Investment Climate Impact Program Marialisa Motta Director, FPD Latin America & Caribbean Region Investment Climate Practice Paris, November 12, 2012

Agenda ♦ Investment Climate Space ♦ Joint Donor/WBG Impact Program ♦ Workshop Objectives 2

Business Regulation for Enterprise Creation and Growth Private Participation in Infrastructure and Social Sectors Investment Climate for Industry International Trade and Investment 3 CROSS- CUTTING THEMES: Inclusion/ Gender Economic Governance Competition Green Growth ICT OPERATING PRINCIPLES: Manage for Impact Benchmarks to Spur Reform Innovation/ Incubation Partnerships and Knowledge Crisis Response Capability Investment Climate – Strategic Areas Economy-wide Industry-specific

Main drivers ♦ Internal drive: to decide what we should more and less of, we need to understand the impact of IC work (on investment, jobs, growth, poverty) ♦ Client and donor demand for impact measurements: where should we allocate our funds? ♦ WBG management and board ♦ IFC Impact Development Goals and WB Scorecard Goal ♦ Better understand how to maximize the impact of our work, better manage what we do, make strategic choices and tell meaningful stories. Answer key questions for evidence-based policy making: what works, what doesn’t, where, why and for how long? 4 Why are we increasing our focus on impact? 4

Internal Partners ♦ World Bank Development Impact Evaluation (DIME) unit ♦ World Bank Research Department (DECRG) ♦ FPD Global Practices, FPD Chief Economist office ♦ IFC & FPD Regional Teams ♦ The IFC Development Impact Department (CDI) Donor community including USAID, DFID and DCED Key Partners 5

The Investment Climate Impact Framework: Six Key Areas of Work 1. Core results indicators ♦ Identify measurable indicators (Outputs, Outcomes and Impacts). 2. Literature reviews ♦ Summarize existing research findings on the impact that investment climate reforms have on key economic variables such as firm creation, exports, investment and employment. ♦ Assess the changes that can be attributed to a particular reform (or to a specific mix of reforms) and seek to answer cause-and-effect questions. 3. Target setting ♦ Estimate Outputs, Outcomes and Impacts at project inception. 4. Impact evaluations ♦ Conduct impact evaluations on topics for which we do not have sufficient evidence in the existing literature (cross country or country-specific). ♦ Focus on sustainability and inclusion. 5. Value for money: Measure internal effectiveness and efficiency 6. Communication ♦ Communicate achievements to all stakeholders. ♦ Build a community of practice for implementers in Government and private sector. 6

(1) Definition of Core Results Indicators Outcomes Fostering Enterprise Creation and Growth Facilitating International Trade and Investment Unlocking Sustainable Investment in Key Sectors IC Strategic Priorities Facilitating Private Participation in Infrastructure and Social Sectors* Impacts Outputs Average number of days to comply with business regulation Average cost to comply with business regulation Number of recommended procedures/firm/policies /practices /standards that were improved/eliminated Number of recommended laws/regulations/amendment s/codes enacted or public policies adopted Number of commitments by investors/private partnerships Number of documents related to trade Number of insolvency cases resolved through the improved insolvency regime Number of firms that benefit from reformed registration requirements Number of firms that benefit from reformed licensing requirements Number of firms that benefit from reformed inspection requirements Number of firms that benefit from debt resolution and business exit processes Number of firms that benefit from improved customs/border services Number of firms that invest Direct compliance cost savings US$ Private sector savings for trade logistics Investment Generated Returns to creditors Renewable energy expected to be produced (MWh/year) Reach indicators 7

(2) Key Findings from the Literature: Business Entry Examples of improvements: India: 6% increase in registered firms due to reduction of entry procedures 1 Colombia: 5.8% in newly registered firms due to One-Stop Shop 2 Mexico: 5% new registered firms and 2.8% jobs created due to a One-Stop Shop 3 Improvements are higher when complementing entry reforms with other reforms (eg, labor) Examples of improvements: India: 6% increase in registered firms due to reduction of entry procedures 1 Colombia: 5.8% in newly registered firms due to One-Stop Shop 2 Mexico: 5% new registered firms and 2.8% jobs created due to a One-Stop Shop 3 Improvements are higher when complementing entry reforms with other reforms (eg, labor) Reduce time and cost of business start up by introducing standard articles of incorporation, eliminating the minimum capital requirement, introducing electronic registration. Source: 1. Aghion et al. (2008), 2. Cárdenas and Rozo (2007), 3. Bruhn (2008). Graph source: Doing Business 2008, 2009, and procedures 20 days US$ procedures 99 days US$ 630 Liberia example Knowledge Gaps: Effects on new firms in low income countries; effects on employment, informality and firm survival. To have a significant impact, we need to reduce time by at least 40% 8

