Chapter 2. Improving the business environment for SMEs and entrepreneurs
Business laws and regulations need to serve the public interest without placing undue burdens on private enterprise. This chapter focuses on key reforms and actions since 2014 in terms of administrative reform and simplification, the operational environment for business creation, and bankruptcy laws and procedures.
The interim assessment finds that several MED economies are working towards establishing formal mechanisms for regulatory impact analysis – although not yet through the implementation of an SME test. The interim assessment also notes increasing efforts to facilitate procedures for enterprise creation, particularly through the introduction of single identification numbers and online registration, to different degrees.
Key recommendations from the chapter are as follows:
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MED economies could step up their efforts to introduce ex ante and ex post regulatory impact analysis (RIA) – especially those that have not yet established a comprehensive committee and strategy to improve the business environment. Governments could also introduce the SME test, which is still absent in the MED region.
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There are laudable efforts to facilitate the creation of new firms by introducing online portals and single identification numbers when dealing with different organisations. These efforts could be taken a step further by reinforcing the role of one-stop shops in the facilitation of business registration.
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Those economies that have reformed their insolvency legislation could support the implementation phase closely, particularly through training programmes supporting professionals working in the judiciary and related occupations.
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Enterprises constantly interact with the public administration throughout their life cycles. This interaction starts with registration procedures, including applications for the licenses and permits needed to launch a business. Enterprises have to comply with a wide range of regulations (either horizontal or sector-specific) related to taxation, the use of production factors (such as labour and energy), protection of consumers and the environment, supervision of market activity, and restriction of anti-competitive practices. In addition, enterprises are asked to report regularly on their activities and respond to data and information requests from public bodies. On top of this, businesses must comply with requirements set by different levels of government: national, regional and local.
If it is not efficiently organised, this interaction with the public administration may lead to an unnecessary administrative burden that can weigh heavily on company resources, particularly for smaller enterprises. In the case of micro enterprises, it is often the entrepreneur who takes on the obligation to deal with administrative requirements, diverting time and resources from the core business activity. A more responsive public administration, with the capacity to interact efficiently with all classes of enterprises, provides a better environment for the productivity and growth of the enterprise sector.
This chapter focuses on key reforms and actions carried out since 2014 in terms of administrative reform and simplification, the operational environment for business creation, and bankruptcy laws and procedures. The interim assessment finds progress in almost all the economies and policy areas assessed, as summarised in Table 2.1.
Most MED economies have progressed in the implementation of regulatory impact analysis, but the implementation of the SME test is preliminary at best.
Regulatory impact analysis (RIA) is a systemic approach to critically assessing the positive and negative effects of proposed and existing regulations and non-regulatory alternatives. In other words, RIA helps to ensure that regulation is produced efficiently and effectively and that regulatory decisions have considered issues such as costs, benefits, distributional effects and administrative requirements.1 RIA mechanisms can help to systematically improve the current stock of business regulations (ex post regulatory stock-taking/evaluation) by reviewing or eliminating redundant, burdensome or outdated procedures and rules, or by adapting existing regulations to changes in the economy and society. RIA can also improve future regulations (ex ante) by providing mechanisms to assess the merits, costs and benefits of new procedures and rules.
Beyond analysing the impact on the general businesses, RIA mechanisms can also explicitly consider the impact of SME legislation through the introduction of the “SME test”, which is a fundamental part of the “think small first” principle.2 The SME test may lead to the exclusion of SMEs (often micro enterprises) from the scope of regulations or to the introduction of exemptions, transition periods or tailor-made provisions for SMEs.
Progress since 2014
The SME Policy Index 2014 pointed to the increasing awareness among MED economies of the importance of improving the quality of the regulatory environment and launching legislative simplification and regulatory reform programmes. Of the eight economies, however, only Egypt and Morocco had implemented systematic regulatory reform programmes, co-ordinated by an inter-ministerial body and organised around a multi-year strategy complemented by short-term action plans. Furthermore, none of the MED economies had applied RIA formally and consistently, with the exception of pilot projects in Egypt, Israel and Jordan.
