Photo credit: https://unsplash.com/photos/1j0sKFxXVck LOCAL ECONOMIC DEVELOPMENT FUELING PRIVATE SECTOR INVESTMENTS AND GROWTH CASE STUDY PREPARED BY: Senka Vranić, Ruvejda Aliefendić, Tarik Šahović, and Imeldin Radaslić March 2021 The International Finance Corporation (IFC)—a member of the World Bank Group (WBG)—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2020, we invested US$22 billion in private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org. This work is a product of the staff of IFC’s Creating Markets Advisory Unit and the Finance, Competitiveness, and Innovation Practice of the International Bank for Reconstruction and Development (the World Bank). The information included in this work, while based on sources that the WBG considers to be reliable, is not guaranteed as to accuracy and does not purport to be complete. The findings and views published are those of the authors and should not be attributed to IFC, the World Bank, the Multilateral Investment Guarantee Agency (MIGA), or any other affiliated organizations (together, the WBG). The WBG accepts no responsibility for any consequences of the use of such data. The information in this work is not intended to serve as legal advice, nor do any of the conclusions represent official policy of the WBG or any of its member institutions. The denominations and geographic names in this publication are used solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of any member institution of the WBG concerning the legal status of any country, territory, city, area, or its authorities or concerning the delimitation of its boundaries or national affiliation. The WBG’s teams in Bosnia and Herzegovina wish to thank the British Embassy in Sarajevo and the Good Governance Fund of the United Kingdom for their generous support in funding the projects’ activities. Rights and Permissions The material in this work is subject to copyright. Because the World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Acknowledgments This case study is authored by Ruvejda Aliefendić (Senior Private Sector Specialist), Tarik Šahović (Senior Operations Officer), Senka Vranić (Associate Operations Officer), and Imeldin Radašlić (Regulatory Reform Consultant). This work greatly benefited from the guidance of Damien Shiels, IFC Europe and Central Asia Creating Markets Advisory Regional Manager, and from valuable comments provided by Abeer Kamal Shalan and Eugeniu Osmochescu (Senior Operations Officers). Contents Acknowledgments ......................................................................................................................... 2 Abbreviations .................................................................................................................................. 5 Executive Summary ...................................................................................................................... 6 Introduction ..................................................................................................................................... 9 Development of the Reforms ................................................................................................... 12 Challenges ....................................................................................................................................... 16 Results ............................................................................................................................................ 22 Success of the Reforms ............................................................................................................ 24 Lessons Learned and Key Recommendations .................................................................. 25 ACKNOWLEDGMENTS | CONTENTS  | 3 Abbreviations BD Brčko District BiH Bosnia and Herzegovina CAD Current Account Deficit CAG Cumulative Aggregated Growth CCSM Compliance Cost Savings Model EU European Union FBiH Federation of Bosnia and Herzegovina FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service GDP Gross Domestic Product GIPB Global Investment Promotion Benchmark ICIS Investment Climate and Investment Support Project IFC International Finance Corporation ISCRA Investment Climate Regulatory Advisory Project LIFE Local Investment Friendly Environment Project OECD Organization for Economic Co-operation and Development OHR Office of the High Representative RS Republika Srpska SFRY Social Federal Republic of Yugoslavia SMEs Small and Medium Enterprises SOE State-owned Enterprise TAFBiH Tax Administration of Federation BiH TARS Tax Administration of Republika Srpska ABBREVIATIONS  | 5 Executive Summary The study highlights the lessons learned and outcomes of the implementation of local economic growth and regulatory simplification technical assistance work in Bosnia and Herzegovina (BiH) since 2007. It provides recommendations and a methodology on how to address existing market and regulatory failures elsewhere to enable private investments and enterprise and private sector growth at the local level. The report concludes that bottom-up reforms could be an approach to igniting reforms at national level(s) and offers a road map for similar policy reforms elsewhere. The report outlines how this work can lead to private investments, job and enterprise growth in localities that implement these reforms. Finally, this approach can be effective in engaging with the local authorities in broader municipal economic and infrastructure development. COUNTRY’S PROFILE. BiH has a complex regulatory EVOLUTION OF REFORMS. Unlocking the potential of the framework, with multiple levels of authority and governance private sector remained a core objective of the reforms that spanning a national government (Council of Ministers) two were designed to tackle the issues of the complex and non- entities (Federation BiH and Republika Srpska), cantons in transparent regulatory framework. The International Finance Federation BiH only, and municipalities as sub-national levels Corporation (IFC), a member of the WBG, has implemented of government. This can be detrimental and affects firm subnational regulatory reform projects in BiH since 2007, in competitiveness and discourages investments as businesses three stages. The report covers involvement with regulatory are faced with multiple regulatory and enforcement levels simplification at the subnational level from 2007 to 2011, of administration that often overlap in competencies. the Investment Climate Regulatory Advisory Project (ISCRA) (2011 to 2014), and the Local Investment Friendly Environment MARKET FAILURE. BiH is a small country with a limited Project (LIFE) (2015 to 2019). While the objectives of the domestic market, poor economic performance, low domestic technical assistance work remained focused on the issues and foreign investment levels. BiH is the least favorable outlined above, the tools and the approach were adjusted place to do business in the Western Balkans characterized and improved to reflect the lessons learned from previous by voluminous red tape due to multiple regulatory and engagements. Original work in 2007 was focused only on enforcement levels of administration. Inconsistent simplifying high-impact administrative procedures and interpretation of regulation coupled with unclear procedures creating a nascent e-register of all procedures at the local and timelines lead to lack of predictability for businesses level. The follow-up project, ISCRA, expanded its scope to hampering the private sector to unleash its potential. This reflect the importance of foreign direct investment (FDI) is what the World Bank Group’s (WBG) projects since 2007 by developing investment profiles for localities1, initiating were designed to help the authorities resolve—removing investor servicing at the local level and enhancing e-register regulatory bottlenecks for private sector investments at functions. ISCRA also ignited a bottom-up approach by the local level. engaging higher-level authorities in making changes based on recommendations from the localities. LIFE further focused on outreach at the subnational level and institutionalization of economic councils, for the first time, as well as taking 1 Municipalities, cities, and cantons. 