Shaping an Enabling Business and Investment Climate … · ‘Shaping an Enabling Business and...

Shaping an Enabling Business and InvestmentClimate in Asia

– Making Reforms Work –

July 25-28, 2005 | Manila, Philippines

S E M I N A R R E A D E R

SEMINAR READER

Table of contents

Seminar purpose ......................................................................................................................3Keynote presentations ..............................................................................................................4Participant introductions and expectations .................................................................................4

Seminar expectations:Responses to the question, “Why have you come to the seminar?”........................................................4

Regional overview ....................................................................................................................5The Business and Investment Climate in the Asia-Pacific Region.........................................................6Reforms in the Mekong ........................................................................................................6

Small business perspective on the business and investment climate ............................................8Small business perspective on business and investment climate ............................................................8

Assessing the business and investment climate and designing reforms– a framework for analysis and reform .....................................................................................11Implementing reform programs ..............................................................................................12

Sector development and business and investment climate reforms .................................................. 13A sectoral approach to improving the business and investment climate for SMEs ..................................... 13Picking winners in Asia; the electronics sector ............................................................................ 14Economic Zones - Sector Development and BIC reform................................................................. 15Approaches to private sector development in the tourism sector: Critical issues for business andinvestment climate reform ................................................................................................... 16Breakout session report ...................................................................................................... 18

Making financial markets work better ................................................................................................................. 19Towards a Systemic Approach for Improving SME Access to Finance................................................. 19Making Financial Markets Work Better for SMEs ....................................................................... 24Making Financial Markets Work Better for SMEs– The Role of the Small Industries Development Bank of India ......................................................... 29Outcomes of the breakout session........................................................................................... 33

Regulatory reform processes and strategies ....................................................................................................... 35Regulatory reform for a more competitive business and investment climate ............................................ 36Regulatory Reform: Processes and Strategies;A Case of Korean Regulatory Reform ..................................................................................... 39Introducing regulatory impact assessment (RIA) as an innovative instrumentin the making of business laws in Vietnam................................................................................. 44Report from breakout session on regulatory reform processes and strategies............................................ 47

Sub-national reform processes and strategies .................................................................................................... 49Sub-National Reforms of the Business and Investment Climate; an overview......................................... 50Designing local business reform interventions in the Philippines ........................................................ 52The role of local business support organizations (BSOs) in shaping the business and investment climate ........................................................................... 58Report from breakout session on sub-national reforms ................................................................... 59

Monitoring and impact assessment ..........................................................................................60Seminar summary and review.................................................................................................62

Seminar outcomes and next steps ........................................................................................... 63Seminar closure............................................................................................................... 67

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Seminar purposeThe German Technical Cooperation Agency (GTZ), the Asian Institute of Management (AIM)and the Philippines Department of Trade and Industry organized a regional seminar entitled,‘Shaping an Enabling Business and Investment Climate in Asia – Making Reforms Work’.This seminar was held at the Traders Hotel in Manila, the Philippines, from 25 to 28 July 2005.

The aim of the seminar was to provide participants with insight into the methods andexperiences governments, development and donor agencies have had when reforming the businessand investment environment for private sector development.

Seminar objectives:o To provide a means for the exchange of information and experience in the Asian region

on business and investment climate issues

o To provide an insight into tools and processes that can be used to improve the businessand investment climate

o To learn from experts in the field

o To help participants establish a framework or mindset for the assessment, design andimplementation of business and investment climate reforms

Expected seminar outcomes:o Better informed about BIC issues and practices in the region

o Able to find entrance points for reform in their countries and to set priorities for thereform process

o Better access to practical and feasible tools as well as strategies required to reform inspecific fields of concern

o Better understanding of what are good reform practices and conditions for success

o Build a model for BIC reform they can apply to their work

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Keynote presentationsThe following presentations were made to open the seminar:

• GTZ’s role in Business and Investment Climate Reforms in the Asian regionMartina Vahlhaus, Program Manager, GTZ-Private Sector Development Programe,Philippines

• Key priorities for reform of the business and investment climateElmer C. Hernandez, Undersecretary, Industry and Investments Group,Board of Investments

• Role of the private sector in creating a better business and investment climateDonald Dee, President, Philippines Chamber of Commerce and Industry

Participant introductions and expectationsFollowing the keynote presentations, the seminar participants were given the opportunity tointroduce themselves and speak on their interests in, and expectations of, the seminar.

Seminar expectations:Responses to the question, “Why have you come to the seminar?”

• To learn from others

• To get good examples and experiences from others• Transferability

• Choosing the right sectors for BIC reforms

• BIC in economic zones and outside• Methodologies and tested tools in BIC reforms

• Recommendations for BIC reforms

• How to influence actors, pressure groups• Public private partnership in BIC

• Learn about framework | mechanics for reform process

• Women’s participation• Acquire method/techniques

• Practical lessons in how reform works – on the local, national & regional level

• Learning on regional process• Networking – region

• GTZ Private sector development products and experiences

• Theory vs. practice• Follow-up – next steps

• Explore Manila

• Practical lessons – which strategy to choose for creating anenabling environment for ICT

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Regional overviewIn the afternoon of the first day of the seminar attention was given to the issues affecting businessand investment climate reform in the Asia region. Dr Federico M. Macaranas, began with apresentation.

The Business and Investment Climate in the Asia-Pacific RegionBy Dr. Federico M. Macaranas, Executive Director, Asian Institute of Management,Policy Center, Philippines

Following the local and global challenges framework, the presentation aimed to assess and determinekey factors affecting business and investment climate in the Asia pacific region. The presentationbegan by revealing economic, political and social challenges in the region for 2005, followed by longterm global economic challenges that include the possibility of synchronized recession of majoreconomies, oil price shocks and the increasing number of bilateral and multilateral FTAs includingthe WTO. Emphasis was given in the Asia-Pacific region in which there are five (5) multilateralagreements in the pipeline concluding between 2009 and 2020. Other global challenges identifiedinclude political issues such as government transparency, corruption, terrorism and security, andsocial challenges focusing on corporate social responsibility.

Using JETRO’s Diffusion Index that measures short-term business sentiment, the presentationshowed the short-term business climate from January to July 2005 for Thailand, Singapore, Malaysia,Indonesia and the Philippines. A longer term view is afforded by a comparative analysis of overallcompetitiveness and its four components of economic performance, government efficiency, businessefficiency and infrastructure of these five countries plus China Mainland, India, Korea, and Taiwanwas presented using data from the World Competitiveness Yearbook (WCY) from 2000 to 2005.Furthermore, key economic indicators of GDP and FDI growth from 2000 to 2004 were alsocompared for the same countries.

The presentation concluded with a summary of the golden rules of competitiveness using theinput-process-output framework. Inputs can be in the form of investments in infrastructure,education and training, and the promotion of savings and investments. Policy makers are alsoadvised to create a stable and predictable legislative environment, work on a flexible and resilienteconomic structure, develop aggressiveness on the international markets as well as attractiveness forFDI, focus on quality, speed and transparency in government and administration, maintain arelationship between wage levels, productivity and taxation, and preserve the social fabric byreducing wage disparity and strengthening the middle class. Only then can a balance betweeneconomies of proximity (domestic markets) and globality (international trade and investment) beachieved that will ensure substantial wealth creation, while preserving the value systems that citizensdesire.

This was followed by a discussion among participants of the key issues they believed influencedthe need for reform in the region.

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Main issues affecting the BIC in the regionThe following table contains the issues defined by country groups during the seminar discussion.

Laos

Cambodia

Thailand

Philippines China Vietnam Indonesia Bangladesh

No tax of SMEsto a certain

size

Legislativeefficiency for

new bills /amendments

Tax systemreport

Fair businessenvironment

Agribusiness Infrastructure

HRD –technical –manager

government

Implementation of existinglegislationsspecially

coordination

Agriculturalreport

Ensure freebusiness rights Tourism

Humanresource

development

Reduceadministrative

burden oninvestors and

businessoperators

Access tofinance

Financialreforms

State sectorreform /financial

SMEGood

governance

Resistance toliberal change

by…

Electoralreforms

Governmentreform

Enforcementimprovement

InfrastructureFinancialreforms

Actualimplementatio

n of reforms

Goodgovernance

GovernanceResearch anddevelopment

Infrastructure CurrencyLaw and orderimprovement

Industrialstructure

Domesticmarket

Naturalresources

The discussion that followed this identified a number of common issues of concern for reform inthe region. These included: financial sector reforms; the improvement of public sector governance;and improving implementation (i.e., implementing policies, laws and regulations).

Reforms in the MekongNguyen Hang Nam, Business Development Officer, Business Enabling Environment Program, MekongPrivate Sector Development Facility, Vietnam, gave a presentation on the reforms undertaken in the

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Mekong sub-region. The presentation provided an overview of the major business and investmentclimate issues in each of the three countries of the Mekong region including Vietnam, Cambodiaand Lao PDR; with a focus on those that affect private sector development.

On that background information, the presentation provided a brief description of the majoreconomic and/or legal and administrative reforms that have been implemented in the last year andor are planned for the coming year. Details were provided on the practical tools and processes thathave been developed and used by IFC/MPDF to advocate and support these reforms; which arecategorized into four main areas:

- Legal and administrative reform

- WTO accession

- Sustainability: this includes corporate social responsibility, gender and private sectordevelopment, corporate governance

- Financial markets development

Key themes of each country are:

1. Vietnam: Unified enterprise law and common investment law, corporate governancepractices, gender and private sector development, provincial simplification, privatecredit bureau

2. Cambodia: corruption, trade facilitation costs, administrative reforms, WTO guide forSMEs, study of provincial business environment

3. Lao: business registration and start up, enterprise law, Lao business forum

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Small business perspective on the business and investment climateToward the end of the first day, seminar participants were asked to consider the view of the privatesector when considering the issues of importance to the business and investment climate. To thisend, Leah Zveglich made the following presentation.

Small business perspective on business and investment climateBy Leah Zveglich, Business Consultant, Philippines

Most of small business owners wear many hats. They are in charge of running companies,marketing their products and services, managing their people, production, finance and budget…

For these people, time is more precious than money. Money is something you can get more ifyou have excellent products or services. But time is something you cannot have more regardless ofhow excellent your products and services are.

When I was running my business, I worked day and night. I dedicated all my hours for thebusiness but it was still not enough. I wanted to do so much but had so little time. Anything thatwould save me time had great value for me.

I love on-line or mail-in business registration, on-line tax filing and direct payment from bank– all these wonderful things that do not require me to leave the office. A day saved attributesenormous value that I create for my business working on marketing and product development.

I love customized information on various business issues. Data is everywhere but useless. I haveno time to go through them and extract what I need. But information that’s organized in the way Ineed is precious. The Small Business Administration and bank provided information and tools onany management issues I faced. Department of Commerce provided information on internationalmarketing and helped me find overseas partners.

As a small business owner, my decision making involves following steps.

1. Does it save my time?

2. Does it help me get more business?

3. Does it help me do business better?

4. Does it help me save money?

Policy makers talk a lot about investment climate and investment in small and mediumenterprises. But, for most business owners, outside investment is not as attractive as a bank loan orpartner.

Investment poses a problem for small business owners. More often than not, investment meansgiving up the majority of company ownership to an outside investor. Institutions tend to make largerinvestment than those which small and medium enterprises need. For business owners, a loan, evenat higher interest rate, may serve as a better option because they still get to keep their company.Most of business owners have already taken great risks by starting a business; they don’t mind addingadditional risk by getting a loan to make the business grow.

Small and medium enterprises, no matter how desperate they become, are not keen on the ideaof giving up their business. Their business is like their baby. They spent so much time and energy tocreate the company and run it and it is not easy to give up.

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Angel investors or private investors who tend to invest small amount is a second best optionafter loans. In the U.S., there is an active community of angel investors and often there are regularmeetings where business owners can meet these potential investors. Small investment injected atthe right time creates more value than large investment that comes in late.

For small business owners, hiring talented people is extremely difficult. Because owners wearmany hats and are busy all the time, they need support of people who are capable and flexible, oftencarrying out multiple tasks or roles. But most of talented people prefer to work for a large establishedcompany due to stable income and good benefit packages. It is very rare to meet people who preferhaving a dynamic and challenging work experience than a stable income.

Internship programs provided by business schools greatly helped me. Because it was a part ofstudents’ degree requirement, student interns took their work seriously. I usually did not have to payminimum wages. I only had to package the work in such a way that was interesting and challengingfor them but at the same time easing my work load. Once I got the reputation of providing excitingwork experience, I found it easy to get a stream of talented young people working for me.

Their value addition was priceless. They were young, enthusiastic and full of fresh ideas. Inreturn, I provided them ample opportunity to explore, be in charge and make decisions. It wasexcellent partnership.

Compared to working in a big established company, they had full exposure to all aspects ofbusiness, and had bigger responsibilities. As a result, after internship, all of them found great jobopportunities else where. I still keep in touch with them and it is truly exciting to watch theirprofessional growth.

Trade missions organized by government often tend to be policy driven rather than demanddriven by small and medium enterprise owners. My previous company, Aster International, was anexport company. Ninety-nine percent of our businesses were in the export market. Due to itsexcellent growth rate and contribution to US export, the company was invited to join President BillClinton’s trade mission to China. Secretary of Commerce invited me to join his trade mission toJapan. All these invitations were very flattering and I must say that I was extremely thrilled.

However, when I thought about it in realistic sense and from the business perspective, it did notmake any sense. Most of these government-led trade missions are filled with policy related meetingsand functions. There are match making sessions but most of them are with big businesses. Due tolimited capacity of small business, even if I get a deal with a large company aboard, I cannot meet thedemand unless I have a magic wand and can increase the company’s capacity overnight.

Unfortunately, capacity building does not happen overnight even when you have growth fundand everything else lined up.

I did not participate in any of these trade missions even though department of commerce keptsending me invitations over and over. I participated in trade shows by sharing booth with severalother companies so that we can save money. Meeting and talking to potential small business buyersor consumers were far more effective.

Besides above issues that are applicable to small and medium enterprises everywhere around theworld, I find that in developing countries, there are additional constraints mostly in infrastructuresuch as communication, transportation, logistics, banking and finance, etc.

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However, none of them are as important as human resource factors. It’s people who makebusiness succeed or fail. It’s people who come up with ideas to work around obstacles and overcomeconstraints. It’s the capable people who make world go round. Lack of capable human resource isdetrimental to businesses, especially to small businesses whose reliance on people is higher than largebusinesses.

One of the best small business administration’s officers I’ve met and worked with was someonewho started his own company and later got a job in the government. When he was talking withsmall business owners, he knew how to balance policy makers’ perspective with business owners’perspective. We definitely need more of those people.

Governments, development and donor agencies which know small business owners operate willbe able to deliver what they really need. Small business owners are already motivated andempowered people. They do not need huge support from the government but little bit of push hereand there to ease the pain of growth. Currently I feel that there are too many programs that aredesigned from policy makers’ mindset, not from business owners’ perspective.

