Trade & Competitiveness In Practice october 2017 No. 1 Promoting Investment Policy Reforms Amid Political Turbulence and Transition The Case of Tunisia and the Arab Spring Policies to attract and retain private sector investment feature prominently in both developing and developed countries’ growth Ivan Nimac strategies. Yet designing and implementing reform programs are Mouna Hamden particularly challenging for those facing prolonged political turbulence Yassin Sabha Mohamed El Shiaty and transition. Countries may be tempted to focus on quick wins for Kathy Khuu short-term gains rather than tackle the more difficult, structural reforms Ivan Nimac (inimac@ifc.org) is that take longer to yield meaningful results. Despite the challenges, Head of the Vienna Investment Climate Hub. Mouna Hamden some countries, and notably Tunisia, have successfully designed (mhamden@ifc.org) and Yassin comprehensive reform agendas using a gradual approach that includes Sabha (ysabha@ifc.org) are Private Sector Consultants, and extensive consultations and consensus building. The case of Tunisia Mohamed El Shiaty (melshiaty@ shows that, even during long transitions marked by political and social ifc.org) and Kathy Khuu (kkhuu@ worldbank.org) are Senior Private tensions, investment policy reforms can be achieved. Sector Specialists, all at the World Bank Group. Tunisia Before and After the Revolution The authors gratefully acknowl- Following the October 2011 Constitutional Assembly elections, Tunisia enjoyed its first edge the contributions of Najy democratically elected government. This was less than one year after the “Jasmine Revolution,” Benhassine, Christine Zhenwei Qiang, Georges Joseph Ghorra, during which President Zine El Abidine Ben Ali and his “coercive apparatus” were ousted, triggering Antoine Courcelle-Labrousse, political movements in Tunisia and throughout the region.1 In March 2012, the government Antonio Nucifora, Roberto Echandi, of Tunisia embarked on an ambitious program of policy and regulatory reforms to make the Sebastian James, Xavier Forneris, country’s economic environment more competitive and to attract and retain private investment. Amina Khaled El Zayat, Nawal Filali, and William Mut, and peer Expectations for the economic reforms were high, particularly among Tunisian citizens and civil reviewers Magdi Amin and Ab- society. Tunisians now wanted to see the dividends of the democratic transition permeate society doulaye Sy (all at the World Bank in the form of more employment opportunities, rule of law, and good governance. Group), and Brian Levy, a professor at the Johns Hopkins School of But similar to other countries experiencing political transition, Tunisia underwent multiple Advanced International Studies. changes in government and dynamic shifts of power during its reform process. Six ministers of investment were successively in charge, each with his own perspective, approach, and priorities. In addition, institutions retained numerous aspects of the old regime, with certain interest groups continuing to resist reforms. Despite this, the government kept private sector development—with investment policy a key pillar—at the center of its reform agenda. Trade & competitiveness in practice | 1 Investment Policy Reform in the law introduced the principle of “silent consent” for investment approval by the Tunisia Tunisia Investment Authority and required written During the Ben Ali regime,2 restrictions on explanations for negative decisions (Article 4). foreign direct investment and authorization Reforms on investor protection introduced requirements enabled the government a set of guarantees, including, among others: to regulate business entry and access equal treatment of foreign and domestic to investment incentives and to control investors in comparable circumstances competition. Politically connected firms (national treatment principle; Article 7); fair enjoyed significant economic gains compared and equitable compensation for expropriation to other businesses (Freund, Nucifora, and (except when done in the public interest; Article Rijkers 2014). Furthermore, Tunisia’s old 8); free transfer of funds abroad (Article 9); and investment framework lacked important free convertibility of funds into foreign currency guarantees, such as protection from unlawful (Article 9). Finally, regarding investment expropriation and disadvantageous treatment incentives, the law distinguished between fiscal of foreign investors. Certain government and financial