Business Environment Reforms in Fragile and Conflict-Affected Situations: What Works and Why? Tania Ghossein; Ahmed Nauraiz Rana 1 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Editing: Susan Boulanger Cover design and layout: 2 Authors Tania Ghossein, Senior Private Sector Specialist Ahmed Nauraiz Rana, Consultant - Economist Acknowledgements This note was prepared by Tania Ghossein and Ahmed Nauraiz Rana under the technical guidance of Sylvia Solf (Global Lead - Business Regulation) and Asya Akhlaque (Practice Manager, Investment Climate Unit). The team is grateful for the contribution and inputs from Andreja Marusic, Aris Molfetas-Lygkiaris and Iulia Cojocaru (Country Case Study – West Bank and Gaza territories), Lars Grava and Taneem Ahad (Country Case Study – Somalia), Nneka Ekwuozor (Country Case Study – Nigeria), Goran Vranic (Regulatory Technology), Gharam Alkastalani Dexter and Souad Adnane (Gender Equity). The note benefited from the constructive comments of the following peer reviewers: Alessio Zanelli (Senior Private Sector Specialist), Besart Avdiu (Economist), Joanna Kata-Blackman (Global Lead for Fragile Countries, International Finance Corporation), and Nadia Fernanda Piffaretti (Senior Economist). 3 Table of Contents Acronyms ...................................................................................................................................................... 6 Executive Summary....................................................................................................................................... 7 1 Introduction ............................................................................................................................................. 10 2 Characteristics and Drivers of Fragile and Conflict-Affected Situations .................................................. 12 2.2 Violence and Sub-national Conflicts ................................................................................................. 16 2.3 Poverty and Lack of Economic Inclusion ........................................................................................... 17 2.3.1 Gender inequality ...................................................................................................................... 18 3. Private Sector Development in FCS ........................................................................................................ 18 3.0.1 Environment Reforms ................................................................................................................ 19 3.0.2 Foreign and Local Investment in FCS ......................................................................................... 20 3.1 Barriers to Private Sector Development ........................................................................................... 21 3.1.1 Operational Challenges for the Implementation of BER Programs ........................................... 23 3.1.2 Challenges to Business Environment Reform and Implementation ........................................ 24 4 Business Environment Reform Interventions in Fragile and Conflict-Affected Situations ...................... 26 4.1 How to Implement BER .................................................................................................................... 26 4.1.1 Keeping project design simple, accepting higher costs, and longer timelines .......................... 26 4.1.2 Understanding local context ...................................................................................................... 27 4.1.3 Focusing on fundamental interventions, first ............................................................................ 28 4.1.4 Implementing BER programs in a cluster................................................................................... 28 4.1.5 Ensuring Government buy-in ..................................................................................................... 29 4.2 Elements to Consider for BER in FCS................................................................................................. 30 4.2.1 An in-depth Assessment of Business Environment Constraints (by leveraging specific data) .. 30 4.2.2 Realizing the Limitation(s) of Traditional Approaches to BER ................................................... 31 4.2.3 Leveraging ICT for Regulatory Design, Implementation, and Monitoring & Evaluation (M&E) 32 4.2.4 Encouraging formalization and supporting subsistence firms ................................................... 33 4.3 Business Environment Reform Themes in an FCS context ............................................................... 35 4.3.1 Public-Private Dialogue .............................................................................................................. 35 4 4.3.2 Reform Governance ................................................................................................................... 36 4.3.3 Elite Capture and Leveling the Playing Field .............................................................................. 38 4.3.5 Gender-specific interventions .................................................................................................... 39 5. Country Case Studies .............................................................................................................................. 42 Business Environment Reforms in FCS – Somalia................................................................................... 43 Business Environment Reforms in FCS – Nigeria .................................................................................... 46 Business Environment Reforms in FCS – Lebanon.................................................................................. 50 Business Environment Reforms in FCS – West Bank & Gaza territories ................................................ 55 6. Conclusion ............................................................................................................................................... 60 References .................................................................................................................................................. 60 5 Acronyms BER Business Environment Reforms CAMA Companies and Allied Matters Act DFIs Development Finance Institutions EBES Enabling Business Environment Secretariat FCS Fragility and Conflict-Affected Situations FCV Fragility, Conflict and Violence FDI Foreign Direct Investment GDP Gross Domestic Product GIC Global Investment Competitiveness GIS Geographic Information Systems GNI Gross National Income GVCs Global Value Chains G2B Government to Business IBEP Improving Business Environment Program ICT Information and Communication Technology IEG Independent Evaluation Group IFC International Finance Corporation IFIs International Financial Institutions MDA Ministries Department and Agencies MNCs Multi-National Corporations MoCI Ministry of Commerce and Industry MSMEs Micro, Small and Medium Enterprises M&E Monitoring and Evaluation NAFDAC National Agency for Food and Drug Administration and Control PPD Public-Private Dialogue RegTech Regulatory Technology RRA Risk and Resilience Assessments SDGs Sustainable Development Goals SMEs Small and Medium Enterprises SOEs State Owned Enterprises SON Standard Organization of Nigeria (SON) WBG World Bank Group WDR World Development Report WEF World Economic Forum 6 Executive Summary There are currently 39 fragile states that have been classified by the World Bank as “countries with high levels of institutional and social fragility� and/or “affected by violent conflict.� They are inhabited by almost one billion people, 335 million of whom live in extreme poverty.1 Of deep concern is that the prevalence of fragility and conflict-affected situations (FCS) is on the rise today. In all likelihood, some FCS economies will plunge further into conflict, while other economies currently not in FCS will erupt into conflict of different types including interstate (such as the one ongoing between Ukraine and Russia), and those within a country or subnational region(s). Economies that are suffering from fragility, conflict and violencea (three distinct yet interconnected elements of FCS) confront intractable poverty, and faltering growth – missing out on development objectives by significant margins. As the poverty rate in FCS has increased, the number of poor people in those economies has increased from 180 million to nearly 300 million2 – almost at par with the number of poor in non-FCS economies (which constitute 90 percent of global population). It is estimated that by 2030, two-thirds of the global poor will be concentrated in fragile states. This means that ending extreme poverty requires accelerating gains where poverty has been most intractable: in FCS. By definition, the economies concerned are often characterized by weak institutions and political instability, and lower level of private sector development to promote business-led growth. FCS economies require significant reforms to policy and delivery mechanisms along multiple dimensions to achieve growth and poverty reduction. The private sector can act as a counteracting force to ensuing fragility and conflict and reversing their economic impacts. However, the private sector in FCS economies tends to be small and underdeveloped. Private sector development is difficult due to lack of institutional capacity (and sometimes willingness), political instability, weak enabling environment, and lack of domestic and foreign direct investment (FDI) owing to negative perceptions, in addition to myriad factors which are operational in nature (such as lack of human and/or capital resources). The private sector can be supported in reaching its full potential for growth and job creation by putting in place an enabling business environment that is predictable and transparent, and serves to protect public goods such as health, safety, and the environment. Generally, sound business regulations, policies, and related institutions that facilitate new entry, growth, and exit create a level playing field for all market actors and promote dynamic contestable markets. Rule of law, strong institutions, and secure contractual and property rights encourage investment. A favorable business environment is particularly important in fragile contexts, where the private sector plays a critical role in transitioning countries out of fragility. A favorable business environment is also instrumental in contributing to longer-term resilience against shocks and fosters stronger economic bounce-backs as countries transition out of fragility. a The World Bank Group’s list of Fragility and Conflict-affected Situations (FCS) captures countries affected by fragility and conflict, but not violence (i.e., only violence). 7 Business environment reforms (BER), whether regulatory, institutional, or administrative, therefore aim to improve the overall regulatory quality and effectiveness of the business environment by removing barriers to entry and operation, reducing procedural complexities, and improving economic governance. However, the success of such reform projects in an FCS country is dependent not only on the type of reform and/or intervention, but also on the manner in which the reforms are designed and employed, as well as the differences in political economy, stability, and security across FCS countries. This study seeks to identify and present the types of, and ways in which, BER can contribute toward building of resilient societies and private sector development in countries and sub-national regions grappling with fragility, conflict, and violence. It draws lessons learned from the World Bank’s business regulation-related engagements in Lebanon, Nigeria, West Bank and Gaza, and Somalia (incorporated as country case studies), and complements the lessons learned with in-depth review of literature, and existing project reports such as those by International Finance Corporation (IFC), and Independent Evaluation Group (IEG), evaluating business environment reforms undertaken in FCS countries. The derived findings and recommendations of this study can be leveraged by policymakers and development practitioners to design and implement BER – targeting FCS economies. On how to implement business environment reforms in FCS contexts, the following recommendations can be considered by policymakers as well as the donor community: 1. Understanding the local context to develop an understanding of the major driver(s) of fragility, leveraging tools such as ‘Conflict-Sensitivity Assessments’, ‘Political Economy Analysis’, ‘Do-No- Harm framework’, and ‘Risk and Resilience Assessments’ (RRAs), 2. Focusing on fundamental interventions, first, such as improving G2B services by putting in place more efficient and transparent company registries, land registries, conflict resolutions mechanism, etc., 3. Implementing business environment reforms (BER) in a cluster, and in close succession to build (and leverage) trust with the government, 4. Factoring in (and accepting) higher costs and longer timelines of BER, 5. Ensuring government ownership and aligning projects with national priorities. Additional elements to consider during the design and implementation of BER include: 1. An in-depth assessment of business environment constraints – going beyond tools and diagnostics that may work well in non-FCS settings – leveraging innovative techniques and approaches of collecting data, such as mobile phone survey, geospatial imaging, etc. 2. Realizing the limitation of traditional approaches to BER, given the heterogeneity between FCS and non-FCS countries, 3. Leveraging information and communication technology (ICT) to enact BER and employ monitoring and evaluation (M&E), 4. Encouraging formalization and supporting subsistence firmsb to build greater competitiveness in the economy. b Such as micro-enterprises who do not have the capacity to formalize. 8 And finally, the following reform themes were identified with respect to business environment reforms in FCS countries (or subnational regions): 1. Employing Public-Private Dialogue (PPD) to build trust between different stakeholders and ensure support for meaningful and sustainable reforms, 2. Developing institutional frameworks (such as those that improve cross-institutional coordination, remove bureaucratic redundancies, and ensure greater accountability and transparency) and focus on strengthening institutions (improving governance and service delivery), 3. Focusing on competition-enhancing reforms which can serve to counteract elite capture and improve the level playing field for private sector operators (to avoid risks of instability, such reforms will take into account causes and drivers of fragility and be informed by RRAs and other available diagnostics), 4. Designing and implementing gender-specific interventions given that women are affected disproportionately by conflict-related violence and its aftermath. 9 1 Introduction Fragile and Conflict-Affected Situations (FCS) is one of the major threats to sustainable growth making low-income, as well as middle-income countries prone to a cycle of fragility. Preventing and mitigating the challenges associated with FCS is central to achieving the Sustainable Development Goals (SDGs) and the World Bank Group’s (WBG) twin goals of ending extreme poverty and promoting shared prosperity. A state of fragility is characterized by deep governance issues and institutional weakness, and violent conflict is characterized by active conflict culminating into loss of life. Economies in FCS suffer high poverty rates and have difficulty reducing them. Deteriorating macroeconomic conditions, such as high rates of inflation or unemployment tend to signal the impact of fragility on a broader economic scale. Similarly, a weak private sector – product of continued fragility and conflict - signals deteriorating (or non-conducive) business enabling environment. The incidence of FCS has only increased in recent years and is expected to further exacerbate. Old conflicts remain unresolved, while new ones continue to erupt, such as the ongoing one between Russia and Ukraine. By 2030, about two-thirds of the world’s poor will be concentrated in fragile states as illustrated in Figure 1.3 c Despite the unique differences with respect to local and or regional contexts, states engulfed in an environment of fragility, conflict or violence tend to exhibit common characteristics which include but are not limited to: 4 • social conflict and excluded groups, • poor institutions and services, • inadequate infrastructure and government and firm capabilities, • environmental and social issues, • limited and undiversified private sectors, and • low levels of trade and per capita incomed. Covid-19 has further exacerbated fragility and other conditions that tend to aggravate fragility and conflict. Amplifying the pressure on already-stressed health systems, the covid-19 crisis has deepened economic fragilities with countries experiencing their worst recession in five decades. As per the World Bank’s estimates, the covid-19 crisis has pushed an additional 18 – 29 million people living under FCS into extreme poverty,5 owing to supply-chain disruptions, permanent business closures, and layoffs, among other reasons. In light of existing and evolving conditions, private sector-led growth and development can help reverse the economic impact of the covid-19 pandemic and serve as a counteracting force to ensuing fragility, conflict, and violence. However, the private sector in most FCS economies is weak and underdeveloped, dominated by the presence of state-owned enterprises (SOEs) and high informality. c This statement precedes the Ukraine-Russian conflict. d Imperative to note that fragility and violent conflict have also been increasing in