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Why business needs to embrace institutional reform at long last

Martin Summers makes the case for engagement and offers seven steps for companies seeking to embrace change.

The sustainability community’s love of system thinking and public-private partnerships has so far stopped short of embracing an agenda for the institutional environment.

This is the network of institutions and processes by which public policy is implemented and public services are provided, and without which sustainable development and competitiveness are difficult to achieve.

The UN Sustainable Development Goals (SDGs) and new World Bank data should change that.

The Bank recently published Doing Business 2016, its annual survey of how easy it is to start up and run a business in 189 economies, and it identifies major opportunities for business, donors and civil society to drive institutional reform to help achieve the UN Sustainable Development Goals and also to maximise the potential of programmes to promote enterprise and Local Content (i.e. largely mandated spending on local suppliers and their development).

Martin Summers

Martin Summers

The report spells out the substantial costs and time involved in getting business-critical services and approvals in many countries, such as getting connected to an electricity grid, registering property or enforcing contracts.

These are also good indicators of the overall institutional environment experienced by non-commercial organisations, without which the SDGs can’t be achieved.

The centrality of government institutions to the success of the SDGs underpins one of the toughest challenges that Business Fights Poverty sets out in its new report Business and the Sustainable Development Goals.

This being, what can we do to renew, sustain or even intensify focus on some critical foundations for the success of the SDGs: the rule of law, good governance, anti-corruption and the business enabling environment?

Multinationals’ increasing investment in the development of local supply chains – to achieve greater security of supply or cost savings through local sourcing, or to comply with Local Content regulations or investment agreements – should highlight the impact of the institutional environment on their bottom line and on their efforts to promote inclusive, local economic growth.

This is particularly important for those FMCG companies trying to move beyond local agricultural sourcing, typically from smallholder farmers operating in the informal economy towards developing local value chains that need to operate in the formal economy, such as brewing and food processing, where institutions typically play a much bigger role.

(An agricultural equivalent of the Doing Business survey would nonetheless be invaluable: poor extension services, import duties on feed and fertiliser, price controls, and poor land registration – which makes it difficult to securely buy or sell land or borrow against it – all limit the productivity and growth potential of farmers.)

SMEs won’t be able to realise the growth potential offered by company-funded enterprise development programmes, such as training and micro-credit schemes, if their growth is stunted by institutional constraints.

These would include e.g. excessive or confusing regulations, or poor capacity or capability in government to process applications and enforce regulations.

Donor dialogue with the private sector will help promote a more active role for business in institutional reform, as David Kennedy of DFID says in the Business Fights Poverty report: “We want an active dialogue with the private sector to understand better the constraints to greater levels of investment and trade.” (continues below)

doing-business-fy14-draft1bBusiness will, however, need to do more than just engage in dialogue with governments.

By itself this will probably result only in them continuing to articulate the direct constraints on their growth and investment, while ignoring the constraints on the local companies they work with and on potential suppliers.

Companies could follow an approach that is many ways similar to how many companies address human rights and anti-corruption:

1) Map the country risks, using global indices such as Doing Business, the WEF Global Competitiveness Index, or Verisk Maplecroft’s Legal and Regulatory Environment Risk Index.

2) Validate these risks by engaging with their own managers and with local suppliers, identifying what institutional problems affect them the most.

3) Agree an agenda for change, working with current and potential suppliers, as well as political and business representatives.

4) Implement an evidence-based advocacy programme. Advocacy is best undertaken by collective forums that genuinely represent a broad cross section of global investors and local businesses in a country, augmented by advocacy by individual companies.

Evidence, from global indices and local surveys, needs to be supported by case studies showing exactly how institutional constraints have hindered the growth of particular companies or sectors. This can feed into governments’ sector development strategies.

5) Help SMEs to negotiate the existing institutional environment. Just as many companies fund services to train and support small local businesses in writing business plans and responding to tenders, so they could fund services to help them file their taxes, make applications for permits or services, and negotiate bureaucracies. These are often bigger hurdles to their expansion than having the necessary finance or skills.

6) Support programmes that help build the capability of local institutions. Many companies already support vocational and educational programmes to build up the capability of local workforces. The same approach could be extended to help programmes to build up the capability of local workforces.

This could be extended to help local officials and policymakers gain the skills and knowledge to develop and administer regulations effectively. (Some developing countries send their civil servants for training overseas for this reason, but funds are typically limited.)

7) Articulate principles for institutional reform and engagement, which should be agreed with other companies and organisations working together on achieving institutional reform. The objectives of reform should be stated with reference to general principles, such as the OECD Guiding Principles for Regulatory Quality and Performance, or countries’ own regulatory principles, and preferably backed up by company statements as to their general objectives for institutional and regulatory reform.

(Few companies do so: Microsoft offers a good example.) Principles should also be set with reference to the manner of engagement, in line with best practice on transparency and stakeholder engagement.

There are many other steps that can be taken, but the first essential step is for business to understand the institutional constraints on their own growth potential and that of their business partners and potential local suppliers.

Only then will a compelling business case for embarking on an institutional reform agenda emerge.

It will also require donors, civil society and host governments to accept that business has a legitimate and invaluable role in identifying barriers to growth and the key ingredients of enabling environments for businesses large and small, foreign and domestic.

These ingredients are also critical for achieving other sustainability objectives: for example, the Rana Plaza factory collapse in Bangladesh could arguably have been prevented if Bangladesh’s building and factory inspection services were properly resourced, incorruptible and able to do their job properly.

Similarly, certification services and related third party audits are often compensating for the absence of sufficient regulations and their effective enforcement.

Whatever the sustainability objective, the institutional dimension cannot be ignored. A sustainability strategy without an institutional and regulatory strategy is incomplete at best, and inevitably limits the success of any sustainability programme.

Martin Summers is director, Maginot Consulting.

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