Attachment_J_11_-_ICI_Final_Report.pdf

December 15, 2014

This publication was produced for review by the United States Agency for International Development by Chemonics International. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

INVESTMENT CLIMATE IMPROVEMENT PROJECT

Final Report 2010-2014

Task Order No. EEM-I-13-07-00008-00

CONTENTS

Acronyms ..................................................................................................................................................... i Section I. Overview

A. Context: Implementation of Strategic Frameworks

B. USAID’s Investment Climate Improvement (ICI) Project

Section II. Policy Reform

A. Overview: World Trade Organization and World Bank Offer Reform Models

B. The Palestinian Authority is Technically Prepared for WTO Observer Status

C. Tax Reforms Recognized in 2015, but Other Reforms Miss Doing Business Survey

D. Tools are in Place to Help Understand Policy Scenarios

E. Other Policy Support Strengthens ICI Objectives

Section III. Fiscal Reform

A. Overview: IMF Assessment Provides Focus

B. Automation Increases Revenue

C. Other Fiscal Support Strengthens ICI Objectives

Section IV. Grants Engage the Private Sector in Reform

Section V. Lessons Learned and Recommendations

Annex I

This publication was produced for review by the United States Agency for International Development. It was prepared by Chemonics International Inc.

Investment Climate Improvement Project (ICI) Final Report i

ACRONYMS

ASYCUDA Automated system for customs data CGE Computable General Equilibrium CTT Core Technical Team DSGE Dynamic Stochastic General Equilibrium IPR Intellectual property rights IMF International Monetary Fund ICI Investment Climate Improvement Project IEC Israel Electric Corporation IT Information technology LTPO Large Taxpayer Office MOF Ministry of Finance MONE Ministry of National Economy NTF National Task Force NET Net Investment & Services Company NIS New Israeli Shekel (currency) PIPA Palestinian Investment Promotion Agency PA Palestinian Authority PalTrade Palestinian Trade Center PCBS Palestinian Central Bureau of Statistics PCCDS Palestinian Center for Communication and Development Strategies PMA Palestinian Monetary Authority PMOH Palestinian Ministry of Health RMS Revenue Management System SCSM Small Calibrated Structural Model SPS Sanitary and Phytosanitary TAT Technical Advisory Team TFP Trade Facilitation Project VAT Value-added tax WBG West Bank and Gaza WTO World Trade Organization

Investment Climate Improvement Project (ICI) Final Report 1

SECTION I. OVERVIEW

A. Context: Implementation of Strategic Frameworks

Political uncertainty and restrictions have inhibited the West Bank and Gaza’s (WBG’s) economic expansion for years. In 2010, unemployment was at an all-time high and the government’s liquidity crisis deepened due to the private sector’s (bank and non-bank) reluctance to finance the public sector.

The transfer of customs clearance revenues was either delayed or used to pay outstanding debt to Israel, and donor aid was insufficient to cover the fiscal deficits. Moreover, movement of people and access to goods outside of the Palestinian territories remained unchanged.

Despite this gloomy economic scenario, the government recently appointed forward-looking partners in key ministries who want to take control of the WBG’s economic destiny. Building on that momentum, the Ministry of National Economy (MONE) and Ministry of Finance (MOF) adopted frameworks and recommendations from three multilateral organizations — the World Trade Organization (WTO), the World Bank, and the International Monetary Fund (IMF) — to inspire and implement reform. At the same time, the Palestinian Reform and Development Plan (2014-2016) highlighted the need to place its finances in order, reduce dependency on external aid, and create an institutional environment conducive to private sector growth.

B. USAID’s Investment Climate Improvement (ICI) Project

USAID designed the ICI Project to support the Palestinian economy in moving toward a more sustainable fiscal position through a) improved revenue generation and b) adoption of policies and legislation that promote private sector development. Financed under the General Business Trade and Investment II indefinite quantity contract awarded to Chemonics International, ICI began in September 2010 and concluded in September 2014, providing approximately $18.65 million in assistance.

ICI comprised two project components, policy reform and fiscal reform. The policy reform component was divided into two sub-components: preparing the Palestinian Authority (PA) to achieve WTO observer status and improving the business-enabling environment. Additionally, through grants and subcontracts, ICI implemented four crosscutting activities: a grants program, gender-related activities, a public information and outreach campaign, and institutional capacity building and training. Throughout the project, ICI’s main partners were the MONE and MOF. The project also provided targeted assistance to 12 nongovernmental organizations (NGOs) and private companies through its grants program. ICI collaborated intermittently with the Ramallah Municipality and other municipal agencies, the engineer syndicates, Civil Defense, the Palestinian Monetary Authority (PMA), the Palestinian Capital Market Authority, the Palestinian Land Authority, and the Palestinian Investment Promotion Agency (PIPA). In the final year of project operations, ICI supported the Ministry of Health, the Palestinian Electricity Transmission Company, the Palestinian Energy Authority, and the Ministry of Local Government. In addition to these organizations, ICI extended its reach to other ministries, organizations, and individuals

Achieving Long-Lasting Impact

“Despite the rapidly changing environment in the West Bank and Gaza and the consequent shifting priorities, ICI has achieved a measurable and long-lasting impact for the Palestinian economy.”

