78071 April 2013 - Number 92 FIRM PERCEPTIONS IN POST-REVOLUTIONARY TUNISIA Djibrilla Adamou Issa1 limiting competition, investments, and job creation. Domestic private investment Introduction: Through steady structural remained low and increasingly focused on real reforms and good macroeconomic estate, considered a relatively safer sector. management, Tunisia has been successful in sustaining growth. The country enjoyed a 4.8% The Transitional Government and Reforms: average annual growth in GDP over most of the Reforms initiated by the transitional 2000‟s, placing the country among the leading Government to improve transparency have not performers in the region. Most of the growth changed firms‟ perception and new challenges was driven by private enterprises in the export are identified by firms in post-revolutionary sectors. Tunisia did better than most countries Tunisia. The new reforms aimed to reduce red in the region because it started structural tape, eliminate discretion and increase reforms earlier and stayed the course in a transparency in the regulatory and legal gradual fashion. But many emerging countries, framework for investments, and remove such as Malaysia and Turkey, which share privileges and monopolies/concessions similar growth models, outperformed Tunisia. towards greater market contestability and competition. The Government launched a Tunisia and Crony Capitalism: The process to revise the Investment Code and the uncompetitive business environment in Tunisia Competition Law and regulations to reduce did not support the dynamism found in high- discretionary application of rules and to growth economies. While macroeconomic increase the transparency of the Competition policies were sound and a substantial package Authority. A survey of 600 enterprises in of incentives successfully attracted FDI to the Tunisia in 2012 identified key challenges2: exporting offshore sectors, the economic regime under former President Ben Ali was Leading constraint currently identified by characterized by lack of transparency, cronyism Tunisia firms: Instability and uncertainty are and anti-competitive behavior, discouraging the major constraints to firms‟ operations in entrepreneurship and private sector Tunisia. The Tunisian revolution, besides investment, particularly in the „onshore‟ removing the former President and his regime, domestic economy. Heavy and pervasive created new challenges for the private sector intervention by the state in the economy and related to uncertainties about the political and slow progress in improving the business macroeconomic future of the country. This is environment in the „onshore‟ sector plagues well reflected in firms‟ responses during the much of the private sector in Tunisia to date, survey. Over half of the surveyed enterprises 1 Djibrilla Adamou Issa works at the Finance and Private 2 Sector Development Unit, the Middle East and North Africa The reference is to the Enterprise Surveys conducted for Region (MNSF1), the World Bank. This Quick Note was the Investment Climate Assessments (ICA) undertaken by cleared by Simon Bell, Sector Manager (MNSF1). . the World Bank in the latter part of 2012. perceive political instability as a major or very particularly problematic. By sector, severe constraint to their operations, making manufacturing firms are more constrained than political instability the top constraint among 20 are tourism and services firms. This does not different issues. It is the top constraint for all necessarily mean that the Tunisian labor force sectors. The tourism sector was particularly is not well educated. However, it does indicate concerned with 65% of firms seeing political that the skills available in the labor market do instability as a major constraint to their not fully match firms‟ needs. business (figure 2). Coming in third place is macroeconomic uncertainty, with one out of Figure 2: Leading Constraints in Tunisia, by Sector every three firms indicating it is a major (or very severe) constraint to their operations Leading Constraints in Tunisia, by Sector (figure 1). Large firms in particular perceive Political instability macroeconomic uncertainty as highly Inadequately educated workforce constraining (44% of large firms vs. 33% of Macroeconomic uncertainty medium firms and 30% of small firms (figure Access to Financing (Ex: Collateral) 3). The impact of these constraints varies across Electricity Tunisia. They have most negatively affected Corruption firms in the Greater Tunis area, which includes Practices of competitors in the informal sector Ariana, Tunis, Manouba, Ben Arous, Bizerte, and Nabeul (figure 4). Customs and Trade Regulations Tax Rates Figure 1: Leading Constraints in Tunisia Telecommunications Tourism Services Transportation Manufacturing Leading Constraints in Tunisia 2012 Labor Regulations (Like Social Insurance) Political instability 55.6 Courts Inadequately educated workforce 39.0 theft,disorder and crimes 0 10 20 30 40 50 60 70 Macroeconomic uncertainty 34.8 percent of firms saying "major" or "very severe" constraint Access to Financing 33.9 Access to Finance: Overall, one out of every Electricity 33.5 three Tunisian firms finds access to finance a Corruption 28.9 major impediment (figure 1). This is a result of Practices of competitors in the informal sector 25.9 unfavorable conditions, including the high Customs and Trade Regulations 25.8 collateral required to obtain a loan. Also, small (34%) and medium firms (40%) find access to Tax Rates 24.5 bank financing more constraining than large Telecommunications 22.7 ones (2%) (figure 2). By location, firms in Transportation 22.5 Jendouba, Beja, Kef, Siliana, Sidi Bouzid, 0 10 20 30 40 50 60 Kasserine, and Kairouen are the most percent of firms saying "major" or "very severe" constraint constrained by access to finance - 51% of firms in these areas found access to be a major/severe Worker Skills and Education: The second constraint. According to the data, tourism firms leading constraint to firm operation is do not face major problems to obtain financing inadequate worker skills and education, with compared to manufacturing (34%) and services 39% of sampled firms indicating that the lack of (36%). Therefore, more favorable conditions for an adequately educated workforce was lending should be offered with a specific April 2013 · Number 92· 2 emphasis on small and medium enterprises in need to be addressed on a priority basis. manufacturing and services firms, and firms in Customs and trade regulations are particularly identified regions. constraining for