89038 Investment Climate Assessment Enterprises’ Perception in Post Revolution Tunisia FEBRUARY 2014 Finance and Private Sector Development Middle East and North Africa Region The World Bank © 2014 The International Bank for Reconstruction and Development/ The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved A copublication of the World Bank and the International Finance Corporation This volume is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank group does not guarantee the accuracy of the data included in this work. Rights and Permissions The material in this publication is copyrighted. 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Ltd. www.macrographics.com Currency Equivalents (Exchange rate as of September 1, 2013) Currency Unit  : Tunisian Dinar (TND) US$ 1 = 1.64 TND Fiscal Year January 1 – December 31 Vice President : Inger Andersen Country Director : Neil Simon Gray Sector Director : Loïc Chiquier Sector Manager : Simon C. Bell Task Team Leader, Lead Author : Djibrilla Issa Co-Task Team Leader, Co-Author : Mehdi Benyagoub Contributing Authors : Gael Raballand, Randa Akeel, Laurent Gonnet, Lina Badawy, Phlippe Alby, George Clarke, Peter McConaghy, Annoula Rysova Editing Assistance : Marjorie Espiritu, David Phan, Stephanie Hubbard, Stefanie Ridenour Abbreviations and Acronyms Association de Développement Technologique Innovation et ADTP Production CEM Country Economic Memorandum or Monitoring CPS Country Partnership Strategy DPR Development Policy Review ES Enterprise Survey EU European Union FAMEX Fonds d’Acces aux Marches d’Exportation (Export Market Acess Fund) FDI Foreign Direct Investment Fonds d’Innovation et de Developpement des Exportations FIDEX (Innovation and Export Development Fund) FSAP Financial Sector Assessment Program GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product IACE Institut Arabe des Chefs d’Entreprise ICA Investment Climate Assessment ICS Investment Climate Survey ICT Information and Communications Technology IME Industrial Mechanical Engineering IP Intellectual Property IPR Intellectual Property Rights ISN Interim Strategy Note Abbreviations and Acronyms v IT Information Technology LLC Limited Liability Company LMIC Lower Middle Income Countries MCCG Materials for Construction, Ceramics and Glass MENA Middle East and North Africa region MFI Microfinance Institutions MNC Multinational Corporations MSME Micro Small and Medium Enterprises NPL Non-performing Loans OECD Organization for Economic Co-operation and Development PCR Public Credit Registry PSD Private Sector Development R&D Research and Development SME Small and Medium Enterprises SOE State-Owned Enterprise SSA Sub-Saharan Africa STI Science Technology and Innovation Strategy TCLF Textiles and Clothing, Leather and Footwear TFP Total Factor Productivity TND Tunisian Dinar UMIC Upper Middle Income Countries UN United Nations UNCTAD United Nations Conference on Trade and Development USD United States Dollar VAT Value Added Tax WTO World Trade Organization vi Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table of Contents Acknowledgements xv Introduction xvii Executive Summary xxi Economic and Private Sector Performances; Profile and Trends xxi Leading Constraints Perceived by Tunisian Firms xxiii Governance and Regulatory Constraint xxvi Innovation Amongst Tunisian Firms xxviii Labor Markets and Workers’ Skills xxviii Infrastructure Challenges xxiv Access to Finance xxx Economic and Private Sector Performances, Chapter 1:  Profile and Trends 1 Growth and Performance: Is the Tunisian Economy Generating Long Term Growth? 2 Employment Responses to Economic Development Policy 4 Labor Market Indicators 5 Firm Profile, Performance and Productivity in Tunisia 6 Firm Profile in Tunisia’s Private Sector 6 Labor Productivity 7 Total Factor Productivity 8 Labour Costs 8 Firm Performance by Firm Type 10 Has Tunisia Undergone Transformational Economic Changes Over the Last 15 Years? 11 Structural trends of Tunisia’s Economy 11 Export Policy in Tunisia 12 Export Orientation and Performance 14 Export Diversification 14 Export Markets 15 Table of Contents vii Technological Sophistication in Exports 16 Creative Destruction 17 What Drives Firm Dynamism in Tunisia: A Look at Recent Trends 18 Firm Dynamics Entry and Exit: Sectoral Analysis 18 Effects on Productivity and Employment: Has there been a creative destruction process? 19 Conclusions and Recommendations 20 Chapter 2: Governance and Regulatory Framework 23 Direct and Indirect Regulatory Burden on Firms 24 Importance of Discretion and Arbitrary Application of Rules 27 Uneven Enforcement of Regulations for Private Sector 28 Recommendations 32 nnovation Technology & Exports for Private Chapter 3: I Business in Tunisia 35 Definition of innovation and scope of the analysis 35 Firm Innovation in Tunisia: The General Picture 36 Innovation and Its Added Value to the Economy 39 Firm Innovation and Contribution to Exports 39 Job Creation 40 What Differentiates an Innovative Firm in Tunisia? 41 Technology Use and R&D 41 Employee Skills and Training 41 Barriers and Challenges Faced by Innovative Firms 42 Macroeconomic Framework 43 Labor Force Qualifications 43 Access to Finance 44 Customs/foreign trade regulations and competition from the informal sector 44 The Tunisian Innovation Ecosystem 45 Recommendations 45 Science Technology and Innovation (STI) Strategy 46 Short-term 46 Medium- term 48 Long -Term 48 Chapter 4: Labor Markets and Workers Skills 51 Characteristics of the Labor Market 51 Main Characteristics of Employees: Education and Training 52 viii Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Hiring Employees 56 Employee Compensation 58 Level of Remuneration 58 Wage Structure 59 Labor Taxation 62 Conclusions and Recommendations 63 Chapter 5: Infrastructure Challenges Facing Firms in Tunisia 65 Electricity 65 Telecommunications 67 Water 69 Conclusion and Recommendations 69 Chapter 6: Access to Finance 71 The Tunisian Financial Sector 71 Major Impediments to Firms Access to Finance 72 Inefficiencies in the Bankruptcy Regime 73 Outdated Collateral Regime 73 Insufficient Competition in the Banking Sector 73 Low Quality of the Credit Demand and Risk Assessment 74 Firms’ Access to Finance 74 Limited Credit Information Sharing 75 Chapter 7: Policy Recommendations 77 Employment 77 Regulatory Environment 78 Innovation and Entrepreneurship 79 Access to Financial Services 80 Annexes 83 Annex I: Standard Tables 83 Measures of Firm Performance and Total Factor Annex II:  Productivity Analysis 95 Total Factor Productivity Estimation 97 Methodology 97 Methodological Issues 100 CA Enterprise Survey Sample Composition & Annex III: I Population Frame 103  egression Tables & Additional Relevant Annex IV: R Data Used in the Innovation Chapter 105 Table of Contents ix List of Figures Figure 1: GDP Growth Per Capita (average 2000-2012) xxi Figure 2: Unemployment Trends in Tunisia xxii Figure 3: Survey Results Indicating the Top Constraints Perceived by Businesses xxiv Figure 4: Prevalence of Corruption and Delays for Services xxv Figure 5: Innovation Reported by Firms (% Each Sector) xxvi Figure 6: Innovative - Non-Innovative Firms by Major/Very Severe Obstacle to Current Operations xxvii Figure 7: Percentage of Companies Providing Formal Training xxviii Figure 8: Percentage of Firms Rating “Electricity” as a Major or Very Severe Constraint xxix Figure 9: Wait Days and Informal Payments for Obtaining an Electricity Connection in MENA xxx Figure 10: Percentage of Firms Using Bank Finance A) by Regional Comparison B) by Size xxxi Figure 11: GDP Annual Growth (%) 3 Figure 12: GDP Growth Per Capita (average 2000-2012) 2 Evolution of FDI as a Share of GDP a) in Tunisia Figure 13a and 13b:  b) Comparison with other Countries 4 Growth and Unemployment of University Figure 14a and 14b:  Graduates; a) Population with Tertiary Education; b) Evolution of Unemployment 5 Figure 15: Labor Force Participation Rates amongst Youth, Tunisia and Comparators 6 Figure 16: Employment to Population Ratio, Comparators 6 Figure 17: Labor Productivity in the Manufacturing Sector 7 Figure 18: Total Factor Productivity is Low in Tunisia, Relative to Countries at Similar Levels of Per Capita Income 8 Figure 19: Labor Costs as a Function of Per Capita GDP 9 Figure 20: Unit Labor Costs in Tunisia and other Low and Middle Income Countries  10 Figure 21: Differences in Total Factor Productivity by firm type 10 Figure 22: Tunisia’s Evolution of Sector Shares in GDP 12 Figure 23: Manufacturing Sector Value-added Growth (10-year average) 12 Figure 24: Manufacturing Sector Value-added Growth (10-year average) 12 Figure 25: Exports of Goods and Services 13 Figure 26: Number of Products Exported 15 x Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 27: Tunisia’s High-Technology Exports (% of manufactured exports, annual growth rate) 16 Figure 28: High-Technology Exports (% of manufactured exports avg. 15 year) 17 Figure 29: Firm Density and Development 18 Figure 30: Entry and Exit rates in Manufacturing (2000-2011) 19 Figure 31: Entry and Exit Rates in Services (2000-2011) 19 Figure 32: Perception of the Corruption Constraint among MENA Firms 24 Figure 33: Perception of Corruption Index (WGI) 24 Figure 34: Prevalence of Corruption and Delays for Services 25 Figure 35: Percentage of Informal Payment Request to Speed Things Up 26 Figure 36: Percentage of Senior Management’s Time Spent Dealing with Regulations 26 Figure 37: Losses Due to Investment Climate Weaknesses (in % of sales) 27 Figure 38: Corruption Payment by Firm Size 27 Figure 39: VAT Reimbursement Frequency by Number of Days 31 Figure 40: The Vicious Circle Between Tax and Customs Agents’ Behaviors and Some Private Sector Operators 31 Figure 41: Benchmarking of Cargo Dwell Time 32 Figure 42: Ratio between Longest Dwell Times/Average 32 Figure 43: Innovative vs. Non-Innovative by Capital Share 35 Figure 44: Innovation Reported by Firms 36 Figure 45: Distribution of Innovative & Non-innovative Firms by Size 37 Figure 46: Innovative/Non-innovative Firms by Industry in Firms 0-5 Years Old 37 Figure 47: Innovative/Non-innovative Firms by Industry  38 Figure 48: Innovative/Non-innovative Firms by Industry  38 Figure 49: Innovation Firms by Region 39 Figure 50: Distribution of Innovative and Non-innovative Firms by Exports40 Figure 51: Innovative vs. Non-innovative Firms by Number of Jobs Created40 Figure 52: Innovative vs. Non-innovative Firms and Number of Jobs Created by Firm Age 40 Figure 53: Innovative vs. Non-innovative Firms by Various Input Variables 41 Figure 54: Firms Indicating that They Do R&D by Industry 42 Figure 55: Innovative vs. Non-innovative Firms by Labor Skill Level and Training 42 Table of Contents xi Figure 56: Contribution of Innovative vs. Non-innovative Firms to High Value Added Jobs 42 Figure 57: R&D Expenditure and GDP Growth in Tunisia  43 Figure 58: Innovative/Non-innovative Firms by Major/Very Severe Obstacle to Current Operations 43 Figure 59: Innovative/Non-Innovative Firms and Access to Finance as a Major Obstacle by Firm’s Size and Age 44 Figure 60: Innovative/Non-Innovative Firms by Practices of Competitors that Impose Major/Severe Obstacles 45 Figure 61: Percentage of Companies Providing Formal Training 54 Figure 62: Constraints Related to the Employees’ Qualifications and Type of Industry 62 Figure 63: Labor Taxation 63 Figure 64: Percentage of Firms Rating “Electricity” as a Major or Very Severe Constraint 65 Figure 65: Wait Days and Informal Payments for Obtaining an Electricity Connection in MENA 67 Figure 66: Telecom Indicators in Tunisia, by Firm Size 68 Figure 67: Structure of the Banking System; Share in Total Outstanding Credit 71 Figure 68: Evolution of Credit to GDP 72 Figure 69: Credit to Private Sector 72 Percentage of Firms Using Bank Finance Figure 70a and b:  a) by Regional Comparison b) by Size 74 Figure 71: Percentage of Firms Rating “Access to Finance” as a Major or Severe Constrain  75 Percentage of Firms Audited, and Percentage of Figure 72a and b:  Firms Having a Loan (Audited/non-Audited) 75 Figure 73: Collateral Requirements 76 Figure 74: Better Access to Finance in Tunisia: Key Policy Recommendations 81 Figure 75: Is the Establishment a Part of a Larger Company, by Non-innovative vs. Innovative Firms 108 Figure 76: Innovative Firms by Age Group 108 Figure 77: Has the Establishment Benefited from a Facility Upgrade Scheme? 109 Figure 78: Innovative vs. Non-innovative Firms, by Inability to Benefit from Facility Upgrade Scheme 109 Figure 79: Availability of Scientist and Engineers 109 xii Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 List of Tables Table 1: ICA Survey Results 29 Table 2: Types of Competitors’ Practices which Harm your Company 30 Table 3: VAT Reimbursement: Delays and Constraints 30 Table 4: Average Number of Jobs Created by Firms according to Firm Age 41 Table 5: Job Category 51 Table 6: Constraints Related to Labor Regulations 52 Table 7: Constraints Related to Employees’ Qualifications 53 Table 8: Educational Level of Production Workers 53 Table 9: Formal Vocational Training 54 Table 10: The Determinants of Training 55 Table 11: Delays in Hiring 56 Table 12: Availability of Labor Force 57 Table 13: Lack of Experience and Training 57 Table 14: Monthly Earnings by Sector in 2011 58 Table 15: Monthly Earnings in 2011 59 Table 16: Wage Determination within a Company 60 Table 17: Wage Determination 62 Table 18: Electricity Loss by Region 66 Table 19: Power Supply Indicators 67 Table 20: Telecom Indicators, Tunisia and Comparators 69 Table 21: Delays for Water Connections across Regions 69 Table 22: Survey Sample Structure 83 Table 23: Globalization of Markets and Inputs 84 Table 24: Competitors and Suppliers 85 Table 25: General Constraints to Operation 86 Table 26: Infrastructure Indicators 87 Table 27: Sources of Finance 88 Table 28: Credits, Loans, and Liabilities 89 Table 29: Financial Sector: Auditing, Transaction Costs, and Property Rights 90 Table 30: Regulatory Burden and Administrative Delays 91 Table 31: Governance: Uncertainty and Corruption 92 Table 32: Technology Indicators 93 Table 33: Workers 94 Table of Contents xiii Table 34: Manufacturing and Service Companies by Size and Region 107 Table 35: Manufacturing and Service Companies by Size and Sector 107 Table 36: Manufacturing and Service Companies by Region and Sector 107 Table 37: Indirect Exports and Input Variables 108 Table 38: Direct Exports and Input Variables 108 xiv Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 ACKNOWLEDGEMENTS This Investment Climate Assessment (ICA) is based on a survey of 600 Tunisian enterprises to better understand their perception of the business environment in post revolution Tunisia, as well as the dynamics and diversity of the Tunisian private sector. The intention of the ICA is to inform policy- makers on the current private sector performance and business constraints to guide the reform agenda. The ICA was undertaken in cooperation with the Institut Arabe des Chefs d’Entreprises (IACE). The activity was led by Djibrilla Issa, (Lead Author), and Mehdi Benyagoub (Co-Author). The team included Lina Tarek Badawy (Data Analysis), Gael Raballant (Governance Chapter), Laurent Gonnet (Access to Finance Chapter), Randa Akeel (Innovation Chapter), George R. Clarke (Productivity Chapter), Philip Alby (Labor Market Chapter), Annoula Rysova (Policy Research Analysis on Innovation) and Marjorie Espiritu (overall report editing). David Phan, Peter McConaghy, Jade Salhab, Stephanie Ridenour and Stephanie Hubbard provided valuable contributions and editorial assistance. Special thanks go to the peer-reviewers Gabi Afram, Thomas Haven, Thomas Kenyon and Jean-Michel Marchat. Antonio Nicifora and Hebba Elgazzar provided useful comments. The activity was developed under the overall supervision of Simon Bell, Sector Manager, and the general direction of Loic Chiquier, Sector Director. Simon Gray Country, Director, and Eileen Murray, Resident Representative, have provided continuous strategic guidance. The team wishes to thank Maourane El Abassi who provided useful guidance. The authors wish to extend their gratitude to Mejdi Hassen, Director General of the Institut Arabe des Chefs d’Entreprises (IACE), Farouk Kriaa, Chief Project Manager and Professor of Statistics and all members of the IACE. The authors acknowledge the support from the survey team of IACE, in particular, Mourad Kriaa. These partners at IACE were instrumental in the successful completion of the survey. The report was designed and printed by Macro Graphics Pvt. Ltd., New Delhi, India. ACKNOWLEDGEMENTS xv Introduction Located in the heart of the North African coastline, adjacent to vital shipping channels connecting Europe and Asia, Tunisia has long been a regional economic influence in the Middle East and North Africa. Although socialist policies dominated the Tunisian economy throughout the latter half of the 20th century, Tunisia has re-focused its economic strategy on key indicators such as foreign investment, domestic job creation, exports and tourism. These have become the backbone of the Tunisian economy and have helped strengthen relationships with primary trading partners in the European Union. Exports such as textiles, computer arts and petrochemicals now account for a significant portion of the Tunisian economy. This liberal economic development strategy created years of stable annual growth and improved living standards well into the 2000s. However, this growth was unequal due to a culture of corruption and cronyism that reached its height during the era of former President Zine el Abidine Ben Ali from 1987 through 2011. Years of progressive economic growth were stymied by rising unemployment and government waste. Discontent for the Ben Ali government boiled over in January 2011 with a revolution to overthrow the president, ruling party and Parliament. In the ensuing months of uncertainty, declines in tourism and investment contributed to an overall economic decline that lasted throughout much of the year. The political climate also remained uncertain as Tunisians worked to form a new coalition government and transition into a democratic system. Despite these uncertainties and external factors which hamper growth, Tunisia’s economy began the process of recovery in 2012. Rebounding from the contraction of 1.9% of GDP in 2011, the economy grew by 0.6% in 2012. Unemployment receded from 18.9% in 2011 to 16.7% in 2012, albeit still well above the pre-revolution level of 13%. Much of the growth was the result of a rebound in tourism and mining, and increased consumption resulting from large public expenditures on wages and social programs. Private Sector Development (PSD) in Tunisia remains a key challenge going forward. Before the revolution, a system of privileged access to public resources and efforts to shield favored companies from competitive forces limited the benefits of economic liberalization and growth. A persistent inability Introduction xvii to address youth unemployment, combined with growing unhappiness about the lack of political and economic fairness and openness, fed revolutionary fervor. There is an important regional dimension to unemployment and the lack of opportunity in Tunisia. Tunisian researchers estimate that in some governorates unemployment is double the national average while firm population density is less than half the figure found in urban centers. Political uncertainty and persistent social domestic tensions, all combined with the weak Eurozone performance and the instability in Libya, are key factors impeding faster recovery.1 The transition period will continue to have a significant impact on the country’s political and socio-economic landscape. The government’s challenge will be to put an end to the past legacy of cronyism and jumpstart more inclusive economic growth to provide employment for Tunisian men and women, while maintaining social cohesion. By surveying 600 firms across the country, the Investment Climate Assessment (ICA) aims to identify current priority challenges confronted by firms operating in Tunisia, including their constraints and costs, and document their performance under prevailing conditions. Second, it draws on the regional and global experience of the World Bank to provide best practice principles and examples for Tunisia’s reform priorities. Third, by grounding discussion of these issues in hard facts and rigorous analysis, the ICA provides the basis for consultations and consensus-building around a reform strategy and action- plan to promote inclusive, private sector-led growth. ICAs at the World Bank Investment Climate Assessment are critical instruments to: (i) quantify features of the investment climate that matter most for productivity and income growth, especially for the poor; (ii) track changes in the investment climate within a country, and (iii) compare performance within regions or countries. ICA’s focus on microeconomic and structural dimensions of a nation’s business environment, viewed in an international perspective. To this end, ICAs look in detail at factors constraining the effective functioning of product markets, financial and non- financial factor markets, and infrastructure services which include weaknesses in the legal, regulatory and institutional framework. ICAs also provide the tools and analytical framework to identify reform priorities in a country’s investment climate, by linking constraints to firm-level costs and productivity. The ICA complements on-going efforts to enhance equitable growth and competitiveness in Tunisia. With its focus on the real economy, the ICA is a natural complement to the recent Financial Sector Assessment 1 The World Bank, Tunisia Overview: http://www.worldbank.org/en/country/tunisia/overview. xviii Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Program (FSAP). It also acts as a vehicle to bring the lessons of regional work on investment climate, financial inclusion and integration into the Tunisian context, grounded in the experience of Tunisian firms. The ICA will also be an input to the future Country Partnership Strategy (CPS). It has informed the design of the Competitiveness and Export Development Project under preparation. The ICA also coordinated with and can provide empirical data to the Development Policy Review (DPR) for two of its three modules i.e.: (i) the policy environment for attracting investment, and jobs creation; and (ii) developing regionally sensitive growth strategies. As the economy continues to recover and the political landscape solidifies, Tunisia’s government faces real challenges reassuring businesses and investors. Through insight and best practices from new democracies around the world, coupled with empirical data collected through the ICA, Tunisia can embark upon the meaningful task of creating stability, reducing unemployment, streamlining disparities and strengthening the country’s financial system. Introduction xix Executive Summary ECONOMIC AND PRIVATE SECTOR PERFORMANCES; PROFILE AND TRENDS Tunisia enjoyed a 4.8% average annual growth in GDP over most of the 2000s, placing the country among the leading growth countries in the MENA region and well above the world average of 2.68% (Figure 1). While Tunisia’s growth has been on par with that of Turkey and Lower Middle Income Countries (LMIC), it is significantly lower than the growth experienced by Upper Middle Income Countries (UMIC) including China, Malaysia, and Thailand. The January 2011 revolution posed both challenges and opportunities for the country. On one hand, the revolution increased economic uncertainty and joblessness; growth fell to -1.1% in fiscal year 2011 while unemployment increased from 13% in 2010 to 18.9% in 2011 and then to 16.7% in 2012. At the same time, the revolution has provided Tunisia an opportunity to rethink its private sector growth model. The country stands to reflect on the lessons learned over decades of economic liberalization and utilize empirical data to develop policies that will lead to long-term growth. Figure 1: GDP Growth Per Capita (average 2000-2012) 7.00 6.00 5.00 4.00 3.42 2.91 3.00 2.00 1.00 0.00 Yemen, Rep. South Africa Chile Czech Rep. Korea, Rep. Bangladesh Cambodia Malaysia Lebanon Morocco Average Bulgaria India Vietnam Mexico Algeria Tunisia Jordan Poland Turkey Brazil Egypt Mauritius Source: WDI/INS, 2012. Executive Summary xxi Unemployment is one of the most pressing socio-economic issues facing the country. The unemployment rate in Tunisia has traditionally hovered around 12 to 13%, however, this figure has increased substantially as a result of the Eurozone crisis and the 2011 revolution (Figure 2). The national unemployment rate was estimated at 16.7% for the last quarter of 2012, with close to 653,000 unemployed. Unemployment disproportionally impacts youth and educated individuals. Among graduates of higher education, the unemployment rate was 33.2%, with 45% of female graduates unemployed, compared to 22.6% for their male counterparts. This indicates a growing structural imbalance between the demand for unskilled labor, and an increasing supply of skilled labor. Through lowering trade barriers, integrating into international supply chains, and incentivizing investment, Tunisia’s gradual integration into the world economy has facilitated a shift away from agriculture and raw materials (phosphates, oil, and gas) towards manufacturing and services. Tunisia has achieved some structural transformation seen in other high-growth economies. However, productivity and output gaps remain low, particularly among micro firms, and relative to countries with similar levels of development. Firms comprised over 100 workers, account for over a third of all jobs, more than all one-person firms combined. Eighty six percent of all Tunisian firms, however, are one-person enterprises. Labor force participation in Tunisia hovers around 50% for the overall population and remains comparable to countries in the region. Labor productivity is lower in Tunisia than would be expected given Tunisia’s per capita income. The move toward services has been driven mainly by low value-added activity such as individual unit in transports, real estate and some hotels and restaurants. Figure 2: Unemployment Trends in Tunisia 20% 15 In constant TND millions 15% Unemployment rate 10 10% 5 5% 0% 0 1984 1987 1989 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Unemployed with Primary Degree or Less (left axis) GPD per Capital (right axis) Unemployed with Secondary Degree (left axis) Output per Worker (right axis) Unemployed with University Degree (left axis) Source: INS Data; and Barro-Lee, 2011. xxii Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Tunisia’s growth and development over the past decades have been fuelled by the export of goods, though exports remain hampered by slow EU growth and low diversity. The export sector grew at an average yearly rate of about 5.3% between 1997 and 2010. However, Tunisia’s exports are less dynamic than they used to be and are evolving at a slower pace than global trade trends. Over the past decade, Tunisia’s exports have grown 3.41% per year, significantly lower than fast growing exporters such as Romania or Vietnam, and even slower than Morocco and Jordan. Though Tunisian exports have diversified, they remain concentrated within a small number of products and sectors. Tunisian firms are also highly vulnerable to negative shifts in EU growth due to their reliance on European markets. The EU accounted for over 70% of Tunisia’s exports in 2010, while France, Italy and Germany accounted for 56% of all exports. Finally, though technological content in Tunisia’s exports has increased steadily over the past fifteen years, the average percentage of high-tech exports was only 5% in 2011. Leading Constraints Perceived by Tunisian Firms The Investment Climate Survey (ICS) seeks to identify the leading factors that prevent enterprise growth and development by asking business managers how they perceive constraints to the operation and growth of their business. The survey uses a set of indicators at the regional level that provide comparisons of conditions among regions and with other countries and regions. Instability and uncertainty are the top constraints noted by firms. Fifty-five percent of firms rate political instability as a severe constraint. Likely a result of the recent political transition, the overall investment climate is viewed by operators as unpredictable, unfair and costly. Corruption, informality, and market factors such as finance, infrastructure, and labor are of significant concern to private firms (Figure 3). A second tier of concerns is comprised of regulatory factors including customs and trade regulations. Crime and disorder also figure strongly among this second tier group. The level of workers’ skills and education are the second leading perceived constraint to firm operations. Thirty nine percent of sampled firms perceive the available skills of the workforce as a weakness. Many firms have responded that candidates do not meet their required qualification expectations. For instance, 70% of respondents stated that the types of engineers and/or professionals available on the job market do not possess adequate skills required for the position. Executive Summary xxiii Survey Results Indicating the Top Constraints Perceived by Businesses Figure 3:  Political instability 55.6 Inadequately educated workforce 39.0 Macroeconomic uncertainty 34.8 Access to Financing (Ex: Collateral) 33.9 Electricity 33.5 Corruption 28.9 Practices of competitors in the informal sector 25.9 Customs and Trade Regulations 25.8 Tax Rates 24.5 Telecommunications 22.7 Transportation 22.5 Labor Regulations (Like Social Insurance) 22.2 Courts 21.4 Theft, disorder and crimes 20.0 Tax Administration 14.5 Licensing and Permits 13.2 Access to Land 12.2 Water 12.0 Formalities for starting a business 11.2 Regulatory Uncertainty 9.9 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Source: Author’s calculations, The World Bank Enterprise Survey, 2012. Firm location is an important factor. Firms located along the coastal areas of the greater Tunis region had fewer complaints about the business environment than did their peers located in the hinterland. For instance, operators in the Jandouba region pay almost six times more for security and have suffered significant losses related to disorder (12%). Firms in Sfax, Gabes, and Mednine are overall more constrained than firms located in any other region. Governance and Regulatory Constraint Twenty nine percent of firm managers rated corruption as a severe or very important constraint, ranking this challenge as the overall sixth leading constraint identified. Bureaucratic and regulatory requirements continue to impose a significant burden on businesses. For instance, it can take up to 60 days for an industrial electrical connection to be set up and almost six months for a construction permit to be approved. Likewise many firms are subject to informal payment requests ranging from 5% for import licenses to 23% for construction permits. More than a quarter of all firms surveyed declared that they have to provide some form of informal payment in order to accelerate a transaction with the administration. There is significant space for discretionary power by bureaucrats and politicians in the various applications of the law. Only 26.5% of managers disagree with the statement that the rules and regulation governing their main activity are unpredictable, while 43% of managers do not believe these xxiv Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 laws and regulations are applied  revalence of Corruption and Figure 4: P Delays for Services evenly. In addition, many firms complain that their competitors 180.00 are not subject to the same types 160.00 157.55 of cost and regulations that they 140.00 themselves face. 120.00 100.00 Import cargo dwell time and 80.00 VAT reimbursement variations 60.00 59.16 represent examples of uneven 40.00 19.28 and discretionary enforcement 20.00 16.09 19.06 16.96 16.88 23.00 of regulations. When compared 0.00 4.76 4.86 to other MENA countries, Telephone Operating Import Electricity Construction License License Permit including in the sub-region, % rm that were requested a gift Delays for the service (Days) cargo dwell time in Tunisia is, on Source:  Author’s calculations, The World Bank Enterprise average, the worst after Algeria Survey, 2012. (close to 10 days), much worse than Morocco (below 5 days) and not better than Lebanon and Egypt. The large magnitude in variances suggest that even firms with similar profiles are subject to different treatment, VAT reimbursement occurs almost 200 days after the request has been lodged (accounting for 15% of total sales). Small firms often do not find the delay associated with long and heavy VAT procedures worth the amount they could receive. Key Messages and Recommendations to Address Regulatory and Governance Constraints The uneven and discretionary enforcement of regulations adds to the time and money needed for doing business in Tunisia. Authorities must directly address regulatory burdens, procedural delays, and uneven enforcement. Steps to do so include: ™™ Reducing the delay and ensuring predictability of key service delivery, including operating licenses, import licenses, construction permits, and electricity connections. ™™ Cutting discretionary measures by increasing accountability such as imposing deadlines and explicit recourse alternatives to help govern the interaction between the administration and enterprises. ™™ Continuing customs reform to help reduce uneven enforceability of regulations. Upgrading the customs information system and introducing a comprehensive computerized risk management system designed to reduce human intervention in customs activities will increase efficiency, transparency and improve governance. Executive Summary xxv Innovation Amongst Tunisian Firms Innovation, defined as the absorption and adaptation of technology to develop new unproven products and processes for commercialization, is important for Tunisian firms to produce higher-value -added products and expand into new products and markets. Of Tunisian firms, 47.5% have introduced a new product or improved on an existing one. The highest level of innovation is reported by firms in the ICT sector, followed closely by textiles and agribusiness (Figure 5). Firm size and age are nnovation Reported by Firms (% Figure 5: I Each Sector) particularly important factors for innovation. Large firms report the highest level of innovation, Health 42.9% Agrbus. 