-Fadi Abdellatif, Contracting Officer’s Representative (COR), USAID

Investment Climate Improvement Project (ICI) Final Report 2 in nearly all of the West Bank’s regions to achieve project goals (see Exhibit 1).

Exhibit 2 below summarizes the project’s main outcomes. Despite government strikes, partners who were often non-responsive, and a full project shutdown in the first year due to funding uncertainties, the ICI team is proud to have met three of its project objectives, and is confident that the fourth will be met in the very near future.

1. The PA will be fully prepared for observer status in the WTO. – Achieved

2. The Palestinian private sector will be equipped to participate with the PA to fulfill WTO accession requirements. – Achieved

3. PA revenues will increase progressively, reducing the large gap between PA fiscal revenues and expenditures. – Achieved

4. The Palestinian ranking in the World Bank’s Doing Business Indicators will improve.

– Will likely be achieved in future Doing Business reports.

To accomplish these goals, ICI first organized working groups with the National Task Force (NTF) and Technical Advisory Team (TAT) to lead the WTO effort. The NTF, comprising representatives from the public and private sectors and the TAT, included 45 PA government officials who developed a roadmap for WTO permanent observer status. ICI helped draft 37 key pieces of legislation, three of which were focused on helping the PA comply with WTO guidelines, such as the Intellectual Property Rights (IPR) Law. One-third of the ICI grants awarded directly helped this subcomponent attain its project objectives. During these activities, a public outreach campaign indicated that public awareness of the WTO had increased by 38 percent.

ICI helped the PA government complete the World Bank’s Doing Business reforms, which led to an improved 2014 score (published in 2013): 138 out of 189 economies as compared to 145 out of 189 in 2013 (a lower score reflects greater ease in doing business). For the current 2015 report (published in October 2014), ICI and its counterparts were disappointed in the slip in overall score to 143 (out of 189).

The important reforms that were made during the project were not reflected due to the World Bank’s recent change in ranking methodology, the changing scores of other economies, and the fact that the World Bank often requires one to two years for its staff to verify reforms claimed by a country.

Exhibit 1. Areas Served by ICI

Investment Climate Improvement Project (ICI) Final Report 3

Exhibit 2. ICI in Numbers

Investment Climate Improvement Project (ICI) Final Report 4

Exhibit 4. ROI/Leverage

Notwithstanding, ICI’s support to PA tax reforms were recognized in the 2015 report, causing a 28-place improvement in Paying Taxes from 79 to 51 in the world.

In the 2015 Report, a new indicator was also introduced: the Distance to Frontier Score. This score aids in assessing the absolute level of regulatory performance and how it improves over time. The score measures the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. This allows stakeholders to see the gap between a particular economy’s performance and the best performance at any point in time, and to assess the absolute change in the economy’s regulatory environment over time as measured by Doing Business. West Bank/Gaza improved their score 0.62 percent from last year, and 2.07 percent since 2010.

As a result of information technology (IT) initiatives, including the design and implementation of the Revenue Management System (RMS), the creation and adoption of an interface between the PA and Israeli Customs, and technical assistance provided to the Large Taxpayer Office (LTPO), ICI contributed to the government’s 37 percent increase in total net revenue during the project’s four years of implementation.

As a result of the cumulative fiscal and policy reform initiatives supported by ICI, in 2015 the PA will collect $182 million more in tax revenues than would have been collected absent these reforms.

Based on economic modeling simulations completed by the MONE, the World Bank business enabling environment and WTO reforms will contribute an additional $1.407 million to the Palestinian economy in 2015. This increased GDP benefits the economy through increased investment and employment, and also benefits the PA with much needed incremental tax revenues to addresses the public sector deficit.

Exhibit 3. Economic Impact of ICI Activities in WBG Incremental GDP Growth

Investment Climate Improvement Project (ICI) Final Report 5

Likewise, removing unnecessary governmental procedures reduces transaction costs for private sector production. The methodology for these calculations can be found in the Annex I.

Although the numbers may seem high - they represent an 877 percent annual return on USAID’s four-year investment of $18.23 million - ICI was conservative in the assumptions and used official statistics from the MOF, MONE, and Palestinian Central Bureau of Statistics (PCBS). Moreover, the economic modeling simulations were based solely on those fiscal and policy reforms that ICI directly supported and were adopted by the PA. Following this brief introduction, sections II, III, and IV of this report highlight success stories from ICI’s two components and its grants program. Section V contains lessons learned and recommendations. Project activities, performance indicators, and links to project videos are included in a separate document.

SECTION II. POLICY REFORM

A. Overview: World Trade Organization and World Bank Offer Reform Models

At the project’s onset, several developments created a unique opportunity for the team to address long-standing shortcomings in the enabling environment for private sector activity. These developments included the appointment of reform-oriented ministers in the Ministry of National Economy and other ministries, the PA’s strong desire to include WTO accession in its framework for legal reform and institution building, and significant room for improvement in the World Bank’s Doing Business scores.

