J.7_Lebanon_AMEG_SME_Growth_Assessment_May_2015_from_USAID_Dec_PUBLIC_(1).PDF

1 MAY 2015

This publication was produced for review by the United States Agency for International Development. It was prepared by Douglas Muir, Janet Gohlke-Rouhayem, and Craig Saltzer of Chemonics International, Hayley Alexander of Banyan Global, and Henri Stetter of the Pragma Corporation for the Asia & Middle East Economic Growth Best Practices Program contract no.

AID-OAA-M-12-00008.

INCREASING

ENTERPRISE GROWTH

AND JOBS IN LEBANON

OPTIONS TO INCREASE SME GROWTH AND JOBS

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.

INCREASING

ENTERPRISE GROWTH

AND JOBS IN LEBANON

OPTIONS TO INCREASE SME GROWTH AND JOBS

Asia & Middle East Economic Growth Best Practices Program Contract No. AID-OAA-M-12-00008 iv INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON

INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON v

CONTENTS

EXECUTIVE SUMMARY

SECTION I: INTRODUCTION

A. Purpose of Assessment

B. Methodology

C. Special Considerations

SECTION II. POLICY AND REGULATORY CONSTRAINTS FOR SME GROWTH

AND INSTITUTIONAL CAPACITY TO ADVOCATE FOR CHANGE

A. Overview of Policy and Regulatory Constraints to SME Development

B. Findings: Policy and Regulatory Constraints to SME Growth

C. Findings: Non-Regulatory Barriers to SME Growth

D. Findings: Institutional Capacity for Advocacy

E. General Recommendations to Support Regulatory Reform

SECTION III. ENHANCING PRIVATE SECTOR GROWTH THROUGH BUSINESS

DEVELOPMENT SERVICES

A. Overview of Business Development Services in Lebanon

B. Supply-side Findings: In-Country Capacity to Provide Specialized Technical Assistance and Business Development Services to Improve Competitiveness

C. Demand-side Findings: SME Needs for Business Development Services in High- Growth Sectors and Value Chains

C1. SME Technical Assistance Needs

C2. SMEs in Sectors with High Growth Potential

D. General Recommendations for Technical Assistance to Enterprises

SECTION IV. TRADE AND EXPORT LINKAGES

A. Overview of Trade and Exports in Lebanon

B. Findings: Trade and Exports

C. General Recommendations: Trade and Exports

SECTION V. ENHANCING PRIVATE SECTOR GROWTH THROUGH

WORKFORCE DEVELOPMENT

A. Overview of Workforce Development in Lebanon

B. Findings: Workforce Development

C. General Recommendations: Workforce Development to Enhance Private Sector Growth vi INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON

SECTION VI. SPECIAL ECONOMIC ZONES

A. Overview of Special Economic Zones and Industrial Parks in Lebanon

B. Findings: Special Economic Zones and Industrial Parks

C. General Recommendations: Special Economic Zones and Industrial Parks

Section VII. YOUTH AND GENDER CONSIDERATIONS

A. Youth Considerations

B. Gender Considerations

SECTION VIII: PROGRAM RECOMMENDATIONS AND OPTIONS

A. Program Recommendation 1: Firm-Level Technical Assistance to Enterprises

B. Program Recommendation 2: Export Promotion Assistance

C. Program Recommendation 3: Workforce Development and Job Placement

Annex A. References

Annex B. List of Interviewees

Annex C. SME Profile Tiers

Annex D. Tunisia Business Reform and Competitiveness Program Approach

Annex E. Overview of Mauritius Business Growth Scheme

Annex F. Lebanese Import and Export Customs Data Over the Last 5 Years by Sector . 93

Annex G. Qualifications of Business Advisors

Annex H: North Lebanon SME Competitiveness and Job Creation Concept Note

Annex I. Assessment Scope of Work

INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON vii

ACRONYMS

ACC-VET Advisory and Coordinating Committee for Vocational Education and Training steering committee ADR Alternative Dispute Resolution AMEG Asia Middle East Economic Growth Best Practices Program AOU Arab Open University AUB American University of Beirut BEE Business Enabling Environment BT Baccalaureate Technique CAD/CAM Computer-aided Design / Computer-aided Manufacture CCIAT Chamber of Commerce Industry and Agriculture of Tripoli CIT Centre International Des Sciences Techniques CNAM Centre régional associé au Conservatoire national des arts et métiers DGVTE Directorate General for Vocational and Technical Education DS Dual System EBRD European Bank for Reconstruction and Development EU European Union ETF European Training Foundation FDI Foreign Direct Investment GIZ Gesellschaft für Internationale Zusammenarbeit (German Society for International Cooperation) GoL Government of Lebanon ICSID International Center for the Settlement of Investment Disputes ICT Information and communications technology IECD European Institute for Cooperation and Development IDLO International Development Law Organization IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund IPR Intellectual Property Rights ITC International Trade Center of the WTO IQS Indefinite Quantity Services MEHE (Lebanese) Ministry of Education and Higher Education MoET (Lebanese) Ministry of Economy and Trade NEO National Employment Office NGO Non-governmental Organization PPD Public-Private Dialogue PPP Public Private Partnership SEZ Special Economic Zone SME Small and Medium Sized Enterprise TVET Technical / Vocational Education and Training UNCTAD United Nations Conference on Trade and Development viii INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON

