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Lebanon SME Strategy: A Roadmap to 2020

“How-to” of Financing Technology Acquisition, Innovation and

Entrepreneurship

Izmir, Turkey

Thursday 4 June, 2015

Zeina El Khoury

Head of Enterprise Team

Ministry of Economy and Trade

SMEs are the engine of growth of economies. In Lebanon, they represent more than 90% of registered firms, employ 50% of working population, yet contribute only ~27% of total revenues

Number of Registered SMEs per Turnover

47,474

8,196

4,804

6,870

1,925 793

<150 M 150-500M 500M-1B 1-5B >5B LTO

90% of Enterprises

NOTE

As per the revenue department at the MOF, the

number of all tax payers is almost 100,000

Excluding the trade and crafts sectors the number

becomes 70,062

Using turnover as the only criteria , enterprises

with <LBP 5 Bn in turnover were considered

SMEs, summing up to 67,344 (96.1% of

enterprises)

NEW SME definition proposed by MOET

The proposed definition combines annual turnover

and number of employees as follows:

- Micro Enterprise: Less than LBP 500 million

AND less than 10 employees

- Small Enterprise: Less than LBP 5 billion AND

less than 50 employees

- Medium Enterprise: Less than LBP 25 billion

AND less than 100 employees

6/25/20152

SMEs are mainly in Mount Lebanon (55%) and Beirut (23%), and operate mostly in Trading (53%), Real estate (13%) and Manufacturing (12%)

37,033

15,226

6,784

3,314 3,290

1,697

Mount

Lebanon

Greater Beirut North Lebanon Bekaa South Lebanon Nabatiyeh

(Jebel Amel)

Wholesale, Retail Trade

and Repairs, 53%

Manufacturing, 12%

Real Estate, Renting

and Business Activities, 13%

4%

5%

2% 4%

4%3%

Wholesale, Retail Trade

and Repairs

Manufacturing

Real Estate, Renting

and Business Activities

Transport, Storage

and Communications

Construction

Financial Intermediation

Hotels and Restaurants

Community, Social and

Personal Service Activities

Other

Geographic Distribution of SMEsSectoral Distribution of SMEs

6/25/20153

Key Overview of the Support Waves

Waves

Key Active Stakeholders

Support Areas

Laws and Regulations

Financing and Investments

Economic Zones & Incubation

Space

Early 1990s After 2005Early 2000s

Government

Int’l Orgs

NGOs

Private Financers

Strengthening of Enabling

EnvironmentFocus on Sectorial Efforts

Support for

Entrepreneurship and SME

� Set the enabling environment for economic growth1

� Establishment of IDAL in 1994

� Reactivation of Beirut Stock Exchange in 1996

� Launch of Economic Zones concept

� Launch of National “Investment Law” in 2001

� First DB2 Report for Lebanon Triggering SME Support

� Establishment of Kafalatin 2000

� Long-term subsidized loans focusing on selected sectors driven by BDL with development agencies support (e.g., EIB)

� Update of National “Investment Law” in 2001

� Lebanon-Paris III Reform Program prompted focus on SMEs

� Issuance of BDL Circular 331 promoting bank investments

� Rise of angel and venture capital investments

� Launch of IBEL by PCM in 2010

� Launch of Business Development Centers and “Logistics Free Zone”3

� Private sector/NGOs launch initiatives to promote SME4

NON-EXHAUSTIVE

In the past two decades, Lebanon witnessed several waves of interest in supporting private sector including entrepreneurs and SMEs

6/25/20154

Particularly in the past few years, Lebanon has seen the advent of several public and private sector support initiatives

6/25/2015 5

Key Stakeholders

Networking and Mentorship Awards and Competitions PPP Programs

Incubators and AcceleratorsFunding Solutions

(VCs, Crowd funding, etc.)NGOs

Awards and Competitions PPP Programs

NGOs

Financing Options (non-exhaustive)

The Financing landscape evolved significantly in the past few years, to include diverse innovative options and covering the full life cycle of a firm