middle-income countries and are not exclusive to low-income or poor countries, only. 10 The challenges faced by the private sector are much amplified in FCS in comparison to countries or regions classified as non-FCS. These challenges include – among others – limited investment inflows, lack of investor and entrepreneur confidence, a non-conducive investment climate including a weak institutional capacity, and volatile and highly uncertain environments. Operating in an environment of fragility and conflict, private sector firms tend to struggle and underperform, often at times downsizing and reducing the number of employees – further exacerbating economic instability. FCS economies also tend to suffer from misallocation of labor across firms and from production to protection. The loss due to protection effort is substantial and patterns of state protection at the micro level can have a profound impact on aggregate output losses. Lebanon, for instance, a country which is currently amid one of the worst economic crises since the 19th century, experienced a drop of 11.1 percent in firms’ real sales and a drop of almost 4 percent in employment, annually, between 2016 and 2019. The persistent state, regional and national conflict, together with high levels of institutional fragility are considered among the major causes of Lebanon’s economic situation. Figure 1: Global Population living under FCS Source: World Bank 2020.6 Governments across majority FCS economies, lack the capacity (and in many instances, the legitimacy) to deliver jobs, effective public services, and opportunities that firms and individuals need. This makes it challenging for the private sector to reach its full potential for growth and job creation. Therefore, among other interventions to strengthen the private sector, such as developing the financial sector or promoting sustainable infrastructure, creating an enabling environment – characterized by predictable and transparent regulatory environment, good governance, diversified economy, accountability, low levels of corruption – can support business-led growth and serve to break free from the “fragility trap�.7 11 Additionally, given the lack of governance and institutional capability and structures, building trust, security and strong institutions serves to ensure long-term stability. It is imperative to note that BER are not substitutes to interventions at the micro-level (especially ones that could provide direct support to vulnerable firms in fragile context and/or humanitarian assistance) but are rather complementary to ensure long-term and sustainable success. This study focuses on the design and implementation of business environment reforms in the context of FCS economies and seeks to answer how business environment reforms can contribute to the building of stable and resilient societies through the development of a vibrant private sector. Furthermore, this study focuses on the lessons that are learned with respect to the WBG’s business regulation-related engagements in Lebanon, Nigeria, Palestine, and Somalia. It aims to leverage the lessons learned to better identify solutions and reforms that have worked in FCS, and distill trends, factors, and recommendations for more impactful business regulatory reforms which can be leveraged by policymakers and development practitioners. 2 Characteristics and Drivers of Fragile and Conflict-Affected Situations There are now more violent conflicts globally than at any time in the past 30 years.8 Simultaneously the world is facing the largest forced displacement crisis ever recorded, with more than 6 million who were forced to flee their homes these past weeks due to the Ukraine – Russia conflict.9 Rising inequality, lack of resources and economic opportunities, discrimination, and exclusion are fueling grievances and perceptions of injustice. Climate change, demographic change, migration, digital transformation, illicit financial flows, and violent extremism are often interconnected, with effects that transcend borders.10 These factors can increase vulnerability to shocks and crises and create regional spillovers. They can cause lasting and devastating impacts, especially on women, children, youth, and people with disabilities, that are likely to be felt for generations. In view of such adverse and deteriorating circumstances, FCS tend to suffer negative and lasting economic ramifications that can even outlive the conflict situations, and in many instances erode the progress made in terms of socio-economic growth and eradicating poverty. Causes of fragility and conflict are deep-rooted and the result of tensions that evolve over years – decades, and sometimes even transcend generations. However, many times, the economic impact is sudden and often triggers a multitude of problems (social, political). Their nature of FCS varies across countries (or subnational regions) and is driven by distinct factors such as ethnic fractions, long periods of economic turmoil, modes of governance (such as authoritarianism or military-rule), among other. Policy makers, therefore, need to be aware of these distinct factors and characteristics for the design of policy interventions. A conflict situation arising due to distinct ethnic fractions, for instance, may call for the need for establishing trust between stakeholders, before implementing any actionable solution. Policies and reforms – including those that focus on creating and improving the business enabling environment – should incorporate tools such as conflict sensitivity (Box 1) and political economy analysis (Box 2) to understand and identify the context of fragility. By doing so development practitioners and agencies can create reforms that can target sociocultural constraints, address challenges to private sector development and influence the behavior of public and private stakeholders (such as government and business entities) to accept and comply with (newly introduced) business regulations. 12 The risks facing the private sector also vary across FCS economies, affecting not only investors’ decisions but also the scope and the depth of necessary business environment reforms. Along the so-called fragility chain, conflict-affected situations include territories under severe risk of conflict, others experiencing active conflicts, and states in post-conflict transitions.11 Some drives of fragility and conflict are more prominent than others and tend to exacerbate underlying issues more aggressively and actively, as captured in the following sub-sections. It is important to note that many of these issues are both the cause and effect of FCS, such that they can interchangeably be considered as both drivers as well as characterizing features of fragility and conflict. To help differentiate the approaches, policies, and instruments that may be adopted when pursuing engagements in FCS, distinctions between countries can be made based on the nature and severity of the issues they face. Countries (or subnational regions) with weak institutions and/or governments tend to amplify the grounds for institutional and social fragility. 13 Box 1: What is Conflict-Sensitivity12 Conflict sensitivity is an approach adopted to ensure that the designed intervention mitigates unintended negative effects and does not contribute to the conflict, but rather, strengthens the possibility for peace and stability. It is an overall approach which is employed to understand and identify how an intervention would affect the context in which it is implemented and takes measure at all stages of design and implementation. It assesses the two-way interaction between an intervention and the context, the findings of which are leveraged to make adjustments to ensure that the interventions “does no harm.� The approach encompasses the following: 1. Understanding the conflict and context, including conflict actors, key driving issues and dynamics 2. Understanding the interaction between the key elements of the reform/intervention and the key elements of conflict (context). 3. Adapting and creating strategic choices (including management and coordination decisions) during various stages of the reform/intervention. 14 Box 2: What is Political Economy Analysis (PEA)13 Crucial distinguishing factors for whether reforms/interventions are successful is how incentives and constraints shape the willingness and ability of national or local elites to act in pursuit of development goals. Political incentives are frequently at odds with a technocratic approach to development. Given this challenge, there arises a need to better understand stakeholder incentives, and answer questions such as ‘What is blocking reforms in other places, and what could be done about it?’ The premise of PEA for development effectiveness is that it is important to understand how such political incentives shape decisions and to build an awareness of political constraints—as well as opportunities—into the provision of advice and development engagement. Political economy analysis (PEA) helps complement the design and implementation of a reform/intervention by clarifying and presenting the prevailing political and economic processes in the society – specifically, the incentives, relationships, and distribution and contestation of power between different groups and individuals. PEA can support politically feasible and therefore more effective reforms by setting realistic expectations of what can be achieved, over what timescale, and the risks involved. As the following figure illustrates, PEA approach broadly comprises three steps: 1. Identifying a specific development challenge, where technical analysis and engagement is required. 2. Analyzing why the observed, dysfunctional patterns are present, that is, the political economy drivers. 3. Identifying ways forward, including how to initiate change (considering political economy constraints). 15 Fragility is strongly associated with governments’ failure to fulfill the basic needs of their citizens – whether through lack of capacity or intent. This further amplifies the potential for adverse outcomes dues to the absence of fundamental structures that ensure stability. Over the past decade, nearly 30 countries have shown chronic fragility – with majority of them being low-income countries. Where institutions and governments are weak and unable to manage the stresses or absorb economic shocks (such as the one caused by the ongoing Covid-19 pandemic), the risks to the stability of states and societies often increase. 2.2 Violence and Sub-national Conflicts The proliferation of non-state armed groups, globally, is linked to rise in interstate conflicts which many times transform into extreme violence. In the last one decade, the number of major violent conflict events has tripled, globally. Findings reveal that violent conflicts span country income levels, highlighting that they violence is not a problem that only low-income countries face. Many of the current subnational conflicts are taking place in middle-income countries with relatively strong institutional capacity, regular elections, and capable security forces. Armed conflicts and high levels of interpersonal violence heighten vulnerabilities, including gender-based violence, food insecurity and forced displacement. Since World War II, interstate conflict has fallen sharply, but intrastate conflicts and interpersonal violence have risen.14 Despite fewer wars between nations, global safety and security indicators have deteriorated over the past decade.15 In many FCS, poverty rates appear to be rising, stagnating, or at best declining slowly. And the conditions of FCS are spreading, casting their shadow over a growing number of countries and an increasing share of the global population. The number of people living in close proximity to conflict zones has more than doubled in the past decade (Figure 2), driven by wars in the Ukraine, Syria and Yemen that alone have affected millions of people. The World Development Report (WDR) 2011 on Conflict, Security and Development advocates prioritizing “ending and preventing violence� as the main impact that all interventions in fragile and conflict-affected situations should aim to achieve.16 Armed by research and analysis, the WDR 2011 identified three key outcomes as essential to achieving this ultimate objective: security, justice, and jobs. Figure 2: The World’s Populations Living in Proximity to Conflict Deaths Has Doubled in 10 Yearse e The figure shows the world’s population living within 60 kilometers of a major conflict event, defined as 25 or more battle-related deaths in the year in question. In relative terms, the share of the world’s population living in close proximity to conflict has increased from 1.5 percent in 2007 to 3.0 percent in 2017. 16 Source: UCDP 2019; LandScan 2012 2.3 Poverty and Lack of Economic Inclusion Poverty levels often tend to coincide with the presence of fragility and conflict. There is a significant overlap between low-income countries and those that are categorized as FCVf (Fragility, Conflict and Violence) with almost 70 percent of low-income countries being classified as such by the World Bank. In addition to being a direct or sometimes indirect function of poverty, different forms of FCS are increasingly linked with lack of political and economic inclusion and equality as well as grievances and perceptions of injustice – all of which are factors which also tend to dampen a country’s investment climate. FCS countries are often characterized by divisions within the society, and skewed power structures. As a result, socioeconomic dividends are not equally distributed among all segments of the population. Lack of economic opportunities, high unemployment, and a weak business enabling environment all feed into FCS, exacerbating other FCS drivers as well. Among other factors, poverty is increasingly linked to FCS, due to insecurity and lack of institutional capacity.17 Government institutions may not be able to provide adequate services, and informal institutions— often non-inclusive, i.e., available to only certain segments of society—may take a large role in managing daily life and commerce. Poverty is often substantial, and people lack formal employment – leading to the preservation and growth of the informal economy. f The term FCV is used by the World Bank Group and refers to fragility, conflict, and violence – conditions that affect countries and/or subnational areas. By contrast FCS refers to countries or territories. 17 Even countries that are categorized at risk of conflict suffer substantial economic marginalization, political polarization and external stresses which heightened uncertainty and point the needs for prevention of conflict-related situations, including through enabling environment and increased investment. Poverty, and inequality are also associated with increases in a range of illicit activities, including trafficking, corruption, and illicit financial flows – all of which exacerbate FCV-related challenges.18 2.3.1 Gender inequality Gender inequality projects another form of lack of social inclusion and is an aggravating factor in fragile situations. Gender inequality tends to be magnified under FCS where regressive gender norms, including those related to patriarchal structures (such as workplace biases), and higher risk of gender-based violence, including sexual exploitation and abuse, combine with lack of access to health, education, and employment. Only four out of 10 women in settings marked by fragility, conflict and/or violence are in formal employment, a figure that drops to two in 10 in protracted conflicts,19 leaving the majority more vulnerable to economic hardship and also excluded from social protection measures targeted at workers. In addition to the common issues relation to the gender impacts of conflicts, there are specific characteristics in different countries which related to the overlap of conflict and gender dimensions. In Sri Lanka, for instance, majority of the approximately 90,00020 war widows in the North and the East remain without access to adequate resources, housing, or vocational skills and are often denied land rights and exposed to sexual violence and trafficking21. Women�headed households in FCS, have not benefited proportionally and are vulnerable to economic shocks. Because the share of women-headed households tends to increase during violence and conflict, promoting economic opportunities for women is key. Findings from focus group discussions in Indonesia (BRA�KDP project) suggest that women-headed households tend to be more actively engaged than other women in attending community meetings and participating actively since they are less likely to be represented by men. 3. Private Sector Development in FCS The development of the private sector is key for helping FCS economies deal with the socioeconomic impacts of fragility, conflict, and violent (and their adverse effects on development and poverty levels). The private sector is the engine for growth and employment and contributes to trust and stability by building functioning markets and trading relationships. A diverse and vibrant private sector also helps in embedding greater resilience through sectoral diversification and value chain integration; and greater inclusivity by adopting inclusive business models and improving access to goods, services, and markets to underserved groups or communities – moving the country toward shared prosperity.22 Inclusivity and shared prosperity can serve to heal tensions and/or avoid the breakout of conflict by mitigating grievances stemming from economic exclusion. 