UNDP United Nations Development Programme UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development VAT Value Added Tax WFD Workforce Development WTO World Trade Organization

INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON 1

EXECUTIVE SUMMARY

In January 2015, USAID engaged the USAID Asia and the Middle East Economic Growth Best Practices Project (AMEG) to examine impediments to private sector growth

— particularly the growth of small and medium sized enterprises (SMEs) — and opportunities for USAID to remove or alleviate these impediments in the future. The assessment examined enterprise development challenges and opportunities across five areas to propose recommendations to support:

1. Advocacy for an improved business enabling environment

2. Demand-driven business development services (BDS)

3. Increased trade and export linkages

4. Enhanced workforce development

5. Opportunities for growth in special economic zones.

The assessment examined the needs of SMEs and high-growth lead firms within key sectors and value chains to identify specific bottlenecks to growth as well as to identify strategic interventions to support SMEs developing goods and services for which demonstrated demand and commercial matchmaking opportunities exist. The scope of work for the assessment can be found in Annex I.

The AMEG assessment was conducted in Lebanon over a period of six weeks in February and March 2015 by a team made up of experts from Chemonics International, Banyan Global, and the Pragma Corporation. Desk research was followed by interviews with more than 200 representatives of chambers of commerce, business associations, government ministries, donors, universities and vocational training institutes, banks, incubators, as well as business owners and experts. Included in the total number were 55 interviews with SMEs representing 11 different industries. The assessment team also held two focus groups with small, medium, and large enterprises to ground truth findings. In addition, the team hosted a large public event to share findings and build consensus around next steps for USAID.

Policy and regulatory constraints and advocacy for reform. While at least 11 laws pose real challenges to the business operating environment and are in need of updates, most businesses cited non-regulatory issues such as electricity outages, poor internet, poor transport infrastructure, corruption, and customs delays as their main constraints to growth. Lebanon remains in a state of political paralysis due to the inability to elect a President, but the development of a new SME Strategy 2020 by the Ministry of Economy and Trade (MoET) is helping to reinvigorate dialogue around reforms to support the business enabling environment. The SME Strategy has identified six areas for reform, and MoET is assembling committees led by public officials and business leaders to spearhead them. This structure is a significant step toward a formalized advocacy process, and presents an opportunity for USAID to support reform by providing selective advisory and research expertise on an as needed basis. USAID can also work with private sector advocates to structure compelling platforms for reform.

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Business development services. Of the 55 SMEs interviewed, the vast majority were relatively advanced and sophisticated, sometimes world class in their industry/sector, but were either the only one, or part of a very small group of enterprises active in their sector or sub-sector in Lebanon. Of the 55 SMEs the assessment team interviewed, at least 20 percent were poised to grow immediately and hire new workers with targeted technical assistance. These firms needed help identifying and developing strategies to: enter new export markets; implement new technologies and more efficient production techniques;

and conceptualize, research, and test new products. Many of the firms are in high-growth sectors and sub-sectors as identified by the assessment team: agro-processing;

pharmaceuticals/medical; light manufacturing; alternative energy and recycling;

information and communications technology and media; and ready-to-wear fashion and accessories. These businesses need highly individualized and specialized coaching, mentoring, and technical assistance to grow and hire significant numbers of new employees. As such, USAID should employ a development approach that works directly with individual medium to large firms to identify new buyers, develop strategies to enter new markets, and increase sales and jobs. Target firms will be committed to working with USAID to achieve growth. Strategies for growth will be developed and driven by the firms themselves with mentoring and technical assistance provided by a USAID-funded program to help address bottlenecks in production, overcome constraints to export, and hire and train additional workers. Firms participating in the program will be expected to pay for a portion of the technical assistance costs, implement recommendations, and report progress toward new sales and employee targets.

Enhancing trade and exports. Many firms and business support organizations expressed a lack of access to information to trade information and the need for help understanding foreign markets and export requirements. While Lebanon has a well-developed consulting industry, the assessment team could not find consultants specializing in trade/export support and facilitation. In addition to assisting individual firms to meet export requirements, USAID can build on existing USAID best practices and tools to support high-functioning chambers of commerce and business associations to prepare their members to export to new markets. For example, a USAID-funded program can strengthen the capacity of chambers to provide training and online toolkits aimed at members in sectors with high export potential. It can also co-fund participation of member firms in trade fairs and facilitate matchmaking with potential buyers. Exporting involves a wide range of service providers, such as customs brokers, freight forwarders, distributors, bonded warehouses, and the like. A USAID-funded initiative could also help chambers connect first-time exporters to service providers who have demonstrated flexibility and openness to dealing with new market entrants.