53.4% at 55.8%, followed by medium Constr Clothes 30.9% 50% and small firms with 45.2% and 44%, respectively. Large firms Manufacturing Textiles Services 64.3% tend to invest in Research and ICT 73.3% Development (R&D) and have IME more capital to invest in new Tourism 46.6% technology and production 26.1% Trade Other processes needed to maintain 48.4% MCCG* 51.3% market share and 51.9% competitiveness. Amongst young Source:  Author’s calculations, The World Bank Enterprise firms (up to five years), higher Survey, 2012. concentrations of innovative firms Notes:  IME – Industry mechanical engineering; MCCG – exist in tourism, trade, and ICT. Materials for construction, ceramics and glass. Innovative firms are found to create more jobs than non-innovative firms, except for older firms (15+ years) where innovation and job creation are negatively correlated. High-risk innovative firms in Tunisia that succeed beyond three years will go on to contribute more to job creation than all other SMEs. Innovative firms are significantly more likely to engage in R&D (44% versus 22%), use technology and the Internet, and invest in vocational training for their employees, than non-innovative firms. Innovative and non-innovative firms indicate similar issues to be major/ very severe obstacles, however, with certain variations. Macroeconomic framework and labor force qualifications are severe/major obstacles to both types of firms. Overall, innovative firms consider issues such as political instability, electricity and access to finance, less of a major/very severe obstacle (Figure 6). Compared to non-innovative firms, they consider macroeconomic framework and lack of labor qualifications, to be more of a major/very severe obstacle. xxvi Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 6: Innovative – Non-Innovative Firms by Major/Very Severe Obstacle to Current Operations 70% 60% % of rms saying “yes” 50% 40% 30% Non-innovative 20% Innovative 10% 0% Telecommunications Transport Access to land Customs/foreign trade regulations Crime Tax rates Relationship with tax authorities Formalities to start business Uncertainty of business regulations Licensing and permits Corruption Courts Access to nance Legislation Lack of training and quali cations Electricity Political instability Competition from informal sector Macroeconomic framework Water supply Source: Author’s calculations, The World Bank Enterprise Survey, 2012. Key Messages and Recommendations to Foster Innovation among Tunisian Firms Empirical analysis demonstrates that innovation is critical to job creation in Tunisia. Tunisia must focus on developing and fostering an ecosystem that allows all firms to integrate technology into core operations. This will allow firms to develop new products and processes, move into value-added sectors, and enter new markets. Developing and growing this innovation ecosystem entails: ™™ Establishing a source of revenue for R&D support that is not exposed to government fiscal volatility. The Tunisian government may consider setting up an endowment fund through public-private partnerships or implementing tax breaks to support R&D. ™™ Promoting training of skilled labor in technology-driven fields. The government should support programs such as the training program developed by the Association of Firms in Technology which provides training by ICT companies for in-demand skills. ™™ Developing mechanisms that would encourage equity investments and angel investors to invest in early start-ups and growing innovative SMEs. This includes developing public-private investment funds, linking start-up firms to existing early stage financing funds, promoting diaspora finance in tech-oriented startups, and increasing the role of FAMEX/FIDEX to cultivate access to external linkages for foreign firms. Executive Summary xxvii ™™ Strengthening intellectual property frameworks and providing support to firms to manage Intellectual Property (IP) issues through government institutions including FAMEX, INNORPI, and Ghazala ICT. Labor Markets and Workers’ Skills The lack of workers with relevant skills is a severe problem for Tunisian companies. While there are an alarmingly high number of educated young people unemployed, private sector firms complain about the many difficulties they face when hiring employees. Over 39% of companies surveyed believe this constraint as an obstacle for the company. Similarly, 66% of firms believe there is a shortage of experience and training among skilled workers, engineers, and technicians. At the industry level, more than 70% of companies in the clothing and textile industry report issues with labor availability. Education levels are relatively high among workers. The vast majority of companies have, on average, production workers who have completed more than seven years of study. Large companies appear to have a slight advantage regarding the education level of their production labor force. Forty six percent of workers show an average education level greater than 10 years of education. Similarly, foreign companies seem to attract more skilled labor than domestic companies. However, exporting companies show a significantly lower level of education than companies targeting the domestic market. A majority of firms provide formal training to their employees, which exceeds what is observed in the region (Figure 7). Company size appears Figure 7: Percentage of Companies Providing Formal Training 60.0 54.3 52.4 52.9 50.0 39.5 40.0 30.0 28.8 24.7 24.9 25.6 23.9 20.0 17.3 10.0 0.0 Algéríe Jordanie Maroc Roumanie Maurice Turquie Coree Liban Bresil Tunisie (2007) (2006) (2007) (2009) (2009) (2008) (2005) (2009) (2009) (2011) Source: Investment Climate Surveys in Tunisia, World Bank. Exclusively for companies in the manufacturing sector. Source: Investment Climate Surveys in Tunisia, Note:  World Bank. xxviii Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 to be the main factor determining the decision to offer formal training, with larger firms being significantly more likely to train than smaller firms. Key Messages and Recommendations to Address Labor and Skill Mismatches in Tunisia ™™ Companies must forge closer links with universities, schools, and training centers to ensure graduates possess the skills required to meet the demands of the private sector. ™™ The government can promote matching labor supply and demand through tax incentives for hiring young graduates without experience. Alternatively, the State could reduce taxation on the amount incurred on the companies’ in-house training programs. ™™ While maintaining quality and academic rigor, the education system could be adapted to provide shorter and more practical training schemes for skills demanded by the private sector. ™™ Training courses provided by public universities and private schools must be reformed to increase quality, as they are considered disparate and opaque to both employers and students. ™™ Strengthen the role of the National Agency for Employment and Autonomous Work (Agence Nationale de l’Emploi et du Travail Indépendant) to address labor mismatches by focusing on recent graduates and other vulnerable groups. ™™ Revise the labor code to focus more on income protection through social safety nets of the unemployed rather than labor protection. This would help improve labor mobility and incentivize firms to hire more regularly.  ercentage of Firms Rating Figure 8: P “Electricity” as a Major or Very Infrastructure Severe Constraint Challenges 50.00 45.00 43.9 40.00 Electricity is perceived as 35.00 33.5 33.9 31.4 29.3 30.00 a leading constraint to firm 25.00 operations in Tunisia, although 20.00 15.00 perceptions vary by location 10.00 (Figure 8). Gaining access to 5.00 0.00 electricity takes an average Tunisia all Tunis Sousse-Mahdia- Monastir Sfax-Gabes- Mednine Jendouba-Sidi- Bouzid of 59 days, one of the highest regional averages. Seventeen percent of firms are expected to make informal payments in order Source:  The World Bank, Enterprise Survey, 2012. Executive Summary xxix  ait Days and Informal Payments for Obtaining an Electricity Connection Figure 9: W in MENA 140 100 118 90 120 80 100 70 number of days 60 80 percent 50 59 60 49 40 32.4 32.0 40 40 30 16.9 20 17 18 19 20 14 11.5 8.9 5.1 5.0 5.3 10 4 7.7 0 0 Egypt Jordan Iraq Turkey Morocco Romania Algeria Tunisia Lebanon Days to obtain Was a gift expected? Source: The World Bank, Various Enterprise Survey, 2012. to obtain an electricity connection, also a relatively high figure compared to other MENA countries (Figure 9). Businesses located outside the greater Tunis region are more constrained across most indicators measuring the reliable delivery of power. Key Messages and Recommendations to Address Infrastructure Challenges in Tunisia ™™ Address lengthy delays for the connection of infrastructure services, particularly in the Jendouba/Sidi Bouzid/Kaasserine/Kairouan regions. ™™ Bring more transparency to the provision of infrastructure services. This can be done with stronger local oversight of procedures and introducing the possibility of recourse if delays exceed an agreed upon period for the provision of infrastructure-related services. Access to Finance The use of bank finance for firm financing is high by regional comparison. Of surveyed firms, 54.7% have a loan from a financial institution. Tunisian firms finance 63.8% of their working capital and 55.3% of their investments using internal funds. Compared to other MENA countries, the reliance on bank finance in Tunisia is particularly high (Figure 10). Large firms tend to rely more on bank credit (64.1% report having a loan), than medium (53.9%) and small firms (44.7%). xxx Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 10: Percentage of Firms Using Bank Finance a) by Regional Comparison b) by Size 100% 100% 8.9 11.7 19.3 17.1 17.3 16.2 90% 90% 28.5 24.3 25.2 80% 39.8 80% 24.1 70% 28.1 70% 30.0 30.0 56.8 60% 60% 30.1 47.3 50% 50% 61.2 40% 58.2 40% 47.9 64.1 30% 30% 52.9 53.9 54.7 44.7 20% 20% 34.3 33.4 10% 10% 12.3 13.3 14.6 0% 0% Syria Yemen Egypt Jordan Tunisia Small Large Morocco Lebanon Medium Have loans Voluntary exclusion Do not have loans Has loans Voluntary exclusion Does not have loans Source: The World Bank, Enterprise Survey, 2012. Access to finance, however, remains perceived as a leading constraint by firms, especially for SMEs. Over 34% of firms rate access to finance as major or very severe constraint. As in most countries, this perception is related to the size of firms; small firms are generally more likely to identify access to finance as a serious constraint over large firms. However, in Tunisia, more medium-sized firms rate access to finance as major or very severe constraint (36.7%) than small firms (33.5%), but less than large firms (22.1%). It is also worth noting that the perception of access to finance as a major constraint has been dwarfed by the other current concerns, chief among these the political instability and the economic downturn. Access to finance is thus perceived as less constraining. Access to finance constraints can be explained by factors related to inefficiencies in the Tunisian financial sector. Historically high levels of Non- Performing Loans (NPL), compounded by civil unrest and high bank exposure, imply that Tunisian businesses are generally experiencing financial distress, an overall de-leveraging, and are unable to access additional credit to finance operations. First, there are significant deficiencies in the bankruptcy regime. Second, Tunisia suffers from an outdated collateral regime that is slow and costly. Lenders thus have little incentive to ease collateral requirements or find more efficient collateral procedures, such as relying on movable assets. Third, there is little competition in the banking sector, with many banks failing to meet risk management standards and key regulatory requirements. The lack of competition causes a narrow range of available products with high collateral requirements. Fourth, only 32% of firms surveyed had their financial statements certified by an external auditor, which significantly increases Executive Summary xxxi the probability of gaining access to bank financing. Finally, the public credit registry in Tunisia does not provide sufficiently reliable data to allow lenders to undertake a quality credit assessment, particularly for consumers and MSMEs. Key Messages and Recommendations to Address Access to Finance Challenges in Tunisia Critical deficiencies in the financial sector contribute to making access to bank financing difficult and cumbersome. Key reforms include: ™™ Developing a standardized system for collateral to reduce barriers for SMEs and create a more equitable borrowing platform. This system would establish a benchmark through a comprehensive legal framework, allow for collateral enforcement, and facilitate access to information through a collateral registry. ™™ Strengthening prudential regulation and enforcement to ensure banks are not overly risk-adverse due to their institutional health. ™™ Modernizing the credit information sharing system to ensure reliable data is being provided to financial institutions to provide a full and efficient credit assessment. Promote the participation of non-regulated entities such as microfinance institutions, telecoms, retailers, and utilities to provide additional data sources to assess credit risk. ™™ Encouraging banks to enter partnerships with innovative entrepreneurs, providing them with their expertise on financial management, accounting and human resources management. This will mitigate the risk perceived by banks in lending to entrepreneurs and provide Tunisian banks with valuable insights and understanding of challenges facing SMEs. xxxii Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Chapter: 1 Economic and Private Sector Performances, Profile and Trends Through steady structural reforms and good macroeconomic management, Tunisia has experienced relative success in growing its economy over the past decades. The country enjoyed a 4.8% average annual growth in GDP over most of the 2000s, placing Tunisia among the leading growth countries in the MENA region. This was largely attributed to significant growth in manufacturing, services, and exports backed by a series of structural reforms in competition, labor, investment, and trade policy. Tunisia’s accession to the GATT (1989), WTO (1994), and the completion of a free trade agreement with the EU (1996) allowed for a gradual integration with the global economy through lowering of trade barriers. In addition, Tunisia prioritized export development and completed a series of reforms that focused on decreasing the cost and time of trade through strategic investments in customs and trade infrastructure, as well as facilitating export market linkages for Small and Medium Enterprises (SMEs). SME development was further promoted through domestic programs consisting of a combination of financing support and business development services. These policies contributed to a progressive opening to international trade, a stabilization of the country’s macroeconomic position, and a progressive adoption of market- oriented reforms. Trade openness, measured as imports plus exports as a share of GDP, nearly doubled between 1986 and 2008 when it reached almost 126%. Partially as a result of these measures, Tunisia experienced strong growth in its export sector, which grew at an average yearly rate of about 4.38% between 1997 and 2010. However as this chapter and the report will show, Tunisia’s current development model shows signs of limitations. While Tunisia has been a regional leader in growth and competitiveness amongst countries within the Middle East North Africa (MENA), it ranks below average when compared to emerging markets including India, China, and Malaysia. Export growth has not been matched by job creation and widespread productivity gains. The January 2011 revolution, fueled by widespread anger and frustration over the lack of social and political inclusion, has increased economic uncertainty and joblessness. Growth fell to -1.1% in fiscal year 2011, while unemployment increased from 13% in 2010 to 18.9% in 2011 and then to 16.7% in 2012. Unemployment is highest Chapter: 1: Economic and Private Sector Performances, Profile and Trends 1 among educated young individuals, particularly college graduates. In 2011 the national unemployment rate reached 35% among 15-29 year olds. Persistently high unemployment is in partially structural, due to very low employment to population ratios, rapid growth in the labor force (particularly among graduates), and a widening skill gap. Demographic trends suggest that unless the pace of economic growth accelerates substantially, unemployment will continue to worsen in the coming decade. The goal of this chapter is to evaluate trends, opportunities and constraints in Tunisia’s productive sector and outline areas of policy reform to address key bottlenecks. The chapter analyzes different performance metrics of the Tunisian economy, including the overall performance, exports performance, job creation, firm performance and productivity. Growth and Performance: Is the Tunisian Economy Generating Long Term Growth? Tunisia’s economy has grown at a respectable pace during the past two decades, particularly when compared to other MENA countries. Growth averaged over 5% during the nineties, while the country enjoyed a 4.8% average annual growth in GDP over most of the 2000s (Figure 11). Over this period, some growth increase in productivity and private investment occurred in response to the policy measures liberalizing the trade regime, attaining macroeconomic stability, and adopting a set of market-oriented reforms to enhance the country’s competitiveness. This growth lifted the per-capita GDP to just over 6,000 Tunisian dinars in 2010 (nearly $4,200 at market exchange rates) and while at the same time a significant reduction in poverty was achieved.2 While Tunisian growth has been significant in the MENA region, Tunisia’s achievements in attaining broad-based growth have been relatively Figure 11: GDP Annual Growth (%) 10.00 8.00 6.00 4.00 2.00 0.00 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2.00 -4.00 Source: WDI/INS, 2012. 2 Since 2000, poverty declined by more than half, from 32.4% to 15%. 2 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 modest when compared to a large sample of 22 developing nations and emerging economies. For many of Tunisia’s regional and global competitors, per capita growth for the least 10 years has remained below average (Figure 12). While Tunisia’s growth has been on par with that of Turkey and the lower Middle Income Countries (LMIC), it is significantly lower than the growth experienced by more dynamic Upper Middle Income Economies (UMIC) including China, Malaysia, and Thailand. Tunisia’s acceleration into the world economy, coupled with domestic reforms aimed at increasing firm competitiveness, have contributed to increasing investment in the country over the past two decades. Tunisia’s private sector gross fixed capital formation, which measures the acquisition of new or existing fixed assets in the economy, increased from an average of 13% during 1985-1995 to 19% during 1996-2009. Although Tunisia’s ratio of private investment to GDP at 19.9% from 2000-2008, was less than neighboring Morocco (23.4%) and Romania (21%), it exceeded the average for a country of its income level. Investment was particularly important in exporting sectors such as electrical and mechanical manufacturing, which became integrated with EU production networks and saw significant growth as a result of trade and competitiveness reforms. The inflow of Foreign Direct Investment (FDI) in Tunisia over the past decade was the result of significant economic integration and targeted reforms to improve competitiveness. Admission into the GATT and WTO in 1994 and the signing of the association agreement with the European Union in 1995 paved the way for gradual tariff elimination throughout the 2000s.3 The government also implemented a series of fiscal and financial incentives Figure 12: GDP Growth Per Capita (average 2000-2012) 7.00 6.00 5.00 4.00 3.42 2.91 3.00 2.00 1.00 0.00 Yemen, Rep. Mexico Algeria South Africa Brazil Egypt Tunisia Malaysia Chile Czech Rep. Turkey Jordan Average Lebanon Morocco Korea, Rep. Poland Bangladesh Bulgaria India Vietnam Cambodia Mauritius Source: WDI/INS, 2012. 3 Under the term of the Association Agreement, the EU and Tunisia would commit themselves to cooperate in a wide range of areas including: strengthened political dialogue, trade, economic, social and cultural issues. The Agreement also foresees financial co-operation to accompany reform measures in Tunisia. An important component of the Association Agreement is the clause providing for the establishment of an EU-Tunisia free trade area by the year 2010. Chapter: 1: Economic and Private Sector Performances, Profile and Trends 3 to create an “off-shore” sector with generous fiscal and financial incentives to attract FDI and enhance export competitiveness. Although hovering around 1 to 4% of GDP between 1986 and 2005, Tunisia FDI inflows average nearly 5% of GDP from 2005 to 2010. These FDI flows were some of the highest ratios in the region and high even compared to other country groups (Figure 13a and 13b). From 2006 to 2010, the majority of FDI inflows went into the energy sector (60%), followed by manufacturing (25%) and services (8%). Ongoing economic uncertainty surrounding the political and economic transition since the 2011 revolution has led to significant contraction in FDI. FDI decreased from 5.8% of GDP in 2008 to 0.9% in 2012. The Tunisian investment authority estimates that in 2011 alone, at least 41 foreign companies shut down operations, leading to 2,800 lost jobs. Employment Responses to Economic Development Policy Despite the country’s relatively solid growth rate, high unemployment is one of the most urgent socio-economic issues facing Tunisia. The unemployment rate in Tunisia has traditionally hovered around 12 to 13%, however, this figure has increased substantially as a result of the Eurozone crisis and the 2011 revolution. The national unemployment rate was estimated at 16.7% for the last quarter of 2012, with close to 653,000 unemployed. The current pace and trends of the Tunisian economy remain insufficient to create adequate levels of employment. Since 2006, 327,000 jobs have been created, representing an average of 55,000 jobs annually. The efforts to expand tertiary education have not been matched by corresponding job opportunities. As a result, in recent years the increase in unemployment has mostly fallen on young and educated individuals. This trend reflects a growing structural imbalance between the demands for unskilled labor, and an increasing supply of young graduate job seekers. The share of population Evolution of FDI as a Share of GDP a) in Tunisia b) in Comparison Figure 13a and 13b:  with other Countries 10.0% 18% 1990-99 9.0% 16% 2000-04 14% 8.0% 2005-09 12% 7.0% 10% 6.0% 8% 5.0% 6% 4.0% 4% 2% 3.0% 0% 2.0% Tunisia Algeria Egypt Jordan Morocco Syria Upper MICs EU10 1.0% 0.0% 1980 1984 1988 1992 1996 2000 2004 2008 4 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 aged 15 or more with a tertiary education nearly quadrupled between 1990 and 2010, increasing from 3.7% to 12.3% (Figure 14a and b). While unemployment among university graduates was virtually negligible until the 1990s, nearly every fourth university graduate was unemployed by the end of 2010, (Figure 14b). Labor Market Indicators An analysis of broader labor market indicators provides insight into the structural challenges facing the Tunisian economy. Labor force participation in Tunisia hovers around 50% for the overall population and remains comparable to countries in the region, for example Morocco (51%) and Jordan (45%). However, labor force participation is lower than emerging markets including Turkey (52%) or Malaysia (62%) and significantly less than upper middle income countries (74%). Labor force participation amongst youth (ages 15-24) stood at approximately 33% in 2011 and is significantly lower than comparator countries in the Mediterranean (Figure 15). Only 28% of women participate in the labor force, a figure near average for the MENA region though well below other middle income regions. Similarly, the employment to population ratio is also very low at 40% and has not evolved in the past ten years (Figure 16). This stagnation is particularly troublesome given that Tunisia is nearing the end of its youth bulge, implying that many youth have entered the labor force over the past 10 years. While this rate is typical of the MENA region, it is well below the value of other emerging and advanced economies. Growth and Unemployment of University Graduates; a) Population Figure 14a and 14b:  with Tertiary Education; b) Evolution of Unemployment 20% 20% 15 18% In constant TND millions (% of population age 15 and above) 15% Unemployment rate 16% Population with tertiary education 10 14% 10% 12% 10% 5 5% 8% 6% 0% 0 1984 1989 1995 1997 1999 2001 2003 2006 2007 2009 2011 4% 2% Unemployed with University Degree (left axis) 0% Unemployed with Secondary Degree (left axis) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Unemployed with Primary Degree or Less (left axis) Tunisia Egypt Jordan GDP per Capita (right axis) EU11 Morocco Output per Worker (right axis) Source: Barro-Lee, 2011 and INS;Doemel and Duclos, 2013. Note: EU11 refers to the new EU member states, excluding Cyprus and Malta, and including Croatia. Chapter: 1: Economic and Private Sector Performances, Profile and Trends 5 Figure 15: Labor Force Participation Rates amongst Youth, Tunisia and Comparators 70 Tunisia 60 Jordan % of Labor Force 50 40 Malaysia 30 Morocco 20 Romania 10 Turkey 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Upper Middle Income Source: World Development Indicators/International Labor Organization. Figure 16: Employment to Population Ratio, Comparators 90 80 70 60 50 40 30 20 10 0 West Bank and Gaza Iraq Jordan Algeria South Africa Iran Tunisia Yemen Lebanon Syria Egypt Turkey Morocco Bulgaria Poland Chile Argentina Romania Mauritius Czech Republic India Mexico Korea Malaysia Brazil Bangladesh China Vietnam Cambodia Source: World Development Indicators/International Labor Organization. Firm Profile, Performance and Productivity in Tunisia Firm Profile in Tunisia’s Private Sector Tunisia’s private sector is characterized by a high number of very small firms engaged in small-scale activity. Eighty-six percent of all Tunisian firms are one-person enterprises and only 0.4% of all firms employ more than 100 workers. Many of these firms are found in small-scale retail industry (including textiles, leather, and woodworking production) and manufacturing for exports, including automobile components, electrical and mechanical equipment. They also play an active role in the real estate and tourism sectors. Firms employing more than 100 workers play an important role in employment creation in the country, despite their small share of the formal private sector firms. Large firms account for more than a third of all jobs, more than all one-person firms combined. 6 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 In order to assess the overall performances of firms sampled, this section evaluates several measures of firm performance including labor productivity, labor cost, and total factor productivity. For each measure, the estimates are paired against a large sample of countries to place Tunisia’s firm performance in an international setting. Labor Productivity Labor productivity is lower in Tunisia than would be expected given Tunisia’s per capita income4. In Tunisia, value-added per worker is close to $8,000 according to estimates based on the IC survey (Figure 17). This is lower than in other countries at similar levels of development (i.e., below a linear projection based on per capita income). Compared to other countries at similar income levels, one would expect labor productivity to be closer to about $12,000 per worker. Results suggest that in part, the low labor productivity observed in Tunisia is the result of a low level of capital intensiveness relative to other countries with similar levels of per capita income. Figure 17: Labor Productivity in the Manufacturing Sector $30,000 Value-added per worker (2009 US$) $25,000 $20,000 $15,000 $10,000 $5,000 $0 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 Per capita GDP (2005 PPP $) Other Countries Tunisia Linear (Other Countries) Source: Author calculations based on data from World Bank Enterprise Surveys. Note: All data points are for the median firm on each measure of performance. For presentational purposes the chart is shown only for countries with per capita GDP between $0 and $16,000. Countries with GDP per capita over this amount are included when we calculate the linear projection. 4 Enterprise Surveys are firm-level surveys of a representative sample of an economy’s private sector. The surveys cover a broad range of business environment topics including access to finance, corruption, infrastructure, crime, competition, and performance measures. Value-added per worker measures the value of the goods and services that a firm produces less the cost of the raw materials and intermediate inputs (such as engine parts or textiles) used to produce the output divided by the number of workers in the firm shows per capita income plotted against labor productivity (value-added per worker) for countries where World Bank Enterprise Surveys have been completed since 2006. Value-added per worker measures the value of the goods and services that a firm produces less the cost of the raw materials and intermediate inputs (such as engine parts or textiles) used to produce the output divided by the number of workers in the firm shows per capita income plotted against labor productivity (value- added per worker). Chapter: 1: Economic and Private Sector Performances, Profile and Trends 7 Total Factor Productivity Total Factor Productivity (TFP) in Tunisia remains lower than in other countries with similar levels of per capita income. Total factor productivity tends to be higher for firms in countries where per capita income is higher (Figure 18). The correlation between per capita income and total factor productivity is about 0.74. Although Tunisia’s TFP is higher than in most low- income countries, it remains lower than in other countries with similar levels of per capita income. Labor Costs Although productivity measures provide some information about firm competitiveness in Tunisia relative to firms in other middle-income countries, they can be misleading when considered in isolation. One issue is that firms can be competitive even when labor and total factor productivity are low if wages are comparatively lower. For this reason, it is useful to look at labor costs in addition to labor and total factor productivity when assessing competitiveness. Labor costs are relatively low in Tunisia compared to countries at similar levels of per capita income.5  The median firm reports that labor costs per worker are about $3,520 (Figure 19). Based on per capita income alone, one would expect the median firm to have labor costs that were equal to about $4,500 per worker. Labor costs can reflect differences in things such as worker  otal Factor Productivity is Low in Tunisia, Relative to Countries at Similar Figure 18: T Levels of Per Capita Income 300% 200% 100% 0% $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 -100% -200% Per capita GDP (2005 PPP $) LAD Tunisia Linear (LAD) Source: Author’s calculations based on data from World Bank Enterprise Surveys. Note:  All data points are for the median firm on each measure of performance. For presentational purposes the chart is shown only for countries with per capita GDP between $0 and $16,000. Countries with GDP per capita over this amount are included when we calculate the linear projection. The coefficients are from the LAD regressions (see appendix) for description. In practice, however, the results are virtually identical in the OLS and frontier regressions. 5 The cost of labor that is used in this study is per worker labor costs, (the cost of wages, salaries, bonuses, other benefits, and social payments for workers at the firm) divided by the number of workers. The data are taken from the firms’ accounts. It includes wages and salaries paid to all workers and managers, not just production workers. 8 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 19: Labor Costs as a Function of Per Capita GDP6 Labor costs per worker $15,000 $12,500 (2005 US$) $10,000 $7,500 $5,000 $2,500 $0 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 Per capita GDP (2005 PPP $) Labor Costs per worker Tunisia Linear (Labor Costs per worker) Source: Author’s calculations based on data from World Bank Enterprise Surveys. education and worker skills. If labor costs are high because workers are highly educated and the firm experiences higher productivity as a result, firms can remain competitive even when they pay high wages. In contrast, if labor costs are high because of scarcity or because unions manage to extract rents, high labor costs might hurt competitiveness. Given that both labor productivity and labor costs are low in Tunisia, it is not immediately clear whether high labor productivity makes up for high labor costs. Unit labor   costs in Tunisia are very close to the average for other countries at similar levels of GDP at about 37%. Unit labor costs can help shed more light on the issue of labor cost relative to productivity. This is done by taking differences in productivity into account when assessing differences in labor costs.7 Unlike the partial productivity measures discussed above, unit labor costs do not consistently increase as per capita income increases (Figure 20). This suggests that in most countries, productivity and labor costs increase in tandem. Low labor costs thus appear to mostly cancel out low labor productivity. Given that firms do not appear to be highly capital intensive, at least when measured using the sales value, suggesting that Tunisian manufacturing firms could potentially be competitive on international markets. It is, however, important to note that although unit labor costs are not high relative to the average middle income economy, they are higher than in many of the successful exporters from East Asia. For example, unit labor costs are only about 26% in Thailand and about 30% in Vietnam. In 2005, the time of the last Enterprise Survey in China, unit labor costs were only about 13%, although labor costs appear to have been increasing rapidly over the past 8 years. 