This interim assessment registers progress on RIA in the following economies:
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In Israel, the October 2014 Resolution 2118 includes provisions for RIA ex ante and ex post (OECD, 2015). The Resolution is applied by a special unit at the Prime Minister’s Office, in collaboration with contact points in each ministry or government agency involved in matters related to regulations. Nonetheless, the implementation of Resolution 2118 started in January 2017 and there are no published results. As part of the wider RIA efforts, the SMBA has published guidance for the implementation of an SME test; however, the guidance is not yet part of the RIA process.
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In Jordan a pilot regulatory guillotine initially launched before the 2014 assessment has been continued and significantly expanded under a MENA Transition Fund project, Jordan Economic Legislation Reform Project (2016-2018). The project is developing a roadmap for regulatory reform and building implementation capacity. Its ultimate goal is to establish a regulatory impact analysis mechanism to ensure the quality of new laws and regulations and the quality of regulatory delivery. There is no reference to the development of an SME test, though.
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In Tunisia, the General Directorate for Reform and Administrative Outlook (DGRA), within the Office of the Head of Government, continues to co-ordinate the implementation of a regulatory guillotine. Furthermore, a new initiative called “SOS Ijraat” was created in 2016 to receive information from businesses on difficulties with administrative matters. The initiative is framed by a public-private consultation platform called the National Business Agenda (NBA). There is no reference to the development of an SME test.
The assessment also notes efforts to improve the business environment in the following economies:
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In Egypt, the Egyptian Regulatory Reform and Development Activity (ERRADA) has been reactivated and is currently participating in the revision of a number of laws and the implementation of a comprehensive inventory of business regulations (these are being published in an e-registry for public consultation). ERRADA is one of the most advanced initiatives in this area in the region. However, there is no evidence of the consistent application of RIA to business regulations. The SME Strategy under preparation is expected to fully reflect the SME test and the “think small first” principle.
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The National Committee of the Business Climate (CNEA) continues to be the main driver of regulatory reform and administrative simplification in Morocco, but it is not an RIA initiative. There is an RIA requirement in the Law on the Functioning of Government Bodies and the Status of their Members. According to it, every new law proposal should be accompanied by an impact assessment. In compliance with this, the Secretary General of the Government (SGG) and SME Morocco are studying the possibility of introducing the SME test.
There has been little progress in other MED economies:
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There is no evidence of concrete efforts in Algeria or Lebanon to develop and implement RIA and introduce an SME test.
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In PA there is no practice of RIA or the SME test and there are no plans for their introduction. Gathering evidence for RIA requires consultation mechanisms which are essential to fill the democratic vacuum created by the non-functioning of the Palestinian Parliament. Laws are not approved by the parliament but issued by the President under a state of emergency. A strong public-private dialogue could provide a platform for such consultation mechanisms.
It is worth noting that Jordan, Morocco and Tunisia systematically publish draft laws online and in a centralised manner for consultation. In Jordan and Tunisia, the online consultation is part of their open government commitments.3
For further action
This interim assessment notes progress in the implementation of RIA, in particular through the creation of formal mechanisms in Israel and Tunisia and the continuation of pilot projects in Jordan. It also notes the continuation of efforts to improve business environments through comprehensive initiatives (although not through RIA, strictly speaking) in Egypt and Morocco. None of the MED economies applies the SME test, although there are ongoing efforts in that direction in Israel and Morocco with the technical support of the EU’s Enhancement of the Business Environment in the Southern Mediterranean (EBESM) project.
All MED economies have public-private dialogue platforms that could advocate the implementation of formal ex ante and ex post RIA mechanisms and the introduction of an SME test. Such efforts would go beyond targeting very specific regulatory aspects (for example, those reflected in Doing Business) and would involve improving the business environment for SMEs in a systematic and comprehensive way.
There has been progress in online registration and single identification numbers, but little development of one-stop shops.
