49256 MAY 2009 Art or Science? Measuring the Impact of ABOUT THE AUTHORS MARGO THOMAS Business Environment Reforms at the is the Manager of the BEE program in Southern Europe, Subnational Level and is Regional Program Coordinator, Investment Climate Department As the Western Balkan economies look toward policymakers to build stakeholder support and CESAR CORDOVA-NOVION integration into the European Union, each is target reforms recognizing that "what gets Director of Jacobs and striving to increase its competitiveness and measured, gets done"; and, (3) support our Associates, is an IFC improve its economic growth. Considerable regional monitoring and evaluation consultant on regulatory reform in the region. He momentum has been developing on business framework. developed the Regulatory enabling environment (BEE) reform. Since Reform Calculator, which was 2005, four countries--Albania, Croatia, New Approach for BEE Reform in applied in Kenya. Macedonia,andSerbia--havebeenrecognized the Western Balkans as Top-10 reformers by the global Doing ANA BATIC Business report. However, there is still much Since 1995, IFC has been providing investment is an IFC consultant providing analytical support, training, work to be done. The overall Doing Business climate advice in this region, assisting our and quality control for the rankings for the countries in this region are in clients by, among other things, introducing application of the BSCM in the the third and fourth quartiles for 2009, new tools to systematically address the region. showing plenty of room for improvement. impediments to doing business, reduce the Investors identified improvements in cost of doing business, and improve the quality APPROVING MANAGERS Giovanni Daniele, Regional regulations affecting businesses as a key of regulations affecting business activities. We Manager, IFC Advisory priority for upgrading the business enabling developed a series of national and subnational Services in Southern Europe. environment in the region (Figure 1). projects that introduced systemic reforms to: 1) clean up the stock of regulations affecting Thomas Davenport, Senior In this SmartLesson, we share our experience business start-up and operation, using Manager, Investment Climate Department. of adapting the Standard Cost Model to primarily the guillotine review of regulations; review regulations and measure impact in and 2) improve the flow of regulations by supporting BEE reforms at the sub-national implementing processes to maintain the level in Bosnia and Herzegovina, Montenegro, quality and consistency of those affecting and Serbia. We have adapted a relatively businesses, by using the regulatory impact sophisticated tool, and applied it to support assessment tool. This approach is particularly BEE reforms to: (1) measure the impact of the important in the Balkans, where the stock of reforms in terms of cost savings for businesses; regulations and business formalities (2) help drive the reform agenda by enabling (administrative procedures, licenses, permits, and so on) consists of layers of regulations, some predating the Yugoslav Republic. Information on these regulations and administrative requirements isoftennotreadilyaccessible. This situation increases business risk and the cost of compliance due to limited access to information, lack of transparency, uneven interpretation and applica- tion of the regulations, and discretionary authority. In particular, we adapted Figure 1: Business constraints as reported by investors in Southeast Europe. andappliedtheinternational IFC SMARTLESSONS -- MAY 2009 1 Standard Cost Model, an integral pillar of the guillotine review of regula-tions, to the subnational level in several countries, including Bosnia and Herzegovina, Montenegro, and Serbia1. This adaptation of the SCM, referred to as the Balkan SCM, is part of an integrated monitoring and evaluation (M&E) framework.2 Moreover, rather than apply this measurement simply as an internal or donor monitoring tool, we integrated it into the reform process and technology, providing for our clients an important metric for setting targets, establishing accountability, and engaging with the business community and other stakeholders to implement and sustain this important reform agenda. We engaged international experts and clients during the process of adapting this model and held a regional SCM workshop in Podgorica in October 2008.3 Andre Nijsen: reputedly the Father" of the SCM, explains the model to regional clients and staff,April 2009. What is the Standard Cost Model? First developed in the Netherlands, and currently applied in at the local level and an important generator of growth most developed countries, the SCM is a method for for these economies. Since this is a significant burden on determining the administrative burdens imposed on business, we adapted the SCM by monetizing5 --albeit businesses by regulation. This activity-based measurement roughly and indirectly--an "opportunity cost" of invest- breaks down regulation into a range of manageable ment income forgone while waiting for authorizations. components that can be measured. The SCM does not focus on the policy objectives of each regulation, but rather The Balkan SCM measures four key cost components: measures only the administrative costs incurred by businesses in complying with regulations (highlighted in · Submission time: monetization of the time invested in Figure 2). In adapting this tool, we simplified and minimized gathering information and preparing forms for the detailed data requirements and categories of activities submission for the model, tailoring them to local administrative regulations and procedures. · Fees and stamp: duties required for each formality What do we measure in the Balkan SCM? · Documentation: amount of expenditures required to acquire and prepare supporting documents (data