6 All data points are for the median firm on each measure of performance. For presentational purposes the chart is shown only for countries with per capita GDP between $0 and $16,000. Countries with GDP per capita over this amount are included when we calculate the linear projection. 7 Because of limitations related to the data collected in the Enterprise Surveys, the measure that we use, labor costs as a percentage of value-added, is an approximation to true unit labor costs (i.e., more accurate unit labor costs do not measure output in dollars but instead use physical measures of production). Chapter: 1: Economic and Private Sector Performances, Profile and Trends 9 Figure 20: Unit Labor Costs in Tunisia and other Low and Middle Income Countries 80% 70% (% of value-added) 60% Unit labor costs 50% 40% 30% 20% 10% 0% $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 Per capita GDP (2005 PPP $) Unit labor costs Tunisia Linear (Unit labor costs) Source: Author’s calculations based on data from World Bank Enterprise Surveys. Note:  All data points are for the median firm on each measure of performance. For presentational purposes the chart is shown only for countries with per capita GDP between $0 and $16,000. Countries with GDP per capita over this amount are included when we calculate the linear projection. Firm Performance by Firm Type Tunisian exporters are about 25% more efficient than non-exporters. Across the whole cross-country sample, exporters are about 14% more efficient than non-exporters. The difference appears to be larger in Tunisia. It is important to be cautious about interpreting this result causally. That is, although it is possible that the discipline of competing in export Figure 21:  Differences in Total Factor Productivity by Firm Type markets causes firms to become 175% more productive (the learning- 150% by-exporting hypothesis), it is also possible that only firms that 125% are already efficient are able to 100% enter export markets (the self- 75% selectivity hypothesis). 50% Foreign owners: On average, 25% across all countries, foreign- 0% owned firms are about 18% -25% Exporters Foreign Owned Credit ISO Certified Foreign License Internet Use Training Program more productive than similar domestic firms. The difference between foreign-owned firms and domestic firms in Tunisia is Average (all countries) Tunisia smaller, about eight percent. Source:  Author’s calculations based on data from World Bank Enterprise Surveys. Access to Credit: On average, firms that have access to credit including loans, lines of credit or overdraft facilities, are about 14% more productive than other firms. Although this could be because access to credit improves performance, it is also possible 10 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 that banks are more likely to lend to more productive enterprises. In contrast, Tunisian firms with access to credit are less, not more, productive than other firms, about 18% less productive. This may suggest that Tunisian banks do not effectively allocate credit to the most productive firms. Technology and Training: In general, technologically advanced firms appear to be more productive than other firms. On average, firms that are ISO certified are about 14% more productive than firms that are not. Similarly, firms that use the Internet to communicate with customers and suppliers are about 27% more productive. Firms with training programs are about 9% more productive than firms that do not. Finally, firms that license technologies from foreign-owned firms are about 5% more productive than firms that do not. The differences are generally large for manufacturing firms in Tunisia. Has Tunisia Undergone Transformational Economic Changes Over the Last 15 Years? Recent research and policy analysis suggests that a country can attain long-term accelerated growth through steady transformation from agricultural production towards high-value-added goods and services, where capital and labor are most productive. East Asian countries such as Korea, Malaysia, Singapore, and China have sustained high levels of economic growth over the past two decades through a combination of dynamic agricultural sectors, high levels of savings and investment, investment in human capital, and particularly high growth in exports. Value-added sectors also draw on technology to innovate and create additional value. Structural Trends of Tunisia’s Economy Since independence, output of the Tunisian economy has moved away from agriculture and raw materials (phosphates, oil, and gas) towards services and manufacturing. The share of services in GDP rose from 48.7% in 1990 to 59.7% in 2010. Throughout the 1970s and 1980s manufacturing remained concentrated in a few areas of production, such as clothes, textiles, and leather goods. Manufacturing as a share of GDP increased from 10% in 1971 to 18% in 2009. This increase is significant given the fact that the manufacturing sector was non-existent at independence. Over the past 10 years, growth in the manufacturing sector progressed at a pace similar to the economy as a whole, growing at 3.45% (Figure 22). The sector has experienced increased volatility in the last five years due to the global financial crisis, ongoing economic instability in the Eurozone, and the 2011 revolution. Manufacturing, particularly electrical and mechanical Chapter: 1: Economic and Private Sector Performances, Profile and Trends 11 goods for export to EU countries,  unisia’s Evolution of Sector Figure 22: T Shares in GDP remains an increasingly important 70 component of Tunisia’s broader economic development strategy. 60 The manufacturing sector’s value- 50 added growth, however, remains 40 below the average of 22 global 30 comparators (Figure 23). 20 10 Export Policy in 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Tunisia Agriculture Export development is an Manufacturing important factor in a country’s Industry, excluding manufacturing ability to undergo a process of Services Source: WDI/INS, 2012. structural transformation and long-term growth. Research (Maloney, 2003; Rodrick, 2004) has demonstrated a strong linkage between export dynamism and growth, particularly through diversification and scaling- up. Countries like Tunisia increase their productivity through more sustained diffusion of knowledge and the acquisition of new technologies and processes. Figure 23: Manufacturing Sector Value-Added Growth (10-year average) 14.00 12.00 10.00 8.00 5.42 6.00 3.45 4.00 2.00 0.00 Algeria Mexico Lebanon Brazil Morocco South Africa Tunisia Chile Egypt Yemen Malaysia Turkey Average Bulgaria Czech Rep. Korea Bangladesh Poland India Jordan Vietnam Cambodia Mauritius Source: WDI/INS, 2012. Figure 24: Manufacturing Sector Value-Added Growth (10-year average) 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -10 10 yr avg comparators Tunisia Source: WDI/INS, 2012. 12 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 A more diversified export basket  xports of Goods and Services Figure 25: E (Avg. 10 yrs. Annual Growth %) of goods and services tends to 16 play a positive role in expanding 14 the structure of the industrial base by increasing competition. Finally, 12 more diversified exports reduce 10 weaknesses and exposures due 8 to external shocks. Exporting 6 countries are subjected to more 4 3.41 intense international competitive 2 pressures. 0 Egypt Turkey Tunisia Jordan Vietnam Lebanon Malaysia Romania Morocco Mauritius Tunisia’s growth and development over the past Source: WDI, 2012. decades have been fuelled by the export of goods. The export sector grew at an average yearly rate of about 5.3% between 1997 and 2010. Tunisia initiated two waves of economic structural changes in its export sector. The first wave involved diversifying away from oil towards light manufacturing and tourism. This was done through government policy which created an off-shore sector, with generous fiscal and financial incentives to attract FDI and attract investors. Fiscal incentives provided by the government are among the main drivers of the development of the off-shore industries in Tunisia (Hammouda, 2010). These incentives began in 1972 and include duty-free treatment of imported raw inputs (e.g. equipment and materials), exemption from export taxes, reductions in corporate income tax, and tax holidays. They, in large part, enabled the development of a textile export sector destined largely for the European market. Investors were further attracted to Tunisia because of its geographical proximity to Europe, the relatively cheap labor and higher productivity compared to regional neighbors, and political stability under the Ben Ali regime. During the second wave of economic structural change in Tunisia, major shifts occurred within the manufacturing sector. Electronic and mechanical engineering emerged as important exporting sectors and became highly integrated into global value chains. The off-shore sectors benefited from increasing integration with the EU production networks following the Tunisia- EU Association Agreement. They have been able to attract investment, raise factor productivity and boost job creation. More than 90% of workers in these industries have been sub-contractors working in vertical integration with production networks in Europe. However, the value-added of the exporting industries remained low and they are subject to stringent competition in the European markets. Chapter: 1: Economic and Private Sector Performances, Profile and Trends 13 Export Orientation and Performance The export sector accounts for close to 46% of the GDP on average over the last 15 years, and near 48% for 2012. The sector employs close to 20% of the total workforce (Duclos and Doemeland, 2013). However Tunisia’s exports are less dynamic than they used to be and are evolving at a slower pace than global trends. Tunisia has gradually liberalized its foreign trade and investment since the mid-1980s, as evidenced by the joining of key global trade regimes (GATT, 1990; WTO, 1995) and the signing of the Association Agreement with the EU. The latter particularly led to the progressive adoption of free trade in industrial products between 1996 and 2008. Tunisian exports increased by 5.1% per year in the 1990s. Over the past decade, however, exports of goods and services on average have progressed at a lower rate when compared with lower and upper middle income emerging economies. Tunisia’s exports have grown 3.41% over the past decade, significantly lower than fast growing exporters such as Romania or Vietnam, and even slower than Tunisia’s neighbors Morocco and Jordan. A small number of select sectors, such as mining and electrical engineering, saw significant growth over the last decade. In 2008, exports slipped below 50% per capita in response to the recessionary conditions in Europe. Export Diversification Analyzing export composition and diversification (i.e., number and types of products exported, and their destinations) provides additional insight into the relative depth and resilience of the export sector for a given country. A wide body of empirical literature demonstrates that diversifying exports leads to significant knowledge spillovers (Feenstra and Kee, 2004), expands and stimulates industries, and reduces the volatility of export revenues (Gourdon, 2010). Tunisia exports approximately 1,200 products, based on Comtrade’s six digit definitions of export greater than 100,000 US dollars in volume. This is more diversified than other countries in the MENA region, although significantly below the level of diversification of other developing nations as well as fast growing economies (Figure 26). While over the last decade the structure of Tunisian exports has made some progress in terms of diversification, they are still concentrated on a small number of products and sectors. Four products of the top 20 exports belong to the garment, textile, and shoes sector that account for nearly a quarter of total exports. Textiles and Clothing, Leather and Footwear (TCLF) and the mechanical and electrical sectors combined, account for approximately 65% of exports. Services continue to have a relatively low share of export composition. Around 80% of Tunisia’s service export revenues come from tourism, travel, and transport services. 14 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 26: Number of Products Exported Algeria Saudi Arabia Syria Egypt Jordan Morocco Tunisia Chile Argentina Slovakia Hungary Indonesia Brasil Malaysia Turkey Mexico Poland Korea Thailand China 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Source: Comtrade 6 digits 2006-2011 (Greater than 100,000 US Dollars). The lack of diversification and limited production of higher-value-added goods for exports can, in part, be explained by the way in which Tunisian exports are integrated into the global supply chains. Tunisian exporters still largely remain subcontractors to foreign companies; only small minorities have become direct exporters. As a result, Tunisian exporters continue to produce relatively simple goods that can be easily replaced with similar products from lower cost locations like China, India, and Bangladesh. Export Markets Tunisia’s main export markets have remained almost unchanged despite the slight diversification and have moderate growth prospects. The European Union accounted for over 70% of Tunisia’s exports in 2010 (France, Italy and Germany alone accounted for 56% of all exports). As a result, Tunisian firms are highly vulnerable to negative shifts in EU growth. Tunisian firms are also highly dependent on vertical integration from European supply chains. Growth prospects for Tunisia’s export sectors have decreased recently as a result of ongoing economic instability and fiscal contraction in the EU. Tunisian exports to the rest of the MENA region are low. Only 8% of Tunisia’s exports are shipped to other MENA partners, of which 4.2% now goes to Libya and 2.8% to Algeria. Because of the lack of intra-regional trade, Tunisia is not only losing direct market opportunity but also opportunities for future investments from Multinational Corporations (MNC). The location decisions of multinationals are influenced significantly by the size of the market, the scope for effective sourcing of inputs, and the ability to move inputs quickly and cheaply across national boundaries. While both Tunisia and Morocco are well-connected to EU production networks, there is very little cross-border trade in components for products subsequently exported to the EU. Exports to Sub Saharan Africa (SSA) are marginal at approximately four percent. GDP in SSA expanded by 4.6% in 2012 and is expected to grow at Chapter: 1: Economic and Private Sector Performances, Profile and Trends 15 least 6% between 2013 and 2015 (World Bank Global Economic Prospects). SSA is already a market for Tunisia’s engineering, health, and education services, although this could expand significantly. Similarly, trade potential in manufacturing with African nations is so far untapped and represents significant market opportunity as well as an opportunity to decrease dependence on European supply chains. Technological Sophistication in Exports Current research (Krishna and Maloney, 2011; Haussman et al, 2007) shows that a country’s capacity to move up toward a higher-value- added basket of goods is associated with elevated and sustained levels of growth. Recent trends show that higher-value-added goods endowed with a high degree of technological content are among the fastest growing global exports (Diop, 2012). Connected, developing countries are increasingly becoming exporters of high-tech products thanks to greater trade openness, greater ability to master and use technologies, and a rise in Foreign Direct Investments (WTO, 2009). For countries such as Tunisia, there is pressure to move up the technological value chain because competing in labor-intensive, cheaper manufacturing is very difficult due to cost and scale advantages held by the likes of China. Thus, examining the technological sophistication of Tunisia’s exports can provide important insights into broader, long-term growth and competitiveness challenges. Over the last 15 years the technological content in Tunisia’s exports has increased steadily but slowly. This reflects a constant move up the technological production ladder, albeit from a very low base (Diop and Khalil 2012). The share of medium and high tech exports has increased steadily, while low tech exports have declined significantly as a percentage of total exports, from 56.7% in 1996 to 38.3% in 2009. The percentage Figure 27:  Tunisia’s High-Technology Exports (% of manufactured exports, of growth in high-technology annual growth rate) manufacturing exports increased 20 from 2% in 1995 to approximately 6% in 2011 (Figure 27). However 15 this is in large part due to the changes in production patterns 10 of a small number of products, mainly in textiles. In Tunisia, the 5 share of exports of textiles and textile products in total exports 0 dropped by almost half, from 44% 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: The World Bank, Diop and Khalil 2012. to 24% between 2003 and 2010. 16 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 As of 2010, automobile parts and components had overtaken textiles and clothing as Tunisia’s largest export sector, accounting for 30% of total exports (against 9% in 1995). Creative Destruction To a certain extent the firm performance results Figure 28: High-Technology Exports (% of manufactured exports avg. 15 yr.) observed earlier can also be 60 contextualized by looking at the broader firm population 50 trends in dynamism. Recent 40 empirical research (Klapper and Love, 2010) points to 30 the existence of a positive 20 association between levels of development and firm entry 10 3.81 density, as measured by the 0 number of new firms registered Egypt, Arab Rep. Turkey Jordan Lebanon Tunisia Romania Vietnam Morocco Malaysia Mauritius per 1000 capita compared to relative levels of development as well as by income. Freund et al (2012) find that relationships Source: The World Bank, Diop and Khalil, 2012. between firm density and income levels exist but are less direct, since exporting firms in more developed economies show lower churning rates (lower entries and lower exits over existing firms ratios, as an indicators of firm dynamism). This is reflected by the non-linear relationship in Figure 28. The figure following (Figure 29) illustrates the relationship between development levels and firm entry density for Tunisia and a sample of 37 developing countries.8 Tunisia boasts nearly 602,222 registered firms of all types, which is a relatively high number for its population size (INS 2012). Given that most of these firms are individually-owned micro enterprises, looking at the number of Limited Liability Companies (LLCs) to assess the magnitude of firm creation in Tunisia is appropriate. Firm entry density for Tunisian LLCs is estimated at around 0.6 (number of newly registered LLC per 1000 capita). Taking into account the development level of Tunisia, firm entry density is higher than most MENA comparators (as represented by orange dots). Firm density in Tunisia is relatively close to countries with similar levels of development but remains well below 8 The developing nation sample is a mix of regional comparators, newer and established exporters and development levels below, close and above Tunisia’s. Chapter: 1: Economic and Private Sector Performances, Profile and Trends 17 Figure 29: Firm Density and Development 8 Firm Density (number of newly registered limited liability companies per 1,000) 6 4 2 Tunisia 0 0 2000 4000 6000 8000 10000 12000 14000 16000 GDP per capita, PPP (constant 2005 international $) Source: INS, RNE 2011, Author’s calculations. countries with higher levels of development (and the trend line) such as Turkey, Chile or Malaysia. What Drives Firm Dynamism in Tunisia: A Look at Recent Trends Firm dynamism can be measured by analyzing entry and exit patterns in a particular economy over a given period of time. The creation of new businesses can be measured by entry rates, the ratio of new firms over existing firms. During the last decade the rate of new business entry has declined slightly, from 12% in 2000 to 8.8% in 2011 (Figure 29). Exit rates have been also slowly declining during the same period, however at a slower pace than entry rates. Exit rates averaged 6.2% over the period, compared to an average of 10.1% for entry rates. Churning rate9, which measures the total entry and exit patterns of firms over a given time period, provides an aggregate indicator for firm dynamism in a given economy. The combined decline in both entry and exit rate, however slight, results in a downward churning rate trend. The fact that entry rates have been declining faster than exit rates implies the churning rate in Tunisia is being driven mainly by entry. This suggests that overall firm dynamism has been decreasing for the last decade with an average churning rate of 15.8% for the period down from 22.2% in 2000. Firm Dynamics Entry and Exit: Sectoral Analysis Desegregated data of firms’ entry and exit patterns between 2000 and 2011 (Figure 30) provide insights on sectoral trends. The firm renewal process (or churning rate) is declining slower in the services sector when compared to the manufacturing sector. Average entry and exit rates between 2000 and 2011 years were 8.4% and 9.9% in the services sector. The average churning rate in the services sector for the last decade averaged 13.8%, down 9 Churning rates, a measure of firm dynamism, is calculated by adding lower entries and lower exits and dividing by existing firms ratios. 18 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 30: Entry and Exit rates in Manufacturing (2000-2011) 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Entry rate Exit rate Churning rate Linear (Churning rate) Source: The World Bank, Diop and Khalil, 2012. Figure 31: Entry and Exit Rates in Services (2000-2011) 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Entry rate Exit rate Churning rate Linear (Churning rate) Source: INS, RNE 2011, Author’s calculations. Note: Construction and Trading Firms were not included. from 21% in 2000. Manufacturing entry rates have been declining along with exit rates, thereby generating relatively low churning rates. Churning rates in the manufacturing sector have declined from 20% in 2000 to approximately 12% in 2010. Within the larger services sector, three subsectors drive the firm dynamics observed in services: transport (driven mainly by the allocation of individual licenses with 52,560 firms in 2000 to 94,836 in 2011); real estate services (with 23,897 new licenses in 2000 and 56,000 in 2011) and the education/health sector (with 8,000 licenses in 2000 and 20,000 in 2011). Overall, these trends suggest a relative decline in the productive tissue of the manufacturing sector, as evidenced by the decreasing overall churning rates. The services sector, on the other hand, has been more dynamic, a reflection of higher entry rates, a higher churning rate, and a more dynamic overall renewal process in the sector. Effects on Productivity and Employment: Has there been a creative destruction process? Transition economies are often characterized by high firm turnover, whereby the process of creative destruction plays an important role in Chapter: 1: Economic and Private Sector Performances, Profile and Trends 19 productivity growth (Haltiwneger and Scarpetta, 2003). With high turnover, new firms replace less productive ones, increasing competitive pressure and contributing to the exit of firms performing below average. With regard to Tunisia, recent research (Rijkers et al, 2013) finds that allocative efficiency, the process whereby the renewal and destruction of firms result in productive gains, is actually low. This is due to high productivity dispersion within size categories, which is indicative of frictions and distortions (Rijkers et al, 2013). This small reallocation from the creative destruction process is not inconsistent when there is a lack of higher-value- added sector firms in an economy. This trend has been observed in Tunisia over the past decade, being driven primarily by smaller firms. As noted previously, 86% of all Tunisian firms are one-person enterprises and only 0.4% of all firms employ more than 100 workers. Self-employment, especially in services, comprises 74% of all net job creation (Rijkers et al, 2013) and accounts for more than all other groups of firms combined. Because smaller firms tend to grow less, the result has been an inadequate job creation response due to productivity gains caused through allocative efficiency. Conclusions and Recommendations This chapter has examined overall performance trends and characteristics of the Tunisian economy, analyzing growth, employment, and firm performance, productivity, and dynamism trends. It also provided a bird’s-eye overview of the results of Tunisia’s investments in an export-driven growth economy facilitated through the creation of off-shore manufacturing and services sectors. Through this analysis, this chapter has attempted to gauge whether a process of transformation into higher productivity and value-added activities has taken place over the past decade or so. While growth has been commendable over the past two decades, its performance lags when compared to emerging markets that have witnessed a faster and more pronounced process of structural transformation across most metrics that the report examined, including productivity, technological sophistication of exports, and employment responses. Unemployment, which stood at 16.7% in the last quarter of 2012, is perhaps the most pressing public policy challenge Tunisia is facing. Unless the pace of economic growth accelerates substantially, demographic trends suggest that unemployment is set to worsen in the coming years. Exports, while a major source of growth over the past two decades in Tunisia, are declining as a relative share of GDP. They are not the engine of technological spillover witnessed on many export-driven countries that have sustained long 20 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 bouts of growth. Although firms are more likely to export than similar firms in other middle income countries, exports are still highly concentrated in a small number of products (textiles, electrical sector). Exports are also limited mainly to the sluggish EU market, and often lack high levels of technological sophistication that has been associated with sustained growth in other emerging markets. Through lowering trade barriers, integrating into international supply chains, and liberalizing and incentivizing investment, Tunisia’s gradual integration into the world economy has facilitated a structural shift from an economy based on agriculture and primary products to one based on manufacturing for exports, and more recently in services. As such, Tunisia has achieved certain elements of structural transformation seen in other high-growth economies. This has occurred, however, both with limitations and without achieving the type of transformational influence observed in fast growth performers. The move towards services has been driven mainly by low value-added activities such as individual units in transport, some real estate, and some hotels and restaurants. Meanwhile the recent growth of electrical and light mechanical manufacturing, although considered high to medium technological in content, has not been significant enough to make a transformational impact. Unlocking Tunisia’s private sector potential by alleviating the most present constraint can ultimately facilitate a process of transformation which would result in moving up the value chain in traditional export sectors and product sophistication. Similarly, the country could be in a better position to promote investment in newer, knowledge-intensive products and services. It will also be paramount for Tunisia to find a path to an elevated and sustained growth rate, necessary to begin reducing high unemployment. As such the authorities must address some of the more persistent binding structural constraints to growth and private sector development. The incentive structure which favored disproportionately an off-shore sector with its share of induced distortions and imbalances has shown its limits. The remainder of this report looks at several dimensions of the investment climate and related constraints that prevent Tunisia’s private sector from exploiting its full potential, as well as participating in full structural transformation in order to accelerate growth and reduce unemployment. Chapter: 1: Economic and Private Sector Performances, Profile and Trends 21 Chapter: 2 Governance and Regulatory Framework In From Privilege to Competition (Benhassine et al, 2009), published prior to the Arab spring, the author found that one of the most important limitations to private sector growth and development in the MENA region was policy uncertainty. Also prominently noted was discretion in implementing the rules in a region where incumbents have always had a noticeable role.10 In order to make productive investments, private enterprises require a predictable regulatory environment with clear rules that are applied evenly, irrespective of firm characteristics. Historically, the state in Tunisia has played an ambiguous/dual role in promoting private sector growth. On the one hand, it has signaled support for private enterprises by providing various incentives (e.g., fiscal). On the other hand, it has utilized the same instruments to favor some companies, thereby undermining the long-term credibility of public policies as well as the enabling governance environment. It became well-known that the administration has sometimes served the interests of the connected and privileged belonging to the inner circle of the Ben Ali regime. Regulations were used for decades for rent extraction and even predation during the Ben Ali regime as documented in World Bank (2013)11. In a post-revolution environment, it is even more crucial to examine whether some of the practices inherited from the past regime have continued; and to what degree they are still present. Of paramount importance would be to assess whether post-revolutionary conditions have led to and added erosion in the application of the rule of laws and/or a widespread use of a prevailing cronyism system. The first part of this chapter looks at the direct and indirect cost of the regulatory burden on firms; that is the rules and regulations affecting firms and the cost they represent to firms in 10 Benhassine, Najy (2009), From Privilege to Competition: Unlocking Private-led Growth in the Middle East and North Africa. MENA development report. Washington D.C.-The World Bank. Available at: http:// documents.worldbank.org/curated/en/2009/01/11409150/privilege-competition-unlocking-private-led- growth-middle-east-north-africa. Other research (Kiefer 2004) suggest that de jure regulatory reform does not always impact investment or employment. “The results contrast with recent research that uses the cross-sectional dimension of the Doing Business data and finds strong cross-country correlations between regulatory burdens and economic outcomes.” 11 World Bank (2013, forthcoming), Tunisia- Development Policy Review. Chapter: 2: Governance and Regulatory Framework 23 Perception of the Corruption Constraint among MENA Firms Figure 32:  (% of Firm Managers who Rate Corruption as a Major or Severe Constraint to Their Business) Yemen, Rep. 74.0 Syrian Arab Rep. 67.1 West Bank and Gaza Economies 66.5 Lebanon 66.0 Algeria 64.3 Egypt, Arab Rep. 43.8 Jordan 38.4 Tunisia 28.9 Morocco 27.3 Oman 11.9 0 10 20 30 40 50 60 70 80 Source: Various Enterprise Surveys. terms of compliance to regulations. The second part examines the importance of discretion and arbitrary application of rules. The last part provides some possible recommendations to alleviate the most pressing issues related to this topic. Direct and Indirect Regulatory Burden on Firms Close to a third of the firms surveyed in Tunisia complained about corruption. Twenty nine percent of firm managers rated corruption as a severe or very important constraint, placing it as the overall sixth leading constraint identified from a total of 20. On a regional basis, it does appear that Tunisian firms tend to complain less than their peers (Figure 32). However, in terms of ranking, Figure 33:  Perception of Corruption Index (WGI) most of the countries included 60 rate corruption as one of their top five constraints. This result 40 suggests that the perception of corruption varies according to 20 the evolution of the environment in which firms operate. There 0 are no firm-level survey panels 2007 2008 2009 2010 2011 Voice and Accountability Control of Corruption to confirm this, but a look at the World Governance Indicators Source: T he World Bank, Perception of Corruption Index, 2012. reveals a deterioration of perceived corruption after post-revolutionary Tunisia. Interestingly, this result is combined with an improvement in “voice and accountability” (Figure 33). Tunisia is not unique in this paradox, whereby two governance-related sub-components move in opposite directions. Keefer (2004) shows 24 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 that in other post-revolutionary environments, such as Indonesia after the fall of the Suharto regime, similar trends were observed; which can be attributed to a period of change characterized by an erosion of the former system of enforcement which maintained or even created more space for discretion. Firms seem to transition from a more predictable corrupt/predatory environment to an open democratic system that does not yet present the attributes of a stable and predictable policy framework. This trend enables more uncertainty and a higher perception of corruption than before. In addition, when freedom of expression is institutionalized, open discussions on corruption may flourish and increase the perception that corruption is a widespread phenomenon. Looking further into quantitative data from the survey aimed at capturing governance and regulatory/bureaucratic issues shows that Tunisian firms operate in an environment where petty Figure 34:  Prevalence of Corruption and Delays for Services corruption seems prevalent. 180.00 Bureaucratic and regulatory 160.00 requirements continue to 140.00 impose a significant burden 120.00 on businesses. For instance, 100.00 it can take up to 60 days for 80.00 industrial electrical connections 60.00 (Figure 34) and almost six 40.00 months for a construction permit. 