J.16 LED - BEE Assessment.pdf

BUSINESS ENABLING ENVIROMENT

ASSESSMENT

Lebanon Enterprise Development Project (LED)

October 2019

This report was prepared for the United States Agency for International Development (USAID) pursuant to Contract No. AID-268-C-17-00001, Lebanon Enterprise Development Project.

Implemented by:

CHEMONICS INTERNATIONAL INC.

1717 H ST. NW

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DISCLAIMER

This report is made possible with the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the responsibility of HR Works a local subcontractor of Chemonics and do not necessarily reflect the view of USAID or the U.S. Government.

CONTENTS

EXECUTIVE SUMMARY

BACKGROUND

INTRODUCTION & PURPOSE

PROBLEM DISCUSSION

STATE OF THE LEBANESE ECONOMY

LEBANON BEE

THIS STUDY

Key research Considerations Methodology and Sampling Documented Literature Interviews Delimitations

LITERATURE REVIEW

Introduction About the Reviewed Documents Business Environment Formal Constraints

Policy Constraints Legal Constraints Regulatory Constraints Administrative Constraints Budgetary Constraints Institutional Constraints

THE INFORMAL SECTOR

Business Environment Informal Constraints Macro Business Environment Constraints Social Constraints Cultural Constraints

LEBANON BUSINESS ENVIRONMENT COMPREHENSIVE CONSTRAINTS

INTERVIEWS

IDENTIFIED CONSOLIDATED BEE CONSTRAINTS

Findings and Analysis The Identified Constraints The Nature of Constraints The Scope of Harm The Affected Sectors The Affected Regions The Main Causes Conclusions from the Attention Points

THE TOP 5 ISSUES AND THEIR SELECTION

RECOMMENDATIONS AND SOLUTIONS

ACTIONS

CONCLUSION

APPENDICES

APPENDIX I: Literature Review Sources APPENDIX II: The 8 Selection Criteria of Informants APPENDIX III: List of Interviewees APPENDIX IV: Indicative Formal Rules Questions asked to Players and Influencers APPENDIX V: Indicative Informal Rules Questions Asked to Business Owners APPENDIX VI: Issues’ Assessment Model

EXECUTIVE SUMMARY

With unfavorable ease of doing business, competitiveness, and corruption track records, Lebanon’s business environment is poised to become a leading disabler for business. However, Lebanese businesses seem to have developed immunity to the harshness of the business environment.

Acceptance of the problems undermining the business environment was a result of the ingenuity of business leaders; yet pragmatism in dealing with challenges led to complacency. Every Lebanese accept the constraints. Every Lebanese tries to find ways around them. Few are willing to tackle and solve the problem, leading to a dominating and inclusive sense that nothing can be done.

With most efforts aimed at circumnavigating the constraints, Lebanese businesses are failing to create enough jobs. The World Bank stated that the decoupling of GDP growth and employment, skills mismatch, and informal employment are the main impediments facing job creation. This is the result of businesses focusing on non-productive sectors to avoid business environment constraints.

Formal and informal rules regulate the business environment, with the first being directly impacted by government actions or inaction (policy, legal, regulatory, administrative, budgetary, and institutional), which can create barriers and flaws in the business environment, impact the cost of doing business, increase risks, limit market development, and impede competition. On the other hand, informal rules are beyond the impact or control of a government and represent the social, cultural, and behavioral dynamics within firms, between firms, and across value chains. This can be observed through the dominance of family businesses and their prioritizing control of operations in the hands of the family/owner, thus often undermining their ability to grow and create jobs.

Further examination of Lebanon’s business enabling environment (BEE) was done through 20 interviews with businesses and players, who identified 15 main BEE constraints with the most recurring ones being: (i) absence of business incentivizing laws and regulations, (ii) absence of business enabling services and infrastructure, (iii) lack of access to markets, (iv) country volatility, and (v) the high cost of production. These constraints and others ranged from generic, having become chronic national level problems, to sector/industry specific constraints that are impeding certain businesses, harming their internal operations, and undermining their ability to grow and expand. In addition, even though the causes for these BEE constraints can be highly diverse, interviewees kept pointing at the role of the government in creating and sustaining a healthy BEE.

On the other side of the fence, the grass is greener. A hint of initiative can be inferred from the interviewees who provided a blueprint for a U-turn that, if implemented, can transform the Lebanese business environment from being disabled to enabled and Lebanon economic performance from abysmal to stellar. These solutions covered access to markets, standardization, skills mismatch, special economic zones, information, infrastructure, latent workforce, and informal sectors.

From this blueprint, definitive and quick actions were recommended and aligned with the objectives and directions of LED for supporting BEE, impacting tourism, IT, trade, and PPPs, with the hopes of punching a hole in the wall of complacency.

