Third plenary session Bari, 30 January 2012

Report on The role of small and medium-sized enterprises in the Mediterranean

This report was drawn up by the rapporteur, Mr Fathallah Oualalou, Mayor of Rabat (Morocco). It was discussed by the Commission for Economic, Social and Territorial Affairs (ECOTER) on 8 July 2011 and adopted on 30 January 2012 during the third plenary session of ARLEM in Bari, Italy.

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-1The role and importance of SME development in the Mediterranean basin Small and medium-sized enterprises (SMEs) play a very important economic and social role, both through their importance in the economy and in job creation, a role which is greatly appreciated in these times of crisis and rising unemployment. In the Mediterranean in particular, the development of SMEs can help to face many challenges linked with economic development, inequalities, very high unemployment, demographic developments and the need for structural change. In particular, SME development offers many job opportunities which can help to lower the unemployment rate and address the demographic challenges posed by growing populations. In addition, the development of the SME sector can help to increase competition and productivity and thus stimulate the growth of income both overall and per capita. This development will also stimulate structural change, since a healthy SME sector is associated with innovation and technological upgrading. In return, this process contributes to regional and local development and to social cohesion as it helps to reduce inequalities, since a rise in the incomes of a wider section of the population should create a greater demand for better governance. All these positive developments should help create better opportunities, both economically and politically, that will transform discouraging and potentially aggravating demographic projections of increasing poverty and instability into a force for positive change. It is therefore no exaggeration to say that SMEs have the potential to act as key drivers of 1 development for the entire Mediterranean region . The development of the SME sector is therefore very important for the southern Mediterranean especially as the profound social unrest that is troubling these countries is largely the result of excessively uneven economic growth. Sustainable development in the region requires the dissemination of a culture to promote investment in the territories among local actors, so as to bring about a better share-out of investments, jobs and wealth in the face of growing competition. Key actors and initiatives for SME development in the Mediterranean Recognising the important role of SMEs in the Mediterranean region, several actors are undertaking to promote their development. As part of the Euro-Mediterranean Partnership and the European Neighbourhood Policy, the European Union has developed close economic and financial cooperation with Mediterranean partners with the aim of establishing a free trade area. Industrial cooperation under the Euro-Mediterranean Partnership seeks to establish an area of shared prosperity between the EU and its Mediterranean partners. European and Mediterranean

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Note on "the role of small and medium-sized enterprises in the Mediterranean basin" prepared by the Aston Centre for Europe for the members of ARLEM's ECOTER commission.

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-2industry ministers meet every two years to discuss progress, decide on future priorities and adopt a work programme for the next two years. At the Ministerial Conference on Industry in Caserta in 20042 several initiatives were adopted, in particular the Euro-Mediterranean Charter for Enterprise3, aimed at stimulating the development of the private sector and of a favourable investment climate in order to promote economic development. In spring 2011, in response to the events of the Arab spring, the European Commission proposed creating a Small Business Act for the Mediterranean to promote entrepreneurship and stimulate economies. The Union for the Mediterranean (UfM) made the "Mediterranean Business Development Initiative" one of its six priorities with the aim of promoting SMEs by "assessing the needs of these enterprises, defining policy solutions and providing these entities with resources in the form of technical assistance and financial instruments"4. This marks an important step because it is the first time that support for SMEs is explicitly mentioned as a priority of Euro-Mediterranean cooperation. Through the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), and in harmony with the European Neighbourhood Policy, the European Investment Bank (EIB) seeks to help the Mediterranean partner countries to face the challenges of economic and social modernisation and regional integration by financing private sector projects, whether they be local initiatives or direct foreign investment (DFI). To this end, FEMIP offers loans, private equity and technical assistance, in many cases to SMEs. It also supports the implementation of three of the six priority initiatives of the UfM5. The Organisation for Economic Cooperation and Development (OECD) is active in many countries of the southern shore of the Mediterranean through its Initiative on Governance and Investment for Development in the Middle East and North Africa (MENA). The promotion of SMEs is a key component of this initiative. The OECD's role is to provide technical assistance to governments in the region. The European Bank for Reconstruction and Development (EBRD) invests primarily in private sector companies in twenty-nine countries from Central Europe to Central Asia. It has a strategy for micro-enterprises and small and medium-sized enterprises (MSMEs). Following the events of the Arab spring the Board of Governors of the EBRD decided to expand its field of intervention to the Southern and Eastern Mediterranean.

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http://ec.europa.eu/enterprise/policies/international/files/f1960quar_en.pdf. http://ec.europa.eu/enterprise/policies/international/files/euromedcharterf1949_en.pdf. http://www.semide.net/media_server/files/J/t/20080713_UfM_declaration_EN.pdf. http://www.eib.org/projects/regions/med/index.htm?lang=en.