To that end, using the WTO and World Bank as a reform framework became the cornerstone of ICI’s policy component strategy. Specifically, ICI set goals to prepare the PA to become technically compliant to achieve WTO observer status and to raise the World Bank’s Doing Business scores. While the WTO-related goal was met, the overall Doing Business score deteriorated despite the accomplishment of significant reforms.

The process of becoming technically prepared for WTO observer status required a combination of legal reform, capacity-building activities in key ministries, and intense efforts to raise stakeholders’ awareness of WTO and its benefits to the Palestinian economy. ICI first established a public-private sector institutional framework to drive the process, and then focused on key legislation that would need revision to comply with WTO rules. As IPR is an important issue in global trade, ICI allocated resources to improve that law, including upgrading the IPR Directorate at the MONE and conducting awareness campaigns to inform stakeholders of IPR’s importance to business and investors.

The PA and WTO:

Observer Status vs. Membership

The formal application made by the PA for WTO observer status reflects its desire to accede to this organization in the future and to actively participate in the multilateral trading system.

From a strict legal point of view, the PA as established by the Israeli-Palestinian accords of the 1990s does not satisfy the formal criteria for candidacy of WTO membership. Once accorded observer status, the PA will have five years to negotiate membership while attending meetings and reviewing WTO documents. Many governments, including the PA, undertake reform in their foreign trade regime in anticipation of the accession process and request observer status.

Due to changing U.S. Government priorities, technical assistance for ongoing WTO support was eliminated in the project’s final year.

Exhibit 5. WTO and World Bank

Investment Climate Improvement Project (ICI) Final Report 6

ICI staff used a similar approach to improve the World Bank’s Doing Business scores, setting up a team of public and private sector members. They chose five topics and later added a sixth based on criteria that did not require excessive legal reform, as this would have stalled the process given the absence of an active Legislative Council. The team focused its efforts on business process reengineering to reduce the cost, number of procedures, and time required to complete an action, such as starting a new business. Team members, including primary stakeholders at the MONE, quickly discovered that of greatest importance to the reform process was the methodology used to make improvements. Early results of this approach resulted in the 2014 overall score (published in 2013) improved from 145 to 138 (out of 189 economies) from the previous year. Even though the World Bank’s Doing Business simulator results suggested great improvement to the overall WBG 2015 ranking, the recently published results (October 2014) showed a slight overall worsening from 138 to 143 (out of 189 economies). It is important to note that simulations are static – they are unable to take into account improvements that other countries will make, as well as the fact that the World Bank must verify all reforms claimed by a country — a process that can take up to two years. Moreover, the World Bank changed its methodology this year, details of which were not made available to the PA or others, and revised 2014 scores that did not alter the overall score but did alter those of some topics. Nonetheless, the PA accomplished significant reforms with ICI assistance, some of which are captured in rankings of individual topics (such as Paying Taxes) and some of which are expected in the near future. Section C below provides additional detail on achievements made with ICI assistance.

Another important success for ICI’s policy component included developing and implementing two mathematical models — Computable General Equilibrium (CGE) and Dynamic Stochastic General Equilibrium (DSGE) — for the PA. Through ICI assistance, the MONE identified and led representatives from six government ministries in learning how to build the CGE model and use it to evaluate alternative scenarios of macroeconomic growth. As a result of this activity’s success, the PMA requested additional assistance to model specific scenarios for monetary policy, such as shocks to the economy caused by interest rate and technology changes. This will allow officials to make more informed decisions based on analytical research and understand economic options as they emerge, such as the effects of changes in trade and fiscal policy. For details on these two models, see Section D below.

Reforms Matter More than Rankings

In addition to the PA, many governments are deeply disappointed at having their overall Doing Business scores decrease in spite of absolute increases in reform. For example, during a public meeting in which the 2015 scores were released, a vocal Chilean contingent demanded to know why they had lost their top Latin American Reformer label to Colombia. World Bank officials responded that their Bankruptcy Law was not enacted until October 2014 – well after the June 2014 cutoff for the 2015 report. This case is similar to that of the PA for this particular topic, and other topics for which significant efforts were made that will not be reflected in the score for many months. World Bank officials appealed to the audience by saying, “Don’t worry about the rankings”.

Exhibit 6. IPR Awareness

Investment Climate Improvement Project (ICI) Final Report 7

Apart from these three successes, ICI provided legal advice in other business-related laws, such as the Debt Resolution Law, Industrial Property Rights Law, Companies Law, and Commercial Agents Law, to improve trade and the enabling environment. The project also funded an online compendium of investment-related laws to promote trade and investment in the PA.

