96187 BURKINA FASO RWANDA LIBERIA SIERRA LEONE SOUTH SUDAN SOME POSITIVE RESULTS ACHIEVED IN A COMPLEX ENVIRONMENT Support to Investment Climate Reforms Liberia – Key facts The World Bank Group’s (WBG) work on investment climate Africa’s second oldest independent nation, Liberia is a small (IC) reform in Liberia started in early 2006, less than three years country with a population of 4.3 million. After the end of the after the end of the second civil war. The program adopted a two civil war and the return to democracy in the mid-2000s, Liberia pronged approach, aiming at: (i) rebuilding the basic legal and experienced a significant economic recovery, with real GDP institutional framework for business activities; and (ii) attracting growing at an average 11.4% over the 2006-2013 period and foreign direct investments (FDI), which in the pre civil war nominal GDP reaching US$ 2 billion in 2013. Economic growth period accounted for a large share of economic activity, especially was largely driven by large scale foreign investments in mining in agriculture and mining. and commercial agriculture, with the rehabilitation of operations that had been destroyed during the civil war and the launch of After some initial diagnostic activities, WBG operational work some greenfield projects. However, due to the capital intensive was articulated into two phases. Over the 2007-2011 period, nature of most investments in natural resources, the rapid GDP WBG assistance targeted a broad range of themes, including growth only partly translated into new employment opportunities the reform of business registration, the improvement of trade and the country is still afflicted by pervasive poverty. In 2013, logistics, investment policy & promotion, the development of Liberia had a per capita GNI (Atlas method) of just US$ 410, one special economic zones (SEZ), legal reforms linked to Doing of the lowest in the world. In recent times, social and economic Business (DB) indicators, as well as the setting up of a platform conditions were further aggravated by the Ebola epidemics, which for public private dialogue (PPD). During the subsequent by end 2014 had caused some 3,500 deaths. 2011-2014 period, the scope of work was further expanded, with were allocated to seven reform areas of similar importance, each the inclusion of components targeting business taxation reform accounting for between 10% and 20% of total funding. and the improvement of business regulations, with focus on the reform of business inspections, and industry specific reform work, The WBG program was implemented in parallel with other IC with special emphasis on agri-business. The value of the WBG reform initiatives funded by various donors. In particular, WBG assistance is quite significant, with a total budget of some US$ reform activities were actively supported by the Investment Climate 9.5 million. In line with the broad IC reform approach, resources Facility for Africa (ICF), which provided about US$ 2.5 million to finance technical assistance and investments in IC reform-related Budgetary Allocations Reflect a Broad IC Reform Agenda Budget Composition by Reform Area infrastructure (e.g. refurbishment of the business registry). 10% 20% 12% During the first phase, the program was implemented in a difficult Business Registration Public Private Dialogue environment, characterized by extremely weak capabilities in Industry Speci c IC Business Taxation counterpart institutions and changes in policy priorities, which led Investment Policy and Promotion 12% to the discontinuation of assistance in some areas (SEZ legislation, Trade Logistics 19% reform of the investment promotion agency). Conditions improved Business Regulations during the second phase, although activities were slowed down by 13% the general elections and securing and maintaining support from 14% key decision makers has remained quite challenging. Initial Analytical Work on SEZ and Investment Work Promotion Agency Reform Suspended General Elections 2006 2007 2008 2009 2010 2011 2012 2013 2014 First Phase Second Phase 1 Results of IC Reform Efforts clearance times. As a result, the average waiting time for imported goods passing through the Monrovia Freeport (which handles The WBG program was quite successful, contributing to the about 90% of all merchandise traffic) declined by 54 hours in 2010, implementation of 17 IC reforms over the 2008-2013 period. The 9 hours in 2011, 15 hours in 2012 and another 3 hours in 2013. vast majority of reforms refer to DB-related themes, with business registration and trade logistics cumulatively accounting for almost Investment Policy & Promotion. WBG played a crucial role in half of all reforms. Non-DB related reforms include the enactment the adoption of the Investment Act of 2010, which considerably of a new investment code, the improvement of business inspections improved the legal framework for foreign direct investment (FDI), mechanisms, and the setting up of a platform for PPD. WBG- namely through a reduction in the