Reforms improve regional business climate

19 October 2009

The World Bank’s Doing Business 2010 report praises the Middle East for making it easier to set up firms

The Middle East and North Africa (Mena) region is reforming business regulations faster than any other, according to the World Bank/International Finance Corporation’s Doing Business 2010 report. 

The global economic crisis has prompted governments worldwide to make it easier to start and operate a business, to strengthen property rights and improve commercial dispute resolution and bankruptcy procedures.

Middle East governments are taking up  the challenge of business reform, says the report, primarily by making it easier for small and medium-sized enterprise (SMEs) to start up.

Saudi Arabia and Yemen, for example, have abolished minimum capital requirements – the minimum capital an entrepreneur has to deposit before starting a business – for new businesses, speeded up processes for granting building permits and set up one-stop shops for business registration.

Two Mena states, Egypt and the UAE, are among the world’s top 10 business reformers, at 9 and 5 in the rankings respectively. The UAE has also moved up to 33 from 47 in the global rankings on the ease of doing business.

Egypt has moved up to 106 from 116 in the overall ranking, helped by measures including the removal of the minimum capital requirement and eliminating most preapprovals for construction permits.

Easing business

But it is Saudi Arabia that has emerged as the region’s star reformer, rising to 13th position globally in the overall ease-of-doing-business rankings. As well as setting up one-stop centres for business registration, it has speeded up the process for obtaining construction permits by introducing a one-day procedure.

Builders can now obtain a temporary building permit, allowing them to begin construction, in one day and a final building permit in one week. Starting a business has become easier with the creation of a new office at the Commerce Ministry that has merged registration procedures and simplified publication requirements.

Bahrain is the only other Mena state in the global top 20, at 20th place in the overall rankings, although it has dropped two places since last year.

The Doing Business 2010 report suggests that progress in reforming business regulations has been spread across the region. Jordan has made it easier to start a business and pay taxes, extended its construction permit one-stop shop to medium-sized projects, lowered property transfer taxes and implemented major court reforms.

The poorest Arab state, Yemen – which last year became the world’s fastest reformer in terms of starting a business out of 49 countries where start-up regulations were simplified – con-tinued to ease business start-up procedures. It now takes an average of 12 days to start a business in Yemen, the same as in Oman and Morocco, putting it in 53rd place in this category.

The Maghreb economies have shown similar improvements. A private credit bureau opened in Morocco in March, and Tunisia has strengthened investor protection and eased trade rules.

Algeria has introduced regulations to better administer the construction permit process. Contract enforcement has been improved with a new code of civil procedures, which reduces time and eliminates some procedures. Algiers has also slashed tax rates, cutting the corporate income tax rate from 25 per cent to 19 per cent for tourism, construction and public works, and production of goods. 

The surprising exception in the rankings is traditionally business-friendly Tunisia, where the government has introduced a negative reform, raising the total tax rate for businesses by 3.7 percentage points, through an increase in social security taxes of 0.6 percentage points and an increase of 3.1 percentage points from abandoning accelerated depreciation. Total taxes for businesses in Tunisia are now 62.8 per cent, compared with a Mena average of 32.9 per cent.

Of the region’s largest economies, Saudi Arabia and the UAE have led the way in business climate reform, targeting administrative procedures. In early September, the UAE abolished the AED150,000 ($40,000) minimum capital requirement for establishing a limited liability company. The primary beneficiaries of this move are SMEs, which comprise 80 per cent of the country’s businesses. 

But even the strongest performers exhibit wild variations between the different indicators that contribute to the rankings. While Saudi Arabia tops the world rankings in the speed of registering property, it ranks 140th in enforcing contracts. Contracts in Saudi Arabia take an average of 635 days and 43 procedures to enforce.

Significant differences are apparent even among the six GCC states. For example, it takes just five days to start a business in Saudi Arabia, but 35 days in Kuwait. 

Most Mena states perform well on minimum capital requirements, with Egypt, Saudi Arabia, Tunisia, the UAE and Yemen requiring zero per cent of income per capita, against a regional average of 129.7 per cent. But again, the divergence between states can be wide. In Bahrain, the equivalent figure is 195 per cent, in Oman 273.6 per cent and in Syria 1,102.5 per cent.

Over-regulated labour

The World Bank’s Doing Business 2010 report is long on praise and short on criticism, in line with the multilateral agency’s political sensitivity. Other institutions have been less circumspect. For example, the World Economic Forum’s Global Competitiveness report 2009-10 is more explicit in its highlighting of countries’ shortcomings, noting Egypt’s over-regulated labour markets, with inflexible hiring and firing procedures that keep the country’s unemployed young people from entering the formal labour market.

But the Doing Business 2010 report defines a broadly positive trend. It suggests that Mena countries are making serious efforts to overhaul their business climates amid challenging economic times. The current trend is to make it easier for local SMEs to prosper. Since SMEs are the drivers of commercial activity, this is a sensible strategy.

The highest-ranking Mena states are doing well because of their sustained commitment to improving business conditions. For example, Saudi reforms gained serious traction in 2000 when the kingdom set up the Saudi Arabian General Investment Authority. It was no coincidence that the immediate backdrop to the body’s formation was the precipitous fall in oil revenues in the post-1997 era, and the need to diversify the economy away from a single resource, namely hydrocarbons. The kingdom has since embarked on a drive to upgrade its public institutions, bolster property protection rights and eliminate corruption.

The next phase of reforms may be trickier for Middle East authorities to implement, since they will involve potentially complicated changes to legal systems. 

According to the Doing Business 2010 report, it takes an average of 3.5 years for companies in the Mena region to complete an insolvency, almost double the Organisation for Economic Co-operation & Development countries’ average. In the UAE, it averages 5.1 years.

The UAE is now considering a judicial reform that could include a new courthouse that will be able to determine to which dispute process a case is best suited. A draft law on the regulation of arbitration in commercial disputes is also under consideration.

Cairo has in the past year introduced commercial courts to speed up contract enforcement, which can currently take more than 1,000 days. In Jordan, contract enforcement has also been expedited by setting up special commercial courts and equipping them with computer-aided case-management systems. 

Judicial reforms may not yield material short-term improvements that will send Mena states shooting up the Doing Business rankings next year. But they will provide the institutional structure that will eventually make doing business a less onerous task for the region’s entrepreneurs.

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