The Balkan SCM goes beyond the international SCM requirements) practice of measuring the cost of information obligations 4 in the following ways: · Waiting time: This includes: 1) time to receive or obtain supporting documents from the issuing authorities · To reflect the realities investors face in the field, it (submission time), and 2) time to receive a response from captures the actual direct costs borne by businesses in the relevant authorities after submitting the required complying with the regulations, requirements, and paperwork administrative procedures imposed by public authorities. Therefore, we apply the concept of the It is important to note two key assumptions of the model: business formality (see box) as a basis for quantifying 1) All registered businesses comply fully with all formalities; and monetizing the costs incurred by business. The and 2) costs related to corruption, including unofficial cost of compliance with a formality includes not only administrative costs but also fees and waiting time. Figure 2.The International SCM Methodology · The Balkan SCM quantifies and monetizes the indirect costs incurred by businesses in complying with business formalities. In developing and transition economies, the burden of waiting for authorities' responses and other "red tape" is one of the most significant compliance costs of regulations. It opens huge opportunities for cor- ruption and "speed money," and immobilizes capital that could have been invested elsewhere. Moreover, this cost is often disproportionately borne by small and me- dium enterprises--the majority of businesses operating 1 This model is also being applied in BEE reform projects in several other regions including Central Asia and Africa. 2 This M&E framework is developed in collaboration with the IFC Advisory Services Results Measurement Unit. 3 The second annual Regional BEE Reform Network Conference, Podgorica 2008. http://www.fias.net/ifcext/fias.nsf/Content/RegionalConferenceinSouthEastEu- 5 The basic formula used to estimate the waiting time savings is: OS = DS ·GPI ·I, ropeOctober2008. where OS is the opportunity saving, DS is the aggregate number of days saved in the regulatory reform process, GPI is the average gross investment (by small and 4 These are obligations arising from regulations to provide information and medium enterprises) in the country in the past five years, and I is the daily interest data to the public sector and third parties. rate. 2 IFC SMARTLESSONS -- MAY 2009 speed payments, cannot be reliably estimated or tracked subnational level, where firm-level surveys are expensive-- for this model. Separate tools exist (outside of the SCM in both cost and time--and where it is difficult to draw approach) for measuring the impact of corruption on robust samples for municipalities through national-level compliance costs. surveys. How is the Balkan SCM used? In addition to the cost of large firm-level surveys, there is the issue of survey fatigue and low response rates when The Balkan SCM is used as part of a guillotine review of surveys are conducted too frequently. As noted by the regulations, which systematically reviews the stock of OECD6, "Opinion surveys of businesses are, in particular, business formalities to determine which ones should be susceptibletothebusinesscycle.Poorcompanyperformance eliminated or amended to increase transparency and may induce managers to respond to opinion surveys in a consistency, and ultimately reduce the cost and risk of doing negative fashion." However, putting together and business. First, it is applied after the inventory of formalities facilitating focus groups constitute both a science and an is completed to measure the baseline costs incurred by art. Our initial efforts to conduct focus groups met with businesses. In subsequent phases of the stock review, it is mixed results. We learned that extensive local networking integrated into the registry of formalities to: 1) provide and partnering with the local business associations were estimates of the changes in costs as a result of essential for building trust, increasing the number of recommendations for reforms; 2) calculate the cost of participants, and improving the quality of the participation. formalities after the implementation and validation of the Firms and entrepreneurs have to be assured that they will reforms; and 3) calculate the cost savings generated by the not be penalized for frank feedback, and they need to reforms. know what's in it for them. In addition to data collection and validation, focus groups have been useful for "taking Lessons from the Balkan SCM the temperature" of the business climate and proactively identifying emerging issues of concern for businesses, in a Two sets of lessons are emerging from our use of the Balkan cost effective way. SCM to measure the impact of regulatory reforms at the local level: 1) the "art" of adapting sophisticated tools to 2) Build support for reforms: "What gets measured, gets make them scaleable and replicable in challenging done." situations; and 2) the importance of measurement tools in building support and momentum for reforms and in By incorporating into the reform process the measurement targeting reforms. of the costs associated with implementing or complying with business formalities, we provide our clients with a 1) Using focus groups for data collection and validation language and metric for articulating the importance and improves flexibility and saves money. scope of the reforms. This enables our champions and mayorstoexplainmoreconcretely--notonlytostakeholders The baseline costs are compiled on the basis of information but also to their public administration--how the burdens provided by regulators and public authorities as well as the imposed on businesses by regulations limit investors' private sector. In addition, primary and secondary