6/25/2015 6

SEED START-UP/EARLY STAGE GROWTH COMPANIESMATURE

BUSINESSES

Grants– ISME World Bank

Project $2.5– Competitions

Crowdfunding– Zoomal

– Eureeca

– Zoomal

– Eureeca

Guarantees

– Kafalat

– ESFD

– IM USAID/Berytech fund

(equity guarantee) $15

Equity

Financing

– Lebanese Business

Angels

– BdL 331 (commercial banks

and funds $400+)

– Berytech FUND II $50

– IM USAID/Berytech fund

$15

– Thimar Tripoli $25

In addition to regional funds

(Wamda, Saned Partners etc…)

– ISME World Bank

Project $25

– IM USAID fund $15

– MEVP $50

– Leap $50

– Thimar Tripoli $25

– In addition to regional

funds (Wamda, Saned

Partners etc…)

– MEVP $50

– Leap $50

In addition to

regional funds

(Euromena Fund

etc…)

Debt – Microcredit− Faro Fund CoC

− ESFD

– Commercial banks

(subsidized loans)

– Commercial banks

(subsidized loans)

Evolution of funding landscape

6/25/2015 7

Funding landscape

DiscontinuedM S Active

Size of Funding

BUILDING

BLOCK EQUITY

FUND

Eq

uit

y C

ap

ita

lD

eb

t C

ap

ita

l

Subsidized Loans

New Wave of

Subsidized Loans

Targeting High

Tech, Environment,

Renewables, etc.

2000 2005 2010 Today

BDL 331

ILLUSTRATIVE

In sum, more than 150 initiatives have spurred…

6/25/2015 8

State of Public and Private Support

� There are ~45 public sector ongoing and

planned initiatives and programs (some

pending in the government’s pipeline)

� Main focus on four key areas such as

legal and regulatory, capabilities

building and market structure

� These efforts target all of Lebanon and

many of them catering for all sectors

� There is noticeable focus on Agriculture,

Industry and ICT sectors as they are

considered as promising sectors

Summary of Public Support

� More than a 100 initiatives and programs

target SMEs

� Majority of established programs are driven

by the private sector, with noticeable

involvement of NGOs

� Overwhelming majority of these programs

addresses capability development and

access to capital

� Most current programs target all of

Lebanon with the majority also catering

for all sectors, with a slight focus on ICT

Summary of Private Support

Despite all these efforts, SMEs are still facing challenges, and require more support given their potential

6/25/2015 9

Challenges facing SMEs

Culture

� Everlasting Owner-Manager, Limited institutionalization, professionalization of management

� Family First, Hereditary and family-centered approach to owning and managing businesses

� The 2nd 2-Million, Low participation of women in SME leadership positions

Capabilities

� Ephemeral System of Capabilities, Capabilities, organizational and individual, are not systemically developed

� The Middle Management Gap, Large gap in middle management due to emigration (unfavorable socio-economic conditions) and poor talent retention ability

� Capability Mismatch, Mismatch in human capital supply and market requirements

Capital

� Capital Mismatch, Mismatch in target, type and quantity of capital, with the dominance of costly and highly collateralized debt

� Distorted Cost of Capital

� Outside Investors Persona Non Grata, Low appetite for "outsider" institutional / active investors and fear of loss of control

Employment and Labor Law

Research & Innovation

Capabilitie

s

Capita

l

Culture

6/25/2015 10

MENA Share of SME Loans in Total Loans (%)

0.5%

2%

2%

2%

4%

4%

5%

6%

8%

10%

15%

16%

20%

24%

26%

Qatar

Oman

Kuwait

SaudiArabia

Syria

UAE

Egypt

Palestine

MENA

Jordan

Tunisia

Lebanon

Yemen

Morroco

DeveloppedCountries

Proportion of Investments Financed by Equity or

Stock Sales

9.3

4.5 4.3

2.5

0.6

Eastern Europe

& Central Asia

High-income

OECD

Latin America

& Caribbean

Lebanon Middle East &

North Africa

World Bank Enterprise Survey, 2009Union of Arab Banks Survey, 2011

Share of SME loans in Lebanon is 16%, and only 2.5% of Investments are financed by Equity