BACKGROUND

Lebanon Enterprise Development Project (LED) is a USAID funded initiative that aims at creating new jobs for Lebanese citizens. It has three main objectives as follows:

1. Create jobs by increasing the competitiveness and enhancing growth of Lebanese client firms

2. Improve Lebanon’s business enabling environment

3. Communicate results and share project knowledge with the public and private sectors

As stated above, the second objective aims at acting on the Business Enabling Environment (BEE) to render it more conducive of business growth and hence more able to create new jobs in Lebanese enterprises. To realize this objective, it is critical to assess the BEE and identify its current characteristics to identify what could be hindering the growth of Lebanese businesses and consequently the creation of new job opportunities.

Understanding the BEE and its constraints requires conducting an initial assessment of the various components of BEE, analyzing them, and identifying key issues that can be acted upon immediately and practically in order to create a more hospitable and growth-conducive business environment.

INTRODUCTION & PURPOSE

The scope of the BEE assessment is to investigate various contextual elements including policy, regulatory, legal, administration, budgetary, and institutional constraints (among others) that are significantly impeding businesses in Lebanon from achieving growth and creating new jobs. Two main sources of information were utilized to accomplish this assessment, and those are:

a. Review of existing literature about Lebanon BEE and state of economy, and

b. Feedback from key informants including players, influencers, and business owners.

The study was done at almost national level taking into consideration, as much as possible, the sectoral and geographic aspects of the BEE in order to be able to reflect the widest perspective possible about the BEE and increase the chances to identify the largest number of practical solutions for stimulating business growth and creating new job opportunities.

The purpose of this assessment is to develop a prioritized list of BEE constraints that impede enterprise (or sector) growth and create obstacles to generating new jobs for Lebanese citizens.

The listed constraints are identified through a thorough review of relevant and current literature about Lebanon’s BEE, and interviews with key informants, such as business owners, economists, bankers, heads of business associations, and other relevant non-governmental organization and entities involved in lobbying and advocacy activities related to the BEE.

PROBLEM DISCUSSION

According to the Government of Lebanon’s Central Administration of Statistics, unemployment rate in Lebanon stands at 10%. However, further investigations show that 17.9% (ILO, 2018) of the Lebanese workforce younger than 24 years old is unemployed. Furthermore, unemployment affects the female population more than the male population with rates of 22.1% and 16% respectively.

However, a reduction in unemployment trend reversed after the eruption of the Syrian crisis in March 2011. According to the World Bank Group (2018), this crisis worsened poverty incidence among Lebanese citizens and pushed up to 300,000 Lebanese citizens (most of them unskilled youth) into unemployment1. This unforeseen dynamic was coupled with a significant slowdown in the growth of Lebanese economy, which also led to the discharge of many employees from Lebanese businesses both in the formal and informal sectors.

In its October 2018 Economic Monitor2, the World Bank identified the impediments to the growth of Lebanese economy, and those were:

1 The World Bank In Lebanon, Country Overview https://www.worldbank.org/en/country/lebanon/overview#1 2 The World Bank, Lebanon Economic Monitor – De-risking Lebanon, Fall 2018 https://www.worldbank.org/en/country/lebanon/overview#1

• Fragility of the macro-financial environment due to a frail macro-fiscal framework, unsustainable debt ratios, and large fiscal and current account deficit, exposing Lebanon to refinancing risks.

• High frequency of political, security and structural shocks, which led to highly volatile and uneven growth due to interruptions in governance and absence of economic reforms.

In parallel, since 2011 the traditional drivers of the Lebanese economy – real estate and construction (combined these constitute the largest service sector at 17.3% of GDP, but these sectors are low value added and do not generate high skill job opportunities), and finance – had suffered greatly from regional turmoil, leading to sluggish real GDP growth that averaged at 1.7% annually.

Consequently, Lebanon is continuously losing its economic competitiveness with its ranks slipping yearly, both globally and regionally. As a result, the economy has failed to generate growth, resulting in limited job creation, both of which are destabilizing factors at the social and political levels.

In the same context, the International Labor Organization (2015) identified various challenges3 facing the Lebanese job market as mainly being:

• The economy’s inability to generate enough jobs, particularly in value-added sectors,

• Informal employment affecting a substantial share of the workforce

• Substantial immigration from several parts of the region and forced displacement from Syria;

• Emigration of Lebanese skilled workers;

• Skills mismatch and occupational segregation at various sectors employing only one group of workers. Example, Syrian workers are the main low skilled workers at the agricultural sector, same case for construction where they occupy 70% of skilled and unskilled jobs.

A historical flashback shows that the above challenges have been in the making for some time. In its 2012 assessment of Lebanon’s Labor market dynamics4, the World Bank Group, identified the following constraints that undermined job creation:

• The decoupling between GDP growth and employment. From 1997-2009, GDP grew by a yearly average of 3.7%, yet employment grew by only 1.1%. This particularly affected women and youth.

• Skills mismatch fully or partially affecting 41% of employees which hindered the creation of higher productivity jobs.

• Informal employment. With an estimation of 20% of labor force in informal employment

(transition rates to formal employment is estimated to be quite low), keeping them without a safety net, impeding access to social insurance and protection by labor regulations.

