The Mediterranean Middle East and North Africa 2018

Chapter 12. Palestinian Authority

The foundations of SME policy: definitions, statistics and institutions

The Palestinian Authority (PA)1 has yet to put into place a full-fledged SME and entrepreneurship policy. PA has an official SME definition introduced by the Ministry of National Economy and approved by the cabinet in 2011 (see Table 12.1). However, the definition is not consistently used between different policy actors. The definition was already reported in the SME Policy Index 2014 and has not changed; although there are reports that the Ministry of National Economy, the Palestinian Investment Promotion Agency (PIPA), the Palestinian Monetary Authority (PMA), the Prime Minister Office, the Palestinian Central Bureau of Statistics, the banking association and private sector organisations are working on updating and adopting a definition accepted by all relevant parties.

Table 12.1. SME definition by the Cabinet

Criterion	Micro	Small	Medium
Employment criterion	1-4 employees	5-9 employees	10-19 employees
Financial criterion	Annual turnover ≤ USD 20 000	Annual turnover ≤ USD 200 000	Annual turnover ≤ USD 500 000
	Paid-up capital ≤ USD 5 000	Paid-up capital ≤ USD 50 000	Paid-up capital ≤ USD 100 000

Source: SME Definition by the Palestinian Authority.

PA has official sources of enterprise statistics from the Palestinian Central Bureau of Statistics; however, the data published is not broken down by size class.2 PA is not covered by the Enterprise Surveys of the World Bank, which makes data availability scarce, except for the coverage by the Global Entrepreneurship Monitor (GEM).

The wider economic development agenda in PA is characterised by a difficult and volatile context, especially given regular instability, fragmented markets and high dependence on donor support. Following the 1993 Oslo Agreement, PA has direct and exclusive competence over a number of areas related to the broad business environment and enterprise development agenda, including SME policy, business regulations, access to finance, innovation, entrepreneurship education and training. But it has limits regarding trade, territorial development and other civilian functions.

The development agenda is framed by a number of policy documents such as the National Policy Agenda 2017-2022, which includes a series of priorities and objectives in terms of creating job opportunities, improving the business environment and promoting the Palestinian industry.3 However, there are no formal co-ordination mechanisms and there is no SME strategy yet developed, although there have been recent discussions on this issue by the Ministry of National Economy and the Palestinian Federation of Industries. The Ministry of National Economy continues to be the main authority in charge of private sector development and the improvement of the business environment, although most enterprise support activities continue to be financed by donors and managed at the local level by business associations and non-governmental organisations (NGOs). Other important agencies with an economic portfolio are the PIPA, the Palestinian Industrial and Free Zone Authority, and the Metrology Institute.

Public-private dialogue (PPD) continues to be strong in PA. The main forum for public-private consultation cited by the SME Policy Index 2014 was the Private Sector Co-ordination Council which held regular consultations, although, the report noted, SMEs were often sidelined as SME associations did not play a significant role. This interim assessment’s findings suggest that the Private Sector Co-ordination Council still operates and has expanded its membership, although it does not meet regularly with the public sector anymore.

There are other instances through which PPD takes place. For instance, the Palestinian Export Council (led by Ministry of National Economy) was created to implement the National Export Strategy and works as a PPD advisory council with the private sector. The Ministry of National Economy is also implementing a Clusters Development Project to promote five business agglomerations. This builds on a strong mechanism for public-private dialogue representing hundreds of SMEs (leather and shoe, palm and dates, stone and marble, tourism and furniture).

For further action: PA is still at the very early stages of developing a multidimensional, multipartite SME policy. Important elements such as an official SME definition and sufficient SME statistics are still missing. There is also a need to establish a multiannual SME strategy and an implementation unit. So far PA is the only MED economy lacking an SME agency, unit or department. Indeed, the strong culture of public-private dialogue in PA and the active role played by business associations in policy making could provide fertile ground for the strengthening of SME policy making.

Improving business environments for SMEs and entrepreneurs

The SME Policy Index 2014 reported that the introduction of regulatory reform and simplification was at a very early stage. PA had completed a first draft of a manual for primary and secondary legislation, and a Core Technical Team from public and private organisations was working on administrative simplification focusing on the areas covered by Doing Business. The technical team was being co-ordinated by the Ministry of National Economy.

This interim assessment finds no clear evidence on the continuation of the Core Technical Team although there have been some reforms registered by Doing Business, notably on getting credit, in which PA ranks a remarkably high 20^th (see section on access to finance). Nonetheless, the implementation of regulatory impact analysis (RIA) and the SME test is not in practice.

In terms of the operational environment for enterprise creation, the SME Policy Index 2014 reported that the company registration process in PA was complex and lengthy. Reforms had helped simplify the process and reduce costs but there was still much room for improvement. PIPA was in the process of fully implementing a one-stop shop and there were ongoing projects to simplify registration processes and increase decentralisation, however, the absence of adequate infrastructure hindered the development of e-registration services.