B. The Palestinian Authority is Technically Prepared for WTO Observer Status

The most recent National Development Plan (2014-2016) spells out an economic policy agenda and actions to improve the WBG’s macroeconomic and fiscal framework, thereby improving the overall welfare of the Palestinian population. It also highlights the PA’s commitment to expand bilateral and multilateral cooperation and integrate itself into the international community and global economy. In this regard, the Palestinian government seeks trade and cooperation agreements with potential trade partners and encourages the private sector to take advantage of existing agreements.

Following that directive, the PA has taken important steps to create a trade and investment framework consistent with the WTO, which will promote the competitive development of domestic business and lay the groundwork for integration in international financial and trading networks. The PA recognized that many laws required revision to comply with WTO guidelines; it also understood the need to raise the private sector’s and general public’s awareness of the benefits of becoming WTO compliant.

USAID set out to accomplish these goals through ICI by establishing working relationships with the NTF, TAT, and the WTO unit. The NTF, established by the Council of Ministers in 2010, is structured as a consultative institution to prepare for WTO accession. NTF members make recommendations to the Minister of the National Economy, who in turn defers, when necessary, to the Council of Ministers for final decisions. TAT members represent the public and private sectors and undertake analytical and technical work to support the NTF. The WTO unit, created in 2011 by the MONE as the secretariat for NTF and TAT, advises the Minister of National Economy on WTO matters.

The NTF adopted a two-track approach. First, it proposed a roadmap toward permanent WTO observer status. Second, it undertook activities leading to the implementation of a Palestinian WTO-compatible trade regime. Both tracks required ICI support to improve the trade policy regime, build trade-related institutional capacity, and improve stakeholders’ knowledge of the economy and WTO. Given that WTO observer status is a first step in the accession process, if granted, the PA would attend formal WTO meetings and review documents before negotiations begin. To support the PA’s eventual application, ICI sought out WTO-specific legal advice on how to approach the PA application. Later, ICI provided experts to review and analyze laws, such as the Debt Resolution Law, Foreign Trade Law, and Trade Remedies Law. In 2012, the project supported a study tour for five NTF and TAT members to attend the WTO’s 2012 Public Forum in Geneva, where they participated in workshops and sessions on the multilateral trade system.

ICI also provided technical experts to prepare policy and concept papers on WTO-related issues, such as trade in services, agriculture, and customs. In the future, the MONE plans to form special working groups to tackle sector-specific issues affecting Palestinian trade.

“Prepared” for WTO Observer Status

“Solely because of ICI, the PA is now prepared for WTO observership.”

-Fadi Abdellatif, COR, USAID

Raising Awareness of IPR

“ICI was an excellent project. It helped us to understand the needs of IPR and where we are going. Before ICI, no one knew about IPR in Palestine. After our awareness campaign, we received many questions about registering trademarks and a lot more applications.”

-Ali Thoquan, Acting Director of IPR Directorate, MONE

Investment Climate Improvement Project (ICI) Final Report 8

Exhibit 7. ICI WTO-Related Activities

Investment Climate Improvement Project (ICI) Final Report 9

Additionally, as part of improving Palestinian trade policy, ICI designed an IPR initiative that combined legal reform, training, and awareness-raising on intellectual property. Working with the IPR directorate at the MONE and grantees, ICI helped to draft a law on intellectual property rights and implement an IPR awareness campaign. Roundtables in Ramallah, Nablus, and Hebron spurred debate and discussion between the public and private sectors on IPR issues. ICI also delivered specialized training to ministry staff on trademarks, patents, copyrights, and unfair competition.

In addition, ICI established a WTO Resource Center in the MONE, which is open to the public. The project procured publications and books on the WTO and related subjects, and contracted a company to develop library software for archiving and cataloguing books. They then trained staff and connected the new system to public libraries throughout the PA. ICI also procured IT and non-IT equipment for use by the WTO unit and covered the annual subscription in the Hein Online, a website focusing on WTO accessions.

Challenges. ICI faced several challenges while delivering policy assistance. Convening two teams (NTF and TAT) was especially difficult, because the large number of technical team members (80) slowed down the decision-making process. Given that both the public and private sectors were involved, ICI often found it difficult to resolve competing issues. Finally, given the political sensitivity of the PA and WTO, certain activities, such as the trade policy conference, did not move forward as planned. Shifting government priorities and leadership changes within key ministries also led to changes in levels of commitment. Nonetheless, ICI adapted to these shifting priorities and consistently communicated with its key stakeholders. As a result, the PA is now technically prepared to move forward with its WTO application for permanent observer status.

Next steps. Should the PA proceed with WTO accession by submitting its application for permanent observer status, it will require additional assistance to fully understand the options under the Sanitary and Phytosanitary (SPS) Agreement, Trade in IPR Agreement, and General Agreement on Trade-in Services. The CGE model, referred to as “PalMod,” would also benefit from specific instruction on how to evaluate policy, fiscal, and trade scenarios, including impact analyses of WTO accession. This model is described in greater detail in sub-section D below. Additional training on how to analyze negotiating options should be delivered to the group at the MONE who would actually negotiate at the WTO.