These aforementioned factors of the Lebanese labor market provide a clear view of the current Lebanese business enabling environment’s impact on job’s creation, exposing various constraints, inter alia labor regulations and government policy regarding immigration. Tackling these issues will act as a catalyst to new employment opportunities for Lebanese citizens.

STATE OF THE LEBANESE ECONOMY

Lebanon is a country that has always played a major role in the history of the Middle East and Levant. Its geographical location along with the dynamics of its population renders it a critical path for many of the socio-political and economic undercurrents that take place in its region throughout history. One of its most differentiating characteristics is the spread of its citizens to every corner of

3 Matching skills and jobs in Lebanon- Main features of the labor market – challenges, opportunities and recommendations 4 World Bank. 2012. Republic of Lebanon--Good Jobs Needed: The Role of Macro, Investment, Education, Labor and Social Protection Policies.

the globe, a fact that allowed for the build-up of two major points of strength into the socioeconomic status of the country.

One is that Lebanese people became significantly sociable, accessible, hospitable, and diplomatic, all of which are the characteristics of a great trader. Second, the Lebanese diaspora maintained strong connections with their country, opening the doors wide for introducing Lebanese culture, and intellect products to the world, and securing and an almost-sustained source of cash flow into the country - at least until recent years when remittances dried due to the economic volatilities in diaspora countries (especially in Africa and GCC) and worldwide cash crunch. This description, however, is not meant to discount the dynamics of Lebanon’s more recent history, which is associated with the civil war, the volatilities in the region, and their consequences on Lebanon’s socio- economic status. These facts led to the emergence of a BEE that has a wide array of constraints and enablers at the same time that Lebanese businesses interact with on daily basis.

On the constraints’ side, the government of post-war Lebanon emerged with the need for large-scale reform at all levels. A total makeover of its public policies, laws and regulations, budgeting and public finance, public administration, and public personnel was – and continues to be – a major requirement echoed by local and international bodies and organizations. In addition, the whole country is in a dire need for a modern infrastructure including roads, water, electricity, telecommunications, and others. Most pressing is the challenge of sustainable development and decentralization of the economy in order to stimulate a more balanced and sustainable development across the country. This represents the constraints side of the BEE in Lebanon.

Yet, simultaneously, and on the enablers’ side, the BEE of post-war Lebanon was given due attention from various stakeholders. In fact, it has been vibrant with a lot of players from both public and private sectors, as well as a wide involvement by international organizations and agencies all eager to support the BEE and build a healthier economy in the country. Through comprehensive and targeted programs all players aimed at securing the right conditions for businesses in Lebanon to grow and create new jobs. Some of those programs focused merely on the enabling environment including laws, regulations, access to funds, and access to markets, whereas a substantial number of programs focused on securing technical assistance and capacity building support for businesses themselves.

Those included offering training, strategy setting, financial planning, organizational development, product enhancement and standardization, etc.

However, although some of the initiatives achieved their goals, many proved to be less impactful for several reasons that could be highlighted in the form of macro BEE considerations:

1. The socio-political structure of the country: Lebanon’s socio-political structure splits the country into regions and confessions in the mindsets of Lebanese citizens in general, and in the perspective of key players (including public and private sector, and international organizations).

This fact does not allow for comprehensively approaching the BEE, consolidating efforts, and implementing, where possible, universal solutions.

2. The nature of the Lebanese economy: Strongly resting on service economy (including tourism), agriculture, and light industry, real economic movement in Lebanon is highly dependent on external variables. In what is related to services, the country is dependent on the inflow of tourists, students, and healthcare seekers, among others. While for agriculture and light industry Lebanon depends on leveraging extensive access to markets both neighboring and international ones. This fact also renders Lebanon continuously vulnerable to regional and international variables and volatilities that govern international political and economic relations.

3. The nature of Lebanese businesses: Although several Lebanese businesses have managed to scale up locally, regionally, and internationally, SMEs and family businesses still represent 90% of the economy. Although, this type of enterprise has significant growth potential, the risk averse mindset of family businesses, and the significant investments needed for institutionalizing this type of businesses remain a challenge when it comes to building the optimal BEE in a country.

4. The scale of the informal sector: In order to create impact, the BEE should be available and accessible to all businesses to benefit from; however, the large scale of the informal sector in Lebanon acts as an impediment in allowing the services and support brought about by the BEE to reach the informal sector. Too many local and international BEE players either do not have (or do not want) access to the informal sector, and in return the informal sector avoid being significantly exposed to sources of help in fear of being obliged to formalize its operations.

Further, the lack of information about this sector and its composition in terms of the nature of businesses, specializations, number of employees, etc. does not allow for setting realistic and fact-based BEE strategies and action plans at the country level.