6 |  Local Economic Development Fueling Private Sector Investments and Growth gender aspects into account. The report concludes that a RESULTS. Since 2007, three projects have been designed comprehensive package of reforms at the local level involving to support 41 subnational localities in BiH to strengthen not only simplification work, but investor servicing and their competitiveness and stimulate private sector growth. public/private cooperation via economic council does lead to The implementation of these three projects in 41 locations more impactful reforms and makes a difference in localities resulted in over US$60 million in private investments at a where it is implemented. Finally, given the country’s complex local level, US$12.8 million in direct cost savings annually, government structure, the reform at the local level has a 49 percent reduction in indirect costs, and increase in embodied the vision of hierarchical regulatory simplification employment in selected localities as compared to those triggering entities’ governments as higher-level authorities localities where project was not implemented (based on to take on the reform process and deepen it by digital two independent impact assessments completed). transformation. The introduction of electronic registries ensured greater CHALLENGES. The gradual evolution of individual projects transparency in dealing with administration procedures. over more than 10 years has considered the challenges and Citizens and entrepreneurs can now simply know in advance ways of dealing with them from different perspectives. what lies ahead. Establishing access to information for Two major challenges were considered: (a) challenge of investors on the principle of ‘one-stop shop’ where a (potential) starting a business and (b) challenge of engagement. These investor can obtain all relevant information pertaining to two challenges are viewed differently by the private sector municipal investment, potential locations for investment, and had to be leveraged in negotiations with the public and support during the investment process is an added administration in several stages providing the arguments so benefit. that they could accept and visualize the outcomes. Regulatory simplification aiming at reducing the costs for businesses and SUSTAINABILITY OF THE REFORMS. Long-term sustainable improving regulatory service delivery and overall systems for change can only be achieved if reforms at the local level business registration is a way of creating a better business are embedded in local ownership and linked to reforms at environment that would encourage entrepreneurs to consider the entity and national levels. The work at the local level starting or expanding their businesses. also includes recommendations for higher levels, which are passed on to the relevant entity institutions through the Furthermore, regulatory simplification is a comprehensive entity focal points to drive change from the bottom up and process that saves money and time for businesses and enables create a feedback mechanism. Over 95 percent of localities a more efficient administration. Increasing transparency is a have fully integrated the streamlined processes and one-stop way of changing the mentality inhabited by local syndromes shops for investors. Moreover, about 95 percent of localities and rules. Finally, the lack of mutual trust and the perception have not reversed the reforms. In addition to streamlining of the private sector that public administration only penalizes, operations, 90 percent of institutionalized economic councils collects revenue, and so on and has no understanding of continued to operate after the project completed. Finally, the day-to-day business problems will deter the business this work has proven to be a good entry point to discuss from integrating into an operational structured model that broader municipal economic and infrastructure development will benefit the community, administration, and business. and investment and, more importantly, has demonstrated reforms’ sustainability. EXECUTIVE SUMMARY  | 7 LESSONS LEARNED AND KEY RECOMMENDATIONS. The design of regulatory reform at the subnational level and the implementation of fieldwork reveal the day-to-day situations that businesses and investors face with cumbersome regulations. To design a successful regulatory simplification project, tailoring is the key. The specifics of the governance structure for the country must be reflected in the design. The successful simplification of regulations is a multiyear process, with gradual upgrading of instruments and mechanisms and continuous adjustment to specifics of challenging and demanding reforms. No matter how well the project is designed, a need to easily adapt and adjust is crucial for successful implementation. Implementation is the process of putting a decision or plan into effect and executing it. Adaptability, as a mechanism, opens the door at the subnational level and catches the attention of businesses. Ultimately, adaptability turns the implementation of the projects into harmonization of regulations horizontally. A focus on regulatory reforms often neglects or underestimates the power of the subnational. This is often due to the perception that the nominal values of the budgets at the subnational level are often much smaller than at higher levels. However, it is important to keep in mind that jobs are ‘resident’ in the city or municipality from where the power of the subnational comes. The importance of involving stakeholders in project design is critical because their impact on subnational regulatory simplification is often seen in the long term. Different stakeholders can provide valuable, realistic, and quick insight into the activities and priorities of regulatory simplification. The power of the subnational is enormous, though still undervalued. Key messages out of lessons learned for regulatory simplification of work at the subnational level to be easily replicable somewhere else are the following: a. Transparency and improvement in servicing the private sector increase competitiveness of local businesses. b. Predictable environment and proactive approach of local governments increase chances for (re)investments. c. Local authorities need to have an active dialogue and coordination with the business community to increase efficiency and overall environment for business operation and creation of jobs. d. Such an approach opens doors for broader local economic, municipal finance, and infrastructure development. 8 |  Local Economic Development Fueling Private Sector Investments and Growth Introduction Bosnia and Herzegovina (BiH) is a small country with a limited negative gross domestic product (GDP) of 3.2 percent. In domestic market and its model of economic development the forecast for 2021, supported primarily by consumption strongly relies on the openness of its investment regime. The and to some extent by public investment, economic growth overall economic performance of the country, domestic and is projected to strengthen to 3.0 percent.2 Unlocking the foreign investment levels, and the participation of economic potential of the private sector remains a major challenge operators from BiH in the global supply chains to a great for BiH and will continue to hamper increased growth in extent depend on efficient administration and competitiveness the medium term. of the private sector. Over the last decade, the economic growth recovered but stagnated in the last few years. Growth The complex regulatory framework in BiH affects firm was expected to slow down to 3.1 percent in 2019, from competitiveness and discourages investments. Businesses 3.6 percent in 2018. At the same time, unemployment is in BiH are faced with multiple regulatory and enforcement at its lowest in over a decade, while the Current Account levels of administration that often overlap in competencies. Deficit (CAD) was expected to widen to 4.3 percent in 2019 The purpose of this publication is to capture the key as exports declined by 0.9 percent and imports rose slowly experiences and lessons learned by the BiH team of by 2.2 percent. By the end of 2020, with an outbreak of the subnational regulatory reform work in BiH as a helpful global pandemic, the economy declined and experienced a overview in designing and developing the regulatory reform projects at the subnational level. FIGURE 1: Administrative map of BiH 2 Brčko District RS 1 3 4 6 FBIH 10 9 5 7 8 Cantons: RS 1. Una-Sana Canton Bosnia and Herzegovina 2. Posavina Canton Federation of Bosnia and Herzegovina 3. Tuzla Canton 4. Zenica-Doboj Canton Republika Srpska 5. Goražde Canton Cantons 6. Central Bosnian Canton Brčko District 7. Herzegovina-Neretva Canton Municipalities 8. West-Herzegovina Canton 9. Sarajevo Canton Source: BiH Agency of Statistics 10. Canton10 2 Western Balkans Regular Economic Report No. 18, Fall 2020. INTRODUCTION  | 9 BiH has a complex government structure that comprises There are 143 municipalities across the entities and the the national-level institutions and the three entities—the 10 cantons in FBiH. This four-level government structure Federation BiH (FBiH), Republika Srpska (RS), and Brčko added complexity to the efforts of the World Bank Group District (BD). (WBG) to improve the investment climate. FIGURE 2: Governance structure in BiH Source: BiH Agency of Statistics 10 |  Local Economic Development Fueling Private Sector Investments and Growth Since there is no clear division and alignment of the policies Subsequently, subnational service delivery lacks regulatory affecting business operation, each administrative level can transparency. Only few cantons and even fewer cities/ and often does provide an additional layer of regulations municipalities have fully transparent electronic registers and enforcement for the businesses in BiH to comply with. where all the information about procedures for businesses Each municipality administers on average 147 business is publicly available. administrative procedures,3 while each canton administers on average 319. At the same time, the FBiH administers Municipal and cantonal request submission forms often 373 business administrative procedures, RS administers do not contain information about relevant