data are productive capacities and resources for investment. This is collected regarding: an intuitive but powerful argument in localities where industries died off during the transition and there are · Official information on the costs, frequency, and significant levels of unemployment and excess capacity. The coverage of formalities from national, city, and mayor of Vranje, Serbia, explained this best during a recent municipal governments conference in Belgrade when he said that by going through the process of reviewing the formalities and measuring the · Economic and labor statistics from national and time and cost of compliance, city officials now understand subnational official statistics departments; and in concrete monetary terms how reforms to formalities and quantitative and qualitative information on formalities, business procedures can impact business and, ultimately, compliance costs, and time (from focus groups with their decisions on where to invest. Mr. Azdejkovic, Mayor of selected businesses, business associations, citizens who the City of Krusevac, added that one of the most important are required to comply with the inventoried formalities, benefits of this work is the changing mindset of officials, and intermediaries such as third-party service providers improving governance and accountability, and the shifting of professional and technical services to businesses). to a more service orient culture as officials recognize the "costs" imposed by poor regulations and excessive The data are validated through a rigorous process of review, requirements. analysis, and confirmation by stakeholders and experts. Gathering reliable and accurate data is therefore critical for 3) Target "high-value" formalities for reform. the successful application of the Balkan SCM. We have effectively used focus groups (with business owners, It is generally difficult to attribute changes in levels of business associations, and intermediaries) to collect and employment or gross domestic product (GDP) directly to validate data inputs for the Balkan SCM. Focus groups regulatory reforms. However, using the Balkan SCM, we can provide a cheaper and more flexible instrument for calculate the costs of the formalities and the savings collecting and validating data, as compared to firm-level generated by firms as a result of such reforms as reductions surveys, for example. This is particularly important at the 6 Organisation for Economic Co-operation and Development. IFC SMARTLESSONS -- MAY 2009 3 in fees or waiting time and streamlined for information and approvals or permits. procedures. Since the baseline provides a fairly Based on the reforms actually implemented rigorous estimate of the cost of complying and randomly verified, the estimated direct with specific formalities, it is possible to target and indirect cost savings to firms is "high-value" formalities for reform. Despite approximately $50 million annually. The the risk of bias, focusing on reforms with high "bang for the buck" ratio (of cost savings opportunity costs (waiting time), and perhaps generated to project costs) is almost 50 to 1. avoiding procedural reforms, is a potentially powerful tool for setting priorities and We achieved this ratio by reducing the number allocating resources to implement reforms in and types of activities covered by the areas where there is potential for the greatest international SCM, applying the measurement impact. We are using this more targeted toformalities(notjustinformationobligations) approach based on an 80/20 rule--meaning with which firms are required to comply, and that we focus the review and reforms on the including the indirect costs of complying with 20 percent of the regulations that, according the formalities, thereby focusing on the to international experience, account for regulatory and compliance issues faced by the roughly 80 percent of the administrative countries in the region. Where robust firm- compliance costs. We are applying this level survey data were not available, we used approach in three municipalities in alternative sources of data and focus groups. Montenegro as well as for the second round We successfully transferred to our clients the of municipalities in Bosnia and Herzegovina technology for the Balkan SCM, a relatively and Serbia. Our goal is to push for deeper low-cost tool, and are building their capacity reforms to improve governance and fiscal to continue applying this tool to review the accountability by focusing the discussion and impact of regulations affecting businesses. the importance of avoiding the use of regulations and fees as extra-budgetary Finally, it should be noted that the Balkan SCM mechanisms for financing the bureaucracy. is just one of a combination of measurement tools that are being applied in the region to Conclusion assess the impact of reforms. A preliminary comparison of the results from a firm-level We successfully adapted for the subnational survey, the Balkan SCM, and the subnational level a relatively sophisticated tool that has Doing Business Study in Bosnia and been applied to drive the national-level Herzegovina is showing an encouraging trend administrative simplification agenda in in the convergence of the results produced by Western countries such as the Netherlands. To these tools. This analytical exercise is ongoing date, five municipalities in Bosnia and for Bosnia and Herzegovina and Serbia. Herzegovina and Serbia have completed detailed inventories and reviews of more than 1,000 formalities, and have implemented legal and operational changes in 90 percent of those formalities. Many of the amendments relate to reductions in the time required to comply with formalities and resolve requests Figure 3.Baseline Cost of Formalities and Ex-PostAnnual Savings Generated. DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SMARTLESSONS -- MAY 2009 4