manufacturing (27%) and service (24%) firms. Also, the larger the firm is, Figure 3: Leading Constraints by Firm Size the higher the constraint in that regard (figure 3). This issue specially affects firms in Sfax, Leading Constraints in Tunisia, by Firm Size Gabes, and Mednine, where 36% of firms in Political instability these cities perceive customs and trade regulations as a major or very severe constraint Inadequately educated workforce to their businesses (figure 4). This issue is also Macroeconomic uncertainty accompanied by a high level of corruption (29% of firms-figure 1). Access to Financing Figure 4: Leading Constraints in Tunisia, by Electricity Location3 Corruption Leading Constraints in Tunisia, by Location Practices of competitors in the informal sector Political instability Customs and Trade Regulations Inadequately educated workforce Large Macroeconomic uncertainty Tax Rates Medium Access to Financing Telecommunications Small Electricity Transportation Corruption Practices of competitors in the informal sector 0 10 20 30 40 50 60 70 percent of firms saying "major" or "very severe" constraint Customs and Trade Regulations Tax Rates Access to Infrastructure: Private firms in Telecommunications Region D Tunisia complain about inadequate levels of Transportation Region C power supply, commonly interrupted Labor Regulations (Like Social Insurance) Region B telecommunications, and poor transportation. Courts Region A One out of every three firms in Tunisia finds theft,disorder and crimes access to electricity highly constraining and 0 10 20 30 40 50 60 70 23% of firms have a problem with both percent of firms saying "major" or "very severe" constraint telecommunications and transportation (figure 1). Manufacturing firms are the most Conclusions: The Tunisia ICA identified the constrained in electricity (36%) compared to following areas for reform: 28% of services firms and 25% of tourism firms. Political and macroeconomic uncertainty is the most Manufacturing firms are also the most commonly shared constraint identified by private constrained in transportation (figure 3). companies in Tunisia across sectors and regions. The Government will need to build credibility There are some regulatory and governance issues that require attention. With a growing export market in Tunisia, firms perceive 3 Region A includes the Greater Tunis cities (Ariana, Tunis, Manouba, Ben Arous, Bizerte, and Nabeul), Region B customs and trade regulations as constraining includes Sousse, Mahdia, and Montasir, Region C includes their growth. To maintain and further enhance Sfax, Gabes, and Mednine, and Region D includes growth, customs and trade facilitation reforms Jendouba, Beja, Kef, Siliana, Sidi Bouzid, Kasserine, and Kairouen April 2013 · Number 92· 3 with investors and citizens through a new set of access to information by lenders are explaining engagements that encourage consultation, factors. Banks compensate the lack of transparency and accountability, while information through over-collateralization. establishing a clear strategy that gives emphasis Around 87% of firms interviewed in Tunisia to promoting inclusive, private sector led during the enterprise survey indicated that they growth. are required to have land titles as collateral to secure loans compared to 67% in Jordan. On Inadequate worker skills and education is a major average, the amount of collateral requested by constraint. The efforts to expand tertiary banks is as high as 176% of the value of credits education have not been matched by job requested by firms overall – and 203% for small opportunities. As a result, in recent years the firms. Tunisia needs to explore mechanisms, increase in unemployment has mostly fallen on including risk mitigations instruments, young and educated individuals, reflecting a allowing SMEs to have better access to finance. growing structural imbalance between the demands for labor, tilted towards the unskilled, Customs regulations and trade logistics still impose and an increasing supply of skilled labor. The significant transaction costs on Tunisian firms. For persistently high unemployment rate reflects a key exporting sectors in manufacturing and rapid growth in the labor force and the large services, logistic costs account for 20 to 73% of and widening gap between the profile of gross margins. Overall, even if Tunisia is above demand and labor supply. Therefore, attention or at par with the overall MENA average in must be directed towards equipping students term of global Logistics Performance, it still with the necessary skills and tools to be able to lags behind in terms of “Logistics Competence� fulfill the needs of private firms. compared to its regional peers and remains way below the best performers in the world. There is an important regional dimension to Finally, despite improvements in custom‟s, unemployment and the lack of opportunity in there is still room for improvement in terms of Tunisia. The ICA looked into the regional import and export control procedures and dimension of the investment climate to provide delays of clearing and releasing containers in benchmarks for policy makers concerned with Rades Port (the main container port of Tunisia) the increased dichotomy between the inland which now averages 6 days. Tunisia needs to regions and the more affluent urban and coastal improve trade logistics to lower the cost of centers. It is estimated that in some exports for Tunisian enterprises in the governorates unemployment is double the following areas: (i) infrastructure; (ii) transport national average while firm population density services; and (iii) other logistics support is less than half the figure found in urban services. centers. At the policy level, Tunisia will need to Contact MNA K&L: address gaps and failings in prior measures Gerard Byam, Director, Strategy and Operations. that limited inclusive growth – particularly in MENA Region, The World Bank regions outside the major urban centers and the Regional Quick Notes Team: off-shore enclaves which has limited the impact Omer Karasapan, and Roby Fields on employment and skewed opportunities Tel #: (202) 473 8177 towards a privileged few. The MNA Quick Notes are intended to summarize lessons learned from MNA and other Bank Knowledge Access to finance remains an issue, especially for and Learning activities. The Notes do not necessarily SMEs and firm in the manufacturing sectors. Lack reflect the views of the World Bank, its board or its of collateral by private companies and limited member countries. April 2013 · Number 92· 4