5. Remittances: Lebanon has always relied on a multibillion-dollar remittance activity, estimated in 2017 at USD 7.9 billion, or 13.209% of GDP5, mostly channeled from Lebanese emigrants from all over the world. Despite being a major source of cash inflow into the country, this money remained a personal affair between family members basically targeted towards deposit accounts (25% of total banking deposits comes from the Lebanese Diaspora6), real estate, and consumption (taking up more than 70% of the inflows7), and to a lesser extent towards business development and expansion. In other words, even though the volume of remittances is significant as a ratio of the GDP (17th highest ratio worldwide), its impact on economic growth and the creation of a productive economy is rather limited.

Besides the BEE considerations, Lebanese firms are facing economic headwinds that are weighing them down and undermining their expansion and ability to create employment opportunities, having to deal with a stalled GDP growth in the past few years (1.2% in 2017; prediction 1% in 2018), and falling credits to private sector due to rising interest rates. Furthermore, main growth drivers of economy like tourism (14.5% of GDP) and real estate (19.2% of GDP) are slowing down, and consumer’s purchasing power is undermined due to low growth and inflation (4.44% in 2017, up from -0.77% in 2016; 6.23% in 2018)8. This downward pressure on the Lebanese economy is rooted in the government’s weak fiscal policy that is not helping to restore investor’s confidence and led in 2017 to a fiscal deficit of 6.6% of GDP, and the growth of public debt to 153.4% of GDP9.

Consequently, to reduce deficits and public debt ratios, reforms are needed in the short and long term, this being the only way forward as identified by the Government of Lebanon, international financial institutions, donors, and the international community during the economic conference for development through reforms with the private sector ‘CEDRE’ that took place on April 8, 2018.

On one hand, short-term reforms need to focus on reducing the fiscal deficit, increasing public revenues, and reducing expenditures on waste management, and electricity (which constitute around 20% of expenditures and may save up to 2.5-3% of GDP, at least approx. $1.5B post-reform10). Thus, reducing government dependency on local banks to finance its activities, improving its credit ratings and lowering interest rates for the private sector.

On the other hand, long-term reforms need to focus on improving Lebanon’s business environment, and governance. These reforms target regulatory, legal, institutional and administrative aspects of the Lebanese business environment such as the simplification of bureaucratic procedures, revamping the Code of Commerce (the amendment of the code of commerce was ratified by the Parliament on March 7 2019), enhancing the ease of doing business, and fighting corruption. These reforms spurs accountability, credibility, and confidence; leading to a more conductive business environment that generate productive activities and create employment opportunities for Lebanese citizens.

5 World Bank – Personal Remittance Received 6 McKinsey – Lebanon Economic Vision 2018 7 McKinsey – Lebanon Economic Vision 2018 8 BLOM Invest The Lebanese Economy in 2018, Time for Drastic Reforms 9 World Bank 10 BLOM Invest The Lebanese Economy in 2018, Time for Drastic Reforms

LEBANON BEE

USAID defines BEE as “the entwined set of policy, institutional, regulatory, infrastructure and cultural conditions that govern formal and informal business activities. It includes the administration and enforcement of government policy, and national and local institutional arrangements that affect the behavior of relevant actors: regulatory authorities, entrepreneurs, business and trade union organizations, banks and nonbank financial institutions, and civil society organizations” 11.

A conductive BEE is one that encourages firms to operate efficiently. The World Bank Lebanon Enterprise Survey discusses several factors and rules that shape the Lebanese business environment, and identifies the main factors that impact a firm’s ability to operate and prosper as follows:

First, business environment factors and rules can both be enabling (accommodating) or disabling (constraints) and play an important role in whether a country will prosper or not.

Second, the business environment’s impact on firms is dependent on whether these organizations have experience. Accordingly, seasoned firms and young ones may differ in their capabilities, and their success is dependent on their ability to successfully navigate the business environment12

By the same token, Mercy Corps evaluates a country’s BEE through the assessment of formal rules on one hand, which are under the direct influence of the government, and informal rules on the other, which are outside the influence of the government.

The steady application of formal rules through the functioning of various governmental organizations such as the judiciary systems, regulations, inspection and licensing, revenue authorities, company and land registries, industry regulators, local tax offices and self-regulation mechanisms, affects market outcomes and regulates players’ participation and behavior.

However, social, cultural and political norms and practices – informal rules – shape the application of the formal rules. Consequently, a weak formal rules application, leads the BEE to be somehow governed by the informal13.

In this regard, it is important to consider that Lebanon’s BEE is governed by the following formal and informal dynamics:

11 USAID - Business enabling environment Indonesia 2011 12 World Bank Enterprise Survey - Lebanon Country Profile 2013 13 Mercy Corps - Business Enabling Environment Assessment Tool

Strong BEE encourages firms by creating incentives for firms to innovate and thus increase productivity, which are key factors for sustainable development and job creation.

In turn, the productive private sector will expand employment and contribute taxes deemed necessary for public investment in health, education, and other critical sectors.

Weak BEE increases obstacles to conducting business activities and thus decreases a country's prospects for reaching its potential in terms of production and employment.