documents 812, and there are 102 procedures at the national level. needed, waiting time, and costs. Different interpretations Businesses face a maze of more than 1,700 administrative of regulations adopted at higher levels by local-level procedures combined. implementing officials, coupled with unclear timelines to resolve business application, lead to lack of predictability While there are significant regulatory and legislative powers for businesses and investor grievances. Businesses cannot at the entity level, most small and medium enterprises (SMEs) efficiently plan their operations and channel their resources to rely on service delivery at the municipal and cantonal levels. deal with multiple paperwork requirements and interactions Plenty of overall business requests related to registration, with officials. Late market entrance and lost opportunities day-to-day operation, and investment cycles are mostly follow. For example, the score for the indicator Starting issued and resolved at the local and cantonal levels, clearly Businesses4 in the World Bank Doing Business 2020 report demonstrating that most of the investors (local or foreign) was the worst out of all the 10 indicators that are measured. depend on the subnational authorities. The score for Starting Business indicator was 60 out of 100—compared to neighboring countries and the regional However, there is a weak link between municipalities and higher average (score 90.5) leaves huge room for improvement. levels when it comes to business policy-making process. The Additionally, the second-worst indicator was Dealing with same national/entity regulation is implemented differently Construction Permits,5 where BiH scored 48.6 out of 100 in municipalities and cantons (and for that matter, the compared to the regional average score of 69. Generally, a same cantonal regulation is implemented differently by significant portion of grievances that investors are facing municipalities in that canton), adding to complexity for in the country are generated at the subnational level. businesses. This is creating a regulatory implementation gap that is becoming a serious issue in BiH. 3  he term administrative procedure includes all licenses, permits, approvals, certificates, authorizations, estimates, assignments, consents, and payments T of charges and fees, including notifications of the administration required by third parties for operation of businesses and the day-to-day life of citizens. 4 This topic measures the number of procedures, time, cost, and paid-in minimum capital requirement for a small- to medium-size limited liability company  to start up and formally operate in each economy’s largest business city. 5  This topic tracks the procedures, time, and cost to build a warehouse—including obtaining the necessary licenses and permits, submitting all required notifications, requesting and receiving all necessary inspections, and obtaining utility connections. INTRODUCTION  | 11 Development of the Reforms The focus of this study is on lessons learned from the be considered as three stages or phases in improving the design and implementation of the reforms at the local level business environment and creating an investment-friendly in BiH from 2007 to 2019 (see Figure 3). In a period of over setting at the local level in BiH. Every succeeding project more than 10 years, three subnational regulatory reform tried to upgrade the previous one with its content and scope. projects have been implemented by IFC. These projects could FIGURE 3: Reforms in BiH from 2007 to 2019 Timeline and evolution of the key scope elements under each phase 2007–2011 2011–2014 2015–2019 Investment Climate and Investment Climate Local Investment Investment Support Regulatory Advisory Friendly Environment Project (ICIS) Project (ISCRA) Project (LIFE) • 4 locations • 14 locations • 23 locations • Municipal level • Municipal and cantonal • Municipal and cantonal • Regulatory simplification level level • Regulatory simplification • Regulatory simplification • E-registries • E-registries • Investment profiles • Attracting the Investment opportunities • Local Economic Councils The aim of this case study is to analyze and describe the approach and tools used by the team in creating a local investment-friendly environment to facilitate learning and to emphasize the importance of continuing these reforms and the need for sustainability. 12 |  Local Economic Development Fueling Private Sector Investments and Growth Phase I Encouraged by the favorable domestic economic developments According to the World Bank’s Doing Business Indicators supported by global economic trends and successful in 2007, BiH was ranked 95. At that time, the ratings of reform at national levels, in 2007, IFC pioneered the work BiH by the Organisation for Economic Co-operation and at the subnational level to address the difficult business Development (OECD) Investment Reform Index and other environment. At that time, digital transformation was an regulatory quality indicators were poor. This was important elusive dream, but the idea to design the regulatory reform for to understand particularly for two reasons: the subnational level was captivating. The Bosnia Subnational Project (2007–2011) was designed to pioneer these issues. a. The stock of subordinate regulations and administrative The businesses faced a difficult business environment. procedures comprised layers of regulations that still The findings on barriers that the businesses faced by the dated back to the former Social Federal Republic of Foreign Investment Advisory Service (FIAS) report,6 from Yugoslavia (SFRY). These regulations and administrative the beginning of the decade, were still accurate as little was requirements were applied inconsistently. In many done to improve the business environment. Major barriers cases, the only public record of regulations was to investment in the relatively small market of BiH were the available in the published official gazettes. This absence of a seamless, transparent, and predictable legal increased business risk and the cost of compliance due and regulatory framework for business establishment; the to limited access to information, lack of transparency, lack of consistent and transparent business regulations and and corruption. administrative procedures that provide opportunities for b. Experience from other ongoing reforms at that time, at corruption and the abuse of power by officials at various the national level, helped build momentum for deeper, levels of government, thereby increasing the risk and cost systemic reforms, encouraging a sense of ownership of doing business; and the lack of effective, efficient, and and commitment among champions and stakeholders, adequately resourced administrative and judicial systems. including the private sector. Local authorities need All these negatively affected the ease, cost, and risk of to have an active dialogue and coordination with the doing business in BiH. business community to increase efficiency and overall environment for business operation and creation of jobs. “The 2002 Bulldozer Initiative (50 reforms in 150 days) which identified specific changes needed (to eliminate was the first innovative response to the rising needs of red tape) and created a platform for their adoption the private sector and to government inertia and lack and implementation. Focusing on quick wins (50 of capacity to bring about the changes needed in the reforms in 150 days), the initiative gave businesses business environment. The initiative, although it was a powerful tool for influencing governments to deliver conceptualized within the international community on reforms.”7 This momentum created the ambition at and led by the Office of the High Representative the subnational level to start better service delivery. (OHR), was the first example in BiH of a bottom- With improvements in the transparency and consistency up approach to change BiH. According to Herzberg of regulation, subnational administrations needed to (2006), the private-public dialogue used during the focus on delivering quality services to businesses and Bulldozer Initiative successfully overcame the lack the public. For many subnational administrations, this of political will and capacity. The initiative energized required a fundamental shift from a focus on ‘enforcement’ the public sector relationship with the private sector, to ‘service’. 6 T  he aim of this case study is to analyze and describe the approach and tools used by the team in creating a local investment-friendly environment to facilitate learning and to emphasize the importance of continuing these reforms and the need for sustainability. The World Bank. 2016. “Bosnia and Herzegovina’s Economic Journey: Through Peace and Transition to Prosperity.” https://documents.worldbank.org/en/ 7 publication/documents-reports/documentdetail/686081474374448860/bosnia-and-herzegovina-two-decades-of-peace-and-transition; Herzberg, Benjamin. 