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Assessing the business and investment climate and designingreforms – a framework for analysis and reformDuring this session, Sonja Kurz, Economist, Economic Development and Employment, GTZHeadquarters, Eschborn, presented a framework for understanding the way the business andinvestment climate can contribute SME development. It included a description of the ways businessand investment climates can be assessed and programs for reform designed.

This presentation considered the following topics:

1 Understanding Business and Investment ClimateHere two aspects of the business and investment climate (BIC) were described: the“narrower” definition and the “wider” definition.

o Stronger concentration on state and institutional failure than on market failureo Stronger emphasis on the political economy

o Decrease of direct support on the enterprise level

o Private sector plays an active role in problem solvingo Better representation of the private sector in the political process

2 Result chain of the Business and Investment ClimateA chain of results was presented to show how improvements to the BIC can havebroader affect on poverty, economic development and employment creation.

3 How to analyze Business and Investment Climate?Key questions when assessing the BIC: What constraints hinder private sectordevelopment? Which legal, political and institutional framework conditionsare responsible?

Methods of analysis – use of standardized assessments:o Reduce risk of subjectivity

o Promote comparisons across locations

o Promote comparisons over timeo Can be used by partners to build capabilities

o Promote a consistent focus of investigation

o Cost-efficient means of assessmentUse of self-collected data:o Emphasis on the unique nature of assessments

o Used to supplement the information from standardized assessments produced byother agencies

o Tool for public private dialogue

o Tool for capacity building of the partnersOverview of standardized assessments

4 Case Studies to analyze Business and Investment Climate?Two case studies were presented to show how the above elements of BIC reform havebeen applied by GTZ: the SADC Regional Business Climate Survey and RegulatoryImpact Assessments.

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Implementing reform programsThis section of the seminar program dealt with the ways the business and investment climate can beimproved for SME development. Four areas of interest were addressed:

1 Sector development and business and investment climate reformsThis topic examines the relationships between sectoral development approaches to SMEdevelopment and reforms in the business and investment climate. It describes the kindsof reforms that can be used to enhance sector development opportunities. This includedconsideration of the advantages and disadvantages of special economic zones as strategiesthat have a sectoral focus and offer special concessions in the business and investmentclimate. The breakout session was facilitated by Anja Gomm, GTZ, Manila.

2 Making financial markets work betterThis topic examined in depth approaches to making financial markets work better forSMEs. It provided practical examples and tools on how to assess financial markets andidentify the obstacles to making financial markets work better for SMEs. It also providedexamples of strategies that have been used to improve financial markets such as the useof credit bureaus, strategies for improving secured lending practices, leasing, etc. Thebreakout session was facilitated by Martina Vahlhaus, GTZ-Private Sector DevelopmentProgram, Manila.

3 Regulatory reform processes and strategiesThis topic looked at the processes and strategies that can be used to reform theregulatory framework for private sector development. It included information on the useof regulatory impact assessments (RIAs) and drew from the experiences of South Korea.The breakout session was facilitated by Anja Gomm, GTZ, Manila.

4 Sub-national reform process and strategiesThis topic examined a range of practical processes and strategies that can be used tomake local business and investment climates more competitive. It presented assessmenttools and described strategies that have been used in the region. Special considerationwas given to the role of local and provincial/regional governments. The breakout sessionwas facilitated by Simon White, a consultant to GTZ-Private Sector Development Program,Manila.

Each of these topics of interest was introduced to the plenary of the seminar. In the afternoon ofthe second and third days, seminar participants broke into discussion groups where it was possible todiscuss each topic in more detail. Breakout sessions (discussion groups) were encouraged to identifygood practices for reform in each of these topics. These practices were then discussed in the plenarysession on the following morning.

The following pages contain a synopsis of the presentations that were made under each of thesetopics of interest and the lessons and good practices each discussion group identified.

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Sector development and business and investment climate reformsThe following speakers made presentations under this topic:

• Session overview: ‘A sectoral approach to improving the business and investmentclimate for SMEs’ by Federico M. Macaranas, Executive Director, Asian Institute ofManagement, Policy Center, Philippines

• ‘Picking Winners in Asia: the electronics sector’ by Federico M. Macaranas, ExecutiveDirector, Asian Institute of Management, Policy Center, Philippines

• ‘Economic zones and sectoral business environments’ by Wilhelm Ortaliz, DeputyDirector General, Philippine Economic Zone Authority

• ‘Approaches to private sector development in the tourism sector; critical issues forbusiness and investment climate reform’ by Cherry Lyn Rodolfo, School of Economics,University of Asia and the Pacific, Tourism sector Philippines

A sectoral approach to improving the business and investment climate for SMEsBy Dr. Federico M. Macaranas, Executive Director, Asian Institute of Management,Policy Center, Philippines

Small and medium enterprises (SMEs) play a strategic role in countries – particularly indeveloping countries and NIEs. As major players in industrial development, SMEs are consideredvital in the promulgation of indigenous enterprises. In the Asia Pacific region, SMEs account to over70% of total registered enterprises, a few of which even tip the 99% level. SMEs moreover employover half of the labor force and thus contribute significantly to the value added of nationaleconomies. However a comparative analysis of the state of SMEs for selected Asian economies ofChina, Korea, Malaysia, Taiwan, Thailand and the Philippines showed that although SMEs accountfor as high as 99% of registered enterprises and employ employ as much as 78% of the totalworkforce, their value added contribution to the economy falls to just between 26% to 60%. Asectoral analysis of some policies targeted at promoting and strengthening SMEs in the area ofagriculture, industry, and services for the 6 countries followed.

China’s policies on agriculture centered on the Grain Bag Policy to increase rice production,and the promotion of rural development through the provision of training for farmers. Korea’sstrategy to promote agricultural growth centers on R&D of mechanical, technical and biologicaltechnologies. Malaysia’s Third National Agriculture Policy or NAP3 encourages large scale paddyproduction, higher private sector participation through better incentives, support and infrastructure,high tech production of vegetables, and the promotion of agricultural and forestry education. Inaddition to the Ginintuang Masaganang Ani (GMA) Program of the Philippines, advanced researchand development programs for agriculture products are also promoted as well as special creditfacilities and support programs. In the face of WTO, Taiwan’s strategy is to promote recreationalagriculture, horizontal and vertical technical integration as well as agricultural biotech park schemes.Thailand meanwhile promotes through credit access and RD support.

For the industry sector, China has several testing and standards bodies to promote qualitycontrol, tax incentives. Korea provides effective financial services, ensures a stable supply of humanresources, and has a long term promotional plan for their motor industry. Malaysia advocates cluster-based approach, free trade zones, tax incentives and holidays, and monetary exchange control

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regulations. For the Philippines, the current administration has laid down an Investment andPriorities Plan 2005-2010, in addition to a focus on export winners, special investment zones, and itsBig Enterprise-Small Enterprise Program. Taiwan concentrates on precision and high valueindustries, vertical integration, S&T parks, IPR protection and promoting collaboration betweenSMEs and MNCs. Thailand promotes the industry sector through import tariffs, fiscal incentives,HRD and development of industrial networks.

In the services sector, China is keen on its strict operational limits on foreign entry to protectlocal providers. Korea is focusing on improving market access of SMEs, while Malaysia grants taxreduction for R&D training. For the Philippines, job creation in high skill services, as well asinfrastructure and HRD is emphasized. Taiwan promotes R&D in the pharmaceutical, biotech, andtechnology industries and also stress English as their quasi-official language, while Thailand grantscredit access, training and government support services.

From the policies instituted by the six countries to improving productivity in the sectors ofagriculture, industry and services, four common strategies were revealed. These are: making SMEsmore competitive through the provision of basic platform to increase productivity, sectoral niching,designing separate policies for proximity versus globality and macroeconomic and political strategy.The presentation then gave examples of notable and best practices of different local and nationalgovernments. SME productivity can be increased by increasing credit access, training and technologytransfer, providing an enabling environment, and assisting in marketing efforts. Sectoral nichingstrategy can be implemented through the establishment of economic and industrial zones. In theconcept of proximity versus globality, outward orientation of SMEs to broaden its market base issuggested. Finally macroeconomic stability can be achieved through sound economic fundamentals.The presentation concluded by emphasizing the importance of a collaborative effort amonggovernment, private sector, academe and civil society in achieving a sound business and investmentclimate for SMEs.

Picking Winners in Asia: The Electronics SectorBy Dr. Federico M. Macaranas, Executive Director, Asian Institute of Management,Policy Center, Philippines

Despite academic focus on free market principles, the strategy of picking potential winners haslong been used by many governments in hopes of protecting chosen industries from various internaland external threats, allowing it to prosper. The rationale behind selecting only a few industries tosupport is that with the resources concentrated on these picks, there will be a higher possibility forthese industries to thrive, compared to spreading resources thinly over the whole economy. It is thehope of the government that the other industries will benefit from the eventual development of thewinners. Upon determining the potential winners, the government can successfully allocate scarceresources to aid in their development.

The presentation thus focused on the experiences of Taiwan, Philippines, Korea and China,now major players in the global electronics market, in picking the electronics sector as a potentialindustry winner.

In conclusion, that the practice of picking potential winners is evidently rooted in theeconomic, where countries try to “cash in” on industrial strengths. Countries nowadays are forward-looking in their perspectives, with globalization looming in the future. Most cases seen are veering

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towards export-orientation. It is about simply asking: What can my country supply best that thewhole world is demanding or will demand in the future? Ultimately, a balance between creatingand picking winners can develop a country in a more holistic manner.

Economic Zones and sectoral business environmentsPrimary tasks of the economic zone authority (PEZA is a government owned andcontrolled corporation):

o Encouraging and supporting private sector investment in the development and operationof the economic zones

o Attracting foreign investment through the implementation of focused programs tocontribute to growth and diversification of exports in an environment-friendly zone

o Deliver high level services towards enterprises inside the zones

o Assisting Local government units in developing a vision and their planning

o Undertaking active advocacy for policy and administrative reforms towards reducing thecost of doing business in the country

o Matchmaking between zone export-producers and domestic enterprises to increase thelocal value-added in manufactured exports

Advantages:o Fiscal incentives for export producers are provided; export manufacturers are tax-exempt

and duty-free (on machinery and equipment imports, raw materials etc.)

o Non-fiscal incentives are given to foreign investors e.g. permanent resident status

o Through cooperative undertakings with agencies like the bureau of customs, departmentof labor & employment, dep. of environment, the companies’ compliance withregulations is facilitated; for example: in cooperation with the bureau of internal revenuea ‘e-substituted filing system’ has been piloted which eliminates the need for employeesof economic zone enterprises to file separate income tax returns

o One-stop-shop provides efficient processing of documents e.g. for receiving regulatorylicenses/more streamlined procedure, for receiving environmental certificates;

o Cooperative undertakings

o Easier networking possibilities are given which strengthen the voice of businessassociations;

o Feeding learning into policy (national, regional) and markets (actors)Disadvantages:

o Every benefit has a corresponding responsibility: rules are more strictly monitored insidethe zones than outside

o Domestic producers outside the zones compete in foreign markets with export producersinside the zones

o Grant of incentives given to enterprises within the zone diminishes governmentrevenues

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Approaches to private sector development in the tourism sector:Critical issues for business and investment climate reformBy Maria Cherry Lyn S. Rodolfo, Economist, School of Economics, University of Asia and the Pacific,Philippines

Tourism contributes around ten percent to total Philippine Gross Domestic Product. It employs3 million Filipinos directly and indirectly, generates foreign exchange and is a major vehicle in thedevelopment of small and medium enterprises. In 2004, the Philippines attracted 2.3 million visitorsand witnessed a surge in mobility by domestic tourists. The revenue generating markets fromNortheast Asia continue to grow while new niches such as health tourism reveal huge potentials.On the other hand, the Philippines continue to lag behind.

This paper will present evidences of public-private partnership in tourism developmentparticularly in infrastructure (hard and soft), area development projects and marketing programs topromote the various destinations. However, certain factors continue to limit a more activeparticipation by the private sector towards sustainable development. These factors are political,economic and social in nature. Examples are the lack of consistency between national and local laws(particularly in land issues), cumbersome government procedures, foreign investment laws thatprohibit greater commercial presence in growth areas such as health tourism, lack of access tofinancing, lack of quality manpower training programs, and the lack of culture for tourism.

The paper will then explore ways by which government and even private sector are reducingthese barriers. By using the experiences of other countries, the paper will consider how investmentincentives shall be enhanced consistent with the policy on rationalization of fiscal incentives andlikewise assess the implications of the establishment of establishing tourism economic zones inenhancing private sector participation – on a small, medium or large scale basis.

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Breakout session reportWhat was important in the presentations?

1 Tourism• Need for Competitive Advantage, e.g. Phils in Global Top 20 in Biodiversity• Sustainable development is important (destinations can quickly reach limits of carrying

capacities, e.g. Boracay)• Quite specific to Philippines tourism• Methodologies and tested tools in tourism (e.g. development of attractions, transport

infrastructure)• Need to preserve local flavor and culture• What was important in the presentations?

2 Economic zones• Experimental bowl, good learning field• Limitations, cannot provide mass employment and poverty alleviation• SME are embedded in their environment / context• Learning has to be spread wider• Infrastructure availability is crucial (the set-up is ready to go for investors)

3 Semi-conductor industry• “Reforms are for our children’s children”• Life long learning is needed, for when incentives disappear• The selected sector should be one with potential for many SME (not only 1 or 2 large

players)• Need to consult business / industry on selecting the “winner” sector

Lessons learned in tourism:• Access restrictions was key constraint• Need for renegotiating air traffic agreements• Promotion/marketing is key to attract investors and tourists e.g. ecotourism in Asia• Need to develop niche markets e.g. Retirement Village for Japanese• Security, peace and order, is important

Lessons learned in economic zones:• Take lessons learnt to the whole nation• More important than incentives is removing disincentives

Lessons learned in the semi-conductor industry:• Watch out for free riders• Picking winners is a difficult task, think through it• Picking winners cannot be Govt. task alone, need to consult• Picking winners needs for continuous business intelligence• Picking winners should be flexible, based on global markets

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What makes reforms work in tourism?• Associations need to speak with one voice to lobby for reforms (“strong voice of the

private sector”)• Multi-stakeholder approach• strong local community (manpower development)• support of media• Strong civil society• Decentralization• Eliminate artificial borders e.g. between Local Government Units (LGUs), to enhance

cooperation• What makes reforms work

What makes reforms work in economic zones• Principle of business sector as risk taker instead of picking winners• It’s the song, not the singer• Political will• Govt. incentive• Networking of reform champions• Communication, action, transparency, ownership

What makes reforms work in the semi-conductor sector:• Incentives to improve BIC of selected sectors

Best practice in reforming the BIC for the tourism sector:• Identify key tourist attractions/sites e.g. make use of local tourism councils, create

clusters• Create a network of main stakeholders• Attract investment to build infrastructure (private or j.v.)• Build capability and service culture• Cultivate support of local stakeholders – community, government, civil society• Promote site to tourists – foreign and domestic

Best practice in reforming the BIC for economic zones:• Efficient processing of documents / “one-stop shop”• Easy doing business in EZ for foreign investors• Feeding learning into policy (national, regional) and markets (actors)

Best practice in reforming the BIC for the semi-conductor sector:• Spread the word, advocate• Adjust sector policy focus to changing markets• Transparent sequence / phasing of BIC sector policy• Need for Govt. to do homework (i.e., economic intelligence, consultations with

business, trade bodies)

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Making financial markets work betterThe following speakers made presentations under this topic:

• ‘Towards a Systemic Approach for Improving SME Access to Finance’ by StefanJansen, GTZ Advisor, GTZ Indonesia

• ‘Making Financial Markets Work Better for SMEs’ by Benel Lagua, President and COO,Small Business Guarantee and Finance Corporation, Philippines

• Hans Shrader, International Finance Corporation, Indonesia [No synopsis provided]

• ‘Making Financial Markets Work Better for SMEs – the role of the Small IndustriesDevelopment Bank of India’ by N. Balasubramanian, Small Enterprise Development Bankof India, Chairman and Managing Director, India

Towards a Systemic Approach for Improving SME Access to FinanceBy Stefan Jansen, GTZ Indonesia

A systemic approach towards improving SME access to finance addresses shortcomings of earlierfinancial sector reforms. During the 1980s and 90s, reforms aimed at market liberalization andderegulation. These reforms neglected the institutional environment which financial markets requireto function well.