23 It is imperative to recognize that the private sector is diverse and represents a range of interests. Driven by incentives to optimize economic and financial gains, the private sector plays a leading role in providing 18 essential goods and services, such as food, medicine, and other basic supplies that are desperately needed in countries with limited economic activity, such as post-conflict or acutely low-income economies. Private financing enables critical infrastructure—such as roads, electricity, and sanitation—through public-private partnerships. The private sector also delivers revenue stream (in the form of tax revenue generation) which subsequently enables the government to provide public services to its citizens. However, the private sector in most FCS is underdeveloped due to instability, weak enabling environment, and lack of local and foreign direct investment (FDI). Generally, it comprises of largely informal firms, with poor capabilities and lack of access to finance. It is often prey to elite capture and constrained by lack of security and rule of law – making the business environment unattractive for investment and or entrepreneurial ventures. All of these factors imply that the prospects for private-sector or business-led growth are lower for countries and/or subnational areas under FCS. Furthermore, state-owned enterprises (SOEs) tend to dominate the business environment, and infrastructure and supply chains are typically inadequate in many FCS economies.24 The dominance of SOEs enables state capture and creates an imbalance where certain social groups are favored market actors. The presence of state, through SOEs, acts as a barrier to contestable markets and creates an unequal field for private businesses. Such a scenario tends to lower investment towards productivity- enhancing economic activity and deters private sector development. Additionally, as previously stated institutions are weak and government capacity is low which implies a sub-par legal and regulatory framework. To this end, improving the investment climate and economic governance serve as an avenue for private sector development. Economies that find themselves under FCS tend to rank low in investment climate indicators, especially quality of infrastructure, market size, and institutional trust.25 A difficult and unfavorable business environment coupled with an increased risk profile of countries engulfed in FCS deter both local and foreign investors, as well as traditional lenders (primarily banks) from investing. To unlock private sector- led growth it is therefore essential to create a business environment which enables investees and entrepreneurs – across different size industries – to operate effectively and securely. Jobs and private investment are much needed to ensure peace and stability in a setting marred by conflict and violence.26 3.0.1 Environment Reforms Business environment reforms are interventionsg that serve to improve the overall regulatory quality and effectiveness of the business environment. These include addressing issues identified in firm surveys such as the WBG enterprise surveys, and factors underlying country performance in global benchmarking products such as the Global Competitiveness Index or the Product Market Regulation Indicators. These reforms help remediate key constraints faced by businesses throughout their life cycle and address gender gaps in economic and property rights. Business environment reforms help private enterprises (and broadly the private sector) by (i) reducing business costs, (ii) reducing risks and uncertainty, and (iii) increasing competitive pressures. However, g Interventions can be both micro or macro in nature. 19 private enterprises face severe conditions in fragile and conflict-affected situations, characterized as the ‘combination of exposure to risk (of negative events) and insufficient coping capacity of the state, system and/or communities to manage, absorb or mitigate those risks.’27 Sound business regulations, policies, and related institutions – created in a manner to address the distinct challenges in the context of the FCS can facilitate new entry, growth and exit across distinct industries and sectors. Similarly, rule of law, strong institutions, and secure contractual and property rights encourage investment. Effective business regulations, therefore, promote entrepreneurship, investment, and competitiveness, and help address the country’s legal and institutional deficiencies. A favorable business environment is particularly important in fragile contexts where the private sector plays a critical role in transitioning countries out of fragility.28 Business environment reforms are advantageous in conflictive settings because they aim at creating a level playing field for all businesses (in contrast to selective promotional tools) and promote dynamic contestable markets.29 In a post-crisis context, it is also instrumental in helping firms adjust, thus contributing to longer-term resilience towards shocks and stronger economic bounce-backs.30 3.0.2 Foreign and Local Investment in FCS Foreign investment in the form of loans or equity is an important source of private sector growth in low- and middle-income countries. However, given the weak economic fundamentals and fragility, many international investors do not consider FCS as viable hosts. In South Sudan, the inflow of foreign direct investment (FDI) as share of gross national income (GNI) was virtually zero until 2019,31 highlighting the difficulty as well as the reluctance of investors to invest in fragile and conflict-ridden states. It was only after the ceasefire in 2018, that South Sudan received a new wave of investments, but that too were concentrated in the oil sector – a trend which is often witnessed: concentration of FDI in certain high-rent sectors related to the natural capital, which may not contribute as much toward economic diversification or the creation of a dynamic private sector. Also, imperative to note that overall, FCS receive just one percent of global FDI, or one-fifth of the global per capita average.32 Investment opportunities in countries (or subnational areas) engulfed in fragility and conflict are associated with existing industrial structures, natural resources, skills, and government capacity that enables the investment climate. Key elements of business environment reforms should focus on reducing risks to investors while maximizing investment opportunities and rewards. Moreover, results of the 2019 Global Investment Competitiveness (GIC) Survey show that Investors rank countries’ legal and regulatory environments as one of the top three factors shaping investment decisions (Figure 3), confirming the importance of transparent, predictable regulatory environments to investors. Additionally, as business environment reforms inadvertently reduce business costs, firms can increase profits which may be further reinvested to increase market share, output and employment. Figure 3: Legal and regulatory environment is the third most-cited investment decision factorh h Findings from the Global Investment Competitiveness report are not FCS specific. 20 Source: Global Investment Competitiveness Report 2019/2020. 3.1 Barriers to Private Sector Development Promoting private sector development and private investment in high-risk FCS remains a major challenge. Findings from evaluations, such as those by the World Bank Group’s Independent Evaluation Group (IEG) emphasize the challenges related to leveraging the private sector for sustainable development in FCS countries, including investing in difficult operating environments with specific fragility risks (such as security, weak capacity of clients and governments), different characteristics of the private sectors and potential project sponsors, distinct features of investment opportunities, and higher cost of doing business. Additionally, key knowledge gap remains concerning approaches and instruments which are most effective in engaging the private sector in FCS countries. Several global data sources document what businesses and investors perceive to be the biggest obstacles hindering market entry business-led growth, and the ability (of investors) to expand their investment in a country (or subnational region) marked by fragility and conflict. Surveys that help develop and analyze the understanding of market conditions and risks facing the private sector in fragile situations include but are not limited to the World Bank Group’s Enterprise Survey that presents country-specific data including in some FCS countries, and the World Economic Forum’s (WEF) Executive Opinion Survey. 21 Drawing on survey results from the WEF Executive Opinion Survey, Figure 4 below, maps average perceptions on the intensity of constraints (i.e., how disruptive market conditions can be for business), and the difference in averages between FCS and non-FCS low-income countries to determine how FCS- specific a problem is (i.e., how distinct the constraints are to fragility and conflict rather than a specific level of development). Judicial independence, and property rights, for instance, are two prominent institutional challenges to private sector development that are considered severe and specific to FCS. Figure 4: Perceptions on Severity and FCS-Specificity of Challenges, 2018 Source: Generating Private Investment in Fragile and Conflict-affected Areas Impediments to private sector development in the context of FCS can be categorized under two groups: (i) Operational constraints, and (ii) (Non-conducive) business environment reform and implementation Operational constraints include but are not limited to lack of human and/or capital resources, travel constraints due to security environment, and limited investment and funds necessary to achieve the desired reform. Challenges that relate to the enabling environment are primarily those that impact businesses through their lifecycle. These include non-optimal (or below par) regulatory framework, gaps in reform implementation, judicial independence, and public governance. It is imperative to analyze these distinct challenges to understand the scope for business environment reforms and related government action. 22 3.1.1 Operational Challenges for the Implementation of BER Programs Implementing a project aimed at private sector development or a micro-intervention targeted toward improving an area of business environment (such as a licensing reform or setting up a one-stop-shop) in an FCS country is more expensive. The more challenging the environment, the more costly it tends to be. This is largely due to higher security costs and the need to mobilize specialists that can remain on the ground to support implementation. For example, an analysis of IFC advisory projects implemented by the International Financial Corporation in Somalia shows that the cost to mobilize consultants increased project overhead costs by 25 percent; this was due to increased security costs and increased labor costs compared to a non-FCS environment. Fragility, conflict and/or violence also affects project timelines. Projects in countries with higher fragility take longer to yield results. FCS-related challenges cause disruptions and delays in project implementation, while in comparison a poor investment climate (in a non-FCS country) does not necessarily affect the length of project implementation. In a West Bank and Gaza investment in 2009, for instance, substantial delays had to be encountered (from initiating the project to stages of operation) owing to security issues and authorization required in Israeli-controlled areas. Figure 5: Average Project Length and Cost by Fragility Cluster 23 Note: The circled figures indicate that project timelines are required in countries where fragility is worse than investment climate Source: EFI SSA Advisory Services Project Data, 2002 - 2020 3.1.2 Challenges to Business Environment Reform and Implementation Inadequate governance implying issues with effective service delivery and reform implementation and enforcement, rent-seeking practices, and lack of capacity continues to be a major challenge in FCS. Therefore, improving, or in some instances creating, the enabling environment to support private sector development in an FCS country can be time-consuming, as it requires and is contingent upon a strong commitment and implementation capacity from the government. Due to limited capacity and/or weak enforcement, governments may be more likely to pursue a quicker public sector solution or be tempted to move forward without a buy-in for political or expediency reasons, resulting in limited support for the private sector and associated longer-term permanent solutions. The quality of public governance is also a major obstacle in implementing business environment reforms. Issues of irregular payments and bribes, propagation of existing status-quo for instance redundant and cost-intensive non-tech solutions, weak public trust in politicians, and favoritism in decision making by government officials are perceived as severe obstacles.33 Institutions in FCS are weaki, and this weakness is a common characteristic across FCS – especially a strong feature of states in post-conflict or frequent conflict-to-peace transitions34 – which continues to persist over the years. Data findings and empirical i Imperative to note that this is note a rule. There are countries categorized as FCS which have stronger institutions such as Nigeria, Ethiopia, Sudan, Kenya, Ukraine, etc.). The causes and drivers of fragility and conflict tend to greatly vary. 24 evidence point toward a strong correlation between countries that fare low on government effectiveness and are categorized as fragile as per Fragile State Index (Figure 6). Such an underlying condition makes it imperative for policy makers to considers intervention aimed at enhancing governance while implementing business environment reforms in an FCS country. Closely linked to weak institutions are corrupt practices and rent-seeking behavior of government officials which not only impacts the functioning of service delivery but also erodes public trust. Figure 6: Fragility and government effectivenessj Source: Worldwide Governance Indicators, World Bank; Fragile States Index, the Fund for Peace. Despite those challenges, many fragile and conflict-affected states have been able to improve their business environment in a number of regulatory areas, which encompass business entry, access to credit and finance, tax payments and structures, contract enforcements, real estate transfers and land administration, construction permitting, and cross-border trade. In addition to improving the overall business environment, legal, regulatory, procedural, and institutional reforms have served to enhance a country’s investment competitiveness - reducing the risk investors face by improving the transparency and discretion in regulatory implementation. j Note: Government effectiveness is an aggregate indicator that reflects perceptions of the quality of public services, the quality of the civil service and its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. This is part of the Worldwide Governance Indicators dataset. 25 In Nigeria, for example, the establishment of the enabling business environment secretariat (EBES) helped coordinate the reform effort by working with the ministries department and agencies (MDAs) of government in implementing the recommendations provided by the World Bank Group and other development finance institutions (DFIs). This ensured traction of reforms by government and a positive impact on the private sector. In the years since the establishment of EBES, there have been four laws that have been enacted which had positive outcomes on the regulatory environment as well as reducing costs for businesses. The case study below presents further details about the most notable reforms such as the passing of the Companies and Allied Matters Act (CAMA) in August 2020, a foundational legislation which introduced provisions considerably improving the registration, constitution, and operation of all businesses nationwide. 4 Business Environment Reform Interventions in Fragile and Conflict- Affected Situations Business environment reforms that dismantle barriers include interventions such regulatory simplification, reduction in costs, time, procedural complexity, digitizing and redesigning G2B service delivery, and adopting risk-based approaches. However, the success of such reforms in an FCS country is dependent not only on the type of reform and/or intervention, but also on the manner in which the reforms are designed and employed. Given the differences in political economy, stability, and historical underpinnings between FCS countries and non-FCS countries, it is imperative to consider additional elements and acknowledge the limitation of typical business environment reforms (that tend to work in non-FCS countries). This section delves into the nuances between the ways, types, and themes of business environment reforms which are more likely to work in the context of an FCS country or sub-national region. 