2006. “Monitoring and Evaluation during the Bulldozer Initiative.” Presentation at the International Workshop on Public-Private Dialogue, Working Group 5, Case Study–Bosnia and Herzegovina,” Paris, February 1–2. http://www. publicprivatedialogue.org/case_studies/Working%20Group%20 05%20Case%20Study%20-%20Bosnia.pdf. DEVELOPMENT OF THE REFORMS  | 13 Phase II The initial results of IFC’s regulatory reform work were transparency of the implementation of related regulations. recognized in the 2010 European Union (EU) progress report The objectives remained focused on simplifications of the as the only area where advances have been made against administrative procedures and building on the electronic EU membership criteria. The work at the subnational level registries of the administrative procedures, but the scope was specially credited, but the inevitable conclusion was that was enlarged to cover a bigger number of subnational local the work should be continued because a lot still remained administrations across the country. Additional focus was to be done. Despite the initial results, the foreign direct on building the capacity of subnational administrations to investment (FDI) inflows in BiH remained low relative to implement and sustain the reforms and to harmonize the the rest of the region (US$255 million) in 2009, compared implementation of laws defined at the higher government to US$420 million in Kosovo, US$940 in Albania, US$1.3 layers across the subnational locations within the same billion in Montenegro, and US$1.9 billion in Serbia. In 2010, legislative jurisdiction. While designing the project to focus on according to IFC Investing Across Borders indicators, BiH expanding the reform at the subnational level, the IFC team performed below the average of the region, highlighting the tackled the importance of FDI by starting to develop the potential for substantial policy improvement. Institutional investment profiles for the localities. Gaining the operational capacity for the investment facilitation in BiH, as measured experience and collecting lessons learned allowed the team by Global Investment Promotion Benchmark (GIPB), was to mature and subsequently timely recognize the priorities lower than the regional average as well. BiH was still rated the and needs of partnering local administrations. investment least favorable place to do business among the neighboring profiles were new and went well in practice in increasing countries in Western Balkans and its ranking has been falling the competitiveness of the localities. for seven consecutive years. Still, every other investor is waiting for a construction permit, longer than the legally At the end of implementation, the independent impact binding period. The market was still dominated by the public assessment verified a 6.4 percent increase in employment sector with inefficient management of resources, crowding in localities where the WBG technical assistance was out of the private sector, and prevalent corruption. provided compared to those where it was not. This has been confirmed by IFC’s Jobs Impact Team. The right set To build on the initial success, IFC introduced the second phase of regulatory reforms across different levels of authorities in improving business and investment-friendly environment is critical. Building on these successes, where some inroads at the subnational level with Investment Climate Regulatory have been made in cutting the red tape at the subnational Advisory Project (ISCRA) (2011–2014). The project activities level, it was imperative for this work to continue to build were designed with the objectives to streamline regulations bottom-up momentum for change. related to business permits and licenses and increase the 14 |  Local Economic Development Fueling Private Sector Investments and Growth Phase III In 2015, IFC continued implementing projects in BiH with the objective to improve the business climate starting with implementation of the Local Investment Friendly Environment Project (LIFE) (2015–2018). FIGURE 4: Theory of Change Simplification of business administrative Simplified regulatory procedures at the environment BiH is the least municipal and cantonal Improved transparency Investment favorable place level in 20 localities Significant of regulatory delivery Generated to do business in Improvement of red tape Investor servicing and Compliance Europe and regulatory service Central Asia investments facilitated Cost Savings delivery and overall systems for business Methodology and tools and property registration handed over and construction permits The design of the project relied on lessons learned from the focus was expanded to capacity building of subnational previous projects and additionally focused on outreach at the administrations to provide investor servicing and retain/ subnational level and, for the first time, institutionalization attract investments. More specifically, the project aimed of economic councils and aspects of gender.8 In addition, to (a) increase the competitiveness of the private sector by while designing the project activities, the bigger picture reducing costs for businesses9 and improving the regulatory with different levels of government was embedded because service delivery for the private sector and overall systems regulatory simplification reform at the subnational level for business, (b) improve transparency of the subnational resulted in the desire of the higher levels of government administration regulatory delivery for businesses by provision (entities) for further reform, digitization, and so on. of information on rules and regulations through electronic The cumulative development approach improved the registers and inventory of investment Incentives, and structure of the latest project. Besides the objectives of (c) increase investment facilitated/retained in local regulatory simplification and increase in the transparency, communities. 8 T  he project team conducted exclusive focus groups with women entrepreneurs operating in given localities; the purpose was to channel the voice of female entrepreneurs and to identify if there is additional burden as part of the business environment that is gender biased. The overall conclusion was that the administrative burden does not differentiate entrepreneurs by gender. Still, this was a method to encourage female entrepreneurs to participate in economic councils. 9 Compliance costs associated with administrative procedures, licenses, and permits. DEVELOPMENT OF THE REFORMS  | 15 Challenges The gradual evolution of the projects over more than 10 years took into account the challenges and the ways of handling them from different perspectives. The private sector perceived the same challenges differently. Every challenge had to include final consent from both sectors on desired outcome. The focus of this case study is the major challenges handled by the local team over the implementation period of the reforms at the subnational level in BiH, but arguably applicable in other countries and regions. CHALLENGE OF STARTING A BUSINESS. Although investment opportunities around the world have reached a high level, starting a business in BiH seems like an impossible mission, even if one has a good business idea. The constitutional setup of BiH is complex, and lack of coordination across different levels of authorities and complicated administrations create difficulties in registering and operating a business. How can this problem be solved? A simple answer would be to set fewer procedures to generate more investments, but that is easier said than done. However, let us see why this was a challenge in the first place. The team faced specific challenges in the attitude of civil servants: ignorance, fear of change that could lead to loss of a job, poor understanding of regulatory implications on budget, and so on. So, the outputs of regulatory simplification aiming at reducing the costs for businesses and improving regulatory service delivery and overall systems for business registration had to be leveraged in negotiations with the administration at several stages, by providing arguments in a way that they could accept and visualize the outcomes as beneficial for them as well. A concrete and easy-to-communicate argument was that the regulatory simplification is a simple process providing monetary savings for the businesses and enabling more efficient administration. Streamlining administrative procedures is imperative to ease the process for both administration and the businesses. To understand the broader scope of regulatory reform, it is necessary to define the areas or steps needed to apply comprehensive regulatory simplifications with the aim of solving the problems of the businesses in their day-to-day operations. To address this challenge and leverage the ongoing communication and negotiation with local administration, a road map including four steps can be applied, as shown in Figure 5. To sustain the regulatory simplifications, it is important to institutionalize the permanent regulatory body within the subnational administration. 