Improvement to the insolvency legal framework, introduction of out of court workouts and capacity building for insolvency administrators.. Increase timely repayments and reduce the cost of debt: India: Increase probability of timely repayments by 28% Brazil, India: Reduce cost of debt Brazil: Increase aggregate level of credit by 39% Increase timely repayments and reduce the cost of debt: India: Increase probability of timely repayments by 28% Brazil, India: Reduce cost of debt Brazil: Increase aggregate level of credit by 39% Increase household credit: US: Increase credit supply up to 5.3% per household Reduce SME failure and reorganization duration: Belgium: Reduce failure rates of SMEs by 8.4% Colombia: Reduce duration of reorganizations from 12 to 34 months Reduce SME failure and reorganization duration: Belgium: Reduce failure rates of SMEs by 8.4% Colombia: Reduce duration of reorganizations from 12 to 34 months (2) Key Findings from the Literature: Insolvency Knowledge Gaps: Effect of legal reforms versus introduction of out of court mechanisms or strengthening capacity of insolvency administrators; impact of communication of reforms to banks and firms, impact of insolvency reforms on specific sectors (tourism, construction). Improved insolvency regimes New mechanisms for debt restructuring and reorganization Reforms to individual bankruptcy laws in high income countries 9

The objective is to develop methodologies that estimate the impact of investment climate projects to:  Compare upfront the impact of different interventions.  Better target and prioritize reforms, policy changes and resource allocation. Approach  Project outcomes, reach and impact of our projects.  We use trend lines based on past data or the findings of literature reviews to estimate future targets.  Collect yearly data points to monitor project achievements.  Conduct impact evaluations on few selected projects to verify targets.  Our approach is aligned with IFC’s Development Goals (IDGs). (3) Target Setting 10

Impact projections for the new Investment Climate FY12-18 strategy include:  Private sector savings of over $600 million, which include $350 million in compliance cost savings and $250 million of savings from streamlined trade logistics services.  $3 billion in investment generation: $1 billion from FDI facilitation in priority sectors and $2 billion from new firms created from business entry reforms.  Increase in trade flows by $2.5 billion following trade logistics reforms.  Increased returns to stakeholders by $1.5 billion resulting from 11,000 firms continuing as going concern after debt resolution reforms.  A 10 percent increase in the number of enterprises complying with tax requirement within three years of supported tax reforms. (3) Examples of Targets for Investment Climate 11

Reform  In November 2010, Romania introduced new out-of-court corporate debt restructuring guidelines. Hypothesis  Out-of-court debt restructuring increases: a) Loan repayment rates. b) New borrower requests. Methodology  Encouragement design: borrowers do not know about the existence of out-of-court debt restructuring guidelines.  Intervention: Trainings (e-learning course of the out-of-court guidelines)  Sample:1,000 ‘struggling’ SMEs that have defaulted on their loans, but have not yet been delinquent on repayment (over 60 days). a) Treatment group SMEs will receive trainings on the guidelines. b) The control group SMEs will not receive trainings.  Compare the two groups and determine effects of trainings on borrowers’ behavior following the intervention. (4) Ongoing Impact Evaluation: Out-of-court Workout Guidelines in Romania 12

(5) Value for money: Central America remittances database ♦ Results of Enviacentroamerica database –Estimate: 1% decline in remittance costs amounts to approximately $600 million directly received by Central American remittance recipients and the local economy by ♦ Cost: $150K World Bank and $160K IADB; in kind support from CEMLA Value for money (donor perspective): $1,870 received by Central American remittance recipients and the local economy for each $1 spent by the Bank & the IADB Using the IFC Impact Development Goal methodology to calculate impact of remittances work - to be confirmed after we hear from Massimo and Marco