4.1 How to Implement BER 4.1.1 Keeping project design simple, accepting higher costs, and longer timelines As per the challenges identified above – higher costs, longer timelines, and increased government buy-in correlated with the success of projects implemented in FCV-settings. World Bank Group’s engagement in FCS and associated data shows that higher spend in combination with longer project timelines leads to more successful and better project outcomes in FCS settings. Given the nature of many BER (such as setting up commercial courts and magistrate to improve contract enforcement), it takes longer on average for results and benefits to become visible compared to non-BER projects, thus practitioners should factor- in and accept long timelines for BER-related outcomes to realize success. Figure 7: Average Implementation Time of Project by Business Environment Reform Area 26 Source: World Bank Sub-Sharan Africa Advisory Services Project Data, 2002-2020 4.1.2 Understanding local context A deep understanding of the local context is necessary for successful realization of reforms and interventions. This covers all aspects of implementation ranging from capturing local business needs and mitigating operational risks to avoiding unintentional consequences. Any business environment reform strategy requires proper sequencing and prioritizing and must consider the country’s conflict dynamics, economic opportunity, institutional capacity, and willingness to reform. The strategy must be implemented in a balanced way to secure short-term gains while building the momentum for deep institutional transformation. The approach of undertaking a deep-dive into FCS-drivers and the local context ties directly with employing a ‘conflict sensitivity’ and ‘conflict-typology’ approach. This implies understanding the context and environment in which companies operate; becoming aware of potential positive and negative effects that reform policies may have on the conflict environment; and adopting the necessary steps to avoid causing or worsening the conflict. It is imperative to be aware of the political economy, as well as of the drivers of FCS and how they affect the local private sector when (i) designing and implementing reforms, 27 and (ii) finding the appropriate entry point for intervention, to ensure that reforms and interventions employ ‘Do-No-Harm’k 35 approach and do not exacerbate the gap between distinct groups in the society. 4.1.3 Focusing on fundamental interventions, first The World Bank Group’s experience in implementing BER in FCS in Sub-Saharan Africa reveals that sequencing typically begins with foundational enabling-environment projects targeting the entire economy (such as those focusing on business registration, construction permits, and property registration) which serve as “low-hanging fruit� and have been implemented across different regions and settings.36 Sector-specific projects which aim to improve access to business or investment in target sectors, such as the financial-sectorl may be more complex to implement. For instance, building a credit reporting system would be contingent upon a working legal system and effective business registry. Similarly, a project on agricultural financing or rural inclusion would more likely be successful if there exists in place a system for accurate land titling. This highlights the need for and importance of developing the broader business enabling environment by addressing horizontal constraints rather than starting with sector-specific reforms or interventions. However, it is imperative to note that this is not a firm rule. Sector specific and transactional efforts can also happen in parallel. Rather, some contexts may likely be more suited for sector-specific intervention. Similarly, it is important to identify and narrow the type (and size) of firms which are most vulnerable to ensuing fragility and conflict. The WBG’s engagement in FCS has highlighted the need to focus particularly on the needs and requirements of SMEs as they are not large enough to afford private protection (such as the provision of private legal expertise), but not small enough to operate “below the radar� and not be exploited from government and non-government entities (especially through violence). Such firms tend to face the risk of predation and consequently reduce investment and (mis)allocate labor to the provision of security, suffering output losses as a result.37 It is therefore advisable for development practitioners and policy makers to factor in the challenges that SMEs face when designing and implementing BER. 4.1.4 Implementing BER programs in a cluster Based on project data from the WBG’s engagement in FCS countries between 2002 and 2020, it can be identified that success was primarily accrued in projects that were implemented in a cluster. Adopting a cluster approach refers to implementing projects or programs in close succession leads and has been found to realize greater success.m Finding an entry point (i.e., a specific project or area for business reform) and following the engagement with other reform programs is indicative of greater trust and better k The approach directs avoiding premature or poorly-thought-out reforms that can do more harm than good--notably, steps that overwhelm a society's capacity to absorb aid and put it to effective use, and that risk pushing fragile situations and societies into particular kinds of corruption that are severely disruptive. It is a tool for mapping the interactions of assistance and conflict and can be used to plan, monitor, and evaluate both humanitarian and development assistance programs. l Financial-sector projects include but are not limited to developing financial infrastructure and institutions, such as credit infrastructure, SME finance, and securities markets; and easing access to finance processes, and adopting digital tech solutions. m While there is strong correlation, the evidence and direction of causation remains weak (for instance, were more projects implemented because of permissiveness or did more projects drive improvement) 28 relationship between the development agency and the country government. Such a relationship can be leveraged to ensure government buy-in (a necessary factor for success in FCS context). Also, concentrating resources (i.e., staff on the ground and funding) for use on multiple projects over a limited time period within a given FCS area is more likely to optimize economies of scale and lead to better outcomes. This can also be perceived as a logical deduction given that one of the challenges that FCS- settings pose is the lack of quality human resources as highlighted in the previous section. 4.1.5 Ensuring Government buy-in Successful projects have also been found to have greater government buy-in, which may be in the form of shared dollar cost or in-kind commitments. Naturally, when there is greater financial buy-in by the government, the governments become more committed and involved in ensuring successful project outcomes. Given that governments are the primary clients for projects that involve creating or strengthening the business enabling environment, it is important to align programs with national priorities, particularly ones that sustain the development of the private sector in light of fragility. This course of action helps secure buy-in from government and national stakeholders and ensure that the international development community and governments are both geared towards the same overarching goals. In Malawi for instance, the WBG team aligned its program with the national priority to develop a credit reporting system to expand access to finance. The team working on the credit Reference Bureau Act and subsequent amendments not only gained the government’s approval and applaud but was also able to build sustained trust from the private sector. Conversely, lesson learned from the World Bank’s engagement in Nigeria reveals that a business reform program is only as successful as the principal (i.e., head of relevant agency) allows it to be. Reforms to improve the operational processes (such as movement of goods and people within the country easier) at the ports (airport and seaport) involved agencies such as the Nigerian Customs Service, Standard Organization of Nigeria (SON) and National Agency for Food and Drug Administration and Control (NAFDAC) and the Trademarks Patent and Designs Registry (Commercial Law Department) and were far more challenging than ease of doing business reforms, due to lack of political support and will from concerned agencies and principals. In addition to securing government buy-in, it is also important to build capacity within the government to enable long-term sustainability of the intervention. For example, in 2015, the WBG’s Investment Climate projects in Zimbabwe on creating a business registry and developing a credit infrastructure were met with success due to the government’s collaborative ability and for being able to provide alternative solutions – ultimately owning the project implementation. It is also important to identify and focus on short-term goals and outputs, while pursuing longer-term outcomes to keep public stakeholder engaged and involved. Early wins can help gain the trust of government stakeholders, which is necessary for pursuing objectives that can take years to realize. WBG experience in Sub-Saharan Africa suggests that many governments are reluctant to commit political or 29 financial capital toward supporting program or agenda without having seen concrete or measurable program results. Government ownership of and responsibility for project success can support successful implementation. Experience from past project implementation have shown that government representatives who have decision making authority and public mandate tend to mobilize the support needed by local government agencies. For example, in the Democratic Republic of Congo, the Prime Minister’s Office drove the Investment Climate reform agenda and its implementation. The endorsement from such an office of authority assisted in speeding up the implementation of the reforms, and the solutions were accepted and adopted at the highest level. However, ensuring such buy-in is politically challenging at times. In many instances, the needed reform solutions contest to the existing status quo. The underlying objective of business environment reforms is to enhance the country’s level of competitiveness and strengthen the private sector. Many FCS economies are characterized by the presence and dominance of SOEs, and governments in such economies may be less receptive to interventions which may challenge the sectoral landscape. 4.2 Elements to Consider for BER in FCS 4.2.1 An in-depth Assessment of Business Environment Constraints (by leveraging specific data) The challenges (addressed in the previous sections) posed by FCS require interventions that are tailored to distinct geographies, histories, and drivers of each setting. Therefore, in order to design BER projects, programs or interventions it is advisable to develop a comprehensive and in-depth understanding of the unique challenges that businesses face. Evaluative mechanisms (ex-ante) should be designed to not only measure the economic impact of reforms but to also gauge the reforms’ ability to support a transition toward peace, stability, and sustainability – thereby counteracting fragility. This can be achieved by incorporating conflict assessments that are designed to assess the political economy, identify the drivers of peace and conflict, and determine the appropriate entry point for agency intervention. Diagnostic instruments such as the World Bank’s Risk and Resilience Assessments, Collaborative for Development Action’s Do-No-Harm Framework can be leveraged to assess the context of conflict and factor in the reform’s result metric. Business environment assessments must be adopted and employed for BER programming, and for driving the reform programmers to connect with humanitarian assistance measures. In this regard the aim should be to identify the most severe constraints to private sector growth, simultaneously focusing on private sector issues that affect the most vulnerable and those affected most by the violence and conflict. While tools and diagnostics that assess a country’s business environment may work well in non-FCS settings, lack of data can make it difficult to identify constraints and barriers that impede private sector growth and contribution in FCS countries or subnational regions. While undoubtedly challenging – especially in countries with ongoing violence and conflict – quality data can be collected and produced by leveraging and adopting the following innovations and techniques38: 30 • Mobile phone surveys offer substantial benefits in specific circumstance and for specific data collection needs to remotely collect high-frequency data from conflict-affected and hard-to-reach areas. For instance, they were used to collect information during the Ebola crisis in Sierra Leone, the drought in Nigeria, Somalia, South Sudan and Yemen, and were used to track the welfare of people displaced by the crisis in northern Mali. Business Pulse surveys39 were also done using mobile phones to collect data in Afghanistan. • Geospatial technology has the potential to change how survey data are collected and has made Geographic Information Systems (GIS)-based sampling approaches accessible to more users. To deal with the absence of sampling frames in the Democratic Republic of Congo and Somalia, satellite images and sophisticated machine learning algorithms were used to estimate population density and demarcate enumeration areas. • Endorsement experiments, list experiments, and behavioral approaches can be used to ask questions about sensitive issues such as loyalty to controversial groups along with how to avoid strategic responses when respondents might expect benefits to be associated with certain answers. For instance, in South Sudan, different sampling approaches were tested in an IDP camp to shed light on their precision. Adopting creative ways to fill data gaps in FCV contexts will not only help inform reforms and priorities but will ensure the reform process is an inclusive one. 4.2.2 Realizing the Limitation(s) of Traditional Approaches to BER Findings from a review conducted by the IEG reveal that traditional business environment reforms in FCS tend to focus mostly on simplification of business licensing, permitting, and administrative barriers. In certain countries, they are complemented by broader investment climate reforms encompassing investment promotion and public-private dialogue.40 While regulatory simplification and removing administrative barriers are good confidence-building signals that can yield early results, it is also important to complement those reforms with other areas such as value chain development, particularly for domestic firms through reforms and processes that ease access to finance and technology, and to deepen institutional reforms (such as privatization). Strengthening legitimate institutions to promote rule of law accord citizens the security, justice, and provision to jobs that is paramount for breaking the cycle of violence.41 However, institutional transformation should adopt a “best-fit� not “best-practices� approach. For instance, FCS countries with stronger institutions, such as some of the middle-income countries affected by conflict, may be able to take on more ambitious institutional transformations at an early stage than other countries affected by conflict may be less likely (or unable) to. There is value in prioritizing simplification of business regulations over revamping and expansion at the early stages of reform in FCS. However, business environment reforms must go well beyond simplification procedures responding to the challenges posed, and characteristics embodied by FCS countries. 31 4.2.3 Leveraging ICT for Regulatory Design, Implementation, and Monitoring & Evaluation (M&E) FCS present many obstacles to accessing remote and insecure areas. Lack of physical field access and awareness of specific needs and dynamics in FCS, exacerbated by the recent COVID-19 pandemic, impedes operational engagement precisely in the areas where development interventions are critically needed. Given these constraints, it is advisable for governments and development actors to employ solutions that are digitally driven and can provide real-time insights into field activities. Integrating information and communications technology (ICT) to BER serves a dual purpose. Firstly, it makes it easier for businesses operating in FCS countries to comply with and benefit from regulation through more agile regulatory design and digitalized G2B processes. Secondly, it helps to systematically enhance monitoring and evaluation (M&E), data collection, as well as real-time risk management in FCS. The former, regulatory technology for private sector development (RegTech) combines possibilities of real-time data and emerging technologies, such as artificial intelligence (AI), for innovative regulatory models and service delivery for businesses and citizens. The approach has three pillars: (1) business data management, (2) agile policy making, and (3) smart service delivery. The latter, enables relevant stakeholders to enhance the accuracy and accountability of M&E, evaluate the impact of relevant reforms, and create customized platforms for remote supervision, real-time operational risk management and coordination across projects and partners – responding to the challenge of inaccessibility posed by FCS to help ‘bring eyes on the ground, where and when we cannot always have feet on the ground.’42 This can be achieved by building the capacity of government agencies and implementing partners to leverage low-cost open-source technology, and simple methods of digital data collection and analysis such as mobile phone survey, and geospatial imaging, etc. Table 1: Three pillar of RegTech Pillar I Pillar II Pillar III Business data management Agile policy making Smart service delivery •Design of integrated data for •AI-supported mapping of •Implementation of a single regulatory delivery, administrative procedures for digital point of contact for minimizing data easy navigation and businesses and investors. requirements from understanding by businesses •Integration of G2B services businesses. using a digital registry of throughout the business life regulations. •Design of investor’s cycle—from entry through promotion databases and use •Analysis and design of operation to exit—for of digital platforms to policies and forward-looking increased regulatory connect businesses to global regulations for seamless, effectiveness and reduced value chains (GVCs). digital regulatory delivery. compliance burden. 