Further legal support would support revisions to the Commercial Code and technical regulations related to certain sectors, such as agriculture and pharmaceuticals. Finally, the PA requires a clearly articulated and comprehensive foreign trade policy — hopefully one that will come about as a result of this targeted USAID assistance.

C. Tax Reforms Recognized in 2015, but Other Reforms Miss Doing Business Survey

With the adoption of the World Bank’s Doing Business report as a framework for regulatory reform, and despite the disappointment in the lack of progress in the overall WBDB ranking, the ICI team is optimistic about the future of the Palestinian economy if the Ministry of National Economy continues to implement the new reforms. In fact, notwithstanding extraordinary external challenges the Palestinian government and its people have realized that by implementing reforms –especially those that do not require lengthy legislative approval – they have control over their economy and can produce new and improved jobs. The 2014 Doing Business report ranked the WBG as 138 out of 189 economies, as compared to 145 out of 189 economies in the previous year. Even though the MONE’s simulations

Investment Climate Improvement Project (ICI) Final Report 10 showed that the overall score for the 2015 report would have improved, methodological changes and reforms implemented after the Doing Business survey contributed to the final score published in October 2014 of 143 (out of 189). The actual score for the overall reforms and 10 individual topics depends on the performance of other economies as well as on the World Bank’s recently-changed methodology, in which verification is based on implemented laws and regulations (or formal commitment to them) and practice of claimed improvements. Therefore, many of the PA’s reforms will not appear until at least the 2016 WBDB Report. Exhibit 8 shows reforms implemented under ICI and ongoing reforms under World Bank Doing Business topics.

Exhibit 8. World Bank Doing Business Reforms

Topic Reforms Implemented during ICI Ongoing Reforms

Starting a Business

• Procedures and time reduced

• Change to minimum capital requirement

(MCR)

• Business registration certificates issued after registration requirements are met (before MCR is paid)

• Standardizing and simplifying document requirements so that the assistance of a lawyer is not required

• Creating online document submission system

Dealing with Construction

Permits

• Procedures and time reduced

• “No objection” letter no longer required from

Water and Sewer Company

• Concrete casting permit is electronically shared with municipality for approval, thereby expediting certain processes

• Further improvements in time, procedures, and costs

Registering Property

• Procedures reduced

• New software corrected administrative inefficiencies

• Applicants no longer required to interact directly with Council of Ministers for purchase permit

• Land Authority now handles administrative tasks due to upgraded filing systems

• New IT systems will support ongoing improvements

Paying Taxes

• Monthly income tax payments replaced by 1 annual advance payment or 4 quarterly installments

• Time reduced

• Discount incentives now available with early payments

• Administrative efficiencies gained with

Revenue Management System (RMS)

• Additional streamlining in procedures in time and procedures expected with

RMS

Getting Credit

• Leasing law enacted

• Improvement on depth of credit indicator

• Limited improvement made to legal rights index

• Improvement to legal rights index

Resolving Insolvency

• Companies Draft Law merged with new Debt Resolution Law • New combined law ready to be passed

Investment Climate Improvement Project (ICI) Final Report 11

Exhibit 9. Annual Savings from WBG Reforms

Topics Estimated Cost Savings as a Result of Reforms

(NIS)

Starting a Business 1,156,004 Dealing with Construction Permits 5,172,245 Registering Property 1,977,428 Paying Taxes 21,157,796 Getting Electricity 141,475 Total in NIS 29,604,947 Exchange Rate 3.4072 Total in U.S. Dollars $8,688,937

While the Doing Business rankings are important for policy reform visibility, the much better ranking system is the distance to frontier (DTF) ranking, also published in the report, which demonstrates absolute performance over time compared to the best practice globally. As you can see from Figure 1 below, by this measure the West Bank and Gaza has improved annually each of the past four years. This is the data that the World Bank Doing Business team uses in presenting the information to individual countries because they have no control over what other countries are doing/implementing. We can hope for more rapid progress, but the direction of change has been consistent and positive.

Figure 1 - West Bank and Gaza Progress on Distance to Frontier (DTF) Score

Despite the change in World Bank methodology to calculate Doing Business scores, the report has introduced new ways to implement reforms in economies across the globe, which the PA and the private sector have adopted with the support of ICI. As a first step, ICI helped to establish the Core Technical Team (CTT), whose initial task was to design a comprehensive strategy that identified priorities to improve the WBG’s ranking. With representatives from the public and private sectors and organized by the MONE, the CTT initially chose to focus on five topics in the Doing Business report: starting a business, dealing with construction permits, registering property, getting credit, and paying taxes. Later, the CTT added two topics: getting electricity and resolving insolvency. The potential to remove

Investment Climate Improvement Project (ICI) Final Report 12 bottlenecks in a reasonably short timeframe was the main criteria for topics, as the CTT hoped to jump-start the reform process and significantly improve the WBG’s overall Doing Business score.