A key lesson learnt is that financial markets are part of the investment climate for firms:Financial Institutions invest through debt and equity instruments in firms, so they depend on thecost of doing business and returns of these firms’ projects. In addition, financial markets areprofoundly shaped by the investment climate facing providers of financial services: financialinstitutions’ willingness to participate in investment projects depends on the transparency of businessprospects, suitable contract designs and the possibility to enforce these contracts, i.e. to appropriatethe returns.

In addition to financial sector institutions, weaknesses in the legal and judicial frameworksrequire attention. On the demand side, a systemic approach also needs to address informality and alack of transparency of small firms. Frequently, industrial policy and institutional frameworksintroduced a bias against the SME sector. The resulting “missing middle” in the firm size structuresignificantly retarded financial market development with regard to innovative technologies cateringfor SME demand.

Financial services for small firms require adapted lending technologies, which can only work inconducive regulatory and institutional environments. Small firms are very diverse and, thus, have adiverse demand for financial services. The most critical issues, however, remain access to workingcapital and investment loans from formal institutions. Equity finance is unlikely to becomeimportant soon, as it only plays a minor role in developed financial markets as well.

I will briefly outline past experience with financial sector reform to highlight the lessons learntand outline key challenges. Then, I will take a closer look at some elements of a systemic reformapproach, such as the legal reform for secured transactions and the requirements for setting up creditinformation bureaus.

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In the 1980s and 1990s, liberalization shifted financial sector policy to a more market-based,internationally open approach. Before liberalization, the financial system was treated as aninstrument of the treasury: governments directed credit at below-market interest rates to favoredsectors. Resources were mobilized through monetary policy instruments or state-guaranteed externalborrowing. State banks were considered necessary to carry out the targeted credit allocations. Banksupervisors focused on the often intricate requirements of directed credit rather than prudentialregulations. Interest rates to depositors were kept low to reduce the cost of loans.

Poor results, high costs and pressure from globalization provided motivation for deregulatinginterest rates, credit allocation, private entry into the banking sector, and opening the capitalaccounts. Yet this shift, frequently combined with other reforms along the lines of the “WashingtonConsensus”, had less than the expected effects on growth.

Liberalization has succeeded in mobilizing significant domestic and foreign resources. Incontrast, credit to the private sector, especially to small firms, does not seem to have improvedsubstantially in the 1990s. However, private sector credit is a key ingredient to economic growth.But banks can intermediate funds only if private credit is not crowded out by government debt. Overthe 1990s, deposits grew faster than in the previous decade, but in many countries the increase inloanable funds was largely absorbed by the public sector.

In addition, increasing domestic and foreign resources in the financial system, often withoutadequate prudential supervision, contributed to costly banking crises. Especially in East Asia, theaverage growth of private sector credit was much faster before 1996. But much of the private creditextended proved to be unproductive, in the sense that it became nonperforming before or during thecrises. During bank restructurings, these credits were replaced with government debt to repaydepositors. When eventually executed, the associated collateral was usually worth less than 30percent of the face value of the loans, suggesting how unproductive the growth in private sectorcredit had been.

Frequently, banks and markets are considered unwilling to take risks and extend credit to theprivate sector. Perhaps the most immediate obstacle for the financial system to carry out itsintermediary role is the large amount of government debt, which significantly raises the cost ofprivate credit: in order to ensure that all government debt is held, the spread between interest rateson government and private sector debt has to be high enough to crowd out sufficient private debt.

The positive effects of liberalization have been limited by weak institutions, both in thefinancial sector and the overall economy. The quality of institutions was not changed much bylifting restrictions on interest rates and credit allocations. These weaknesses were not just a technicalissue: they reflected the difficulty of changing the political-economic basis of the previous state-leddevelopment model within a short period, while restraints on markets were quickly lifted.

Indeed, the main lesson from financial liberalization is the need for much stronger institutionalunderpinnings. Institutions are required to mitigate the risks which result from introducing marketmechanisms into the financial sector, and to stabilize market operations, which are likely to failotherwise.

The underlying challenge with the investment climate for financial institutions flows frominformation problems, which are often exacerbated by weak protection of property rights. Financeinvolves many different kinds of risk. These risks arise because financial contracts includetransactions in an uncertain future. To make matters worse, the two parties in such a contract often

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have different (asymmetric) information on what will happen in the future. E.g., a smallentrepreneur knows risks and expected returns of her investment project a lot better than a loanofficer. If the loan officer is to finance this project, he has to be confident that he will get his moneyback. Otherwise, he might not provide funds, however profitable the project may be. The objectiveof lending technologies is to create this confidence, and to lower the resulting costs.

A number of instruments have been developed to increase certainty with regard to future loanrepayments. Secured lending uses fixed or moveable assets as collateral. Leasing contracts provide thesupplier of finance with the ownership of the asset. Credit bureaus create records of repaymentperformance and, thus, give an incentive to build up a sound reputation.

The most common instrument is collateral, which ties the lender’s interest not to the uncertaincash flow of a project, but to an existing asset. The overall effect of collateral on lending ispotentially huge. Over a wide range of countries, the reproducible capital stock is 2.5 - 3.5 timesGDP. About 30% is residential capital, about 30% is business and farm fixed capital, and about 40%is movable property. However, the private debt/GDP ratio in developing countries runs only between15- 30% of GDP. By contrast, in the United States, whose legal system permits taking most propertyas collateral, private credit amounts to about 220% of GDP. Of that credit, about 70% is secured,about half by movables and half by real estate.

An institutional framework for secured lending consists of four elements: How to create asecurity interest, how to establish priority in case of competing claims, How to publish existingclaims, and how to enforce claims in case of default. Each element is crucial for the system tofunction.

The creation of security interests poses different challenges in each country, depending on theprevailing commercial laws. They define which property can be used for what kinds of transactions,and determine scope and cost of secured lending.

A critical issue in this regard is land titling, as creditors prefer assets which are not moveable. Infact, private firms, especially SMEs and Micro enterprises have 80-90% of their capital in movablecapital. Moreover, even the small fraction of fixed capital is often leased. In principle, land owned bythe entrepreneur could be used as collateral. In order to be accepted, the ownership of the land needsto be proven, and this poses significant challenges in many countries: de Soto found that it may takeup to 25 years in the Philippines, because more than 50 institutions are involved in formalizingownership.

Moveable assets represent 80-90 % on average of potential SME collateral. Both inventory andaccounts receivable can be pledged and improve the creditworthiness of the borrower. The former isfrequently used in trade finance, i.e. by discounting warehouse receipts. Accounts receivable can besold (factoring) if the respective debtors are themselves more creditworthy than the SME. This isfrequently the case if exports go to an OECD country.

Secured lending also requires clear priority in case of default. In the absence of clear regulationson which parties secured by the property will receive payment in the event of default and sale of thecollateral, costly litigations may arise which prevent financial institutions from extending loans fromthe outset.

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Security interests which have been created to back a loan contract need publicity, so thatpotential lenders can learn about the existence of competing claims against a debtor's property,especially those with higher priority.

Enforcement of existing security interests in case of default or bankruptcy is another criticalelement in the framework for secured lending. It can be very costly and time-consuming to repossessand sell the collateral, which significantly reduces its value.

Improvements in the legal and judicial framework, notably the definition and execution ofcollateral and bankruptcy laws, are important in improving credit access. Good bankruptcy lawsallow shifts of physical capital from nonviable firms to others, with creditors receiving the maximumsettlement.

Leasing is an important innovation, which circumvents bottlenecks with collateralized loans. Astandard contract involves an asset, e.g. machinery, which is financed by the lessor, who remains theowner. The lessee may use the asset for income-generation in order to repay the lessor. Since theprovider of the funds remains the owner of the asset, risk is considerably reduced.

The poor supply of information about borrowers limits lending to smaller clients. On the onehand, financial statements of small firms lack credibility and conformity with accounting standards.On the other hand, more transparency on repayment performance would give borrowers an incentiveto service their loans. Credit bureaus serve this goal. Important issues that need to be addressed whenintroducing this instrument are banking secrecy; how to make banks comply with the requirement toprovide information; whether the credit bureau is to be private or public; the inclusion of relatedinformation such as installment purchases; and consumers’ rights to challenge and amend theinformation.

The potential to improve credit access through better information, contract enforcement, andtechnology is great: in the United States, the cost of processing a small loan is now below the price ofa modest lunch.

We will further discuss the application of these and other instruments in practice and indifferent country contexts during the break out session.

Reform efforts must focus on potential binding constraints in the key areas relevant to SMEaccess to finance:

The Legal & Judicial Environment• Commercial Law (Property Rights)

• Secured Transactions: Creation, Priority, Publicity, Enforcement

• Fixed Assets

• Moveable Assets (Inventory, Accounts Receivable)

• Unsecured Transactions

• Commercial Law (Business Registration / Formalization)

• Bankruptcy Law

• Land Titling Procedures

• Law Enforcement

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The Tax Environment

• Level Playing Field among Financial Services

The Information Environment• Accounting Standards & Accounting Firms

• Business Planning for SME

• Credit Bureaus (Repayment Performance)

• Rating Agencies

Financial Sector Regulations• Reserve Requirements for SME Loans

• Business registration requirements for SME Loans

• Enabling Regulations for Non-Bank Financial Institutions

• Leasing

• Venture Capital

Financial Institution Structure• Market Concentration

• Public Ownership

• Foreign Ownership

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Making Financial Markets Work Better for SMEsBy Benel P. Lagua, President and COO, Small Business Guarantee and Finance Corporation, Philippines

The Small Business Guarantee and Finance Corporation is a government financial institution,created through RA 6977 (as amended by RA 8289) or the Magna Carta for Small Enterprises, toprovide credit to specific clients, which are the micro, small and medium enterprises in the country.SBGFC is mandated by law to support the development of small and medium enterprises through theprovision and promotion of various alternative modes of financing and credit delivery systems. It wascreated to support SMEs in the areas of finance, technology, production, management, andbusinesses linkages.

As credit champions for SMEs, SBGFC has adopted different financing schemes that cater tothe needs of SMEs throughout the country. These include retail and wholesale lending, as well asguarantees to loans. Retail lending constitutes loans that are given directly to SMEs classified as pre-bankable but viable, approaching maturity as a going business concern. SMEs falling under the pre-bankable category have limited but profitable track record, significant growth in assets/sales butwithout a management system in place, credit track record, and ability to put up bank loancollaterals. The strategy being used in this type of financing is the operation of non-bankingsolutions for SME credit delivery, in particular, addressing enterprises in the “grey economy”, aproactive solution to the singular problem of information asymmetry in SME Lending.

Wholesale funds, on the other hand, are set-up to address the financing problems of bankableSMEs through conduits banks, AFIs, NGOs, and POs. Bankable SMEs are those that have full creditmaturity, established substantial business track record and asset size, management systems in place,credit track record with formal credit sources, and ability to put up bank loan collateral requirements.This credit facility is designed to enhance competitiveness of SMEs with lower cost of financing.SMEs get longer payment terms with lower and fixed interest rates and improved access to bankfinancing.

Finally, we have the credit guarantees facilities granted to near-bankable SMEs that areapproaching credit maturity and exhibit substantial business track record with management systemsin place, but with limited or no credit track record with formal credit sources due partly to lack ofcollateral requirement. SBGFC’s guarantee acts as collateral substitute or collateral supplement toexpand banks’ comfort zone in SME lending. This serves as a “soft-entry” mechanism to formalsources of credit.

SB Corporation (or SBGFC) is a credit mobilizer for the SME sector. At the enterprise level, itacts as a financing incubator. The company’s ultimate measure of success is the number of SMEs itcan graduate into the formal credit or capital market. Thus, SBC is marketing for a huge potentialmarket that is now still inaccessible to the banking system.

Even with its contributions in providing assistance to SMEs, SBGFC still recognizes the need toimprove the environment for SMEs. It is always on the look out on what can be done in order tomake the market work better for the SME sector. What it actually aims to do is make SME financemore accessible, especially for enterprises in the countryside. In order to achieve this, there is a needto identify first the deficiencies in the financial markets and target specific areas that makes creditaccess difficult for the SME sector.

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Deficiencies in the Financial MarketsBased on various studies, local and international, we can classify problems of SME financing to beconstrained by the following factors:

• Collateral requirement• Lack of credit information

• Weakness in credit risks evaluation

• High cost of lending• Weakness in credit guarantee mechanism

• Limited financing sources

Banks are known to be risk-averse, and are, thus, reluctant to lend to SMEs due to high riskperception on SME lending. In addition, due to legal and regulatory constraints, bank fear that theywill find difficulty in loan recovery. In effect they look at assets pledged as a second way out, or aform of primary or secondary repayment in case of default. They demand higher collateral to placemore security to the loan. However, many SMEs do not have suitable and adequate collateral to offerto the lender. Therefore, collateral requirements become an impediment to their access to bankfinance.

In addition to banks being risk-averse, many loan officers and bank personnel who areresponsible in loan processing lack relevant skills needed for better management of SMEs and theevaluation of SME risks. They often base their credit decision-making on proper accounting recordsand information such as a strong financial statement. It seems that the basis of credit risk evaluationis limited to the presence of these information about the borrower. In order to improve their creditrisk evaluation, it may be necessary to train the people involved in bank loan processing so that theycan develop better understanding of SMEs and be able to better evaluate credit risks.

Bank loans entail long procedures that are rather complicated and time-consuming, and cansometimes be costly. Many financial institutions impose restrictive requirements and the completionof necessary documents that would speak about the current status of the SME borrower i.e. financialcondition, performance on loan repayment, etc. before a loan is granted. Banks aim to get as muchinformation about the borrower to give them more confidence that the loan applicant iscreditworthy. To answer problems that relate to the lack of credit information, there is a need to setup a central credit information bureau that will provide reliable and strong credit information onSMEs.