32 As a model for enhancing service delivery the World Bank Group supported adopting a new and modern Company’s Act in West Bank and Gaza (published on December 31, 2021). The enactment of the new legal framework is a prerequisite for implementing a digital solution for the Automated Business Registry supported through the World Bank’s Innovative and Private Sector Development operation (IPF). A low- capacity environment requires an innovative and agile approach to developing the new digital solution. As a transitional option, the World Bank team had already supported the Ministry of National Economy in publishing new forms for business registration online, which enabled the commencement of new procedures in April 2022. Similarly, in Kosovo, the World Bank supported the enactment of a new Inspection Law which was published in January 2022. The new Law sets a basis for implementing the new digital platform for inspection management – e-Inspections. Currently, the World Bank’s Kosovo Competitiveness and Export Readiness Project (IPF) is supporting the client government in developing a technical specification for e- Inspections and developing an action plan to set a new General Inspector’s Office under the Prime Minister in August 2022. 4.2.4 Encouraging formalization and supporting subsistence firms One of the major effects of conflict and insecurity in widespread informality. Research shows that weak government enforcement capabilities combined with an adverse business climate increase the costs and reduce the benefits of operating formally43. Indeed, the high perception of lack of government enforcement capabilities is an important factor associated with informality. With these conditions in mind, it is easier to understand the nature of the informal economy in conflict settings. In response to conflict and fragility, high-potential domestic firms tend to impose a self-moratorium and flee the country while smaller firms go informal to avoid harassment or extortion by public authorities.44 The covid-19 pandemic has further exacerbated informality in FCS countries – the economic contraction increasing instability and the risk of closure for smaller firms.45 Such trends and business responses to economic shocks reduce the size of and productivity of economic activities and undermine market development. A large presence of informal activity tends to hold back growth, create unfair competition, and erode formal firms’ market share and resources available to boost productivity, as informal businesses circumvent government regulations on cost and quality assurance (Figure 8). Empirical evidence shows that the labor productivity of informal firms is about one-fourth that of formal firms.46 Moreover, the labor productivity of formal firms that face competition from informal firms is about 75 percent of the average labor productivity of formal firms that do not experience informal competition.47 Informal activity also reduces public revenue due to unpaid taxes which in turn lessens government capacity to provide social protection programs and robust public services, which are particularly important in FCS contexts 33 where trust in government service delivery is eroded. Above-median rates of informality are associated with reduced government revenues as a proportion of gross domestic product (GDP).n 48 Improving the regulatory environment can contribute to the formalization of businesses that have the capacity to transition out of the informal economy. Drivers of informality are generally interlinked. For instance, corruption and lack of trust in public institutions – which are prominent across countries in FCS - are linked with regulatory burden. While these findings are not specific to countries in FCS, however analysis from firm-level surveys reveal that bribery rates increase by 0.03 percentage point for each percentage point increase in the regulatory burden.49 Encouraging formalization and supporting businesses with high-growth potential is therefore a key component of a private sector development strategy in fragile states. Business environment reforms that help economic activity shift to the formal sector in FCS should be considered by relevant stakeholders. Overregulation, lengthy procedures, and high compliance costs throughout the business life cycle may incentivize entrepreneurs to operate informally. Therefore, depending on the degree of fragility, the demand for reform can be as basic as setting up a well-functioning company registration process and introducing appropriate company laws. In other contexts, other incentives to formalization may be needed. However, it is important to note that addressing informality is a complex undertaking. It not only encompasses interventions aimed at formalization but also entails mechanisms to promote the productivity of informal operators. Though a result of market inefficiencies, the informal economy provides substitute an otherwise unavailable income (in the formal economy). Many informal actors, particularly ones that don’t have yet the capacity to exit the shadow economy derive their livelihood from informal activity. While devising policy objectives and interventions, it is therefore imperative to consider the heterogeneity of the informal sector and remember that not all informal firms have the capacity to formalize – making it critical to balance the formalization agenda. Figure 8: Half of firms in developing countries compete directly against informal ones n Ohnsorge and Yu (2021) suggest this may range from five to 12 percentage points. 34 80 70 60 50 40 % of firms 30 20 10 0 High income: Europe & South Asia Middle East & East Asia & Sub-Saharan Latin America OECD Central Asia North Africa Pacific Africa & Caribbean % of firms competing against unregistered or informal firms % of firms identifying practices of competitors in the informal sector as a major constraint Source: Enterprise Surveys – various years. 4.3 Business Environment Reform Themes in an FCS context 4.3.1 Public-Private Dialogue Factors that lead to the emergence and existence of FCS environments are created by both state and non- state actors (in most FCS countries), making it imperative for engagements and interventions to materialize in agreement with both state and non-state actors. BER are most successful when they accurately cover all business segments of a population, including ethnic minorities, women, and youth. Inclusiveness is even more important in FCS and post-conflict environments where divisions within the society are prevalent. Paradoxically, in FCS, basic societal agreements and structures are either failing or so new that they lack the capacity to comply with their own mandates. Public-Private Dialogue (PPD) is one way to build trust between different stakeholders and ensure support for meaningful and sustainable reforms. PPD platform not only support horizontal reforms but can also provide a useful starting point for private sector development in FCS for projects in key sectors, such as agribusiness and extractives, where PPD can help build links between large-scale investments and the local economy.50 PPD fills the gap resulting from the lack of legitimate institutions and builds ownership, transparency and confidence in reform efforts – essential for successful reforms in FCS. PPD identifies the need for reforms and interventions that can improve the business environment and attract investment in a manner that is inclusive. It is employed as a ‘process’ through which business environment reforms can be executed. Reinforcing the lesson highlighted in the previous section: not only what has to be done (i.e., the content of reforms) matters, but also the manner in which reform programs are designed and implemented. As elaborated upon in the sections above FCS are characterized by low levels of trust in the government and in the business community. In this regard, evidence points toward the importance of PPD when supporting 35 business environment reforms in FCV settings, as it helps build consensus and confidence among diverse groups (to be likely) affected by the reform process.51 But PPD has to be done in a transparent way where it is immune to hijacking by vested interests and politically connected firms. While weak government and private sector institutions are the biggest challenge for effective PPDs, some elements could contribute to its success despite the FCS context. For instance, communicating commitments publicly, including in the media, is an effective means of creating transparency and accountability. For instance, in Cambodia as the country was transitioning out of conflict52, the government established The Government-Private Sector Forum. This PPD body aimed to provide a reliable and trustworthy dialogue mechanism for consultation between the government and the private sector on investment and business climate issues. It also aimed for the inclusion of a struggling private sector in the development of the economy, a necessary condition for its growth. An important factor that enabled the forum to move forward was the focus on a neutral, inclusive, apolitical platform that could be used for constructive consultation on issues. If the forum had been perceived as other than a constructive, participatory process, it would not have encouraged businesspeople to engage in a participatory process for development. Twenty-four years later, the forum continues to provide a reliable platform for the business community to raise and resolve problems with the Government of Cambodia53. Similarly, in South Sudan, where foreign companies were perceived as colonizers, the Sudanese government had suppressed the ability of South Sudanese enterprises to development linkages with international firms or multi-national corporations (MNCs). This context had created a deep mistrust in public-private sector relations, as the government was wary of the possibility of perceived colonization by talking to large businesses. Consequently, South Sudan had no entity able to organize and represent the private sector. Knowing the background of this relationship, the World Bank Group initiated a reform program with a very gradual process to first help the local private sector organize itself into associations and build trust among stakeholders. The subsequent culmination of PPD was instrumental in building the needed trust for private sector development and entrepreneurship in the country. 4.3.2 Reform Governance When implementing business environment reform programs, the institutional environment and political economy can substantively influence success. Oftentimes, well designed reforms plans fail to achieve their goals due to lack of effective oversight and poor coordination mechanisms to ensure implementation, particularly in FCS contexts that are usually characterized with low governments’ capacity and weak institutions. Effective reform governance, including stakeholder engagement, cross- institutional coordination, capacity building and accountability mechanisms are all critical (Table 2). In the context of FCS, institutions implement the regulatory framework, both formal (e.g., laws, decrees) and de-facto (norms, customs), governing business’ behavior and limiting the harm individuals and groups can inflict. Therefore, it is imperative to focus on strategies and institutional mechanisms that help to (i) successfully identify and prioritize reforms, and (ii) ensure successful reform implementation in different country contexts. Table 2: Key Features of Effective Reform Governance 36 Level Features Responsibilities High-level • Often public-private • Determine overall priorities oversight • Relevant ministries for investment • Set KPIs mechanism climate reform agenda • Unblock implementation • Direct periodic reporting PM or obstacles/delays together with President (e.g., monthly; every PM/President three months) Coordinating • Technical staff • Oversee reform program day-to-day unit • Direct reporting line to PM across all areas • Liaise between technical level • Monitor reform roadmap and KPIs/ working groups and steering setting KPIs committee or PM • Ensure agenda setting, minutes, • Escalate key issues to steering follow-up items, timelines committee or PM for action • Escalate issues Technical • Key stakeholders from public • Develop and implement detailed working agencies (e.g., focal points of action plans, bringing in expertise groups relevant line ministries) where needed (e.g., legal assessments, • Private sector; professional proposals for legal amendments, IT experts (lawyers, IT, accountants, assessments, budget proposals) architects, etc.) • Develop timelines and milestones; • Frequent structured meetings clarify responsibilities (e.g., bi-monthly) Inefficient and discretionary institutional frameworks undermine legal certainty, increase costs for the private sector and negatively impact market dynamics. This is even more so in a fragile and conflict contexts where there’s an increased necessity for strong state institutions that deliver security, justice and jobs to move beyond conflict, promote compliance through increased trust. Developing Institutional frameworks help in removing regulatory capture by vested interests and intermediaries; ensuring efficient service delivery to the private sector; interagency coordination is crucial for effective policy implementation; integrating and consolidating registration databases; developing institutional capacities through training on new tools and digital technologies; and rehabilitating offices for physical one-stop-shops in low digital capacity environments. Institutions play a central role that cuts across various phases of business lifecycle ranging from entry (such as business registration and licensing), operations (such as permitting, competition and taxation, etc.) to growth or exit. Therefore, institutional reforms, such as setting up one-stop-shop for business registration and licensing, have been considered to have favorable outcomes in FCV settings.54 37 4.3.3 Elite Capture and Leveling the Playing Field Competition and privatization policies are contentious and difficult measures for governments operating in FCS countries to adopt. Competition-enhancing reforms can serve to improve the level playing field for private sector operators and contribute to the creation of a more dynamic market – promoting greater inclusion and social cohesion in FCS countries and subnational regions. In cases where pre-conflict legal system may have favored and protected vested interests through a variety of restrictions on competition or through incentives for non-competition that favored entrenched groups, post-conflict reforms offer an opportunity to introduce a legal and regulatory system that applies equally to all economic actors. Lack of competition and an uneven level-playing field are often a result of monopolies, including state- owned monopolies, politically aligned incumbents and sectors captured by political elite and groups involved in conflict. Reformers, therefore, justifiably see robust business environment as a necessary condition for increasing competitiveness and job creation. It is also important to be conscious of pushback by actors with vested interests and existing status quo – detrimental to competition. In Ghana, reformers avoided vested opposition by focusing on ministerial decrees that could be delivered complete while bypassing opponents. Elite capture manifests across a number of policy areas, ranging from influence in policymaking to disproportionate allocation of incentives, public contracts or licenses. While not specific to FCS contexts, it tends to be more accentuated there given the weak governance, rule of law and accountability. Central African Republic, Lebanon and Nigeria are ones of many countries where the regulatory frameworks are conducive to elite capture and hamper market-based competition, affecting the countries’ ability to achieve their growth potential. Following a conflict or political instability, governments may also make regulatory reform part of a national strategy to restore entrepreneurial and investor confidence, both domestically and internationally. Innovative BER such as the use of regulatory technology and digitalization of government- to-business service also tend to reduce clientelism and cronyism. Moreover, identifying gaps and entry points prone to privilege call inform the design of privilege-resistant policies (figure 9)55. 38 Figure 9. Areas prone to elite capture in Lebanon Lebanon Public Procurement Citizen engagement The institutional and regulatory frameworks Publication and consultation Fair Opportunity Regulatory Impact Assessment Transparency, confidentiality and access to information Use of technology Score Grievance, complaint, recourse Integrity and accountability Access to Public Industrial Land Trade and Customs Institutional and regulatory framework Transparency, publicity and scrutiny Tariffs structure and transparency Grievance and recourse Import restrictions and special regimes Enforcement: tax collection Electronic processing of declarations and connectivity Fines Business Regulation Brokers Customs procedures and ethics Business registration Laws and appeals Permits and licenses: Construction permits Tax Inspections Incentives policy Finance Legislative framework Consultations Related Parties and PEPs Administration and governance of incentives Corporate Governance Transparency and access to information Insider trading Public Accountability Mechanisms Access to Information Conflict of Interest Asset Disclosure Source: Mahmoud and Slimane, World Bank 2018 4.3.5 Gender-specific interventions In the FCS context, a focus on inclusive growth and employment is highly relevant to address drivers of fragility, with important linkages to state-building and peace-building activities. Gender issues in FCS are often more acute than in comparison to even low-income countries. As a result, they merit special attention because of the different needs, coping strategies, and challenges for women versus men. But more often than not, women are affected disproportionately by violence and its aftermath. Women face gender-based inequality and barriers to participation; are more vulnerable to gender-based violence and often face greater economic burden than in more stable societies. These include but are not limited to barriers such as capital market imperfections that make it difficult to access funding; social and cultural 39 norms associated with gender roles; as well as laws and regulations that discriminate against women and the economic empowerment of women. 