Workforce development. The sixth most mentioned constraint for SMEs in a 2009 World Bank Report was “skills and education of available workers,” with 55 percent of enterprises listing a general lack of skills, including problem solving, creative thinking, and management skills, among employees as a serious matter. There are also significant gaps between the skills that employers demand and those that workers have. Neither universities nor vocational and technical training institutes are currently providing the

INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON 3

skill sets demanded by employers. As USAID works with individual firms, it can identify the skill sets needed to fill immediate job vacancies and work with university and technical vocational education and training (TVET) career centers, as well as support more targeted job fairs to identify appropriate candidate pools. A USAID-funded program could also work with existing training providers and employers as well as expand the application of Microsoft’s YouthWorks Platform.1 With existing training providers, the program would be able to design and implement post-employment training programs that enable new hires with some, but not all of the desired experience, to master the skills most critical for their new jobs. Building up the Youthworks Platform in Lebanon the program would be able to further expand outreach efforts to promote youth skilling and employment to even more diverse and distant beneficiaries and partner organizations.

Special Economic Zones and Industrial Parks. Special Economic Zones (SEZs) are special geographical regions, designated by law, where certain laws (typically on taxation, trade, and certain sorts of regulation) are suspended or amended in order to allow the rapid growth and development of enterprises. SEZs have been engines of development and growth in a number of countries across the region. SEZ have attracted much attention and discussion in Lebanon in recent years, establishing an SEZ is a complex and lengthy process that may or may not prove unsuccessful in the end. In addition, prior to any engagement on development of an SEZ in Lebanon, the SEZ law must be amended. In light of the current political situation, it is unlikely that any amendments to the law will be passed in the near term. There are a couple of municipalities which have started the process of creating Industrial Parks. Initiatives in Saida and Terbol have advanced with the support of local mayors and chambers. USAID could help support those municipalities and chambers in the planning process.

Youth and gender considerations. In Lebanon 42.4 percent of the population is below the age of 25. Youth aged 15-24 are currently experiencing a 24 percent unemployment rate.

This rate is even higher in regions outside of Beirut. Lebanese youth are highly educated, but Lebanon produces far more educated job seekers than the domestic labor market needs. For more disadvantaged, and less educated Lebanese youth, the presence of migrant workers depresses wages for low productivity/low skilled jobs. There is no national strategy being implemented to support youth employment, and youth are at a disadvantage resulting from the lack of guidance provided on study and career pathways.

Poor opportunities exist for apprenticeship-style practical work within the school context.

USAID can support job fairs, work with firms, universities, and TVET centers to establish more internships and hands-on learning opportunities for students, and co-finance post-employment trainings to help recent graduates’ develop relevant skill sets on the job. In collaboration with Microsoft’s YouthWorks Platform USAID could cost-effectively expand soft-skill training to NGOs. USAID’s approach should also consider regional distinctions into consideration when designing programs to affect youth employment opportunities.

1 Microsoft presently has a version of the YouthWorks Platform operating in Lebanon known by the name Ta3mal.

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Lebanon benefits from a high volume of experienced female entrepreneurs relative to other MENA countries. With respect to business development and financial services however, women-owned business in Lebanon are disproportionately less served. There is a high demand among female business owners for greater access to information and training on topics such as general business management skills, using financial products such as SME lending products or equity capital, exporting, accounting and financial management, and selling to large, multi-national corporations. By taking an active approach to seeking out female business owners and entrepreneurs, USAID can positively affect women’s access to untraditional employment and increase opportunities and chances for success in growing their businesses.

Program recommendations. The AMEG team’s mandate included the development of specific, actionable recommendations for USAID assistance in Lebanon. Criteria used for assessing potential assistance included:

Contribution to sustainable job creation;

An identified market demand;

Existence of a capable implementing partner;

Activity leverages prior or current assistance by the U.S. Government and/or other donors and/or represents a good opportunity for a Public Private Partnership;

Impact extends beyond area of Greater Beirut;

Activity positively impacts women and/or youth.

The three program recommendations below could be implemented as three separate activities, but would likely be more effectively implemented as three components in a larger, five-year, integrated enterprise and workforce development program. This three-faceted program could leverage lessons learned and identify synergies across components to have greater impact on enterprise growth and job creation at lower cost. All three proposed options should focus activities in Beirut, Bekaa Valley, North, and South Lebanon.

1) Firm-Level Technical Assistance to Enterprises

Objective: Achieve business growth leading to incremental employment, increased exports, and improved competitiveness through providing targeted technical assistance to partner enterprises in Beirut, Bekaa Valley, North, and South Lebanon.