6/25/2015 11

While small, most equity funding was for seed/angel and early stage SMEs, and most of the funded businesses had a significant ICT component in their value proposition

23

4

7

32

1

4

1

2

1

2

1

1

1

201

3

4

201

2

10

2011

8

201

0

7

200

9

200

8

4

Seed/Angel

VC - Early

VC - Growth

PE - Growth

TRANSACTIONS BY STAGECOUNT, 2008 - 2013

3 3

1 1

21

2

1

3

12

1

23

3

1

1

2

1

1

2013

8

2008

2011

4

7

5

2010

10

2012

2009

Gaming

Business Services

Retail

Media

Consumer Goods

ICT

Financial Services

Education

Healthcare

1 1 55 10 4

TRANSACTIONS BY SECTORCOUNT, 2008 - 2013

Note: Includes only Buy transactions, excludes PE transactions in large enterprises (e.g., EuroMena fund investment in FNB Bank)Source: Zawya PE Database, MEVP and Berytech websites, literature search, Inventis Analysis


6/25/2015 12


Market Structure

� Unleveled Playing Field, Non-competitive structural challenges stemming from exclusive agencies, de-facto oligopolies and yet to be implemented antitrust laws

� Trading Inefficiencies, Suboptimal and non-streamlined trade processes with yet to be active export promotion agencies

Legal and Regulatory Framework

� Legal Enforcement vs. Contractual Goodwill, Legal framework requiring updating and inefficient judicial system results in costly and lengthy enforcement

� Creditor Protection, Lengthy and costly insolvency procedures with low recovery rates

� Companies in Perpetual Limbo, Lengthy and costly process to close a business

� One-Size Fits All Taxation

� Red Tape


� Untapped Innovation Potential, Insignificant R&D budget translating into untapped innovation potential

� Nascent IP Protection

� Poor Market Research, Irregular and poor market intelligence driven by small budgets of research and statistical institutions



Capabilitie

s

Capita

l

Culture

6/25/2015 13

With predominance of traditional industries, Lebanon’s drive for innovation is low

TOP GROSSING SECTORS

WHOLESALE, RETAIL TRADE

AND REPAIRS

MANUFACTURING

REAL ESTATE

CONSTRUCTION

HOTELS AND RESTAURANTS

etc.

COUNTRY RANK SCORE

Switzerland 1

UK 3

USA 5

Singapore 8

Germany 15

New Zealand 17

Malaysia 32

China 35

UAE 38

Brazil 64

Turkey 68

Lebanon 75

Out of 142

Comments

� Global Innovation Index ranks Lebanon at #75 in 2013

� Typically, Lebanese business owners tend to invest and engage in low-risk and traditional industries (e.g., trading, real estate) as opposed to “new” and high risk innovative products and services

� Given innovation is a key driver of economic growth and prosperity, low performance on this dimension can hinder Lebanon’s economic development

GLOBAL INNOVATION INDEX2013

35.5

36.0

36.3

41.9

44.7

46.9

54.5

55.8

59.4

60.3

61.2

66.6

6/25/2015 14

Despite ~440 inventions/year, innovation efficiency also shows that Lebanon is performing below-par

� In recent years, and average of 330 inventions and 110 industrial designs were filed annually for protection

� However, patents are based on a deposit system (i.e., there is no examination for patent applications)

� Lebanon is below its upper middle income group trend line

– On the input side, compared to UM countries, Lebanon performs relatively well in terms of institutions setup, human capital adequacy and availability, research, infrastructure, market and business sophistication

– However, Lebanon lacks innovation outputs indicating that amount of knowledge, technology and creative outputs is lower than its income group average

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

20 25 30 35 40 45 50 55 60 65 70 75

Inn

ova

tio

n O

utp

ut

Ind

ex

Innovation Input Index1

GIN

LBN

ROUCHN

CHE

SGP

Low Income

Lower Middle

Upper Middle

High Income

INNOVATION EFFICIENCYINNOVATION INPUT AND OUTPUT 2013

246 316 371 345 376 386282

114113

113 97 109 113

109

2011

391

2010

499

2009

485

2008

442

2007

484

2006

429

2005

360

InventionsIndustrial Designs

INVENTIONS & PATENTS

1) Input Index includes institutions, human capital and research, infrastructure, market and business sophistication2) Output Index includes knowledge, technology and creative outputsSource: WEF Global Innovation Report 2013; Inventis Analysis

