Finding the right balance between state and private sector

By Vanora Bennett


The private sector needs an enabling state

Behind the EBRD’s work with the private sector lies another area of engagement – policy dialogue with governments and other partners to get the balance between state and private sector right.

With experience as a transition bank stretching back 25 years, the EBRD has learned important lessons about the process of transition to well-functioning markets in countries with different starting points, histories and cultures.

 

Alan Rousso, Managing Director, External Relationships and Partnerships, has been involved in the Bank’s policy dialogue work since 2001. The key lesson, he says, is that in all countries strong institutions and an effective state are needed for markets to function well and for investments to flow.

Clear rules are crucial. There needs to be a level playing field for both state agents and private business. Businesses cannot thrive where the state does not provide essential “public goods” – sound regulation, market-supporting laws that are implemented fairly and a transparent procurement system. Trust cannot be established without a means to address abuses by public officials for private gain – in other words, corruption. The private sector needs an enabling state.

Alan Rousso traces the history of the Bank’s focus on helping fine-tune that boundary back to its early days and focus on creating a sound legal framework for markets, especially through the work of the Legal Transition Programme. The publication of the EBRD’s 1999 Transition Report “Ten Years of Transition” was a milestone. It was the first Bank study to focus on how the quality of governance – both political and economic – affects transition. It drew on the results of what became a joint EBRD and World Bank product, the Business Environment and Enterprise Performance Survey or BEEPS.

BEEPS asks firms questions on access to finance, perception of high-level and petty corruption, quality of infrastructure, crime, competition and enterprise performance measures. The first BEEPS was a vital tool to advance analytical understanding of corruption in the EBRD region and to steer policy engagement towards improving governance.

Direct, firm-level data from regional businesses spawned a rich new strain of academic and policy papers which would affect thinking about governance, reflecting growing interest in the concept of “state capture” – the “buying” by companies of state influence – and making it possible to quantify concepts like a “bribe tax” and “time tax” on firms’ performance.

“These ideas took the governance world by storm,” recalls Alan Rousso. “The World Bank had a head-start in working on governance and corruption globally, starting around the mid-1990s, but the EBRD was the first to identify and diagnose mid-transition issues, and think about how to get around them. And it all started here and with the BEEPS.”

“After that there was a period when we were looking for a niche,” he adds. “We were good at analysis and we deepened our understanding of the business environment through further rounds of the BEEPS and other studies, building up analytical and policy advisory capacity in public procurement reform, corporate governance, judicial capacity building and other aspects of legal transition, and anti-money-laundering - but it was not very joined up.”

However, the importance of making sure investments and policy reform were indeed joined up came with the publication of the EBRD’s 2013 Transition Report “Stuck in Transition?”.

In that report, the Bank analysed why the transition process had slowed significantly. The loss of momentum was visible in areas such as the rule of law, control of corruption, regulatory quality and government effectiveness. Policy work was identified as a major priority for the EBRD.

In January 2014, the Bank approved an initiative to help reinvigorate transition – the Investment Climate and Governance Initiative (ICGI). It designs tailored country programmes to strengthen the economic governance framework and promote a level playing field for private business. A key element has been enhancing public-private dialogue, for example through investment councils and business ombudsmen, an area where the EBRD is uniquely positioned to make a difference.

The ICGI aims to enhance transparency in business reporting and to streamline regulation to reduce the administrative burden on firms. It targets the enforcement system by enhancing both the commercial courts and through the development of alternative mechanisms for dispute resolution amongst firms and between firms and the state.

The initiative draws together work carried out by different teams so that the whole will be greater than the sum of the parts. The ICGI also engages institutional partners such as the European Union, other international financial institutions and intergovernmental organisations, civil society and the business community.

One element is the Anti-Corruption Initiative agreed in May 2014 for Ukraine, a key country for the Bank, by international and Ukrainian organisations. The Bank has devised a structure for the Business Ombudsman office there, which is led by former EU tax commissioner Algirdas Šemeta. Drawing on this, the ICGI team has developed a template that can be deployed in other countries. Several countries have already asked the Bank to help set up similar institutions, recognising the impact this can have on the business environment.