Many financial institutions in the Philippines are small in terms of size and thus, have limitedcapacity to cater to all financing needs of SMEs due to limited resources. High costs of operationsand loan processing are some of the major concerns of banks that constrain them from lending toSMEs. Even if they grant loans to SMEs, the tendency is that these costs are passed on to theborrowers (sometimes in the form of higher interest rates) making SME loans more costly.

Lastly, we find a need to promote credit guarantee schemes currently being offered by variousgovernment agencies such as the SBGFC, Philexim, and Quedancor. Many SMEs and banks are notaware of these credit facilities. Moreover, we see the need to expand the scope of this type ofguarantee—the outreach of these facilities is limited, and their funding is insufficient. As anexample, SBGFC has limited capacity in providing financing assistance to SMEs as it is self-fundingand does both lending and guarantees. In addition, its liabilities are not guaranteed by the State in

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spite of state-ownership, making financing institutions wary of its counterpart risks. In addition tocredit guarantees, there is a need to promote and expand the scope of other financing sources such asleasing, venture, capital, equity financing, etc. so that there will be a bigger market for SMEs, givingthem more options for financing. Moreover, the presence of these financing schemes will providebetter competition to traditional banks, compelling banks to become more efficient in their lendingpractices.

In addition to the weakness in financial markets, bank lending to SMEs is constrained byweaknesses in the legal and regulatory environment. Some of the identified legal constraints thatneed to be addressed in order to improve the financial market, especially bank lending, are thefollowing:

• land title

• registry of charges

• default enforcement proceedings

It is equally important to review the current banking regulations and registration requirementsin order provide a more enabling environment for the SMEs.

Possible Steps toward a More Adequate Lending System to SMEsA review of literature as well as experiential discussion of SBGFC with both SMEs and financialinstitutions identified the need to address several concerns. We have listed below some of thepossible advocacies to improve financial markets so that SMEs can have better access to differentfinancing sources. It is also important to note that some changes in the legal and regulatoryenvironment are necessary for banks as well as other financing sources to be more willing to practiceand expand SME lending.

Strategies to Improve Bank Financing:• improving the conditions for the collateralization of loans;• improving loan approval techniques;• developing track record of credit applicants;• adopting proper lending technologies;• establishing unified register of information on SMEs to help lower credit risks;• standardization and unification of methodology in preparation and evaluation of business

plans and investment feasibility studies for SMEs;• training of loan officers and other bank personnel involved in SME financing to improve

their lending skills;• sharing of information among banking institutions;• establishing low interest medium- and long-term credit schemes for SMEs.

Strategies to Improve Non-Bank Financing to Provide More Credit Sources to SMEs:• Expanding financing through equity funds and venture capital (including setting up a

government venture capital fund;• Expanding and promoting the role of leasing;• Assisting micro-credit institutions such as credit cooperatives and credit unions by

helping these institutions improve their lending skills;• Enhancing credit guarantee mechanisms.

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Strategies to Improve Legal and Regulatory Environments:

• Establish national business registry to improve the quality of information on SMEs;

• Establish central credit information bureau to facilitate an increased informationdisclosure and lending by banks;

• Enhance the legal framework (including land titles, contract enforcement, and defaultforeclosure process) and support institutions;

• Lower banking regulations with regard to SME lending;

• Streamline registration and administration processes and requirements (standardizingrequirements, integrating common administrative functions government agencies andreducing duplication of efforts of different government agencies);

• Solve particular problems that relate to collateral requirements;

• Decrease fixed costs of small-sized loans.

• Provide more incentives for banks to lend to SMEs (including tax rebates, lower liquidityrequirements, banking privileges, etc.).

Small Business Guarantee and Finance Corporation (SBGFC) InitiativesSBGFC, being in the business for several years now, has continually provided, and will continuallyprovide SME support so that they will attain their highest level of competitiveness and productivecapabilities. It will further intensify its efforts to strengthen the SME sector by providing variousprograms to reduce the problems of SME financing. It promises to strengthen all its current programsand lending technologies that would cater to the funding needs of SMEs throughout the country.SBGFC would like to do its share in leveling the playing field for entrepreneurs through a system offinancial intermediation products that take into account the weaknesses and strengths of SMEs ofvarious categories.

The following represent some of the initiatives of the organization in pushing for the marketreform:

• Partnerships with Industry Organizations and Associations: Many of SBGFC’s programsare moving forward because industry associations and organizations are being attracted tohelp solve some of the information issues normally confronted when dealing with SMEs.Currently, SBGFC has program partnerships with the following: FOBAP in theimplementation of SME-Financing Reach for Exporters through Network Development(SME-FRIEND), AFFI and PFA for SME-Financing for Organizationally Competentand Excellent Franchise Business (SME-FORCE), and the Cable Industry for SME-Guarantee Incubation for the DTI-Endorsed Projects (SME-GUIDE).

• Conducting the GFI approach to SME Lending: SBGFC is one of the GFIs that areimplementing the SME Unified Lending Opportunities for National Growth(SULONG) Program. The SULONG Program is being implemented in support of theNational SME Development Plan, in participation of SBGFC and other GFIs namely,the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP),National Livelihood Support Fund (NLSF), Philippine Export-Import Credit Agency(PHILEXIM), and Quedan and Rural Credit Guarantee Corporation (QUEDANCOR).

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SBGFC, being the Chair for the SULONG Finance Committee, is in the forefront oflooking for measures that would improve the SME environment, enabling them to havebetter and easier access to finance and enhancing a better market for the SME sector.Under the Unified lending programs, these GFIs are applying simplified and standardizedlending procedures and guidelines when it comes to interest rates, applications forms,financial ratios, parameters for the evaluation of loan applications, loan purpose, etc.

• Representing the SME View in Dealing with the Monetary Board: SBGFC, beingheaded by the acting Chair of the SMED Council and as the Chair of the SULONGFinance Committee has taken the cudgels for the Chamber of Thrift Banks and theRural Bankers of the Philippines in making presentations to the Monetary Board onrequest for relaxation of guidelines affecting the delivery of SME credit. Among theissues discussed include requests related to the reserve requirements for SME loans, riskwade in connection with loan guarantees for SMEs, and the pricing of rediscountwindow for SMEs with the BSP.

• Experimenting with Lending Models: SBGFC’s part of its efforts to try new measures andlending technologies, has opened up a receivable and PO financing program which isfriendly in terms of collateral requirements. However, to ensure a good collection rate,the program had built in cash-capture mechanisms as the institution took upon itself tocollect from the supplier in behalf of the borrower. Suppliers were screened such thatonly those among the top 1,000 could be taken in the program. On the similar plane, itopened up bold start-up facility to franchisees of franchisor members of the two largePhilippines advocations, namely, the Philippine Franchise association (PFA) and theAssociation of Filipino Franchisers Incorporated, with the franchisors putting upguarantee in favor of their franchisees. SBGFC found it comforting to lend for theworking capital and fixed asset requirements of franchisors knowing that they wereworking on business models. Other programs are the tie-up with Cable associationswhich assisted small business corporations with the technical review of potential clients.

• Continuing Research on innovations in other economies, which can find Philippineopportunities: Finally, SBGFC is taking upon itself to seek out new methodologies andtechnologies that may be applied in Philippine setting as tested in other economies. Forexample, it is widely known that a credit scoring mechanism is now being used in othercountries. SMEs and SBGFC are seeking out assistance of international organizationslike ADB in tailor-fitting a scoring model applicable in the Philippines. We are currentlydoing research on SMART cards for SMEs, and other such innovations that are not yetused locally, but are being utilized in other countries like Brazil and India.

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Making Financial Markets Work Better for SMEs– The Role of the Small Industries Development Bank of IndiaBy N. Balasubramanian, Chairman and Managing Director, Small Industries Development Bank ofIndia, India

I am indeed thankful to the organizers of this international seminar for choosing a topic of currentstrategic relevance and also for inviting me to speak on the methods that development agenciesadopt to equip the SME sector in their interface with markets. Since markets in general are stated tobe unbiased and supposed act based on the mutual play of demand and supply factors, sectors likeSMEs in general and within that micro financing institutions in particular need to have specialsectoral focus to maximize the advantages of market vis-à-vis sectoral interventions. I feel that atthis juncture of on going global competition, the timing and the content of the seminar isappropriate.

Such seminars assume significance for Development Financing Institutions like Small IndustriesDevelopment Bank of India (SIDBI), the national level apex bank for the promotion, financing anddevelopment of small and medium enterprises in India and also personally to me, to share with yousome of the interventions we have been innovating and experimenting with a view to evolve astrong and sustainable SME sector. We do believe that, there has to be sector specific interventionsto maximize the economic benefit to the nation, especially when the sector contributes significantlyto the economy. Since I realize that the participants gathered here require practical sessions, I havestructured this session with specific focus on SIDBI’s role in supporting SME sector.

SMEs in India: A case for sectoral supportThere is a growing worldwide appreciation of the fact that Small and Medium Enterprises (SMEs)play a catalytic role in the development process of most economies. Their contribution gets reflectedin the form of significant contributions they are making in the national economies in areas likemanufacturing, exports, employment, technical innovations and promotion of entrepreneurial skills.

In India, SME sector is the second largest employment provider, after agriculture and the outputfrom small scale industries sector alone constitutes about 40 percent of the value added in themanufacturing sector and one third of national exports. Within the SME sector, the small scalesector serves as a green field for nurturing of entrepreneurial talent and helping the units to grow intomedium and large size. Promotion of SMEs, therefore, becomes a major area for policy focus in India.

In recognition of the contribution and vast potential of the sector in the economy as well as itsinherent infirmities, provision of adequate credit to this sector has continued to be an element ofbanking policy, even though economic and financial policies themselves have undergone significanttransformation, particularly after the initiation of economic reforms in 1991.

In the policy context, the Government of India introduced a comprehensive policy package forSMEs, which encompasses fiscal, credit, infrastructural and technological support to SMEs.

An exclusive Ministry dedicated to small scale industries was created by the Government in1999 to provide more focussed attention to the sector. There exists a well structured institutional setup both in the public and private sectors to cater to the credit needs of SMEs.

The Union Ministry in its last budget while appreciating the contribution of the small scalesector as an engine of growth, has acknowledged that small scale units must be given the space to

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grow into medium enterprises. The agenda marks a leap forward in the policy initiatives fromprotection to promotion and supports vertical expansion of units in accelerating the pace of growthof the sector.

The financial sector reforms introduced as part of the economic liberalisation policies havederegulated interest rates, and also given considerable freedom to the banks and other institutions indeciding their focus areas of financing. Though the SME sector continue to form part of the prioritysector identified for the policy based lending, the recent trend has given an indication that, thecredit flow to this particular segment is to be enhanced further to sustain higher employment growth.

The SME sector in India is highly heterogeneous comprising of very small unorganizedenterprises to more organized small factories at the higher end of the spectrum. Apart from theperception of higher risks by the lenders, information asymmetry by way of lack of transparency, non-availability of adequate information flow to the lenders etc. have been observed as factorshampering the credit flow to the sector. Such facts have to be addressed to enhance credit flow tothe sector without distorting financial markets.

SIDBI - The Apex Bank for promotion, financing anddevelopment of SME SectorThe Small Industries Development Bank of India (SIDBI) was set up in April 1990, as the principalfinancial institution for financing and development of SSIs and coordination of institutions engagedin similar activities. The setting up of SIDBI also incidentally coincides with the economicliberalization policies of the Government, started since 1991.

At the outset, SIDBI has taken a multi-pronged approach to tackle the problems of the SMEsector on a regular basis.

The SIDBI model in the initial stages envisaged for providing refinance to State FinanceCorporations / State Industrial Development Corporations/ Banks etc., against their loans granted tosmall scale units. Considering the needs of time and in line with the requirements of today’sfinancial environment, we have started taking up direct financing of small scale projects as well.

Under the direct lending activities of SIDBI, financial support has been provided for setting upof new unit, for expansion, technological upgradation, marketing requirements or infrastructuraldevelopment etc.

SIDBI has also been co-coordinating as Nodal agency for various Government of India schemeslike Technology Upgradation Schemes for Textiles (TUFS), Credit Linked Capital SubsidyScheme(CLCSS), Tannery Modernization Scheme from time to time.

As an apex development bank, SIDBI has been emerging as a major partner with multilaterallending agencies like World Bank for channeling finance with technical assistance component tostrengthen the support services to SMEs in their efforts to emerge stronger.

Identifying the ObstaclesIn spite of the promotional policies taken by the Government, banks and Financial Institutions,

SMEs face certain challenges, which are universal in nature. These problems relate to the issue ofcollateral, cost of loans, delay in receivables, obsolete technology, and problems in marketing ofproducts. In order to address these problems in the Indian context, some innovative instruments of

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financing have been introduced and institutional set up has been created. For SIDBI, innovatingproducts to enhance the strength of SMEs has been an on-going process. Reassessment of thestrategy of lending to this sector has been an area where SIDBI, as an apex institution of the SMEsector in India, has been playing a major role. At macro level, our interventions comprise of twoareas: To make appropriate supportive interventions at various segments of the sector withoutdistorting the market forces; and to strengthen the market to make informed decisions with a viewto enhance credit flow to the sector.

Strategies for improved lending practices major initiatives and interventions of SIDBI include:

• Credit Guarantee Fund Trust for Small Industries: Government of India, in associationwith SIDBI, has set up a Credit Guarantee Fund Trust for Small Industries (CGTSI) toimplement the guarantee scheme. The corpus of the Trust is proposed to be enhancedfrom the present level of Rs.7 billion to Rs.25 billion. The main objective of the Trust isto facilitate hassle free credit to the SSI sector and encourage banks to shift from securitybased lending to merit based lending. SSI loans up to Rs.2.5 million are eligible to becovered under the scheme. Some new guaranteeing techniques like mutual creditguarantee scheme on the lines of similar schemes in Italy and other European countriesare also being developed.

• Venture Capital Funding: With regard to new sources of financing, many countries areconsidering liberalizing the rules regarding venture capital investments. In India also,various measures have been taken in this direction. SIDBI, along with some otherinstitutions, has taken a lead in promoting venture capital funding in the country. TheBank has contributed in setting up of 16 State level / Regional level funds; set up aNational Fund for Software and IT Industry with a corpus of Rs.1 billion and recentlylaunched a new SME Growth Fund of Rs.1 billion corpus. This Fund would focus onunits in pharmacy, biotech, light engineering, software and other knowledge basedindustries.

• Micro Finance: Realizing the potential of micro finance in stimulating economic growth,SIDBI has laid emphasis on institutionalizing micro financing channels in the country byenhancing the capacity of the hither to unorganized sector intermediaries. SIDBIFoundation for Micro Credit (SFMC), presently functioning as a Department of SIDBI,has been pioneering the spread of banking hitherto unbankable segments includingweaker sections through non-governmental organizations. The SFMC is dealing with thehuge task of developing an organized informal credit structure in orderly fashion byproviding capacity building support services. The intermediaries are expected to emergeas alternative channels of financing targeting the poor and weaker sections of thecommunity.