6/25/2015 15

Furthermore, as in most Arab countries, innovation in Lebanon is mainly constrained due to low R&D spending

Egyp

t

0.3

%

Jord

an

0.4

%

UA

E

0.5

%

Turk

ey

0.6

%

Bra

zil

1.0

%

New

Zeala

nd

1.2

%

0.1

%

Kuw

ait

Alg

eria

8.7x

0.2

%

0.1

%

5x

Lebanon

0.2

%

Saudi A

rabia

Ara

b C

ou

ntrie

s

Av

era

ge

1.2

%

Chin

a

1.3

%

UK

1.8

%

Wo

rld A

vera

ge

2.1

%

Sin

gapore

2.2

%

OE

CD

Av

era

ge

2.4

%

All D

ev

elo

pin

g

Co

un

tries

2.4

%

US

2.7

%

Japan

3.2

%

Sw

eden

3.6

%

R&D SPENDING% OF GDP, AVERAGE 2000 - 20111

Other Countries

Regional Averages

Arab Countries R&D in Lebanon

� Public entities and institutes - CNRS, LARI, IRI and Lebanese University –collectively spent ~US$ 22.6 Mn on R&D in 2006

� Higher education private institutes with in-house research and development (e.g., AUB and USJ) together spent ~US$ 31.8 Mn on R&D in 2006

� R&D spending represented ~0.24% of GDP in 2006, which is 5 times lower than Arab countries average and 8.7x lower than World Average

NOTE: CNRS = National Center for Scientific Research; LARI = Lebanese Agricultural Research Institute; IRI = Industrial Research Institute1) Data is not available on yearly basis for all countries; average value is derived from years for which data is availableSource: American University of Beirut; World Bank; Inventis Analysis


6/25/2015 16




Capabilitie

s

Capita

l

Culture


� Informal Workforce Market, No SME-specific incentives for formal job creation, leading to sustenance of an informal labor market

� Foreign Skilled Labor, No special provisions for highly-skilled foreign labor as a method of transferring knowledge

Financial Markets

� Shallow Beirut Stock Exchange, Shallow and illiquid equity capital market driven by lack of large institutional investors leading to limited attractiveness for enterprises to list

Infrastructure and Enablers

� Infrastructure Patches, Poor infrastructure reduces competitiveness of SMEs and ability to operate across the territory (poor quality of roads, costly and subpar ICT , challenges in supply of electricity)

– 45% of the Lebanese population are young

– Lebanon will need to create 23,000 jobs per year, 6 times more, to absorb the new entrants to the Labor market*

– Unemployment is 35% among the youth (1 out of 3)

– High rate of youth and skilled emigration

– Brain drain losses are huge and outweigh the benefits, mainly remittances

– Lebanon ranks 120 out of 144 countries in the world in brain drain losses, according to the Global Competitiveness Index

6/25/2015 17“Good Jobs Needed: The Role of Macro, Investment, Education, Labor, and Social Protection Policies ”, World Bank, Dec 2012

Unemployment

Economic Slowdown

– 1.5-2% well below Lebanon’s potential

Loss in National Competitiveness

– Increasing operational and production costs

– Depleting Infrastructure

Substantial Brain Drain

3

2 4

1

Supporting this sector is urgent and key to help Lebanon overcome its challenges, most importantly, JOB CREATION

Pressing Challenges Facing Lebanon

As such, MOET launched the “Lebanon SME Strategy: a Roadmap for 2020”. This strategy has a clear vision, mission and objectives. Achieving objectives rests on six strategic thrusts that are effectively the pillars of the Strategy