Rules Government Influenced Impact Variables Assessment

Goals

Formal rules Yes, impacted by government activity

Excessive or negative rules can create barriers limitations, and flaws in the business environment

Increase/decrease the cost of doing business

Increase/decrease risk

Hinder/Support market development

Reduce/Support competition.

General rules and their enforcement: contract, property, consumer and environmental protection, weights and measures, health and safety, competition and tax laws.

Sector-specific rules:

banking regulations, energy & environment regulations, telecommunications acts, and land use and ownership laws

Non-statutory regulations such as quality assurance mechanisms, third party certification, and quality standards.

Infrastructure and services

Finance and access to funds

Understand the enablers or constraints on private sector activity resulting from government activity or inaction

Informal rules and norms

No, generally outside the direct influence of the government

Social & Behavioral dynamics within firms, between firms, and across value chains

Social and cultural issues (e.g. women’s role in the workplace, perceptions of paying for services or interest, the role of social factors, etc.

Create a picture of the business environment that supports or hinders the private sector outside formal government channels

More specifically, informal rules and norms that govern the BEE in Lebanon are:

1. The intra-company norms – dynamics within firms – are associated with corporate governance, professional management, hiring decisions, and the quality of leadership decisions. Those directly enable or disable the likelihood for business growth. In parallel, they encompass a firms’ abilities to navigate turbulent times and show resilience and agility facing changing market conditions.

2. The inter-company norms – dynamics between firms – are associated with business relations and resources sharing. It stems from the combined effort of stakeholders and leads to having either a poor or a beneficial business environment

3. The value chain norms – dynamics across value chains – are associated with constraints that affect all firms, players, and participants in the value chain. It stems from commodities’ price volatilities and global market volatilities and arey outside the control of domestic government.

Still, it is noteworthy for understanding the BEE in Lebanon, that as per the World Bank, 23,000 individuals enter the labor market each year since 2012. At this rate the Lebanese economy needs to create more than 6 times the number of jobs it is currently creating14. Accordingly, a BEE reform strategy should foster healthy and inclusive economic growth, consequently creating employment

14 World Bank. 2012. Republic of Lebanon--Good Jobs Needed: The Role of Macro, Investment, Education, Labor and Social Protection Policies opportunities. In this respect, DCED’s multi-donor guidance15 indicates that business environment reform should aim at improving the functioning of all businesses by:

• Reducing business costs and risks caused by poor or changing government policies, laws and regulations.

• Increasing competition by stimulating new market entrants.

Considering that more than 90% of Lebanese businesses are categorized as SMEs, reforming the Lebanese business environment should lead SMEs to focus on innovation, wealth generation, and providing employment opportunities, thus driving economic value creation16.

THIS STUDY

As highlighted earlier, the purpose of this study is to conduct a comprehensive assessment of the BEE in Lebanon in order to:

• Understand current BEE dynamics of the country.

• Identify the most pressing BEE constraints - relevant to LED - that are impeding businesses from realizing growth and creating new jobs for Lebanese citizens.

• Consolidate and prioritize the most pressing BEE issues.

• Provide practical recommendations for resolving selected BEE issues.

Given the mentioned macro BEE considerations, identifying the BEE constraints that are impeding Lebanese businesses becomes more delicate. It is very important, in such a context, to identify reliable sources of information, in order to draw valid conclusions. Accordingly, this assessment referred to targeted informants who are significantly active and involved in the BEE, supported by reliable and recent literature from local and international sources.

Key research Considerations

There is no doubt that major efforts have been and continue to be invested in studying the BEE of Lebanon. Effectively, there is global implicit and explicit agreement that in order to enable Lebanese businesses to realize growth and create new jobs, it is critical to work on two main components: an internal component that focuses on building the institutional capacity of the business itself, and an external component that focuses on building and nurturing a business conducive environment at all levels, i.e. policy, regulatory, legal, taxation, markets, etc., which is the scope of this study.

Many initiatives are concretely being implemented on both the internal and external components that enable businesses to grow, and for that purpose, many studies, surveys, and interviews have been conducted. This includes initiatives from the World Bank, international organizations, Lebanese Ministries, etc. However, as noticed from the topics covered by the available studies, most of them had confined objectives that emphasized a specific sector, region, industry, or social group, rather than the whole BEE of Lebanon. Still, this aspect of comprehensiveness of the studies is essential if the various constraints of the BEE are to be identified in totality.

Accordingly, this research was approached with the above attention points in mind, and as a result the following issues were taken into consideration:

1. Approach the study comprehensively focusing on the overall BEE of Lebanon, rather than on a specific sector, region, industry, or social group.

15 Donors Committee for Enterprise Development - Creating An Enabling Environment For Inclusive Business 2016 16 Ministry of Economy and Trade: Lebanon SME strategy 2014, A roadmap to 2020

2. Emphasize the aggregation of the literature review findings from various studies. This approach was valuable in allowing to compare between the outcomes of the various BEE studies, and consequently identify common constraints or issues that recur across the various researches.