According to Doing Business, the only reform over the past few years in terms of starting a business is the elimination of the paid-in minimum capital requirement (2014).4 However, the multiple responses by private sector and incubators representatives to the consultations for this interim assessment noted that there is much to do to improve the registration process. For example, it is perceived that although minimum capital requirements have been supressed, there is still need to pass through a lawyer for registration. This cost is perceived as high. According to the consultations, this requirement has been removed in the latest draft of the Companies Law.

The consultations did not lead to a consensus on how well the one-stop shops work; some stakeholders consulted indicated that PIPA’s One Stop Shop concerns itself mainly with approval of investment projects and investment promotion. Others noted that one of the services provided is addressing obstacles facing the registration of a business of any kind.

In terms of bankruptcy procedures, the SME Policy Index 2014 noted that the framework was based on two laws: the Jordanian Commercial Law Number 12 of 1966, valid in the West Bank, and the British Mandate Bankruptcy Ordinance Number 3 of 1936, valid in the Gaza Strip. A draft new debt resolution (bankruptcy) law was under review. There has been no concrete progress on this area, although a Companies Law that is under discussion in cabinet will have clauses addressing bankruptcy.

For further action: PA continues to have an important margin of action for the improvement of the regulatory environment for SMEs and entrepreneurs. None of the policy elements analysed in this area by this interim assessment is under development (i.e. introduction of regulatory impact analysis and SME test; single identification numbers; online registration; and one-stop shops for enterprise creation). Furthermore, according to Doing Business, PA is a “no practice economy” in terms of bankruptcy. In this view, PA could prioritise and sequence important actions such as the passing of the Companies Law, the elimination of unnecessary or redundant regulations, and the easing of procedures to start a business. Such actions could be undertaken following the importance and feasibility determined by public and private actors and considering the specific circumstances of the wider economic, social and political context; for example, the establishment of effective one-stop shops may have a greater impact than the introduction of online registration, but they may also be more costly and difficult to implement.

Fostering access to finance

PA continues to perform higher than the regional average in terms of the legal and regulatory framework for access to finance. The SME Policy Index 2014 noted that the Palestine Monetary Authority (PMA) had established one of the most effective credit registries in the region, involving all banks and other financial institutions, such as microfinance institutions. By law, individuals and firms could access their credit data. But the coverage of the bureau at the time was only 8.8% of the adult population. This coverage has expanded in recent years to 19%, which is slightly higher than the OECD average of 18.3%. Furthermore, according to Doing Business the credit registry began to distribute credit data from retailers and utility companies, increasing the wealth of information and therefore providing more complete reports.

Important progress has also been made through the introduction in June 2017 of an online collateral registry for moveable assets hosted by the Ministry of Economy. According to Doing Business, the collateral registry is operational, unified geographically, searchable by a debtor’s unique identifier, modern, and notice-based. According to the consultations for this interim assessment, the difficulties of land registration and hence of having an operational cadastre or register of immoveable assets have worked as a drive for the establishment of the collateral registry for moveable assets.

In addition, a Secured Transactions Law was issued by the end of 2016 with the support of the World Bank. According to Doing Business, the new law implements a functional secured transactions system by allowing a general description of single categories of assets and a general description of debts and obligations. The new law gives priority to secured creditors outside insolvency procedures and allows out-of-court enforcement, hence addressing indirectly some of the shortcomings of the bankruptcy system.

The creation of the registry of moveable assets and the passing of the Secured Transactions Law contributed to a remarkable ascent of PA in Doing Business to 20^th place, by far the highest among MED economies and the OECD average. It also placed PA at a distance to frontier of 80, also much higher than the regional and the OECD average.5

In terms of access to sources of finance, the SME Policy Index 2014 noted the existence of two credit guarantee schemes: the European-Palestinian Credit Guarantee Fund (EPCGF, supported by the European Union and KfW) and the Loan Guarantee Facility (supported by the Overseas Private Investment Corporation) which guaranteed about 60-70% of loans. It also noted the existence of several equity/venture capital funds operating and focusing on SMEs and start- ups.

This interim assessment finds that the EPCGF and the Loan Guarantee Facility continue to operate and that two new vehicles have entered the market: the Swedish International Development Cooperation Agency (SIDA) Guarantee Scheme Facility, launched in 2015 and managed by the Loan Guarantee Facility; and the Middle East Investment Initiative, focusing on SMEs and housing loans. New venture capital funds also have also been established since 2014. However, there are no facts and figures on the reach and effectiveness of these measures.