Scope of Work: Over the course of a 5-year USAID funded activity, a team of 5-6 local business advisors with extensive work experience in the private sector will work with medium to large partner firms (20-100+ employees) to provide coaching and mentoring, identify new opportunities for growth and job generation, and develop technical assistance plans to take advantage of those growth opportunities. To be successful, the approach must remain “by business people for business people.” This means that technical assistance activities will largely be driven by the firms themselves. Assistance will be cost-shared and will be implemented via subcontracts with local consulting firms.

INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON 5

In select cases where highly specialized technical assistance is required that cannot be found in Lebanon, the program will pair international consultants with local consultants/firms to build capacity. While firms in any sector would be eligible for assistance, business advisors will begin by seeking out firms in sectors with high-growth potential such as: agro-processing; pharmaceuticals/medical/health care; light manufacturing; alternative energy and recycling; information and communications technology and media; and ready-to-wear fashion and accessories. The assessment team estimates that with ideal conditions and staff, this type of program could work with 500 enterprises to create more than 10,000 jobs over a five-year period.

2) Export Promotion

Objective. Facilitate SME entry into new regional and international markets and increase SME export sales by strengthening the export promotion capacity of businesses through associations and chambers of commerce.

Scope of work. Driven by challenges and issues identified through the development of firm-level assistance agreements, this program will help partner SMEs to identify and capitalize on opportunities to export products to new regional and international markets.

Business advisors will work with firms to address specific challenges and opportunities to export at the firm level. It will also utilize lessons learned through firm-level assistance and partner with business associations and chambers of commerce to strengthen and consolidate tools to help SMEs in sectors with high-export potential familiarize themselves with new markets, identify specific buyers, and develop strategies to export.

This would involve co-sponsoring relevant export trainings and online toolkits, SME participation in regional and international trade shows, and market studies for sectors with high export potential. The assessment team estimates that this type of program could work with three to four chambers and create 780 jobs over a five-year period.

3) Workforce development and job matching

Objective. Foster more demand-driven education and facilitate job matching to ensure that new jobs created as a result of growth of partner firms can be filled.

Scope of work. The program will work with firms receiving individualized assistance to identify job vacancies and candidates with appropriate skill sets. The program will also work with business associations and Chambers to improve job fairs (in-person and virtual) and sponsor attendance at job fairs for SMEs. The program will work with university and TVET career centers to help them understand the types of skills in high-demand, advocate for integration of more practical learning opportunities into curricula, and to strengthen job-matching programs, tools, and events. In addition, the program will work with employers and local training providers to develop short-term, post-employment training programs for new hires with less experience. Additionally, the program can work through existing training providers to target trainings to mid-career professionals in need of skills upgrading. The program can also incorporate the Microsoft

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YouthWorks Platform2 into each of the various other activities supporting this Objective.

The YouthWorks Platform enhances access to soft-skills training and employment matching by serving as a one-stop-shop for youth for eLearning, internships, mentoring, and career guidance. The assessment team estimates that this type of program could help match 2,250 job seekers with new jobs.

Overall, these three proposed activities are estimated to create a total of 13,230 jobs at a cost of roughly $2,645 per job.

2 Microsoft has successfully collaborated with USAID to adapt the YouthWorks Platform to support USAID-funded youth projects in Iraq, Tunisia, and West Bank and Gaza.

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SECTION I: INTRODUCTION

The Lebanese economy faces challenges in the areas of competitiveness, diversification, and modernization, as well as the overall capacity to absorb a large existing pool of unemployed labor and the continuous addition of young graduates seeking to join the workforce. Over the next 10 years there will be an average of 19,000 new entrants into the Lebanese labor market annually. To absorb them, the economy would need to create more than five times the number of jobs it currently offers, which is estimated at only 3,800 net jobs per year. (Robalino & Sayed, 2012)

Using the proposed Ministry of Economy and Trade (MoET) definition of firms with 10- 100 employees, small and medium enterprises (SMEs) make up more than 93 percent of registered businesses in Lebanon and employ roughly half of all workers. (Inventis, 2014,

p. 14) Therefore, growth of the SME sector is essential to developing a diversified, dynamic, innovative, and competitive economy in Lebanon capable of providing the required quantity and quality of employment opportunities.

MoET’s SME Strategy further makes the case that “Lebanese entrepreneurship can become an essential lever for economic development and the fight against unemployment.” As compared to other countries in the region, Lebanese entrepreneurs are highly educated and employable. Roughly 82 percent of Lebanese entrepreneurship is driven by the desire to capitalize on opportunities rather than driven by necessity to generate one’s own employment. And these entrepreneurs are typically successful in building sustainable, high-growth businesses with high-employment potential. (Inventis, 2014, p. 15) Additionally, a growing group of incubators, accelerators, venture capitalists, and entrepreneurial support organizations has cropped up to support them.