16 |  Local Economic Development Fueling Private Sector Investments and Growth FIGURE 5: Regulatory simplification - Implementation steps 1. Preparation and initial review of the Administative Procedures inventory ƒ ƒ Define priorities and action plan ƒ ƒ Adopt the necessary resolutions ƒ ƒ Identified functional authority submits complete lists of administrative procedures and legal acts and prepares inventory of administrative procedures under this authority 2. Consultations with the businesses ƒ ƒ Engage with the private community ƒ ƒ Provide objective input and feedback of the actual issues within the predefined layer of administration and regulatory framework ƒ ƒ Address properly the issues and generate results of the national regulatory reforms, in terms of their impact on the desired outcomes 3. Analysis and recommendations ƒ ƒ Perform legal and economic analysis of the inventory of all administrative procedures ƒ ƒ Complete set of recommendations for simplification ƒ ƒ Working group (authorized body) verifies the recommendations and input 4. Adoption and implementation ƒ ƒ Adopt all necessary decisions by relevant authority to enable the implementation of recommendations and streamlined procedures (that is, ministerial decisions, amendments to the regulations, laws, and so on) ƒ ƒ Establish permanent regulatory reform body (if not existing already) The first step, preparation and revision of inventory of The preparatory activities phase ends with several decisions administrative procedures is a keystone for the entire that define the following: commitment to streamline the process, as it defines the state of play and paves the way administrative procedures and implement regulatory for the consultations with all stakeholders and ultimately simplification; readiness to adopt or revoke subnational affects the recommendations. It feeds into a clearly defined regulations and establish a permanent regulatory body; action plan to ensure successful realization of the project commitment to set up an online electronic registry; and, and enables organization of the participants in the process, if not already existing, the introduction of a local economic thereby ensuring achievement of the objectives in a timely council. manner and with quality. CHALLENGES  | 17 The inventory of administrative procedures starts with Answering the first question will disclose the legal acts identifying all existing requirements and details regarding defining the administrative procedure. If administrative a particular administrative procedure. The administrative procedure is not legally defined, it will lead to the decision procedure registration form is used to collect and present whether it would be eliminated or introduced into the legal a formal textual description,10 that allows public officials system. Examining the elements of the administrative without special knowledge to correctly and unambiguously procedure registration form will reveal whether the practice interpret the administrative procedure. By completing the of administrative procedure is harmonized with the relevant administrative procedure registration form, we will be able legal acts. Assessment of these issues will help understand to evaluate the following questions: if there is a need to simplify or eliminate the administrative procedure. The second question about necessity of the a. Is the administrative procedure legal? administrative procedure focuses on the following issues: b. Is the administrative procedure necessary?  What is the purpose of administrative procedure? c. Is the administrative procedure favorable  Is it of public interest? for businesses?  Is there another way to fulfil the purpose?  What are the benefits for business and private sector?  What negative consequences are being prevented by having this administrative procedure in place? FIGURE 6: Regulatory simplification - Implementation steps 1. Legal? Is the 2. Necessary? formality: 3. Business Friendly? 10 All the existing requirements and details shall include, but are not limited to, the following: • Name of the procedure • Identification of legal basis for the procedure (laws, bylaws, and other legal acts) • Interdependency with other administrative procedures (list of authorizations which are prerequisite for the procedure) •Details of the procedure with a sequence and description of steps with identified stakeholders according to the steps (public agencies and other bodies, business representatives, inspectorates, laboratories, and others) • Typical duration in practice of every step •Input and output information requirements, that is, documents and data required in every step and source of information (in particular, the list of information and document attachments to be provided by the business applicant) • Maximum duration stipulated by law or regulation (a deadline within which a case must be processed) • Whether the procedure applies to both foreign and domestic applicants (a) legally or (b) in practice •If an application form is required, then (a) whether it is publicly available and accessible or (b) whether all information fields are clearly defined • Rules/criteria/requirements for decision-making clearly spelled out in the regulation • Taxes and fees associated with each procedure or step (if applicable) (a) for the applicant or (b) for the public agency • Differences in treating men and women during the procedure (if any) • Common reasons for the delay. 18 |  Local Economic Development Fueling Private Sector Investments and Growth The last question defines whether the current implementation The third step is the legal and economic analysis and of the administrative procedure with its defined elements preparation of recommendations. Legal analysis is done to such as deadlines, fees, taxes, requested information, and assess the legal grounds of administrative procedures; analyze documents is favorable for businesses or whether it could the laws and other legal acts governing the administrative be structured better. procedures; analyze the purpose of the administrative procedures; check whether the deadlines for administrative The second step in the implementation of regulatory procedures are prescribed in bylaws and if so, which ones; simplification aims to provide objective feedback from identify fees, charges, and other financial expenditures that private sector related to current problems and shortcomings are prescribed for the administrative procedures; confirm the in the economy and verification of the mapped process validity period of the document being issued; find if there is and documents regarding the administrative procedures. a prescribed form for a given administrative procedure; and Regulatory simplification cannot be properly implemented identify information required when submitting an application unless businesses, individually or through associations and as well as the required documents to be enclosed with civil society, are included in the process. Therefore, it is vital the application. Harmonization of recommendations is to compile a list of all relevant businesses and representatives essential. The entire process of analysis and formulation of civil society within a specific locality that could be included of recommendations can be lengthy and detailed, and in the process, with the provision of their opinions on the sometimes, there is a need for further consultations with administrative procedures relevant to them. In this step, public officials about specific recommendations. What is following the identification of the relevant associations, it especially important for the process of recommendations is is necessary to make initial contacts to ensure cooperation to be detailed and comprehensive, include quality analysis, within the project. All stakeholders are invited to define the reflect the basic criteria (legality, necessity, and business best solutions to their problems along with the competent convenience), reduce costs for private sector, and increase authority. Three or four focus groups are formed, with a the efficiency of administration and transparency of specific topic for each group. The theme depends on the administrative procedures. specifics of the given location and the strategic areas that the group wants to focus on. It is recommended to consider procedures or areas with the highest initial baseline cost. FIGURE 7: Types of recommendations Streamlining Reducing/ Reducing/ Reducing local Streamlining and simplifying eliminating eliminating local administration and simplifying information documentation taxes/fees processing time submission forms requirements CHALLENGES  | 19 Impact aspects of recommendations are related to the Challenge of engagement. Engaging business in an administrative procedures of special importance. The greatest operational structured model would benefit both sides of effects of the reform are achieved by the simplification of the community, administration and private sector. The third administrative procedures with the highest impact and phase of implementation of the subnational regulatory administrative procedures with the highest costs and the reform projects focused on strengthening the capacities highest frequency. These are mainly the administrative of subnational authorities for promoting and attracting procedures in the field of spatial planning and economic investments. This additional scope of the project was affairs. introduced as an attempt to develop an instrument to use the competitive advantages of one subnational location One of the basic indicators of the success of subnational to attract and generate investments. It was important for