“Policy priorities to improve the environment for entrepreneurship”

1. “Policy priorities to improve the environment for entrepreneurship” Panel on “The Regulatory and Policy Environment”, Best Practices in Entrepreneurship Policy Conference Dubai School of Government, November 19-20, 2009 Presented by: Lois Stevenson, IDRC, Cairo

2. Context in MENA Region • Employment creation, especially for youth, is major challenge • Private sector not large enough to absorb growing number of job seekers • SMEsare major driver of private sector, but • Very small (over 95% are under 5-worker enterprises) • High level of informality (enterprises & employment) • Concentrated in low-growth sectors • Most only have capacity to serve local markets (low exports) • Low use of modern technologies • Low level of competitiveness • Low innovation • Few women participating in entrepreneurial /SME ownership activity • Need pipeline of more, and higher quality, entrepreneurs

3. SME/entrepreneur challenges • Regulatory burden to start-ups • Complex and costly administrative procedures affecting entry, operation and exit of enterprises • Low access to external debt & equity financing • Inadequate access to BDS, entrepreneurship/ management training, business & market information • High social security & non-wage labor costs(affects hiring practices) • High input costs due to low economies of scale & weak bargaining power • Constrained access to some markets

4. Lessons learned from policy practices in 14 developed countries

5. Framework for Entrepreneurship Policy Policy Objectives Create dynamic start-up market for entries and exits Stimulate climate and culture for entrepreneurship Stimulate more entrepreneurial activity; new businesses; new entrepreneurs Reduction of entry/exit barriers Entrepreneurship education Start-up financing Promotion of entrepreneurship Start-up support (enterprise & SB centres; networks) Target group measures

6. Objectives of policies to improve the regulatory environment • Ease the burden of entry and exit – the importance of turbulence • Reduce barriers to entry (excessive procedures to obtain permits, licenses and approvals impede business start-ups • Reduce barriers to exit – create a “rescue culture”, possibility to restart; reform to bankruptcy laws • Increase private sector opportunities in the marketplace – reduce restrictions on competition; sector deregulation • Reduce tax burden, provide incentives to encourage start-ups and investment in seed/venture capital and R&D • Reduce inequities in treatment of the self-employed due to biases in the tax and social security system (i.e. “quiet disincentives”) • Ease the burden on hiring – reduce non-wage labor costs, simplify the administration of payroll issues • Create more flexible labor markets – reduce employment contract requirements, payroll taxes and social security costs for employees • Reduce or simplify reporting to government authorities – use of single business number, e-transfer of information

7. Four broad categories of policy actions • Ease of starting a business • Simplifying start-up procedures and processes • Legislation affecting entry and exit • Adjusting laws related to competition, sector deregulation, the formation of limited liability companies, bankruptcy procedures, inheritance laws, patent procedures , IP protection • Labor issues • Creating more flexibility in labor market regulations and requirements • Taxation • Improving the taxation regime AND also simplifying all reporting to government authorities

8. Framework map of policy options to ease entry, growth and exit A (1):Ease of starting a business Reduce red-tape, time and cost of starting a business; provide regulatory and start-up information (one-stop shops) B: Legislationaffecting entry and exit Competition Acts; bankruptcy laws;insolvency rules; company laws; patent laws/IP rules • Objectives • Ease firm entry requirements • Increase market opportunities for new firms • Reduce exit burden and stigma of failure • Reduce regulatory burden on starters & new firms • Decrease labour costs/increase flexibility • Reduce administrative burden of new regulations on existing small firms A (2):Simplified reporting Information services; Single Business Number; electronic filing; streamlined procedures C:Labour issues Adjust employment contract rules; make changes to Workplace Relations rules D (1):Taxation Tax breaks for new starters; tax rebates for new firms; accelerated tax allowances for start-up costs; VAT exemptions D (4): Lower capital gains tax; reduce inheritance taxes D (2): R&D tax credits for new, young firms Objectives • Reduce tax burden • Reduce tax costs • Facilitate transfer of family enterprises • Stimulate investments (e.g. in R&D) • Stimulate informal and venture capital investments • Simplify tax reporting D (5): Small business tax deduction; simpler audit requirements; longer tax reporting cycle D (3): Tax credits to private investors and venture capitalists