Recognizing the potential of Lebanon’s SMEs to become critical drivers of job creation and economic development, MoET developed a series of strategic thrusts and proposed initiatives under each to address constraints to SME growth. The six thrusts are:

1. Evolving Business Leaders

2. Facilitating the “Right” Funding

3. Improving Access to Markets

4. Enhancing Capabilities and Innovation Capacity

5. Developing a Conducive Business Environment and National Environment

6. Ensuring Coherence and Effective Coordination. (Inventis, 2014, p. 37)

A. Purpose of Assessment

Recognizing the opportunity to support and build upon momentum generated by MoET’s new SME strategy, in January 2015, USAID engaged the USAID Asia and the Middle East Economic Growth Best Practices Project (AMEG) to conduct an assessment of the prospects for enterprise growth and job creation in Lebanon. The assessment examined enterprise development needs across five areas to report on the current situation of SMEs in Lebanon as well as propose recommendations to support:

8 INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON

Advocacy for an improved business enabling environment Demand-driven business development services (BDS) Increased trade and export linkages Enhanced workforce development Opportunities for growth in special economic zones.

The assessment examined impediments to private sector growth — particularly the growth of small and medium sized enterprises — and opportunities for USAID to assist in removing or alleviating these impediments in the future. The assessment examined the needs of SMEs and high-growth lead firms within key sectors and value chains to identify specific bottlenecks to their growth. The assessment also attempted to identify strategic interventions to support SMEs to produce and market goods and services for which demonstrated demand exists. Furthermore, the assessment examined the potential for public-private sector partnerships to leverage resources to contribute to increased SME productivity, sales, and exports.

B. Methodology

The AMEG assessment was conducted in Lebanon over a period of six weeks in February and March 2015 by a team made up of experts from Chemonics International, Banyan Global, and the Pragma Corporation. The team conducted initial desk research – reviewing relevant national strategies, government and donor reports, statistics, etc. (see Annex A) – to gather data on key sectors and sub-sectors, identify key public and private sector interviewees, and understand past and present donor and government programs to support job generation and economic growth.

The desk research was followed by interviews with more than 200 representatives of chambers of commerce, business associations, government ministries, donors, universities and vocational training institutes, banks, incubators, as well as business owners and experts. The assessment team also hosted two focus groups with small and medium enterprises to ground-truth findings and a larger public event to share findings and build consensus regarding next steps. The interviews made it possible to gain an in-depth understanding of policy and regulatory challenges in Lebanon, high-growth and emerging sectors and sub-sectors, the Lebanese labor market and skills shortages, and ongoing efforts by the government, USAID, and other donors to support economic growth. Interviews were conducted in Beirut, Mount Lebanon, Saida, Tripoli, and the Bekaa Valley. The team spoke with and visited 55 Lebanese private sector enterprises across 11 sectors and industries, including:

Cosmetics Energy Fashion/garments/footwear Food production and processing Franchises Furniture and home goods

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Information and communications technology (ICT), including media, film, and advertising

Industrial manufacturing Packaging and plastics Tourism and hospitality Waste management and recycling.

The assessment team used structured interviews to gauge SME needs, willingness, and ability to grow with targeted technical assistance. Focus group meetings with SMEs in Beirut provided an opportunity to understand specific and pressing challenges faced by business owners, particularly in those sectors with potential for growth and job creation.

A discussion of major types of technical assistance necessary in Lebanon is included in Section III.

C. Special Considerations

The team was asked to focus recommendations on interventions that would help create jobs for Lebanese workers in Lebanon. However, the large number of Syrian refugees living in Lebanon as a result of the conflict presents a significant challenge for the government that must be addressed. While more recent restrictions limit Syrian refugees’ ability to obtain formal employment in Lebanon, many refugees are engaged informally or in seasonal, weekly, or daily low-skill, low-wage positions in agriculture, domestic services, and construction. The team did not specifically examine employment opportunities for refugees as part of this assessment, but did try to take note of opportunities in sectors that could impact the availability of new jobs, both high and low-skilled, for all those residing in Lebanon.

The team also examined the issue of high rates of youth unemployment and potential interventions to generate additional employment opportunities and match them with youth with less experience in the workforce. In addition, the team examined barriers to employment for women and constraints to growth of women-owned enterprises. Section VII highlights some of the team’s findings around youth and gender constraints and potential options for addressing them. The team also took these considerations into account when designing its recommendations for increasing overall enterprise growth and job creation in Lebanon.

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SECTION II. POLICY AND REGULATORY CONSTRAINTS FOR

SME GROWTH AND INSTITUTIONAL CAPACITY TO ADVOCATE

FOR CHANGE

A. Overview of Policy and Regulatory Constraints to SME Development

The policy and regulatory constraints to SMEs in Lebanon are well documented. Whether they are immoveable at this stage in Lebanon’s development remains a subject of some debate. Most interviewees who participated in the assessment, in both the public and private sectors, believe the political paralysis that currently grips the country will not be resolved in the near term.3 Nonetheless, a few people were at least hopeful that some regulatory changes continue to be possible. But it is clear such changes are conceivable only if they are addressed within an individual ministry and with the strong support of that particular Minister. Broad or systematic regulatory reforms are not believed to be feasible at this time. For the situation to change, at least two things need to occur: a president must be selected to help normalize Lebanon’s political structure and a culture of organized public-private dialogue must develop.

