore demand special efforts to make the reforms permanent, insulate the process from political and bureaucratic interference, and ensure transparency and accountability. For business climate reforms to be successful, it is of crucial importance to engage all relevant stakeholders who can positively influence and support the implementation of the reform policies. It also helps ensure a sense of ownership and continuity, and can enable reforms to persist despite changes in the political landscape. The private sector which is the main beneficiary of reforms related to business climate has to be involved at every step of the reforms program. Its participation in the decision making, monitoring and evaluation process is crucial. Through their respective Professional Associations private sector operators provide feedback on the problems they encounter in their daily operations which constitute valuable information the business climate conditions and on areas to be reformed. The involvement of the private sector at the level of the National Commission is therefore fundamental.

The main potential benefits of setting up a structured stakeholders engagement process in defining and in implementing business climate reforms include: • Facilitate business climate reforms by supporting champions for reform, create momentum and accelerate the reform process. The most possible tangible benefits would be policy reforms, new legislation, amendment or scrapping of existing legislation, removal or simplification of regulations and controls, standardization of procedures across different jurisdictions, and establishment of new institutions. • Promote better diagnosis of business climate issues and design of policy reforms. Governments that are attentive to the constraints of the private sector are more likely to devise sensible prioritisation plans and workable reforms. This, in turn, can encourage investors to cooperate with laws and regulations. When governments and businesses are mutually mistrustful and uncommunicative, investors lack confidence and are disproportionately drawn to short-term returns and resort to the informal sector. • Facilitate implementation of policy reforms. When entrepreneurs understand the government’s objective through a reform package, they are more likely to accept and adopt the actual reforms. Very often, legislations may be passed and enacted but they have little impact because of lack of follow-through. It should be ensured that reforms help in disseminating awareness of the changes, feed information back and maintain the momentum for reforms. • Promote transparency, good governance and create pressure of public scrutiny. For instance, it is quite common to see that one sector lobbies for a specific reform, which has unwelcome effects in other sectors that lobby for its reversal. The monitoring and evaluation systems in place need to promote a culture of compliance and entice governments by establishing regular assessments processes. • Building an atmosphere of mutual trust and understanding between public and private sectors and civil society. In many countries, mistrust and misunderstanding between the public and private sectors needlessly hampers reform efforts. A structured stakeholders’ engagement process can build consensus, trust and understanding between the public and private sectors stakeholders by engaging them through a structured dialogue platform.