6/25/2015 18

National SME Strategy for Lebanon

COHERENCE & EFFECTIVE COORDINATION1

VISION

MISSION

OBJECTIVES

SMEs as Key Economic Engine for

Growth & Job Creation

Foster the creation of vibrant and globally competitive SMEs that

contribute to employment opportunities and high value-added economy

SMALL to

LARGE

Grow SMEs through

their next stages of

development

INNOVATIVE

Transition to higher

value added economy

SUSTAINABLE

Ensure long-term

sustainability of

businesses

COMPETITIVE

Transform into more

productive, competitive

and global players

EVOLVING BUSINESS LEADERS

IMPROVING ACCESS TO

MARKET

FACILITATING THE “RIGHT”

FUNDING

ENHANCING CAPABILITIES

AND INNOVATION CAPACITY

DEVELOPING A CONDUCIVE BUSINESS

ENVIRONMENT & NATIONAL

INFRASTRUCTURE

STRATEGIC THRUSTS

41 Initiatives have been identified and prioritized to be implemented in 3 waves

6/25/2015 19

National SME Strategy for Lebanon

Timeline

Initiatives

Wave I

Wave II

Wave II

21

Initiatives

10

Initiatives

10

Initiatives

~5 Years ~10 Years

�All of the 8 “Booster”

initiatives

�Selected high-potential

additions:

–5 “Complex Setup”

–8 “Add-ons”

�6 remaining “Complex

Setup” initiatives

�4 remaining “Add-ons”

�All “Secondary” initiatives

A set of five initiatives that would help develop business leaders were identified

6/25/2015 20

Thrust # Initiative Name Wave StatusMain

Objective

Evolving Business Leaders

1 Develop Mentorship Networks

Small to Large

Sustainable

Innovative

Competitive

2Launch Entrepreneurship & Family Business Center at the Lebanese University

Small to Large

Sustainable

Innovative

Competitive

3 Provide National Recognition for SME Role Models

Small to Large

Sustainable

Innovative

Competitive

4 Develop a Second-Launch Restructuring Program

Small to Large

Sustainable

Innovative

Competitive

5 Establish Women-Friendly Business Environment

Small to Large

Sustainable

Innovative

Competitive

STRATEGIC THRUSTS AND RESPECTIVE INITIATIVES (1/9)

1

Start Implement ExpandEnhance

For the “Right Funding” , a set of five initiatives that support achieving stated objectives were also identified


Objective

Facilitating the “Right”

Funding1 Attract top-tier VCs, angel investors & PE firms

Small to Large

Sustainable

Innovative

Competitive

2 Broaden Circular 331

Small to Large

Sustainable

Innovative

Competitive

3 Improve Access to Debt Capital

Small to Large

Sustainable

Innovative

Competitive

4Introduce SME Stock Exchange & Enhance Startup Crowd Funding

Small to Large

Sustainable

Innovative

Competitive

5 Launch iSME Project

Small to Large

Sustainable

Innovative

Competitive


2


6/25/201521

Six initiatives supporting improved market access were further identified


Objective

Improving Access to

Market1 Bridge SMEs to Large Enterprises and MNCs

Small to Large

Sustainable

Innovative

Competitive

2 Leverage the Global Lebanese Network

Small to Large

Sustainable

Innovative

Competitive

3 Activate Lebanese Export Promotion - LEBEX

Small to Large

Sustainable

Innovative

Competitive

4 Improve Market Competitiveness

Small to Large

Sustainable

Innovative

Competitive

5 Enhance Standards of SME Products and Services

Small to Large

Sustainable

Innovative

Competitive


3


6/25/201522

Six initiatives supporting improved market access were further identified


Objective

Improving Access to

Market6

Strengthen Relationships with New Top Trading Partners

Small to Large

Sustainable

Innovative

Competitive


3


6/25/201523

As for Capabilities & Innovation, 10 potential initiatives were identified


Objective

Enhancing Capabilities

and Innovation

Capacity

1 Develop Competitive Capabilities Clusters

Small to Large

Sustainable

Innovative

Competitive

2 Repatriate Expat Lebanese Success Stories

Small to Large

Sustainable

Innovative

Competitive

3 Assist SMEs’ Technology Upgrade

Small to Large

Sustainable

Innovative

Competitive

4 Introduce Apprenticeship Programs

Small to Large

Sustainable

Innovative

Competitive

5Expand Vocational and Training Programs to Meet Market Needs

Small to Large

Sustainable

Innovative

Competitive


4


6/25/201524

As for Capabilities & Innovation, 10 potential initiatives were identified (cont’d)