B. Findings: Policy and Regulatory Constraints to SME Growth

The recently completed SME Strategy 2020, produced by the Ministry of Economy and Trade, offers an overview of the regulatory environment and reform areas critical for economic growth. Five laws – of the many awaiting passage – are highlighted in the strategy as particularly important to help move toward a more supportive regulatory environment for small and medium-sized enterprises:

The Code of Commerce

The Insolvency (Bankruptcy) Law

The Public Procurement Law

The Domestic and Foreign Investment Law

The Labor Law. (Inventis, 2014)

In most of these cases, outdated legislation will be replaced. The Code of Commerce, Bankruptcy, Public Procurement and Labor Laws, for instance, are intended to replace anachronous laws from Lebanon’s colonial past. The Domestic and Foreign Investment Law was introduced to address a legislative gap in the ways of doing business during the 21st century, particularly reflecting the advent of globalization.

In addition to the above, there is general consensus about several other laws and reforms which should also be included among the reform agenda’s early priorities:

3 At this writing (April 2015), the political paralysis is particularly extreme: Lebanon has not had a President for several months, and each of 24 ministers has de facto veto power over proposed legislation.

While it is not expected that this situation will last for years, even with a President in office it will not be easy to pass new legislation.

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A Secured Transactions Law

The Anti-Corruption Strategy

The National Energy Efficiency Action Plan

The Competition Law

Establishment of a Trade Promotion Agency

The Law for Tax Reduction on Exports (passed but not implemented).

These laws are commonly found in other developed and developing countries, and are fundamental for Lebanon’s evolution toward a friendlier legal and regulatory environment. For instance, a secured transactions law is important to further improve the flow of financing while offering creditors greater protection in the event of debtor bankruptcy. The Anti-Corruption Strategy presents a way forward to combat the pervasive graft and corruption amongst Lebanese governmental entities, which now significantly adds to the cost of doing business. The Competition Law is intended to establish parameters limiting the monopolistic practices and oligopolistic collusion that has so greatly concentrated wealth in the country today.

A set of 69 laws, including most of these and several other useful commercial laws, was prepared for presentation to Parliament several years ago. (UNDP) However, this package was never advanced. The general consensus is very few of these laws will be reviewed or passed until a new president is in place. Even then, the “package of 69 laws” has itself become somewhat controversial and many of the laws are unlikely to move forward unless they are first reformulated.

Table 1. Legal and Regulatory Reform Priorities for SME Growth and Job Generation

Law Priority Level

Considerations

The Code of Commerce (Commercial Code)*

1 Critical to improve legal transparency for commercial relationships and contracts. Will improve the investment climate.

The Insolvency (Bankruptcy) Law* 1 Important to allow companies to liquidate without criminal proceedings and seek protection during restructuring for continued economic contribution. Allows for continued use of productive assets.

The Public Procurement Law* 1 Needed to improve transparency and encourage broader access to lucrative government contracts, particularly for SMEs.

The Domestic and Foreign Investment Law*

1 Facilitates secure investment in Lebanese entities thereby fostering growth. Important to clarify recourse for all investors especially for FDI.

A Secured Transactions Law* 1 Reduces lending risk by allowing lenders to take a secured interest in collateral; also, works in parallel with an effective bankruptcy law for liquidations or restructuring, and protection of creditor’s rights.

The Anti-Corruption Strategy* 1 An important first step to establish a roadmap to fight endemic corruption and the cost burden to private enterprises.

The National Energy Efficiency Action Plan

1 A roadmap to address the dysfunctional system of energy use, its high cost to business (reducing competitiveness) and the resulting environmental degradation.

The Competition Law* 1 To foster a level playing field for all enterprises and reduce

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the heavy concentration in two-thirds of Lebanese industry sectors, wherein 70% of all economic activity is controlled by three firms.

The Labor Law 1 This law needs review but should be directed at reducing the outdated and restrictive termination regulations, which act as disincentives to new hires. In tandem with the social security law amendments, it should also offer a statute of limitations for company liability to ex-employees and damages thereof.

The Law for Tax Reduction on Exports (passed but not implemented)*

1 One of several important laws to encourage exports, which are a key component to economic growth for the country, especially for companies in the 50+ employees category.

Law to establish an export development (promotion) agency*

2 Another important law to incentivize exports (see above).

While an export development agency is not a panacea for export development, if well-resourced it offers a starting point for SMEs without export experience.

Commercial registry regulations* 1 Important to enact in parallel with a secured transactions Law for lower risk lending.

Collateral Law* 1 Also, important to enact in parallel with a secured transactions Law for lower risk lending.

Law for foreign trade and licensing* 2 Needs review but should work in harmony with the law to establish an export development agency and function.

Six Laws pertaining to IPR protection and registration of marks*

2 The content of these laws have not been examined and will need thorough review and harmonization. However, the need for IPR protection is clearly a priority, particularly for the ICT, agro-processing, consumer goods and light industrial sectors.