20.00 Likewise many firms are subject 0.00 Telephone Operating License Import License Electricity Construction Permit to informal payment requests ranging from 5% for import licenses to 23% for construction % rm that were requested a gift Delays for the service (Days) permits. The firm survey results Source:  Author’s calculations, The World Bank Enterprise show that occurrences of Survey, 2012. informal payment request are dependent on the nature of the services demanded by the firm. Where long delays are frequent, like in the case of building permits, and electricity connections, cases of informal payment are more prevalent. A more concerning and revealing result regarding corruption is best illustrated in (Figure 35). The prevalence of corruption “to speed things up” is among the highest by international standard. More than a quarter of all firms surveyed declared that they have to provide some form of informal payment in order to accelerate any form of interaction with the administration. Chapter: 2: Governance and Regulatory Framework 25 Percentage of Informal Figure 35:   ercentage of Senior Figure 36: P Payment Request to Speed Management’s Time Spent Things Up Dealing with Regulations 35 35 30 29 30 29.0 24 25.1 24.8 25.1 25 25 19.4 19.4 20 20 16.2 15 13.2 15 13.2 10.2 10.3 10.50 10.2 10.3 10.5 10 10 5 5 1.1 0.1 0 0 Mauritius Mauritius Morocco Malaysia Morocco Lebanon Malaysia Lebanon Tunisia Algeria Turkey Poland Jordan Tunisia Algeria Turkey Brazil Korea Brazil  uthor’s calculations, The World Bank Source: A Source:  Author’s calculations, The World Bank Enterprise Survey, 2012. Enterprise Survey, 2012. Furthermore, the time allocated by managers to fulfill the firm’s regulatory requirement seems to confirm the multiplicity of interaction with agencies (Figure 36). According to the survey, close to 25% of the managers’ time are spent on meeting regulatory and bureaucratic burdens. This figure appears relatively high by international standards. In some instances, field interviews reveal that firms have dedicated personnel whose sole responsibility is to ensure that the firm fulfills all its administrative and bureaucratic requirements. This is especially the case for medium to large firms that can afford it. While some firm characteristics such as size or market orientation do not appear to be influencing factors, location shows significant variances in the time spent dealing with meeting the firm’s bureaucratic requirements. In the Greater Tunis areas, firm managers spent close to 35% of their time meeting bureaucratic requirements while this figure was as low as 7% in other regions. The quality of public services to firms is impacted by the intensity of the demand, but the way certain regulations are applied appear to be an influencing factor for this type of variance. It is estimated that close to 13% of the firms’ annual sales were spent to deal with regulations and administrative interaction (direct and indirect costs including compliance time. Figure 36 shows that Tunisia is among the most costly amongst MENA comparators12. The high losses of IC weaknesses combined with the management compliance time are indicative of the important frequencies of interaction 12 It should be noted that over half of the costs are triggered by losses associated with theft and spoilage (a widespread phenomenon after the revolution). In the absence of this, Tunisia would be slightly lower than regional peers. 26 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Losses Due to Investment Climate Figure 37:   orruption Payment by Firm Figure 38: C Weaknesses (in % of sales) Size 25 45.00 40.00 20 35.00 30.00 15 25.00 20.00 15.00 10 10.00 5.00 5 0.00 Operating license Telephone Import license Electricity Construction permit 0 Morocco Lebanon Jordan Tunisia Yemen Egypt Libya Syria Iraq Petty corruption (By rm size) Small Petty corruption (By rm size) Medium Petty corruption (By rm size) Large Source:  Author’s calculations, The World Bank Source:  Author’s calculations, The World Bank Enterprise Survey, 2012. Enterprise Survey, 2012. necessary to meet bureaucratic requirements. These losses point to a problem not unique to Tunisia: implementation of regulations can be uneven, time consuming, and costly to firms. Therefore, it is very likely that issues are solved through negotiations that are characterized by highly discretionary decisions, therefore rendering some benchmarking challenges. Difference of informal payment by firm size can be interpreted as a proxy for uneven enforcement of regulations. It is especially true when large and small firms pay the same amount of bribes for operation and import licenses. It is rather difficult to explain common payment between small and large firms since they have various capacities. Overall in terms of regulatory burdens, the survey results point to issues of perceived corruption, long delays associated with requirements for compliance and an environment where the uneven application of regulations could be important. In the next section, the report will show that there are significant margins in the way regulations are applied and that some areas of the investment climate are more prone to these types of behaviors than others. Research on this topic points to the use of the recurring instrument used to solidify rent/monopolies and predation. In the case of Tunisia, as will be shown, the survey results seem to consolidate these findings. A large part of the problem seems to occur around trade and fiscal regulations. Importance of Discretion and Arbitrary Application of Rules Overall, the Tunisian investment climate, as measured by this survey, has not fared particularly worse than other MENA countries or international Chapter: 2: Governance and Regulatory Framework 27 competitors. What makes a difference for firms is the application of rules, not as intended. That is not to say that Tunisia does not suffer from certain policies and regulations that impede private sector growth. In fact, the application of rules in some areas of the investment climate allow for discretionary power among bureaucrats and politicians. For instance during the 1970s, Tunisian authorities established a policy framework designed to attract foreign direct investment and to further develop export-oriented industries. This economic model has been in place for more than three decades and has had some notable results. It is still today considered appropriate among policy-makers. However, as was the case in many countries, the set of incentives which included various tax incentives favoring export-oriented firms enabled the emergence of a dual economy and created some incentives for domestic firms to become off-shore. This model had a rationale in the 70s and 80s, and was followed successfully by many countries over the years, most notably Mauritius. However, the accumulation of fiscal incentives to exporters became increasingly costly, and its impact on employment began to fade. According to COPA (2012), exporters now benefit for up to two thirds of fiscal incentives while 90% of fiscal incentives benefit only a mere 2,500 companies (out of several million of companies in Tunisia). This becomes even more problematic because employment created by exporters is the most costly per job created.13 The unintended consequences of the proliferation of various fiscal regimes have been strengthening possible discretion by public officials in selected administrations (where these policies had more impact), creating space for the uneven enforcement of regulations, and facilitating instances of corruption. This has been particularly acute for fiscal and customs administrations, as the survey results do point to these types of practices as the report will show. Uneven Enforcement of Regulations for Private Sector The ICA survey can provide proxies for measuring the diversity of firm treatment across agencies by providing associated costs and delays by firm characteristics. How firms perceive the rules and regulations that govern their activities is an indication of the overall conditions in which they deal with the administration. Survey results show that 26.5% disagree with the statement that the rules and regulation governing their main activity are unpredictable. This number does not appear very high. In addition, this result does not vary 13 COPA (2012), Coût/bénéfice des incitations fiscales et financières à l’investissement, mimeo. 28 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 1: ICA Survey Results Tunisia Foreign- Non- Region Small Medium Large Domestic Exporter (All) owned Exporter A B C D Laws and regulations that govern your activity are unpredictable (% disagreeing) 26.52 22.64 28.04 27.41 27.22 23.93 27.46 26.17 21.37 23.14 31.4 35.34 Do you believe that the laws and regulations governing your activities are generally applied evenly (in a consistent manner from all type of firms) 42.28 42.5 43.84 38.52 45.03 30.43 46.64 37.84 32.33 41.67 47.11 57.76 Source: The World Bank Enterprise Survey, 2012. across firm characteristics. What seems to be of more concern to the business community is the way in which the same rules and regulations affecting their activities are applied. When asked, 42% of firms said they disagreed with this statement, a significantly larger share. We also find major differences across firm types with regard to this assessment. Foreign-owned firms and exporters are much less concerned with the uneven application of regulations (only 30% and 32% respectively disagree with the statement). Foreign-owned firms, and to a certain extent exporters, can face significantly different operating conditions in their investment climate than domestic ones. This further signals differences in regimes and treatment. Perceptions of informal behavior by competitors show that many firms complain that their competitors are not subject to the types of cost and regulations as they themselves face. Regulations which are not perceived as evenly applied across the spectrum of firms resonate closely with the manager’s perception of anti-competitive practices. When asked, firms mentioned that the leading cause of anti-competitive behavior, mainly through tax and tariff evasion, represented a severe constraint. Managers’ judgment of informality is closely related to the way firms are treated by the administration and should be considered a symptom of weaknesses of the overall IC rather than a cause. This contributes to an environment where firms always try to get “a better deal” than their competitors, knowing that the agencies in charge do not apply the same rules for everyone. Approximately half of the surveyed firms disagree that regulations are applied in a fair and even manner across the spectrum of agencies described. Perception of uneven application of the rules at customs and trade regulations stands out with only 37% of firms agreeing that the statement is true; while 49% disagree with regard to taxes (Table 2). Chapter: 2: Governance and Regulatory Framework 29 Table 2: Types of Competitors’ Practices which Harm your Company All Firms Foreign-owned Non-Exporter Fiscal evasion 49 34 50 Customs duties evasion and trade-related regulations 37 17 35 Source: The World Bank, Enterprise Survey, 2012. Note: Percentage of companies stating that this is a major or very severe constraint. According to Table 2, customs duties evasion is a marginal problem for foreign-owned companies (17%). This could be explained by the fact that many foreign-owned companies are import/export or assembly and therefore benefit from duties exemption. This seems to be corroborated by the figure of non-exporters, who perceive this problem much more strongly. On the other hand, tax-related problems seem to affect all companies across the board (the difference between foreign-owned and non- exporters is much lower). This is also illustrated below using questions about their experience with VAT reimbursement. In Table 3, approximately one out of six companies filed a request for VAT reimbursement. However, when interviewed regarding the leading reasons for not requesting a VAT reimbursement, one third noted the fear of future audits, and one half noted the long and cumbersome procedures. Problems of long and cumbersome procedures seem to be confirmed by data; on average, VAT reimbursement occurs almost 200 days after the request has been filed (accounting for 15% of total sales). It is likely that larger firms’ applications for VAT reimbursement are associated with much larger sums, hence the longer delays for large firms (over 270 days) compared to small firms (66 days on average). This indicates that large firms are more prone to waiting for large VAT paybacks, whereas small firms do Table 3: VAT Reimbursement: Delays and Constraints Domestic Exporter Exporter Foreign- Medium Tunisia owned Large Small Non- (All) During the year 2012, have you requested a VAT reimbursement? (in percentage of surveyed companies) 16 10 17 21 16 12 16 15 What are the main reasons why you did not request a VAT reimbursement? Fear of future tax audits 30 32 35 9 31 17 33 23 Excessively long procedures 25 28 22 29 26 17 28 21 Excessively cumbersome 19 16 20 27 19 20 18 22 procedures Other 26 24 23 35 24 46 21 34 What has been the time to get VAT reimbursed and how much did it represent in percentage of total sales? (in days) 187 66 159 274 189 175 179 201 (in percentage of total sales) 15 17 14 15 13 23 16 13 Source: The World Bank, Enterprise Survey, 2012. 30 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 not find the delay associated with  AT Reimbursement Frequency by Figure 39: V long and heavy procedures worth Number of Days the amount they could receive. In Kernel density estimate addition, the fear of an audit is of .002 .004 .006 .008 .01 .012 more concern for small firms than larger ones. Small companies, Density on average, wait for 66 days, whereas large companies wait for 274 days. This is counterintuitive since for capacity reasons, large 0 20 40 60 80 100 companies should be reimbursed J22aiDelaiRemTVA kernel = epanechnikov, bandwidth = 12.9674 earlier.  he Vicious Circle Between Tax and Figure 40: T Certain discretion is plausible Customs Agents’ Behaviors and when reviewing the frequency Some Private Sector Operators of VAT reimbursement by the number of days. It presents some Tax/tariff peaks at 20/40 and 70 days, evasion which are difficult to explain but point nonetheless at different treatment of VAT processing time Bargaining across firms. culture, Legitimacy from dual accounts and tax/customs to pervasive inspect corruption As indicated earlier, instruments such as fiscal incentives or fiscal Bargaining systems create discretionary process between some taxpayers/ space in their application. importers and tax/customs Hibou (2011) describes what she adminsitration calls “a vicious circle” that can occur between tax and customs Source: Adapted from Hibou (2011), p.144. agents’ behavior and private sector operators, which gives an advantage to the best-connected firms. This approach legitimizes a bargaining culture of tax and tariff negotiation, in turn, leading to tax and tariff evasion (Figure 39). The bargaining process will affect most negatively impact the least-connected firms and give a stronger competitive advantage for the best-connected firms14. Another illustration of discretion and uneven enforcement of regulations is illustrated with cargo dwell time, i.e. time for cargo to exit the main port of the country (Figure 41). When compared to countries in the sub-region, 14 Chekir, Hamouda, Ménard, Claude, Nucifora, Antonio, Raballand, Gaël and Rijkers, Bob (2013), “Governance, predation and firms’ growth in Tunisia”, mimeo. Chapter: 2: Governance and Regulatory Framework 31 Benchmarking of Cargo Dwell Figure 41:   atio between Longest Dwell Figure 42: R Time Times/Average 40.00 2.4 35.00 2.2 30.00 2.0 25.00 1.8 20.00 1.6 15.00 10.00 1.4 5.00 1.2 0.00 1.0 Morocco Malaysia Lebanon Tunisia Algeria Korea Egypt Morocco Malaysia Lebanon Egypt Korea Tunisia Algeria Average days to clear customs(IMPORTS) Longest days to clear customs (IMPORTS)  he World Bank, Various Enterprise Surveys Source: T Source:  The World Bank, Various Enterprise Surveys cargo dwell time in Tunisia is on average the worst after Algeria (close to 10 days). The cargo dwell time is significantly higher than Morocco, which is the lowest among these countries with five days of dwell time. Discretion and unpredictability seem to also play a role. Figure 42 measures the ratio between the longest dwell times to the average for all the companies surveyed. Ideally, the ratio should be rather close to one since importers have rather similar cargo to import. Again, this ratio is the worst for Tunisia, indicating the possibility that an importer will face much longer dwell times than the average. Dwell time can capture many factors but, in general, it is a proxy for some bargaining processes to reduce fees, bribes and duties. Uneven enforcement of regulations seems also prevalent among regions in Tunisia. For instance, in Tunis, more than two thirds of the surveyed companies feel that regulations are enforced fairly, compared to just above 40% in Region D (Jendouba, Beja, Kef, Siliana, Sidi Bouzid, Kasserine, and Kairouen). The administrative burden and unpredictability of the enforcement of regulations seems to be higher in remote regions compared to Tunis. This also could explain why a gap has been growing between Tunis and some hinterland regions. There appears to be a double sanction for companies residing in the hinterland regions, who usually endure poorer infrastructure and services as well as more unpredictable regulations. RECOMMENDATIONS The findings indicate that beyond the measurable direct and indirect costs that the regulatory and bureaucratic burdens impose on firms, there is a significant discrepancy issue related to how policies and regulations 32 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 are applied today. Widespread before the revolution, the transition has not yet yielded a significant improvement in regularly uncertainties. In order to provide a more predictable environment to firms and to reduce capture and predation, Tunisian authorities need to send a strong message by addressing the issues where it is currently the most prevalent. Areas of intervention may include continuation of the modernization of customs initiated in 2006. Another area of intervention would be to rethink the current incentive system which continues to exacerbate distortions that may no longer be needed. Many countries which suffered from similar types of distortions as Tunisia, such as Mauritius, have successfully transitioned to a simplified and more equitable environment. Chapter: 2: Governance and Regulatory Framework 33 Chapter: 3 Innovation Technology & Exports for Private Business in Tunisia Innovation is an important driver of competitiveness and economic growth. The innovation cycle, starting from the initial idea or identification of a problem or need, to the point where the output is sold in the market, requires a dynamic and holistic ecosystem supported by the appropriate set of policies and resources. To create high wage jobs through a growth-oriented, dynamic private sector, Tunisian industries need to move up the value chain and export higher-value-added goods. Innovation through the assimilation and diffusion of global technology will be a key factor in shifting the Tunisian industry towards this goal. This chapter looks at the data of the sample firms surveyed and identifies where and how much innovation is taking place in the Tunisian private sector. Also examined are the characteristics of innovative firms in comparison to other firms and the value-add provided to the Tunisian economy, specifically in terms of job creation and competitiveness. The last part of the chapter highlights the perception to challenges and barriers that are viewed by innovative firms compared to non-innovative firms. It concludes with suggested areas of reforms and interventions to address these challenges and promote innovation. The recommendations draw, in Figure 43: Innovative vs. Non-Innovative by Capital Share addition to the data findings, on 100% research and assessments of the 17% 14% Tunisian innovation ecosystem 80% and best practice models around % of capital held by... the world. 60% 82% 85% 40% Definition of innovation and scope 20% of the analysis 0% Non-innovative Innovative The enterprise survey tool used Public sector Foreigners or foreign businesses in this ICA is not an innovation Other Locals or local businesses survey and, as such, does not Source: The World Bank, Various Enterprise Surveys. Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 35 capture the full spectrum of indicators on innovation. However, it does include innovation-related questions that shed light on the status of Tunisian firms in this area. Hence, it is important to first clarify the definition of innovation applied in this report and the limitations on the scope of analysis that can be done. Based on the questions asked in the enterprise survey, the definition of innovation used in this report is “firms that produced or introduced a new or improved product or process to the market”. Firms referred to as ‘innovative’ in this report indicates that firms answered ‘yes’ to the question “have you introduced a new or improved product to compete in the market?” This report does not distinguish between process and production innovation, and thus refers to innovation as a whole. Firm Innovation in Tunisia: The General Picture Foreign investment Based on the stated definition, Figure 44:  Innovation Reported by Firms (% Each Sector) the sample indicates that 47.5% of Tunisian firms are Health Agrbus. innovative in that they have 42.9% 53.4% introduced a new product or Constr Clothes 30.9% 50% improved on an existing one to compete in the markets. Manufacturing Textiles Services ICT 64.3% The level of innovation brought 73.3% in by foreign firms is very small. IME While foreign ownership in non- Tourism 46.6% 26.1% innovative firms is 17%, foreign Trade Other ownership in innovative firms is 48.4% MCCG* 51.3% 14%, confirming the prevailing 51.9% literature that the majority of Notes: IME – Industry mechanical engineering; foreign-owned businesses are MCCG – Materials for construction, ceramics and glass. there to capitalize on lower production costs in Tunisia. Promoting foreign investment at the higher end of the value chain is more likely to bring innovation into the country through technology transfer and access to knowledge in external markets. Industry A breakdown of innovative firms as a percentage of each sector shows that the highest level of innovation is reported by firms in the ICT sector, followed closely by those in textiles and agribusiness. Innovation reported by firms in construction and materials for construction is also significant enough to warrant consideration. 36 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Firm Size Large firms in Tunisia report  istribution of Innovative & Non- Figure 45: D Innovative Firms by Size the highest level of innovation. According to the data, 55.8% 60% 50% 48% of large firms are innovative, followed by medium and small 40% % of rms firms with 45.2% and 44%, 31% 25% 27% respectively. The distribution of 20% 20% innovative and non-innovative firms in the sample according 0% to size indicates that medium- Small Medium Large sized firms are better performing. Non-innovative Innovative (Figure 45). Source:  The World Bank, Various Enterprise Surveys. Firm Age Viewing the distribution of innovative and non-innovative firms from the perspective of firm age provides further insight. Firms in operation for over fifteen years showed the highest levels of innovation across most sectors whereas very young firms (less than 5 years) and firms between five and fifteen years old had lower innovation distributed across various industries. The figures below show the comparative advantage in innovation by sector for start-ups, growth stage, and older established firms. Amongst young firms (up to five years), the highest levels of innovation are found in the textiles, clothing and agribusiness sectors. However, trade, tourism, and ICT industries also show a significantly higher proportion of young firms that are innovative compared to those in the same age group and sector that are non-innovative (Figure 46). Among firms who have been in operation between five and fifteen years, the highest levels of innovation are found in trade, textiles and Industrial Manufacturing and Electricity (IME). The proportion of innovative firms in Figure 46: Innovative/Non-Innovative Firms by Industry in Firms 0-5 Years Old 40 Innovative Non-innovative Gap 30 20 10 6 7 8 % 7 1 0 0 0 -1 -2 Agribusiness Clothing Textiles In. Mechanic and electricity Other ind. MCCG constr. Material Trade Tourism ICT Construction Health -10 -14 -14 -20 Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 37 ICT is also significantly higher than other sectors (Figure 47). Older firms show the highest levels of innovation compared to all the other age groups concentrated markedly in agribusiness, IME, and trade. The proportion of innovative older firms in those sectors also surpasses their counterpart non- innovative firms in the same industries (Figure 48). In summary, the findings show that overall a significant level of innovation by SMEs is taking place in services, textiles, and ICT. Tourism and agribusiness in particular have seen an increased entry of innovative start-ups. Given that SMEs constitute the majority of the private sector (more than 95%, Tunisia DPR 2010), it is important to improve the business environment and innovation ecosystem for these sectors in order to promote more opportunities for competitive start-ups and SMEs. A significant share of large and established firms, who have been in business for more than 15 years, are innovating in agribusiness, IMG, MCCG and trade. Innovation in large firms is also important for competitiveness and, more importantly in this case, for moving production processes up the value chain. The increased importance of Tunisian exports in electronic and mechanical engineering product parts may have played a part in the level of innovation found in manufacturing. However, Tunisia needs to further promote these sectors in order to experience positive economic impact. Region A (Ariana, Tunis, Manouba, Monastir and Ben Arous) has the highest concentration of the innovative sectors mentioned above (ICT, textiles, agribusiness, MCCG, construction, trade, and IME). Although the highest concentrations of ICT firms are found in Region A, Region C (Sfax, Gabes, Menine) has a higher aggregate level of innovation. A more in-depth look at the types of ICT firms that operate in the region can help explain Innovative/Non-Innovative Firms Figure 47:  nnovative/Non-Innovative Firms Figure 48: I by Industry by Industry Innovative rms aged 5-15 years Innovative rms 15+ years 25 25 20 20 15 15 15 15 12 11 11 10 10 9 5 5 5 % % 2 0 1 1 1 1 0 0 0 -1 Agribusiness Clothing Textiles In. Mechanic and electricity Other ind. MCCG constr. Material Trade Tourism ICT Construction Health Agribusiness Clothing Textiles In. Mechanic and electricity Other ind. MCCG constr. Material Trade Tourism ICT Construction Health -2 -5 -5 -4 -4 -5 -5 -10 -10 -9 -11 -15 -15 Innovative Non-innovative Gap Innovative Non-innovative Gap 38 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 this paradox. For example, Figure 49: Innovation Firms by Region agents or representatives of 70 foreign technology companies, 62.3 60 trading in wholesale or retail, are 53.14 largely not innovative. The high 50 level of SMEs found in those 41.46 40 areas are mostly non-dynamic % firms, especially in Region D. 30 26.72 Firms in Region D complained 20 more than firms in other regions about constraints in the business 10 environment particularly security 0 and power issues. Region A Region B Region C Region D Source: The World Bank Enterprise Survey, 2012. Notes: Region A: Ariana, Tunis, Manouba, Ben Arous; Innovation & Its Added Region B: Sousse, Mahdia, Montasir, Kariaoun; Region Value to the Economy C: Sfax, Gabes, Mednine; Region D: Not specified. This section focuses on key value-added outputs/results15 that innovative firms provide in the Tunisian economy, such as the number of jobs created or level of exports. The following section examines the specific value-added inputs16 that innovative firms apply specifically focusing on employee skill level and/or amount of training offered by the firm. Firm Innovation and Contribution to Exports Although Tunisia enjoys relatively high levels of exports as a result of government reforms, its export products continue to have low technological content. Today the country’s exports are even less dynamic and are evolving at a slower pace. Export sales, a key indicator for competitiveness, tends to be positively linked to innovation as firms strive to grow by capturing other markets. According to the data, about half of both exporting and non-exporting firms indicate that they innovate, indicating a relatively high level of firms who innovate for the national market. A distribution analysis of innovation (Figure 50) shows that innovative firms contribute to exports equally as non- innovative firms. 15 Value-added outputs/results variables in this case are defined as those factors that are produced or happen directly as a result of the firm’s activity such as exports, number and types of jobs created, revenues, growth etc. 16 Value-added inputs are defined as inputs the firm uses and invests in its production and business operations such as human capital skills and training offered, technology use, and research and development. Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 39 Job Creation  istribution of Innovative and Figure 50: D Non-Innovative Firms by Exports The positive linkage between 30% 28% 27% job creation and innovation 25% % of total annual sales is an important value-added 20% outcome. Figure 51 shows the 15% distribution of the number of jobs 11% 9% 10% created over a firm’s lifetime, for 5% innovative versus non-innovative 0% firms. Innovative firms show a Non-Innovative Innovative higher net positive number of Indirect exports Direct exports jobs created at 52%, compared Source: The World Bank Enterprise Survey, 2012. to 39% for non-innovative firms. To further understand where job creation is taking place, the analysis looked at the average number of jobs created by all firms in the sample, based on their age. Start-ups, which typically have a high failure rate, create a net job loss after 3 years, while older firms which tend to be larger have the highest average contribution to jobs. A distribution analysis by innovation and number of jobs created by firm age groups (Figure 52) shows that innovative firms contribute more to job creation in every age group, except for very old firms over fifteen years of age, where job creation is lower by innovative firms. Like all small firms, innovative start-ups (less than 3 years) which tend to be particularly risky with a high chance of failure, exhibit net job loss (Table 4). However, the high risk innovative start-ups that succeed beyond three years will grow and go on to contribute more to job creation than all other SMEs. In terms of job loss, innovative older firms are likely to be Innovative vs. Non-Innovative Figure 51:  nnovative vs. Non-Innovative Figure 52: I Firms by Number of Jobs Firms and Number of Jobs Created Created by Firm Age Innovative vs. Non-Innovative 100.0 94 rms by number of jobs created since strat-up 83.8 150 80.0 No. of jobs created Number of jobs created 100 60.0 50 40.0 33.6 52 39 0 20.0 13.79.6 11.4 6.0 -50 0.0 < 3 yrs 3-5 yrs 5-15 yrs 15+ Non-Innovative Innovative -20.0 Excludes outside values -19.4 *Number of jobs created = (# full-time employees in 2012 -40.0 # of full-time employees upon start-up) Innovative Non-innovative Source: The World Bank Enterprise Survey, 2012. 40 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 4: A  verage Number of Jobs Created by large manufacturing firms who Firms according to Firm Age have invested heavily in capital Age group Average number of Std. Dev. Number of firms to lower production costs and jobs created have reduced their need for labor, Less than 3 years old -4.48 88.71 40 particularly at the low end of the 3-5 years old 10.96 43.21 85 value chain. The result is a net 6-15 years old 22.95 65.83 210 job loss, but new jobs created 15+ 83.90 402.75 237 Total     572 are most likely higher-value- added jobs due to innovation and upgrading of technology. What Differentiates an Innovative Firm in Tunisia? Technology Use and R&D Higher use of technology, including the Internet, is a distinctive characteristic of innovative firms. Engaging in R&D activities is also a distinctive characteristic of innovation. For example, in Tunisia 44% of innovative firms engage in R&D development, compared to only 22% of non-innovative firms (Figure 53). Figure 54 shows the breakdown of R&D done by firm type, according to industry. The data highlights that the highest level of R&D is done by firms in construction, ICT, agribusiness, IME, and textiles, respectively. Employee Skills and Training A higher proportion of innovative firms, compared to non-innovative firms, have employees with university degrees and offer vocational training to their permanent employees. Innovative firms tend to hire Figure 53: Innovative vs. Non-Innovative Firms by Various Input Variables 100% 98% 93% 92% 90% 85% 85% 79% % of firms reporting “yes” 80% 69% 70% 60% 59% 50% 44% 40% 34% 30% 26% 22% 20% 15% 10% 6% 0% ISO Email Own Broadband R&D Patent Using Internet for Certification Website Internet R&D Non-Innovative Innovative Source: Author’s calculations, The World Bank Enterprise Survey, 2012. Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 41 university graduates due to the  irms Indicating that They Do R&D Figure 54: F by Industry prevalence of technology and engineering in innovation. The .29 data shows that innovative firms 14 .88 s. 45 ri-bu Health Co have more high skilled jobs 50 Ag ns g tru hin compared to non-innovative ot cti Cl .43 on 20 firms (Figure 55). Although there Manufacturing ICT Services is a link between innovative firms 48.28 Textiles 37.5 employee training, it is challenging M 44 ech to establish causality. rism .5 . & Tou 7 8 ele ial 0 1 . de 7 c. ter .53 a a Tr .98 23 ild M 17 r Othe 9 Barriers and Bu 43.5 Challenges Faced by Innovative Firms In order to develop the appropriate recommendations to support innovation, this section examines the unique challenges indicated by innovative compared to non-innovative firms. Figure 55: Innovative vs. Non-Innovative Firms by Labor Skill Level and Training % of firms reporting “yes” 80% 70% 70% 65% 60% 57% 60% 55% 52% 50% 45% 39% 40% 30% 20% 20% 15% 10% 0% Trained full-time non-production employees (manufacturing only) Permanent employees offered vocational training Skilled workers (manufacturing only) Trained full-time production employees (manufacturing only) university degree and higher Employees with Non-Innovative Innovative Source: Author’s calculations, The World Bank Enterprise Survey, 2012. Figure 56: Contribution of Innovative vs. Non-Innovative Firms to High-Value-Added Jobs 80% 64% 67% % of firms reporting “yes” 62% 59% 57% 55% 60% 53% 50% 52% 46% 40% 20% 0% Managerial staff Engineers/technicians Skilled workers Unskilled workers Traders Non-Innovative Innovative Source: Author’s calculations, The World Bank Enterprise Survey, 2012. 42 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Macroeconomic Framework  &D Expenditure and GDP Growth Figure 57: R in Tunisia Compared to non-innovative 8% 1.2% firms, innovative firms consider R & D expenditure (% of GDP) 6% 1.0% the macroeconomic framework 4% 0.8% to be a major/very severe GDP growth obstacle. On the other hand, 2% 0.6% innovative firms as a whole 0% 0.4% 1996 1998 2000 2002 2004 2006 2008 2010 consider issues such as political -2% 0.2% instability, electricity, and access -4% 0.0% GDP growth R & D expenditure to finance to be less of a major/ very severe obstacle. In terms of Source: World Bank WDI, 2012. the macroeconomic environment, innovative firms are particularly vulnerable to shocks and volatility given their exposure to exports, inflation and the financial sector. In addition, as the government focuses on stabilizing growth and managing the fiscal balance, public investments in innovation activities such as R&D take a back seat. Data from the World Bank Development Indicators shows a correlation between public expenditure on R&D and GDP. During Tunisia’s high growth period, between 2002 and 2004, R&D expenditure shot up and continued throughout the next three years when the economy sustained a GDP growth between 5–6%. Labor Force Qualifications Lack of qualifications in the labor force is a significant barrier, but more so in soft skills rather than hard technical skills. This is a problem faced by all firms in Tunisia but it is critically important for innovative firms who Innovative/Non-Innovative Firms by Major/Very Severe Obstacle to Current Figure 58:  Operations 70% 60% % of rms saying “yes” 50% 40% 30% Non-innovative 20% Innovative 10% 0% Telecommunications Transport Access to land Customs/foreign trade regulations Crime Tax rates Relationship with tax authorities Formalities to start business Uncertainty of business regulations Licensing and permits Corruption Courts Access to nance Legislation of employees Electricity Water Supply Political instability Competition from informal sector Macroeconomic framework (in ation/exchange rate) Lack of training and quali cations Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 43 compete in global markets. In the Global Competitiveness Index, Tunisia ranks the highest among comparable countries in the MENA region in terms of availability of scientists and engineers, ranking 8th out of 142 countries globally. It is followed by Jordan at number 20 then Lebanon at 30. However, jobs at the higher end of the value chain also require good communications and marketing skills. Individual one-on-one interviews with business leaders and entrepreneurs indicated that the labor force does not suffer from lack of technicians, ICT, engineering and science specialists. The problem lies in the soft skills such as languages, marketing and communications skills. Figure 58 looks at factors that are indicated by a firm as major to very severe obstacles to operations, including lack of training and qualifications. Access to Finance Access to finance is a major/severe obstacle for very young innovative firms (start-ups) and firms on the verge of high expansion. Overall, access to finance appears to be less of a major/very severe obstacle to innovative firms. Breaking down the results by firm age sheds more light on this issue. Innovative firms up to three years old indicated that access to finance is a major/severe obstacle, at a significantly higher proportion than their non-innovative counterparts. Innovative firms that are ten to fifteen years old have a similar perception of access to finance as a major/severe obstacle (Figure 59). Customs/foreign trade regulations and competition from the informal sector Uncompetitive practices have a strong negative effect on innovation. Figure 60 looks deeper into the uncompetitive practices by other firms that affect innovative firms. These practices mostly relate to violation of property rights/counterfeiting followed by evasion of labor regulations, evasion of customs/tariffs/foreign trade regulations, and tax evasion. Innovative/Non-Innovative Firms and Access to Finance as a Major Obstacle Figure 59:  by Firm’s Size and Age 35 % rms indicating access 30 to nance as major/ 25 severe obstacle 20 15 11.08 10 5 3.59 0 -5 -0.94 -0.22 -3.93 -10 < 3 yrs. 3-5 yrs. 5-10 yrs. 10-15 yrs. 15+ yrs. Firm age Innovative Non-innovative Gap 44 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Innovative/Non-Innovative Firms by Practices of Competitors that Impose Figure 60:  Major/Severe Obstacles % of firms saying “yes” 60% 50% 48% Innovative Non-innovative 50% 39% 38% 40% 32% 31% 29% 30% 23% 20% 19% 20% 12% 14% 10% 0% Labor regulations evasion Preferential treatment in access to credit Other preferential treatment Customs tariffs/ foreign trade regulation evasion Violation of property right/licenses/ counterfeiting Tax evasion The Tunisian Innovation Ecosystem During the past decade, Tunisia made various investments in innovation infrastructure. The building of a knowledge-based economy constituted a key component in the National Development Strategy (2007-2011). The Association de Developpement Technologique Innovation et Production (ADTP) was established to coordinate and lead the national efforts in innovation. Several policy reforms were undertaken in education and the business environment, eight specialized technology parks were built across the country dedicated to the main industrial sectors ranging from biomedical to ICT, and the government also supported the establishment of incubators for every region. Access to the internet was significantly improved, and the country’s Intellectual Property (IP) system was strengthened. Despite all these initiatives, Tunisia still lags behind most comparable countries in the region in terms of innovation and technological advancement. The Bank’s 2010 DPR calls for “critical reforms to strengthen Tunisia’s innovation system that include: (i) adopting a balanced innovation strategy, (ii) enhancing the efficiency and effectiveness of research and development (R&D) spending, (iii) adapting the supply of adequate skills and competencies, and (iv) strengthening the financing of innovation”. Recommendations The data on innovative SMEs in Tunisia, as compared to all other SMEs, point to their positive contribution to job creation, especially at the higher end of the value chain and to exports. As such, there is high merit for the Tunisian government to work on promoting the growth of this group and work on the key issues that they face. The challenges faced by innovative firms are the same as all other firms, but addressing the particular areas that are found to be more challenging for innovative firms can help promote growth and employment generation in the private sector. Tunisia also needs to address Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 45 inefficiencies in its innovation ecosystem. It is beyond the scope of this report to provide a full innovation policy strategy and implementation framework, thus the recommendations below are intended to provide a base for the launching process to transform Tunisia into an innovation-led economy. Science Technology and Innovation (STI) Strategy Tunisia needs to build a strong cohesive STI strategy focusing on the needs of industrial upgrading, productivity growth and technology progress, specifically capacity in technological absorption and assimilation. Key industries like agribusiness, construction and construction material, textiles and ICT should be focus sectors. Putting in place a strong ecosystem for technology, the ICT industry and investment in advanced technology purchases will support innovation and growth in the services, trade and tourism sectors (areas where Tunisian firms show potential) and accelerate technological development of the country’s traditional industries like textiles and clothing. Capacity to absorb and assimilate these technologies must accompany their introduction via mechanisms that ensure knowledge transfer. Policy and mechanisms should also be put in place to increase R&D and the commercialization of the products. Doing all this will not be easy and policy makers should keep in mind that all the successfully innovative economies that exist today took decades to build. However, discouragement is not an option and a country does not have to wait until its innovation system is completed to enjoy prosperity. Tunisians should take comfort in the fact that by achieving this goal the country can begin to reap immediate systemic benefits in employment and development. By using a strategic programmatic approach, where specific investment climate challenges are addressed in the short-term, and broader policy, capacity, and infrastructure bottlenecks are tackled over the medium- and long-term, sustainable development can be achieved. Short-term Access to Finance Innovative Tunisian firms face challenges in accessing financing when they are at the very early stage and at the point when they are experiencing high growth. The banking sector, as well as Microfinance Institutions (MFIs), experienced severe setbacks after the revolution. Since then, specific mechanisms and programs have been put into place to put liquidity into the financial sector and help encourage lending. However, innovative start- ups and SMEs operating mostly in the services sector, where collateral is not available, face a financing gap at the very early stage (0-3 years) and at 46 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 their expansion stage (10-15 years). Tunisia needs to develop mechanisms that would encourage equity investments and angel investors to invest in early start-ups and growing innovative SMEs. Most investors in the region typically support existing firms that have a track record due to a lower level of risk as opposed to early stage firms. Tunisia’s few public-private investment funds have had limited investments in innovative start-ups. These fund managers point out that the private sector is driven by market return and the ability to exit investments in the stock market. In Tunisia, most innovation investments by these funds are in ICT companies that are seeking to expand in external markets. Thus, one of the elements that inhibit private equity investment in early stage firms is the high transaction cost required to develop them. This factor impacts the potential return and ability of fund managers to focus on other investments. The other discouraging factor is the lack of market exit. Innovative ICT companies operate at a very fast pace by nature, where they develop a market-ready concept in six months to a year. The Tunisian SME stock market (Marche Alternative) is not very flexible in that companies must have three years of audited financial statements. Tunisia can learn from the public-private equity funding models that have been developed in the region and in other countries. These funds have addressed the issue of balancing the private sector’s need for profit and the government’s objective for development. Funds and SMEs can also be provided with help to access external markets where they can exit. This requires resources and effort by government agencies like FAMEX/FIDEX to cultivate the diaspora and facilitate their linkage to their host market. Trade Regulations Both trade and property protections are essential for the survival and growth of innovative firms. The enterprise data indicate that the main issues related to both areas are the lack of regulatory enforcement and tax evasion. Innovative firms, unlike established, old family enterprises, rely on equity capital to support their operations more than other firms. They are also more likely to exit in the capital markets. These financial mechanisms require firms to follow transparent practices which put them at a particular disadvantage to uncompetitive practices from other firms. Hence, in addition to being an important agenda for the private sector, proper enforcement of trade regulations and taxes will be very beneficial for innovative SMEs. Fostering the Diaspora Noting that many immigrants maintain linkages with family back home, the country’s large diaspora is a potential source of investment and support during hard times. In the case of Tunisia, efforts must be made to provide an Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 47 institutionalized outreach and coordination mechanism to connect diaspora with entrepreneurs and businesses in their home country. An example of such a program is the Chile Global, which works to connect local entrepreneurs with Chile’s diaspora all over the world. Medium-term Intellectual Property Protection Protection of Intellectual Property Rights (IPR) is very weak in Tunisia and it is imperative for the country to implement an effective IPR system. Until such a mechanism is operational, innovative companies need the support, networking capacity, and knowledge to establish IPR protection externally. This capacity needs to be placed in FAMEX, INNORPI and the Ghazala ICT technopole, since this sector suffers the most from piracy and duplication. Coordination between all these entities will ensure an effective level of protection and enforcement which is particularly important for foreign investment and bringing of technological know-how into the country. Weaknesses in Labor Force Qualifications Taxing firms to provide government programs for skills and vocational training has proven ineffective in many countries. Rather, government can put into place incentive mechanisms and national policy to assist enterprises in attracting and developing high-level talent skills, such as linking talent/skills training to performance, as well as reward and tax incentives for firms to provide training in technology and engineering. One of the most successful post-graduate job preparation training programs in Tunisia is that of the Association of Firms in Technology. The training provided by this Association is led and managed by a leading Tunisian ICT company and an executive member. It provides training in areas that are in demand by the rest of the Association members and the transition to employment for many of those graduates has been made possible through this program. The government should support such programs and integrate incentive mechanisms to encourage other sector associations and groups to do the same. Private sector-led employment training has proven to be more effective than government vocational centers that are often disconnected from the demands of the private sector. Long-Term Research & Development Empirical evidence from developed countries attests to the private returns from investment in R&D, which average 28%17. Thus, there is merit for 17 Wieser, 2005. 48 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Tunisia to develop a framework for priority areas in R&D that meet its national development plan. This should be accompanied by a carefully formulated visionary strategy for a sustainable source of revenue for R&D support, which is not completely exposed to government fiscal volatility. Some governments set up endowment funds through public/private partnerships, allowing both sides to leverage R&D funding. Recent trends have focused on tax incentives to encourage and allow the private sector to invest in commercially viable R&D. Also used in several countries are: customs exemptions, import VAT deductions for equipment used for R&D and testing purposes, and accelerated depreciation of machinery used for R&D. A third component in a sound R&D strategy is how to facilitate the commercialization of new and adapted technology. This will need a strong and streamlined IPR system and a technology transfer office that is clearly defined in scope and objectives. Government-sponsored R&D must have clear criteria and monitoring systems, Performance assessment should incorporate all these elements. Government Investment in Innovation In most countries, the government has been the primary catalyst in promoting and developing innovation systems. For example, governments have direct grant funding as well as direct investment programs for strategic R&D or achievement of economies of scale in a key industry. The government is also an important user of innovative technology. Public procurement policy can be leveraged to promote and encourage innovation and use of innovative products and processes in production. Policies can be put in place where the government would be the first to buy new products developed in the market, ensuring a market for such products. The government can also include incentives for the use of innovative products in large public construction projects and provide criteria in its monitoring and reward mechanism with respect to where knowledge transfer is taking place. Government procurement reforms must ensure a level playing field. They must also open opportunities for SMEs to benefit through rewards to FDI and large corporations that use local SMEs and transfer knowledge and manufacturing of innovative technology to them. Chapter: 3: Innovation Technology & Exports for Private Business in Tunisia 49 Chapter: 4 Labor Markets and Workers Skills Characteristics of the Labor Market In the manufacturing sector, a major part of the formal labor force, about 80%, is active with a permanent, full-time status (Table 5). This does not allow companies to be flexible with their labor force and cope with possible changes in trends. Large companies use less temporary employees than other companies. Similarly, exporting companies may be penalized in international markets by excessive use of a permanent labor force (80%). In contrast, the services and tourism sectors make extensive use of temporary workers – nearly 50% of their labor force. Contrary to what is observed in the manufacturing sector, large companies rely on this type of more flexible labor. Foreign and export companies in these sectors resort far less to these temporary contracts than their Tunisian non-exporters counterparts. The regulatory framework related to the Labor Code can have a major influence on the labor market in Tunisia. Even if more than one in four companies in the manufacturing sector declares that labor legislation is Table 5: Job Category Manufacturing     Sector Services Tourism Permanent, full-time labor force 79.5% 52.4% 51.3% Temporary labor force 20.5% 47.6% 48.7% By Size Small Permanent, full-time labor force 71.8% 57.9% 100.0% Temporary labor force 28.2% 42.1% 0.0% Average Permanent, full-time labor force 70.5% 69.7% 45.2% Temporary labor force 29.5% 30.3% 54.8% Big Permanent, full-time labor force 83.6% 48.5% 55.0% Temporary labor force 16.4% 51.5% 45.0% By Capital Structure Foreign Private Enterprise Permanent, full-time labor force 79.9% 83.8% 84.9% Temporary labor force 20.1% 16.2% 15.1% Tunisian Private Enterprise Permanent, full-time labor force 79.3% 42.2% 45.9% Temporary labor force 20.7% 57.8% 54.1% By Market Orientation Exporter Permanent, full-time labor force 80.2% 73.1% 40.1% Temporary labor force 19.8% 26.9% 59.9% Non-Exporter Permanent, full-time labor force 77.2% 52.4% 53.2%   Temporary labor force 22.8% 47.6% 46.8% Source: Survey of Investment Climate in Tunisia, World Bank, 2012. Chapter: 4: Labor Markets and Workers Skills 51 a major or severe constraint, this particular constraint is ranked in twelfth position among all constraints (out of 20). In the services sector, only 15% of companies consider the current labor legislation as a major or severe problem for business growth (Table 6). The tourism sector does not seem affected by the labor laws at all, and in the three sectors covered by the survey, virtually none of the respondents mentioned labor laws as the biggest obstacle to the proper management of the company. Small businesses seem to be less affected than others by the constraints that may be related to labor legislation. Companies’ market orientation and capital structure do not seem to make a major difference in the evaluation of this constraint. Main Characteristics of Employees: Education and Training The issues of worker education and training and the ability for the economy to absorb this labor have often been placed at the heart of the Tunisian revolution. The fact that a large mass of educated workers could not find a job in the labor market is often cited as a trigger of the 2011 revolution. Overall, the Tunisian educational system seems relatively strong. The literacy rate among adults was 74.3% in 2012. In 2009, the gross enrollment rate was 109% at the elementary level and 90% at the secondary level. However, as shown in Table 7, employee training is a severe problem for Tunisian companies. In fact, over 42% of companies surveyed in the manufacturing sector believe this constraint is an obstacle for the company. Similarly, about 12% of manufacturing companies mention employee training availability as the main obstacle to their economic development. This phenomenon is less apparent in other areas, but it remains problematic. This discontent of entrepreneurs vis-à-vis the quality of the labor force seems to affect businesses of all sizes. However, it seems that foreign Table 6: Constraints Related to Labor Regulations % of companies indicating that the Labor Legislation constitutes a major or severe obstacle Manufacturing Sector Services Tourism Sample 25.61% 15.03% 5.26% By Size Small 15.94% 14.46% 0.00% Average 27.75% 14.55% 11.11% Big 27.19% 23.08% 0.00% By Capital Structure Foreign Private Enterprise 20.41% 18.18% 0.00% Tunisian Private Enterprise 27.24% 14.79% 6.25% By Market Orientation Exporter 25.57% 11.54% 33.33% Non-Exporter 25.68% 14.63% 0.00% 52 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 7: Constraints Related to Employees’ Qualifications Percentage of companies indicating that the availability of employee education constitutes a major or severe obstacle Manufacturing Sector Services Tourism Sample 42.41% 31.58% 25.00% By Size Small 31.88% 26.83% 33.33% Average 47.39% 36.36% 11.11% Big 38.79% 38.46% 40.00% By Capital Structure Foreign Private Enterprise 31.37% 18.18% 0.00% Tunisian Private Enterprise 46.01% 32.62% 23.53% By Market Orientation Exporter 43.45% 34.62% 66.67% Non-Exporter 40.54% 30.33% 23.08% Source: Survey of Investment Climate in Tunisia, World Bank, 2012. companies are less subject to this constraint. As will be seen later, pay attractiveness offered by this type of companies may explain this difference. As indicated in Table 8, the majority of companies have production workers who have on average completed more than seven years of study. Large companies appear to have a slight advantage regarding the education level of their production labor force. In fact, 46% of the production labor force at large companies have completed an average education level of 10 years. Similarly, foreign companies seem to attract more skilled labor than domestic companies. However, exporting companies show a significantly lower level of education than companies targeting the domestic market. Since a significant percentage of businesses suffer from the lack of labor force education, their responses have been analyzed to determine whether formal vocational training has developed in Tunisia. In practice, a little over half of the companies in Tunisia provide formal training to their employees. This ranks Tunisia higher than other countries with recent data available. The proportion of companies providing training to their employees exceeds what is observed in Tunisia, Lebanon, Morocco, and Turkey Table 8: Educational Level of Production Workers Percentage of companies with production workers having averaged the following number of study years 0-3 years of 4-6 years of 7-9 years of 10-12 years 13 years or study study study of study more Manufacturing Sector 2.17% 15.22% 37.92% 38.65% 6.04% By Size Small 0.00% 19.72% 36.62% 38.03% 5.63% Average 3.91% 14.35% 37.39% 38.26% 6.09% Big 0.00% 14.16% 39.82% 39.82% 6.19% By Capital Structure Foreign Private Enterprise 2.00% 14.00% 32.00% 46.00% 6.00% Tunisian Private Enterprise 2.23% 15.61% 39.81% 36.31% 6.05% By Market Orientation Exporter 2.67% 14.50% 38.55% 38.17% 6.11% Non-Exporter 1.32% 16.45% 36.84% 39.47% 5.92% Chapter: 4: Labor Markets and Workers Skills 53 Percentage of Companies Providing Formal Training Figure 61:  60.0 54.3 52.4 52.9 50.0 39.5 40.0 30.0 28.8 24.7 24.9 25.6 23.9 20.0 17.3 10.0 0.0 Algerie Jordanie Maroc Roumanie Maurice Turquie Coree Liban Bresil Tunisie (2007) (2006) (2007) (2009) (2009) (2008) (2005) (2009) (2009) (2011) Source: The World Bank, Enterprise Survey, 2012. Note: Exclusively for companies in the manufacturing sector. (Figure 61). It therefore appears that Tunisian companies are tracking ahead on this issue. Not all companies practice the same policy on vocational training (Table 9). Foreign and exporting companies seem to have a more developed training system, and the vast majority of large corporations try developing training programs to address the shortage of adequate labor force skills. The size of companies seems to be a determining factor in the development of vocational training programs. In the manufacturing sector, production workers benefit the most from on the job and vocational training. However, statistical analysis Table 9: Formal Vocational Training Percentage of companies having provided formal training to their employees Manufacturing Sector Services Tourism Sample 54.3% 56.3% 52.6% By Size Small 34.3% 42.7% 33.3% Average 50.0% 68.5% 50.0% Big 75.0% 92.3% 80.0% By Capital Structure Foreign Private Enterprise 60.2% 63.6% 50.0% Tunisian Private Enterprise 52.4% 55.7% 50.0% By Market Orientation Exporter 58.3% 55.6% 100.0% Non-Exporter 47.4% 55.8% 46.2% % of Employees Trained Workers excluding the production sector 41.3% Workers in the production sector 62.54%     Source: Survey of Investment Climate in Tunisia, 2012. 54 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 conducted so far does not allow simultaneous control of the confounding factors affecting the decision of companies that provide training. We present the results of a regression (decrementation) to fill this gap in Table 10. The study estimates a Probit model on manufacturing data in which the dependent variable is the formal training provided by companies. A set of control variables that capture company characteristics such as nationality, size and market orientation were included. In addition, the economic activity of the company was controlled by including variables such as the total amount of sales made by the company. We also take into account the composition of the labor force. Lastly, a dummy variable is included to control whether the company captures the level of training and competence of employees as a major obstacle to its operation and growth. Dummy variables are also included to control for the type of business of the company. The results show that company size appears to be the main factor determining the decision to offer formal training. The composition of Table 10: The Determinants of Training Dependent Variable Formal Training (1) (2) (3) Constant -0.178 -1.243 -1.346 (0.48) (1.77)* (1.89)* Size of Companies Average 0.377 0.261 0.261 (1.98)** (1.22) (1.20) Big 1.097 0.874 0.868 (4.78)*** (3.20)*** (3.13)*** Labor force % of Non-production employees 0.003 0.007 0.007 (0.76) (1.65)* (1.65)* % of production employees -0.004 -0.001 -0.001 (1.11) (0.26) (0.30) Average level of education of a production employee 0.046 0.050 0.084 (1 if the level is greater than 9 years of studies, 0 otherwise) (0.33) (0.33) (0.54) Availability of employees' training and competence Constitutes a major obstacle (dummy variable) 0.031 (0.21) Other characteristics Logarithm of total sales in 2011 0.051 0.055 (1.13) (1.22) Foreign company 0.007 0.117 0.112 (0.04) (0.64) (0.59) Age of the company -0.000 0.003 0.003 (0.04) (0.56) (0.57) Export company 0.183 0.137 0.157 (1.13) (0.80) (0.90) In manufacturing sector yes yes yes Number of observations 397 342 336 Wald Chi2(10) 35,69 36,090 38,010 Prob>Chi2 0,000 0,000 0,000 Pseudo R2 0,065 0,076 0,082 Note: Robust Standard errors in parentheses, *** significant at 1%, ** Significant at 5%, * Significant at 10%. Chapter: 4: Labor Markets and Workers Skills 55 the labor force, in turn, slightly influences the likelihood to provide training to employees. In fact, most companies have a large proportion of white- collar workers (executives, managers and directors) which results in a high probability of offering formal training. Surprisingly, the fact that managers perceive the level of training and competence of workers as obstacles to smooth operation of the business does not significantly influence the decision to offer training. The size of the business seems to be the only crucial factor and other variables do not appear to be critical in the decision to offer a training system for employees. Hiring Employees This section reviews the impact of the availability of adequately trained labor force on the hiring strategy of companies. Table 11 gives insight on the time required to find and hire a particular type of worker. As can be expected, the higher the level of education and training sought, the longer the hiring process takes. However, some differences exist depending on the type of business. For example, companies operating in the textile sector consistently report much longer recruiting times than the average, regardless of the category of the workers. Conversely, foreign companies seem to have much less difficulty in finding people to hire. Beyond the delays incurred to find a particular category of workers, companies also reported difficulties in the recruitment process. Table 12 shows the possible issues associated with the limited availability Table 11: Delays in Hiring Average time (weeks) to hire an employee in 2011/2012 Executives Senior Engineers/ Skilled Unqualified Commercial Technicians Workers Workers Representatives Manufacturing Sector Sample 10.3 8.9 7.6 6.0 8.8 By Size Small 5.4 2.8 2.3 3.4 2.5 Average 10.4 10.2 8.9 6.3 7.1 Big 11.6 8.6 6.9 6.0 13.4 By Capital Structure Foreign Private Enterprise 5.4 5.2 4.1 3.6 3.5 Tunisian Private Enterprise 11.5 10.0 8.5 6.7 10.3 By Market Orientation Exporter 11.9 10.7 9.0 6.8 11.0 Non-Exporter 6.9 5.4 3.9 3.9 4.8 By Industry Food 5.5 5.0 4.3 3.1 5.9 Clothing 11.4 11.5 8.5 8.9 3.0 Textile 19.4 22.2 15.1 15.1 35.8 Mechanical and Electrical 11.5 9.3 8.1 4.2 7.0 Other Manufacturers 3.5 5.0 5.4 1.4 6.3 Building Materials 14.9 7.2 2.4 2.4 4.6 Construction 1.0 1.0 1.0 - - Source: Survey of Investment Climate in Tunisia, World Bank, 2012. 56 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 12: Availability of Labor Force Percentage of Companies Stating that the Availability of Skilled Labor Force is Limited Senior Engineers/ Skilled Unqualified Commercial Executives Technicians workers workers Representatives Manufacturing Sector Sample 55.8% 58.2% 66.3% 56.0% 50.2% By Size Small 50.0% 45.0% 61.4% 52.1% 52.5% Average 57.3% 58.2% 71.3% 56.9% 46.7% Big 56.0% 64.4% 59.3% 56.3% 55.2% By Capital Structure Foreign Private Enterprise 50.0% 61.3% 68.6% 61.0% 43.9% Tunisian Private Enterprise 57.9% 57.1% 65.4% 54.2% 52.4% By Market Orientation Exporter 53.2% 58.0% 70.2% 60.3% 50.3% Non-Exporter 61.0% 58.8% 58.8% 47.6% 50.0% By Industry Food 52.5% 51.7% 63.6% 60.9% 51.9% Clothing 62.3% 67.8% 77.8% 68.0% 53.8% Textile 61.5% 58.8% 72.5% 51.3% 62.1% Mechanical and Electrical 51.5% 54.7% 47.8% 42.9% 38.3% Other Manufacturers 59.3% 56.7% 67.7% 42.9% 51.9% Building Materials 51.4% 56.8% 70.7% 63.2% 50.0% Construction 0.0% 100.0% 66.7% 0.0% 0.0% Source: Survey of Investment Climate in Tunisia, World Bank, 2012. Table 13: Lack of Experience and Training Percentage of Businesses Stating that experience/training of potential labor is limited Executives Senior Engineers/ Skilled Unqualified Commercial Technicians Workers Workers Representatives Manufacturing Sector Sample 68.8% 71.1% 72.8% 64.8% 63.2% By Size Small 63.0% 56.4% 67.3% 72.3% 53.8% Average 67.5% 72.2% 70.6% 60.8% 61.5% Big 73.9% 75.9% 80.4% 68.5% 71.6% By Capital Structure Foreign Private Enterprise 59.0% 65.8% 68.2% 60.5% 54.5% Tunisian Private Enterprise 72.2% 73.1% 74.4% 66.4% 66.1% By Market Orientation Exporter 68.2% 72.2% 75.3% 68.1% 62.7% Non-Exporter 70.0% 69.1% 67.9% 58.0% 64.2% By Industry Food 63.5% 64.9% 64.6% 59.4% 57.7% Clothing 68.7% 77.2% 81.3% 74.3% 61.8% Textile 70.3% 69.7% 80.5% 63.4% 64.3% Mechanical and Electrical 71.2% 68.2% 67.2% 67.7% 59.2% Other Manufacturers 82.1% 83.3% 81.8% 66.7% 89.3% Building Materials 60.5% 65.8% 63.2% 52.6% 54.8% Construction 100.0% 100.0% 66.7% 50.0% 100.0% Source: Survey of Investment Climate in Tunisia, World Bank, 2012. of labor force while Table 13 indicates whether a particular category lacks of experience or training. The least available category of workers in the manufacturing sector is by far that of skilled workers, followed by engineers and technicians. Note that for managers and unskilled workers the percentage of businesses Chapter: 4: Labor Markets and Workers Skills 57 reporting limited availability is essentially the same. Regarding the skilled worker category, foreign and exporting companies seem to be those most affected by this lack of availability. At the industry level, more than 70% of companies in the clothing and textile industry report issues with this type of labor availability. Skilled workers are those who are most lacking in experience and/or training, according to companies. Again, the most affected companies are foreign and exporting businesses operating in the textile and clothing industry. Employee compensation Compensation data presented below has been provided by the companies and not from individual interviews with employees. These data have been aggregated to each company. Level of Remuneration Table 14 and Table 15 show the average level of monthly earnings for production employees, expressed in dollars using the average exchange rate for 2011. Compensation levels vary greatly across sectors. Manufacturing companies provide on average the lowest monthly salary ($313), which is pulled down by the compensation levels observed in the textiles and clothing industries. Companies operating in the services sector offer much more attractive salaries ($432 on average). This is the direct consequence of the high salaries offered to production workers employed in the ICT sector ($592). The following table (Table 15) shows the increase in salary based on education level, in all three sectors. The relatively high level of compensation Table 14: Monthly Earnings by Sector in 2011 Average monthly gross wage of a production worker (U.S. $)* Manufacturing Sector Services Tourism Agribusiness 330 Clothing 261 Textile 278 Mechanics 341 Building Materials 334 Other manufacturing sectors 329 Construction 585 Commerce 419 ICTs 592 Tourism 312 370 Health 407 212 Total 313 432 362 Source: Survey of Investment Climate in Tunisia, World Bank, 2012. Note: (*) Except social security and other taxes. 