Firms have to comply with a wide range of laws and regulations throughout their life cycles. This section focuses on a one-off procedure: business registration. Other legal requirements and administrative procedures also have a great impact on enterprise performance, such as those concerning taxation and labour. However, business registration may be viewed as a proxy for the overall level of efficiency of the public administration. Furthermore, it is often the entrepreneur who takes on the obligation to deal with administrative requirements, diverting time and resources from the core business activity. This is very often the case for start-ups.
Both the level of entrepreneurial activity and the rate of formal business start-ups in the MED region are usually lower than in other emerging markets. More efficient business registration procedures may help reduce barriers to business creation and provide an incentive for the formal registration of ongoing business activities. Inefficient business registration and burdensome licence application procedures are one of the many factors pushing a large number of private enterprises to operate informally.
This interim assessment looks at three specific issues related to the formalities for enterprise creation:
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The availability of single identification numbers used by different administrations involved in company registration (business registry, social security, tax administration, business associations, etc.). Single identification numbers help reduce the costs of, and time required for, registration by making it simple for different agencies to share administrative information on a specific firm. They can also provide an important source of administrative information for the development of more timely, extensive and accurate statistics.
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The ability to register a company using online platforms. This results in a faster and smoother registration process for entrepreneurs.
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The availability of one-stop shops that allow firms and entrepreneurs to deal with different administrations from a single space.
Progress since 2014
The SME Policy Index 2014 noted some efforts by MED economies to facilitate enterprise creation through single identification numbers, online registration and one-stop shops. Algeria had extended its network of one-stop shops to facilitate company registration, and Egypt had established three one-stop-shop networks. Jordan and Tunisia had introduced single identification numbers, and Morocco had eliminated minimum capital requirements. Company registration processes in Israel and Lebanon were still relatively costly, whereas in PA the process was quite lengthy. The provision of e-government services, including online registration, remained limited.
This interim assessment finds that MED economies have generally progressed in these policy areas. However, looking at the Doing Business “Starting a business” indicators reveals that the region has plenty of room to improve – with the exception of Israel and Morocco, which perform relatively well in this area (see Table 2.2).
A few economies have in place all three elements related to the formalities for enterprise creation analysed in this section (i.e. single identification numbers, online registration and one-stop-shops for enterprise creation).
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In Egypt a company’s registration can now be initiated online and physically concluded in one window and one step at the facilities of the General Authority for Investment (GAFI). As reflected by Doing Business, in 2016 Egypt improved its one-stop shop for business registration by introducing a unit to liaise between the tax and labour authorities on one the hand, and the firm on the other.4 However, there is no evidence of the implementation of a single identification number for companies, although such stipulation is reflected in the new Investment Law of 2017.
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In Israel, business registration has become easier through the adoption of 1) a single identification number to deal with different government agencies and 2) the establishment of an online registration platform that, according to reports, handles 75% of all applications and provides registration between two and four days.
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As part of the Doing Business reforms driven by CNEA, Morocco has streamlined the process of starting a company by eliminating the minimum capital requirement, reducing registration costs, simplifying documentation requirements and introducing an online platform to reserve the company name. Morocco is also revamping a project to create an online system for enterprise creation, and it has created a single identification number (identifiant commun de l'entreprise, or ICE) for natural and legal persons to register more easily.
Other economies have different degrees of advancement towards that direction:
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In May 2017, Algeria created a new electronic portal for enterprise registration, which provides useful information on the different requirements to create a firm. However, the procedure has to be accompanied by a notary registered with the National Centre of the Commercial Register (CNRC). The notary is in charge of transferring the information and the documents necessary to the agencies concerned by the procedure. The portal has registered 80 new enterprises and around 276 notaries have been trained to use the platform.
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In Jordan a Local Enterprise Support (LENS) project has been established by the United States Agency for International Development (USAID) to, among other things, improve business registration by strengthening the IT capacity of the business registry (Companies Control Department) and developing a business registration manual to help entrepreneurs learn the registration process for different types of businesses. Nonetheless, there is no evidence of concrete results for these initiatives in new enterprise registration – nor is there evidence of progress with regard to online registration services and one-stop shops for companies’ registration.