Despite the strategy to focus on quick wins, ICI and the CTT carefully planned their next steps, as each of the Doing Business topics contains certain indicators, two of which are always procedures (measured by number) and time (measured by days or hours). Additional indicators vary by topic. For the registering property topic in the WBG, the indicator of “cost” (measured by percentage of property value) is also included. To choose indicators corresponding to each topic, ICI focused on the number of procedures and time required to complete them. (For details, choose “West Bank and Gaza” in www.doingbusiness.org and click on a topic like “Registering Property.”)

To a great extent, the success of the WBG’s reforms is due to business process reengineering, which resulted in significant time savings. However, without the CTT’s institutional framework, it is doubtful that many of these reforms would have occurred. For example, CTT members convinced key stakeholders to work together and change their way of doing business. They also convinced key agencies of the benefits of reform (rather than simply highlighting a need to improve World Bank scores). Thus, one of ICI’s key recommendations is to institutionalize the CTT within the Office of the Prime Minister or Deputy Prime Minister (a recommendation echoed by the head of the CTT) to ensure its sustainability. The CTT could also benefit from additional training to understand how to monetize reforms and undertake impact analysis.

Starting a business. This topic examines the ease of establishing a new formal sector business enterprise.

The assumption in the new Doing Business methodology that is reflected in the most recent 2015 scores

Study Tour Reveals Best Practices

“As a result of our study tour to Turkey, we saw that a true dialogue had formed between the public and private sectors under the umbrella of the prime minister’s office. The Turkish study tour has opened our eyes and we want to adopt further international best practices to improve our competitiveness.”

-Imad Jalad, head, CTT

Exhibit 10. In Practice, Starting a Business Now Takes Less Time

Investment Climate Improvement Project (ICI) Final Report 13 is that the new enterprise will be organized as a “private limited liability company” for all economies under review, and in the case of the WBG’s economy, that it will be located in Ramallah. Regardless of the World Bank’s assumptions as to the location of the business, similar reforms will be implemented throughout the PA. Despite the decline in the current ranking under this topic, the CTT has made significant progress in this area. Overall, in current practice there are five procedures required for starting a business, down from nine as reported in the 2015 report.

Furthermore, the amount of time in current practice is 34 days, which represents a decrease of 10 days reported in the 2015 report. Of great importance is a change to the minimum capital requirement for starting new businesses; previously, this payment was required to establish a business, but now it is not required until three months after the business is established. In addition, business registration certificates, which were previously issued after the MCR had been paid, are now issued after all registration conditions have been met. Apart from advocating for this important change, ICI drafted the Companies’ Controller circular to announce the reform (a World Bank requirement). It is hoped that these reforms will be reflected in an improved score in 2016 for this topic.

Legal ground for these reform measures has been established by issuing formal circulars and letters of commitment to identify and explain streamlining measures by the Companies’ Controller Office at the MONE, the Chamber of Commerce for Ramallah and Al-Bireh governorates, the MOF, and the Ramallah Municipality. The Companies’ Controller is working on additional reforms, such as standardizing and simplifying document requirements so that the assistance of a lawyer is not required and creating an online document submission system. Apart from saving time and money, these reforms will allow the Companies’ Controller to focus on company performance. They will also encourage private investment and stimulate business creation in the formal sector.

Exhibit 11. Dealing with Construction Permits

Investment Climate Improvement Project (ICI) Final Report 14

Dealing with construction permits. This topic measures the ease of dealing with construction permits for a two-story commercial warehouse located, in the WBG’s case, in Ramallah. Again, improvements will be applied to all construction permits throughout the PA, as applicable. Procedures measure the number of interactions required between the builder and external officials to obtain permission to build, carry out inspection during construction, and connect to utilities (except electricity). In addition, procedures measure the process of obtaining permission to use the warehouse and registering it with the property registration agency, if required. The CTT encouraged collaboration among stakeholders in the construction sector (primarily Ramallah Municipality and the Engineers’ Syndicate) to reduce the number of procedures from 18 to 12 in current practice (15 as published in the 2015 report) and the number of days from 87 to 51 in current practice (82 as published in the 2015 report). Most of this business reengineering occurred at the municipality level. The municipal office now handles most of the eliminated procedures.

Registering property. The CTT and ICI embarked on an aggressive path to improve the WBG’s score for registering property. Although the new scores held almost steady, future ranking for this topic should improve due to savings in time. Most of the improvement will be in terms of time (38 days in practice versus 56 days as reported in 2015 scores), as the result of the Land Authority circular that eliminated two procedures and the new registration software that corrected administrative inefficiencies. The new IT systems will support ongoing improvements in the property registration process (however, the need to ensure that Palestinian land remains available to Palestinians makes this more challenging).

Applicants are no longer required to interact directly with the Council of Ministers to obtain a purchase permit, and the Land Authority now handles administrative tasks thanks to its upgraded filing systems.