58 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 15: Monthly Earnings in 2011 Average monthly gross wage of a production worker (U.S. $) 0-3 years of 4-6 years of 7-9 years of 10-12 years 13 years or Total study study study of study more Services Sector 343,0 301,9 360,0 543,8 432,4 Tourism Sector 382,2 322,3 468,9 361,5 Manufacturing Sector 247,7 292,4 290,2 331,3 434,1 312,5 By Size Small 277,3 287,2 295,7 336,2 291,2 Average 247,7 290,1 285,0 321,5 495,4 307,7 Big 314,3 301,5 374,4 386,9 336,9 By Capital Structure Foreign Private Enterprise 247,7 265,2 293,1 328,4 377,5 309,3 Tunisian Private Enterprise 247,7 299,6 289,4 332,5 456,7 313,5 By Market Orientation Exporter 240,6 275,9 289,0 329,3 393,0 306,6 Non-Exporter 272,5 315,8 292,3 334,9 536,7 322,9 Source: Survey of Investment Climate in Tunisia, World Bank, 2012. previously observed in the services sectors stems from an elevated compensation offered to employees with a high level of education (13 years and more). In the manufacturing sector, there are two levels of educational “return on investment”: the first level at three years of study and second level at 13 years. In fact, companies with a relatively low educated labor force offer a monthly salary equivalent to $248. Beyond three years of study, the average monthly wage rises to $290 for companies where workers have a proven record of up to 9 years of study. Beyond 13 years of education, companies will offer up to $ 434 per month on average. In the manufacturing sector, the average monthly wage increases with the size of the company. Large companies offer $337 to their production workers against $291 in small businesses. Insignificant wage differential is observed between foreign and domestic companies. Surprisingly and contrary to what can be observed in other countries with available data, exporting companies compensate their employees less than companies focused on the domestic market. Wage Structure The above statistics suggest the persistence of substantial wage differentials. It is, therefore, necessary to analyze the factors responsible for this situation. In such a framework, the determinants of wages rely both on the employees’ individual skills and on the company’s intrinsic characteristics. A simple way to separate the respective influences is to estimate wage functions using various specifications (Table 16). Three econometric models were estimated: The first is a variant of the basic Mincer model (1974) that assumes employers are able to discover the differences in productivity between employees on the basis of their human capital, and adjust the Chapter: 4: Labor Markets and Workers Skills 59 Table 16: Wage Determination within a Company Logarithm of the average gross monthly salary of a Dependent Variable production employee   (1) (2) (3) Constant 5.668 5.537 5.202 (135.19)*** (104.62)*** (46.07)*** Labor Force Characteristics Average level of education of a production employee 0.138 0.127 0.125 (1 if the level is greater than 9 years of studies, 0 otherwise) (4.18)*** (3.87)*** (3.75)*** Company Characteristics Average 0.036 0.036 (0.92) (0.92) Big 0.096 0.038 (1.98)** (0.75) Foreign company 0.018 0.047 (0.43) (1.13) Company located in the Greater Tunis area 0.087 0.119 (2.66)*** (3.60)*** Age of the company 0.001 0.002 (1.37) (1.64) Export company 0.067 0.041 (1.80)* (1.11) Companies and their Training Program The company offers formal training (dummy variable) 0.091 (2.82)*** Available training and competence of staff is a major or severe issue 0.021 (= 1 if a major obstacle, otherwise: 0) (0.68) Business Performance Logarithm of total sales in 2011, per employee 0.030 (2.95)*** Sectors yes yes yes Number of observations 531 523 442 R2 0.19 0.24 0.32 Note: Robust Standard errors in parentheses, *** significant at 1%, ** Significant at 5%, * Significant at 10%. compensation accordingly. The second model is more comprehensive and includes, in addition to labor force characteristics, variables representing various company-specific characteristics. Lastly, the third model takes the previous specifications, while also taking into account the employees’ economic performance and the position of the company faced with the issue of the labor force’s lack of training. The results of the econometric estimates (Table 16) clearly demonstrate that when the analysis focuses only on the employee characteristics (column (1)), the level of compensation depends positively on the average educational level of production workers. Note that this effect remains robust to the various different specifications outlined above. When it is assumed that the level of remuneration is dependent on some companies’ intrinsic characteristics (column [2]), it is found that the human capital dimension remains an important determinant in terms of wages. Regarding company characteristics, it is noted that what matters most is the size of the business, its location, and to a lesser extent, its market orientation. Thus, the major 60 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 exporting companies located in the Greater Tunis area offer a higher average monthly wage for their production labor force. The last specification (column [3]) also takes into account the performance of employees by introducing the total sales per employee. Not surprisingly, this last variable is both positive and significant. Companies with more efficient employees are more able to reward them. Given the lack of adequately trained labor force, a company offering formal training to their employees also offers them higher pay. Trained workers increase their productivity while at the same time causing a revaluation of their salary. The scarcity of a well-trained employee seems to have given rise to something comparable to a training bonus. The location of the company in the greater Tunis area plays a positive influence on the level of remuneration. However, the report notes that the variable controlling for the level of constraint represented by a worker’s lack of training or skills has no significant influence on the average wage level. Thus, companies facing this problem do not seem to be trying to attract better-trained workers by offering them a more attractive remuneration. As mentioned above, companies focus more on their internal training scheme to tackle this issue, thus inducing salary increases. The three specifications above are all performed by controlling for the business sector in which the company operates. The following table presents the coefficients and their significance in the most complete specification (Table 17). Only five of these sectors significantly influence the average salary offered to production employees. We have on the one hand construction companies, commercial companies and ICTs providing significantly greater remuneration. On the other hand, the clothing and textiles industries offer smaller salaries. This finding is to be linked with Figure 62 to describe the degree of stress related to lack of training and competence of the labor force by sector of activity. The companies operating in the commerce and ICT industries seem to have fewer issues with workers’ skills. These companies seem to pursue a high pay policy to attract good quality workers. In contrast, the study finds that companies operating in the clothing and textile industries have not opted for a high pay policy. Therefore, they fail to attract enough workers with an adequate level of qualification, and a large part of them are facing severe problems regarding the quality of the available labor force. Companies operating in the construction industry are the ones who claim to be most affected by the lack of properly trained workers (50% of those surveyed). In contrast to the garment and textiles enterprises, it seems that construction companies opt for an ambitious compensation policy to attract workers with adequate training. Chapter: 4: Labor Markets and Workers Skills 61 Table 17: Wage Determination Dependent Variable Logarithm of the average gross monthly salary of a production employee (3) Sectors Food Reference Clothing -0.130 (2.24)** Textile -0.162 (2.47)** Mechanical and Electrical -0.028 (0.51) Other Manufacturers -0.023 (0.33) Building Materials 0.067 (1.07) Construction 0.378 (2.38)** Commerce 0.162 (2.82)*** ICTs 0.352 (4.32)*** Health 0.062 (0.34) Tourism 0.052   (0.74) Note: Robust Standard errors in parentheses, *** significant at 1%, ** Significant at 5%, * Significant at 10%. Figure 62: Constraints Related to the Employees’ Qualifications and Type of Industry 60% 50.0% 46.9% 50% 43.6% 42.6% 41.9% 41.2% 37.6% 33.7% 40% 33.3% 30% 26.1% 20% 14.3% 10% 0% Construction Garment Other Manufacturing Textile Mechanic and Electric Building Material Agri Business Commerce ICT Tourism Health Source: The World Bank, Enterprise Survey, 2012. Labor Taxation Workers’ compensation only partially reflects the true cost of labor for businesses. The following chart shows the different tax rates applied to wages. To a large extent, income tax is collected through withholding. This de facto transforms it into the cost to the employer. There are, however, many exemptions. These exemptions preferentially apply to sectors considered “booming” and to companies that recruit Tunisian workers. Thus, exporting companies are exempted from the government’s Special Funds. Companies that recruit Tunisian employees with two years of post-high-school education (“Bac +2” level) are totally exempt from payroll taxes for 5 years. Companies 62 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Figure 63: Labor Taxation 1.0% 1.0% 0.5% 1.0% 1.0% 0.5% 16.3% 19.2% 15.5% 15.5% 65.7% 62.8% Income Taxe Income Taxe Employer Contribution to Social Security Employer Contribution to Social Security Vocational Training Taxe paid by employer Vocational Training Taxe paid by employer Others Others creating new work teams and companies recruiting Tunisian personnel holding at least a “Bac +4” level diploma are exempt at 50% from payroll taxes for 5 years. These policies indicate a clear ambition to fiscally help companies hire graduate workers. Conclusions and Recommendations The major issue of the labor market in Tunisia appears to be a typical problem between supply and demand. The country has a population of graduates that are not engaged in a particularly important activity. On the other hand, the survey noted a very large number of companies complaining about the many difficulties (e.g., availability, delays, training, and/or experience) they face when hiring employees. Education and type of training undertaken by the youth seem more suited to positions in the public service. However, the public does not appear able to absorb such a large amount of labor force. The report therefore recommends a strategy aimed at matching labor supply and demand. From this point of view, the example of skilled workers is very striking, especially in the clothing and textiles sectors. Both sectors must first improve their very negative brand image and convince graduates of the attractiveness of these industries. A communication campaign at the company level should be implemented in the short-term, to increase awareness of job profiles sought by companies. Symmetrically, the state should also better communicate its needs for labor, thus better influencing the career choices of prospective students. In the longer term, companies need to forge much closer links with universities, schools, and training centers. These “training providers” are Chapter: 4: Labor Markets and Workers Skills 63 required to show a fine knowledge and reactive demand from businesses. Companies and the state must also coordinate to establish a genuine block- release training program. In this sense the study recommends further tax incentives for hiring young graduates without experience. Symmetrically, the State could reduce taxation on the amounts incurred on the companies’ in- house training programs. In terms of remuneration, the lack of available labor in some sectors (ICT) pushes the proposed salaries upwards. This makes employment opportunities even less attractive, and thus the training choice of future workers in sectors such as textiles and clothing. Regarding the education system, Tunisia should continue to offer high level education to as many people as possible. However, the system should adapt its teaching system into shorter and more practical training schemes ensuring far better “employability” in line with the needs of private companies. In addition, a major effort remains to be done regarding the quality of training courses, as these are still being considered very disparate and opaque to both employers and students. The National Agency for Employment and Autonomous Work (Agence Nationale de l’Emploi et du Travail Indépendant) should not only fulfill its role of providing unemployment benefits, but also fully embrace its role of an organization capable of matching supply and demand for labor. The Agency should focus particularly on certain categories of job seekers, such as graduates, rather than treating all applicants on an equal footing. Personalized support of the job seeker must be implemented to facilitate the hire and/or proper training. The government should also facilitate labor mobility by allowing companies to adapt their labor force to economic shocks and by implementing social safety nets to improve the consumption level of the unemployed. This is why a revision of the Labor Code focusing more on income protection rather than labor protection would help improve labor mobility. 64 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Chapter: 5 Infrastructure Challenges Facing Firms in Tunisia Electricity Reliable and predictable provision of infrastructure services is essential to help firms maintain a competitive position. The authorities have an essential role to play in regulating infrastructure services and assuring that public goods are provided adequately. Although the Tunisian Government has been developing electrification in Tunisia, particularly in rural areas, reliable access to electricity remain a challenge to many firms in Tunisia. Lack of access to electricity is perceived as a leading constraint to firm operations in Tunisia. As noted previously, access to electricity is ranked as the fifth leading constraint to businesses in Tunisia, with one third of firms citing it is a major or very severe constraint. Firm perception of such constraints varies by location within Tunisia (Figure 64). For instance, close to 44% of firms in Region D (which includes the cities Jendouba, Beja, Kef, Siliana, Sidi Bouzid, Kasserine, and Kairouen) perceive electricity as a major or very severe constraint, as opposed to 29% of firms in Region A (Ariana, Tunis, Manouba, Ben Arous, Bizerte, Nabeul), 34% in Region B (Sousse, Mahdia, Montasir), and 31% in Region C (Sfax, Gabes, Mednine). Looking at power indicator  ercentage of Firms Rating Figure 64: P “Electricity” as a Major or Very across regions covered by Severe Constraint the surveys confirms the 50.00 43.9 perceptions of firms with 45.00 40.00 regard to regional differences 35.00 33.5 29.3 33.9 31.4 30.00 (Table 18). Businesses located 25.00 outside the main region of Greater 20.00 15.00 Tunis are more handicapped 10.00 across most indicators measuring 5.00 0.00 the reliable delivery of power. Tunisia all Tunis Sousse-Mahdia- Monastir Sfax-Gabes- Mednine Jendouba-Sidi- Bouzid The region covering Jendouba/ Sidi Bouzid/Kaasserin/Kairouan appears particularly affected; firms in this region are subject to Source: The World Bank, Enterprise Survey, 2012. Chapter: 5: Infrastructure Challenges Facing Firms in Tunisia 65 Table 18: Electricity Loss by Region   Tunis Region Region B Region C Region D Power interruptions (Number of times last year) 4.5 5.1 8.2 8.6 Losses due to power interruptions (% of annual sales) 1.1 2.9 2.4 3.9 % firms with a generator 16.8 25.8 18.2 14.3 Delays for electrical connection (Days) 73.0 26.2 60.8 54.8 Length of power interruption (hours) 7.1 3.3 9.2 7.2 twice as many interruptions as in the Greater Tunis area, resulting in three times more losses than the national average Furthermore the delays for obtaining an electrical connection varies significantly by location, where the longest are found in the Grand Tunis area (73 days), followed by 61 days in Sfax, Gabes, and Mednine. Besides regional differences, another important factor seems to be long delays. Access to electricity is reportedly slow, taking an average of 59 days, which is one of the highest regionally. Waiting for two months means that despite the relatively low/easy business registration process in Tunisia, electrical connection delays and further hinders new firms wanting to begin their operations. Long delays in the delivery of services create more space for discretion. The ICS interviews with private firms indicated that “petty” corruption when dealing with public enterprises in position of monopoly, such as electricity, is a major source of barriers to business development.18 According to the Investment Climate survey, 17% of the firms are expected to make informal payments in order to obtain an electricity connection, a relatively high figure when compared to other MENA countries (Figure 65). The level of petty corruption in Tunisia is highest in small (24%) and medium (21%) vs. large firms (only 5%), as well as firms in Jendouba, Beja, Kef, Siliana, Sidi Bouzid, Kasserine, and Kairouan (44%). The quality of power supply appears overall reliable. International comparison of the power supply indicator show moderate weaknesses when compared on an international and regional basis. For instance, in terms of power outages, Tunisia and Brazil share similar figures. Tunisia has one of the least interrupted power supplies in MENA, with an average of only six power outages per year. The losses resulting from these outages are also one of the lowest in MENA at three percent of sales. Due to the high quality and efficiency of government supplied electricity, only 19% of Tunisian firms own a generator (Table 19). This puts Tunisia ahead of countries like Morocco, Algeria, Egypt, Syria, Lebanon, and Yemen. 18 World Bank, “Barriers to Private Firm Dynamism in Tunisia: A Qualitative Approach”, Hamouda Chekir and Claude Menard, September 2012. 66 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Wait Days and Informal Payments for Obtaining an Electricity Figure 65:  Connection in MENA 140 100 118 90 120 80 100 70 Number of days 60 80 Percent 50 59 60 49 40 32.4 32.0 40 40 30 16.9 20 17 18 19 20 14 11.5 8.9 5.1 5.0 5.3 10 4 7.7 0 0 Egypt Jordan Iraq Turkey Morocco Romania Algeria Tunisia Lebanon Days to obtain Was a gift expected? Source: The World Bank, Various Enterprise Surveys. Table 19: Power Supply Indicators Brazil Chile China Egypt South Arica Morocco Turkey Jordan Tunisia Power Interruptions (Days) 7.2 2.7 NA 21.1 5.9 2.7 10.2 3.2 6.63 Losses due to power 3.1 3.5 4.2 7.4 3.7 3.3 2.3 3.24 2.87 interruptions (% of annual sales) % of firms with a generator 17 25.6 18.3 19.3 9.5 16.3 NA 14.77 18.9 Delays for electrical 22.6 35.3 NA 107.9 7.3 18.8 6.1 45.12 63.51 connection (Days) Length of power interruption (hr) 5.8 2.57 NA 2.9 4.1 1.8 5.6 2.17 6.76 Regional differences and delays are contributing factors in explaining the reason behind Tunisia’s rating of electricity as a high constraint, but these factors alone do not account for the level of complaints associated with electricity. In particular, the prices of industrial and commercial electricity in Tunisia are among the highest in the MENA region. High electricity prices are a serious concern for firms, particularly among the energy intensive manufacturing sectors. Telecommunications The development of telecommunications in Tunisia has an important aspect of the country’s development strategy. Policies including regulations aimed at opening other sectors and the development of ICT infrastructure have been in place since the early 2000s. Today, despite the element of capture that this industry has been subjected to (it is known and documented that the license to exploit mobile and internet provision were attributed to elements close to the Ben Ali regime),19 telecommunication infrastructure and 19 World Bank, “Barriers to Private Firm Dynamism in Tunisia: A Qualitative Approach”, Hamouda Chekir and Claude Menard, September 2012. Chapter: 5: Infrastructure Challenges Facing Firms in Tunisia 67 delivery appears adequate to the needs of firms. In fact, Tunisia has some of the best ICT indicators in the MENA region. The ICS shows that usage among firms in Tunisia is widespread, with one of the highest number of cellular mobile and Internet subscribers in the region. According to the ICA survey, telecommunications were not cited by firms as a significant constraint. However, Tunisia has been subjected to Internet outages during and in the aftermath of the political turmoil, resulting in a much lower intensity. Telecommunications seems to be a moderate concern for firms, as 22% have rated it as a major or severe constraint. The impact of telecom interruptions on small firms was the highest. Even though small firms witnessed a relatively lower number of telecom outages (seven times/year), the average duration of the outage was the highest (48 hours), resulting in a loss of 4% of total annual revenues. The frequency and duration of such outages on medium and large firms are considerable as well. Internet usage for business operations is high among Tunisian firms. A vast majority of firms in Tunisia use email (96%) and have their own website (70%). Additionally, 89% of firms have an Internet broadband subscription. Firms mainly use the Internet to communicate with customers and suppliers (98%), provide services to customers (87%), and make purchases related to the needs of the institution (86%). Some firms also use the Internet for research in innovation of products and services (77%). According to the World Development Indicators (WDI), Tunisia is among the highest Internet users in the region (lagging only behind Morocco and Lebanon). Tunisia also has one of the highest numbers of mobile cellular subscriptions in MENA (Table 20). Telecom Indicators in Tunisia, by Firm Size Figure 66:  60 50 48 40 30 23 20 17 18 13 11 11 10 7 4 2 1 1 0 Freq of telecom outages last year Average duration of telecom Loss as percent of total annual outages (hours) sales due to telecom outages Tunisia Small Medium Large Source: The World Bank, Enterprise Survey, 2012. 68 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 20: Telecom Indicators, Tunisia and Comparators Internet users (per 100 people) Mobile cellular subscriptions (per 100 people) Algeria 14 99 Yemen 14.9 47 Syria 22.4 63 Egypt 35.6 101 Jordan 35.7 118 Tunisia 38.8 117 Morocco 51 113 Lebanon 52 79 Source: World Bank, World Development Indicators, 2011. Water Water remains a long term development issue for the country, even though a relatively modest number of firms report owning a well (25%). About 65% of all water need is sourced from a public water system, usually an indication of sound water management. As a result, few firms invest in self-provision of water and consequently water is not rated as an obstacle by Tunisian enterprises. However, obtaining a connection can be a lengthy process. On average, obtaining a water connection in 2012[?] took almost 2 months, with considerable variation depending on region. It can take up to 50 days for firms located in the greater Tunis region and 52 days for Region C, compared to 25 and 18 days for Regions B and D, respectively. Table 21 shows the delays for water connections by region. Table 21: Delays for Water Connections across Regions Tunis region Region B Region C Region D Delay for a water connection (days) 50 25 52 18 Conclusions and Recommendations Overall the quality of infrastructure, as measured by ICS indicators, appears adequate, noting issues of regional disparities for the provision of electricity and to a lesser degree telecommunications. There are, however, challenges associated with lengthy delays for the connection to infrastructure services which create more space for discretion. This was particularly evident in the instances of informal payment requests in the provision of electricity and water. In order to consolidate its relative comparative advantages, Tunisia will have to strengthen its transport/infrastructure network and bring more transparency in the process of provision of infrastructure services. This can be done with stronger local oversight of procedures and introducing the possibility of recourse if delays exceed an agreed upon period for the provision of infrastructure related services. In addition, the authorities may wish to address the issue of regional disparities with regard to the quality and reliability of electricity, telecommunication and water. Chapter: 5: Infrastructure Challenges Facing Firms in Tunisia 69 Chapter: 6 Access to Finance The Tunisian Financial Sector The Tunisian financial sector is small and dominated by banks, with assets equal to about 115% of GDP. This figure is somewhat lower than those of its regional peers such as Egypt, Jordan, Lebanon, and Morocco. There are 21 on-shore banks, including three large state-owned banks with 37% of banking sector assets; three large private domestic banks with 28% of total assets; and six foreign-owned private banks with a 28% share. More than half of total bank credit is provided to firms in the industrial, trade, and tourism sectors. A large part of the remaining credit appears to be provided to the public sector. The non-bank financial sector is relatively small. The equity and fixed-income markets are still relatively modest, with a market capitalization equal to 24% of GDP, lower than in regional peer Structure of the Banking System; Figure 67:  countries such as Jordan (112%) Share in Total Outstanding Credit and Morocco (76%). Private equity remains small. The leasing sector, with nine institutions, accounted for 15.5% of private gross fixed 34% capital formation in 2010. 41% Although State-owned banks provide credit universally, they 25% maintain a development role. The ICA results show that State-owned banks compete with the private Public banks Foreign private banks banks on all the different segments Domestic private banks of the firms market. However, they Source: Central Bank of Tunisia. are more active in some specific segments such as the financing of new investments for small firms (50% market share), the financing of the tourism sector (50% market share) and the financing of firms located in underserved regions (64% market share). Despite the economic downturn that started in 2011, financial intermediation remained relatively high by international and regional standards. It increased slowly but steadily from 2006 to 2009, and then Chapter: 6: Access to Finance 71 Figure 68: Evolution of Credit to GDP 100 80 60 40 20 0 Tunisia Malaysia Turkey Mauritius Romania Egypt Lebanon Morocco Jordan Source: World Development Indicators. more rapidly since 2010. This progress was made possible thanks to a sharp decline of non-performing loans, which dropped from 21% to 12% between 2005 and 2012. The Central Bank of Tunisia Figure 69: credit to private sector adopted contra-cyclical 90 measures to support access 80 to finance. It is worth noting that 70 banks continued to extend credit 60 to firms in the first two years that 50 followed the Revolution, although 40 at a slower pace. This was 30 20 largely due to the contra-cyclical 10 measures implemented by Central 0 Bank, illustrated by a significant 2006 2007 2008 2009 2010 2011 2012 increase of its collateralized Source: World Development Indicators. short-term loans to banks, a sharp reduction of mandatory reserves and successive cuts of Central Bank interest rates. These measures offset the liquidity squeeze faced by the banks in the aftermath of the revolution. The Central Bank of Tunisia also adopted a circular strategy allowing the Tunisian banks to avoid NPL classification for the restructured loans resulting from the economic difficulties. As a result, NPLs ratios and provision needs remained artificially stable, as well as the solvency ratios. However, this prudential measure masks the growing vulnerability within the banking system and, as a consequence, may jeopardize the confidence of the stakeholders, namely the depositors, lenders, and shareholders. Major Impediments to Firms Access to Finance This paradox of a relatively high percentage of firms using bank finance and a relatively high rate of finance as a perceived constraint) 72 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 can be explained by a combination of several factors: i) inefficiencies in the bankruptcy regime, ii) an outdated collateral regime, iii) an insufficient competition amongst banks, iv) a low quality in the credit demand and v) a limited credit information sharing system. Inefficiencies in the Bankruptcy Regime Historically high levels of NPLs, compounded by civil unrest and high bank exposure, imply that Tunisian businesses are generally experiencing financial distress and an overall de-leveraging, and are unable to access additional credit to finance operations. Tunisia’s bankruptcy framework is thus of critical importance in improving stakeholder recovery, reducing creditor risk and facilitating asset disposal. Tunisia currently has two laws dealing with restructuring and bankruptcy, setting out the provisions on business rescue. These regulations have resulted in a fragmented bankruptcy regime with duplicate and overly lengthy processes for business rescue and business exit. Mindful of this major impediment, the Government is preparing a new legal framework aimed at achieving a better balance between lender and borrower. Outdated Collateral Regime A sound collateral regime is essential to facilitate firms’ access to credit as lenders want to recover, in part or in full, their loans if a borrower defaults. In Tunisia, lenders use a very narrow range of securities, limited to mortgage and personal guarantees. There are multiple reasons for this, instead of reliance on particular instruments, chief among them difficult collateral enforcement, a complex legal framework, and lack of a [credit?] registry. As collateral enforcement is known to be very slow and costly, lenders have no incentive to take security that would be more sensitive to time and costs (which is the case for movable, tangible and intangible assets, which can fluctuate very rapidly). Also, the legal framework regarding security is complex and based on the principle that parties could not agree contractually beyond what is expressly allowed by law. If there were a centralized collateral registry, some of these uncertainties could be avoided. Insufficient Competition in the Banking Sector Until recently, most banks were allowed to carry out their activities without meeting risk management standards and key regulatory requirements. This situation is changing as the Central Bank of Tunisia has started tightening prudential requirements and strengthening their enforcement. Nonetheless, the regulatory and prudential framework permitted the survival of relatively weak credit institutions with limited skills and resources to manage risks and innovate in new products as well as in new processes. As a result, Tunisian Chapter: 6: Access to Finance 73 banks are competing on a narrow range of products while limiting their risk by over-collateralizing their loans. In this context, State involvement in the banking sector has been an additional undermining factor. Although State participation in banks has decreased over the last decade, it still plays a critical role directly through State-owned banks and indirectly through State-owned enterprises (which are important clients of all commercial banks, both as debtors and as depositors). Recapitalizations of public banks initiated by the State, without changing their governance structure, have created additional distortions vis-à-vis other commercial banks. Low Quality of the Credit Demand and Risk Assessment According to the ICA survey, only 31.9% of firms had their financial statements certified by an external auditor. In addition, non-audited firms’ financial statements are generally of poor quality and not reliable. For private firms, having certified financial statements would increase the probability of using a loan by seven percentage points. For small firms, having audited financial statements would increase this probability from 12.8% to 29.8%. In addition, banks complain about the poor quality of loan demand, pointing out the lack of managerial skills of borrowers. Finally, although the Central Bank made it mandatory for banks to establish a dedicated SME unit, few of them have actually invested in capacity- building (e.g., training of loan officers, sectoral and economic studies, credit risk assessment technologies) to really improve their ability to lend to SMEs. Firms’ Access to Finance The use of bank finance is high by regional comparison (Figure 70). The ICA results show that 54.7% of surveyed firms have a loan from a financial Percentage of Firms Using Bank Finance a) by Regional Comparison Figure 70a and b:  b) by Size 100% 100% 8.9 11.7 90% 19.3 17.1 17.3 90% 16.2 28.5 24.3 25.2 80% 39.8 80% 24.1 70% 30.0 28.1 70% 30.0 60% 56.8 60% 47.3 30.1 50% 61.2 50% 40% 58.2 40% 47.9 30% 30% 64.1 52.9 54.7 53.9 20% 20% 44.7 33.4 34.3 10% 10% 12.3 13.3 14.6 0% 0% Morocco Lebanon Medium Jordan Tunisia Yemen Egypt Large Small Syria Have loans Voluntary exclusion Do not have loans Has a loan Voluntary exclusion Doesn’t have loans Source: The World Bank, Enterprise Survey, 2012. 