regulatory simplification is savings in costs of administrative subnational authorities to understand the most important procedures compared to the previous situation, which is factors for the companies that influence the choice of location achieved through the adoption and implementation of for their investments, that is, market size, local market growth, the recommendations. Recommendations such as those existence of suppliers and partners, access to international and shortening process deadlines; eliminating documentation; regional markets, stable and business-friendly environment, changing document forms; reducing/eliminating stamp duties, availability of trained workforce, infrastructure quality, taxes, or fees; and the like directly affect the reduction of availability of cheap labor, government efficiency, incentives, direct and indirect costs burdening the business community and others. Introduction of specially designated individuals and citizens submitting requests. The purpose of an economic or organizational units within subnational administration analysis is to provide good insight into direct and indirect costs was the initial step in engaging the administration with businesses face for each of the administrative procedures. the potential and existing investors. By using the Compliance Cost Savings Model (CCSM), it is possible to point out some specific parts that are particularly Another key activity in challenging the engagement was to burdensome for the businesses to comply with. Baseline support establishing economic councils at the municipal level costs’ measurement reveals barriers to entry for SMEs in for each location, as places for exchanging business ideas case the costs are too high. and needs. This helps better communication and coordinated work among subnational authorities and the private sector Economic analysis is done for each administrative procedure, as well as increases the efficiency and overall progress of and the CCSM allows for all business expenses to be seen the local community. The instrument of economic council in one place. It verifies how much businesses must pay for helps the local administration overcome the problem of fees, stamp duties, and required documents; how much time insufficient motivation of the business sector by engaging is needed for collection of requested documents, payment directly with the business community about the positive of fees, and stamp duties, and submission of request; and results and experience of already-implemented reforms. In how many days they need to wait to receive a response practice, local economic councils are coordinating mechanisms from the relevant authority. This assessment identifies where the mayor and businesses can exchange ideas on the two kinds of costs: direct costs are expressed in terms of administrative burden placed by regulations and suggest money, while indirect costs are expressed in terms of days. ways to improve. Also, businesses participating at the local economic councils realize the benefits of practical business coordination even for a very simple business situation, that is, experiencing problems with finding the specific qualified workforce. 20 |  Local Economic Development Fueling Private Sector Investments and Growth FIGURE 8: Question of solving the problem CONSTRUCTION PERMIT MISSION IMPOSSIBLE HOW TO S SOLVE THI PROBLEM? DAYS GOING SYSTEMATICALLY THROUGH THE STEPS OF REGULATORY SIMPLIFICATION AND HANDLING THE CHALLENGES MIGHT BE FEASIBLE SOLUTION ON HOW TO SOLVE THE PROBLEM. CHALLENGES  | 21 Results The overall objective of all three phases of the regulatory Reformed local communities have achieved investments simplification project was to “support limited number of over US$60 million in total, which are confirmed. subnational administrations in BiH in strengthening their competitiveness and boosting private sector growth.” The An independent impact assessment in 2015 hypothesis of the regulatory simplification projects was confirmed that in localities where the second that transformation by implementing regulatory reform phase of the regulatory simplification project should result in reduced administrative burden and direct intervened, the following result was achieved: 6.41 time and costs savings to businesses by getting permits percentage point increase in employment levels more easily as well as increased investment, employment, compared to other municipalities. Additionally, and competitiveness. during the implementation of the third phase, reformed local communities have confirmed Since the beginning of implementation of employing 329 workers. reforms at the subnational level in BiH Locations treated by the project have a better and more Direct cost savings US$12.8 million transparent service for the investors now: having established access to information for investors on the principle of ‘one stop shop’—where the investor can obtain all relevant information Indirect cost savings by 49% relating to investment in the municipality, potential locations for investment, and support during the investment process. The investment profiles with potential investment locations More than US$60 million and offering of the locations for investors are prepared, in private investments focusing on specific investment locations, sectors, and other potential competitive advantages. 41 electronic registries of licenses and permits Introduction of 41 electronic registries (at each location treated by the project) of licenses and permits will secure increased transparency in the implementation of administrative procedures by the administration. Citizens and The results of implementing the project in 41 locations at businesses can now, in a simple way, know in advance what the subnational level across BiH and working with cantonal lies ahead—the procedure from applying to obtaining the and municipal officials are seen in direct cost savings of decision, documentation they would need, and information around US$12.8 million annually for businesses, all owing to for submitting the application, the amount of fees, and the simplification of administrative procedures by eliminating deadline for finalizing the process. documents, introducing ex officio flow of documentation, simplifying documentation, and reducing the fees and the time needed to resolve the official request filed by an applicant. The indirect costs were reduced by 49 percent on average, which means the time needed for getting permit from the cantonal or municipal administration is now improved and shorter than it used to be before the streamlining of the procedures. 22 |  Local Economic Development Fueling Private Sector Investments and Growth Verifying the Impact – is there a link between BOX 1   regulatory simplification and job creation An independent impact assessment in 2019 verified the that with respect to other indicators of administrative relevance of project intervention from 2015 to 2018. It burden, descriptive statistics also suggest that the confirmed that the design of the project intervention reforms generally had a positive impact, meaning has been highly relevant to the context of BiH. More that fewer firms in the treatment group mentioned specifically, the conclusion of the impact assessment ‘administrative burden’ or ‘procedures’ as a barrier stated that the project objectives were well aligned to growth. with the broader governmental priorities defined in the Reform Agenda; the emphasis on reforms at the In addition, data were obtained from the Tax subnational level were relevant given that municipalities Administration of FBiH (TAFBiH) and Tax Administration and cantons in BiH have significant competences in of RS (TARS) to identify the evidence of a spillover regulating businesses; and the project objectives effect of the reforms on job creation and the number and design of the intervention were also relevant to of newly registered companies and entrepreneurships. stakeholder priorities. The data gathered from tax administrations were based on treatment group and comparison group identical Data gathered through the impact assessment revealed to those done by the independent impact assessment, that there is evidence that the costs related to fees and for the period January 1, 2015 to June 30, 2019 (this taxes were reduced more in treatment localities11 than time interval referred through the end of this text as in comparison localities. This means that businesses ‘period’). increasingly agree that it is cheaper, easier, and less burdensome to obtain licenses and permits in the This assessment showed that the treatment group reformed cities and municipalities. Furthermore, it localities experienced 17.2 percent Cumulative was confirmed that with respect to the number of days Aggregated Growth (CAG) in employment over January spent on a procedure, the treatment group experienced 1, 2015 to June 30, 2019. The increase in total number a larger decrease compared to the comparison group. of employees experienced in the treatment group was Finally, the independent impact assessment revealed 22,875 compared to 8,162 in the comparison group. CUMULATIVE GROWTH IN THE NUMBER OF EMPLOYED IN 2015-2019 22,875 FIGURE 9: Job creation12 8,162 TREATMENT GROUP CONTROL GROUP As evident from the data above, the project has shown results in lowering the administrative burden on companies and creating a conducive environment for local competitiveness of the private sector and creation of a more stable and dynamic economy in BiH. 11 E  nd line data were collected by an independent contractor in early 2019, based on baseline data collected in early 2016 in randomly preselected 36 municipalities and 4 cantons, where 18 municipalities and 2 cantons were assigned to the treatment group (those that the project worked with) and 18 municipalities and 2 cantons were assigned to the comparison group (those that the project did not work with). The independent contractor randomly selected 36 municipalities and 4 cantons and selected 20 localities for comparison and 20 for treatment group. 