Objective

Enhancing Capabilities

and Innovation

Capacity

6 Provide Incentives for Employee Training

Small to Large

Sustainable

Innovative

Competitive

7 Establish Commercialization Office

Small to Large

Sustainable

Innovative

Competitive

8Link Industry Players To Academia with Innovation Vouchers

Small to Large

Sustainable

Innovative

Competitive

9 Optimize R&D Spending on Core Sectors

Small to Large

Sustainable

Innovative

Competitive

10 Introduce R&D Expenditure Tax Credit

Small to Large

Sustainable

Innovative

Competitive


4


6/25/201525

For business environment & infrastructure, three research & innovation initiatives were identified …


Objective

Developing a Conducive Business

Environment & National

Infrastructure

1 Twin IPPO with International Counterpart

Small to Large

Sustainable

Innovative

Competitive

2 Upgrade IP Framework & Patenting Process

Small to Large

Sustainable

Innovative

Competitive

3 Update Code of Commerce & Related Laws

Small to Large

Sustainable

Innovative

Competitive

4 Update Insolvency Law

Small to Large

Sustainable

Innovative

Competitive

5 Update Public Procurement Law

Small to Large

Sustainable

Innovative

Competitive


5


6/25/201526

…six initiatives related to legal & regulatory framework, three related to employment & labor…


Objective



Infrastructure

6Update Domestic & Foreign Investment Promotion Law

Small to Large

Sustainable

Innovative

Competitive

7 Adapt Judicial System to Meet SME Requirements

Small to Large

Sustainable

Innovative

Competitive

8 Attract and Facilitate Access to Skilled Labor

Small to Large

Sustainable

Innovative

Competitive

9 Develop a Job Matching Program

Small to Large

Sustainable

Innovative

Competitive

10 Update Code of Labor

Small to Large

Sustainable

Innovative

Competitive


5


6/25/201527

… as well as an initiative related to financial markets


Objective



Infrastructure

11Introduce Governmente-Services to Entrepreneur Lebanon Website

Small to Large

Sustainable

Innovative

Competitive


5


6/25/201528

Finally, four initiatives that fall under Coherence & Effective Coordination strategic thrust were identified


Objective

Coherence & Effective

Coordination1 Create a Concerted Focus on a City/Industry

Small to Large

Sustainable

Innovative

Competitive

2 Establish Regional SME Malls

Small to Large

Sustainable

Innovative

Competitive

3 Setup "SME Observatory"

Small to Large

Sustainable

Innovative

Competitive

4Upgrade "Entrepreneurs Lebanon" to Full-Fledged Portal

Small to Large

Sustainable

Innovative

Competitive


6


6/25/201529

Imitative 20

WG20

- TBA

Imitative 7

WG7

- TBA

6/25/2015 30

To drive the implementation of the Lebanon SME Strategy and to enhance coordination among all stakeholders, a Public Private SME Board chaired by the Prime Minister is being established

Proposed SME Strategy Governance (1/2)

Champion/Working Groups/Initiative

SME Board (14-16 members)

Secretariat

Initiative 1

WG1

- TBA

Initiative 2

WG2

- TBA

Initiative 3

WG3

- TBA

Initiative 4

WG4

- TBA

Initiative 5

WG5

- TBA

Imitative 6

WG6

- TBA

MoET

MoI CCCIAMoF MoA IDAL ALI TBA

PCM

MoET

TBA

Let’s All Act Now!!

A CALL FOR COLLECTIVE ACTION!

Thank you for your attention!

https://www.youtube.com/watch?v=Arje63DDoYY

The “Lebanon SME Strategy: a Roadmap to 2020”

http://www.economy.gov.lb/public/uploads/files/6833_5879_4642.pdf

The development prospects of this sector are promising. Under the right direction and with the support of all stakeholders, we can make this happen!!

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