3. Ensure that the identification of the informants is selective when it comes to BEE players and influencers, and more random when it comes to Businesses. The rationale is that for a country the size of Lebanon, the key BEE players and influencers are very well known and can be targeted directly, whereas in Businesses’, randomness is critical for validation of the results, and to mitigate the effect of acquiring information from an isolated sample.

4. Consider both the formal and informal norms that constitute the BEE in Lebanon.

Still, in addition to the above points, the various types of stakeholders as well as players who can worsen or relieve the constraints that are impeding Lebanese companies’ growth and their job creation capacity were considered. Those stakeholders were split into two categories:

• Businesses: Those provided their perspective about what are the major and most challenging

BEE constraints that are standing in the face of their growth and ability to create jobs. The main aim was to meet with business owners and CEOs and focus on acquiring a wide perspective of their experience with BEE’s both formal and informal rules. This in addition to accounting for any other type of important constraints that might have been missed in scoping this study.

• BEE players: Those included entities whose decisions, actions, inactions, and directives have a direct impact on creating a healthy or an unhealthy BEE. BEE direct players are public sector entities, private sector entities, and international development institutions, and influencers.

Methodology and Sampling

To implement this study, a standardized methodology was utilized, based on 6 main steps as follows:

1. Identify and agree on the sources of information

2. Collect required information from targeted sources

3. Analyze and discuss acquired information

4. Identify a list of pressing BEE constraints and assess their validity (availability of solution, practicality of solution, availability of political willingness).

5. Assess and identify the prioritized - up to five - BEE constraints / issues

6. Provide practical recommendations for solving the identified issue/s

Two primary sources of information were utilized in this study: 1) Documented Literature and 2) Interviews with key informants.

Documented Literature

A detailed literature review of endorsed references was conducted to better understand the historical and current state of the BEE in Lebanon, and the main factors that led to the current situation. Further, the literature review investigated references, including policy, regulatory, legal, financial, and economic reports and formal documents in order to deduce the location of constraints (or potential constraints) that are standing in the way of business growth and job creation.

A structured approach was utilized in compiling the proposed list of literature review, while providing a clear rationale for each of the references. Effectively, reference was made to both local and international literature and reports in order to ensure 1) relevance and recentness of the document to the BEE, 2) objectivity and reliability in terms of its source/publisher, 3) accommodation of multiple perspectives, and 4) comprehensibility in terms of covering all aspects of the study. In order to ensure credibility, literature review references came from international entities including the World Bank, UN, ILO, McKinsey, in addition to local entities including Ministry of Economy and Trade, Investment and Development Authority of Lebanon (IDAL), BLOM Invest, and others. A comprehensive list of literature review sources is available in Appendix (I).

Interviews

This step involved interviewing a group of key stakeholders that have direct relevance, impact, and/or influence on the BEE in Lebanon, and they were identified taking into consideration the following selection methodology:

1. Determine the type of information needed from human sources (facts, perspectives and opinions, initiatives).

2. Identify the profile of informants from whom the needed information can be collected (sector, organization, position within the organization, availability/access to needed information, active involvement/influence on BEE).

3. Identify a pool of potential informants and sort them into the 2 categories identified in the work approach (Businesses and Players)

The selected list of informants was based on 8 predefined selection criteria shown in Appendix (II).

Here it is important to note that a reasonable level of randomness was maintained in the study in order to ensure that the assessment will not be biased towards a predefined conclusion.

Based on the above methodology, distribution of the informants was as follows:

• Mature Business: 2 Informants

• SMEs: 1 Informant

• Transport & Shipping Sector: 1 Informant

• Food & Beverage Sector: 2 Informants

• Energy Sector: 1 Informant

• Tourism Sector: 1 Informant

• Banking Sector: 1 Informant

• Investors: 1 Informant

• Ecosystem: 4 Informants

• Public Sector: 2 Informants

• Economists & Influencers: 4 Informants

It is important to note that 20 to 25 informants were targeted for the interviews, of which 20 were interviewed (Appendix III). Further, the interviews were conducted using indicative unstructured questionnaires in order to allow for an open discussion and flexible exploration about the BEE constraints and solutions. Utilized unstructured questionnaires are included in Appendix IV and V.

Delimitations

It is critical to highlight that the boundaries of this study were developed in order to complete the required assessment within the allocated scope and time frame. The availability of the interviewees was paramount, as was the use of open-ended questions to gather as much information as possible.