• Small and Medium Enterprises Fund (SME Fund): The most important amongst thesectoral initiatives taken by the Government of India and SIDBI is launching of an SMEFund of Rs.100 billion, with a view to giving impetus to the fund flow to the SME sector.SIDBI has been advised to structure the Fund and its operations have commenced witheffect from April 2004. Under the Fund, assistance is being provided to SMEs at aninterest rate of 200 basis points below the Bank’s prime lending rate. Direct assistance isbeing extended to SMEs through SIDBI’s own offices at 9.5 percent rate of interest asalso by way of providing refinance to the primary lending institutions. The Fund,

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besides upscaling the flow of assistance to SMEs, addresses the issue of cross sector parityin the cost of loans.

• Technology Bureau for Small Enterprises: One of the most important issues that hinderthe growth of SMEs in a globalised scenario is that of access to appropriate technology.Technology upgradation is key to face global competition. SIDBI has given focusedattention towards industries having potential for high growth as also industries requiringstrategic measures to retain competitive edge in the post-WTO regime. TechnologyBureau for Small Enterprises - a collaborative venture between SIDBI and UnitedNations Asian and Pacific Centre for Transfer of Technology [APCTT] has beenassisting small enterprises in accessing the latest technologies in diverse industrial fields,both from within and outside India as also facilitating transfer of technology and jointventure collaborations. - Technology Bank. SIDBI is the nodal agency forimplementation of government schemes such as Technology Upgradation Fund Schemefor textile and jute sectors and Credit Linked Capital Subsidy Scheme for SSIs

• Credit Rating: With a view to providing credit enhancement and comfort to the bankofficials at the field level in their taking bona fide credit decisions, SIDBI is in theprocess of setting up an independent rating agency. Formalising and institutionalizingrating for stand alone SMEs as also rating for clusters is a key to rapid development ofcost effective credit. Credit rating of clusters would not only help the lenders but alsothe clusters by providing information on wider market opportunities for their products,strengthen negotiability and adopt improved business practices and better qualitycontrol. Lenders in turn would be in a position to cross sell their financial productsthrough better market penetration, monitoring and information sharing.

• Risk Sharing Facility: While the CGTSI extends guarantee cover for the loans up toRs.2.5 million, there is a need for offering guarantees for loans extended by banks beyondthe above limit. Under a World Bank led Project on Financing and Development ofSMEs, a possibility of introducing a Risk Sharing Facility for the SME sector is beingexamined, wherein the risk in lending by banks to SMEs could be shared on pari passubasis between the originating banks and the suggested entity. Of course, the facilitywould be available at a cost. This mechanism, as and when in place, would mitigate thecredit risks of the banks and upscale SME financing.

• Linkages with large industry: There is strong evidence that SSIs which are linked assuppliers, service providers, etc to successful large industries are usually successfulventures in India as well as in many other countries. Under the Receivable FinanceScheme, SIDBI discounts the short term bills/ invoices relating to the supplies made bythe SMEs to large corporates and collects the amount on due dates directly from thecorporate buyers.

SIDBI also support industrial clusters and sponsors training in entrepreneurship and skilldevelopment.

ConclusionGiven the special characteristics of the SME sector, SIDBI has been evolving policies either by itselfor in co-ordination with government agencies with a view to extend a series of support services to

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this critical segment. Such sector specific interventions are aimed at mitigating the distortions in themarket, through supporting certain segments and areas, which require support to integrate withmarket forces. Such interventions are also specifically targeted to the weaker segments within theSME sector setting, examples in specific targeting. The SIDBI model has been aimed at impactingthe economy in an effective manner through proper risk mitigation in SME lending, mitigatinginformation gap through establishing a dedicated credit rating agency for the sector, reaching to thehomogenous units through integrated development of 25-30 SME clusters across the country, anddevelopment of business membership organizations with an intent to facilitate increased flow ofcredit.

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Outcomes of the breakout sessionIndicators for functioning markets for financial services to SME

• High diversity of institutions and products• Low transaction costs• Fast processing time• Increasing number and volume (of financial services to SME)• Competitive interest rate• Asset quality (NPL)• Increasing percentage of private banks

Good reforms and best practice:• Diversification/Promotion of new Financial Services• “Simple” Credit Rating Agency for SME• Credit Bureau• Secured transaction• Government intervention focusing on information, changing the mind set,..• Use of ICT• Encourage private enterprises• Regulatory Issues: Bankruptcy law and enforcement, secured lending, secured transaction• Increase good governance• Strategic alliance of banks

Reforms and strategies debated:• SME Agency/Corporation (should address specific issues)• Regulatory issues: Mandatory SME-lending of banks• Value Formation Advocacy for rural entrepreneurs deposit insurance funds

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Regulatory reform processes and strategiesThe following speakers made presentations under this topic:

• Session overview: ‘Regulatory reform for a more competitive business andinvestment climate’ by Jong Seok Kim, Member of the Presidential Regulatory ReformCommission, Director Jacobs & Associates, Seoul, South Korea

• ‘Regulatory Reform: Processes and Strategies; A Case of Korean Regulatory Reform’by Jong Seok Kim, Member of the Presidential Regulatory Reform Commission, DirectorJacobs & Associates, Seoul, South Korea

• ‘Case study: Viet Nam’ by Le Duy Binh, GTZ, Hanoi, Viet Nam

• ‘Observations on the dynamics of regulatory reform in the Philippines’ by John Avila,Institute of Political Economy, University of Asia and the Pacific, Philippines (no synopsis)

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Regulatory reform for a more competitive business and investment climateBy Jong Seok Kim, Professor of Economics, Hong Ik University,Member of Regulatory Reform Committee, Republic of Korea

The term “red tape” is derived from 18th-century British government officials who customarilybound their files together using red tape. Today it stands for the procedural regulations that canmake even the simplest tasks a nightmare.

Cutting red tape is a subset of deregulation, and deregulation is a subset of regulatory reform.

How regulations affect investmentRegulations affect the investment first, by increasing business costs. Regulation affects rate of return(ROR) on investment by raising business costs. High compliance cost is the real barrier toinvestment, not the volume of paper work. Regulation is a form of hidden tax. For any regulation,businesses must incur compliance cost. Therefore, deregulation will have the same effects as tax cuts.

Recommendation 1: Government should focus on reducing compliance costs from business point of view,and prioritize reform agenda by compliance costs of regulations.

Second, by increasing business risk. Regulatory uncertainties raise business risks. Higher risksdiscourage investment. Most of regulatory uncertainties come from unclear and unpredictableenforcement of rules, and low quality regulations.

Recommendation 2: Government should try to improve the quality of regulations rather than reduce thenumber of regulations and paper works. Rules and procedures should be made more transparent andpredictable. Compliance rate of regulations should be improved. Overlapping regulations should be madeunified into a single combined regulation.

Improvement of regulatory quality will reduce business risk, compliance costs, and corruption.

What are the Low Quality RegulationsLow Quality Regulations are:

• Regulations with vague rules and unpredictable results: Many regulatory rules and theirstandards are not concrete or specific enough. Consequently, regulators have widediscretionary power in interpreting and applying these rules. In practice, this has createda situation where nothing is certain, but nothing impossible either. In addition, manygovernment interventions are based on "past practices" or in the name of “administrativeguidance,” and are sometimes without a clear legal basis. The subsequent opaqueprocedures, ambiguous rules, and unpredictable results create uncertainties in businessactivities, which by themselves are a cost-raising factor, and create an environmentconducive to corruption and abuse of power.

• Regulations with low compliance: In some regulations, requirements and standards are soidealistic and stringent that following them is virtually impossible. Excessive compliancecosts arise when regulatory requirements and standards are very difficult to meet. Undersuch circumstances, both regulators and regulatees have an incentive to by-pass the law

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so that the enforcement of the regulation is compromised in that particular field, therebyreducing the effectiveness of the regulation.

• Regulations that cause excessive social costs: For some regulations, social costs are sohigh that they do not justify the benefits expected. Costly regulations exist because thesocial cost of a regulation is externalized. Regulators would be more concerned abouttheir administrative costs and their budget constraints than the indirect social costs andprivate sector compliance costs.

• Regulations that are unfair to honest people: Many regulatory rules and procedures aredesigned based on the premise that regulatees are so unreliable that, if they areunregulated and left alone, there would be disastrous results. Consequently, licensing andpermits became the primary tools of regulation in many areas. “Prohibition in principle,permission in exception” became a common practice in regulatory enforcement.Sometimes a registration procedure is administered like a permit system. This type ofregulatory culture may be the unfortunate result of the regulators’ occupational tendencyto suspect the civilian sector's ability to self-regulate and maintain order, as well as thegeneral lack of confidence in the market functions. In such a regulatory culture, virtuouspeople would have little incentive to remain honest, because their virtue is not rewardedby the system.

Why Low Quality Regulations take placeIt is not a matter of some incompetent bureaucrats. There is a more fundamental structural reasonthan human factors.

Government agencies are always constrained by shortage of personnel and budget. To overcomethis constraint, ministries and regulators tend to resort to regulatory methods to achieve their policygoals, since issuing regulations would cost them nothing.

Also, private sector’s compliance costs are not borne by regulators. Therefore, regulators andregulatory designers have little incentive to consider private sector’s compliance costs. They tend toemphasize beneficial effects of their intended regulations and neglect or underestimate possiblenegative side effects. There is a structural bias in favor of costly and excessive regulations.

Moreover, in general regulators are given a carte blanche in regulatory design and enforcement,unlike personnel and budget allocation, since they are considered as the experts in their respectiveareas of regulation.

Recommendation 3: Government should introduce a permanent system of regulatory quality.And let an independent body in the government monitor and control the quality of regulations,and make regulatory quality control a part of government administrative function.

Korean Regulatory Reform: BackgroundIn 1997, South Korean economy was hit by the Asian financial crisis. Four broad major reforms werelaunched to overcome the crisis. They were:

• Financial sector reform

• Labor market reform

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• Corporate sector reform

• Public sector reform

The four sectoral reforms were regulatory reform in broad sense.

Korean Regulatory Reform of 1998There were 11,125 regulations as of January 1998. President D. J. Kim ordered to eliminate 50% ofexisting regulations by the end of 1998. This approach is now known as “Regulatory Guillotine”.

In this scheme, each ministry had to prove the need for its regulations before Regulatory ReformCommittee (RRC), or they would lose their regulations. By the end of 1999, the total number ofregulations in Korea decreased to 6,308. Among the remaining regulations, 2,411 regulations weremodified. Virtually all areas of Korean economy and life were affected.

Recommendation 4: Government should consider “Regulatory Guillotine” to reduce total number ofregulation. The beauty of this scheme is that regulators should prove the need and effectiveness of theirregulations in front of an independent committee. If they fail, regulators could lose their regulations.

Concluding RemarksWe cannot eliminate “red tape” entirely. It would be a futile effort to eliminate all the regulations.The basic idea of regulatory reform is to improve the regulatory quality, and make them easier tocomply.

In general, the degree of regulation seems to be proportional to the degree of mistrust andsuspicion regulators have on the people they regulate. Regulations become excessive and restrictivewhen regulators are suspicious about the civilian sector’s ability to keep rules and maintain order bythem. However, the ability to self-regulate and maintain order is not inherent. These qualitiesshould be cultivated and the private sector should be given an opportunity to maintain order bythemselves and become more involved in market functions.

Economic liberalization through regulatory reform will allow citizens just such an opportunity.However, this will take time and must go through a process of trial-and-error. Therefore, one shouldconsider the private sector's ability to self-regulate and maintain order to be a consequence ofregulatory reform, not a prerequisite for regulatory reform. Regulatory reform is an importantnecessary and first step toward a freer and more open society.

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Regulatory Reform: Processes and Strategies;A Case of Korean Regulatory ReformBy Jong Seok Kim, Ph.D., Professor of Economics, Hong Ik University, Seoul, Korea,and Member of Presidential Regulatory Reform Committee, Republic of Korea

Regulatory Challenges in Korea Before 1997Korean economy had become very heavily regulated during its rapid growth. Korea, as with manyother countries, used direct intervention and allocation of resources in the early stages of itseconomic development, most notably in the 1960s and 1970s when there were doubts that marketinstitutions were functioning efficiently. As a result, a tradition of government intervention in theeconomy was established that became increasingly costly as Korea entered its mature marketdevelopment phase in the 1980s

The drive for reform was out of popular demand from business, since the early 1980s

As the Korean economy grew and its structure became increasingly complex, limits in thegovernment’s ability to control the economy began to show, and the costs of government failuresbegan to outweigh the benefits of government intervention. Korean businesses had long complainedof inefficiencies arising from Korea’s complex and opaque regulatory regime, and there had beenvarious attempts at regulatory reform since the early 1980s. Thus, even before the financial crisis,regulatory reform has been an official government policy in Korea for almost 20 years.

Early attempts at reform were insufficientUp to 1997 Korea used a "bottom-up" approach to regulatory reform, which limited the effectivenessof reforms. Under the "bottom-up" approach, regulators themselves were responsible in determiningwhich regulations to reform or abolish. Calling for a “bottom-up” approach in reform is tantamountto the public asking the regulators to admit that their rules were mistaken or misguided. Althoughsome efforts were made to collect suggestions from the private sector, it was always the regulatingbureaucrats who had the final authority to make decisions on whether the suggestion should beaccepted or not. When there was strong opposition to changes from any of the concerned ministries,such changes would not take place. Even if such changes were enforced upon a ministry by politicalpressures, the ministry that opposes it still had the means of diluting the effect of changes, becausethe ministry itself usually implemented the proposed changes to the regulation.

These problems were worsened by regulatory capture. Many ministries have also maintained along "cooperative" relationship with interest groups and organizations under their jurisdiction.Naturally, the regulators tended to sympathize with the regulated interest groups that supportedthem. Thus, it has been particularly difficult for the ministries to voluntarily propose regulatoryreforms that may negatively affect their interest groups.

1997 financial crisis created a new impetusTo overcome the financial crisis and strengthen the underlying structure of the economy, Korealaunched various reforms to promote efficiency and discipline using market principles and marketforces. Most reform measures stemming from the financial crisis were classified into one of fourcategories:

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• public sector, or regulatory, reforms,

• financial sector reforms,

• corporate sector reforms, and

• labor market reforms.

There were other major reform measures, such as measures to facilitate and increase foreigninvestment and various measures to reduce trade barriers. However, these four categories are oftenreferred to collectively as the “four major reform areas” to emphasize their importance. The outgoingPresident, Kim Young Sam, had begun these reforms, but they did not take hold until the incomingpresident, Kim Dae Jung, took the initiative.

Many of these reform measures required changes in regulatory methods and policy tools, andthey were all regulatory reforms in a broad sense. Public sector reforms included the passage of theBasic Act on Administrative Regulation(BAAR), which included basic provisions on theinstitutions and processes of regulatory reform, and set forth the institutional reforms.