9. Current areas of regulatory focus in MENA countries

10. Regulatory priorities in practice – MENA countries (1) • SME Law governing the sector • SME Law (Egypt, 2004; Algeria, 2001; Morocco, 2002; Palestine, SME Law drafted in 2009) • Regulations affecting SME access to financing • Microfinance Law or strategy to regulate the MF sector; establish framework for MFIs (Egypt, 2009; Jordan 2008; Syria 2007; Turkey – draft law on MFIs; Yemen, new Bank Microfinance Law issued in 2009 opens the door for micro-savings) • Leasing Law (Egypt, 2006; Syria, in process; Algeria, regulations in place ; Yemen, 2007) • Legislation/regulations governing venture capital funds/incentives (Morocco, 2006; Jordan 2008) • Regulations for licensing of credit bureaus (Egypt, 2007; Jordan, 2009) • Capital Market Laws (Lebanon, new; Syria – CMA, 2006; Egypt) • Legislation /regulation affecting SME access to bank financing (Egypt, Sudan – at least 10% of bank loans have to be allocated to MF; Tunisia, SME Bank,2005) • Laws liberalizing the banking sector (most MENA countries to some degree)

11. Regulatory priorities in practice – MENA countries (2) • Regulatory reform initiative to simplify regulatory environment for businesses & reduce costs • Egypt, 2008, Lebanon 2007; Tunisia –2007 Law on Economic Initiative; Iraq, Task Force on Economic Reforms and Private Sector Capacity; Palestine, Institutional Reform for Enterprise Program • Adoption of Regulatory Impact Assessment (RIA) regime (Turkey, 2007; Egypt, underway) • Legislation/regulations affecting the entry of new firms • Establishment of one-stop shops for registration, permits and licenses for entrepreneurs & investors (Egypt, Morocco, Tunisia, Jordan, Syria, Lebanon, Algeria • Reduced minimum capital requirements for limited liability companies (Egypt, 2007; Jordan, 2009; Morocco; Tunisia) • Review/amendments to Laws governing competition/anti-monopoly (Jordan, in process; Lebanon, in process; Palestine - reform to Competition Law initiated) • Review/amendments to Company Law (Lebanon; Jordan, Egypt, Iraq; Palestine, new Company Law drafted; Yemen, review initiated in 2009) • Sector deregulation (various)

12. Regulatory priorities in practice – MENA countries (3) • Legislation affecting the exit of firms • Review/amendments to Bankruptcy Law (Jordan 2008-09; Lebanon, in process) • Regulations affecting operation of enterprises • Regulations to reduce level of informality (Morocco, 2008; Turkey, underway) • Amendments to Tax Law in favour of SMEs(Egypt, 2006; Jordan, 2009; Morocco, Tunisia, Algeria + tax OSS for small businesses) • Law governing SME procurement access (Egypt 2004) • Legislation/regulation affecting the provision of SME services • 2003 decree in Algeria for establishment of incubation and facilitation centers • Regulations regarding Entrepreneurship Education • Ministry of Education and Higher Education decree (Egypt 2008, 2009; Jordan (agreement MIT & INJAZ); Syria • Morocco’s National Education and Training Charter 2008-2010 emphasizes teaching of entrepreneurship (mindset and skills)

13. Issues • NGO laws – important issue • Labor laws – critical area of reform (e.g. social security costs, firing costs, complexities in dealing with authorities re employees) • Reform process in MENA is very lengthy • Difficult to reach consensus • Lack of strong advocacy organizations (“voice of SMEs and entrepreneurs”?) • Vested and conflicting interests • Implementation of new laws and regulation a major challenge (capacity, information, willingness) • see 2009 WB MENA report” From Privilege to Competition” • Improving “business enabling environment” necessary but insufficient to foster entrepreneurial growth • Need to implement actions in all areas of the entrepreneurship policy framework..AND MONITOR IMPACT!