MIDDLE EAST AND NORTH AFRICA INVESTMENT POLICY PERSPECTIVES.

Preface Foreword Table of contents Abbreviations and acronyms Executive Summary A common challenge: making investment work for sustainable development Improve the investment climate and realise the benefits of FDI: four priorities 1 Overview and key policy messages Introduction A diverse group with a common challenge: make investment work for sustainable development Early economic reforms advanced aggregate growth Further reforms are required to support a dynamic, competitive and rules-based private sector... ...and to increase the benefits of FDI to the economy and society Harnessing the benefits of investment will be key to the post-pandemic recovery Investment policy priorities for the MENA region Priority 1: Improve the clarity, consistency and transparency of investment-related rules and procedures MENA governments have adopted numerous reforms to improve investment-related legislation Revisions of investment legislation can, but do not always, improve legal clarity Clarifying the regulatory framework for investment would reduce opportunities for discretionary decisions MENA governments could enhance efforts to curb corruption across the investment process Priority 2: Advance reforms to improve competition and private sector development MENA economies have recently undertaken meaningful liberalisation reforms Reducing FDI restrictions in services could support productivity gains from competition Wider pro-competition reforms would encourage investors’ entry and growth Priority 3: Target investment policy to better serve sustainable development objectives Investment promotion activities target investment with high development impacts Investment incentives should focus on achieving specific spillovers Targeted policies and programmes can enhance SME-MNE linkages in GVCs Strengthening responsible business conduct would help advance sustainable development goals Priority 4: Strengthen good governance and co-ordination to deliver better investment policy MENA countries have undertaken numerous reforms of their institutional framework for investment... ...but clarifying responsibilities and strengthening co-ordination over investment policies continue to be priorities Inter-agency collaboration would deliver better investment policies and services Sharing responsibilities between national and subnational bodies could improve investment promotion and facilitation outcomes Investment facilitation entails a whole-of-government approach and digitised services Dialogue with the private sector on future reforms contributes to policy legitimacy Good governance of investment policy entails transparency in the monitoring of government actions References Notes 2 Foreign investment trends and sustainable development benefits Summary Investment trends point to challenges ahead FDI to the MENA economies remains below potential Some MENA economies were more resilient to economic shocks than others MENA economies primarily attract FDI from Gulf countries and increasingly from Asia-Pacific Mining and fuels have attracted the most greenfield investment in recent years, but manufacturing investment is growing Harnessing FDI for sustainable development The sectors that receive the most investment in the MENA region do not create the most jobs FDI has the potential to improve working conditions, but benefits are often not realised in MENA FDI can enhance productivity, but foreign firms in MENA are not always more productive Foreign firms tend to perform better than domestic firms on measures of gender equality in MENA Foreign firms tend to be more energy efficient than domestic peers References Notes 3 Towards modernised legislative frameworks for investment Summary and policy considerations Investment-law making is at the core of countries’ business regulatory environment The overall regulatory environment matters as much as the investment legislation itself Regional wave of investment law reforms Protection of investors’ rights in domestic legislation of MENA economies More room for reform through the gradual incorporation of investor obligations References Annex 3.A. MENA economies’ investment frameworks 4 Openness to foreign investment and recent liberalisation reforms Summary and policy considerations FDI restrictions can inhibit investment and its economic benefits Common statutory FDI restrictions and their economic costs MENA economies tend to be more restrictive than their peers Several MENA governments have removed important FDI restrictions References Notes 5 Investment treaty policy and dispute settlement Summary and policy considerations MENA economies have concluded a significant number of international investment agreements Content and purpose of investment agreements Bilateral Investment Treaties (BITs) Regional investment agreements Other international investment-related agreements Towards investment treaty reforms ISDS cases in the region raised in the last decade Analysis of cases ISDS raises concerns and triggers reforms, including in the region Periods of crisis may increase ISDS risks Link between periods of crisis and investment disputes in the MENA region Uncertain links between the Covid-19 crisis and ISDS Proactive approaches to dispute prevention and management should be pursued Dispute prevention policies Dispute prevention mechanisms in the region References Notes 6 Investment promotion and facilitation strategies Summary and policy considerations Institutional choices and mandates Governance of IPAs: the composition of boards could be more inclusive Most MENA IPAs combine investment promotion with regulatory functions Strategic priorities and related resources The way MENA IPAs allocate their resources is coherent with their priorities The Covid-19 outbreak is reorganising the way IPAs’ do business Investment promotion: strategies and implementing tools Investment promotion requires a well-defined and transparent strategy Most economies focus on building their image as an investment destination Investment facilitation efforts and evolving priorities Investment facilitation efforts are geared towards pre-establishment services... ...but during Covid-19 outbreak agencies focused on existing investors Monitoring and evaluation Promoting and facilitating investment in regions and provinces The degree of state centralisation influences the local dimension of investment promotion and facilitation The rationale for conducting investment promotion activities at the local level References Notes 7 Towards smarter use of investment incentives Summary and policy considerations Investment incentive instruments All MENA economies provide income tax holidays CIT rate reductions in MENA economies are often permanent Tax deductions and credits used less frequently than profit-based schemes Exemptions from other taxes, duties and fees widespread Financial incentives offered in the majority of MENA economies Targeting of investment incentives Incentives target agriculture, tourism and industrial sectors All