Paying taxes. A new MOF regulation eliminated the need for monthly income tax payments. Businesses are now given the option to make one annual advance payment or four quarterly installments. At the end

Exhibit 12. Registering Property

Investment Climate Improvement Project (ICI) Final Report 15 of the year, the taxpayer is required to file a return and pay any underpayments. In practice and as reported in the 2015 Doing Business report, this regulation reduced the number of tax payments from 39 to 28 and the associated time from 170 hours to 162 hours. Additionally, the MOF issued announcements in late 2013 and early 2014 to encourage businesses to make advance payments and take advantage of discount incentives. The regulation reduces the advance payments required by at least eight payments depending on whether the annual or quarterly advance payment option is chosen. This development, in addition to other efficiencies achieved with the new RMS (implemented with the support of ICI), will continue to reduce the time required to make tax payments.

Getting credit. The World Bank uses two indices

— depth of credit and strength of legal rights index — to compute the score for this topic. Both indices are measured according to “yes/no” answers to questions. Unfortunately, the legal rights index has brought the WBG’s overall score down in the past. However, in January 2014, the president signed a leasing law published in the Official Gazette. As a result of this law, the Secured Transaction Law No. (46) of 1953, and the Execution Law No. (23) of 2005, the WBG can now record six “yes” answers, compared to one in the previous reporting period under the strength of legal rights index. The depth of credit indicator will also include an additional positive answer, raising the total to five out of six as a result of the PMA’s clarification of its information policy. As confirmed by an IMF consultant, the PMA distributes historical credit information for more than two years, which is in line with other economies ranking the highest on this indicator. Despite expectations for great improvement in this topic, the 2014 score was changed to reflect a dramatic improvement for that year (that score was originally 165 and then revised to 111). The score for this topic, as published in 2015, fell slightly to 116. Notwithstanding the score, the passage of the two laws marks important reforms in this topic, and more importantly, to the Palestinian economy.

Resolving insolvency. During 2012, the World Bank changed the title of the Closing a Business topic to Resolving Insolvency, keeping essentially the same indicators. The lowest possible ranking for this topic

(189) in 2013 and 2014 is based on the time, cost, and outcome of insolvency proceedings against a local company. In efforts to improve the practices associated with this topic, the CTT has coordinated with the Higher Judicial Council to obtain more information on the PA’s bankruptcy practice, with particular focus on bankruptcy cases raised or settled in the past five years. The World Bank’s methodology states, “If an economy had zero cases a year over the past five years involving a judicial reorganization, judicial liquidation, or debt enforcement procedure (foreclosure), the economy receives a ‘no practice’ ranking. This means that creditors are unlikely to recover their money through a formal legal process (in or out of court). The recovery rate for ‘no practice’ economies is zero.” The CTT raised the following argument with the World Bank’s technical team: If there is a court case in the West Bank, then the economy should not be ranked as zero, but rather as an economy that has a practice in place. It is hoped that the World Bank’s technical team will review this justification for the 2016 DB report. In addition to advising the CTT on this topic, the ICI policy team contracted legal experts to draft a new

Exhibit 13. Paying Taxes

Investment Climate Improvement Project (ICI) Final Report 16

Debt Resolution Law in compliance with international standards and best practices. During the last few months of ICI, the MONE requested ICI assistance to revise the Companies Draft Law and merge it with the new Debt Resolution Law. The combined new draft is ready for implementation. After its enactment, the law will establish the appropriate legal practice and help to improve the PA’s ranking in this topic.

Challenges. ICI and the CTT worked in close collaboration to decide on a strategy focusing on administrative rather than legal reforms. Some legal reform was still required to improve Doing Business scores and technically prepare the PA for WTO observer status. Legal work on a new Debt Resolution Law, for example, was required to stimulate discussion about the bankruptcy process and pave the way for future legal reform (which is important for private sector development). As far as implementing non-legal reforms, process reengineering was a tedious process. Many organizations were reluctant to forfeit processes or revise regulations due to a potential loss of control or job security.

Others simply did not understand the benefits of change. Like all reform processes, engaging and informing the private sector is a critical step to ensure success. In order to assure the new streamlined processes become the norm, the private sector must be assured the change is real; they must see the impact in their daily lives and operations. Similarly, as part of the Doing Business methodology, the private sector must confirm that the reforms have positively impacted and improved efficiencies. Thus, the CTT must communicate to the extent of nearly over-communicating.

Next steps. Improving the WBG’s overall Doing Business ranking and scores will require sustained effort over time, although, as discussed above, it is the reform process and end result that really matter most. As noted, it took some time for the CTT and its counterparts to take advantage of the World Bank’s new ways of doing business, rather than merely focusing on the Doing Business report scores.

With the assistance of ICI, the Palestinian government and private sector have made important improvements in doing business. However, as mentioned above sustained reform will have a better chance with institutionalization of the CTT within the Office of the Prime Minister or Deputy Prime Minister (as stated by the head of the CTT himself). The CTT could also benefit from additional training on monetizing reforms and impact analysis. In addition, the CTT could benefit from ongoing conversations with the World Bank’s Doing Business team to further understand World Bank expectations and methodologies and put them into practice, especially for low-scoring topics. These conversations should take place well in advance of annual surveys.