incentives. The implementation institutions with discretionary power over of both types of incentives was mandated in investment were linked to notorious abuses. specific decrees approved in March 2017. Fiscal The Higher Commission on Investment, for incentives were also integrated into the tax example, could preauthorize investments in legislation, in accordance with best practice. several sectors and control economic activities on a case-by-case basis for investments in which foreigners would hold more than 49 Seven Principles of Investment percent of the capital. Tunisia’s investment Policy Reform incentives framework, moreover, was highly The Tunisian government’s initial steps toward complex, contributing to red tape and allowing extensively revising the Investment Law opportunities for authorities to exercise addressed a wide range of topics, from the discretion (World Bank Group 2013 and 2014). sectors open for investment to investment Tunisia’s new Investment Law (Law No. incentives and promotion. Led by the desire 71-2016), approved September 30, 2016, for reform, balanced with the knowledge of the introduced a number of positive changes country’s political economy shortcomings, the compared to the 1993 legislation, and it better government developed an iterative strategy. aligned Tunisia with international best practices This note documents this approach and its (see Table 1). Investment entry reforms opened significant parallels with the seven main several economic sectors previously closed to guiding principles considered good practice foreign investment (OECD 2015). In addition, for countries undertaking investment policy reforms. Table 1: Tunisia’s Investment Law of 2016: Summary of Key Reforms Investment entry ❏❏ Preauthorization by the Higher Commission on Investment no longer required for 45 sectors and economic activities ❏❏ Institution of the principle of “silent consent” investment approvals by the Tunisia Investment Authority ❏❏ Written explanations required when approvals are denied Investor ❏❏ Guarantees for investors, including: equal treatment of citizens and foreigners; fair and equitable protection compensation against expropriation (except when done in the public interest); free transfer of funds abroad; free convertibility of funds in foreign currency; and possibility of having 30% foreign management staff during the first three years of incorporation or effective entry into operation and 10% from the fourth year onward Investment ❏❏ Fiscal and financial incentives distinguished; implementation of both types of incentives mandated in incentives specific decrees ❏❏ Integration of fiscal incentives into the tax legislation 2 | Trade & competitiveness in practice Leverage a common development 1.  however, generating immediate resistance. objective presenting a consensus To make progress, focus was shifted to achieving intermediate results through of key parties targeted interventions in specific areas of the In situations in which opposing parties investment policy and regulatory framework. continuously compete for political power and Efforts regarding investment entry, for changes in government are frequent, it is example, granted market access to only important to identify points on which all parties certain new sectors and activities, rather can agree. This is particularly important in than to all sectors, which aligned with best countries where reforms affect the interests practice. Similarly, reforms to the incentives of entrenched elites who may resist. Obtaining regime focused on increasing predictability commitment from all contending parties on and improving the legal basis by moving fiscal crucial fundamentals can help ensure the incentives from the new Investment Law into continuation of reforms despite changes in government. the Tax Code. But this approach required tradeoffs; for example, on the institutional Tunisia's In Tunisia, multiple governments were in dimension, the Tunisia Investment Agency retained its regulatory functions, rather approach to power throughout the Investment Law reform process, including both secular and Islamist than focusing only on promotion, as per best practice. investment factions. Successive governments all wanted to send a strong signal to the local population 3. Build “islands of effectiveness” as policy reform and to the international community that the country was dismantling the old system of entry points for more systemic parallels seven changes privileges and capture that