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-3The International Finance Corporation (IFC), a member of the World Bank group, promotes sustainable private sector investment in developing countries. The IFC is active in all the Mediterranean countries, with a committed portfolio of around two billion U.S. dollars, through which it promotes private businesses, which are often SMEs6. "Invest in Med" is a project funded by the European Union which aims to encourage European investment in the Mediterranean area. The main goals are to increase direct foreign investment and trade flows, to develop sustainable partnerships on the three shores of the Mediterranean and implement a new model of economic cooperative networking between European and Mediterranean public or private bodies. SME development is an important part of the "Invest in Med" programme7. Challenges facing SME development in the Mediterranean Despite its important role the SME sector is generally under-developed in the southern and eastern Mediterranean. Although there are some variations between countries, several barriers to SME development are common to all. In many countries of the region, the structure of the economy is strongly oriented either towards large-scale enterprises, or to large state enterprises and state administration or to the large private companies in the energy, petrochemical, mining, agribusiness, real estate and tourism sectors. SMEs tend to supply the low and medium-tech sections of the economy and their productivity is generally low. In many industries, the opportunities for SMEs to enter markets are also often restricted by monopolistic market structures, which puts the brake on 8 their activity . The small size of the SME sector in much of the Mediterranean basin is above all due to the fact that the challenges the region faces are also the factors behind the high barriers to SME market entry and development. In general, the business environment is unfavourable in the Mediterranean area. Access to funding – both national and international credit – is one of the main constraints on the creation, survival and growth of SMEs, especially the most innovative of them. Another challenge is related to public administration and officials who are often poorly trained, too much red tape and often a lack of transparency. In addition, the inadequate quality of key infrastructure such as roads, telecommunications, and electricity and water distribution networks often leads to poor yields on 9 private investment in projects that depend on such infrastructure .

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http://www1.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/home# http://www.invest-in-med.eu/en/invest-in-med-project-2.html. Note on "The role of small and medium-sized enterprises in the Mediterranean basin" prepared by the Aston Centre for Europe for the members of the ECOTER commission of ARLEM, p. 13; CEPS policy brief No 239 of 25 March 2011, published by Rym Ayadi and Antonio Fanelli: "A new Framework for Euro-Med Cooperation on Micro, Small and Medium-Sized Enterprise Support – The role of the Union for the Mediterranean", p. 2. Note on "The role of small and medium-sized enterprises in the Mediterranean basin" prepared by the Aston Centre for Europe for the members of the ECOTER commission of ARLEM.

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-4The economic and financial crisis makes the difficulties for SMEs worse, firstly because it is more difficult to find funding and secondly because it leads to a drastic fall in demand for goods and services. In general, SMEs are more vulnerable in times of crisis for several reasons. On the one hand it is difficult to reduce their size, because they are already small. On the other, their financial structure is weaker and they often suffer the backlash of the difficulties faced by large companies. Local authorities and SME development The regional and local authorities play a very important role in the development of small and medium-sized enterprises and economic development at territorial level also helps to improve governance. It is important to remember that the competitiveness of national economies is often based on geographically limited areas – and therefore regional or local – which in turn are often composed of a large number of SMEs10. These "industrial centres" highlight the considerable importance of entrepreneurship and SMEs at local and regional level and it is very important to increase interaction and cooperation between local authorities and SMEs. Local governments in the Mediterranean area would be better placed to assess how certain factors can help to stimulate economic growth. For example, the development of industrial centres is accompanied by a number of benefits such as better access for businesses to skilled workers and competitive suppliers, stronger links and complementarities between sectors that are at different stages of production, better access to specialist information and sources of financing and equity capital, fewer constraints regarding imbalances in coordination and information, and easier access to public services provided because of the significant demand created by the industrial centre11. At the same time, economic development at regional and local level can help improve the quality and effectiveness of local authorities as a higher level of small business activity creates an increase in demand for better governance and stimulates the provision of local public services. In this way, although local authorities have a role to play in encouraging the development of SMEs in the early stages of their development, their success then has the effect of turning them from an agent of change to an object of change. It is through these processes that successful local and regional development 12 helps to boost social cohesion by creating jobs and improving the quality of public administration . Despite this important role of local authorities, most initiatives to encourage SME development are based on implementation at national level, neglecting the role of regional and local authorities. Moreover, even when there are local and regional initiatives, their effectiveness is limited by restricted administrative capacity as regards both funding and human resources. Therefore, greater

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For example, Italy's specialisation in fashionable leather goods is based mainly on an industry which is concentrated in the Tuscany region. Note on "The role of small and medium-sized enterprises in the Mediterranean basin" prepared by the Aston Centre for Europe for the members of the ECOTER commission of ARLEM, pp.15-16. Ibid, p. 16.

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-5importance must be given to measures by local and regional bodies to stimulate entrepreneurship and SME creation. At the same time the tools needed to create an SME-friendly environment must be provided13.