MENA economies incentivise export activities, many incentivise environmental protection Location-based incentives most widely used in the region Discretion in awarding incentives References Notes 8 Enabling SME linkages with foreign firms in global value chains Summary and policy considerations SME internationalisation through GVCs and SME-MNE linkages All MENA economies participate in GVCs but not in the same way MNEs can help countries plug into higher-value added segments of the supply chain Integrating SMEs in GVCs: the extent of linkages with foreign investors Manufacturing MNEs’ sourcing of local inputs is relatively high in the region MNE affiliates are a key source of revenue for local suppliers but not necessarily SMEs Improving investment and business environments for SME participation in GVCs Opening up to FDI in services can increase the potential for MNE-SME linkages Guarantees of legal security and investor protection can strengthen linkages Policies and programmes for SME-MNE linkages in GVCs Reinforcing business associations and enterprise networks Providing business development services for SMEs to engage in linkages with MNEs Investment promotion agencies can also use a variety of tools to connect businesses Promote safe business linkages through responsible business conduct Smart incentive regimes and zone-based policies can support deeper linkages Diaspora investors can forge enhanced linkages with local business References Notes 9 Enhancing connectivity through infrastructure investment Summary and policy considerations Key infrastructure challenges affecting investment in the MENA region The quality of hard and soft infrastructure in the MENA region remains low Transport connectivity The poor quality of connectivity infrastructure constrains the manufacturing sector The maritime networks in the MENA region are fragmented Energy and ICT connectivity Many countries in the region are well endowed with renewable energy resources but have not sufficiently diversified their power supply ICT infrastructure has been expanding fast but businesses in the region still face high costs The infrastructure gap in the MENA region Investment gap in infrastructure amounts to 7% of regional GDP The MENA region lags behind other regions in terms of private financing Establishing an enabling environment for investment in infrastructure Infrastructure development strategies and financing instruments Improving the regulatory framework for investment in infrastructure The legal frameworks for public-private partnerships can bring important financing solutions for infrastructure projects Re-thinking restrictions to foreign investment in sectors relevant to connectivity Beyond removing restrictions, improving the governance of infrastructure could also attract more private investment References Annex 9.A. Comparative infrastructure indicators across MENA Notes 10 Promoting responsible business conduct as a strategic choice Summary and policy considerations Scope and importance of responsible business conduct Promoting RBC in MENA can help attract quality FDI and participate in trade Awareness and understanding of RBC in the MENA region is growing Important commitments towards RBC have been made MENA economies face challenges in implementing RBC principles and standards Advancing human and labour rights Supporting industry initiatives Improving environmental protection Tackling corruption Promoting policy coherence on RBC National action plans can help strengthen RBC Governments should implement RBC in their own economic activities Strengthening MENA National Contact Points References Notes 11 Integrity for sustainable investment Summary and policy considerations Investment, integrity and the fight against corruption Challenges and state of play in the MENA region Corruption risks across the investment process Market entry Protection of property rights Taxation and investment incentives Access to finance, foreign exchange and profit repatriation Policy options to enhance integrity for sustainable investment Enhancing the connection between integrity and investment frameworks at the domestic level International conventions and standards in the fight against corruption International instruments Regional instruments Other OECD instruments promoting a clean business environment Role of businesses: promoting strong corporate compliance measures and multi-stakeholder initiatives to prevent corruption References Notes 12 Investment policy in fragile contexts Summary and policy considerations The complex relationship between fragility and FDI Fragility is multidimensional and affects the focus economies to different degrees Fragility and investment interact in complex ways Investment can help to mitigate elements of fragility Fragility and conflict, where present, can limit FDI and encourage FDI enclaves Fragility is costly for investors, even in the absence of conflict On some occasions, investments can exacerbate risks to stability that need to be managed The five dimensions of fragility in the focus economies The political dimension of fragility The societal dimension of fragility The economic dimension of fragility The environmental dimension of fragility The security dimension of fragility Policy considerations to improve investment outcomes in the face of fragility Enhancing the investment environment in a fragility context Towards a holistic approach to investment, resilience and inclusive development Laying the institutional and legal bases for a sound investment framework Development actors can support private sector development and help improve the investment environment in fragile contexts Mitigating the risks that fragility poses for investors Blended finance and risk transfer mechanisms Promoting linkages between foreign firms and domestic businesses Promoting integrity and responsible business conduct Developing investment promotion strategies tailored to fragility Sectoral focus Targeting investors Targeting regions References Notes Middle East and North Africa Investment Policy Perspectives highlights the considerable progress in investment policies made by the region's governments over the past decade. Yet, the reform momentum needs to be sustained and deepened for the benefits of investment to be shared with society at large and for growth to be sustainable, particularly in the context of the COVID-19 pandemic and resulting global economic upheaval. The publication takes stock of investment policy trends and reforms in Algeria, Egypt, Jordan, Lebanon, Libya, Morocco, the Palestinian Authority, and Tunisia, and draws out common challenges, offering suggestions of reform priorities. It considers several dimensions of the policy framework that affect the investment climate and places strong emphasis on how foreign investment can help economies of the region improve their citizens' lives. The publication serves as reference point, informing policymakers on specific areas as they continue work on leveraging investment to advance inclusive and sustainable growth.