had been reflected in its former investment framework. All were When the inherited system of public institutions good-practice acutely aware of Tunisia’s high unemployment rate—nearly 18 percent in 20113—as an no longer fully functions, better results can be achieved by targeting specific agencies principles. underlying factor in the revolution. Each for reform. Focusing on these “islands of government committed itself to implementing effectiveness” through narrowly channeled reforms to increase job creation via a initiatives can provide entry points for improving productive private sector, moving away the overall system. If the changes accomplished from reliance on the public sector and resonate in the overall system, demonstration nonproductive firms connected to the elite. effects can trigger change in other bodies.4  et ambitious yet realistic 2. S After the revolution, a multidisciplinary unit expectations: incremental steps to manage the reform was created, with members from the Ministry of Investment rather than systemic changes and International Cooperation, the Ministry In highly polarized and unstable political settings, of Finance, the Ministry of Justice, and other targeted interventions can help achieve concrete public agencies responsible for investment. The results in the short term, because large-scale unit took ownership of the reform, ensuring reforms may be resisted by entrenched elites. It continuity despite government changes. It is important to regularly assess the context and played a key role in pushing reforms within players when identifying reforms with the highest the government and in consulting externally chances of success by using techniques such as with stakeholders across the private sector stakeholder mapping, in-depth political economy and with key players in civil society. This analysis, and so on. Incremental change can pave unit was able to organize consultations and the way for broader reforms in the long run. meetings with more than 1,500 individuals. It also helped to analyze the different data and In Tunisia, the Jasmine Revolution created reports available on the investment scheme great optimism for reform among the and ways to improve it. The unit led efforts on population, civil society, and the international a benchmark analysis with 14 countries and community. These supporters often favored drew on lessons learned to feed dialogue and systemic, “Big Bang” changes to bring Tunisia the reform process. The unit’s participatory in line with international best practice and approach and the outcomes it achieved to confront the perils and residue of the old set positive examples for other parts of the system. Some of these proposed dramatic government and helped the unit attract reform reforms directly affected vested interests, leaders from civil society and the private Trade & competitiveness in practice | 3 sector. Ongoing work and analytics provided especially useful where political turbulence or by the World Bank Group and other donors other challenges make private sector reforms also helped by offering neutral viewpoints difficult.     to underpin difficult reforms and overcome vested interests, particularly among senior Data, analytics, and lessons learned from civil servants and with reform champions who other countries informed Tunisia’s decision worked throughout the political changes. (See making, grounding it in facts and convincing Figure 1, showing the many actions of this unit audiences with different backgrounds and and other reform participants in the context perspectives. The government commissioned of government leadership changes and the a series of studies, interviews, and investor progress of the Investment Law.) surveys on the potential benefits of reforms to the current investment framework, building on 4. Use evidence to push reforms 120 previous studies. A cost-benefit analysis Using empirical evidence to support proposed of incentives, for example, revealed that tax initiatives helps decrease resistance among key incentives cost the government approximately stakeholders and encourage their acceptance 2.2 percent of gross domestic product, even of the necessity for the changes. This can be though 79 percent of these incentives went to companies that would have invested without Figure 1: Key Steps in the Investment Law Reform Process, 2011–2017 Appointm nt of H m di J b li Appointm nt of Ali Appointm nt of Gov rnm nt (third ov rnm nt L r dh M hdi Jom ft r th r volution) Gov rnm nt Gov