(6) Communications 14 Impact framework The operations-learning feedback loop promotes a ripple effect beyond Bank operations. Promote knowledge spillovers for practitioners and researchers across WBG and Global Practices Build a community of practice for implementers in Government and private sector. Development community Government and PS counterparts World Bank Group Global Practices + DIME

(6) Investment Climate Impact Website 15

Objectives of the this week’s Impact Evaluation Workshop Objectives ♦ To develop a high-quality impact evaluation design and implementation plan through clinics by bringing together a country/project delegation with impact evaluation experts ♦ To enhance the country/project delegation’s technical capacity to design and implement impact evaluation of IC reforms through hands-on training on methods and policies ♦ To create an IC impact evaluation community of practice with donors, practitioners, country representatives, and WBG partners Participants ♦ Delegations of client representatives, experts and facilitators to agree on the IE building blocks and implementation plans ♦ Countries represented: Albania, Bangladesh, Benin, Bosnia and Herzegovina, Kenya, Kosovo, Malawi, Moldova, Nepal, Romania, Serbia, Tajikistan 16 SET THE STAGE for new impact evaluations. ADDRESS knowledge gaps… TRAIN on evaluation methods… DEVELOP implementation plans... BUILD a CIC impact evaluation community of practice

Investment Climate Impact Program Marialisa Motta THANK YOU Paris, November 12, 2012

Back up slides 18

Investment Climate – A Joint World Bank Group Space Consolidated Investment Climate program 19 CIC / FIAS A unique WBG partnership: includes mandates of the World Bank (IBRD/IDA), MIGA and IFC Ultimate objective: better service and value to clients

(4) Ongoing Impact Evaluation: New Tax Code for SMEs in Georgia 20 Reform  In September 2010, Georgia introduced a new tax simplification regime for MSMEs, expected to significantly reduce compliance cost:  SMEs with turnover below GEL 30,000 (approx. USD 18,000) are exempted from income taxation.  SMEs with turnover below GEL 100,000 (approx. USD 61,000) are taxed based on turnover (3 or 5%). Hypothesis  Tax reform increases tax compliance.  Tax reform increases firm formalization. Methodology  Only firms with turnover below GEL 100,000 (approx. USD 61,000) are eligible.  Compare firms just below and above the cutoffs and observe the difference in outcomes (tax compliance and formalization) after the reform.  The regression between declared turnovers in 2008 and 2010 should be smooth if no effect is achieved. Otherwise, any changes can be attributed to the reform.

Increases bilateral trade: Sub-Saharan Africa-OECD: By a range between 0.6% and 0.18% 1 Increases productivity: China: Generates a 2% increase in productivity for apparel and leather goods industry and more than a 6% increase for consumer goods 2 Increases bilateral trade: Sub-Saharan Africa-OECD: By a range between 0.6% and 0.18% 1 Increases productivity: China: Generates a 2% increase in productivity for apparel and leather goods industry and more than a 6% increase for consumer goods 2 Equivalent to an ad-valorem tariff reduction of 0.6% to 2.3% 3 Reducing time to export by 1 % Reducing time to export by 1 day Reduction of number of documents for import and export; introduction of risk-based inspection and introduction of an electronic filing systems; and unification of custom operations at the borders. 5% reduction in trade costs over 5 years Increases GDP by 0.98% 4 Source: 1. Subramanian, Anderson and Lee (expect 2012); 2. Subramanian, et al (2005), 3. Hummels (2012), 4. APEC (2004) Key Findings from the Literature: Trade Logistics Knowledge gaps: Effects on intra-regional trade, foreign direct investment and on corruption; effects of reducing number of documents versus introducing risk-based inspections or streamlining custom procedures; effects of single window solutions. 21

22 Key Findings from the Literature: Alternative Dispute Resolution (ADR) Establishing a supportive legal framework for ADR, creating a pool of well trained mediators, raising awareness on the advantages of using ADR, creating financially sustainable centers. Alternative dispute resolution mechanisms.. Save cost and time: ADR takes between 1 to 11 months less than court litigation Evidence is mixed: some studies do not find significant reduction in case duration Between 3% to 50% of costs of litigation or between $500 to $6,000 per case Cases unsettled through ADR that return to courts can have higher total costs Save cost and time: ADR takes between 1 to 11 months less than court litigation Evidence is mixed: some studies do not find significant reduction in case duration Between 3% to 50% of costs of litigation or between $500 to $6,000 per case Cases unsettled through ADR that return to courts can have higher total costs Knowledge gaps: Findings on time and cost savings vary and need more research. Effects on investment, employment, access to finance or growth. Effect of legal reforms, versus introduction of out of court mechanisms, effects on the effectiveness of courts and trust in the legal system (many cases often revert back to courts and end up more expensive)