number of activities reserved for supported reforms contributed to improve Liberia’s positioning nationals. The WBG also provided considerable assistance to the in DB rankings, with the country moving from the 170th position National Investment Commission (NIC) to support its transformation in 2007 to the 144th place in 2013. A similar improvement is also from an eminently regulatory body (in charge of managing investment shown by other indicators used to measure the quality of the incentives) into a promotional agency. However, early reform efforts business environment, such as the World Bank’s Regulatory Quality met with considerable opposition from NIC management, fearful Indicator and the Heritage Foundation’s Economic Freedom Index. of losing power, and assistance was discontinued. Work with NIC WBG Contributed to Significant Results in Business Registration and Trade Logistics was recently resumed and WBG is currently assisting in attracting Number of Reforms Implemented investments is selected priority sub-sectors (fruits and vegetables; Business Registration 4 fisheries and aquaculture; and coastal and road transport). Trade Logistics 4 Legal Framework 3 Construction Permits 2 Public Private Dialogue. The WBG program contributed to the Business Taxation 1 establishment of the Liberia Better Business Forum (LBBF), intended Business Licensing 1 to facilitate policy dialogue on IC reform. Established in 2007, the Investment Promotion 1 LBBF has been quite active in promoting reforms in various areas. PPD 1 Major achievements include the adoption of a series of laws that DB Reform Non-DB Reform led to the adoption of Liberia’s first commercial code in 2010, and the elimination of the advance turnover tax, which, however, was Achievements in Selected Reform Areas subsequently reinstated. Business Registration. WBG played a major role in the reform of Private Sector’s Views on IC Reforms business registration procedures. Improvements concerned: (i) the progressive concentration of responsibilities in one single office, Attitudes towards IC reforms were assessed through interviews eventually leading to the establishment of the Liberia Business with local small and medium enterprises (SME) and selected Registry (LBR) in April 2011; (ii) the simplification of procedures foreign investors. IC reforms are generally appreciated by the and documentation (e.g. elimination of the business trading license, business community, but with a prevalence of moderately positive elimination of physical inspections prior to registration); and (iii) the views and some variations across IC themes. In fact, while 60% of elimination of certain fees and other out-of-pocket expenses (e.g. the firms did notice an overall improvement in the IC, one quarter introduction of standardized forms for Articles of Incorporation, of interviewees did not perceive any appreciable change, and the which in principle enables businesses to register without the rest expressed a negative view. Regarding specific IC themes, assistance from an attorney). As a result, registration times and costs labor regulations (an area in which WBG was not involved) and were significantly reduced, leading to significant cost savings for the business licensing (in which instead WBG played a role, with business community. the recent elimination of the trade license) are the areas with the Reforms Received a Moderately Positive Assessment, with Some Variation Across IC Themes Trade Logistics. The first reform in trade logistics concerned the Views Expressed by Interviewees (38 Enterprises) 100% reduction the Pre-Shipment Inspection (PSI) fee, which in mid- 2008 was lowered from 1.5% of FOB value of imports to 1.1%. 80% While the reform does not apply to certain imported goods (rice, 60% fuel and vegetable oil), it nonetheless resulted in considerable 40% savings for importers. Additional simplification measures included 20% the elimination of the fee to obtain an import permit, followed by 0% Overall IC Labor Business Tax Import a drastic reduction in the number of goods for which import or Regulations Licenses Administration Procedures Signi cantly Improved Somewhat Improved Neither Improved Nor Worsened export permits are required. In addition, WBG supported a series Somewhat Worsened Signi cantly Worsened Don't Know of improvements in customs procedures, aimed at reducing customs 2 highest proportion of positive views, more than two thirds. Views 0.4% of private investment, and their importance grew from 0.1% in are also positive regarding tax administration (in which WBG was 2008 to 0.5% in 2011 and 2012. not involved) whereas opinions are much more divided regarding import transactions: while two fifths of interviewees were unable Impact of IC Reforms - Enterprise Formation to comment, the others were almost equally divided between In Liberia, the number of business registrations has seen a six those observing improvements and those noticing no change or, fold increase between 2007 and 2013, with newly registered firms