rnm nt 2011 2012 2013 2014 D c mb r S pt mb r M rch Nov mb r J nu r M Proj ct introduc d to Dr ft cod Consult tions nd n l sis th Tunisi n withdr wn Constitu nt Ass mbl 1 Consult tion with 1,500 p rticip nts • Public nd priv t s ctor , int rn tion l comp ni s, nd Dr ftin of • B nchm rk with conomic p rtn rs th n w Cro ti , C ch • Cr tion of monitorin committ nd n dvisor committ cod R public, nd M l si 2 In-d pth stud of th curr nt inv stm nt fr m work b s d on 120 pr vious studi s • In p r ll l: nd p rticip tor ppro ch b innin th stud of th • 200 p rticip nts in 10 workships nd 20 individu l institution l nd int rvi ws proc dur l • Surv of 140 inv stors • Ass ssm nt of inc ntiv s ov r th l st 10 rs fr m work 3 B nchm rk with 13 conomi s • Studi s of inv stm nt l isl tion in fiv countri s comp r bl to Tunisi : Bul ri , Chil , M l si , Morocco, nd Turk • In-d pth stud of i ht l din conomi s: Br il, Chin , Cro ti , Finl nd, Ir l nd, Norw , Sin por , nd T iw n, Chin • B nchm rk of Tunisi ’s ttr ctiv n ss: thr workshops in th fr m work of Tunisi n–Turkish coop r tion; oth r workshops with OECD, UNCTAD 4 | Trade & competitiveness in practice them (World Bank Group 2013). Similarly, the In Tunisia, the status quo benefitted multiple country benchmarked its legal and institutional actors. Reforms to the investment policy and framework against good- and best-practice regulatory framework had the potential to countries across the globe, from Europe to infringe on the interests of many elements Asia, before finalizing its own new structure. It of domestic society, including local firms broadcast these findings in 10 public workshops operating in closed sectors of the economy to build support for the reform agenda. and public sector employees in institutions slated for restructuring. To overcome this 5. Build inclusive stakeholder resistance, external stakeholders, including coalitions to achieve results international partners such as the Bank Group In situations where vested interests from the were used to support and justify unpopular, former system have not been fully removed yet crucial reforms, including increasing from institutions, changes affecting the status market access for foreign investors in certain quo will often be adamantly resisted. In such sectors and economic activities. Moreover, situations, substantive mutually beneficial gains labor unions, working with revitalized business can be achieved by building alliances with other associations, were very important in “holding stakeholders sharing the same interests. the center” throughout the process and helped Appointm nt of Appointm nt of H bib Essid Youss f Ch h d Gov rnm nt Gov rnm nt 2015 2016 2017 F bru r M –Jun Oct. 30 Nov. 6 F b. 5 Jun 10 Au . S pt. 17 Nov. M rch April Dr ft pr s nt d Cod dopt d Cod N w v rsion Inv stm nt L w Int rn tion l Inv stm nt Applic tion to Council of b Council of submitt d pr s nt d to d cr s dopt d Inv stm nt d cr s of th l w Minist rs Minist rs to th th Ass mbl pr s nt d to b th Conf r nc publish d P rli m nt th Ass mbl Ass mbl Ass mbl N w round of • Pr s nt tion of th • Discussion nd • Communic tion on th consult tions cod to Ass mbl of stud of th dr ft n w inv stm nt l w (m tin s with th R pr s nt tiv s cod b th minist rs nd of th P opl Ch mb r of r l v nt D puti s or ni tions) • Pr p r tion of th l w d cr s • Consult tions b tw n th Ass mbl nd civil soci t Pr p r tion of th s cond dr ft of th • Fin li tion of n w cod nd th pplic tion t xts n ctm nt l w Trade & competitiveness in practice | 5 to push it forward in the face of predation by consultations held in two rounds during entrenched elites. 2012–13 and 2015–16. The Investment Law reform process  oost the impact of reforms 6. B benefitted from an exemplary broad-based through an effective consultation process, including active communication strategy engagement by the private sector, civil society, and the international community. A comprehensive communication strategy is key Two committees were created to facilitate to boosting the impact of reforms. Successful the consultation process: an advisory communications programs help raise awareness committee with mainly private sector and among stakeholders, including sending positive civil society representatives, and a monitoring signals to private investors. committee with public sector representatives. The government of Tunisia used communi- Both ensured efficient coordination among cation as an effective tool to promote reform. represented bodies and