74 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 institution. Tunisian firms finance  ercentage of Firms Rating Figure 71: P 63.8% of their working capital “Access to Finance” as a Major or Severe Constrain and 55.3% of their investments 70 using internal funds. The use 60 of bank loans depends on the 50 characteristics of the firm. Large 40 33.90 firms tend to rely more on bank 30 credit (64.1% report having a 20 loan), than medium (53.9%) and 10 small firms (44.7%). 0 Iraq Libya Egypt Yemen Algeria Tunisia Jordan Lebanon Despite the contra-cyclical measures implemented by Source: The World Bank, Enterprise Survey, 2012. the CBT, access to finance Percentage of Firms Audited, and Percentage of Firms Having a Loan Figure 72a & b:  (Audited/non-Audited) 100 40 90 86.3 35.31 35 79.6 80 30 28.06 70 25 60 54.6 50 20 40 31.9 32.2 15 30 10 20 5 10 0 0 Tunisia Yemen Syria Lebanon Jordan Has a loan Doesn’t have a loan Source: The World Bank, various Enterprise Surveys. continues to be perceived as a leading constraint by firms, especially for SMEs. According to the ICA survey, over 34% of firms rate access to finance as a major or very severe constraint. As in most countries, this perception is related to the size of firms; small firms are generally more likely to identify access to finance as a serious constraint than are large firms. However, in Tunisia, it is worth noting that more medium sized firm’s rate access to finance as a major or very severe constraint (36.7%) than small firms (33.5%). Limited Credit Information Sharing Tunisia has long established a Public Credit Registry (PCR) that is accessible to all the banks and leasing companies. However, this financial Chapter: 6: Access to Finance 75 infrastructure does not provide sufficiently reliable data to allow the lenders to undertake a solid credit assessment (especially for consumers and MSMEs). Data returned to lenders is in an aggregated form which lacks credit history details. Not all data on credit facilities is included (e.g. credit cards). There are data quality issues due to weak validation mechanisms and checks, among others. This has made it difficult for financial institutions to utilize the PCR to the fullest, to better assess loan applications. Moreover, non-regulated entities do not contribute data to the PCR (e.g. microfinance institutions, telecoms, retailers, utilities, etc.) which further deprives banks (and the other lenders) from conducting sound credit risks assessments. Over-collateralization excludes numerous firms and businessmen from access to finance. Given all the constraints listed above, Tunisian credit institutions try to mitigate their lending activities by demanding a high level of coverage by collateral (mainly mortgage). Tunisia has the highest collateral requirements amongst MENA countries. This strategy, which was proven insufficient to protect the banks against defaulting borrowers20, tends to exclude firms and businessmen which do not own the required collateral. The establishment eight years ago of the SOTUGAR, a partial credit guarantee scheme, and the BFPME, a public credit institution focused on startups, only marginally addressed this issue. Figure 73: Collateral Requirements 200 180 160 140 Egypt 120 Jordan 100 Syria 80 Morocco 60 Lebanon 40 Algeria 20 Tunisia 0 Average Value of Collateral Required as a Percent of Firms that Require Collateral Percent of Loan Value Source: The World Bank, various Enterprise Surveys. 20 With a NPL ratio of 13%, Tunisia is among the worst performers in the MENA region. 76 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Chapter: 7 Policy Recommendations Evidence shows that the Tunisian model of growth is limited. Its incentives have proved increasingly costly and in most cases have stifled innovation, weakened linkages and created space for weak governance and discretionary behavior. A transition is needed towards an even playing field in terms of incentives and firm treatment that promote stronger linkages, more efficient transfers of technology and moving up the value chain. A gradual approach to remove some of the incentives associated with the off-shore sector must be undertaken in parallel to measures designed to alleviate some of the most binding business environment constraints. The report has identified four main areas of intervention with steps laid out in the section below: (i) Employment; (ii) Regulatory Environment; (iii) Innovation and Entrepreneurship; and (iv) Access to Financial Services. Employment Tunisia’s past economic growth and successes in trade have not been translated into sustainable, high skill job growth. An implication of the growth model Tunisia pursued is that many jobs tend to be low skilled jobs in industries feeding upper level manufacturers in Europe. Actions must be taken to increase the number and the quality of jobs in order to address the increasing unemployment in this politically volatile country. The report recommends the Tunisian Government undertake the following: ™™ Encourage businesses and SMEs to hire local labor by adopting tax policies, continuing the practice of targeted incentives for new graduates and reducing or eliminating training taxes. ™™ Provide incentives and business development services to college graduates, young entrepreneurs, and skilled technicians to set up start-up companies, even with limited scope, in order to encourage innovation and enterprising projects. Chapter: 7: Policy Recommendations 77 ™™ Offer incentives to foreign companies and manufacturers who choose Tunisia as the location of their R&D efforts. ™™ Reduce the information gap between supply and demand of employment. Suppliers, such as academic and vocational training centers, need to acquire a more acute understanding of employer requirements. This can be achieved if public institutions and the private sector coordinate their actions to put in place relevant training programs. ™™ Encourage the National Agency for Employment and Independent Work to better target job seekers such as new graduates in order to provide the services according to different types of profiles. ™™ Adapt the Labor Code to allow more flexibility, while protecting workers. This could be achieved by adopting a mechanism based more on income than employment numbers. Regulatory Environment Tunisia’s institutional dysfunctions facilitate corruption which is transmitted throughout the multiple interactions between the bureaucracy and firms. There is significant space for discretion in the application of the law by bureaucrats and politicians. Even though the political elites associated with the previous system of cronyism have been removed, a culture of discretion still persists throughout the country, providing fertile ground for profiteering and corruption. In order to fight corruption, it is essential to remove institutional incentives that facilitate misconduct. Tunisia must make rules, procedures and interactions as transparent as possible. Clarity of regulations, standardized and transparent procedures and service standards for administrative approvals are among the measures proposed below and can help to address the uncertainty faced by businesses regarding the application of regulations that apply to them. The report recommends the Tunisian government undertake the following: ™™ Continue customs reforms. The process, which began in 2006, has the potential of increasing economic activity and inspiring the business community by reducing trade barriers and opportunities for corruption. Specifically, reforms for upgrading the customs information system and introducing a comprehensive computerized risk management system designed to reduce human intervention in 78 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 customs activities will increase efficiency, transparency and improve governance. These reforms could be the catalyst for a meaningful and broader regulatory reform process. ™™ Reduce discretionary margins by increasing accountability through imposing deadlines and explicit recourse alternatives to help govern the interaction between the administration and enterprises. ™™ Simplify procedures by eliminating overlap and the multiplicity of agents, particularly those that relate to trade and fiscal incentives. For instance, standardization and automation of forms and procedures can contribute significantly to remove the human “error” margin. This would shift the centralization focus from the authority to standards and mechanism. A uniform mechanism must be applied for all applicants, which will reduce discrepancy and eliminate the power of individuals in the bureaucratic process to practice discrimination. ™™ Reduce uncertainty in the market by sending clear signals and avoiding the multiplicity of strategies and programs typical of Tunisia in recent years. Such reform will serve to signal a more even playing field and remove incentives associated with re-exports. ™™ Ensure predictability of key service delivery and reduce their delay, including: operating licenses, import licenses, construction permits, and electricity connections. Innovation and Entrepreneurship The evidence and analysis confirm the positive contribution of innovative SMEs to the job creation process. This report has identified the major challenges innovative SMEs face because of instable macroeconomic conditions, lack of a skilled labor force, weak financial markets, trade regulations and property protections. The report recommends [the Tunisian Government undertake?] the following: ™™ Set up non-government funds to provide grants and financing to innovative SMEs. The process can be facilitated by: ƒƒ Allocating a budget to fund these centers by the government. ƒƒ Offering tax incentives to these organizations. ƒƒ Forming partnerships between stakeholders of economic growth, governmental agencies, private sectors and local communities to encourage the forming of innovative SMEs. Chapter: 7: Policy Recommendations 79 ™™ Define training standards for skills-based programs, which can be adopted by existing institutions and meet the labor needs of the business population at large. The accreditation process should be independent from the government and granted through an association of the stakeholders and institutions. ™™ Form a partnership between internationally recognized institutions/ centers and Tunisian institutions to serve as the main source of providing technical and expert advice on training programs and training standards. ™™ Develop a source of revenue for R&D support which is not completely exposed to government fiscal volatility. The Tunisian government may consider setting up an endowment fund through public/private partnerships or implementing tax breaks to support R&D. ™™ Develop mechanisms that would encourage equity investments and angel investors to invest in early start-ups and growing innovative SMEs. This includes developing public-private investment funds, linking start-up firms to existing early stage financing funds, promoting diaspora finance in tech-oriented startups, and increasing the role of FAMEX/FIDEX to cultivate access to external linkages for foreign firms. ™™ Strengthen Intellectual Property (IP) protection frameworks and providing support to firms to manage IP issues through government institutions including FAMEX, INNORPI, and Ghazala ICT. Access to Financial Services The ICA reveals that adequate infrastructure exists in Tunisia to promote innovation and business growth. However, the existing infrastructure has not been utilized to its full potential, partly because of the flaws in the procedures to finance innovative SMEs and business expansion. It seems that the banking industry still treats innovative SMEs like any other business projects, thus discouraging potential entrepreneurs. The report recommends the following: ™™ The banking sector adopt a risk assessment process similar to the ones used by venture capital businesses to assess the true risks associated with new SMEs. ™™ A new horizon for returns on investment must be formulated, which takes into account the risks associated with the innovative SMEs. 80 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 ™™ The banks must be encouraged to enter into partnerships with innovative entrepreneurs, providing them with their expertise on financial management, accounting and human resources management. This will reduce the risk faced by entrepreneurs and provide Tunisian banks with valuable insights and understanding of challenges facing SMEs. ™™ A standardized system for collateral should be implemented, to reduce barriers for SMEs and create a more equitable borrowing platform. This system would create a benchmark through a comprehensive legal framework, allow for collateral enforcement, and facilitate access to information through a collateral registry. See Figure 74 for graphical representation of recommendations. Figure 74: Better Access to Finance in Tunisia: Key Policy Recommendations Strengthening of Prudential Regulation and Enforcement Banking Sector Restructuration of the Competition State Owned Banks Better Access to Reform of the Bankruptcy Regime Reform of the Colateral Regime Improved (including a Centralized Financial Collateral Regitry) Infrastructure Modernized Credit Information Sharing System Chapter: 7: Policy Recommendations 81 Annex: I Standard Tables Table 22: Survey Sample Structure Tunisia (Manufacturing and Services) - 2012 Total of 600 firms Firm Size (%) Sector Percent Percent Small (>=5 and >=19 emps) 26.9 Manufacturing 70.7 Medium (20<= × <99 emps) 50.3 Services 26.0 Large (100 + emps) 22.7 Tourism 3.3 Ownership structure % Firm Location (%) Percent Governorate Percent Private domestic 83.8 Region A (Grand Tunis: Ariana, Tunis, Manouba, Ben Arous, Bizerte, 39.8 individuals, companies or nabeul) organizations Private foreign individuals, 15.3 Region B (Sousse, Mahdia, Montasir) 20.5 companies or organizations Government or State 0.2 Region C (Sfax, Gabes, Mednine) 20.3 Other 0.7 Region D (Jendouba, Beja, Kef, Siliana, Sidi bouzid, Kasserine, 19.3 Kairouen,....) Ownership structure % Industry Percent Percent Government Owned 0.7 Food 14.7 > = 10% Private 99.3 Garments 16.2 Ownership structure % Textiles 9.3 Percent Electrical and mechanical industries 14.7 Foreign Owned >= 10% 19.7 Other industries 6.5 Domestic 80.3 Building materials, ceramics, and glass 8.7 Market Orientation % Commerce 15.5 Percent Tourism 7.7 Exporters >= 10% 51.2 ICT 5.0 Non-Exporters 48.8 Construction and public works 0.7 Principle owner’s gender Health 1.2 Percent Corporate form Female 38.9 Percent Male 61.1 Shareholding company with shares trade in the stock market 27.0 Top manager’s gender Shareholding company with non-traded shares or shares traded 66.0 privately Percent Sole proprietorship 0.7 Female 31.6 Partnership 0.0 Male 68.5 Limited partnership 1.3 Other 5.0 Annex: I: Standard Tables 83 84 Table 23: Globalization of Markets and Inputs Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Percent of Sales National sales 62.6 85.3 57.4 46.4 72.4 22.5 99.6 26.9 62.9 62.7 51.0 68.0 55.6 49.7 80.8 70.8 51.7 90.7 86.9 Indirect exports 10.8 6.6 13.7 9.4 10.2 13.3 0.1 21.0 10.5 11.1 15.2 8.8 9.4 14.8 6.5 14.0 14.4 2.0 0.0 Direct exports 26.9 8.1 29.4 44.2 17.8 64.2 0.3 52.4 26.7 26.6 33.9 23.6 35.6 35.6 12.8 15.2 34.2 8.0 13.1 Main market in which establishment sold its main product Local 23.5 44.3 17.6 11.9 27.7 6.8 38.4 9.6 21.1 25.4 15.1 27.4 16.2 18.0 32.0 35.4 16.6 40.8 43.8 National 38.4 39.9 38.5 37.0 43.6 17.1 56.3 21.6 39.5 37.9 32.4 41.2 38.0 27.9 52.5 35.4 37.6 42.1 25.0 International 38.1 15.8 43.9 51.1 28.8 76.1 5.3 68.8 39.5 36.8 52.4 31.4 45.7 54.1 15.6 29.2 45.9 17.1 31.3 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 24: Competitors and Suppliers Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism % of firms competing 41.4 47.8 42.3 33.1 46.2 22.6 49.4 34.7 41.6 41.9 41.2 41.6 35.1 36.7 55.4 43.4 39.8 47.0 33.3 against informal firms Average Number of Competitors (% of firms within each category) None 8.0 3.9 9.4 9.9 5.4 19.4 2.1 13.8 8.7 7.7 9.7 7.3 8.4 9.7 5.8 7.8 10.2 2.6 5.0 One 4.2 2.6 4.5 5.3 3.4 7.4 3.2 5.0 3.7 4.6 2.8 4.8 5.3 2.7 5.0 2.6 4.7 2.0 10.0 Two-Five 26.6 31.2 22.9 29.0 27.7 22.2 32.5 21.6 21.0 29.6 19.9 29.7 28.4 15.9 28.1 31.9 27.2 27.3 10.0 More than 5 61.2 62.3 63.2 55.7 63.5 50.9 62.2 59.7 66.7 58.2 67.6 58.3 57.8 71.7 61.2 57.8 57.9 68.2 75.0 Please rate the degree of severity that the following practices of your competitors represent to your institution (% saying major or very severe constraint) Tax evasion 49.5 44.9 52.6 50.9 51.4 34.4 49.7 49.6 53.1 47.2 39.5 53.7 39.2 45.8 60.9 53.7 52.4 44.6 41.7 Evasion of tariffs and/or 36.6 34.3 35.7 41.7 39.8 16.7 35.2 38.3 38.2 35.6 33.3 38.0 36.4 38.6 47.2 19.2 36.9 40.0 0.0 trade regulations Evasion of labor 34.5 26.6 41.7 30.0 35.7 25.0 28.0 44.5 35.9 33.5 30.7 36.0 32.1 45.8 36.5 25.9 39.0 28.3 8.3 regulations Violation of property 21.6 17.4 23.3 24.1 21.9 20.0 15.9 28.6 25.9 18.7 24.4 20.4 21.8 26.1 23.5 14.0 25.3 15.7 0.0 rights/licenses Preferential treatment in 21.7 19.8 23.2 21.7 23.0 12.1 21.4 22.2 21.1 22.1 21.4 21.8 26.7 22.5 12.4 26.9 22.8 21.4 7.7 access to credit Any other preferential 17.7 14.0 14.8 30.8 18.4 13.3 17.1 18.9 14.0 19.8 12.1 19.8 22.0 11.1 12.8 22.2 21.1 14.6 0.0 treatments Annex: I: Standard Tables 85 86 Table 25: General Constraints to Operation % firms saying “major” or “very Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism severe” constraint Telecommunications 22.7 20.4 24.8 20.9 21.8 25.7 18.2 26.9 21.5 23.7 25.0 21.6 27.1 20.7 15.6 23.5 22.0 24.8 20.0 Electricity 33.5 32.3 36.7 28.4 34.0 30.7 34.2 34.0 36.4 32.0 36.4 32.3 29.3 33.9 31.4 43.9 36.0 27.7 25.0 Transportation 22.5 15.1 24.8 26.2 20.9 28.6 19.9 25.0 20.7 23.6 23.1 22.3 23.9 23.7 21.2 19.8 24.5 17.9 15.0 Water 12.0 8.6 14.2 10.5 12.8 7.9 11.9 12.5 9.7 13.4 11.4 12.3 9.7 11.6 16.4 12.5 11.4 13.4 15.0 Access to Land 12.2 9.5 13.7 12.2 13.3 6.7 12.8 11.2 12.5 12.1 9.3 13.6 11.8 6.8 14.3 16.7 12.0 13.5 5.6 Regulatory Uncertainty 9.9 8.2 11.4 8.5 9.8 9.4 9.9 9.9 9.3 10.4 9.4 10.1 9.6 9.5 12.6 7.7 9.8 10.1 10.0 Tax Rates 24.5 25.0 27.4 16.4 27.7 8.4 29.6 19.9 22.7 25.9 23.7 24.9 23.0 27.2 33.3 15.0 22.9 29.7 15.0 Tax Administration 14.5 9.6 17.0 15.3 16.1 6.1 14.9 14.7 17.3 12.6 14.9 14.4 17.5 15.8 10.8 11.4 14.7 14.0 15.0 Customs and Trade 25.8 16.5 28.0 29.9 24.9 28.6 20.6 29.7 25.6 25.7 25.0 26.3 28.6 20.4 36.3 16.5 27.2 23.7 6.7 Regulations Labor Regulations (Like 22.2 14.6 24.7 26.0 22.8 19.8 19.9 24.4 22.7 22.1 23.6 21.6 23.4 22.9 26.2 14.8 25.6 15.0 5.3 Social Insurance) Inadequately educated 39.0 29.3 44.2 38.8 41.2 29.6 35.2 42.9 40.6 37.9 37.6 39.5 33.3 42.2 48.8 36.8 42.4 31.6 25.0 workforce Licensing and Permits 13.2 9.3 16.7 10.2 14.0 9.8 14.7 12.1 11.8 14.3 15.6 12.1 12.0 13.9 10.6 17.8 13.2 14.2 5.9 Access to Financing 33.9 33.5 39.7 22.1 35.4 27.5 34.9 34.0 33.9 34.1 31.9 34.9 28.0 32.8 29.8 51.4 34.4 35.8 5.6 (Ex: Collateral Corruption 28.9 25.5 31.2 27.3 29.8 25.9 30.5 27.5 28.1 29.5 28.4 29.3 27.9 23.1 41.1 24.5 28.7 32.4 10.0 Practices of 25.9 27.5 27.6 20.8 28.0 17.5 31.6 20.5 25.5 26.4 26.2 25.8 22.3 22.9 38.1 23.9 26.2 27.4 6.3 competitors in the informal sector Courts 21.4 16.1 23.4 22.7 22.9 15.3 22.6 20.3 20.2 22.1 19.0 22.5 22.8 17.5 29.9 12.9 20.8 23.2 20.0 Theft, disorder and 20.0 21.3 21.3 15.9 20.9 15.6 23.2 16.6 24.1 17.3 21.0 19.6 14.9 16.0 14.2 40.0 19.3 19.6 38.9 crimes Political instability 55.6 50.6 58.3 55.6 54.8 58.4 56.3 53.4 55.8 55.8 56.0 55.6 57.8 52.1 50.0 60.9 55.0 56.0 65.0 Formalities for starting 11.2 12.1 13.0 6.3 12.5 6.3 12.9 10.1 13.5 9.9 14.1 9.9 7.2 6.1 9.6 26.6 13.0 7.8 0.0 a business Macroeconomic 34.8 29.6 32.6 43.9 37.2 25.5 34.7 34.9 29.8 38.2 31.0 36.3 43.0 29.1 36.1 21.1 33.6 39.7 25.0 uncertainty Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 26: Infrastructure Indicators Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Freq of power outages (Times last year) 6.5 6.7 6.7 5.5 6.8 4.7 5.8 7.2 5.8 7.0 6.4 6.5 4.5 5.1 8.2 8.6 7.1 4.2 6.3 Average duration of power outages (hours) 6.7 5.9 7.0 6.6 6.6 7.0 6.6 6.8 4.3 8.2 4.4 7.8 7.1 3.3 9.2 7.2 7.2 5.5 1.6 % of sales lost due to power outages 2.6 2.2 3.4 1.0 2.6 2.5 1.8 3.4 2.4 2.8 2.6 2.6 1.1 2.9 2.4 3.9 3.0 1.6 0.4 Freq of water outages (Times last year) 6.2 4.6 6.7 6.4 5.9 7.1 5.5 7.1 4.2 7.8 6.5 6.0 3.8 5.8 8.5 6.5 7.2 3.2 2.8 Average duration of water outages (hours) 29.2 18.3 32.0 34.5 33.3 11.6 7.8 52.1 5.6 48.4 8.0 39.5 9.2 11.7 129.7 6.4 34.1 17.3 1.7 % of sales lost due to water outages 2.3 1.6 3.0 0.4 2.8 0.3 1.7 3.0 1.6 2.9 2.8 2.0 3.5 0.7 1.1 2.8 3.0 0.2 0.1 Freq of telecom outages (Times last year) 11.0 6.9 12.7 10.6 8.9 17.9 9.1 13.0 11.8 10.5 14.4 9.3 8.2 20.4 5.1 12.5 11.8 8.2 15.6 Average duration of telecom outages (hours) 23.4 47.7 17.3 18.4 24.7 19.5 19.4 27.2 20.4 25.5 35.6 16.8 25.0 15.1 41.4 16.9 19.8 35.0 17.5 % of sales lost due to telecom outages 1.6 4.3 1.1 0.7 1.7 1.4 1.8 1.5 1.5 1.7 2.2 1.2 1.2 3.2 1.5 1.2 1.3 2.7 0.3 % of sales lost because of lead times by supplier last year 6.0 6.8 5.9 5.4 6.3 4.8 5.3 6.6 5.1 6.6 5.2 65 5.2 4.8 7.2 7.7 6.1 5.3 11.8 Expected gifts to obtain A telephone connection 4.8 12.9 1.5 3.5 4.0 8.0 6.6 3.2 5.4 4.4 5.9 4.4 6.0 0.0 2.8 7.4 3.6 2.8 33.3 An electricity connection 16.9 23.5 20 5 4.8 18.2 9.5 17.2 15.9 15.2 18.6 15.4 17.7 20.0 0.0 10.5 44.4 16.1 16.7 33 3 A construction permit 23.0 38.5 25.5 12.5 25.0 15.0 25.0 21.7 29.6 16.4 17.2 24.3 17.7 8.7 30.4 40.0 18.8 34.6 20 0 An import license 17.0 11.1 20.6 11.5 10.1 43.5 12.2 21.7 22.9 12.5 22.2 14.5 11.1 4.8 6.7 48.0 16.5 16.7 33 3 An operating license (business license) 4.9 2.8 7.0 2.7 4.5 6.1 6.7 3.7 8.3 2.4 7.1 3.9 0.0 0.0 5.1 26.3 4.6 3.0 50.0 Number of days to obtain: A telephone connection 16.1 17.3 12.4 22.9 13.8 24.4 18.2 14.5 12.5 19.2 128 17.5 18.8 10.5 8.0 24.2 15.9 12.8 38.5 An electricity connection 59.2 51.5 58.7 65.8 60.5 56.0 57.8 59.4 53.2 53.0 45.6 66.7 73.0 26.2 60.8 54.8 60.1 60 7 22 5 A construction permit 157.6 357.4 104.9 147.6 106.3 374.7 198.5 115.5 130.2 183.1 148.1 163.7 315.9 74.8 69.3 74.8 105.4 309.9 52.2 An import license 19.3 33.2 17.4 16.4 21.0 10.6 22.0 17.0 12.4 24.7 11.1 23.2 19.8 26.7 25 5 7.0 17.2 22.5 51.3 An operating license (business license) 19.1 26.4 20.6 8.5 17.6 24.4 23.6 15.9 25.6 14.4 30.5 14.5 16.8 20.9 10.8 45.9 17.7 21.7 52.5 Internet % of firms using email 95.8 90.6 97 3 98.5 95.2 98.3 93.3 98.0 95.2 96.4 96.8 95.3 99.2 92.6 91 8 96.6 96.7 94.2 90.0 % of firms having their own website 70.4 59.0 68.8 86.8 68.9 76.1 65.3 74.3 66.4 72.9 68.1 71.6 84.0 68.0 70.5 44.8 69.7 71.6 75.0 % of firms having a subscription to a broadband internet 88.8 76.9 91.7 96.3 87.3 94.9 82.2 94.7 87.0 89.8 91.0 87.8 97.1 89.3 87.7 72.4 90.1 85.9 85.0 connection Will you use your internet connection for: To communicate with customers and suppliers 97.9 95.9 98.5 98.5 98.1 97.3 97.4 98.2 98.5 97.5 98.2 97.8 98.3 99.1 96.3 97.6 97.9 97.7 100.0 Purchases related to the needs of the institution 86.1 82.6 86.4 88.4 86.7 83.5 82.8 89.4 92.4 82.0 92.8 82.9 88.4 87.2 86.0 78.6 87.3 82.2 88.2 To provide services to customers 87.3 84.3 87.9 88.6 87.2 87.3 81.6 91.9 86.4 87.7 86.8 87.4 88.5 97.3 86.0 72.6 87.6 87.0 82.4 Annex: I: Standard Tables Research in innovation of products and services 77.2 75.4 75.1 83.5 78.0 73.8 73.0 80.0 76.5 77.6 77.4 77.0 86.9 71.6 83.8 51.2 76.8 78.7 73.3 87 88 Table 27: Sources of Finance Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Share of working capital from Internal funds or retained earnings 63.8 61.3 65.8 62.7 60.4 77.9 55.3 73.2 63.8 63.6 68.9 61.5 67.9 74.2 52.1 57.4 65.1 59.7 71.8 Borrowed from Tunisian private commercial banks 17.2 15.5 16.2 22.0 19.2 9.0 20.9 13.3 19.8 15.6 15.7 17.9 18.2 12.9 21.0 15.9 17.9 16.5 7.1 Borrowed from foreign private commercial banks 0.7 0.3 0.9 0.5 0.6 1.1 0.4 0.9 0.2 1.0 0.2 0.9 0.7 0.4 0.2 1.5 0.7 0.7 0.0 Borrowed from state owned banks or other public 5.9 9.9 4.6 3.8 7.1 1.2 8.7 2.7 4.2 7.1 3.7 7.0 2.5 4.2 4.1 16.3 4.0 11.4 3.5 institution Borrowed from a non-bank financial institution 0.6 0.3 0.7 1.0 0.7 0.5 0.8 0.4 0.4 0.8 0.9 0.5 0.5 1.6 0.1 0.4 0.8 0.2 0.0 Customer or supplier credits 6.6 8.0 6.5 5.0 7.0 5.0 8.6 4.7 5.3 7.4 4.4 7.5 4.4 4.3 16.4 3.1 6.7 6.7 2.4 Leasing 3.3 3.5 3.7 2.3 3.8 1.3 4.0 2.7 3.9 3.0 3.8 3.1 3.5 2.1 4.5 2.9 3.2 3.5 4.1 Other 1.8 1.1 1.6 2.8 1.2 4.0 1.1 2.1 2.3 1.4 2.4 1.5 2.3 0.3 1.5 2.5 1.5 1.3 11.2 Financing of new investments from Internal funds or retained earnings 55.3 53.6 53.9 58.8 51.0 73.4 47.7 63.1 53.6 56.2 58.7 53.9 59.4 56.4 43.7 59.0 56.3 49.5 73.2 Owner's contribution or issued new equity shares 1.5 2.2 1.5 0.8 1.6 0.8 2.0 1.0 1.9 1.2 0.6 1.8 2.0 0.6 1.8 0.8 1.7 1.0 0.0 Issuance of debt 0.5 0.9 0.5 0.2 0.6 0.0 08 0.2 0.6 0.4 1.4 0.1 0.7 0.0 0.3 0.7 0.2 1.4 0.0 Borrowed from a private commercial bank 13.7 9.1 11.9 21.2 14.7 9.7 13.7 13.5 15.7 12.3 10.8 14.9 13.6 11.9 16.8 12.3 14.5 12.0 9.7 Borrowed from state owned banks or other public 6.3 9.2 5.8 4.8 7.0 3.4 8.5 4.1 6.4 6.3 5.8 6.5 4.3 10.3 3.1 10.6 5.6 9.3 2.0 institution Borrowed from a non-bank financial institution 6.1 8.0 6.9 3.2 7.3 1.5 9.5 2.7 4.5 7.3 4.4 6.8 2.4 8.5 11.4 5.7 5.1 10.2 0.0 Customer or supplier credits 5.4 7.2 6.2 2.3 6.1 2.6 5.1 5.8 5.9 5.0 5.8 5.2 4.5 4.6 7.4 5.6 6.2 3.8 0.0 Other 11.3 9.8 13.5 8.7 11.9 8.6 12.9 9.6 11.5 11.3 12.5 10.8 13.3 7.8 15.6 5.4 10.5 13.1 15.0 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 28: Credits, Loans, and Liabilities Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Share with overdraft facilities OR 73.5 62.9 77.4 77.1 79.2 50.9 79.6 66.8 74.2 72.7 72.7 73.8 74.0 64.7 82.4 72.2 72.2 77.3 70.0 line of credit excluding loans Share with a LOAN 53.5 44.7 53.9 64.1 59.0 30.4 57.0 49.5 57.0 51.1 46.5 56.5 55.7 40.7 62.8 52.2 53.7 52.9 52.6 For the most recent loan Share that require collateral 86.8 92.9 89.2 77.1 88.7 70.6 89.4 83.3 89.1 85.0 88.0 86.3 85.5 75.0 90.7 93.3 87.7 85.2 80.0 Average value of collateral 178.5 142.3 199.7 171.5 176.9 192.6 165.2 191.2 186.0 173.1 207.0 167.9 219.9 207.5 131.2 129.4 179.2 176.0 182.9 required (as % of the loan) What was the main reason for not applying for a loan? No need for a loan 61.9 54.5 64.9 67.3 59.4 70.5 59.1 65.1 64.9 60.5 71.9 57.3 64.8 71.8 60.3 50.0 61.0 65.2 57.1 -establishment had sufficient capital Application procedures were 11.8 16.8 11.0 3.6 13.3 6.4 14.6 9.1 7.6 14.4 6.1 14.5 4.8 11.5 12.1 21.6 11.4 13.5 7.1 complex Interest rates were too high 3.7 4.0 4.7 0.0 4.8 0.0 4.1 3.4 3.1 4.2 2.6 4.3 5.6 2.6 1.7 3.4 4.1 3.4 0.0 Collateral requirements were 2.9 3.0 1.6 5.5 3.3 1.3 2.9 2.9 0.0 4.7 1.8 3.4 3.2 1.3 5.2 2.3 2.9 3.4 0.0 too high Size of loan and maturity were 0.3 0.0 0.5 0.0 0.4 0.0 0.0 0.6 0.0 0.5 0.0 0.4 0.8 0.0 0.0 0.0 0.0 0.0 7.1 insufficient Did not think it would be 7.5 8.9 7.3 5.5 8.1 5.1 9.9 4.6 9.9 6.1 4.4 9.0 4.0 3.9 6.9 15.9 7.7 6.7 7.1 approved Do not want to deal with interest 4.3 7.9 3.1 1.8 5.2 1.3 4.7 4.0 5.3 3.7 4.4 4.3 5.6 1.3 10.3 1.1 4.5 4.5 0.0 rates Other 7.7 5.0 6.8 16.4 5.5 15.4 4.7 10.3 9.2 6.1 8.8 6.8 11.2 7.7 3.5 5.7 8.5 3.4 21.4 Annex: I: Standard Tables 89 90 Table 29: Financial Sector: Auditing, Transaction Costs, and Property Rights Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Share of firms whose financial statements 31.9 20.0 37.0 35.8 31.0 36.1 26.6 36.4 36.7 28.6 36.1 30.2 32.5 37.0 16.4 42.2 33.5 28.4 23.5 are audited by outside auditors Share of land that is Owned 56.5 47.4 55.9 68.6 62.2 34.2 66 8 46.0 56.0 56.6 46.7 60.9 53.2 49.0 65.7 61.3 55.9 54.9 84.2 leased or rented 43.2 51.7 44.3 31.4 37.5 65.8 32 6 54.0 43.9 43.0 53.1 38.9 46.1 51.0 34.6 38.7 44.2 44 0 15.8 % firms trying to get settled in an area 26.9 25.5 27.3 28.3 27.4 24.0 28.9 25.4 32.1 23.7 29.6 25.7 15.7 13.6 17.5 66.1 28.5 19.3 55.6 other than Greater Tunis and Coastal areas Constraints preventing from settling in an area other than Greater Tunis and Coastal areas Inadequate infrastructure 17.4 21.3 13.9 21.3 17.4 17.4 18.0 16.7 21.0 15.6 13.0 19.4 7.0 32.6 21.2 18.4 17.7 17.6 0.0 Road network 10.8 10.2 11.1 11.5 11.7 7.3 13.4 8.6 8.9 12.0 5.6 13.2 7.0 11.2 19.7 10.5 11.4 10.2 0.0 Lack of qualified manpower 16.0 16.7 16.1 14.8 15.3 18.8 15.1 17.2 17.7 15.1 16.7 15.7 7.0 29.2 22.7 10.5 17.7 13.0 0.0 No particular constraint 57.8 57.4 58.3 57.4 59.2 52.2 61.1 54.6 59.7 56.4 64.8 54.6 64.6 49.4 56.1 52.6 57.0 58.3 83.3 Other 23.1 20.4 23.9 24.6 22.3 26.1 21.5 24.7 16.1 27.1 16.7 26.0 25.3 18.0 21.2 29.0 22.8 24.1 16.7 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 30: Regulatory Burden and Administrative Delays Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism % senior management's time spent dealing 24.8 27.2 24.8 22.1 24.8 25.1 24.6 24.3 23.7 25.4 29.0 22.9 36.0 22.4 23.3 7.6 23.2 29.2 26.5 with regulations % revenues typically paid to officials to "get 4.1 6.0 4.0 1.7 4.4 2.8 5.9 2.6 5.3 3.5 5.0 3.8 2.3 4.1 6.3 5.6 3.7 4.8 7.4 things done" % of firms required to make gifts or informal payments to public officials to "get things 58.5 65.3 59.9 45.3 60.0 52.0 64.5 54.0 57.5 59.1 53.3 60.6 39.6 69.4 50.0 83.8 58.2 59.5 57.1 done" % firms obtaining a government contract or 21.6 22.6 18.5 26.7 24.8 8.8 28.6 14.9 22.1 21.3 18.2 23.2 22.9 17.0 31.1 14.0 20.2 26.7 11.1 tried to get one % of contract value paid as informal payment 3.0 2.8 4.7 1.1 3.2 1.8 3.9 1.7 5.2 2.0 3.0 3.1 2.6 1.6 4.3 2.2 3.6 2.2 0.0 to secure a government contract "Laws and regulations that affect your business 26.5 22.6 28.0 27.4 27.2 23.9 27.5 26.2 33.2 22.3 26.6 26.6 21.4 23.1 31.4 35.3 26.8 27.3 15.0 operations are predictable" (% disagreeing) "Laws that affect your business are generally fairly applied consistently for each firm" (% 42.3 42.5 43.8 38.5 45.0 30.4 46.6 37.8 41.1 43.3 38.2 44.3 32.3 41.7 47.1 57.8 41.7 42.9 50.0 disagreeing) "Laws that affect your business are generally fairly applied consistently for each firm" (% saying yes) Justice 52.5 54.0 49.8 58.8 49.5 64.9 48.2 57.0 54.0 51.6 56.8 50.6 54.3 74.7 45.7 35.2 53.6 51.4 40.0 Tax system 50.5 57.9 44.1 57.4 50.5 50.7 51.3 50.7 42.8 54.4 47.0 52.0 42.9 63.7 55.7 45.7 49.7 54.1 40.0 Customs and foreign trade regulations 37.2 28.6 37.0 54.4 35.3 45.5 28.2 44.9 35.5 37.6 46.2 32.6 49.3 46.2 22.9 22.9 40.1 30.3 33.3 Labor regulations 55.2 53.2 55.5 57.4 53.5 62.3 58.0 52.7 55.3 54.8 65.2 50.2 57.1 62.6 44.3 53.3 53.2 60.6 53.3 Property rights 46.6 45.2 46.9 48.5 44.7 54.6 43.1 49.3 51.3 43.6 55.3 42.5 56.4 46.2 30.0 44.8 48.6 42.2 40.0 Number of inspections and required meetings with officials Tax Inspectorate 1.9 1.6 2.0 2.1 2.0 1.3 1.9 1.9 1.6 2.2 1.5 2.1 1.9 1.4 2.1 2.1 2.0 1.4 3.1 Labor Inspection 2.3 1.8 2.0 3.2 2.2 2.9 2.0 2.5 2.3 2.3 2.2 2.3 2.7 2.1 2.0 2.2 2.3 2.2 3.0 Was a gift or informal payment ever expected/requested? Tax Inspectorate 9.0 12.8 8.5 6.5 8.3 8.8 9.0 9.3 10.6 7.4 8.8 9.1 14.7 0.0 2.9 12.1 7.4 12.8 16.7 Labor Inspection 6.3 8.3 7.2 3.7 7.2 3.3 4.0 8.6 6.3 6.5 4.9 7.0 10.0 1.6 6.8 5.2 7.8 0.0 0.0 Imports Avg. days to clear customs (days) 9.0 10.1 9.0 8.5 10.3 5.5 12.8 6.8 9.2 8.7 8.8 9.1 8.4 7.1 14.0 6.4 8.8 8.8 37.5 Longest days to clear customs 21.2 23.3 20.1 21.7 23.5 15.0 28.0 16.9 19.4 22.1 19.0 22.3 20.1 13.9 36.9 12.5 19.9 26.9 45.0 Annex: I: Standard Tables (days) 91 92 Table 30: (CONTD...) Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Exports Ayg. days to clear customs (days) 4.7 2.6 4.7 5.1 5.1 4.0 3.5 4.8 3.8 5.4 4.3 4.9 4.4 6.1 4.5 3.6 4.9 3.4 0.0 Longest days to clear customs (days) 9.6 5.2 9.2 11.0 10.4 8.1 6.4 9.9 6.7 11.7 8.2 10.3 10.5 9.0 9.5 7.8 9.8 7.4 0.0 % firms making informal payments to expedite 21.8 17.9 20.5 26.0 22.4 20.0 20.8 22.2 26.6 18.4 19.8 22.4 27.7 7.3 19.7 35.1 22.2 21.2 0.0 customs clearance procedures What are your sales projections for the next financial year? Sales will increase 65.8 65.3 68.6 60.5 65.9 65.4 65.7 65.9 65.1 66.3 66.1 65.6 62.7 72.3 71.6 60.2 67.6 62.9 50.0 Sales will remain the same 18.5 21.3 15.5 21.0 18.6 17.8 19.6 17.6 20.4 17.2 20.6 17.6 21.7 13.9 10.3 24.8 18.1 18.9 22.2 Sales will decrease 15.7 13.3 15.9 18.6 15.5 16.8 14.8 16.5 14.6 16.6 13.3 16.8 15.7 13.9 18.1 15.0 14.3 18.2 27.8 Percent increase in sales 22.6 30.9 21.3 14.6 23.6 18.3 21.3 23.6 23.3 22.2 17.6 24.7 20.5 23.6 31.2 15.3 23.9 17.9 29.2 Percent decrease in sales 20.3 20.6 19.9 20.8 20.4 19.9 19.5 20.7 23.2 18.6 23.4 19.3 20.8 12.3 18.0 25.9 18.8 23.4 18.0 Table 31: Governance: Uncertainty and Corruption Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Security (Crime) % firms paying for security, for example 63.9 55.9 64.0 73.3 64.4 61.2 63.2 64.7 67.0 61.9 58.7 66.2 58.7 66.9 63.1 72.2 65.1 59.4 73.7 equipment, personnel, or professional security services % of total annual sales for security 2.7 3.8 2.6 2.1 2.7 2.5 3.0 2.4 3.1 2.4 2.7 2.7 1.5 2.4 2.0 4.9 2.5 2.9 4.4 % of firms experiencing losses due to theft, 25.9 26.4 24.0 29.6 25.3 28.5 27.8 23.5 30.7 22.6 26.3 25.4 26.4 17.5 21.4 37.9 25.5 26.3 30.0 robbery, vandalism, or arson vandalism, or arson as a % of total annual sales 7.5 10.6 8.8 2.4 7.7 6.6 8.8 5.5 6.0 8.7 9.1 6.7 2.4 8.1 9.3 12.1 7.0 7.2 25.0 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 32: Technology Indicators Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism % firms with ISO Certification 29.8 13.3 26.4 57.0 24.7 50.9 19.2 38.9 31.0 28.9 33.2 28.4 37.8 27.6 27.9 18.3 36.2 12.3 31.3 % firms with pending application for an ISO Certification 8.0 5.1 10.9 5.2 8.3 6.9 7.3 8.7 9.6 7.0 5.4 9.1 5.2 7.3 7.4 14.8 8.3 7.1 6.3 % firms forced to reduce prices in response to lower prices by 32.8 34.0 30.0 36.1 34.2 26.6 35.4 29.4 34.0 32.4 30.7 33.8 33.7 30.8 38.3 27.6 27.4 44.5 45.0 domestic competition % firms forced to reduce prices in response to lower prices by 28.8 18.3 29.6 37.6 26.8 36.3 17.3 37.2 27.8 29.5 29.3 28.6 33.7 30.4 30.9 15.6 29.9 24.1 37.5 foreign competition % firms that introduces a new product or service or upgraded an 44.6 45.6 41.7 48.7 46.7 35.1 46.9 41.6 42.0 46.4 40.0 46.9 49.0 34.5 66.7 26.7 43.0 52.9 15.8 existing one in response to domestic competition % firms that introduces a new product or service or upgraded an 38.8 27.2 40.0 47.1 36.3 47.1 27.5 46.5 34.3 41.9 39.6 38.6 45.7 34.6 53.9 19.6 41.6 33.0 18.8 existing one in response to foreign competition % firms using a patent 10.2 9.3 10.4 10.9 10.0 11.0 10.5 10.1 7.9 11.8 8.6 11.0 17.1 6.9 6.8 4.6 11.1 8.6 0.0 % firms utilizing research and development (R&D) 32.1 28.2 26.2 49.6 30.7 37.1 23.7 39.9 31.1 32.8 31.3 32.2 37.2 33.3 35.8 16.7 35.8 22.2 29.4 Where is your R&D department located? Within the business unit, but no dedicated department to R&D 57.1 65.9 58.3 50.0 58.7 51.2 59.4 54.8 56.5 57.1 56.1 57.3 57.8 60.0 43.9 77.8 55.5 58.1 100.0 Within the business unit, with a dedicated department to R&D 34.6 20.5 29.2 50.0 33.3 39.5 29.7 38.3 31.9 36.6 36.8 33.9 36.1 35.0 39.0 16.7 37.0 29.0 0.0 Outside the business unit 8.2 13.6 12.5 0.0 8.0 9.3 10.9 7.0 11.6 6.3 7.0 8.9 6.0 5.0 17.1 5.6 7.5 12.9 0.0 Annex: I: Standard Tables 93 94 Table 33: Workers Tunisia Small Medium Large Domestic Foreign-owned Non-Exporter Exporter Female owner Male owner Female manager Male manager Region A Region B Region C Region D Manufacturing Services Tourism Average number of permanent workers in 2012 95 11 50 299 78 169 61 124 101 91 129 80 146 74 59 54 108 62 75 Average number of permanent workers in 2011 91 11 47 291 73 167 60 120 99 85 124 76 139 72 56 52 105 54 74 Average number of permanent workers in 2010 87 11 46 283 69 164 56 117 98 79 123 71 134 68 56 50 102 48 80 % firms offering vocational training to permanent employees beside 54.8 38.6 53.4 76.9 53.3 60.3 50.5 58.5 53.5 55.1 54.6 54.7 58.1 47.1 55.0 55.8 54.3 56.3 52.6 training on the job Level of education of production employees 0-3 years 1.6 0.0 3.1 0.0 1.5 1.8 0.7 2.4 0.9 2.0 2.2 1.3 0.9 5.0 0.0 0.9 2.2 0.0 0.0 4-6 years 11.8 10.2 11.7 13.9 11.6 12.4 10.8 13.1 11.1 12.3 8.7 13.3 8.3 20.2 15.3 6.2 15.2 3.5 0.0 7-9 years 31.3 23.6 32 8 37.7 32.1 28.3 27.3 35.4 34.2 29.2 33.5 30.1 29.0 31.9 37.3 29.2 37.9 15.2 10.5 10-12 years 38.4 34.4 39.3 40.8 37.3 43.4 38.9 37.5 40.4 37.0 34.1 40.6 36.8 33.6 33.1 52.2 38.7 33.8 68.4 13 years and above {university degree or above) 17.0 31.9 13.1 7.7 17.5 14.2 22.3 11.7 13.3 19.5 21.6 14.8 25.0 9.2 14.4 11.5 6.0 47.6 21.1 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Annex: II Measures of Firm Performance and Total Factor Productivity Analysis The study focuses on several measures of firm productivity. These are calculated in a uniform way in all countries with available Enterprise Survey data from between 2006 and 2011. The Enterprise Surveys collect financial data in the local currency in the country being surveyed. To make cross-country comparisons, the financial data needed to be converted into a common currency in a single year (i.e., to control for inflation and exchange rate differences). To do this, all values are converted into 2009 US dollars (US$). For firm surveys conducted between 2006 and 2009 (that is, surveys with accounting data from between 2005 and 2008), data are inflated to 2009 values in local currency using the GDP deflator. For surveys converted after 2010, the values are deflated in a similar way. The values in 2009 local currency are then converted into US$ using 2009 exchange rates. Since most firms in the sample sell their products primarily in local markets, exchange rates have to be close to their equilibrium values in 2009 for these comparisons to be very accurate. If the exchange rate in a given country is over- or under-valued, the comparisons will under- or overstate the actual value of the performance measure for that country. The individual measures are constructed in the following way Value-added: Value-added is value of the goods and services that the firm produces less the cost of the raw materials (such as iron or wood) and intermediate inputs (such as engine parts or textiles) used to produce the output. Output is measured in local currency not in physical units. We subtract the cost of raw materials, intermediate inputs, electricity and fuel in local currency from output to get value-added. Firms report electricity and fuel costs separately from raw materials and intermediate inputs. Firms that do not report sales or raw materials are dropped for this measure. Electricity and fuel costs are treated as if they are zero for firms that do not report electricity or fuel costs (i.e., the firms are not dropped). This is done because dropping firms that do not report electricity or fuel costs would have a significant impact on sample size and because electricity and fuel costs are small relative to sales and raw materials. Annex: II: Measures of Firm Performance and Total Factor Productivity Analysis 95 Number of workers: The number of workers is the number of permanent and temporary full-time workers. Temporary workers are weighted by the average length of employment for these workers. For example, if the average length of employment for a temporary worker was six months, the weight for temporary workers would be half. Since data on employment was not collected in Tunisia, the weight is set to one for all firms in Tunisia. Data on part-time workers is not collected in most countries outside of Sub-Saharan Africa and so part-time workers are omitted for reasons of comparability. In practice, for countries with data on part-time workers, including these workers does not have a large effect on relative rankings. Firms that do not report permanent or temporary workers are dropped for measures that use workers (e.g., value-added per worker). Labor Productivity: Value-added per worker is the basic measure of labor productivity used in this paper. It is value-added divided by the number of full-time workers in the firm. Firms that produce more output with less raw material and fewer workers have higher labor productivity. Capital Intensity: The first measure is the book value of capital divided by the number of workers. For firms that keep detailed financial accounts, this measure should be the value of capital taken from those accounts. For other firms, it will either be omitted or estimated by the manager. As described in the ICA manual, this variable is: The net book value represents the actual cost of assets at the time they were acquired, including all costs incurred in making the assets usable (such as transportation and installation) minus depreciation accumulated since the date of purchase. (World Bank, 2007b) The second measure is the sales value of capital divided by the number of workers. The manager is asked to estimate the value of the capital if sold in its current condition. Although this is probably closer to the true value of the capital, it has some shortcomings. In particular, when markets for capital equipment are thin, it might be difficult for the manager to give an accurate estimate. The implementation manual notes: Ask the manager to estimate the market value of all of the equipment, land and buildings sold on the open market. If the respondent states that there is no market, ask how much the respondent would be willing to pay for the capital, knowing what it can produce in its current condition. Estimate how much it would cost to buy machinery in the current market which is similar in terms of age and characteristics. (World Bank, 2007b) Firms that do not report these measures have to be dropped when calculating the respective measures of capital intensity. 96 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Total Factor Productivity: This measure of productivity takes both labor and capital use into account. The methodology is described in below: Labor costs per worker: The cost of labor is the cost of wages, salaries, bonuses, other benefits, and social payments for workers at the firm divided by the number of workers. The data is taken from the firms’ accounts. It includes wages and salaries paid to all workers and managers – not just production workers. Firms are only dropped from these averages when they do not report labor costs (or workers). Unit labor costs: This measure is labor costs as a percentage of value-added. Although it is an approximation to true unit labor costs (i.e., it measures output in dollars rather than as physical measure of production), it can be calculated using information from the Enterprise Survey. Unit labor costs are higher when higher labor costs are not fully reflected in higher productivity. Total Factor Productivity Estimation This section describes how total factor productive is estimated for the cross- country comparisons of technical efficiency or total factor productivity and for the within country comparisons for firms with different characteristics. Methodology Technical Efficiency (TE) is calculated as a residual from a regression of the log of output (either value-added or revenue) on labor, capital, and other intermediate inputs.i Using a formulation based upon value-added, the estimation assumes a Cobb-Douglas Production function:ii Yi = A iK iα Lβ i (1) Where Y is value-added for firm i, K is a measure of capital (e.g., the book value or replacement value of capital), L is the number of workers and A is total factor productivity or technical efficiency. Constant returns to scale are not imposed allowing the model to control for differences in productivity by firm size. The higher that A is, the more output the firm produces with the same amount of capital and labor. Taking natural logs of both sides implies that: ln (y i ) = µ + α ln (k i )+ β ln (li )+ ε i (2) where Ai = evi = eµ + ε i Annex: II: Measures of Firm Performance and Total Factor Productivity Analysis 97 That is, the firm’s productivity is equal to a constant, μ, and an additional firm- specific measure of productivity, εi. It is easy to generalize this into a more general ‘augmented’ production function where the error term is: v i = µ + ∂ FCi + ε i (3) Where FCi is a vector of variables representing the characteristics of the firm or the characteristics of the investment climate that the firm faces. This implies that: ln (y i ) = µ + α ln (k i )+ β ln (li )+ ∂FCi + ε i (4) To allow for productivity differences between countries, a vector of country dummies ( µc ) can be included in the analysis. This implies that: ln (y i ) = µc + α ln (k i )+ β ln (li )+ ∂FCi + ε i (5) Under some assumptions, equation (4) can be estimated by Ordinary Least Squares (OLS). In particular, when firm characteristics are omitted (i.e., when equation (2) is estimated), the coefficients can be estimated with OLS if capital and labor are uncorrelated with the error term. That is, any shock or firm- specific factors that affect productivity must be uncorrelated with the firms’ decisions regarding capital and labor choices. This would be violated if, for example, managers were aware of something that affected productivity and allowed this to affect their hiring, firing or investment decisions. For example, this assumption would be violated if a firm received some technical advice from one of their suppliers or buyers that improved the firm’s productivity and then the manager decided to hire more workers to take advantage of this improved know-how. Characteristics of the firm or the investment climate for the firm can also be directly included in the OLS regression as long as these characteristics are exogenous. For example, if becoming an exporter makes a firm more productive (e.g., through exposure to foreign markets) then a dummy variable indicating that the firm was an exporter could be included in the regression as long as changes in productivity did not affect the decision to become an exporter. If, for example, a firm became more productive and decided that this productivity boost meant that it could start exporting this assumption would be violated.iii Rather than including firm or investment climate characteristics directly in the model, it is possible to first estimate equation (2) through OLS or another more 98 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 robust estimation method, obtain estimates of TE by calculating ε for each firm from equation (2) and then regress the residuals on the firm and investment climate characteristics (e.g., estimating equation [3]). An advantage of this approach is that if panel data is available it might be possible to estimate equation (2) using a robust technique such as the method suggested by Levinsohn and Petrin (2003) and then use something such as 2SLS in the second stage if one of the firm or investment climate characteristics were thought to be endogenous.iv The drawback of this second approach is that if the firm level or investment climate characteristics are correlated with the amount of labor and capital that the firm uses (i.e., if the manager’s knowledge about the investment climate affects the firm’s use of labor or capital) then the estimates of the coefficients in equation (2) will be biased.v As a result, the ε’s will be estimated incorrectly and the coefficients from the second stage will be biased. It seems likely that this will often be the case. Escribano and Guasch (2005), argue that “this is almost always the case since the inputs are correlated with the Investment Climate (IC) variables and least squares estimators of [equation 2] are inconsistent and biased.” For this reason, estimation is done in a single step in this report. One concern about OLS is that outliers can have a significant effect on OLS estimates. This can be dealt with in several ways. One possible way is to estimate the equation with a robust estimation method such as a Least Absolute Deviations (LAD) estimator. Another is to drop outliers. Due to concerns about outliers, LAD estimators are often used when estimating production functions.vi In addition to concerns about outliers, a second set of concerns have been discussed in the literature on (i) the functional form of the error term, ε, and (ii) whether the error term is correlated with capital and labor. There are several methods that have been proposed regarding the functional form of the error term. In particular, stochastic frontier analysis allows for two error terms, a one-sided term assumed to have a half normal distribution, ν, representing technical efficiency and a two-sided normally-distributed error term, ε, representing temporary shocks to productivity and measurement error. The model is estimated using maximum likelihood estimation. In the analysis, the LAD estimators were used as the base estimators. The model was also estimated using standard OLS estimators and stochastic frontier analysis. A broader problem is that things that affect productivity might affect firm managers’ choices regarding capital and labor. If this is the case, OLS, Annex: II: Measures of Firm Performance and Total Factor Productivity Analysis 99 stochastic frontier estimation and LAD estimation will all produce biased estimates of the coefficients. Although several methods have been proposed to deal with this, they require panel data (Levinsohn & Petrin, 2003; Olley & Pakes, 1996)—something that is not available for most Enterprise Surveys. A final concern is that for analysis with firms from multiple sub-sectors of manufacturing, the analysis essentially assumes that firms use the same production technologies. Since the analysis in this chapter includes firms from more than one sub-sector of manufacturing, a more flexible estimation technique that allows firms in different sectors to use different production technologies is preferable. This can be done mechanically by including a full set of sector dummies and interacting these dummies with the measures of labor and capital to allow labor and capital intensities to differ in different sectors. The augmented production function then becomes: ( ) log VA ij = µc + ∑( α j j ( ) ( )) + β j log k ij + γ j log lij + ∂ FCij + ε ij + ν ij (5) The coefficients on labor and capital, β and γ, are assumed to vary between sectors. Sector dummies, α, are also included to allow for systematic differences in productivity across sectors. These models are sometimes referred to as the ‘unrestricted models’ while the models that assume identical production technologies are referred to as ‘restricted models’ Methodological Issues There are some well-known problems, however, with this methodology. 1. For cross-country comparisons, value-added and capital have to be denominated in a common currency (e.g., US dollars in these examples). Because these two variables are denominated in local currency in the survey, cross-country comparisons of TE are vulnerable to exchange rate fluctuations. If the exchange rate is overvalued relative to its long-run equilibrium then TE might look artificially high. Although this can make it difficult to interpret differences in TE between countries, it is important to note that this shouldn’t have a significant impact on the coefficients on firm-level variables. 2. The model essentially assumes that firms in different countries in the same sector use similar technologies. 3. Capital is more difficult to measure than labor for both theoretical and practical reasons. Since TE uses measured capital in its construction, it will generally be mis-measured when capital is mis-measured. 100 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 4. Ideally the measure of output would be a physical measure of output. In practice, however, it is difficult to obtain physical measures of output and, instead, most analyses including those using Enterprise Survey data use sales (i.e., output multiplied by unit price) as the dependent variable (i.e., a sales generating function).vii With firms producing heterogeneous products, this can be problematic if some have market power. That is, firms with market power that charge high prices for their output (e.g., monopolists) would appear more productive than a similar firm in competitive markets that charges lower prices.viii 5. Because estimates are calculated in a regression framework, it is less straightforward to calculate TE than labor productivity. One issue is that estimates of TE for groups of firms do not have natural units. For cross-country comparisons, TE is shown as % of TE in Tunisia. For other groups (e.g., exporters) differences are presented in terms of a base category (e.g., non-exporters). 6. As noted by Escribano and Guasch (2005), there is no single accepted approach to estimating TE. For this reason, following Escribano and Guasch, the model was estimated in several different ways to check the robustness of results. We therefore estimate the model in various ways making different assumptions about the error terms (i.e., stochastic frontier estimation, OLS, and LAD estimators are presented). 7. Recent studies have noted that inputs in the production function (labor and capital) are endogenous (Levinsohn & Petrin, 2003; Olley & Pakes, 1996) and this can affect the estimation of TE. With panel data, it is possible to control for this using sophisticated econometric techniques instrumenting for inputs with intermediate inputs or investment. In this case, without a long panel, these methodologies cannot be implemented. There are some additional problems associated with including measures of the investment climate in TE regressions. 8. The impact that different aspects of the investment climate have on firm productivity is likely to vary across countries—and results across countries have often varied in previous Investment Climate Assessments. For example, improvements in access to financing are likely to depend upon how developed financial markets are, how difficult it is to get access, how the financial sector is regulated, what informal institutions have evolved to make up for problems with formal credit markets, and many other factors. Because the study is primarily interested in the effect that investment climate variables have on productivity in Tunisia, the analysis was restricted into looking at Annex: II: Measures of Firm Performance and Total Factor Productivity Analysis 101 the how firm characteristics to affect productivity affect productivity in Tunisia. This ensures that the analysis is looking at differences in productivity as they apply to Tunisia. 9. Most firm-level variables and investment climate variables are potentially endogenous.ix The results for the firm-level variables should therefore be treated with caution and should not be assumed to be causal. For the base estimates of country-level differences in productivity, the study will use the coefficients from the model without additional control variables. Several papers have discussed these issues in more depth including Escribano and others (2005) and Dollar and others (2005).x Data is pooled for the sub-sectors of manufacturing for which enough data were collected to estimate productivity.xi References i. It is possible to make other assumptions about the functional form of the production function (e.g., to assume a trans-log production function), although this does not appear to have a significant impact on results in most cases. See for example the analysis from the Investment Climate Assessment for Turkey (World Bank, 2007a). ii. There is a large amount of literature on whether exporting improves performance (learning- by-exporting hypothesis) or whether only productive firms can export (self-selectivity hypothesis). The large literature on this topic is summarized in Tybout (2003) and Bernard and others (2007). iii. Gatti and Love (2008) do this, allowing access to credit to be endogenous in the second step. iv. This is due to omitted variable bias. It is discussed in more detail in Chapter 7 in Kumbhakar and Lovell (2000) and in Escribano and Guasch (2005). v. See, for example, Greene (2000, pp. 449-450). vi. See, for example, the discussion in Pakes (2008). vii. See, for example, the discussion by Levinsohn (2008) on the Escribano-Guasch methodology (Escribano & Guasch, 2005; Escribano and others, 2008; Escribano and others, 2005). viii. For investment climate variables, many previous studies that use firm-level data from Enterprise Surveys to look at the effect of the investment climate on various measures of firm performance control for this by replacing or instrumenting the potentially endogenous investment climate variables with region-industry averages. ix. See also comments on the Escribano-Guasch methodology by Levinsohn (2008), Pakes (2008) and Verhoogen (2008). Although the analysis is not identical to the analysis that these authors are commenting on, it shares many characteristics with it. Previous investment climate assessments have used multiple firm-level observations in a single regression. In most cases, the data for the investment climate variables and many of the firm characteristics is cross-sectional. That is, it was only asked for a single year. In contrast, productivity data was collected for three years. By replicating the investment climate variables, which were only collected as a cross-section, for each year for which there was productivity data, it was possible to run random effects panel regressions. Fixed effects could not be included because these would collinear with the investment climate variables. In this case, productivity data were only collected for a single period making all analysis cross-sectional by necessity. x. The econometric approach that is used to estimate TE is similar to the econometric approach used in other Investment Climate Assessments in several ways. See, for example, the Investment Climate Assessment for South Africa (2007) or Investment Climate Assessment for Turkey (World Bank, 2007a). 102 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Annex: III ICA Enterprise Survey Sample Composition & Population Frame Survey methodology and sample description The survey was undertaken throughout Tunisia by a survey team from IACE (Institute Arabe des Chefs d’Entreprises) and involved in-person interviews with senior managers or owners of businesses operating in Tunisia. The survey targeted 600 firms operating in Tunisia in the manufacturing and service sectors across several regions. The survey covered several regions and is stratified across three main criteria: size, activity, and location. Since there is not one single reliable source from which to draw a sample containing the information needed, the sample was drawn from multiple sources, including the Social Security Administration, INS (the Statistical Agency) and the implementing agency’s own databases of firms. The survey attempts to use parallel sampling and implementation methodology in order to facilitate comparability across countries and over time. The representative survey uses a standardized manufacturing and services questionnaire from the ICS core questionnaires with a number of additional questions designed to understand country specific issues. In Tunisia these included issues covering informality, the extent of discretion used in certain areas of the administration, and the relation between the administration and the firms. The survey attempts to capture several dimensions of enterprise managers’ experience of the local investment climate: ™™ Private managers’ relative priorities for reform of different investment climate factors. ™™ The private costs imposed by constraints in the enabling environment and support systems (and/or their impact on firm-level performance). ™™ The functioning of policies, as applied at the firm level and its unique institutional environment. Annex: III: ICA Enterprise Survey Sample Composition & Population Frame 103 ™™ The actual behavior of firms and their competitors, formal and informal. The survey field work began in June 2012 and was completed in December 2012. They survey covered four large regions including: ™™ Region A (North East ): Coastal areas around Tunis including Bizerte and Nabeul. ™™ Region B (South East): Sfax, Gabes, Médenine, Tataouine. ™™ Region C  (Center East): Covering the towns of Sousse, Monastir, Mahdia and Kairouan. ™™ Region D (West): Covering towns located in the western areas. 104 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Annex: IV Regression Tables & Additional Relevant Data Used in the Innovation Chapter * probit new products dom 19nivetmoyen vocationaltrain b7anexprience ISO email web internet > internetRD patent RD e32adrd RD1 RD2 RD3 note: email omitted because of collinearity note: internet omitted because of collinearity note: RD omitted because of collinearity note: RD3 omitted because of collinearity Iteration 0: long likelihood = -78.579618 Iteration 1: long likelihood = -72.817518 Iteration 2: long likelihood = -72.708116 Iteration 3: long likelihood = -72.701164 Iteration 4: long likelihood = -72.701114 Iteration 5: long likelihood = -72.701114 Probit regression Number of obs = 114 LR chi2 (10) = 11.76 Prob > chi2 = 0.3016 Log likelihood = -72.701114 Pseudo R2 = 0.0748 newproductsdom Coef. Std. Err. z P> | z | [95% Conf. Interval] 19nivetmoyen .1941986 .1246033 1.56 0.119 -.0500194 .4384166 vocational train .2883342 .2902776 0.99 0.321 -.2805994 .8572678 b7anexprience -.0025732 .0104523 -0.25 0.806 -.0230594 .0179129 ISO -.1913279 .2781869 -0.69 0.492 -.7365642 .3539084 email 0 (omitted) web .023319 .3174206 0.07 0.941 -.598814 .645452 internet 0 (omitted) internetRD .6382464 .6971106 0.92 0.360 -.7280653 2.004558 patent .4369838 .3294074 1.33 0.185 -.2086428 1.08261 RD 0 (omitted) e32adrd 5.48e-08 7.07e-08 0.78 0.438 -8.36e-08 1.93e-07 RD1 -.1020597 .4893262 -0.21 0.835 -1.061121 .857002 RD2 .1317308 .5093153 0.26 0.796 -.8665088 1.12997 RD3 0 (omitted) _cons -1.350208 .9706638 -1.39 0.164 -3.252675 .5522577 end of do-file . do “C:\Users\wb417696\AppData\Local\Temp|STD05000000.tmp” . mfx Marginal effects after probit y = Pr (newproductsdom) (predict) =.55351121 Variable dy/dx Std. Err z P> | z | [95% Conf. Interval] X 19nivetmoyen .076776 .04928 1.56 0.119 -.01981 .173362 3.53509 vocational train* .114231 .11467 1.00 0.319 -.110518 .33898 .675439 b7anexprience -.0010173 .00413 -0.25 0.806 -.009116 .007082 22.2193 ISO* -.0756104 .10967 -0.69 0.491 -.290562 .139341 .45614 web* .0092273 .12571 0.07 0.941 -.237155 .25561 .798246 internet~D* .2472042 .24861 0.99 0.320 -.240062 .734471 .964912 patent* .1669171 .11954 1.40 0.163 -.067371 .401205 .192982 e32adrd 2.17e-08 .00000 0.78 0.436 -3.3e-08 7.6e-08 765971 RD1* -.040287 .19277 -0.21 0.834 -.418119 .337545 .578947 RD2* .0518954 .19976 0.26 0.795 -.339626 .443417 .350877 ( * ) dy/dx is for discrete change of dummy variable from 0 to 1 end of do-file Annex: IV: Regression Tables & Additional Relevant Data Used in the Innovation Chapter 105 * pwcorr new products 19nivetmoyen vocationaltrain b7anexprience ISO email web internet > internetRD patent RD e32adrd RD1 RD2 RD3, sig star (.10) newpro~r 19nive~n vocation b7anex~e ISO email web newproduct 1.0000 19nivetmoyen 0.0781* 1.0000 0.0822 vocational~n 0.0999* 0.1019* 1.0000 0.0248 0.0145 b7anexprience -0.0029 -0.0165 0.0414 1.0000 0.9485 0.6939 0.3194 ISO 0.0541 0.0393 0.2391* 0.0686* 1.0000 0.2241 0.3496 0.0000 0.0986 email 0.0695 0.1083* 0.1646* -0.0611 0.1369* 1.0000 0.1172 0.0095 0.0001 0.1395 0.0009 web 0.1835* 0.0566 0.2004* 0.0459 0.2164* 0.2484* 1.0000 0.0000 0.1755 0.0000 0.2660 0.0000 0.0000 internet 0.0971* 0.1136* 0.1969* 0.1365* 0.1398* 0.4023* 0.2351* 0.0281 0.0064 0.0000 0.0009 0.0007 0.0000 0.0000 internetRD 0.1974* 0.1127* 0.1723* 0.0114 0.1323* 0.0564 0.2925* 0.0000 0.0123 0.0001 0.7991 0.0028 0.2046 0.0000 patent 0.1444* 0.0542 0.0726* 0.0131 0.2072* 0.0742* 0.0469 0.0014 0.2111 0.0911 0.7617 0.0000 0.0835 0.2738 RD 0.2099* -0.0175 0.1949* 0.0411 0.2446* 0.1289* 0.2219* 0.0000 0.6793 0.0000 0.3272 0.0000 0.0020 0.0000 e32adrd 0.0921 -0.0156 -0.1475* -0.0573 0.1439* . 0.0602 0.2918 0.8541 0.0776 0.4967 0.0853 . 0.4719 RD1 -0.490 -0.0324 0.0526 -0.0155 -0.0179 -0.0641 -0.1647* 0.5342 0.6711 0.4832 0.8364 0.8107 0.3910 0.0263 RD2 0.0178 -0.0301 -0.0256 0.0708 0.0642 0.0538 0.1590* 0.8220 0.6937 0.7333 0.3464 0.3902 0.4719 0.0320 RD3 0.0583 0.1118 -0.0502 -0.0938 -0.0788 0.0224 0.0213 0.4597 0.1420 0.5035 0.2118 0.2916 0.7646 0.7754 newpro 19nive vocation b7anex~e ISO email web newproduct 1.0000 19nivetmoyen 0.0222 1.0000 0.6354 vocational 0.1116* 0.1019* 1.0000 0.0157 0.0145 b7anexprie~e 0.0023 -0.0165 0.0414 1.0000 0.9609 0.6939 0.3194 ISO 0.1390* 0.0393 0.2391* 0.0686* 1.0000 0.0025 0.3496 0.0000 0.0986 email 0.1499* 0.1083* 0.1646* -0.0611 0.1369* 1.0000 0.0011 0.0095 0.0001 0.1395 0.0009 web 0.2428* 0.0566 0.2004* 0.0459 0.2164* 0.2484* 1.0000 0.0000 0.1755 0.0000 0.2660 0.0000 0.0000 internet 0.1333* 0.1136* 0.1969* 0.1365* 0.1398* 0.4023* 0.2351* 0.0037 0.0064 0.0000 0.0009 0.0007 0.0000 0.0000 internetRD 0.1651* 0.1127* 0.1723* 0.0114 0.1323* 0.0564 0.2925* 0.0007 0.0123 0.0001 0.7991 0.0028 0.2046 0.0000 patent 0.1638* 0.0542 0.0726* 0.0131 0.2072* 0.0742* 0.0469 0.0005 0.2111 0.0911 0.7617 0.0000 0.0835 0.2738 RD 0.2729* -0.0175 0.1949* 0.0411 0.2446* 0.1289* 0.2219* 0.0000 0.6793 0.0000 0.3272 0.0000 0.0020 0.0000 e32adrd -0.0579 -0.0156 -0.1475* -0.0573 0.1439* . 0.0602 0.5126 0.8541 0.0776 0.4967 0.0853 . 0.4719 RD1 -0.0961 -0.0324 0.0526 -0.0155 -0.0179 -0.0641 -0.1647* 0.2236 0.6711 0.4832 0.8364 0.8107 0.3910 0.0263 RD2 0.0838 -0.0301 -0.0256 0.0708 0.0642 0.0538 0.1590* 0.2892 0.6937 0.7333 0.3464 0.3902 0.4719 0.0320 RD3 0.0283 0.1118 -0.0502 -0.0938 -0.0788 0.0224 0.0213 0.7206 0.1420 0.5035 0.2118 0.2916 0.7646 0.7754 106 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Table 34: Manufacturing and Service Companies by Size and Region Région Size A B C D Total Small 50 26 48 38 162 Medium 115 66 55 66 302 Large 73 32 19 12 136 Total 238 124 122 116 600 Table 35: Manfacturing and Service Companies by Size and Sector SIZE Sectorty Small Medium Large Total Agro industry 21 48 19 88 Confectionaries 8 63 26 97 Textiles 8 27 21 56 Electrical and Mechanical Engineering 16 46 26 88 Others 7 20 12 39 MCCV 10 28 14 52 Commerce 60 24 9 93 Tourism 18 20 8 46 ICT 12 17 1 30 Construction 1 3 0 4 Health 1 6 0 7 Total 162 302 136 600 Table 36: Manufacturing and Service companies by region and sector REGION Activités A B C D Total Agro industry 1 36 14 16 22 88 Garments 2 23 43 11 20 97 Textiles 3 34 10 8 4 56 Electrical and Mechanical 4 45 7 22 14 88 Engineering Other 5 11 7 18 3 39 MCCV 6 15 12 12 13 52 Commerce 7 38 10 30 15 93 Tourism 8 17 13 0 16 46 ICT 9 16 7 4 3 30 Construction 10 1 1 1 1 4 Health 11 2 0 0 5 7 Total 238 124 122 116 600 Note: A higher percentage of firms that are part of a larger company innovate, supporting the findings that large firms have the highest level of innovation in Tunisia. Annex: IV: Regression Tables & Additional Relevant Data Used in the Innovation Chapter 107 Is the Establishment a Part of Figure 75:  Figure 76: Innovative Firms by Age Group a Larger Company, by Non- Innovative vs. Innovative Firms Is the establishment a part of a larger company? 60% 100% 48 50% 80% 36 40% 60% 30% % of rms 76% 71% 21 No 18 20 20% 16 16 40% Yes 13 8 10% 5 20% 24% 29% 0% 0-3 yrs 3-5 yrs 5-10 yrs 10-15 yrs 15+ yrs 0% Non-Innovative Innovative Innovative Non-innovative Table 37: INDirect Exports and Input Variables INDIRECT EXPORTS and input variables (correlation coefficient) Non-innovative Innovative -0.0645 -0.1225* ISO certification (0.3022) (0.0419) -0.0907 -0.0985 Employees with university degree and higher (0.1496) (0.1082) -0.074 0.0595 Email (0.2379) (0.3237) -0.0067 -0.0507 Own website (0.9151) (0.4005) 0.0336 0.003 Broadband Internet (0.5905) (0.9603) -0.0001 -0.1591* R&D (0.9982) (0.008) -0.0204 -0.1542* Patent (0.7507) (0.0121) -0.0732 -0.1998* Using Internet for R&D (0.2809) (0.0015) Note: * Significant at 10%; P value in parenthesis. Table 38: Direct Exports and Input Variables DIRECT EXPORTS and input variables (correlation coefficient) Non-innovative Innovative 0.2287* 0.2491* ISO certification (0.0002) (0.0000) -0.1811* -0.1876* Employees with university degree and higher (0.0038) (0.0021) 0.0685 0.1098* Email (0.2759) (0.068) 0.1027 0.1186* Own website (0.1005) (0.0487) 0.1425* 0.083 Broadband Internet (0.0221) (0.1676) 0.1602* 0.1528* R&D (0.0104) (0.0109) 0.1120* 0.0705 Patent (0.0801) (0.2537) 0.1864* 0.0136 Using Internet for R&D (0.0058) (0.8309) Note: * Significant at 10%; P value in parenthesis. 108 Investment Climate Assessment: Enterprises’ Perception in Post Revolution Tunisia   |   FEBRUARY 2014 Has the Establishment Benefited from a Facility Upgrade Scheme? Figure 77:  Has the establishment bene ted from a facility upgrade scheme? 60% % of rms reporting "yes" 50% 40% 30% 56% 20% 41% 10% 0% Non-innovative Innovative Innovative vs. Non-Innovative Firms, by Inability to Benefit from Facility Figure 78:  Upgrade Scheme Innovative vs. non-innovative firms by inability to benefit from facility upgrade scheme 45% 39% 40% 35% % of firms reporting "yes" 31% 30% 29% 30% 25% 21% 19% 20% 16% 16% 15% 13% 11% 10% 8% Non-innovative 4% 4% Innovative 5% 2% 0% Lack of information Lack of funding Procedures Warranty conditions Eligibility criteria No need Other Availability of Scientist and Engineers Figure 79:  Tunisia 8 Jordan 20 Lebanon 30 Turkey 35 Morocco 36 Egypt 40 Algeria 44 Syria 63 Oman 99 0 20 40 60 80 100 120 GCI Country ranking/142 Source: Global Competitive Index, 2012. Annex: IV: Regression Tables & Additional Relevant Data Used in the Innovation Chapter 109 NOTES NOTES NOTES