56 Discriminatory laws and regulations and absence of legal protections negatively impact economic outcomes, including women’s employment, business ownership, and wages. Gender equality contributes to a level playing field where women can participate in the economy and improve their incomes. Additionally, it is associated with better development outcomes, such as lower rates of vulnerable employment and extreme poverty among female workers. Figure 10: Gender Legal Equality is lower in FCS compared to non-FCS countries 100 90 80 70 60 50 40 30 20 10 0 FCS Economies Non-FCS Source: Women, Business and the Law 2022; Indicator-level scores are obtained by calculating the unweighted average of the WBL questions within that indicator and scaling the result to 100, with 100 representing the highest possible score. In the context of FCS, research has established that inclusive employment and job creation is one of the most effective means of breaking the cycle of violence. Both conflict-related violence and legal constraints on business activities of women tend to be more amplified in FCS. Therefore, it is advisable for policy makers and practitioners to integrate legal analysis and reform solutions that address legal gender inequities that constitute barriers to women’s participation in the economy. In Iraq, for instance it was identified that women (92,272) granted much fewer loans than men (368,868) between 2017 and 2020. To address the disparity, the Central Bank of Iraq (in collaboration with the World Bank’s Finance Competitiveness and Innovation Group, and the World Bank’s Mashreq Gender Facility), issued a circular in March 2022 to prohibit gender-based discrimination in accessing financial services with the aim of increasing women’s access to loans and entrepreneurship opportunities. The circular is binding to all commercial banks and the Central Bank of Iraq is currently undergoing discussions on introducing gender- disaggregated indicators for commercial banks and financial institutions to comply with in the reporting process to the Central Bank. Similarly, in Lebanon, the government enacted legislation protecting women from sexual harassment in employment – a major obstacle and deterrent to women’s economic participation – including both 40 criminal penalties and civil remedies for such conduct. And Burundi mandated equal remuneration for work of equal place. In the design and implementation of gender-specific reforms, policymakers should recognize the potential impact of reforms on vulnerable and marginalized groups such as women and take steps to mitigate the negative effects reforms may have on these groups. More attention should be given to reforms that promote inclusive economic growth and specifically focus of the experiences of vulnerable and marginalized groups. In parallel, it should not be assumed that reforms will affect all social groups or categories of firms in the same way. Therefore, any policy action should take into consideration the potential harm that could be created by reforms to women and other vulnerable groups. 41 5. Country Case Studies 42 Business Environment Reforms in FCS – Somalia Somalia has been engulfed in civil conflict since 1991 following the overthrow of the Said Barre regime by rebels. The conflict spiraled as warring factions were unable to agree on the formation of a unified Government thus splitting the country into factions. This breakdown of civil order incapacitated public institutions, hampered the development of the legal and regulatory frameworks, and severely limited enforcement of existing laws. Without a stable government, Somalia fell into arrears with international creditors, was disengaged from international commerce (formal trade and investment) and heavily reliant on a largely informal economy with few but powerful conglomerates. However, since the 2000, with the peace conferences, formation of a transitional Federal Government and a constitution, Somalia has been on a steady trajectory of transformation. By 2012 Somalia was showing sustained progress with functional institutions and governance. By 2020, international financial institutions’ (IFI) re-engagement is on course, backed by sustained economic reforms delivering critical results – domestic revenue has more than doubled as a share of GDP since 2013. 1. WBG’s engagement In Somalia, businesses have operated in a legal and regulatory vacuum with little or no formal government enforcement, instead relying on traditional or customary mechanisms. Companies were regulated under the Somali Civil Code of 1974, augmented by the Italian Civil Code of 1942 and a number of decrees and directives. In practice, firms were licensed annually by the Ministry of Commerce and Industry, and as of the start of 2017, only about 5,000 businesses were registered – a small portion of the total number of firms operating informally. In order to establish a stable and rules- based business regulatory environment in Somalia, there was a need to introduce a Companies Act as well as a business registration system. The passage and operationalization of the Companies Act was supported by WBG’s Somali Core Economic Institutions and Opportunities Program (SCORE) through the Digital Uplift Project (SCALED-UP) and the Somalia Investment Climate Reform Program (SICRP) phase 1 & 2. The World Bank’s SCALED -UP project also supported the procurement of the Business Registration System with IFC SICRP2 offering project management and ICT backstopping support to the Ministry. The Government identified the passage of the Companies Act as a prior action to be addressed as part of the World Bank-supported debt clearance process. The link to debt clearance increased the Act’s political importance, strengthening the momentum to pass it. As a result, the Somalia Companies Act was part of a package of legal reforms that the Government approved in December 2019. 43 2. Type of BER that was implemented Prior to the reform, the private sector in Somalia operated with outdated legal and regulatory frameworks and inadequate government capacity. Missing or out-of-date company accounts and ownership meant that suppliers, creditors, and customers had to rely on their own information sources to guide their decisions on doing business in Somalia. Specifically, for business registration, the country relied on the Civil Code of 1974 which provided for annual licensing rather than a modern business registration regime. These lengthy procedures affected the contestability of firms and hence their access to market opportunities and consequently contribution to economic growth. The WBG project sought to address this through providing technical assistance to the Ministry of Commerce as follows: i) Undertaking diagnostic work covering detailed process mapping of the business registration process and other relevant agencies involved ii) Engaging the private sector to mobilize input into and support for the law (in the past, due to elite capture, laws had been reported as ‘stuck in parliament’) iii) Providing complementary technical assistance on the proposed Online Business Registration and Online System to be rolled out in Somalia supported by a WB lending project iv) Undertaking legal reforms. The new Somalia Companies Act, adopted in 2019, provides the legal framework to protect creditors and shareholders and provides limited liability for entrepreneurs. For some foreign investors this is a necessary precondition for investment. By enabling expanded access to finance to Somali small and medium entrepreneurs (SMEs), the law will also support their growth. Through easier registration, local companies will be able to access public procurement contracts and international supply chains. Government revenue will also increase as companies formalize and submit their annual returns. As such through the introduction of the Companies Law of 2019, Regulations of 2020 (updated in March 2021) and introduction of the online business registration and licensing system, the following changes have been realized: i) Reduction of legal requirements to start and operate a business – providing for online business registration, excluding the seal requirements and notary involvement. ii) Introduction of limits to the official time for processing applications – name reservation and business registration. iii) Reduction of discretionary power in the Companies’ Registry, specifying regulatory responsibilities and providing for use of ICT in business registration. iv) The legal regime now makes it possible to complete regulatory requirements for starting or operating a business online. v) The online function integrates the regulatory functions for starting and operating a business i.e., incorporation and issuance of business licenses by the Ministry of Commerce & Industry. vi) Through introduction of business intelligence reports, implementation of a monitoring and evaluation mechanism to promote continuous improvement of the business entry system. 44 3. Key findings: what worked, what did not, and what could be done differently in the future to maximize impact and sustainability of BER in such countries. The following are key findings from introducing a new Companies Act and business registration system in Somalia: i) Lack of institutional capacity was a challenge: The Ministry of Commerce and Industry (MoCI), the line ministry administering the Company law, is poorly funded. Restricted resources resulted in limited IT capacity and a difficult working business environment. Despite these challenges, the MoCI worked consistently over several years to pass the act with the support of development partners. The World Bank Group provided capacity support to MoCI and this increased capacity also contributed to the realization of other priorities for the ministry. ii) Somalia’s security environment presented its own challenges. Travel in some areas (including parts of Mogadishu) is deemed to be high risk and travel within Somalia is limited and controlled, making it difficult to hold meetings at the clients’ workplace, or to convene stakeholders. The World Bank Group cannot directly employ staff on the ground, but instead relied on inviting clients for capacity building and meetings outside Somalia, peer to peer learning, and embedding advisers within the Ministry. iii) The high turnover of champions within the Ministry of Commerce and Industry and the accompanying loss of institutional memory, plus overstretched financial and human resources teams, also slowed progress. Ministerial changes led to further turnover among mid-level staff, extra briefings for new officials and leadership, and changes in approach. The appointment of key advisers within the Ministry of Commerce and Industry, until the passage of the law, was an important stabilizing strategy. iv) Low levels of trust and understanding slowed the process. Some stakeholders raised concerns that formalizing the economy would increase taxes and allow the entry of more domestic and foreign investors (mostly diaspora). On the Government side, Federal Member States had to be engaged: they have a stake in the Companies Act because they all currently issue licenses to businesses at a state level, which is a key source of revenue. Supported by the IFC, public private dialogue (PPD) raised the profile of the Companies Act and engaged the private sector. The Chamber of Commerce was also involved, briefing their members on the importance of the reform. In the final year, as the PPD slowed, political support came from the Ministry and a broad-based consultation process involving the Federal Government of Somalia, Federal Member States, the House of the People and Upper House of Parliament. Engaging at the political and technical levels proved equally important: in the end, the leadership of the Ministry facilitated a law which was recognized as home-grown and Somali. 45 Business Environment Reforms in FCS – Nigeria The Nigeria reform journey started with the establishment of the National Competitiveness Council of Nigeria (NCCN) in 2013. The NCCN’s mission was to mobilize the private sector with input from the government around developing and implementing a clear competitiveness agenda aiming to boost collective prosperity of Nigeria. NCCN’s role was to generate and sustain the national conversation around competitiveness whilst positively influencing policy decisions around reform and improving the business and investment climate to make it more attractive for domestic as well as international investors. NCCN was successful in producing an annual report on competitiveness in 2016 which measured the states on human capital development (sub pillars included education, health migration and other labor market issues) Infrastructure ( Quality of Roads, Electricity, Airports, Telecoms, Water and waste management services) Economy (state finances, business sophistication, access to finance and tax) and Institutions (Security and Instability, Transparency, Bribery and corruption, permits, government policy and contracting and justice) Sequel to this work the Federal government set up the Presidential Enabling Business Environment Council (PEBEC) in November 2016 with the mandate to remove critical bottlenecks and bureaucratic constraints to Doing Business in Nigeria. As this work had a direct relationship to the WBG, advisory was provided to the PEBEC team through the Global Indicators Group and then through the prosperity funded Improving Business Environment Program (IBEP) on the set up for reform, reform action planning and recommendations for business environment reforms. 1. WBG’s engagement and the type of BER that was implemented PEBEC unlike the NCCN set up the enabling business environment secretariat (EBES) that coordinated the reform effort and worked with the ministries department and agencies (MDAs) of government in implementing the recommendations provided by the WBG and other development finance institutions (DFIs). Most of the areas of focus for reform were guided by the WBG’s recommendations on formalizing regulation through laws and automation of processes. In the years since the establishment of EBES, there have been 4 laws that have been enacted which had positive outcomes on the regulatory environment as well as reducing costs for businesses. i) The Secured Transactions in Movable Assets Act 2017 enables SMEs to use movable assets (Vehicles, farm equipment, jewelry, machinery) as collateral to get a loan from banks. ii) The Credit Reporting Act of 2017 gives borrowers the legal right to access credit data from credit bureaus who provide credit scores for banks and other financial institutions. iii) The amendment to the Companies Income Tax Act by the Finance Act 2020. Any taxable persons or companies who falls under the ₦25million revenue threshold are not required to make Company Income Tax contributions and file returns to government and are also not required to register, remit or issue tax invoice and collect VAT. Medium sized companies with 46 revenue running between N25 million and N100 million in any tax year will be required to pay a company income tax rate of 20 percent (a 33% reduction from 30%), while companies with turnover bigger than N100million annually would pay CIT rate of 30 percent. To create incentives for early payment of taxes under the self-assessment framework, Section 77 of the Act proposes a 2 percent and 1 percent tax back bonus for medium-sized and large firms that file their taxes early (90 days before the deadline). iv) The 2020 amendment of the Companies Allied Matter Act 1990 (CAMA) has far reached impact in the registration, constitution, and operation of all businesses nationwide. With provisions that make it easier to set up and run a company through reduction in fees, introduction of electronic fillings and signatures, improve the efficiency of administration of business services by the Corporate Affairs Commission, the introduction insolvency framework as well as transparency measures which protect specifically smaller shareholders and investors and also align the framework for regulation of companies and other business entities with international best practice such that Nigeria can position itself as a preferred destination for establishment of a corporate presence for pan-African investments. PEBEC was also working on an omnibus bill which would encompass multiple facets of business regulation reforms that affect businesses. EBES team engaged with stakeholders across the legal and business community for their input, including the Nigerian Bar Association - Section on Business Law (NBA SBL) the Nigerian Economic Summit Group (NESG) and the National Assembly Business Environment Roundtable (NASSBER) as well as other organized private sector stakeholders and members of the public at large. This Bill was to help further institutionalize reforms in the country and was a review of all laws in the country affecting business facilitation by amending provisions of the present legislative framework that have been identi�ed by stakeholders as bottlenecks for the business climate reforms; and introducing new provisions that would accentuate business climate reforms Further to these laws several government agencies automated and streamlined processes for obtaining licenses permits or making payments to government. The Federal Internal Revenue Service (FIRS) automated the corporate tax platform. The CAC optimized the company registration portal and reduced the number of forms needed to complete a company registration, Visa on Arrival was instituted for prospective international investors and work on a single window portal for the ports is ongoing. Subnational Reforms On the subnational level, there is growing interest to replicate the success of the federal government at state level. Since the establishment of PEBEC, some States have set up similar business environment councils. At the forefront of the reform effort Kaduna, Anambra and Enugu states have made significant improvements to their business environment citing the subnational doing business report as the backbone of their reform efforts. Here reform mainly focused on automation and process improvement. The IBEP program in Nigeria further supported states including Anambra, Edo, Ekiti, Kaduna, Nasarawa, Gombe and Ogun in reform action planning and providing reform recommendations that would improve their business environment. Some of the improvements in 47 states range from passing laws (e.g. tax laws and mortgage foreclosure laws in Nasarawa) and executive orders (several states set up their business environment councils, reduced fees and removed unnecessary inspections through executive orders) to building electronic platforms for business registration (Ogun and Nasarawa states) to reducing licensing costs for MSMEs (Ekiti state) and improving transparency and information availability in the state (Kaduna, Edo, Ekiti, Nasarawa and Ogun states). In addition, due to the prioritization of business environment reforms in the state Ogun, Nasarawa and Ekiti formalized their investment promotion activities by passing laws for the setup of their respective investment promotion agencies. 