The red lines in the Lebanese flag extend to its business environment
During my time in Lebanon last summer, I convinced a close friend, Maroun, to start a small manufacturing firm for producing soap and shampoo.
Eventually, he got the business off the ground, and now has four full-time employees, who apart from having steady jobs, also receive health benefits through the National Social Security Fund.
But there is no such thing as a free lunch. I witnessed the pain that Maroun had to go through to formally register and set up his business. It included navigating a complex maze of regulations, as well as paying a number of bribes. So, I was not surprised to see Lebanon’s ranking – 115thout of 185 – in the world economies surveyed in the recent World Bank Doing Business Report 2013. Lebanon was placed 114th in terms of ease of starting a business,172nd when dealing with licenses, 108th in ease of registering property, 100th when protecting investors is concerned, and 95th when it comes to trading across borders.The laws and bureaucratic procedures in public institutions compound the effects of complex and unevenly enforced regulations.
Those responsible for administering Lebanon’s business environment could support local entrepreneurs by simplifying regulations; including the process for property registration, dealing with licenses, and trading across borders. Fortunately, many reforms are “quick-win” reforms because they are primarily administrative in nature and can be accomplished within a reasonable time frame (6-8 months) through ministerial action. This would have a huge impact on the business environment in Lebanon by eliminating the red tape that hinders new businesses and entrepreneurs. It would also create an environment in which longer-term, more in-depth reforms are more likely to succeed. For example, to start a business in Lebanon, a local entrepreneur needs more than one year’s full income(more than US$ 9000) – but only 0.8% of income per capita to do so in United States. Abolishing the minimum capital requirement (as well as the obligation to open a bank account), making optional the requirement to designate a lawyer for standard small-medium businesses, and increasing efficiency at the Commercial Registry could all help reduce the steps, cost and time required to start a business.
In Lebanon,it costs 5.8% of property value to transfer a property from one person or business to another but only 0.7% in Egypt. Going from fees based on a percentage of the property value to lower fixed rates can be a game-changer. Making property registration more affordable usually means more registrations, less evasion, and access to finance – as formally registered property can be used as collateral. High percentage-based fees lead some entrepreneurs to resort to undervaluing their property to avoid paying the full amount, or simply to avoid registration completely. When Egypt lowered the total registration cost from 5.9% of property value to a fixed fee of EGP two thousand (around US$ 364) in 2008, property registration revenue increased by 39% due to the increase in registrations.
Lebanese businesses also face delays while dealing with licenses. It takes them 219 days to obtain the necessary licenses to build a warehouse. Lebanon can learn from more than 50 countries that reformed their construction licensing regulations over the last five years. For instance, Lebanon can enforce existing silence-is-consent rules at the municipal level, streamline design approvals from the Order of Engineers to reduce associated procedures and delays, makethe police notification step an internal process by requiring the municipality to notify the police of the construction permit, and lowering the time needed to obtain building and occupancy permits from the Urban Development Department and Municipality (total time now is six months).
Currently, in Beirut, a trader must spend 22 days to complete cargo export – 30 days for import – procedures. Other countries - i.e. Egypt, Tunisia, Jordan, Djibouti, and Morocco - are more efficient in terms of trading across borders.Most time is spent in dealing with Lebanese Customs - 12 days for export and 19 days for import - and pre-arrival documentation. Such delays are burdensome for exporters and importers. Possible immediate reforms includeextending hours of operation at customs (currently customs operate only from 8 am until 1 pm), allowing pre-arrival customs clearance, and reducing free storage time. Djankov et al. (2010) find that each additional day that a product is delayed prior to being shipped reduces trade by more than one percent. Lost time translates into lost business and revenues.
The reform of business regulations is both necessary and timely in Lebanon, but will not be enough. The above recommendations highlight changes that could be implemented immediately. They would pave the way for future actions. Policy makers would benefit from reviewing the experience of countries that significantly improved their ‘Doing Business’ indicators through reform of the business environment. There are a number of countries that have successfully managed programs of regulatory reform, and they stand as benchmarks for measuring the effectiveness of their respective policy makers. In the same way, implementing the reform outlined above would deliver tangible results, building confidence at the national level, in the ministries of finance, economy and trade, as well as the local, municipal level. This would be especially valuable in these challenging times. Most importantly, they would set the stage for longer-term, more in-depth reforms.
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