Investment Environment Reform

World Bank official advises on improving investment environment

Excerpts of the speech of Hedi Larbi, Director of the Middle East Department at the World Bank, during the Lebanese Businessmen Association (RDCL) gathering on July 5, 2011.

Two years ago when we met with the Prime-minister, I began the discussion by stating that the private sector in Lebanon is a set of hills. It would take some kind of risk-taking entrepreneur to invest. Rarely do you find the sort of risk-taking people such as the Lebanese.

If we look at how states attempt to improve the conditions of the private sector elsewhere, we would realize that such a thing does not exist in Lebanon.

Allow me to begin by presenting the Macro situation and why the private sector is essential for Lebanon.
I shall recite some numbers.

Usually the private sector forms 60-70 percent of a state’s economy. In Lebanon, the private sector forms 90 percent of the economy. This epitomizes a laissez-faire economy. The private sector is considered as the heart of the growth in Lebanon.

Around 30 percent of Lebanon’s GDP is driven by investments. Out of the 30 percent, 28 percent is private sector investment and 2 percent is public sector. Even in leading economies such as China, the shares of the investments among private and public sectors are equally split 50 by 50 percent.

Lebanon will witness a slowdown in growth for 2011. There is no way Lebanon’s economy could gain pace without the active participation of the private sector. Hence, a priority of the new government is to incentivize the private sector. Moreover, there is a huge correlation between Lebanon’s stability and its economy. Politicians should keep an open eye to this phenomenon.

Another positive correlation for small countries like Lebanon and Jordan is the improvement in their economy when oil prices increase. Of course, higher prices would reflect badly on fuel consumers. However, higher oil prices would lead to greater remittances and capital inflows from oil-rich countries. Unfortunately, this time it is not correlated. There is a way to improve if and only if the private sector rebounds. The private sector should play a larger role in the Lebanese economy.

First, the risk of political stability affects the economic situation. Provided that we have some internal stability Lebanon can do well. The second point is that the government should launch infrastructural reforms and projects. This should be welcomed by the people and private sector because it would improve the economic situation.
The main message over here is that you should work with the new government on a series of reforms.
There is an excellent action plan, which we have proposed in collaboration with the government, that would help improve the business environment. The action plan involves a number of reforms which should make doing business easier. I shall go through a number of these proposals.

The authorizing environment in Lebanon generally obstructs economic activity. Transaction costs are very high. I have found it very hard to understand why we require three or four institutions to execute a simple task such as obtaining a construction permit. Having so many transaction costs to obtain a permit are quite burdensome. In some other countries obtaining a construction permit may be as low as $100. While in Morocco it costs $3,000 and in Lebanon it costs $12,000 and may take up to 160 days to be issued.

Some of these institutions are useless. In many countries, they have urban regulations that apply to districts and other administrative constituencies. In other countries, it is a local administrative council or municipality that issues construction permits. The situation in Lebanon is much more complicated and adds no value but simply costs.
We should introduce a whole new set of technical standards and eliminate institutions that simply increase transaction costs.

In many countries, if one is denied a construction permit there is an appeal process. In Lebanon, no such system exists. One would have to re-apply all over again. What we want is to send out a clear message that certain reforms are required. Access to finance should improve. The current system allows already established entrepreneurs access to finance. The regulation that is in place is not conducive to investment. We provided a number of solutions to resolve these issues. There is a draft of a secured lending law which still has to be revised and finalized.

According to the Lebanese system, movable assets such as cars cannot be offered as guarantees. In other countries, movable assets are valued more than fixed assets because they could be liquidated quickly.
The third issue is the trade in goods. The imports and exports of goods are an essential part of an economy.
If you send a truck of goods to Saudi Arabia from Lebanon, it should pass by the Syrian, Jordanian, and Saudi customs to reach its final destination after around three days. Whereas goods sent to Saudi Arabia from the Far East may reach their destination in a matter of hours by plane. Hence, there is a pressing need to facilitate the movement of goods and ease custom duties. There is also a need to regulate and systematize the system. We do have a bunch of excellent Information Technology specialists to refer to. We should convince the customs and the rest of the administration to computerize their systems.

Business registration in Lebanon is a major issue. It would usually take around 24-48 hours in other countries to register a business. In Lebanon, it requires around 5 days if you are well connected and up to 60 days in some cases.
In Lebanon, the legal system mandates every start up should have a lawyer. The lawyer charges $5750 to register your business. In effect, all he does is charges $5750 to document and sign a few papers; whereas in other countries starting up a business may cost as much as $200.

The legal system is very demanding and the procedures are very strict. The mandatory appointment of a lawyer increases costs. In Lebanon, it requires around 643 days to resolve a legal affair on average; a number surpassed only by some countries in Latin America and the Caribbean’s. It takes half that number of days to resolve a legal affair in some Sub-Saharan states. We proposed some reforms in the legal system. Court procedures should be simplified, the mandatory appointment of lawyers should be abolished, and there should be a standard contract. We should have a standard law contract and no mandatory contracts by lawyers and the legal system.

Finally, the insolvency problem is extremely costly. Lebanon has one of the oldest laws in the region. It takes around 124 days to file an insolvency case. In Lebanon, if you do not go through the insolvency regulation you cannot start a new business. The cost of shutting a business in Lebanon is 22 percent of the turnover. This has got to be improved. I don’t think people that close the business would go through the legal system. But people that did file an insolvency case and went to the legal system had a bad experience.