2. Key findings: what worked, what did not, and what could be done differently in the future to maximize impact and sustainability of BER in such countries. i) The biggest takeaway from the Nigeria experience has been that a business reform program is only as successful as the principal (be it the president or the governor of the state or at times the head of an agency) allows it to be. For instance, reforms at the ports (airport and seaport) that involved agencies such as the Nigerian Customs Service, Standard Organization of Nigeria (SON) and National Agency for Food and Drug Administration and Control (NAFDAC) and the Trademarks Patent and Designs Registry (Commercial Law Department) (TPDR) aimed at making the movement of goods and people within the country easier was more challenging than the DB reforms. Reform is also often politicized. With gains made being wiped out if there is a change in political leadership or head of the Agency (this has been the case in Ogun state also) ii) The subnational doing business report was the main motivation for reform in the states It provided structure and measurable outcomes and encouraged healthy competition. Although this was the case, only about a third of the 36 states put in some effort to reform the business environment. Very few states currently have a business environment council or a reform action plan and still struggle to generate momentum. iii) Most states struggle with resource allocation and deprioritize the need for business environment reforms. Reform seems to be part of the state agenda when it is an external initiated (sponsored) activity by DFIs. Only Nasarawa, Enugu and Ekiti States without any help from DFIs have initiated contact and tried to sustain the reform agenda on their own resources. iv) Peer learning among states is in its infancy. The collaboration between federal and state is still very limited. v) WB holds a high level of influence as an authoritative voice in business regulation reform for Nigeria. States want the healthy competition of being ranked and also appreciate the impartiality of the WB in terms of the business environment reform agenda. Further at national level, lack of visibility of reforms done by agencies outside of DB (e.g., NAFDAC or Trademarks Patent and Designs Registry (Commercial Law Department) (TPDR)) often meant they were discouraged from further reform without a regular external ranking by an independent body such WB. 48 vi) Frequent changes of the MDA level hampered progress much in the same way that the lack of removal of offending non effective heads of agencies did. At times lack of clear consequences for erring MDA heads or even civil servants meant that reform was frequently stalled due to a few select individuals. vii) There is strong resistance to any reforms that involve cost reduction as it is perceived to reduce federal or state revenues. What could be done differently going forward to maximize success, impact and sustainability of such reforms i) Financial Incentivization for reforms help with the initial interest generated for reform at state level. ii) There needs to be a more convincing link between improved investment climate and greater revenue generation for states and at federal level in order for them to be interested in improving iii) Focus on not just reform but how states communicate the reforms to the private sector and the world at large is very important. Most state whilst taking steps to improve the business environment tend to not follow up in communicating effectively with their stakeholders. Therefore, the impact of the reforms is minimized. Sustainability of reforms remains tricky as even if laws are passed, uniform implementation takes time and there may not be resources to ensure the implementation drive. 49 Business Environment Reforms in FCS – Lebanon Lebanon is in the midst of a crisis which has culminated as a result of over three decades of social, economic, financial and fiscal mismanagement. While the ramifications and impact are being felt more severely now, the shortcomings and structural deficiencies have continued to exist and grow, exacerbated by the ongoing COVID-19 pandemic and the Beirut port explosion – coming to a point where the country no longer has the fiscal space to boost the economy. The country has been marred by a history of conflict, being caught up in the midst of civil war and geopolitical rifts. The civil war that lasted from 1975 – 90, had adverse impacts on the country’s economy with GDP growth (annual) dropping down to a staggering negative 43 percent. Furthermore, the 2006 conflict with Israel was estimated to cause damages worth $3.5 billion, and the Syrian conflict $7.5 billion in foregone output. However, in the years following the civil war i.e., post 1990 there were periods of economic resurgence during which Lebanon experienced strong economic growth and socio-economic stability. However, the country has been regressing back into fragility and seems to be losing the gains that it had achieved, due to regional spillovers, internal political deadlock, and transnational militant groups, among other factors. The economy has struggled to reduce widespread poverty and to generate inclusive growth, as job creation has been weak and poorly distributed. The long-run employment-growth elasticity is estimated at 0.2 (World Bank, 2012), much lower than an estimated MENA average of 0.5 (IMF, 2014). Meanwhile, the employment that has been generated has been concentrated in low productivity activities as those involving higher productivity have not grown proportionally. The pandemic has further exacerbated economic woes. While long term economic ramifications are becoming more obvious, even by the end of 2020, the pandemic had reduced formal private sector sales by 45 per cent compared with 2019.a The pandemic decreased demand for full-time employment in micro and small enterprises, which hire the majority of poor and vulnerable groups. Compared to 2019, employment in 2020 decreased by an average of 23 percent across key private sector industries. a Lebanon’s current economic crisis finds its roots in elite capture and regional conflict, both of which have served to block reform and development when it did not benefit all confessional leaders. Two mutually reinforcing and overarching constraints: (1) elite capture behind the veil of confessionalism and confessional governance, and (2) conflict and violence, stemming, in part, from the broader dynamics of conflict in the Middle East and exacerbated by the country’s confessional system. These overarching constraints have created a fragile and dysfunctional political system, and a state that has been unable to regulate political conflict and exercise sovereign authority. 50 In addition to the two overarching constraints, Lebanon’s economic growth and development in inhibited by macroeconomic instability, weak business environment, insufficient investment in infrastructure, weak institutions and regulatory framework, and mismatch of skills with labor market needs – all of which can be classified as nested constraints. 1. WBG’s Engagement The World Bank Group, has been actively involved in Lebanon, helping and supporting the government in designing and implementing investment climate and business environment reforms. In 2016, the World Bank signed an agreement with the Office of the Minister of State for Administrative Reform (OMSAR) in Lebanon and initiated projects, including the Lebanon Interoperability Framework, to help the government reduce time and cost of business registration, part of efforts to improve Lebanon’s investment climate and encourage private investments. The World Bank Group has been involved in a number of projects aimed at improving the investment climate and enhancing competitiveness. In 2018, the World Bank supported the creation and development “Creating Economic Opportunities in Support of the Lebanon National Jobs Program-for-Results Project� to improve economic opportunities for targeted beneficiaries in Lebanon. The crisis in Syria had contributed to a sharp slowdown in Lebanon’s economy, aggravating the existing jobs crisis, and raising social tensions. The refugee crisis also exacerbated climate vulnerabilities, raising risks for low income, rural households in lagging regions. In this context, the government of Lebanon has developed a National Jobs Program (NJP), to complement the Capital Investment Plan, as central pillars of the reform and investment program presented at the 2018 Paris investor conference. The World Bank supported the implementation of the government’s NJP. In 2018, the World Bank also supported the development and implementation of the Land Administration System Modernization Project for Lebanon with the aim to improve access to land use and value data, property rights data, and geospatial information through the Land Registry and Cadastre System modernization. And most recently in 2021, the World Bank initiated the Lebanon Reform, Recovery and Reconstruction Framework (3RF) - part of a comprehensive response to the massive explosion on the Port of Beirut on August 4, 2020. The 3RF aims to help Lebanon achieve three central goals in response to the Beirut port explosion, one of which is the implementation of reform to support reconstruction and to help restore people’s trust in governmental institutions by improving governance. 2. Type of BER that was implemented 51 i) Improve Investment Climate and Enhance Competitiveness The aim was to help the Lebanese government improve its services and interactions with the private sector, with a focus on streamlining the business registration process - done through the implementation of an online commercial registry one-stop shop, a system for facilitating business registration, and ensuring the transparency of the process. A cooperation agreement was signed in 2016 between the IFC and the GoL to implement the Commercial Register through the Interoperable platform (CRTIP). Despite this reform being aligned with Lebanon’s priorities to improve its business climate, the need to reduce private sector’s barriers to entry and the government’s buy-in at inception, declining client support and interest during implementation contributed to poor achievement of intended results. As a result, the LGIBE project was terminated before term without achieving its intended outcomes and impact. Nonetheless, it has led to lessons learned for the team on implementing investment climate reforms in the midst of FCS-related challenges and ways to mitigate them for future projects. Many of the challenges faced by the team and highlighted below such as lack of political buy-in, high political turnover and others are not particular to Lebanon and have been observed in other FCS contexts where the team has worked such as in West Bank and Gaza, Somalia and others. In fact, much of the lessons learned are currently being taken into account as the team is kicking off implementation of a World Bank Programmatic ASA, The Lebanon Economic Recovery Project (P178111), which aims at supporting private sector development through investment climate reforms ii) Creating Economic Opportunities – Lebanon National Jobs Program The World Bank program supported implementation of the government’s NJP across three results area as follows: 1. Results Area 1 – Enhancing the Environment for Private Investment; 2. Results Area 2 – Catalyzing Job Creation through Trade and Investment in Lagging Regions; and 3. Results Area 3 – Connecting Women and Youth to Jobs. iii) Land Administration System Modernization In 2018, the World Bank also supported the development and implementation of the Land Administration System Modernization Project for Lebanon with the aim to improve access to land use and value data, property rights data, and geospatial information through the Land Registry and Cadastre System modernization. It had five components, including the implementation of an integrated Information and Communication Technology (ICT) solution for the Digital Land Registry and Cadastre System that is integrated/linked with other functions such as Property Valuation and 52 State Land Management. This component was designed to improve the quality of services provided by the government and trust in the sector through promotion of transparency, equal access to information, electronic services and streamlined processes. iv) Reform, Recovery and Reconstruction Framework (3RF) The 3RF pursues two tracks in parallel: A people-centered recovery track (Track 1) focuses on essential actions, such as policy measures, investments, and institutional strengthening, to address urgent needs of the most vulnerable populations and small businesses affected by the explosion. This people-centered support largely relies on receiving adequate international grant financing, and on clearing progress on immediate policy action to facilitate recovery, such as the adoption of appropriate actions plans and institutional measures. A reform and reconstruction track (Track 2) focuses on critical reforms to address governance and recovery challenges in Lebanon as well as investments that focus on the reconstruction of critical assets, services, and infrastructure. Progress on governance and socioeconomic reforms are prerequisites for mobilizing international support for reconstruction beyond the recovery track, and for unlocking new sources of public and private finance. The 3RF is structured around four strategic pillars: a. improving governance and accountability, b. jobs and opportunities, c. social protection, inclusion, and culture, d. improving services and infrastructure. Each pillar identifies a set of strategic objectives and priority areas across both the recovery track and the reform and reconstruction track. 3. Key findings: what worked, what did not, and what could be done differently in the future to maximize impact and sustainability of BER in such countries Lesson 1: Ensuring buy-in from governments and key public officials The biggest takeaway from the Lebanon experience has been that an investment climate reform program is only as successful as the principal counterpart (be it the president, the Minister or at times the head of an agency) allows it to be. The project to implement an online commercial registry one-stop shop, a system that will facilitate business registration, and ensure the transparency of the process falls within the framework of 53 Dawlati II, an e-government platform led by Lebanon’s Office of the Minister of State for Administrative Reform (OMSAR) – part of Lebanon’s Interoperability Framework. One of the main reasons as to why it was agreed upon and implemented was because it was considered a priority for the government of Lebanon in its quest to support the business community and improve the provision of services through the Dawlati II e-government platform. Through the support and long-standing partnership with the IFC, along with the active coordination with the Ministry of Justice – Commercial Register, Ministry of Finance –, the Tax Authority, the National Social Security Fund, and the Office of the Prime Minister, OMSAR was able to develop a solid plan for the implementation of the commercial registry one-stop shop. However, while the action plan was drafted and agreed upon, much of the expected outcomes for the project could not be achieved and the agreed deliverables could not be attained, mainly due to the fragile state of Lebanon’s government and the ephemeral nature of government counterparts (in position of authority) with whom IFC was collaborating. Furthermore, the country’s dysfunctional political system, characterized by elite capture has impeded the project’s implementation as it prohibited rent-seeking behavior. Lesson 2: Engaging and building trust with the private sector States that have been successful in reforming the business environment built up trust with the private sector and developed relationships that created better regulatory solutions. Most states still do not understand BER through the lens of trying to make a more friendly environment for investment. They almost view businesses as nothing more than targets for taxation. The government in Lebanon, too, needs to actively engage with the private sector and businesses and create business-centric reforms. Lesson 3: Resource allocation, patience, and longer-term result Business environment reforms tend to be prioritized when resources are allotted and relevant projects are externally (sponsored) funded by organization such as the World Bank, or DFIs. Additionally, initiative that are projected to give short-term wins are prioritized over ones that take longer time to realize. It is imperative to consider that Institutional reforms take time to show result. Furthermore, uniform implementation takes time and there may be enough resources to ensure the implementation drive. Political risk remains the biggest obstacle to sustainability as change in government remains disruptive and a threat to continuity. To ensure long-term success it is therefore imperative to ensure efficient (and enough) resource allocation, build long-term implementation plan that is impervious to change in government authority, and adopt a patient approach. 