Draft Law on public private partnership*

2 A vital component to ensure initiatives like the SME Strategy 2020 have the legal framework to implement well-structured PPPs through public-private dialogue.

Amendments to the monetary and credit Act*

2 Needs review but should be harmonized with secured lending, commercial registry and collateral laws.

Law on contracts lending instruments and financial instruments*

2 Needs review but should be harmonized with secured lending, commercial registry and collateral laws.

Electricity Law* 2 Needs review but should work in harmony with the National Energy Efficiency Action Plan to normalize the generation and distribution of electrical power reliably and cost effectively.

Three Laws for social security system amendments and reform*

2 Should be harmonized with the Labor Law and directed toward reducing the employer paperwork burden, establishing a statute of limitations on company liability for ex-employees and eliminating inspector harassment – while offering protection for pensioners. These actions will increase incentives to hire people while improving social protection.

*Included in the list of the 69 laws

C. Findings: Non-Regulatory Barriers to SME Growth

The legislative process in Lebanon has been at a virtual standstill for years. As noted above, no major commercial laws have been passed since 2006. In addition, few relevant regulations have been passed or amended, and few Ministries or agencies have undergone a review and reform of existing policies.

For businesspeople, this has necessitated finding circuitous ways of avoiding obstructive regulations. The business community has done this very effectively. In fact, most

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business owners and managers interviewed downplayed regulatory barriers and asserted that other factors in the operating environment were typically more problematic as business impediments. Some of the above operating environment factors can be dealt with through improved regulations. However, most do not require anything more than resources and the will to implement existing laws and regulations. As several interviewees put it [paraphrasing]: We don’t expect regulations to change, we just want government to get out of the way. Those most commonly cited included the following issues.

Source: World Bank, 2009.

Electricity outages and cost of auxiliary power generation. This is perceived as the most serious of the top three impediments to SMEs in Lebanon, particularly SMEs involved in industry and/or manufacturing. The state-run utility Electricite du Liban (EdL) sells line power at a very low, subsidized price of about $0.07 per kilowatt-hour.4 However, brownouts and blackouts are common, especially outside of central Beirut, undermining security of electrical supply in small and medium size industries. Most SMEs compensate

4 It costs EdL about $0.20 per kilowatt-hour to produce the electricity it sells for $0.07. By way of comparison, line electricity in the United States typically costs between $0.10 and $0.15 per kilowatt-hour.

In most large European countries, prices range between $0.15 and $0.20. A full discussion of EdL’s problems is beyond the scope of this report, except to note that they are severe, and include problems with production, distribution, transmission, administration, and finance.

Figure 1. Leading Constraints to Lebanese Enterprises (% of firms identifying constraint as major or very severe)

14 INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON

by purchasing diesel generators. Generators are an expensive investment in their own right and the electrical power from them is also quite costly, between $0.35 and $0.60 per kilowatt-hour, depending on the size and type of the generator. The use of generator power varies from place to place, but most of Lebanon’s businesses get at least one-third of their electricity from privately operated generators. The regular use of generators forces SMEs to operate under a higher cost structure than foreign competitors.

Photovoltaic solar is gradually being introduced, notably by the EU-funded CEDRO program, which is piloting green villages and solar array farms. However, as yet, use of solar and other renewables is not widespread. (UNDP-CEDRO, 2015)

Internet speed, reliability and cost. This is another of the top three most cited impediments to Lebanese SMEs. Considering Lebanon’s income level and technical prowess, the lack of fast, reliable and affordable internet service is somewhat surprising, and it places Lebanon at a significant disadvantage vis-à-vis rivals from competing countries. Over 90 percent of telecommunications are government controlled and telecommunications remain a large source of government revenue. Historically, the government has tended to underinvest in the network, and has not emphasized bandwidth, reliability, or quality control. The situation impedes all businesses, but particularly those that rely on social media, e-commerce, and those with heavy bandwidth requirements and/or needs for high-quality connections.

Transport infrastructure. Export shipments by land are currently impeded. The border to Israel in the south is closed, while to the east and north the war in Syria makes export into or through that country very difficult as well.5 Most export shipments have little alternative other than embarkation from the Port of Beirut. The physical infrastructure of the Port has been modernized and should be capable of handling all of Lebanon’s import, export, and transshipment needs. The Port however, appears to be somewhat understaffed, leading to occasional bottlenecks. More seriously, there are regular problems with Lebanese Customs, which has a negative reputation for inefficiency and corruption (see below).

Internally, there have been no functioning rail links in the country since the 1970s.

(Ghazi, 1997) All in-country transportation must thus be handled by truck. Outside of Beirut and Mount Lebanon, Lebanon’s roads are poorly maintained for a country of its income level; this is a particular problem in rural regions. Stops by authorities are frequent, ostensibly for security. All of these cause delays and damage to goods – in addition to the issue of unofficial payments [bribes] being demanded for continued passage.