More progress could be made by Lebanon and PA:
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Lebanon has initiated an e-government initiative led by the Office of the Minister of State for Administrative Reform (OMSAR) and in co-operation with relevant ministries involved in business regulations. However, as yet there is no evidence of improved regulations and procedures for enterprise creation.
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In PA, Doing Business reports the elimination of the paid-in minimum capital requirement for starting a business. The consultations for this interim assessment, however, noted no other important reforms to facilitate enterprise creation.
For further action
All MED economies, except Lebanon and PA, have progressed in the introduction of single identification numbers for company registration and online registration. However, there is still much to do in terms of one-stop shops, which have not expanded over the past few years.
Many MED economies have updated their bankruptcy laws, but the impact will depend on their implementation.
Efficient bankruptcy procedures allow the reorganisation of ailing but viable firms and the fast and inexpensive liquidation of unviable businesses. By providing an equitable and predictable framework, they also promote risk-taking by entrepreneurs and financers. This section analyses two themes: “bankruptcy procedures”, which encompass the laws and procedures dealing with distressed companies, receivership and bankruptcy; and “resolving insolvency”, which looks at the relevant indicators from Doing Business.
Progress since 2014
The SME Policy Index 2014 and this interim assessment show that all MED economies have in place laws and procedures to deal with enterprise insolvency and bankruptcy. In recent years Egypt, Israel, Jordan, Morocco and Tunisia have updated their bankruptcy legislation as follows:
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In Egypt, a new law was approved by parliament on 28 January 2018. The law decriminalises bankruptcy by abolishing prison sentences and allows companies more time and options for restructuring by introducing mechanisms to help settle commercial disputes outside the courtroom and simplify bankruptcy proceedings.
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In Israel, an Insolvency and Economic Rehabilitation Law was approved by the Knesset (the national legislature) in March 2018. This is reported to be a comprehensive law covering all procedures for individuals (bankruptcy) and for companies (liquidation, receivership, stay of proceedings and restructuring). Its goals are to advance the debtor’s financial rehabilitation; to maximise the return to creditors; to increase the certainty and stability of the law; to shorten procedures; and to reduce the bureaucratic burden.
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Jordan in April 2018 approved a new Reorganisation, Bankruptcy and Liquidation Law establishing a legal framework for distressed companies.
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Morocco adopted a new law on insolvency on April 2018. Tellingly, the objectives of the new law are reflected in the proposed change of name, from “Enterprise difficulties” to “Procedures for the prevention, rescue and treatment of the difficulties of enterprises.”
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In Tunisia, the Collective Insolvency Proceedings Act (loi 2016-36 du 29 avril 2016 relative aux procédures collectives) was enacted in April 2016. Some observers see it as more concerned with the liquidation of companies than with their restructuring for an eventual redressing. Others point to its positive aspects such as 1) alert systems for auditors of enterprises that could be in difficulty or 2) new rules of conduct to be observed by the courts, judicial experts, and the various partners of the company during the phases of amicable settlement, judicial settlement and eventually, bankruptcy.
The rest of the MED economies have less extensive initiatives related to improving the legal framework:
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Algeria’s Code of Commerce (order 75-79) of 1975 establishes bankruptcy procedures. This interim assessment notes that although Algeria trains judges in this area, there is no tracking of results of this programme – for example, whether the training has resulted in fewer liquidations and business exits and more business restructurings.
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In 2014, the government of Lebanon was revising the legal framework for insolvency and drafting a modern bankruptcy law through the IBEL initiative. There have been no changes in this regard since then.
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In the case of PA, the cabinet is reported to be working on a Companies Law that will update old bankruptcy laws.
The World Bank’s Doing Business indicators provide a glimpse of the cost and duration of resolving insolvency and the recovery rates for creditors of distressed firms. These indicators show that only Israel and Tunisia have relatively effective bankruptcy mechanisms by regional standards (Table 2.3). In terms of changes over time, the Doing Business indicators do not register any major reforms. It is yet to be seen what impact the recent legal reforms will have in future editions; measuring the impact on performance indicators (time, cost and recovery rate) will require time.