LITERATURE REVIEW

Introduction About the Reviewed Documents

As highlighted earlier, the comprehensibility and reliability of the literature review sources was critical for reading the overall trends that shape and define the BEE in Lebanon at the time of this assessment. The 18 sources that were relied upon during this study yielded critical information about the BEE, and to a large extent, this information was highly converged in terms of the named constraints, their causes, and the actions that had to be taken in order to create a healthy BEE in the country. With a focus on World Bank research, especially in the Ease of Doing Business, several constraints that are facing the Lebanese business environment were identified. In addition, International Labor Organization reports provided insights into the Lebanese labor market and its dynamics, the challenges it faces, the level of segregation, skills mismatch, and the level of informality, and same was reviewed in McKinsey’s Report of 2018. In the same context, domestic reports from commercial and investment banks were crucial in securing an insider perspective into the current state of Lebanese economy and financials, this as well as reports issues by the government of Lebanon, which presented a clear picture on the informal norms and dynamics of the Lebanese Business Environment. All the highlights of the reviewed literature were consolidated and presented in the following section of this Agenda.

Business Environment Formal Constraints

In alignment with LED Objective 2, Lebanon’s formal business enabling environment was assessed and dissected along policy, legal, regulatory, administrative, budgetary, and institutional lines, with the objective of identifying business environment constraints. Those BEE aspects were studied taking into consideration that in terms of business sophistication, technological readiness and innovation, Lebanon appears to be stable and even pushing above its weight, but is still burdened by a poor macroeconomic environment, inefficient institutions and labor market.

According to the World Economic Forum Executive Opinion Survey 2017, the most problematic factors for doing business in Lebanon are government instability, corruption, inadequate supply of infrastructure, and inefficient government bureaucracy. In as much as those appeared to be the usual recurring suspects that are at the root cause of BEE constraints, they were critical starting points for looking into the anatomy of the problem from a topical perspective.

Policy Constraints

Various government policy affects firms’ abilities to develop, expand, and hire in Lebanon. For instance, open markets allow firms to access new opportunities, grow, and build the capacity for businesses that are geared towards exports. In addition, it affords business better access to international markets and enables them to source low cost supplies. Further, a sound monetary and fiscal policy reduces the overall financial risks in the country, enables access to finance, and reduces the cost of capital across sectors. All these coupled with a sound taxation policy promote the sustainability of an advantageous business environment.

However, based on the reviewed literature, the main policy constraints facing Lebanese businesses can be highlighted as follow:

1. Monetary, exchange rate, and fiscal policies

In order to ensure continuous flow of foreign capital to be able to finance public and current account deficit, the Central Bank of Lebanon (BDL) maintained monetary and exchange rate policies, which led to the increase of interest rates paid on short term deposits, and the financing cost for businesses, thus undermining their incentives to invest in growth creating activities, expansion, and hence job’s creation17.

2. Tax Policy Tax policies in Lebanon are fragmented and lack consistency; they severely penalize labor and reduce incentives to invest in high productivity sectors. For instance, labor income is taxed approximately 3 times higher than other income such as interest income, capital gains, or

17 World Bank. 2012. Republic of Lebanon--Good Jobs Needed: The Role of Macro, Investment, Education, Labor and corporate profits. In addition, various sectors are also taxed differently. For instance, taxes imposed on the energy, and telecommunications sector, are exceptionally high, whereas, real-estate sector is practically exempted from taxation18.

3. Trade Policy In addition, an analysis of Lebanese trade policy exposes the lack of coordination between various trade-related entities and leaves the private sector exposed to technical and non-technical issues (e.g. sanitary and phytosanitary (SPS) conditions governing food and food safety, registration requirements, quality certifications)19, this presents a constraint for the Lebanese Businesses to seek new markets and open the doors for abundant exports. This constraint mainly affects Lebanese firms engaged in trade with other countries and expecting to benefit from Trade Agreements, which can help with the expansion, and enable them to import low cost supplies. However, the benefits of trade agreements were diminished due to this weakness in trade policy. This was clearly manifested after the EU Association Agreement entered into force leading to a short-lived boost in export that was eroded by the exponential growth in imports. As a result, Lebanon currently ranks at 150th place in trading across borders.

A brief impact assessment table of the various trade agreements is highlighted in the table below:

Agreement Partner Status Impact to date Greater Arab Free Trade Agreement (GAFTA)

Arab Countries Entered into Force in 1998 Positive Impact

EU Association Agreement

European Union Entered into Force in 2006 Negative Impact

EFTA Free trade agreement

Iceland, Liechtenstein, Norway, and Switzerland

Entered into Force in 2004 Neutral Impact

Legal Constraints

Law acts as a major contributor to the development of businesses and the growth of enterprises. It is the instrument in which change is introduced, order is kept, and interest reconciled. The establishment of the rule of law sustains the climate of stability and predictability, reducing business risks, enforcing contractual obligations, and protecting property rights.

In addition, an established legal framework ensures reliability and enforceability of applicable rules.

The rule of law, consequently, attracts private investment, lower transaction costs, allow greater access to capital, and maintain level playing field.

The Lebanese legal framework is based on civil law, inspired by the French system, with disputes typically resolved through a three-tiered court. The legal system of Lebanese is a combination of Civil Law, Islamic and Ottoman legal principles and evidently laws of Lebanese legislature. It acquired the paramount principles of both its judicial and legal systems while under the French mandate which occurred from 1920 to 1943 and has as such retained most of them to date.