12 Data for the statistics about employment, newly registered companies, and entrepreneurships gathered for the period January 1, 2015 to June 30, 2019  from the TAFBiH and TARS. RESULTS  | 23 Success of the Reforms It is imperative to build on the successes of these reforms and to continue the good practices by the localities that have gone through regulatory simplification projects. The expected enrolment of new localities should benefit more businesses as well as local administrations. However, long- term sustained changes can only be achieved if local-level reforms are embedded in local ownership and linked with entity and national reforms. The project team will lead gradual handover of technical work to local stakeholders—institutions. Local ownership and leadership as well as strong local champions and counterparts are essential for the successful implementation and sustainability of reforms. For the handover to local institutions, it is necessary to build technical and financial capacities of the local stakeholders. Human capacity cannot be underestimated in the capacities of the local stakeholders. In case of BiH, the local governments are too used and exposed to the international donors for support of such regulatory reforms. However, the coordination and strategic objectives shall be well harmonized across different layers of the government. Work at the local level also incorporates recommendations for higher levels that will be channeled through focal points in entities to appropriate entity institutions to initiate bottom-up change. The feedback loop mechanism must be envisioned. With information collected from the field, higher levels will be able to initiate bottom-up regulatory change. The upcoming trends of digitalization are imminent and will require even more intense reforms, not only operation-wise but more importantly policy-wise. These changes will necessitate coordination not only from bottom up but also top down. Introduction of an e-construction permit in BiH has already been triggered from bottom up (currently under the ongoing project of the WBG, there is a pilot project of introduction of e-construction permit in two cities of RS), but its implementation is impossible without the entity level, which is the policy maker for construction and spatial planning. In FBiH, there is also wide interest from the local level to introduce an e-construction permit, but it requires wider coordination not only from the local level to the entity but also inclusion of the additional level of canton, the level in charge for policy for construction and spatial planning. The strategic planning of regulatory reforms is critical for a better investment climate for businesses. Various reforms have been initiated to stimulate a more conducive business environment and good governance in BiH, but the real challenge is to align them across different layers of government and make them work to ultimately generate more investments. 24 |  Local Economic Development Fueling Private Sector Investments and Growth Lessons Learned and Key Recommendations Through the implementation of the subnational regulatory projects, the project team learned some valuable lessons that will inform other similar engagements. Designing the regulatory reform at the subnational level and implementing the work in the field essentially reveal the day-to-day situations that businesses and investors face with cumbersome regulations. The lessons learned by tackling these situations helped understand that the elements of regulatory simplification projects could provide results in the short, medium, and long term. Short term ƒ ƒ Design. To design a successful regulatory simplification ƒ ƒ Adaptability. No matter how well the project is designed, project, tailoring is the key. It is necessary to reflect being able to easily adapt and adjust is crucial for successful the specifics of the governance structure of the implementation. Implementation is the process of putting country. The methodology is a systematic approach a decision or plan into effect and executing it. In the aiming to have unique outcomes of the project case of BiH, a need to adjust to different legislations objectives, but the internal complexity of the country’s governing various matters vertically and horizontally governance structure requires adjustment or specific across different layers of administration was inevitable. tailoring of the outcomes to reflect this complexity. Elaborating more on the example of issuing the construction The local team witnessed a multiannual process with permit with adjustment to different legal frameworks gradual upgrade of instruments and mechanisms and and different regulators resulted in successful piloting continuous adjustment to the specifics of challenging of the e-construction permit at two localities in RS. and demanding reforms. Developing and implementing At the same time, in FBiH, due to the legislation being reform takes time, patience, attention to detail, inclusion, regulated at the cantonal level (there are 10 cantons and a clear, sequenced action plan. To succeed with the in FBiH), even though it was initially planned, the pilot objective to simplify the process of issuing the construction could not be implemented as there was no vertical permit13 at the subnational level in BiH, the local team had coordination of the administrations. Related to the to tailor objectives specifically to one group of localities adaptability of regulatory simplification projects, the compared to the other group. This was necessary due key lesson is to not let a complex country governance to the complex regulatory framework in the process of structure override some of the broader objectives. obtaining construction permits. The legal framework IFC’s adaptability and readiness to adjustment in the in FBiH defines the regulator at the cantonal level (only short term resulted in a positive outcome in the medium in exceptional cases at the entity level) while in RS, the term. As the progressive results at one locality, or at one legal framework defines the regulator at the entity level. entity, were a trigger for the other localities or entity, Also, simplification of the entire construction permit additional efforts and approach were needed from the process has to take into consideration the roles of third various stakeholders for their consent. It is the adaptability parties.14 Recommendations for regulatory simplifications to the mechanisms that opens the doors at the subnational of construction permits at different localities were designed level and gets the attention of the stakeholders. Ultimately, to reflect specifics of the regulatory framework. For adaptability turns the implementation of the projects example, regulatory simplification at the subnational into harmonization of regulations horizontally. The local level in FBiH when working with cantons involved drafting team learned that the adjustments cannot be ad hoc, a completely new spatial planning law while the project unstructured, and disconnected from individual actions. in RS could not intervene with the legislation change. 13 Construction permit is used as a common term in communication for the entire process from obtaining urban, then construction, and finally use permit.  