The most important goal of economic reform after the financial crisis was to reinstate effectivemarket governance structures in the government, financial institutions, and the corporate sector inKorea. The reforms were intended to change the traditional relationship between the governmentand the market, as well as the role and behavior of individuals by redefining the rules of the game intheir interactions.

The Basic Act on Administrative Regulation (BAAR)BAAR requires that all regulations be registered, and the number of total regulations limited. Itrequires reviews of new and amended regulations from “zero basis” Core areas for reforms of existingregulations shall be chosen each year, and all Ministries shall form plans for eliminating or reformingregulations under their control, and establish annual goals for reducing the numbers of theirregulations.

Provisions for regulatory impact analysis (RIA) and sunset clauses were also put in place. Underthe current provisions, all regulations have five year sunset clauses, so that unless the regulation isexplicitly renewed, the regulations will lapse in five years. Also, any Ministry, which proposes toinstall new regulations or strengthen existing regulations, must submit a RIA, which explicitlyconsiders the costs and benefits of these proposed regulations and also considers alternate methods ofachieving the regulatory goal.

Following the provisions of the BARR, the Regulatory Reform Commission (RRC) wasestablished by the Kim Dae Jung administration on April 1998. The work on the Basic Act hadbegun in late 1996, but it was only after the financial crisis that there was enough political will andbureaucratic momentum to actually establish the RRC. The establishment of RRC is the mostimportant institutional reform, as the RRC, which continues to work at present, examines new andexisting regulations, and has the main responsibility of maintaining regulatory quality in Korea.

The Presidential Reform Committee (RRC)RRC is an official government body directly under the President, and is co-chaired by the PrimeMinister, so it is meant to have sufficient political and bureaucratic strength to lead the reforms.

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RRC was to consist of 15 to 20 members, the majority of whom had to be civilians. As of March2005, there are currently 20 members, 13 of whom are civilian. The civilian members are academics,including the current chairman of the Korea Society for Regulatory Studies, industry leaders, aforeigner who had been the head of the American Chamber of Commerce, the ombudsman for FDI,and a representative from a consumer group. The seven government members are the Prime Ministerand ministers of various relevant ministries. The RRC is co-chaired by the Prime Minister and acivilian co-chairman. As seen in the previous section, the structure of the RRC is similar to previousorganizations, which were entrusted with regulatory reform. However, it is a permanent standingagency rather than a temporary one, giving it more power than the previous regulatory reformagencies.

All new regulations, or regulations which are to be strengthened, must be approved by the RRC.Under the RRC, three sub-committees are responsible for examining the technical details of theregulations submitted for approval. Two committees examine economic regulations, and oneexamines administrative and social regulations. The first economic committee examines regulationsdealing with finance, public finance, industry and construction. The second economic committeeexamines regulations dealing with agriculture, maritime, environment and information technology.The administrative/social regulations committee examines regulations dealing with administration,welfare, education, culture and labor

The reform of 1998: “Regulatory Guillotine”From the beginning of the Kim Dae Jung administration, the President had expressed the desire tocarry out comprehensive regulatory reform, and ordered each ministry to submit reform plans.Reportedly, the President was not impressed with the submitted plans, and ordered the ministries toreview and eliminate 50% of their regulations across the board by the end of 1998, and ordered theindividual Ministers to be personally responsible for carrying out that goal.

The Ministries reviewed all their regulations to determine which regulations were to beeliminated. The reviews were carried out under the following principles: All regulations must beexamined on a “zero-basis”; regulations that hinder competition and the market are to be eliminatedin principle; but those regulations that are required for the preservation of environment, public safetyor health should be modified to achieve their goals as efficiently as possible. In addition, allregulations without legal basis would lose their status by the beginning of 1999.

By the end of 1998, as a result of the Presidential order, of the 11,125 regulations in place priorto the Presidential order, 5,430 (48.8%) were eliminated, and another 2,411 (21.7%) were revised.

The 1998 deregulation measures touched virtually all areas of Korea’s economy and Korean lifein general. Deregulation covered areas such as corporate regulations, regulations on SMEs andventure firms, financial sector regulations, FDI related regulations, regulation dealing with trade andmarket openness, social regulations, and paperwork. Some oft-cited examples of individualderegulation and regulatory reform measures include: easier dismissals of workers, more flexible workand employment rules, increased access to foreign exchange markets, reduction of regulations onforeign ownership of land, privatization of some state owned enterprises (SOEs), corporate reformmeasures and reduction of privileges for SOEs.

Major functions of RRC and review process

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The major functions of RRC are as follows:

• Establish the basic direction for regulatory reform, regulation research and development

• Review proposals for new, or strengthened regulation

• Examine existing regulation;

• Establish and implement a program for comprehensive regulatory review and reform forexisting regulations

• Register and publish regulations

• Receive opinions and suggestions on how to reform or revise regulations

• Examine the current status of regulations in each executive government agency

All introduction and strengthening of regulations must go through a review process by RRC.About 1,000 regulations go through RRC review each year. Proposing ministries should prepare RIA,and prove the need for and appropriateness of regulatory methods. All law, by-laws, administrativeorders, decrees are reviewed. Emergency regulations may file RIA later.

There are two classes of regulations: important and less important. About 30% of total proposalsfall into the ‘important’ category. RRC maintained consistent set of principles to control the quality.

RRC’S Review principles• Economic regulations are to be deregulated, while social regulations are to be made more

efficient.

• The method of regulations will change from a negative system to a positive system

• Transparency of regulations will be increased. Excessive discretion by field-levelbureaucrats will be reduced.

• Regulations with low compliance rates, or regulations whose costs outweigh the benefitswill be eliminated.

• Overlapping regulations will be unified into a single combined and unified regulation.

• Regulations which are contrary to international agreements and global standards will beeliminated.

Lessons learnt from reformRegulatory reform in the form of regulatory quality control has become a regular function of Koreangovernment. BAAR mandates that new regulations and amendment of existing regulations must gothrough a review process by the Commission. Thus, ministries cannot evade this requirement. Thelaw specifically requires RIA for each new and amended regulation.

As a result, the introduction and revision of regulations are no longer the exclusive rights of theregulating agencies. However, RIA is still at a primitive stage in Korea.

The initial reform drive lost momentum as political support waned.

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Quality of RIA is still low. And number-based deregulation has its limits. RRC needs morepolitical support against resistance from vested interests.

Coordination between RRC and provincial governments is inadequate.

In Korea, a permanent mechanism for regulatory reform has been installed in the bureaucracy,and an interest group within the bureaucracy has been put in place. For Korea, the cultural change inthe public administration has just begun.

Independence and political support is essential to credible role of coordinating the reform.Accountability links to ministries and local government needed to enforce changes. Implementationrequires plenty of expert support, at several levels of government. Make changes visible at local-government level to keep up strategy’s momentum.

Recommendations• Build a coalition within society around regulatory reform. Do not rely on narrow

political bases to drive reform, since sustainability is at risk. This is a constant task, sincepolitical support is always tenuous

• Create a permanent system of reform. Regulatory reform is bound to face resistance frominterest groups. To overcome this, create a bureaucracy which has organizational interestin regulatory reform. For example, create an independent agency at the center ofgovernment at the top of the bureaucracy to control regulatory quality. These strategiesshould be tailored to the bureaucratic culture of the country.

• Synchronize regulatory reform with government reform and budget reform. This willmake regulatory reform more permanent and effective. Regulatory reform normallyentails changes in government functions. Changes in personnel and budget shouldfollow naturally.

• To reduce regulatory and business costs, make rules and procedures transparent andpredictable. Registration of all regulations, sunset provisions, and the disclosure of theRIA process may help.

• Manage regulatory reform to help build the market’s capacity for self-regulation, not tosustain bureaucratic methods.

• Develop and train the concepts and practical application of regulatory alternatives.Alternatives can overcome the seeming conflict between regulatory reform and nationalpolicy objectives and also boost the emergence of visible benefits in the implementationprocess.

• Keep in mind that the ultimate goal of reform is to actually reduce the regulatory burden.Reducing the number of registered regulations should not be the top priority. Focus onthe compliance costs, and reform those regulations with high compliance costs.

• Maintain the momentum for reform through educating the public on the desirability ofreform, and informing them on the progress made.

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Introducing regulatory impact assessment (RIA) as an innovative instrumentin the making of business laws in VietnamBy Le Duy Binh, Advisor, GTZ Program for the Development of Small and Medium Enterprises, Vietnam

Regulatory reform is a key component of the structural reforms needed to support longer-termeconomic growth in Vietnam. In the past 15 years, Vietnam experienced remarkable economicperformance propelled by the private sector and foreign direct investment. The improved businessand investment climate is partly a result of several years of regulatory reforms.

Important challenges lie ahead which are familiar to countries steering their way from socialisteconomies to market economies. Vietnam requires an enormous deregulatory and re-regulatory effortto abolish old and superfluous laws that undermine economic performance, while at the same timedeveloping a new legal and institutional framework for the functioning of the market under the ruleof law.

The reworking of the Unified Enterprise Law (UEL) and Common Investment Law (CIL) arethe two most important ongoing reforms that are expected to have a profound influence on thewillingness of investors to play a role in Vietnam’s economic development.

GTZ supports the UEL and the CIL with the following approach:

• Improving the quality of the Laws: This can be achieved through the application of newlaw-making approaches (particularly the regulatory impact assessment [RIA]),strengthening the participation of the public in the making of the laws, exposing draftingmembers to international experiences and practices, and providing inputs on specificissues, etc. Consultation with various stakeholders should make an equal contribution toincreasing the quality and consistency of the laws.

• Support to the effective implementation of the laws: Law enforcement has always beenproblematic in Vietnam. The existing cooperation with the Enterprise LawImplementation Taskforce will be strengthened. The emphasis will be on monitoringand supporting implementation at provincial levels. This will be the focus of thesupports after the laws are promulgated.

• Development of tools and guidelines: Cooperation is not limited to providing directinputs and improving the quality of laws. A major objective is to further develop, test,customize and document these tools in order for them to be further replicated andeventually institutionalized in Vietnam. This will enhance the quality of business law-making and implementation in a sustainable manner.

Regulatory Impact Assessment and the improvement of the quality of lawsUnderstanding the future impacts of regulatory decisions on the private and social sectors is perhapsthe most crucial dimension for creating and sustaining a high-quality regulatory environment.

In most Organisation for Economic Cooperation and Development (OECD) countries, the toolemployed to examine the costs and benefits of decisions is Regulatory Impact Assessment (RIA).RIA is a method of systematically and consistently examining selected potential impacts arising fromgovernment action or non-action, and of communicating the information to decision-makers andthe public. In essence, RIA attempts to widen and clarify the relevant factors for decision-making. Itimplicitly broadens the mission of regulators from highly focused problem-solving to balanced

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decisions that trade-off problems against wider economic and distributional goals. RIA has severalinternal and external objectives. They are to:

• improve understanding of the real-world impacts of government action, including boththe benefits and costs of action;

• integrate multiple policy objectives;

• improve transparency and consultation; and

• improve government accountability.

Initially, GTZ provided an input on the nature and the importance of regulatory reform andRIA to key national stakeholders. Additionally, a Quick Scan on the Capacities of Vietnam in Improvingthe Quality of Business Laws was conducted. In cooperation with local stakeholders, a plan for theimplementation of the first RIA in Vietnam was prepared. Inputs on methodology and techniques,and documents and hints on the implementation, were provided to a group of local consultants. Thishas helped to initially build up the national capacity on RIA, even though it is still at a very modestlevel.

Application of RIA under UEL and CILThe Prime Minster’s Research Commission (PMRC) has been the key initiator and has requestedsupport from GTZ and the United Nations Development Programme (UNDP) in assessing the likelybenefits of the reforms under the new laws. Research has focused on: (i) attitudes and expectedimpacts of the proposed reforms under the UEL and CIL; (ii) assessing the impact of the proposedshift from a system of licensing foreign investment to registering foreign investments that complywith national regulations; and (iii) suggested guidelines for assessing regulatory impacts. The PMRChas played a key role in raising awareness of the potential benefits of undertaking RIA.

The centrepiece of the process has been the study on attitudes and expected impacts of theproposed reforms under the Unified Enterprise Law and Common Investment Law. The movefrom a licensing to a registration system for FDI, which has been analyzed under RIA, is one of themajor crosscutting reforms of both the UEL and CIL. Specifically, the study tried to answer some ofthe following questions:

• What are the potential impacts (positive and negative, direct and indirect) of theproposed reform to different groups, e.g. foreign investors, local investors, state-ownedenterprises, consumers, regulators, governments?

• Is the reform in the national interest? Are there real benefits of the reforms for thenational economy (e.g. an increase in investment inflow, enhanced competitiveness andmore compliance with WTO requirements)?

• How sizeable are the impacts (quantify the impacts to the extent possible)?

• What are the options for decision-makers in relation to the proposed reform?1

The study and the whole RIA process was discussed and shared with key stakeholders, includingmembers of the National Assembly. In cooperation with other donors, RIA was also promoted and

1 For the results of the study, please visit www.sme-gtz.org.vn or www.sme.com.vn.

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used. The focus of the method has been on local capacity building and on introducing RIA todifferent national bodies with a view to facilitating its use in future policy-making.

On the basis of the report, the PRMC is preparing a Regulatory Impact Statement (RIS) on theproposed key reforms for submission to the Prime Minister. In a standardized format, and a moresuccinct and focused manner, the statement aims to provide answers and arguments to the questionsraised above. One aim of the RIS is to present the major costs and benefits in an easilyunderstandable form so that estimates can be subject to public scrutiny and adjusted as necessary.The estimates of costs and benefits in the RIS could certainly benefit from additional scrutiny by keystakeholders, including the National Assembly when it is debating the law in November 2005.

RIA Methods are being Localized and Developed into a GuidelineAs a basis for stronger use of RIA, there needs to be a guideline on the method that includesinstructions and hints for implementation. Creating a guideline was an aim right from the onset ofthe process.

Implementation of the RIA on UEL and CIL provided many inputs in the development of thisguideline. Version 1.0 of the Guideline has been produced and made available to all relevantinstitutions. Further implementation of RIA on other proposed reforms by local stakeholders willprovide valuable inputs for further improvement of the Guideline in the near future.

Additionally, the OECD Guiding Principles for Regulatory Quality and Performance,2 whichhighlights the importance of RIA, was also translated and distributed to the National Assembly anddifferent Government agencies.

Next StepsAn alliance with local partners to further introduce, replicate and eventually institutionalize RIAhas been set up. The alliance includes major reform-oriented institutions in Vietnam like PMRC,CIEM, VCCI and the Ministry of Justice (MOJ). In particular, the participation and strong interestof the MOJ promises a very high chance that RIA will be institutionalized in the regulation-makingprocess. The alliance has developed a roadmap in order for RIA to be formalized (see diagram below).

It is also agreed by the alliance that the next steps should focus on:

• effective use of the study of RIA and RIS on the proposed reforms of UEL and CIL,particularly for discussions on the two laws by the public and by the National Assemblydeputies;

• implementation of two to three additional RIA on selected reforms;

• further improvement of the RIA guideline with inputs and lessons generated out of theimplementation of additional RIA exercises; and

• developing a strategy for institutionalizing RIA techniques in law and decision-makingin Vietnam.