institutions. National The different steps in the adoption of the figures and experts were also targeted Investment Law were captured by the local to publicize the consultation process and press. Furthermore, the consultation process, champion the reforms. Figure 2 captures with 1,500 participants representing numerous the main points of the consultation process, stakeholder constituencies, served as part of which involved more than 20 organizations, the communication strategy, with selected institutions, and entities through numerous Figure 2: Main steps and Stakeholders in the Consultation Process, 2012–2016 2012 2013 2015–2016 P rticip nts S pt mb r Nov mb r 180+ 120 60 60 N tion l UTIC+CJD CONECT ATIC UTAP SYNAGRI UGTT IACE Account nts p rson liti s Priv t s ctor nd xp rts nd civil soci t L w rs’ Forum of Tunisi n T x dvis rs Economics nd Associ tion of C ntr d’ ff ir Ch mb rs of ssns. d Sf x comm rc Tunisi n Aff irs Busin ss L w Public s ctor BCT AFI API ONA APIA FIPA ONTT CEPEX Int rn tion l institutions nd Ministri s nd Nw WBG OECD AfDB IMF EU UNCTAD ESCWA public bodi s conomic p rtn rs consult tions P rticip nts R ion l 200 T b rk 05-25-2013 220 K irou n 04-06-2013 250 To ur 06-15-2013 consult tions Sf x 04-12-2013 T t ouin 04-19-2013 M hdi 05-03-2013 K f 05-04-2013 Monitorin committ Advisor committ (R pr s nt tiv s of public nci s nd th Committ s (R pr s nt tiv s of prof ssion l nci s nd dministr tion cov rin inv stm nt nd civil soci t ) inv stm nt-r l t d topics) Note: AfDB: African Development Bank; AFI: Industrial Land Agency; API: Agency for the Promotion of Investment and Innovation; APIA: Agency for the Promotion of Investment in Agriculture; ATIC: Tunisian Private Equity and Venture Capital Association; BCT: Central Bank of Tunisia; CEPEX: Tunisian Export Promotion Center; CJD: Centre des Jeunes Dirigeants; CONECT: Confederation of Tunisian Citizen Enterprises; ESCWA: United Nations Economic and Social Commission for Western Asia; EU: European Union; FIPA: Foreign Investment and Promotion Agency; IACE: Institut Arabe des Chefs d’Entreprises; IMF: International Monetary Fund; OECD: Organisation for Economic Co-operation and Development; ONA: National Office of Handicraft; ONTT: Tunisian National Office of Tourism; SYNAGRI: Tunisian Trade Union of Farmers; UGTT: Tunisian General Labour Union; UNCTAD: United Nations Conference on Trade and Development; UTAP: Tunisian Union for Agriculture and Fisheries; UTIC: Unit of Technologies of Information and Communication; WBG: World Bank Group. 6 | Trade & competitiveness in practice national personalities and key opinion leaders playing an important role. Regional workshops climate. For example, the Foreign Investment Promotion Agency has been strengthening its The consultation and consultations were held throughout the country, including locations in northwest, investment promotion functions to attract foreign direct investment in strategic sectors. process involved southeast, southwest, and central Tunisia. Meanwhile, the Ministry of Investment has started the process of simplifying business more than 20 In a key undertaking, the Tunisian government held an international investment conference regulatory procedures for investment organizations, entry. Finally, in its efforts to rationalize its and committed itself to approving and incentives policy, Tunisia undertook a cost- institutions, and adopting the Investment Law before it benefit analysis and has initiated steps to opened, using the conference to serve as systematize assessment of the incentives’ entities through a positive signal to private investors and the international community. The pressure effectiveness in the context of a Public Expenditure Review. numerous exerted by this deadline was very effective, resulting in adoption of the Investment Law consultations in Conclusion before the conference. During the conference, the government was thus able to point to the The case of Tunisia shows that, even two rounds. law as a major step toward improving the during long transitions marked by political investment climate, and this argument was and social tensions, fundamental private well received among both international and sector development reform can be achieved domestic investors. incrementally. To successfully accomplish reforms, Tunisia leveraged a common  se reform results to trigger 7. U development objective based on consensus additional reforms and achieve among key parties. The reform process development impact focused on three pillars: (i) setting ambitious yet realistic expectations, (ii) building “islands Achieving intermediate results can initiate a of effectiveness” as entry points for wider “snowball effect,” setting in motion a pattern systemic change, and (iii) using empirical leading to greater, more challenging reforms. This evidence to support reforms. An inclusive is particularly true in contexts where institutions stakeholders’ coalition was also crucial in are still weak, power plays among rival factions pushing the reform. Finally, the government are common, and reforms threaten the privileges of Tunisia used communication as an effective of the elites. Intermediate reform results can also tool to urge reform adoption. be used to reinforce the coalitions built with other stakeholders. The experience of and techniques used in investment policy reform in Tunisia can help In Tunisia, important improvements in the legal guide such efforts in other countries, including framework for investment have been achieved. economies experiencing similar political and However, substantive issues remain, including social challenges. The Tunisian experience the institutional setting for investment policy shows that deliberate consensual reform and promotion, full market access, and the efforts might be more effective than “Big rationalization of incentives. Nevertheless, Bang” approaches led by isolated clusters of the approval of the Investment Law has built reform champions, whose tenures often prove momentum for initiating a series of additional to be transitory. reforms to improve Tunisia’s investment (See back page for Notes and References.) Trade & competitiveness in practice | 7 Notes Levy, Brian. 2014. Working with the Grain: Integrating Governance and Growth 1. For a definition of coercive apparatus and in Development Strategies. New York: discussion of its impact as it existed prior Oxford University Press.  to the Arab Spring and as it stood after, see OECD (Organisation for Economic Co- Bellin 2004 and 2012. operation and Development). 2015. 2. Brian Levy (2014) has developed a Tunisia: A Reform Agenda to Support framework useful for explaining Tunisia’s Competitiveness and Inclusive Growth. political economy at different points in its “Better Policies” Series, March. Paris: evolution. OECD. 3. The figure represents the number of Tunisia, Government of. 2016. Investment Law. unemployed workers as a percent of Law No. 71-2016. September 30. Tunisia's total labor force; see World Bank World Bank Group. 2011. World Development Group 2011. Indicators. Washington, DC: World Bank 4. See Levy 2014 for more on these concepts. Group. https://data.worldbank.org/ country/tunisia. References ———. 2013. “Cost-Benefit Analysis of TRADE & Incentives in Tunisia.” World Bank Group, Bellin, Eva. 2004. “The Robustness of Washington, DC. COMPETITIVENESS IN Authoritarianism in the Middle East: Exceptionalism in Comparative ———. 2014. The Unfinished Revolution: PRACTICE Bringing Opportunity, Good Jobs Perspective.” https://scholar.harvard This brief note series is published .edu/files/levitsky/files/bellin.pdf. and Greater Wealth to All Tunisians. by the Trade & Competitiveness Washington, DC: World Bank ———. 2012. “Reconsidering the Robustness global practice of the World Bank Group. http://documents.worldbank of Authoritarianism in the Middle East: Group. It discusses approaches to .org/curated/en/658461468312323813/ government reforms that target Lesson from the Arab Spring.” http:// The-unfinished-revolution-bringing- a more robust and vibrant private www.ingentaconnect.com/content/ opportunity-good-jobs-and-greater- sector. These solutions focus on cuny/cp/2012/00000044/00000002/ wealth-to-all-Tunisians. boosting trade, promoting compe- art00002. tition, enhancing the investment Freund, Caroline, Antonio Nucifora, and Bob climate, improving sector competi- Rijkers. 2014. “All in the Family: State tiveness, and fostering innovation Capture in Tunisia.” Policy Research and entrepreneurship. Working Paper 6810, World Bank Group, Washington, DC. http:// The findings and views published documents.worldbank.org/curated/ are those of the authors and en/440461468173649062/All-in-the- should not be attributed to the family-state-capture-in-Tunisia. World Bank, IFC, MIGA, or any other affiliated organizations. Nor do any of the conclusions repre- sent official policy of the World Bank or of its Executive Directors or the countries they represent. 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