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Recommendations Aware of the important role of SMEs in economic and social development, ARLEM: 1.

stresses the importance of SMEs for economic development and innovation, social cohesion, job creation and regional development; notes that despite this important role the SME sector is underdeveloped in the Mediterranean;

2.

calls on the Member States of the Union for the Mediterranean (UfM), fund donors, the UfM, the European Commission and the members of ARLEM to make SME development a priority;

3.

stresses the importance of adopting a long-term strategy for the development of SMEs as a stimulator of innovation and economic growth; calls for a coordinated approach between all the actors concerned and draws attention to the need to involve entrepreneurs and civil society;

4.

notes the need to harmonise legislation and ensure a uniform understanding of concepts and definitions relevant to small and medium-sized enterprises;

5.

welcomes the progress made under the Euro-Mediterranean Enterprise Charter; notes, however, that some key points for the development of SMEs are not mentioned, such as the promotion of women and young entrepreneurs, support for business start-ups, or external funding for SMEs;

6.

therefore calls for a review of the Euro-Mediterranean Enterprise Charter so that it covers these spheres; also proposes that the Charter should mention opportunities provided by the information society as a driver of growth and socio-economic progress, and as a factor that promotes an environment more favourable to SMEs; the Charter could also encourage technology transfers via strong European networks and technology markets at national and regional level;

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recalls the need for a tailored approach that can take into account the specific features of each country and region;

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Ibid.

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-68.

encourages measures which would allow SMEs better access to finance and would improve financial infrastructure and reduce barriers to internationalisation;

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appeals to the authorities to reduce administrative barriers and costs, promote the use of electronic administrative tools to create one-stop shops for information on administrative rules and regulations, focus on transparency, improve infrastructure and invest in the training of entrepreneurs;

10. recommends that the Member States of the UfM set up agencies for the development of SMEs and local development agencies. Such agencies would make it possible to initiate strategies for SME development, promote technology transfer to SMEs, provide consultancy services, create business nurseries, foster networking to facilitate the exchange of experiences and information and boost capacity; also recommends networking of development agencies in the partner countries following the example of the European Association of Development Agencies (EURADA); 11. encourages SME intermediaries on both sides of the Mediterranean to pool their experience by launching effective projects and twinning arrangements; 12. stresses the importance of promoting an entrepreneurial society and a culture of entrepreneurship on the south side of the Mediterranean, building up the skills of entrepreneurs, especially through education and training, and stimulating innovation and creativity; 13. advances the idea of a "Mediterranean prize for entrepreneurship" along the lines of the European Enterprise Awards (EEA)14, with the aim of identifying and rewarding initiatives to promote entrepreneurship and small companies at national, regional and local level; 14. calls on all actors involved in the promotion of SMEs to encourage the entrepreneurial spirit among young people who constitute a large proportion of the population of the southern Mediterranean and constitute a huge potential. This can also help young unemployed people to access the job market; 15. proposes that the entrepreneurial dimension of women be incorporated in the formulation of all policies relating to SMEs; and that the networking of women entrepreneurs be promoted; 16. promotes the idea of creating a Mediterranean Investment Bank with the objective of supporting the countries of the southern Mediterranean in their reform efforts; such a bank should provide funds for decentralisation and local government activities;

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Organised by the European Commission, DG Enterprise: http://ec.europa.eu/enterprise/policies/sme/best-practices/european-enterprise-awards/index_en.htm.

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-717. welcomes the SPRING15 programme launched by the European Union in response to the Arab spring with EUR 350 million for the period 2011-2013, and in particular the goals of improving the regulatory environment of business, increasing the number of small and medium enterprises (SMEs) and reducing internal economic and social disparities16; 18. stresses the important role of local and regional authorities in promoting SME development, which is distinct from and complementary to the role of national administrations, and consequently calls on the national authorities to strengthen the financial and administrative capacity of local authorities; 19. points out that economic development at local and regional level helps to improve the efficiency and quality of local authorities and stimulates demand for better governance; 20. emphasises the role of ARLEM as facilitator and coordinator between the local authorities of the Mediterranean, the regional and local development agencies, the Union for the Mediterranean, the European Commission, fund donors and research institutes; 21. proposes that regional and international forums be held to highlight the role of local authorities in the development of small and medium-sized companies and to promote good governance; 22. invites its members and their administrations to use the TAIEX (Technical Assistance and Information Exchange Instrument) and Twinning programmes which are tools for cooperation between a public administration in a partner country and an equivalent institution in a Member State of the European Union and are designed to improve and modernise institutions in the neighbouring countries; 23. asks local authorities on both sides of the Mediterranean to practise a policy of equal treatment of SMEs when awarding contracts for services of general interest; 24. asks its co-chairs to forward this report to the presidency and the secretary-general of the Union for the Mediterranean, the president of the European Council, the High Representative of the Union for Foreign Affairs and Security Policy and the presidents of the various EU institutions and bodies. * *

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Support to Partnership, Reform and Inclusive Growth. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/636&format=HTML&aged=0&language=EN&gui Language=en.

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-8APPENDIX – List of contributions received from ARLEM members -

Murcia region (Spain) Uszka municipality (Hungary) Constantine province (Algeria)

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