2 http://www.oecd.org/dataoecd/24/6/34976533.pdf

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There are further needs for improving law making. As a result, coordination with othernational stakeholders and donors – particularly those who deal more directly with the issueof law-making in the country – will be important to ensuring the eventual impact of thisinitiative by GTZ and its partners.

The Government is considering integrating RIA into its draft Decree on BusinessLicensing, requiring that a RIA must be conducted before any agency can work out arequirement for a business license.

CAPACITYBUILDING

REPLICA-TION OF RIA

DEV’T OF RIAGUIDELINE

TEST ANDREFINEMENT

INSTITUTIONALIZATION

OF RIA

AWARENESS RAISING

PILOT IMPLE-MENTATION

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Outcomes of the breakout session on regulatory reform processes and strategiesChoosing the reform topic:

• Public private dialog• Select easy feasible problems• Sector with spill-over effects• “Looks easy but doing it proves to be difficult”

Involving stakeholders• Respective line ministries (relevant for the chosen sector) and govt. institutions are

crucial players• Across all countries, common stakeholders are named (govt., political parties,

academia, media, private sector, civil society,…), respective importance depends onchosen issues

Building political will for change depends on:• Clearly defined objectives and outcomes• Building awareness, disseminating information• Facilitating inter-ministerial meetings• Publicizing studies and research• Generating practical approaches• Global benchmarking

Own possible contribution / role:• Facilitate policy dialog• Trigger PPP• Intra govt. cooperation / consultation• TA for CBA and RAI

Possible first / next steps:• Guiding principles• Preparatory work• Needs assessment• RIA TOT training

Other important highlights:• Institutionalize reform mechanism within the govt.• “will take experience of RRC to advise own prime ministerial highest level decision

making body”• Country discussion was like simulation• Discussions captures “real life scenario” where different stakeholders will have

different views on what to reform and in which sequence – very challenging!!• Despite differences in culture, history and development level, there was unanimity

on “mother issues”

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Sub-national reform processes and strategiesThe following speakers made presentations under this topic:

• ‘Practical challenges and approaches in the design and development of sub-national business environment reforms’ by Simon White, Consultant

• ‘Case study: SMEDSEP – promoting sub-national business environment reforms’ byMartina Vahlhaus, Program Manager, Private Sector Development Program (SMEDSEP),Manila, Philippines

• Hans Shrader, International Finance Corporation, Indonesia[No synopsis or paper provided]

• ‘Role of local business associations in business and investment climate reform’ byRestie Male, Program Officer, Partnership Development Facility, Philippine-Canada Localgovernment support program, CIDA-Philippines

SEMINAR READER

Sub-National Reforms of the Business and Investment Climate; an overviewby Simon White, Southern African IDEAS, South Africa

The context and relevance of sub-national reforms• Globalisation• National trade boundaries have become more porous• Protection and subsidisation of national industries is reduced• Growing importance of localities• Decentralization of government services and accountability• National governments have recognized the importance of sub-national authorities• Regional development• Measures taken by national government to balance develop. across urban & rural

areas• Growing urban centres, declining rural hinterlands

The main sub-national BIC actors:• Sub-national government authorities• Local/village• Provincial/regional• Elected officials and employed staff• [Political interests and executive interests]• Local business membership organizations• Chambers of commerce, business associations, informal sector associations, sector

associations• Local development agencies• NGOs, civil society organizations• Local educational institutions• Schools, universities, technical training agencies• Trade unions and other workers’ organizations• Local media

Common sub-national reform issues and strategies:• Benchmarking local BICs

o Creating competition among sub-national authorities• Business regulation

o Business registration and licensingo Health and working conditionso Factories and industrial safetyo Reducing local red tapeo Creating one-stop-shop facilities

• Land use planning and enforcemento Industrial districts, residential areaso Home-based businesses

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o Street trading• Environmental protection• Spatial initiatives• Economic zones• Addressing local informal economy

o Reducing costs to formalityo Improving benefits to formalityo Enhancing organization and representation of informal operatorso Creating managing agents and opportunities for self-regulation

• Local and regional planningo Economic development planningo Housing planningo Social development planningo Infrastructure planning

• Local and regional economic developmento Assessing local/regional economic opportunities and constraintso Managing local/regional economic development projects and programso Local economic development programs and processeso Industry incentives and attractiono Local enterprise development

• Promoting social dialogue at the local levelo Business and government forumo Participatory planning and development processes

• Creating and strengthening local institutionso Public, private and community agencies

• Creating and strengthening local-national linkages to improve:o Information flows (top-down and bottom-up)o Coordinating initiativeso Harmonization of policies, programs, laws and regulations

• Creating an enterprise society

Challenges when working at sub-national levels:o Limitations on political power at the local levelo National interventions can undermine local innovationo Limitations on political will at the local levelo Engaging key stakeholders in a continuous process of reformo Going beyond formal procedureso How sub-national authorities can operate in a strategic manner, facilitating the inputs of

many local stakeholders

SEMINAR READER

Designing local business reform interventions in the PhilippinesBy Martina Vahlhaus, Program Manager, GTZ Private Sector Development Program, Philippines

The major task at the beginning of program implementation in January 2004 was to identify thereform areas with regard to the business and investment climate for MSME at local and nationallevels. Moreover, it was necessary to find local governments that were willing and able to design andimplement local business reforms.

At the national level, key agents had to be found that were able and willing to lead the programand to assist in feeding back local reform experiences into the national policy process. This wasconsidered important in order to induce long-term change and create broader impacts. In this sectionthe approach taken and innovative tools used during this process will be described.

The Asian Institute of Management (AIM) Policy Center conducts a bi-annual PhilippineCities Competitiveness Ranking Project (PCCRP) which has proven to be extremely useful for theidentification of areas for reform at the local level. The survey is an innovative tool that is useful forthe analysis of the local business environment. This analysis can be used to inform the design of localreform activities and the monitoring of the impact of such reforms.

The study serves as a policy and urban management tool for city leaders in identifyingcompetitiveness gaps and potentials of their respective localities. It helps these leaders to understandtheir urban area’s strengths and weaknesses as business and living environments. The study also aidsnational-level policy makers in identifying common problems and weaknesses that may be addressedand remedied by national, sectoral and industrial policies.

As the project is intended to be a continual exercise (the survey is done this year for the fourthtime), looking at these indicators across time traces the development of cities and contributes torealistic planning for longer time horizons. By looking at different Philippine cities, the projectattempts to identify what structural issues are weakening the competitiveness of Philippine urbanareas, and must be addressed by the national government.

The main drivers of the competitiveness of emerging Philippine cities, which AIM hasidentified with their partners, are:

• Cost competitiveness: How expensive is it to operate a business in the city compared toother cities? This driver is concerned with the direct costs of doing business, such asthose for land, labor, rent, telecommunications and power.

• Human resources and training: How well equipped is the population to build and takeadvantage of opportunities in the locality? The education of the populace is taken to bethe most significant component of human resource endowment. The driver primarilyrefers to the competence of local labor and the availability of training programs for skills’development.

• Infrastructure: Are the necessary physical, telecommunications, technological,infrastructure and knowledge support services in place in the city? Transacting businessrequires not only production factors, but also accompanying infrastructure and services.

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These include, among others, road infrastructure, information and communicationstechnology, and transport.

• Linkages and accessibility: Linkages are one of the significant determinants of citycompetitiveness. This refers to proximity to other growth nodes, urban centers, andsurrounding growth regions. The driver's aspects are accessibility to domestic andinternational markets and the availability of national government and business supportservices. Moreover, certain geographical characteristics can be advantages upon which acity can build.

• Quality of life: How well off are residents in terms of quality of environment and life?The quality of life factor has been increasingly considered as one of the yardsticks indetermining which cities have successfully developed and which have succumbed to theills of urbanization. Indeed, the long-term competitiveness of the city would significantlybe influenced by the degree to which its leaders have taken care of the environment andthe local community. Among the relevant aspects of the quality of life are the socialwelfare of the people, peace and order, quality of living environment, and localamenities.

• Dynamism of the local economy. A vibrant local economy is fundamental in attractinginward investments and improving the attractiveness of a city.

• Responsiveness of the local government. More importantly, the role of the localgovernment in urban development cannot be undermined. Much of urbancompetitiveness is determined by the ability of the government to respond to systemicand short-lived issues with a well-grounded and focused vision.

70 qualitative and quantitative indicators were used to assess metropolitan cities (i.e., MetroManila, Metro Cebu and Metro Davao), mid-sized cities (those non-metropolitan cities with morethan 200,000 residents), and small cities (cities with less then 200,000 residents). The statistical dataare acquired from official publications of national government agencies and local government unitsthat include 21 indicators and are referred to in the study as quantitative indicators. On the otherhand, survey-based data are obtained from executive surveys administered to owners and managers ofsmall and medium enterprises whose businesses are located in the city.3

On the basis of the PCCRP 2003 the GTZ private sector development program (SMEDSEP)was able to identify the critical areas of the business and investment climate in the eight citiessurveyed in the pilot provinces. See Figure 1

3 The study uses purposive non-probability sampling due to the unavailability of an updated and

comprehensive listing of small and medium enterprises from national government agencies. The AIMPolicy Center Team decided that sixty respondents would constitute the sample size for each city.Survey-based data include 49 indicators and are referred to in the study as qualitative indicators. Mostof the indicators are based on qualitative data because the perception of businessmen gauges theattractiveness of the city as a place of living and business.

The study uses two methods to score and rank the competitiveness of cities. The first is aranking method. (The IMD also uses this method in its World Competitiveness Yearbook.) Thesecond is the scoring method formulated and applied by the Policy Center in its previous CityCompetitiveness studies.

SEMINAR READER

Figure 1: PCCRP and program design

AIM Policy Center

City Competitivene

ss Project (PCCRP)

(November 2003)

FDG in8 Cities In the

VisayasSept/Oct 04

Identification of Critical Area

and 2 Pilot Cities Nov 04

ProcessImprovement

Evaluation and Feedback (Apr 05 to Jan 06)

ImprovedBusiness

Registration

Replication

Promoting Sub -National Business Environment Reform

Analysis of BIZ registration

processesAction PlanningJan/March 05

AIM Policy Center

City Competitivene

ss Project (PCCRP)

(November 2003)

FDG in8 Cities In the

VisayasSept/Oct 04

Identification of Critical Area

and 2 Pilot Cities Nov 04

ProcessImprovement

Evaluation and Feedback (Apr 05 to Jan 06)

ImprovedBusiness

Registration

Replication

Promoting Sub -National Business Environment Reform

Analysis of BIZ registration

processesAction PlanningJan/March 05

In order to prioritize areas for local reforms with respective local entrepreneurs as well as policymakers SMEDSEP decided to organize focus group discussion in the eight cities. During these half-day workshops the results of the PCCRP of that respective city were presented and discussed withlocal entrepreneurs and policy makers. It was intended to see if policy makers would committhemselves to making changes that would improve the local business environment.

An application form was designed to describe the local reform project and the support needed.Discussions focused on 18 indicators deemed to be easily influenced by local policy makers and couldbe supported within the scope of the program. However, after evaluating the first workshop therewere already several lessons to be learned were then incorporated into the design andimplementation of the focus group discussions. Eighteen indicators proved to be far too many to bevalidated and discussed during a morning session. Thus, the number of indicators was reduced to six.See Figure 2, below.

The planned approach to encouraging local governments to commit to some reform on the spotproved to be too ambitious. Instead, it was decided to conduct the full series of discussions to distillcommon problems and then offer service packages based on international best practice. In addition,the application form was dropped because it became quite clear that local policy makers would haveneeded substantial support in filling it in (from the program) and that this would then lengthen theselection process of some pilot cities even more.

Figure 2: Indicators used for identifying critical areas of local reform with entrepreneurs

1 In general, the city’s regulatory environment (such as licensing procedures andfees, taxes, and other regulatory environment) is conductive to business

2 Securing a business permit is simple and efficient3 Local policies and regulation in the city are reflective of business needs4 The city’s master development plan is appropriate to business sector’s needs5 Business taxes imposed by the city are reasonable6 The city government is honest and transparent in its dealings

SEMINAR READER

During the focus group discussions, business registration was identified as the most promisingarea for local reform in most cities with regards to visible short-term impacts to be achieved at verylow costs. Ormoc and Bacolod were identified as pilot cities for improving business registration andlicensing with their mayors being very committed to design and lead such a change process. It wasagreed that the aim should be to cut procedures and time spent on business registration by 30 percent in the first year. This would help to improve the score of a key AIM indicator: ‘securing abusiness permit is simple and efficient’.

The local government code of the Philippines stipulates that all businesses must renew theirbusiness license in January of each year. Therefore it was easy for SMEDSEP to support Ormoc andBacolod in analyzing their business registration procedures and costs from the point of view of theentrepreneurs by conducting a time and motion study in both cities in January 2005. The surveysalso describe and analyze the procedures and develop ideas how to improve them.

The results were fed into action planning workshops in both cities. In these workshops someexamples of best practice in local business environment reforms were described. This proved to be avery powerful way of engaging local stakeholders in understanding what is needed for implementingbusiness licensing and registration improvements.

Other tools were used to assess the business environment at the national level. This included anational review of policy and legal framework affecting MSME investment and employmentdecisions (Tecson 2004). The results of the focus group discussions as well as the review wereactively fed into the national SMED Council (Small & medium enterprise Development Council, aninter-agency body attached to the Department of Trade and Industry (DTI), the DTI, League ofCities, Donor-Government Dialogue by organizing respective workshops, holding presentation andtrying to present it in the press or other media. See Figure 3, below.

Figure 3: Local and national policy dialogue processes

Policies, laws and regulations

Research Verification

National Agencies[SME Policy Review]National Agencies

[SME Policy Review]

LGUs (AIM City Competitiveness Survey, Improving Business Permit)

LGUs (AIM City Competitiveness Survey, Improving Business Permit)

National

Policy

Dialogue

National

Policy

Dialogue

SEMINAR READER

Conclusions and Lessons learnedThere are a number of lessons that have been learned by SMEDSEP in the design of a local businessenvironment reform processes. Some of these have been learned through success, others through anassessment of design processes that did not work as well as originally hoped.

Using existing assessments and analysisGTZ made good use of the assessments and analysis of other agencies when designing SMEDSEP.Rather than undertake its own assessments and surveys, GTZ drew what it could from the work ofthe Asian Development Bank, the Asian Institute of Management, the Government of thePhilippines and the World Bank––in addition to other academic studies and reports.

Digging deeper as the program is refinedOnce agreements had been reached regarding the overall scope and direction of SMEDSEP, theprogram undertook a number of focused assessments that allowed it to dig deeper into the issues thataffected the business environment for MSMEs. This included the conduct of focus group discussionswith entrepreneurs and local policy makers in eight cities in the Visayas for identifying local reformareas as well as the national assessment of the policies, laws and regulations that apply to MSMEs.