sometimes, a worsening of the situation. passing from little more than 1,000 in 2007 to more than 7,200 in 2013. This remarkable increase coincides with the deployment of Impact of IC Reforms - Reduction of IC reform efforts, but also with the end of the civil war and the Compliance Costs ensuing economic recovery, and the influence of these two factors is WBG-supported reforms greatly contributed to reduce the difficult to disentangle. The scarcity of data for the pre reform period administrative burden faced by the private sector in complying (figures are available just for 2007) does not allow to compare the with business regulations, resulting in significant cost savings. historic trend with registrations in the post reform period. However, Over the 2008-2013 period, 10 reforms generated cost savings taking into account the results of earlier work on the impact of worth a total of some US$ 8.1 million. The bulk of cost savings IC reforms on business registrations,1 it can be grossly estimated consists of ‘monetary savings’, related to the elimination or that incremental registrations attributable to IC reforms account reduction of fees and other out-of-pocket expenses. However, some for about 10% of the firms registered after the start of the reform reforms also achieved ‘time savings’, determined by the reduction process, i.e. about 2,700 firms. in the time required to handle administrative procedures, and/or ‘financial savings’, linked to the cash flow benefits resulting from Business Registrations Show a Remarkable Increase Since the Mid-2000s Number of Newly Registered Firms reduced waiting time at the customs. 8,000 7,000 6,000 Reforms in trade logistics are by far the main earners of cost savings 5,000 (nearly US$ 6 million), accounting for nearly three quarters of 4,000 total cost savings. One single reform, the reduction of the PSI fee, 3,000 resulted in cost savings worth some US$ 4.6 million, making it one 2,000 of the ‘highest yield’ IC reforms implemented by WBG programs 1,000 in Africa. Positive results were also achieved by reforms in business - 2007 2008 2009 2010 2011 2012 2013 registration, generating cost savings of about US$ 1.5 million. Pre Reform Post Reform Some savings (US$ 0.5 million) were also achieved in the area of construction permits, thanks to the reduction of the fees levied by However, new registrations do not necessarily involve the launch the Monrovia City Corporation and the Ministry of Public Works. of new business activities and newly established firms may go out of business shortly after their establishment. Available evidence Trade Logistics Reforms Yielded Considerable Cost Savings suggests that the share of non-operational firms is quite substantial. Cost Savings in US$ Million (2013) 7.0 In fact, the survey of local firms carried out for the study suggests that 0.2 6.0 0.07 in early 2014 only 63% of the firms registered in 2008-2009 were 5.0 5.6 (still) in operation. Based on this result, it can be estimated that IC 4.0 reforms have plausibly facilitated the establishment of about 1,700 3.0 new operational firms. 2.0 1.0 0.6 0.02 0.9 0.6 Impact of IC Reforms – Investment and 0 Trade Logistics Business Registration Construction Permits Employment Generation Monetary Savings Time Savings Financial Savings Impact via the Enterprise Formation Process. The acceleration of the The value of cost savings has been increasing overtime, due to the enterprise formation process induced by IC reforms translated into coming on stream of new reforms and the increasing number of an increase in both investment and employment levels. Information firms/transactions benefiting from earlier reforms. In relative on the investments made and jobs created by newly established firms terms, over the 2008-2012 period cost savings accounted for about was collected through the survey of local firms, which provided data 1 See in particular, Bruhn M, “License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico.” Policy Research Working Paper 4538, World Bank, 2008; Philippe A, R Burgess, S J Redding, and F Zilibotti, The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India, American Economic Review, 2008; and Motta M, A M Oviedo, and M Santini, An Open Door for Firms, Viewpoint, Note N° 323, June 2010. According to these studies the share of incremental registrations is in the order of 5%, but they only focus on the effects of simplification of business registration procedures. As in Liberia business registration reforms were accompanied by several other IC reforms potentially impacting on the enterprise formation process, a 10% share appears more realistic. 3 for investment and job creation both at the moment of establishment Reforms are Generally Sustainable But There are Challenges and in subsequent years. The total investment associated with IC Number of IC Reforms reforms can be estimated at between US$ 1 million and US$ 12 10 9 million. The difference between the two estimates depends upon 8 the parameters used, with the ‘low scenario’ being based on median Fully Sustainable 7 Positive 6 values per firm and the ‘high scenario’ making use of (much higher) Mostly Sustainable 5 Fairly Positive Not Sustainable 4 Uncertain average values. Estimates of job creation range from some 4,100 jobs Not Rated 3 Negative in the ‘low scenario’ to 4,700 in the ‘high scenario’. 