“The best thing a government can do when things are going well is not to do anything,” says Salam Yamout, national information and communication technology strategy coordinator at the Council of Ministers. “Governments move when markets fail,” she says. Yamout’s attitude reflects Lebanon’s laissez-faire economic style when it comes to matters of government intervention in the private sector.
But with an economy ravaged by domestic and regional tensions, paired with a growing unemployment rate, the country could use some government intrusion. Nowhere is this more true than in the budding entrepreneurial ecosystem, which has seen the creation of several successful startups but is still facing many barriers. Lebanon’s score on the World Bank’s “Doing Business” report for 2014 underlines the need for some government action to bolster the business environment for entrepreneurship. Out of 189 economies, Lebanon ranked 120th for starting a business, 109th for getting credit, 98th for protecting investors, and 126th for enforcing contracts.
Waiting on parliament
This need is not completely lost on the various branches of government. A United Nations Development Program (UNDP) project at the presidency of the Council of Ministers is working on removing various barriers to setting up a business in Lebanon. According to economic officer Yasmina el- Khoury Raphael, they currently have recommendations for the code of commerce sitting at parliament awaiting approval. They also recently completed a draft law on secure lending, which would help entrepreneurs take out loans on moveable assets — as many small and medium enterprises (SMEs) don’t have fixed assets. Both initiatives need to be passed by parliament before becoming law. However Lebanon’s parliament has not met since the resignation of Prime Minister Najib Mikati in March.
“There has been a problem in legislating quickly in Lebanon. Some laws have been waiting many years,” says Salam Yamout. “We have very low grades when it comes to governments passing policies and regulations.”
A proposal from the Ministry of Economy and Trade facilitating early-stage financing to entrepreneurs is also waiting for the parliament to convene to be passed. The Innovation in Small and Medium Enterprises (iSME) project hinges on a $30 million loan from the World Bank. Though the World Bank has approved the loan, the Lebanese government requires the approval of parliament to borrow money.
The project could address a salient issue in the entrepreneurial ecosystem. “Access to finance for smaller firms is still a problem,” says Zeina el-Khoury, head of the enterprise team for the UNDP project at the Ministry of Economy and Trade. Despite programs geared toward entrepreneurship, such as the guaranteed loan service Kafalat, only 16 percent of small and medium enterprises in Lebanon have access to loans, compared to a global average of 26, says Khoury.
The money from the World Bank would be deployed through two channels to boost the development of early stage companies. First, it would be awarded to entrepreneurs for concept development grants, in which they can receive up to $10,000 to develop an idea. Second, the bulk of the program’s spending would be a fund that would match investments from venture capital firms. This program would be implemented through Kafalat.
Meanwhile, over at the Investment Development Authority of Lebanon (IDAL), attempts to improve the business climate are similarly pending parliamentary approval, though no one is holding their breath. IDAL submitted a proposal to the council of ministers to amend Investment Law No. 360 which would lower the eligibility criteria for enterprises to benefit from financial exemptions offered through the program to make the business environment more conducive to the development of startups.
Currently the criteria to access such programs are too high for fresh entrepreneurs starting a business. The criteria to benefit from its programs varies by sector, but, for example, the information technology (IT) sector requires a minimum investment of $400,000 and the creation of 25 jobs, and a project in the tourism sector requires a minimum $15 million investment and 200 jobs. The current proposal suggests lowering some of these barriers to eligibility. In the IT sector, for instance, it proposes lowering the job creation minimum to receive incentives. If IT companies can create five jobs in two years, they could benefit from some of the incentives offered through IDAL such as exemption from corporate taxes for five years.
Not all policies regarding entrepreneurs need parliamentary approval to be passed. In a bold move for action in August, the central bank passed Circular 331, intended to stimulate the economy and create jobs, which created a lot of buzz in the startup ecosystem.
The circular takes advantage of Lebanon’s loan-to-deposit ratio of 34 percent — low compared to the global average — meaning Lebanese banks are sitting on a lot of money that could be invested in the startup ecosystem.
It creates incentives for commercial banks to make investments in startups or bodies in the startup ecosystem such as incubators or venture capital firms by guaranteeing 75 percent of their investments. With only 25 percent of the risk, commercial banks are incentivized to make investments in startups, otherwise seen as notoriously risky. In lieu of a functioning government to implement policies that would create a favorable environment for budding businesses to operate in, some members of the ecosystem have hailed the central bank initiative. Others have questioned the ability of banks, who have little experience in investing in startups, to be able to invest in them in a smart way.
Yet initiatives such as Circular 331 cannot replace the government’s role. After all, many of the structures from which entrepreneurs benefit today have been the government’s doing. It was a government initiative that established Kafalat, currently one of the greatest financial resources for entrepreneurs operating startup companies or SMEs. Similarly, Lebanon’s three incubators — Berytech, BIAT, and SouthBIC — came out of a joint project between the Ministry of Economy and Trade’s SME unit and the European Union.
Lack of coordination
The plethora of initiatives coming from all sides shows the awareness shared by members of Lebanon’s political and economic institutions of the importance of encouraging the sector, but it also highlights the discontinuity and lack of coordination between different bodies. The Central Bank’s initiative and the iSME project bear many similarities, which make some members of the different branches question the need for two separate initiatives. “There are a lot of initiatives in Lebanon but they need to be packed in one thing,” says Khoury, “The government can help by playing a connecting role.”
While a coherent policy vis-a-vis entrepreneurship would greatly benefit the business ecosystem, the responsibility cannot fall on the government alone. Members behind the government’s policy making have called for more involvement on the part of the private sector. “The government doesn’t always have to generate policies,” says Yamout. Private sector actors are better placed to propose initiatives that target their direct needs. “But the private sector in Lebanon rarely comes up with a plan,” says Khoury. With a deadlocked government that moves slowly in the best of times, it is certainly difficult to have faith in the system.