54 Business Environment Reforms in FCS – West Bank & Gaza territories 1. WB’s Engagement in the Country The WB team has been engaged in the West Bank & Gaza territories on business regulatory reforms since 2017, through two ASAs,a which provided advisory services and informed the design of a lending operation. The ASAs have focused in three areas, namely in (i) producing diagnostics on the business regulatory environment, (ii) supporting the Palestinian Authority (PA) in implementing municipal business licensing (MBL) reforms, and (iii) overhauling the Companies Law framework. Additionally, an Investment Policy Financing (IPF) Granta will invest in hard infrastructure, and institutional development, to transform the Companies Controllers’ Department into an automated modern Business Registry. The IPF will also support the development of a legal framework to formalize home-based businesses. See figure 12 for an overview of the relevant engagements. Figure 12: An overview of the advisory and lending operations on business regulatory reforms in Palestine. The initial diagnostics identified business entry, operation and exit as major bottlenecks for both domestic and foreign businesses. The main sources for those barriers included: (i) administrative and procedural burdens that increased direct and indirect costs, such as redundant licensing requirements, excessive minimum capital requirements, and onerous corporate governance, and auditing requirements for micro and small businesses, (ii) regulations that granted broad discretionary, supervisory, and quasi-judicial powers to the Companies Controller,a such as provisions that allowed him to sit in General Assembly meetings of Public Shareholding Companies, and reject business registration applications without clear grounds, (iii) regulations that restricted entry to foreign investors, such as discriminatory licenses, foreign equity limits and implicit requirements for foreign investors to have a local partner and/or representative, 55 (iv) regulations that contributed to conflicts of interest and regulatory capture, such as weak protections for minority investors, and mandatory involvement of lawyers in business registration, (v) lack of a transparent framework that contributed to unpredictability for shareholders and creditors, such as the bad quality of, and limited accessibility to business registration data, (vi) regulatory gaps such as the lacking framework for company mergers, divisions, and transformations, (vii) lack of a clear framework on business exit, such the grounds, liabilities, procedures and timelines. Many of these bottlenecks were due to an outdated Companies Law framework from 1964. In 2017, the WB team and the Ministry of National Economy (MoNE) agreed on the pressing need to improve the operating framework for businesses in the West Bank and automate Palestine’s Business Registry – an endeavor which would be supported by the Companies Law reform. The team aimed to build momentum towards these longer-term efforts through quick wins, namely, by reforming the municipal business licensing framework. This had been identified as a bottleneck to market entry since businesses were subject to a convoluted process which was plagued by serious delays extending from several weeks to months. 2. Type of BER that were implemented or are currently under way The WB ASA prioritized a reform in Palestine’s municipal licensing regime. This was initiated by legal amendments, which streamlined the business licensing process by introducing a risk-based classification system of business activities based on the International Standard Industrial Classification 4 (ISIC 4). The legal amendments also introduced a reduced flat fee of 25 Jordanian Dinars (USD 35)a per activity. Moreover, the team supported implementation of these amendments by helping the client improve operational efficiency and close implementation gaps. The reform also streamlined documentation requirements, re-engineered the approval process to remove redundancies, standardized forms for inspectors to ensure consistency in inspection procedures, and developed guidelines to help municipal staff implement the new process. Furthermore, the reform leveraged digital technology solutions. It introduced tablets to help inspectors record findings and violations in real-time, connected databases thus reducing the need to resubmit information, enabled online submission of licensing applications and automatic SMS notifications to applicants to help them track their applications, created auto filled templates for communication with applicants and introduced a management tracking tool to enable case management and ensure timely follow up by municipal staff in case of delays. As a result of these measures obtaining a municipal business license became significantly easier. Based on data from the Ramallah municipality the average time to obtain a business license for a company between December 2019 – April 2020 dropped by 84%. Businesses no longer had to wait for several weeks or months to obtain a license since the average time of issuance dropped to one week. A longer-term effort on the Companies Law has been underway since 2017. The WB team has advised MoNE on how to adapt international good practices into Palestine’s unique context. This entailed developing model articles and working with local corporate lawyers to adapt them to the local legal framework and commercial customs. Moreover, the WB team has assisted MoNE to engage in lengthy consultations with stakeholders such as supervision authorities, Ministries, government lawyers, private law practitioners, private sector representatives, and entrepreneurs, to ensure a 56 participatory process. Lastly, the WB team has delivered workshops to build the local stakeholders’ capacity in various topics relevant to corporate law and the supervision of companies. The Companies Law was enacted on December 30, 2021. The Law provides a more predictable and proportional framework on the establishment and operation of businesses. For instance, it introduced new legal entity types and enables home-based businesses. It also removed restrictions to foreign investors and offers protection to minority investors. It lowers compliance costs and enables the use of digital technologies, and facilitates business exit, among other improvements. 2. Lesson Learned: What worked, what did not and what we could do differently going forward to maximize impact and sustainability of such reforms. Lesson 1: Identifying a critical path to legal reform in Palestine is not always straightforward; the team had to employ innovative approaches to implementation and pursue quick wins before attempting more comprehensive reforms. Legal reform is a key dimension of business regulatory reforms. It is typically the first building block before other improvements can be introduced, such as capacity building, or digital technology solutions. However, legal reform cannot be taken for granted in the FCS environment. In the case of Palestine, amending laws has been difficult because the Parliament has not convened since 2007. All legislation passed into law since 2006 has been done exceptionally by presidential decree, which is not an environment conducive to furthering legislative reform. The team decided to pursue the municipal business licensing reform first, to create momentum before attempting to reform the Companies Law – since the latter was a more comprehensive and risky endeavor. However, when the team explored the possibility of overhauling the Law on Crafts and Industries it soon became clear that introducing comprehensive amendments to the legal framework would not be feasible. The team consulted with local legal experts to explore options to overcome these constraints and came up with a second-best approach of amending the Law’s annex. This proved to be sufficient to adopt ISIC4 and introduce the risk-based classification system for business licensing. This required the cabinet’s approval – which was more feasible in the short-term and a building block for more complex reforms in the future. The lesson learned is that business regulatory reform in Palestine required finding innovative approaches to implementation. The regulatory framework is convoluted, outdated, and implemented arbitrarily. WB teams need to exercise patience and aim for small steps in the beginning -but not exclusively for "quick wins"- when it comes to designing new projects. Lesson 2: Business regulatory reform in Palestine requires a high degree of flexibility in terms of adapting good practices to a unique and challenging environment. Flexibility is not only required in terms of finding innovative approaches; it is also required in terms of crafting policy that is fit-for-purpose in Palestine’s unique environment. In the Companies Law reform, the team had to account for a particularly weak Court system and the lack of Commercial Courts specializing in such disputes. The local Courts’ inefficiency in resolving commercial disputes would take several years to address through capacity building and investment, which was well outside of the project’s scope. Since addressing this institutional weakness was not possible, the team came up with 57 an innovative solution of providing an alternative to dispute resolution. The Companies Law included a section on the mediation role of the Registrar to allow for an additional option in resolving disputes between entrepreneurs/investors and/or with the company/management. The mediation role is not typically in the Companies Registry’s quiver when it comes to other jurisdictions. However, it was a sensible solution given the institutional weaknesses in Palestine. The lesson learned is that a high degree of flexibility in terms of adapting good practices to a unique and challenging environment is necessary to develop fit-for-purpose solutions. Lesson 3: WB teams engaging in business regulatory reforms in FCS must prepare for an intensive engagement which will require going above and beyond the typical advisory delivered to clients. The team realized early on that the client did not have the resources and capacity necessary to do the heavy lifting necessary to implement the Companies Law reform. In response, the regional task team leader identified resources to support a more intensive engagement, and the global team members rolled up their sleeves and invested a significant amount of time to get into the weeds of legal reform to provide a tailored technical assistance. Subsequently the team engaged in labor intensive discussions with local lawyers to gain insights on the laws and practices in Palestine, and on the specificities of the context due to the conflict. In addition, the team worked closely with local lawyers to provide technical guidance on each of the law’s chapters. This was a painstaking exercise that required attention to detail, diplomacy, and patience. Following the first draft’s completion, the WB team supported MoNE to engage in an intensive round of consultations with public and private sector stakeholders through workshops, and bilateral discussions. Additionally, the team delivered targeted trainings on good practices to selected stakeholders. Lastly, the team engaged heavily in policy dialogue with decision makers in the PA to ensure that the new policies are clearly understood, that the reform benefits for all economic participants are aligned with Government development objectives, and that there is ownership at the highest level for such a complex reform. The lesson learned is that teams operating in such contexts implementing similar complex reforms, need to price in the limited institutional capacity, and the limited coordination between the relevant institutions both at a policy and operational levels when designing and implementing a project. Countering those challenges will require heavy engagement by all team members throughout the reform process. Lesson 4: Comprehensive legal reform in the FCS environment is possible, but it requires perseverance, patience, and high-risk tolerance from project teams, coupled by strong management support. Legal reforms are not easy to spearhead in the FCS context, primarily due to strong resistance by incumbents who see efforts towards enhanced transparency and predictability as a threat. The team faced strong opposition from vested interests in the case of the Companies Law reform. For example, the Companies Controller tried to maintain broad discretionary, supervisory, and quasi-judicial powers. The Bar Association tried to capture regulation by mandating the involvement of lawyers in business registration procedures, and by requiring all businesses in Palestine to hire a resident lawyer – policies which were directly at odds with the reform’s broader policy objectives. 58 Political pressure from stakeholders who tried to retain the status quo against the public interest were initially kept at bay for months. However, a government reshuffling in the PA introduced new risks that culminated in the formation of a Drafting Committee (DC) in the Fall of 2019, which comprised a majority of anti-reformers. The DC was tasked with finalizing the draft law previously developed by MoNE with WB’s support that had benefited from a transparent, consultative, and participatory process. However, the DC produced a draft that largely preserved the status quo. This development derailed previous reform efforts and threatened to erase nearly 2 years of intensive work by the WB team, MoNE and local lawyers who had been engaged to produce the initial draft. The WB team had to re-engage MoNE decision makers, reset the policy level dialogue and raise awareness on the broader implications of retaining the status quo for Palestine’s development path. Bringing the reform back on track required several consultations, both internally (e.g., CMU, Regional Management,), and externally, with the donor community. These efforts culminated into a decision from the MoNE Minister to form a new Drafting Committee in the Spring of 2021. The new DC had a different composition -this time it was free of vested interests- and had a clear policy mandate from the Government. The lesson learned is that convening the key stakeholders from the public and private sectors around the table to build consensus may increase chances of success, but it is not always sufficient. Having strong and consistent support from WB management in terms of prioritizing the reform in high level dialogue and in coordinating with other donors is crucial to increase the likelihood of success in this context. Project teams must be proactive when the reform is being derailed due to resistance from vested interests. Acting early on as soon as the WB team becomes aware of efforts to undermine the reform, can be key in avoiding important delays. 59 6. Conclusion Fragility, conflict, and violence are usually the embodiment of issues and tensions that have evolved over years. There are multiple factors that contribute toward and lead to the culmination of FCS. While some countries (or subnational regions) have over the years been able to escape the FCS trap, majority have been stuck in a recurring cycle of fragility and conflict. Lack of economic opportunities and high unemployment is one such factor that exacerbates fragility and unrest, among other drivers. There is no “one-size-fits-all� when it comes to designing and implementing BER in FCS. Clustering countries by fragility profile reveals significant heterogeneity,57 which calls for a differentiated policy and programming approach for effective reform solutions. In addition to the type or theme of reform, factors such as the way the reforms are implemented, and considerations of conflict-sensitivity assessments are equally crucial for ensuring the success of business environment reforms in FCS. Therefore, tailoring BER engagements to the specific manifestations of fragility, building institutions and systems that can deliver on inclusive growth, strengthening public and private sector dialogue are some of the key elements of success. Enabling appropriate private sector activities is a means to break free of the “fragility trap� that impedes progress on economic development and business environment reforms present a solid opportunity towards achieving this goal. 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