 For investment climate reforms, we piloted the calculations of direct cost savings across the portfolio.  The rollout of cost compliance savings (CCS) methodology for business regulations and taxation was conducted during fall 2010, with over 100 people trained through events in six country offices.  Between FY10 H2 and FY12 H1, 24 projects used the CCS methodology, reporting almost $170 million worth of savings for the private sector. Example of Impact Indicator: Cost Compliance Savings CCS Formula for business entry 23

Applying pro-competition sectoral policies effective economy-wide, the enforcement of antitrust rules to deter anti-competitive practices such as cartel agreements, anti-competitive mergers, price controls, statutory monopolies and similar. Greater competition (lower price-cost margins, entry of new competitors) Liberalization of sectors (deregulation, removal of price controls and legal monopolies) Effective enforcement of competition laws Increases innovation, growth and competitiveness: More patents, product variety and quality Higher (L, TF) productivity growth Greater welfare benefits, esp. for poor Increases innovation, growth and competitiveness: More patents, product variety and quality Higher (L, TF) productivity growth Greater welfare benefits, esp. for poor Positively impact prices, GDP and other variables: Lower prices (10-45%) Productivity growth (1-30 percentage points) Consumer savings and GDP boost Lower prices and boost productivity: Mexico: Lower costs/prices between 8% (transport) and 37% (airfares) Ukraine - India: Increased productivity by 3.6%- 87% (LP Indian retailers) Kenya: Increased output (98% maize in Kenya) Lower prices and boost productivity: Mexico: Lower costs/prices between 8% (transport) and 37% (airfares) Ukraine - India: Increased productivity by 3.6%- 87% (LP Indian retailers) Kenya: Increased output (98% maize in Kenya) Key Findings from the Literature: Competition Policy Knowledge Gaps: Effects of various competition policy reforms on country competitiveness and relative effects on market competition. 24

Next steps: FY12-15 Roadmap Programmatic approach ♦ Implement a group of impact assessments to make collective progress and share experiences ♦ Encourage use of mixed-methods to complement quantitative analysis ♦ Assess sustainability and inclusion dimensions of reforms Key elements ♦ Systematic identification and prioritization of knowledge gaps ♦ Regular engagement with key partners ♦ Dissemination of knowledge and incorporation of learning in future project design 25

Impact Assessments: Closing Gaps Between Policy and Evidence 26 Literature reviews: tell us what we know about impact Impact assessments: strategically address knowledge gaps Practical Implications: Inputs for strategic and operational decisions on the IC portfolio Summarize research findings on the impact of IC reforms on key economic variables (firm creation, exports, investment and employment…) Identify knowledge gaps Test the impact of new interventions, their combinations and sequencing Assess the sustainability of the impacts and identify sustainability mechanisms Fine-tuning current IC reforms Prioritization of IC reforms in the next strategy cycle

Knowledge Gaps on other IC topics 27 ♦ Inspections Effects of improved inspections system (integrating a risk matrix, ICT platform and simplified inspection procedures) on business entry, accidents and injuries, revenues and the behavior of inspectors and businesses. ♦ ICT Effects of ICT services on business entry, compliance costs savings, government cost savings, transparency and accountability. ♦ Agribusiness Effects of new food safety regulations (harmonized with EU regulations) on cost compliance savings, the quality of business inspection systems and coverage, domestic and export demand. ♦ Green Growth Effects of green building code reforms on emissions of greenhouse gases, effects of energy efficiency reforms on investment and consumption. ♦ Cross-cutting The relative effect of reforms on different industries (e.g., agribusiness, tourism) on firms of different sizes, on poverty reduction. Effects of combined reforms, sequencing of reforms. Are these effects sustained over time? Do reforms affect certain groups differently?