2 1 0 The value of investment associated with IC reforms increased Current Sustainability Future Prospects overtime. However, in relative terms the impact is fairly modest, as The situation is quite positive for reforms in trade logistics and even in the most optimistic scenario the investments associated with business registration. In trade logistics, all the measures aimed at IC reforms account for 0.9% of total private investment at the most. streamlining import-export transactions are still fully in force and the reform process is actually continuing, again with WBG support, as The Impact of IC Reforms Varies Greatly Depending Upon the Parameters Used Share of Total Private Investment witnessed by the introduction in mid-2014 of measures to further 0.9% simplify customs clearance procedures for larger importers. In business 0.7% registration, the LBR is now well-established and, despite some 0.7% operational problems (the software package is showing important 0.5% 0.4% limitations and will need to be upgraded in the future), it is able to discharge its functions in a reasonably effective manner. The initial enthusiasm for the reform has somewhat lessened and the envisaged 0.03% 0.06% 0.04% 0.06% 0.07% elimination of the annual renewal of registrations did not materialize. 2008 2009 2010 2011 2012 The sustainability of past reforms is, however, not in question. Low Scenario High Scenario A case of clear policy reversal is found in the area of business Impact of Investment Promotion and Industry Specific Reforms. taxation. In October 2013, the Government reinstated the 2% In Liberia, FDI has increased dramatically since the mid-2000s, advance turnover tax that had been abolished by the Consolidated rising from US$ 100-150 million/year in 2006-2007 to about US$ Tax Amendments Act of 2011. This was in response to a significant 450-500 million/year in 2010-2011, and doubling to about US$ 1 shortfall in overall tax receipts (see box). The move prompted billion/year in 2012-2013. However, the surge is largely attributable a strong, negative reaction in business circles. Nonetheless, all to a limited number of very large investments in agriculture and indications are that the turnover tax will remain in force also in mining made by multinational corporations (e.g. Arcelor Mittal, the future (at least until a new simplified taxation regime for micro BHP Billton, and Firestone) that are mostly unconnected to the and small enterprises has been developed). Prospects also appear WBG program. WBG assistance aimed at attracting smaller somewhat problematic for the LBBF. While the forum has proved investors into agri-business and related sectors is still ongoing. a useful instrument to influence government policy towards the While prospects are fairly promising, by end 2013 promotional private sector (as illustrated above), there are doubts that sufficient work had not yet translated into tangible investments. funds can be mobilized (around US$ 200,000 per year) to ensure its continued existence. Sustainability of IC Reforms Liberia’s Advance Turnover Tax The majority of IC reforms are sustainable, but there are also In principle, payments under the 2% turnover tax are considered negative cases and doubts regarding future prospects. Out of the ten as an advance to be deducted from the total profit tax payable reforms analyzed in detail, eight can currently be regarded as fully by business taxpayers. However, the turnover tax is also a sort of or mostly sustainable, with one reform clearly unsustainable and one minimum tax: in case the advance payment is greater than the not rated due to its recent implementation. Future prospects are also total tax to be paid, the difference is retained by the treasury. The generally positive, although the majority of reform are expected to abolishment of the tax was aimed at correcting this imbalance, face some mild problems and two reforms are regarded as uncertain but seemingly opened the door to opportunistic behavior. In fact, or not sustainable. according to government sources, in 2012 no less than 98% of enterprises previously subject to the turnover tax declared that they were operating at a loss. As a result, they did not pay any tax at all, causing a major drop in tax proceeds. This case study is part of the report Evaluation of The World Bank Group’s Investment Climate Programs: Focus on Impact and Sustainability. This evaluation was carried out as an independent evaluation by Economisti Associati on behalf of the World Bank Group. The full report is available at: 4 http://documents.worldbank.org/curated/en/2014/11/24397624/evaluation-world-bank-groups-investment-climate-programs-focus-impact-sustainability