For further action: PA has made great strides on the legal and regulatory framework for access to finance and has introduced new financing sources. However, the specific impact on the financing of SMEs and entrepreneurs is unknown. An in-depth analysis of the financing conditions and the impact of ongoing measures would therefore be helpful to identify policy gaps and strengths. It could also be useful to know the financing conditions and access for different profiles of SMEs and entrepreneurs.

Nurturing start-ups and SME growth

PA continues to have a diversified market for business development services (BDS) provided by a network of public, private and donor-funded institutions. Some of the support services aim at a better economic inclusion of women and youth while other target activities such as export and information technology. Furthermore, 22 business incubators support new firms mostly in the area of information technology and also because of the lack of government control over trade policy. Yet, access to information on business development services is dispersed. The creation of an SME unit or agency under the Ministry of National Economy could help to facilitate access to information on the multitude of business development services and providers available.

In terms of public procurement, the SME Policy Index 2014 noted that there were measures to facilitate the access of SMEs to this important market. These measures included the possibility to split tenders into lots and the publication of free information on procurement opportunities online and in newspapers. E-procurement was not available though and penalties on late payments were reflected in the law but not enforced in practice.

This interim assessment notes nominal progress in this area through the approval of a Procurement Law of 2014, developed with the support of the World Bank. According to the consultations for this interim assessment, the Law is open and transparent and has a website with information (although no information was found whatsoever on this claim). There is no evidence of how this new law can benefit or has benefited SMEs.

Concerning SME internationalisation, the SME Policy Index 2014 noted an important number of initiatives from different actors, including the development of an export strategy to make the most from economic co-operation agreements (e.g. with the EU, United States, Canada, Turkey, Greater Arab Free Trade Agreement, Russia and Mercosur), the establishment of a specialised council to implement the strategy and specific support measures for enterprises. On the latter, one of the main actors was the private sector organisation as secretariat for named council, a public-private initiative to support international trade.

This interim assessment points to continued progress in this area, including the adoption of the National Export Strategy and the establishment of the Export Council composed of 26 members from the public and private sectors, as well as academia, and headed by the minister of National Economy. However, as it is the case of other policy areas, there is no evidence on the impact of these initiatives on the access of SMEs to international trade.

For further action: On paper there has been progress in terms of nurturing start-ups and SME growth in PA. Key initiatives are the introduction of new business development services, the adoption of the new Procurement Law and the establishment of the Export Council in charge of implementing the export strategy. However, there is no evidence on specific results of how this has helped SMEs.

Investing in entrepreneurial human capital

PA has committed to promote entrepreneurship learning in upper secondary education through the 2014-2019 Education Development Strategic Plan. There are plans to develop pupil-centred learning, curriculum modernisation and teacher training with more developed linkages between vocational education, training and businesses. The Ministry of Education has introduced entrepreneurship studies within secondary education but entrepreneurship as a key competence remains is not well understood. Nonetheless, aspects of entrepreneurship key competence are promoted by way of non-formal learning. For example, INJAZ Palestine6 provides support to schools that includes aspects of entrepreneurship key competence e.g. financial literacy, leadership and critical thinking. Further, the Start-up Boot Camp efforts to build entrepreneurship understanding amongst young people through cooperation with schools is good practice and ensuring schools are connected into the wider entrepreneurship eco-system.

Future donor-supported initiatives to upgrade technical and vocational education and training (TVET) should include entrepreneurship key competence in addition to promoting business skills. Expertise and experience from non-governmental organisations working on labour market preparation and employability programmes, such as the Palestinian Education for Employment Initiative, are a good reference for improving TVET entrepreneurship capacity.

Important to next phase developments will be to ensure that all students have the opportunity to acquire entrepreneurial experience. This could build on the wider vocational in-company apprenticeships developed at TVET schools but include more business administration skills.

The policy environment supporting women’s entrepreneurship is underdeveloped. However the National Policy Agenda 2017-2022 (NPA) and a multi-stakeholder task force on women’s entrepreneurship led by the Business Women’s Forum (BWF) both provide basis to carry forward the policy dialogue. Policy efforts to empower women economically should look both at women’s entrepreneurship and the integration of women into the labour market. This will require interfacing core employment, economic and entrepreneurship policies to ensure mutual reinforcement. Similarly, access to finance and training should be combined as a package for women entrepreneurs, such as in the “Start-up Palestine” initiative.

Some successful initiatives can be replicated and scaled-up to provide additional training for women entrepreneurs. The “buddy” mentoring facility of the Bank of Palestine, which helps women grow their businesses, could be extended to early-phase start-ups. The Bank’s online training offered to women entrepreneurs to address mobility constraints between Gaza and West Bank underlines how available technologies can be used to extend training opportunities.

Data on women entrepreneurship is weak and undermines policymaking and prioritising support. With tight public finances, ensuring that training for women’s entrepreneurship, defined with an action plan, is addressed by the national budget may be difficult but options to combine national and donor finance could be considered to reinforce commitment and sustainability of action lines.

