The Link Between Public Sector Reforms and a Thriving Private Sector

Creating and sustaining a public sector that is transparent, inclusive and accountable is the ultimate goal of government reform initiatives, both in developing nations and world powers. One area where this is particularly important, but where a fine line must be walked, is with the private sector.

There’s a push/pull force at work on this front.

Regulatory reform that touches the business sector must, on the one hand, be responsive and do the job of facilitating the interests and needs of the business community. Too much regulation – or regulations that are too onerous – will effectively make it harder to do business. That may stifle business spending, investment, employment and economic growth in total.

But those interests must be balanced against the public good. Regulations that may serve the financial interests of a particular sector but compromise the quality of life of a nation’s people – think air and water pollution, for example – will not measure up to world standards.

That balancing act has made business-oriented policies and regulations an ongoing focus of reform projects, and not just in developing countries. There are lessons to be learned on this front that are critical to any forward-thinking government. The World Bank has funded various such initiatives through the years. Three of the case studies it outlines in its Doing Business 2018 and 2017 reports provide helpful food for thought.

Information transparency at business registries

New regulations on the transparency of business information reflect growing concerns over how some take advantage of obscure company ownership structures to move money illicitly around the world. Allowing disclosure of beneficial business ownership (those who receive equity benefits even if they’re not legal owners), for example, makes it easier to identify suspected money launderers and potential sources of terrorist financing. Furthermore, greater transparency strengthens public confidence in businesses and institutions, helps to better manage financial exposure and makes for more stable markets, the report found.

Facilitating access to business credit

Modern secured transaction laws are being increasingly adopted by developing countries. It’s one way to help make the business environment more secure for smaller companies. Collateral-related reforms are key to the process. Expanding the scope of what small and mid-sized businesses can use as collateral also expands their access to finance. One reform approach is to establish a collateral registry for all sorts of movable assets – digitally-based, accessible to the public and searchable. Ghana opened the first such registry in Africa, where $1.3 billion was issued in financing for small businesses and $12 billion for businesses overall.

Reforming insolvency laws

When a viable business is in financial stress, if procedures for restructuring and reorganization aren’t efficient, the price can be steep – loss of the business itself, its contribution to the economy (like employment and taxes) and losses that creditors can’t recoup. A strengthened framework for insolvency policies, studies have shown, can result in reduced cost and level of credit and lower interest rates on large loans. One example is France, whose 2005 insolvency reforms featured a new restructuring tool – a “safeguard procedure.” This allowed struggling firms to apply for court protection while they negotiated a restructuring plan with creditors. This was refined in 2008 and again in 2011, eventually resulting in business survival in three out of four cases initiated.