Next year (2016) the WBDB team will introduce even more significant changes to a number of indicators — adding new dimensions to capture overall regulatory quality and efficiency. This will result in additional major changes in ranks — in many cases not related to any actual changes in policies taking place that year.

D. Tools are in Place to Help Understand Policy Scenarios

CGE model. Since its establishment in 1994, the PA has used incomprehensive, fragmented information from different resources to design its economic, social, and policy plans. This disjointed system has inhibited staff from monitoring the economy and assessing the impact of shocks, policy measures, and alternative macroeconomic scenarios. Government officials recognized the need to build evidence-based policymaking and analysis capacities to create policies that achieve macroeconomic stability, stimulate domestic investment, and attract foreign direct investment through sound macroeconomic management.

ICI responded to this need by helping the PA develop a CGE model, called “PalMod,” which simulates the workings of a market economy and its key players (such as producers, consumers, workers, Investment Climate Improvement Project (ICI) Final Report 17 government officials, and foreign trading partners). CGE modeling is a proven technique that captures economy-wide impacts of policy changes through input-output and social accounting matrix analysis.

Economic policymakers can use these models to conduct policy simulations by changing a policy variable, such as a change in the value-added tax (VAT) rate, and tracing its effects on key economic players before an actual policy action is taken. A major advantage of the CGE model is its rich data and ability to upload the latest statistics from the Palestinian Central Bureau of Statistics. Simulations generated from the system are based on up-to-date figures and strong microeconomic foundations.

ICI helped to establish a working group comprising 25 professionals representing six PA authorities: the MONE, MOF, Ministry of Labor, Ministry of Planning and Development, Palestinian Central Bureau of Statistics, and Palestine Monetary Authority. Staff from other institutions in the PA were also trained to use PalMod. During the first part of the training, participants analyzed the structure of the Palestinian economy using the national accounts system and Palestinian social accounting matrix. During the second part, participants focused on policy analysis. Although some participants chose to leave the training early due to lack of interest or the complexity of the subject matter, a core group remained. This group continues to use the CGE model today for advanced policy analysis.

Training participants worked in groups to run three policy simulations, which were presented to key decision-makers in the PA and USAID. The results are highlighted in Exhibit 14 (below). Each scenario has important implications for economic growth; they show that PalMod can be used to undertake detailed impact and scenario analysis of the 16 sectors covered (including agriculture, financial services, and communication services). Because PalMod has the inter-industry details from input-output, supply, and use tables, the model allows for behavioral responses to housing and consumer prices, wages, and production costs. The model is steady-state, generating counterfactual analysis and accounting for behavioral responses to domestic and external shocks.

Inspiring Through Training

“As a result of the CGE model training, I started studying for a master’s degree in economics!”

— Soha Awadallah, former head of WTO unit and PalMod member

Investment Climate Improvement Project (ICI) Final Report 18

Exhibit 14. PalMod Modeling Results (Percentage Change Relative to Baseline)

Macroeconomic Variable/Scenario

Scenario One:

1 Percentage Point in Domestic VAT Rate a/

Scenario Two:

20 Percent Increase in

Tariffs b/

Scenario Three:

50 Percent Decrease in Transaction Costs c/ GDP at Constant Market

Prices -0.11 -1.62 +27.33

Real Consumption -0.24 -2.36 +24.44 Real Investment -1.17 -13.48 +48.12

Real Net Export (E-M) -0.56 -6.31 +16.14

Conclusions

Even though revenue would increase by 0.25 percent, overall economic activity and consumption would reduce slightly. This policy might be useful if the government needed additional revenue sources without imposing too much burden on the economy.

The main positive effect of this policy would be an increase in tax revenues by 0.4 percent. However, prices for consumers, investors, and companies that use imported goods in the production process would increase. This would lead to a decline in demand for imports and an increase in production costs for companies. The government needs to consider this policy with great caution.

A decrease in costs would lead to major positive economic impacts. The Palestinian population’s welfare and living standards would increase dramatically and employment would be stimulated. These results indicate the vital importance of the peace process for the Palestinian economy.

a/: Scenario 1 represents a 6.7 percent increase above the statutory VAT rate of 15 percent.

b/: Scenario 2 represents an across-the-board increase in import tariffs for all countries except Israel.

c/: Scenario 3 represents transaction costs on imports, exports, domestic sales, production, and labor as a result of restrictions imposed by Israel.

Next steps. This project should be considered as a first step in building the capacity of the PA to develop evidence-based policies. Implementation of the following recommendations would further strengthen this capacity:

• Setting up a specialized unit to institutionalize analytical policy support work

• Providing advanced capacity-building services to PA staff

• Building a dynamic version of the CGE model

• Disaggregating the household into income groups to analyze income distribution/poverty issues

• Developing the labor market block of the CGE model

• Disaggregating trade partners to make the CGE model more effective for trade policy analysis

DSGE models. Not long after the successful completion of the CGE modeling activity, the PMA requested macroeconomic analysis capacity building to support its monetary…