Additionally, Lebanon’s trucking sector is extremely fragmented and badly undercapitalized. This has led to a situation where margins for the industry are low, yet

5 Although, not quite impossible. At this writing (April 2015), land trade with Syria appears to be continuing, though at a reduced level. Land trade through Syria, to Jordan or Iraq, does still occasionally take place, though the dangers are quite high, as are the corresponding costs. Informal interviews with freight forwarders suggest that land trade with Syria has dropped by about 50% to 75%, while land trade with Jordan and Iraq has dropped by 90%-95%.

INCREASING ENTERPRISE GROWTH AND JOBS IN LEBANON 15

costs to the consumer are high. For instance, moving a single 40-foot container from Mount Lebanon to the Port – a distance of just 10 miles – can cost over $200.

Customs clearance. Related to the transport problem, but deserving of its own section, is the often difficult customs clearance process. While the situation at Customs has generally improved in recent years, in part due to donor interventions and training, many SMEs still struggle with delays and/or unpredictable actions by Customs officials. For example, at the beginning of February 2015, Lebanese Customs increased inspections to 100 percent for incoming and outgoing shipments, creating severe backlogs. (Reportedly, this was done as a means to increase flagging revenues.) If SMEs cannot obtain inputs in a timely manner, or if customer shipments are delayed, their competitiveness will naturally be decreased.

Surprisingly, there was by no means a consensus on the general customs issue. One interviewee stated that they have no problems with Lebanese Customs and are routinely able to clear incoming and outgoing goods in 24 to 48 hours. This seems to be the exception, however, as other SME interviewees firmly stated that 8 to 15 days and even longer is more the norm. The Bertelsmann Stiftung Tranformation Index paints an even bleaker picture with an average time to export of 22 days and an average time to import of 30 days. Some companies are able to maintain excellent relations with customs, routinely benefitting from rapid clearance of goods, while others stand in the queue with paperwork and inspection delays. Our conclusion is the average duration of delays is directly related to the relationship a company has with Customs, which may in turn depend on the size and importance of the company.

High land prices. Lebanon is a very small country in geographic terms. Its population density is high, ranking 21st of 221 countries and territories, and is effectively even higher given that most of the population lives either in the greater Beirut area, Mount Lebanon, or on the narrow coastal plain. (World Bank, 2013) Land is very often sold without basic infrastructure like water, sewerage, electricity, or internet connectivity.

Even when these problems have been addressed by private land owners, facilities expansion may not be possible due to limitations stipulating that roughly half the calculated land area must be left structure-free. The end result is SMEs face very high costs to acquire land, build on it, and install infrastructure. It is a particular problem for space-hungry businesses such as industrial production and warehouses. Thus, land in Lebanon will always be in short supply and expensive. This situation has been made much worse by a steady flow of capital into land, bidding up land prices and causing construction booms, particularly in Beirut.6

Corruption cost and time lost. Corruption is a pervasive problem in Lebanon. In the absence of strong government, corruption is even more rampant and few checks or balances exist to slow its pervasive reach. The World Bank ranks Lebanon at just 146 out

6 The underlying causes of this are beyond the scope of this report, but include an abundance of capital – the Lebanese banking system has over $160 billion in deposits – combined with unwillingness on the part of Lebanese banks to make loans unless backed by land as collateral. Foreign capital also plays a role;

almost all FDI in Lebanon goes towards the purchase of land.

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of 202 countries in terms of effective governance, with one reason being the high rate of corruption. (Transparency-Lebanon.org, 2015) Corruption shows up in the usual places:

regulatory inspections of businesses; customs clearance; administrative procedures and filings; and judicial processes. In December 2014, the Lebanese Transparency Association released the results of the 2014 corruption perceptions index. The causes behind the rampant corruption in Lebanon are said to include: the lack of awareness about corruption; its causes and consequences; the absence of key anti-corruption institutions; the weak legal framework; the lack of proper legal implementation mechanisms; and the post-war structure in Lebanon, which has led to a power-sharing formula among political and confessional groups resulting in competition for state resources. One pharmaceutical firm we interviewed said it is not uncommon to be harassed by inspectors sent to check on their production processes mainly to seek compliance violations. This in itself is not a problem for them; however, the inspectors are not knowledgeable and add no value, they only threaten penalties in hopes of personal enrichment.

High import fees. Lebanon is overwhelmingly an import intensive trader. The high cost of import fees naturally have a major impact on the cost of goods produced because so few raw materials are available in country. Import of containerized goods is particularly expensive. One example for the food industry cited $385 in agent fees and another $735 to the government for port fees to import a 40-foot container. (These costs were in addition to routine import tariffs.) The combined total of over $1,100 is a significant cost, especially if the goods are in bulk and of relatively low value. (Teeny & Gedeon, 2015)

Country/region risk and the perception of risk to outside business relations. The risk of instability to the country and the region is two-pronged.