Continuing consultationsThe early stages of SMEDSEP were characterized by a high degree of consultation with governmentagencies, as well as with the private sector. While two government agencies were assigned as programpartners, consultation with other agencies was also sought. Private sector consultations includedformal representative agencies, as well as opportunities for MSMEs to participate in forums andstudies.

Working with a wide range of actorsSMEDSEP has formed strong relationships with two national partners: DTI (Department of Tradeand Industry) and TESDA (Technical Education and Skills Development Authority). Theseagencies are well placed to take on issues associated with the national policy framework for MSMEdevelopment. However, there are a number of other agencies that need to be brought into the reformprocess (e.g., Congressional and Senate Trade and Industry Committees, Small and MediumEnterprise Development Council––at national and provincial levels, Department for the Interior andLocal Government, Department of Finance, the Philippines Special Economic Zones Authority,Philippines Chamber of Commerce and Industry, Employers Confederation of the Philippines,selected LGUs, and the media). This is not always easy as these agencies often have conflictinginterests and DTI and TESDA are the assigned government partners of the GTZ program.

Applying national and local reform dimensionsSMEDSEP’s approach to reform at national and local levels is significant. This approach allows theprogram to test the impact of national changes at the local level, while also enabling it to pilot newapproaches in selected LGUs. There is a sound rationale for this approach, which is informed by thestrong decentralization program of the Philippine Government and the work on the competitivenessof cities undertaken by the Asian Institute of Management. Local program efforts also build on theprevious experiences, networks and relationships GTZ has in the Visayas.

SEMINAR READER

Supporting current reform effortsSMEDSEP tries to support and strengthen current reform efforts. International experience (includingGTZ experience) has shown that donor agencies wishing to improve the business environmentcannot take the lead in these processes. The key lead agencies are domestic agencies: governmentmainly, but also the private sector. Thus, SMEDSEP works with these agencies to support theirreform efforts.Building a demand for reformUntil now it has been difficult to identify leaders for specific reforms with regard to the business andinvestment climate such as business licensing and registration at national level. Moreover theprivate sector does not assume its advocacy function very well due to many reasons – one of thembeing that at the local level the private sector is very poorly organized. Therefore SMEDSEP spendsmore resources on its dialogue with domestic partners on these issues, including the private sector. Ademand for reform must be created to influence the national policy agenda. This requires a long-termcommitment to establish stable alliances with relevant stakeholders.

Focusing on the achievableSMEDSEP aims to focus on reforms that are possible within the financial and time constraints of theconcerned agencies as well as the program. While there are many elements of the businessenvironment that require reform, SMEDSEP has not attempted to address all these. Instead, theprogram focuses on those elements of the business environment where visible impacts can beachieved in a short time. One of the main problems in the Philippines is that there are so many goodpolicies, laws and regulations formulated, but implementation is poor. More of the same wouldtherefore be to the detriment and not induce any change at all.

Keeping a long-term perspectiveWhile SMEDSEP is focusing on what is achievable within the bounds of its timeframe and resources,it also focuses on long-term results. It is easy, for example, to focus on the simplification of businessregistration procedures and to lose track of broader business environment issues. Thus, SMEDSEPpromotes discussion on the purpose of the business environment reform and the benefit of privatesector development in general and MSME development in particular.

Engaging the private sectorSMEDSEP is eager to work with the private sector in its support for business environment reforms. Ithas ensured that private sector representatives are invited to all workshops and has endeavored tocapture the concerns of this sector in all studies and assessments. In the Philippines this is especiallyimportant as government agencies are still designing and implementing their policies and supportprograms in this sector without much consultation of the private sector.

SEMINAR READER

The role of local business support organizations (BSOs)in shaping the business and investment climateBy Restie Male, Program Officer, Partnership Development Facility, Philippine-Canada Local governmentsupport program, CIDA-Philippines

BSOS are among the major stakeholders in shaping the local business and investment climate. Forlocal businesses to be able to compete, they need institutional support in the form of services likeconsultancy, research, market development among others. Our experience in the field shows that tobe able to come up with apt business development services, we need LOCAL KNOWLEDGE and itshould be MARKET DRIVEN. BSOs are a good source of local knowledge and they have a goodsense of what the market needs. BSOs therefore are your logical institutional partner in shaping localbusiness climate. While SMEs needs the services provided by the BSOs, we also need to strengthenthe capabilities of the BSOs in order to sustain the services they provide to our target beneficiaries,the SMES.

Case Study: the Davao City Chamber of Commerce and Industry-SME CenterOn Investment PromotionThe best strategy is to apply�3cs:

• Cooperation• Complementation• Co-existence

Framework:Government should:

• Strive to provide an environment where business can grow• Provide Infrastructure• Lower the cost of doing business (power, transportation, labor, land/rent)• Local political stability• Local peace and order

Business: Corporate Social Responsibility – Case Study: the Cebu City Government-CebuInvestment Promotion Center-Cebu Chamber of Commerce Partnership

SEMINAR READER

Report from breakout session on sub-national reformsKey questions addressed during the breakout session:

• What makes sub-national reforms work?• What is good practice in sub-national BIC reform?

What conditions are necessary for successful sub-national BIC reforms?• Commitment by all stakeholders to work together• Dynamic pressure groups• Industry-government-academia• Well-organized business sector• Public-private relationships• Three “Cs”: cooperation, complementation, co-existence• Local government• Responsive to private sector needs• Champions for reform• Transparency and accountability• Local leadership• A political will• Long-term vision and commitment• National framework for local BIC reform

What is good practice?Some general points:

• Strengthen/ capacity building for local institutions toward sustainable reforms• Promotion competition between local authorities• Scorecards, competitiveness index to benchmarks• Qualitative and quantitative assessments• Used by national and local government• Ask project partners to apply• Show commitment• Rather than offer assistance• Use media to advocate• Replicate and adapt best practices• International-national-local• Involve active participation to make better use of private sector• As a channel to the government• By consulting with private sector• Provide right incentives to local gov. officials for reform• Maintain constant communication with stakeholders; issues, solutions, benefits,

results etc.• Pick and back potential winners• Involve local students in research and innovation projects

SEMINAR READER

Monitoring and impact assessmentJulius Spatz, GTZ Headquarters, Frankfurt, Germany, conducted this session, which examined waysin which the impact of reform programs can be measured so as to improve program design and toassess the contributions the reforms make to improving the business and investment climate. Hedescribed the attribution gap in more detail and presented a number of ways in which reformprograms can apply different assessment and monitoring methods.

Challenges to impact monitoring:• Complexity of BIC Programs• Length of the Results Chain• Isolating Individual Reform Measures in Embedded Programs or Multi-Donor Settings• Time Lags between Activities and Outcomes• Lack of Counterfactual• Validity and Sustainability of the Survey

Two levels of monitoring were presented:• Monitoring up to outcome level

• Measuring how far the assumed outcomes have been achieved• Identifying external factors that have positively or negatively

affected the process of achieving the outcomes• “Monitoring” beyond the attribution gap: giving a plausible description of possible

contributions of the project towards the observed changes atimpact level

Design of monitoring and assessment indictors:o Indicators at Different Levels of the Results Chain

o Proving Impact: Outcome and Use of Outputo Improving Process: Activities, Outputs, and Use of Output

o Different Types of Indicatorso Qualitative versus quantitative

o Perception-based versus objectiveo Forward-looking versus backward-looking

o Model Indicators:o Outcome: The # of registration procedures has decreasedo Use of Output: A One-Stop-Shop is establishedo Output: An annual public-private dialogue forum is established

Issues for survey design:o Counterfactuals:

They Cannot Be Observed, They Can only Be Simulated by ComparingProgram Participants (Treated Group) with a Control Group

o Experimental:

SEMINAR READER

A set of units of analysis who are equally eligible and willing to participatein the program are ex ante randomly divided in two groups

o Sampling Stratification and weighted multi-stage sampling can be used to increase

precision and cost effectiveness Sample size: > 40 nobs per strata

o Response Rate If the response rate is low, the validity of the surveys is qualified by self-

selection There is a trade-off between the response rate and the costs of the surveys

o The Sustainability of the Monitoring & Evaluation System Has to Be Built intothe Survey

Indicators and Survey Design Should be Agreed Upon by Donor andCounterparts

Data Collection and Analysis Should be Gradually Transferred to theCounterparts

The Survey Should Provide Value Added Beyond the Project The Results Should be Widely Disseminated to Raise Awareness

SEMINAR READER

Seminar summary and reviewWhen considering good practice in the reform of the business and investment climate, seminarparticipants identified the following:

1. Raise awareness on the need for change in the business and investment climate andhighlight the need for information; use benchmarking tools in building public opinion.For example, media such as newspaper can be used to reflect how changes haveimproved the quality of life and have reduced costs of doing business in other countries.Therefore politicians and citizens see incentives for change.

2. Identify champions in the political arena who have political will to implement change.They are the drivers to initiate consultative processes as a basis for prioritizing the reformagenda. Consultative processes involve key stakeholders from the civic, public andprivate sector, and encourage public-private-partnerships.

3. Regulatory Reform is the job of the government. In order to boost investmentscompliance costs which results into higher business costs have to be reduced. Therefore,removing disincentives is more important to businesses than creating new incentives.

4. Make regulatory quality control a part of government administrative functions thereby,making procedures more transparent and predictable for businesses. This can be done byintroducing a permanent system of government regulatory quality and letting anindependent body in the government monitor & control the quality of regulations (as inthe case of the Republic of Korea). Regulatory Impact Assessments is a useful tool tocreate more transparency on the implications of a new law.

5. Reforms have to have long term impacts. Therefore, continuity across political parties isencouraged.

SEMINAR READER

Seminar outcomes and next stepsSimon White, the seminar facilitator asked participants to work in country groups to consider threequestions:

1 What were the main lessons you have learned at this seminar?2 What are the emerging priorities and challenges for BIC reform in your work and

country?3 What outside support do you require to address these priorities and challenges?

The following table presents the responses given to these questions.

COUNTRY BangladeshMain lessons learnedat seminar

Reforms have to have long term impactsReplicate successful reforms of other countries in the regionShaping an enabling BIC is a consultative and coordinated process

involving al the stakeholdersStrengthening business associationsThe push for shaping an enabling BIC should come from the private sector

as well as from all stakeholdersNew ways to shape the BICTo voice through chambers/dialogue for change via meetings, seminars with

the governmentTo tell the government to have a vision, similar to Malaysia's Vision 2020;

in order to achieve a vision by 2020, changes and reforms are neededUtilize the media/newspaper reflecting how changes have improved the

quality of life in other countriesMake the politicians understand that changes are good

Emerging prioritiesand challenges for BICreform in your workand country

To have long term, continuous policy commitment by politiciansBringing all stakeholders in a forum to reach common understanding of

reform needs and prioritize the needs.Disseminate the seminar’s learning to the higher authority of the ministry

& think tanks and creating awareness/voice for reform work with thesupport of outside organizations

Outside supportrequired to addressthese priorities andchallenges

support in all aspects is neededTechnical assistance in benchmarking the existing BIC, e. g. Assessing the

prevailing BIC in some sectorsCapacity building of Bangladeshi business women groups is needed to act as

a pressure group to shape the BIC, to influence policy makers and alsoto act as a bargaining agent

COUNTRY LaosMain lessons learnedat seminar

Reform experiences in other Asian countriesReinforcement of HRDMEProgram approachKorean modelPublic-private dialogue as basis for prioritizing the reform agenda

SEMINAR READER

To develop a mutual understanding between the private and public sector toimprove the BIC


How to build the political will?Driving force for public sector/BIC reforms:Incentives for bureaucrats to turn to civil servants for business sectorHow to identify/pick ‘winners’?Government is not competent enough to pick ‘winner industriesInvestors are the risk takers > consultative process and PP dialogue is

needed


To make the convincing case for the political decision making to undertakereforms

To overcome the lack of financial & human resources

COUNTRY Viet NamMain lessons learnedat seminar

The Korean model for BIC reformNew tools like RIAOne has to take into consideration the competitiveness on the regional,

national and local levelRaising awareness about regulatory reformsSecured transaction lawFinancial/banking sector reforms


Thinking of government officials (both central & local level) on why andhow to do BIC reforms

Transparency of officials (example: give more information to enterprisesabout planning & legal documents)


Capacity buildingBenchmarking

COUNTRY CambodiaMain lessons learnedat seminar

Consultative, participatory process is needed (all relevant stakeholders haveto be involved)

It is more important to remove disincentives instead of creating incentivesIdentify political heroes who introduce changesEliminate vested interests through RIA


Laws & regulationsImprove access to finance through financial reforms


Build the political will and convince decision makers to reform the BICCooperation from the donor community to convince the decision makers is

needed

SEMINAR READER

COUNTRY ChinaMain lessons learnedat seminar

Views from different ankles on how to improve the BICTools on how to improve the BICCase studies form other countries


Financial reformsLand policy reformsCapacity building on local level (government officials improve BIC)

with outside supportShare knowledge


Foreign experienceBest practiceCapacity building

COUNTRY IndiaMain lessons learnedat seminar

Urgency of broad based reforms in realm of state/institutionsStrategizing the reform process (e.g. by building coalitions, institutionalizing

the reform mechanism within the government)Use of benchmarking tools/reforms in building public opinion (e.g.

competitiveness report)


Quantification of ‘cost of doing business’ in existing regulatory environmentConforming costs with international best practicesIdentification of priority/to choose which regulation is best


Tools & methods on Regulatory Impact AnalysisInternational best practices on key business economic legislationHow to systematically engage social and economic actors towards change –

particularly by using ITC

COUNTRY PhilippinesMain lessons learnedat seminar

Identify “winners” and what are the key success factors in this processIdentify champions (“political heroes”) who have political will to

implement change. They are change agents who have the desire forchange and who can infect others with the same desire

Better understanding of regulatory impact analysis as a starting point andresults chain as a way of designing programs

Implement regulatory reformUnderstanding of results chain, impact vs. outcome, and attribution gapThe importance of sub-national level: cooperation, complementation of

stakeholdersNeed for public and private process for partnership prior to any reform-

making: consultation, consensus-seeking, etc.The key role of business associations, these are more permanent than

political and are key at the meso level

SEMINAR READER


Conduct RIA at national and local levelUsing the RIA as a toolTaking reforms to the sub-national levelAwareness and implementation of reformsPolitical will to implement reformsPolicy coherence: national vis-à-vis sub-national, interagency, intersectoral


Training on RIA and other toolsObjective (third-party) review of reforms we are currently designing or

planningSharing of indicators databaseResearch on which key performance indicators are best suited to each

country

COUNTRY EthiopiaMain lessons learnedat seminar

Need to deliberate on BIC/important in the African ContextNeed for streamlining the activities of different interventions by different

donors in private sector development


More stakeholders participation in designing and implementing reformprograms

My particular program needs clear performance & impact assessmentcomponents


GTZ is already involved in the reform program but expertise in the area ofperformance & impact assessment is urgently required

Seminar closureSonja Kurz, GTZ Headquarters and Martina Vahlhaus, Program Manager, SMEDSEP, Manila,Philippines made brief comments to officially close the seminar.

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