For further action
As in 2014, this interim assessment notes that although MED economies have put in place laws and procedures to deal with insolvency and bankruptcy, evidence on levels of implementation remains scarce. As in 2014, this may point to a preferred use of out-of-court mechanisms, high levels of economic informality, and the lack of a system to track the effectiveness of insolvency mechanisms. MED economies could therefore strengthen their monitoring of insolvency and bankruptcy cases in order to better assess the efficiency of the legal and procedural framework.
This interim assessment also notes recent legal reforms in several MED economies over the past few years. These reforms could be accompanied by training programmes supporting professionals working in the judiciary and related occupations.
The way forward
Business laws and regulations need to serve the public interest without placing undue burdens on private enterprise. That is, they need to be effective and efficient. This interim assessment notes that MED economies have stepped up their efforts to improve the business environment, including through RIA, although not yet through the implementation of a SME Test.
The interim assessment also notes increasing efforts to facilitate the procedures for enterprise creation, particularly by introducing single identification numbers, in at least four of the eight MED economies; and the introduction of online registration, to varying degrees, in four economies. This is important since easy and inexpensive start-up procedures facilitate entrepreneurship and ease the expansion of the formal economy.
In addition, efficient bankruptcy leads to a better allocation of resources, and makes it easier for companies to reorganise or wind up. Progress in this area is much less evident and the interim assessment notes that, as in 2014, this remains an issue to be tackled in most MED economies, particularly in Jordan, Lebanon, Morocco and PA. On the other hand, the assessment also notes the recent legal reforms in Egypt, Israel, Jordan, Morocco and Tunisia.
This interim assessment puts forward the following additional actions for MED economies:
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More could be done to introduce ex ante and ex post RIA, especially in those MED economies that have not yet established a comprehensive committee and strategy to improve the business environment (Algeria, Lebanon and PA). Such an endeavour could be part of the agenda of the active public-private dialogue platforms that exist across the region.
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Governments could introduce the SME test, which is still absent in the MED region.
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There have also been laudable efforts to facilitate the creation of new firms through the introduction of online portals and single identification numbers when dealing with different organisations (in all cases except Lebanon and PA). These efforts could be taken a step further by reinforcing the role of one-stop shops in facilitating business registration.
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Economies that have reformed their insolvency legislation could do more to support the implementation phase, particularly through training programmes aimed at professionals working in the judiciary and related occupations.
Bibliography
OECD (2015), OECD Regulatory Policy Outlook 2015, OECD Publishing, Paris, https://doi.org/10.1787/9789264238770-en.
OECD (2013), Regulatory Reform in the Middle East and North Africa: Implementing Regulatory Policy Principles to Foster Inclusive Growth, OECD Reviews of Regulatory Reform, OECD Publishing, Paris, https://doi.org/10.1787/9789264204553-en.
OECD (2012), Recommendation of the Council on Regulatory Policy and Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264209022-en.
World Bank (2018), Doing Business 2018: Reforming to Create Jobs. World Bank, Washington, DC, http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf.
Notes
← 1. See OECD (2012), Recommendation of the Council on Regulatory Policy and Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264209022-en and The OECD Reference Checklist for Regulatory-Decision Making.
← 2. http://europa.eu/rapid/press-release_IP-08-1003_en.htm.
← 3. Consultation in draft laws is a key principle of the OECD’s Regulatory Policy Recommendation and Open Government. See OECD (2013), Regulatory Reform in the Middle East and North Africa: Implementing Regulatory Policy Principles to Foster Inclusive Growth, OECD Reviews of Regulatory Reform, OECD Publishing, Paris, https://doi.org/10.1787/9789264204553-en and http://www.oecd.org/gov/regulatory-policy/mena-2013-report.htm.
← 4. World Bank, Doing Business (2018), “Business Reforms in Egypt, Arab Rep.”, http://www.doingbusiness.org/Reforms/Overview/Economy/egypt.