14 Third parties are various public utility companies, court, bank, specialized service companies, ministries, and so on. SUCCESS OF THE REFORMS | LESSONS LEARNED AND KEY RECOMMENDATIONS  | 25 ƒ ƒ Even though the focus of this study is the implementation to initiate necessary legislation changes as a regulator. of the regulatory reform projects at the subnational level, The desire of the subnational administrations to be the importance of aligning the higher levels should not more competitive put relevant pressure on the entity’s be neglected as quite often the policies reside with them. government to focus on preparing the legal and technical The bigger picture becomes more important once more framework for implementation of the e-construction advanced reforms are proposed for the introduction of permit. This lesson was not feasible in the short run, since information and communication technologies and for it requires significant legislation changes and allocation the wider usage of digitalization. Understanding the of significant technical and financial resources. However, region around the location is also part of this broad after four years of the project’s implementation, the perspective. If locations in neighboring regions are moving e-construction permit was a reality at the pilot localities. forward, then doing nothing is a step backward. It is a This proves that the power of the subnational level makes better business environment in the short run, but better a difference. competitiveness in the long run. Medium term Long term ƒ ƒ The power of the subnational level. Understanding ƒ ƒ The importance of engaging the stakeholders. It is the limits of competencies of local authorities is the critical to take into consideration the stakeholder’s first step in designing the project. Yet, if it is adjusted approach from the beginning while designing the to the specific needs and tuned to support the local project. However, the impact of different stakeholders administration, it could spark the local level to achieve on the regulatory simplification at the subnational its potential from a bottom-up perspective without level could be seen sometimes only in the long run or waiting for higher levels to intervene. When talking after several years. Different stakeholders can provide about regulatory reforms, often, the subnational level valuable, realistic, and quick insights on regulations’ is neglected or underestimated since the perceived power implementation. As described earlier in this study, of the money expressed in budgetary terms does not get one of the steps in the implementation of regulatory that much focus at the subnational level when compared simplification is consultations with the businesses. to the nominal values of the budgets at the higher levels. The IFC local team aimed at engaging with the private However, it is important to keep in mind that the businesses sector to obtain objective input and feedback of the are ‘residents’ at a specific locality. As interpreted by the actual issues within the predefined layer of administration mayor of one of the pioneer localities, the subnational or and regulatory framework. Also, holding consultations local administrations shall adopt a business approach to with the businesses helped address the issues properly positioning themselves in the market. The more competitive and generate relevant issues for the national regulatory the local administration, the bigger the opportunities for the reforms, in terms of their impact on desired outcomes business and bigger the possibilities to attract investments. to put the identified constraints on the agenda of the The bigger the investments, the higher the possibility for higher levels (governments) and advocate for political employment growth. Subsequently, the outcomes achieved support for the implementation of the necessary reforms. at the subnational level make it imperative for the higher Success of the implementation of such reforms is impossible levels to redefine the priorities and accelerate support to the without engaging a broader group of stakeholders, that is, local level in regulatory implementation gap activities. The public sector companies, regulatory agencies, ministries, better the vertical coordination among administrations, the and so on. The IFC local team introduced two mechanisms better the harmonization and implementation of legislation. for long-run impact of regulatory simplifications. First, This is often triggered from the bottom-up perspective. An the mechanism of coordination with local administrations example of the bottom-up approach was the introduction through the implementation of local economic councils was of the e-construction permit with high demand from the built on lessons learned from the previous projects. This subnational level to the entity’s ministry and government coordination, which was based on face-to-face meetings, 26 |  Local Economic Development Fueling Private Sector Investments and Growth structured in advance toward specific issues on a regular basis, resulted in greater support for some of the tougher reforms as well as greater private sector impact. This is especially important for local communities where constant political turmoil at the higher levels is ‘just another day’. Second, the so-called ‘collaboration network’ of local administrations that have been participating within the projects of regulatory simplifications has been formed. The objective of this network was to bring the businesses from different localities within the same industry face to face to share their experiences in solving the barriers with the administrations. This often brought to the fore issues the businesses faced beyond the competencies of the subnational administrations and resulted in an upgrade of this network by engaging the ministries (each entity delegated the responsible ministry) to vertically coordinate the identified constraints. The outcome of this upgraded network was that often the subnational administrations had more responsive higher levels of administration in harmonizing the regulations and the businesses had stronger support from the local administrations in dealing with the identified constraints regulated at the higher levels. ƒ ƒ Municipal finance. Local-level regulatory reform work can be a good precursor for further IFC engagement in local municipal finance or infrastructure development. Our teams have been working closely with the local authorities in implementation of the reforms, and the local authorities have seen firsthand the professionalism, effectiveness, and efficiency of advisory work. This work enabled IFC advisory staff to know local organizational structures in municipalities, the way they work, plan, and conceptualize decisions; it helped to build relationship of trust and delivery. More importantly, they witnessed the impact on the ground. Through local-level economic development work, we are creating opportunities for private sector to grow, that in turn require infrastructure development to be supported by the local authorities. This work is a natural precursor to the potential work on infrastructure, where we can engage with the local authorities on plans to finance development of city infrastructure, transportation system, and so on. LESSONS LEARNED AND KEY RECOMMENDATIONS  | 27 As evidenced by the results, working at the local level could governments increase chances for (re)investments; (c) local improve the business environment and lower the barriers authorities need to have an active dialogue and coordination to daily business operations, but to improve the business with the business community to increase efficiency and environment at a more competitive stage, it is necessary overall environment for business operation and creation to go beyond the nuts and bolts of local governments. of jobs; and (d) such an approach opens doors for broader local economic, municipal finance, and infrastructure The pace of implementing necessary reforms may not be development. The projects implemented are a proof of what at the desired level, but still, with international support can be achieved by eliminating regulatory gaps identified and assistance, implementation of considerable reforms through transparent dialogue and cooperation with the at the subnational level aimed at establishing a more open, private sector. The level of verified investments and jobs efficient, transparent, and competitive business environment. created through the latest phase of the projects could be an The country still has plenty of work ahead as it continues excellent incentive for others to undergo regulatory reform. efforts to further implement more activities and reforms to enhance economic development. This study with comprehensive evidence provides a basis for understanding the power of subnational regulatory reform The power of the subnational level is enormous though policy. Designing the regulatory reform at the subnational still underestimated. Overall, bottom-up reforms could level and implementing the work in the field essentially be more appropriate to initiate reforms. As shown in this reveals day-to-day situations that businesses and investors case, it is a multiannual process with gradual upgrade of face with cumbersome regulations. The solutions applied instruments and mechanisms and continuous adjustment to enhance the methodology over a longer period seem to the specifics of challenging and demanding reforms. legitimately simple and can be easily applied elsewhere with adjustments to the local context. The replicability of this Some of the key messages around the team’s efforts methodology with local adjustments has already taken place in terms of enabling the private sector gained from by involvement with some of the local BiH team members in the implementation of the projects are the following: the design and implementation of simplification regulatory (a) transparency and improvement in servicing the private projects within the other countries and regions.15 sector increases competitiveness of local businesses; (b) predictable environment and proactive approach of local 15 Particularly, based on the experience, the BiH team supported colleagues in Albania, Belarus, Kosovo, the Kyrgyz Republic, Moldova, Serbia, and Tajikistan to replicate the lessons learned. 28 |  Local Economic Development Fueling Private Sector Investments and Growth