It is worth noting that Lebanon's legal framework is in compliance with international standards, offering equal treatment for both local and foreign investors, and in addition presenting an appropriate platform for businesses. Moreover, Lebanon upholds a favorable investment environment when it comes to foreign direct investments (FDIs).

In order to facilitate and encourage the establishment of new businesses in Lebanon, the investment legislation was made to be simple and transparent, as such ensuring the growth and expansion of businesses. Several laws and decrees have been passed by the Government of Lebanon, which have

18 World Bank. 2012. Republic of Lebanon--Good Jobs Needed: The Role of Macro, Investment, Education, Labor and

19 McKinsey - Lebanon Economic Vision 2018 further affirmed Lebanon’s noninterventionist stance towards private investment. It is also worth noting that Lebanon is part of various investment treaties which have improved its investment climate and promoted foreign investments. It is currently a signatory of over 50 treaties with multiple countries.20

By the same token, for companies to branch out and succeed, an efficient legal and judiciary system is required, thus creating a business-friendly environment, which would ultimately increase trust and reduce risks between parties. Yet this is not the case in Lebanon. Inefficient Lebanese judicial systems render contract enforcement costly at 30% of the claim, and time consuming since a legal would require 2 years on average21.

To address this issue, the Lebanese Arbitration Center was established in 1995 to facilitate dispute resolution. The Lebanese Arbitration Center is closely affiliated with the Chambers of Commerce, Industry and Agriculture, which is worth noting given that its bylaws and regulations are greatly homogeneous to those of the International Chamber of Commerce in Paris. Further, the Lebanese arbitration center heavily relies on the Lebanese Procedural Code for the regulation of both internal and international arbitration.

Moreover, the Lebanese arbitration procedure became more efficient due to an amendment that was introduced by law 440/2002 to the Code of Civil Procedure. In order to further solidify the arbitration procedure, Lebanon ratified both the 1988 Convention of New York pertaining to international arbitration and the 1965 Washington convention relating to the settlement of disputes between governments and investors in other countries. Treaties, contracts and agreements related to the protection of investments include as such the possibility of resolving disputes by arbitration. 22

Even with these initiatives, weak government enforcement capacity still impedes the ability to take advantage of existing legal frameworks. When it comes to enforcing contracts, courts are essential for firms since only they have the ability to correctly and fairly interpret the rules of the market as well as protect companies’ economic rights. Moreover, in order to promote fairness, efficient and transparent courts are required, which would ultimately encourage new business relationships, especially if business owners know for a fact that the judicial system will protect them in the event of fraud or problems with customers. This however, does not seem to be fully supported by the current state of implementation of the legal and judicial systems in Lebanon. With this at hand, it is an undeniable fact that speedy and efficient trials would be essential for all businesses, and specifically small enterprises that would lack the resources needed for them to stay in business while awaiting the verdict of a long court dispute.

According to data collected by World Bank Ease of Doing Business 2018, contract enforcement in Lebanon takes 721 days, and costs 30.80% of the value of the chain. Globally, Lebanon stands at 135 in the ranking of 189 economies in the enforcement of contracts (Resolving Insolvency 151 of 189 economies), which is largely alarming.23

It is also important to note that time standards are rarely respected in well more than 50 % of cases24. The Lebanese law fails to regulate the maximum number of adjournments allowed and that neither mediation nor conciliation are governed by a consolidated law or chapter or section of the applicable Code of Civil Procedure encompassing substantially all the aspects of the legal cases.

20 Fransabank. 2017. Lebanon: Investment and Business Guide 21 Ministry of Economy & Trade - Lebanon SME Strategy 2014 22 IDAL. 2012. Doing Business in Lebanon 23 World Bank. 2016. Doing Business in Lebanon 24 World Bank. 2019. Doing Business in Lebanon

Regulatory Constraints

Effective regulations are key for the promotion and development of productive investments and the harmonization of private and public interests. With regulation touching on the legal forms a private company can take, its access to capital, and reaching to the level of protection investors can have;

regulatory enablers affect the incentives to invest and create a favorable business environment.

In contrast, the lack of laws and regulations impedes the business environment. According to the 2018 Lebanon Economic Vision25, Lebanon is stuck with an outdated Code of Commerce that dates back to 1942 and missing the necessary regulation that enables productive activities and strengthens several industries. These regulations are still under consideration in parliament, as listed below:

Regulation Issues Competition Law 5 years since submission of draft Closing a business 5 years since submission of draft Judicial mediation 5 years since submission of draft Bankruptcy law Drafting Stage Insolvency practitioner law Drafting Stage Secure lending Drafting Stage E-signature law 4 years since submission of draft Preferred Shares 6 years since submission of draft Equity compensation law Drafting Stage Intellectual Property protection law Drafting Stage

Consequently, the lack of modern business regulations along with loose application of existing ones affects various sectors of the Lebanese economy and undermines their business environment, as shown below a snapshot of the affected sectors26:

Sector Regulations Impact Real Estate &…