Regarding training for SME internationalisation, a national export strategy gives specific attention to the importance of occupational and management skills within SMEs. Similarly, sector-specific export strategies underline skills weaknesses as a constraint in building SME export potential, and include an action plan to bring forward skills development in these sectors.

The education-enterprise nexus, particularly in terms of skills to support businesses in the export drive, needs to be more strategically developed to meet standards along the manufacturing value chain. Owners and managers require more developed know-how in quality assurance, planning and management of the complete export cycle. In this regard, the co-operation between the Palestinian Shippers’ Council and Birzeit University stands out for its export management training. A next step could be to upgrade this course for online learning purposes.

Across all sectors, it will be important to determine how low-value added production, particularly in manufacturing, can evolve towards higher value-added. This is important in developing innovation base to the economy, allowing access to new markets and generating new and higher-skilled jobs.

A cluster-based approach to training SME owners/managers on export management by the Federation of Palestinian Chambers, Industry and Agriculture is good practice. Training is available in a number of areas (e.g. export market mapping, e-commerce) and for a range of sectors. A new training in 2018 is focusing on quality assurance in the leather and shoe and furniture clusters, considered critical to export promotion. While the cluster members have access to training materials online, a next step could be to provide the online modules beyond geographical coverage of existing clusters.

Sector-skills partnerships involving vocational (secondary and higher) education as well as other training organisations, industry associations, chambers and national authorities (e.g. PALTRADE) could be considered to close the education-business gap. Alternatively, the skills development agenda could be integrated within the sector-specific strategies (e.g. the stone and marble sector). Sector skills partnerships or consortia could additionally build and share intelligence on available trainings. To ensure that the skills dimension of SME internationalisation is given strategic attention, sector skills strategies should be monitored by the National Export Council.

For future action: It is necessary to promote a better understanding of entrepreneurship as a key competence through awareness-raising measures and capacity building. Women’s entrepreneurship can be supported by scaling up successful local initiatives, but developing accurate data will be necessary for evidence-based policy making. With good skills coverage in sector strategies, the vocational training community including universities must be engaged to accommodate the demands of businesses in sectors with export potential.

The way forward

This interim assessment notes continued improvement of SME policies in PA, particularly the significant reforms in terms of the legal and regulatory framework for access to finance. However, PA is still lagging behind the rest of the region in terms of laying down the building blocks for SME policy, notably the development of an SME strategy and the designation of an official SME body (SME unit or SME agency) in charge of co-ordinating the many initiatives already in place. In terms of the particular policy areas analysed in this chapter, key actions that could be taken are as follows:

• Building on the strong practice of public-private dialogue and, with the support of international partners, improving SME policy co-ordination by implementing a multi-year strategy.

• Significantly stepping up efforts to improve the business environment, including 1) by introducing an insolvency framework, a regulatory impact analysis and SME test mechanism and 2) by facilitating enterprise creation.

• Better tracking of the impact of specific measures on SME and entrepreneurship performance. For example, to what extent have access-to-finance reforms resulted in SME creation and growth? What has been the impact of the export strategy in SME internationalisation? What are the results of the many business development services available? The implementation of an SME strategy and the related monitoring and evaluation mechanism could be fundamental in this regard.

• Raise awareness and understanding of entrepreneurship as a key competence across the education and training community with strategic piloting as a basis for further developments.

• Develop data on women’s entrepreneurship to ensure better focus within policy.

• Afford higher recognition of skills to economic development by operationalising the human capital dimensions of sector export strategies.

Notes

← 1.  For the OECD, “PA” is an abbreviation of Palestinian Authority and defines either the territories in the West Bank and Gaza under the administration of the Palestinian Authority, or the Palestinian Authority itself, according to the context. For the European Commission and the EU institutions contributing to the report, PA stands for Palestine and its institutions. This designation shall not be construed as recognition of a State of Palestine and is without prejudice to the individual positions of the EU Member States on this issue.

← 2.  See Preliminary Results of the Population, Housing and Establishment Census, 2017. www.pcbs.gov.ps/Downloads/book2364-1.pdf.

← 3.  State of Palestine (2016), National Policy Agenda 2017-2022: Putting Citizens First, https://eeas.europa.eu/sites/eeas/files/npa_english_final_approved_20_2_2017_printed.pdf.

← 4.  The World Bank Group Doing Business (2018), “Business Reforms in West Bank and Gaza”, www.doingbusiness.org/Reforms/Overview/Economy/west-bank-and-gaza.

← 5.  An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier. The distance to frontier score helps to assess the absolute level of regulatory performance over time. It measures the distance of each economy to the “frontier”, which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005.

← 6.  A youth-centred non-profit organisation established in Jordan in 1999 active in the European Union and worldwide, including in the Middle East, North-Africa and Pakistan.