RAPID Projects - Evaluation of SMEPOL Project: Summary

Summary of Impact, Lessons and Options for Replication

Introduction
We know a lot about why micro, small and medium-enterprises (MSMEs) are important and the types of policies that can help foster their development. We know much less about how donors can actually catalyze policy reform in developing countries. Reform of MSME policy is often particularly complicated given the range and types of issues that matter - which includes access to markets, tax reform, finance, legal and regulatory changes. Comprehensive reform is almost always going to be challenging politically. The Small and Medium Enterprise Policy Development (SMEPOL) project in Egypt is an important case because it has been a successful project and one where the lessons have a broader resonance.

The full report covers four main sets of issues. First, it provides an assessment of the SMEPOL project - what happened, what worked and why. Second, it highlights some lessons for replicability - setting the findings of the SMEPOL project within the context of the literature and practical experience in this area. Third, we make recommendations regarding how Canadian stakeholders might continue to work on policy development on MSME issues in Egypt. Fourth, we outline options for replicating SME policy development type interventions in other parts of the Middle East - based on an analysis of where the context conditions are favourable and the types of activities that donors might support in different contexts.

The study was commissioned by the Middle East and North Africa Office of the Canadian International Development Research Center (IDRC). It was undertaken by the Overseas Development Institute (ODI) during the period August 2005 to March 2006. This report is intended to feed into these processes of programme development at the International Development Research Center (IDRC); they may also be useful for other donors. It was an independent evaluation - the findings, conclusions and opinions are those of the authors based on research conducted.

Clearly identifying and attributing a projects' influence on policy - and then drawing lessons - is rarely straightforward. In common with IDRC principles, our approach to the study was based on the principle of triangulation. We have used a set of specific individual methods - including project document reviews, composition analysis, literature reviews and interviews with a range of SMEPOL stakeholders as well as independent experts on the Middle East. These have given us a range of data to support our conclusions and generate a comprehensive assessment of the evaluation questions. We believe our assessment of the SMEPOL project, key lessons and recommendations for future steps in Egypt is robust. We do stress that our assessment of the potential for replicability across countries in the Middle East is more preliminary - given the much wider focus (on 11 other countries) and the less intensive data collection.

Assessing the SMEPOL Project
The Small and Medium Enterprise Policy Development Project (SMEPOL) ran from April 2000 to December 2005 . It was supported by the Canadian International Development Research Center (IDRC), the Canadian International Development Agency (CIDA) and the Government of Egypt (GoE). MSMEs are estimated to represent over 90% of the non-agricultural private sector, three quarters of the total labour force in the private sector and 75% of the value added in Egypt. But they faced a confused policy situation at the start of the project; the objective of the SMEPOL project was to improve the policy environment for MSME development. It aimed to do this through improving policies, legislation, regulations and procedures regarding MSMEs. The central axis of the project was on policy development - with training, research and networking activities designed to support the primary goal.

The SMEPOL project has made a valuable contribution to MSME policy development in Egypt. The project has helped put MSME issues much higher on the policy agenda, generate a range of policy-relevant research, enhance capacity in key ministries, improve policy development processes and develop a cohesive Competitiveness Strategy for Egypt. This is no small achievement given the widely acknowledged difficulty of policy influence projects and low rates of projects achieving substantial success. It is particularly notable given the challenging and unpredictable context and the "shocks" the project faced over its duration.

The project was well designed to address the need for a coherent MSME policy - and in an area that is important to the development of Egypt. Implementation was challenging given the political shifts, but the project achieved its primary objectives of policy development, as well as the supporting objectives regarding policy relevant research, training and consultation. The project was particularly notable for its partnership approach, embedded project structure (within the Minister's office), flexibility and strategy of following the Ministerial champions. It was particularly impressive from a strategic and tactical perspective - characterised by a "strategic opportunism" - and particular credit here goes to the project director. These, combined with sound risk management structures, accounted for the extent of project effectiveness.

For purposes of learning, we highlight a number of limitations. Policy influence was mostly achieved at the ministerial level rather than across the government. While not a specific objective, we do believe the project should have given greater consideration to issues of policy implementation - an area where progress has been slow. There has been little change in the actual operating environment for SMEs in the last few years. The sustainability of some impacts remains uncertain given the limited mandate in the Ministry of Finance (MoF) for coordinating MSME policy development. The broader legacy of SMEPOL is uncertain and depends on acceptance of the Competitiveness Strategy across the Government of Egypt (GoE) - and its implementation.

Maximizing Chances of Policy Impact: What are the lessons?
SMEPOL is one of a small set of IDRC policy development projects characterized by an explicit, direct and primary focus on policy change, large project size and with external (usually CIDA) funding. SMEPOL was distinct in the extent to which it was embedded within a Ministry. Given the success of SMEPOL, there is interest to learn what the lessons are and how they might be applicable more broadly. We have identified some of the key lessons from the project and set them within the context of the literature and practical experience in this area. Our findings about SMEPOL resonate well with what we know about policy change and how donor efforts can maximize their chances of influence (though this area remains under-explored).

Put crudely, chances of policy impact seem to be maximized when projects do the right kinds of things in the right kinds of contexts. First, therefore, we have outlined the key context lessons. The four most important factors are:

Need - in terms of development need, but more specifically for policy development;
Context of reform - there is broader demand to improve policy;
Mandate / authority - there exists a policymaking organization with the mandate and authority to develop policy; and
Champions - there are key individuals willing to take the reform forward.

We also note that domestic research capacity matters and that donor country presence and a good reputation are important for donors to be able to effectively manage policy change projects.

Second, we have outlined a set of project specific lessons. We argue that policy impact is maximized if the following key issues are addressed:

Explicit policy focus - is more likely to result in policy change. In policy influence projects, it is always important to consider implementation issues and ultimate impact.
Partnership approach - working together to develop and implement the project. The greater the proximity to power, the greater the potential for policy impact. But the risks are also greater.
Risk management - structures must be developed to ensure that the project remains "on track".
Strategic opportunism - an approach that builds towards long term goals, while being ready to respond nimbly if opportunities arise.

We have also highlighted the importance of having adequate resources, taking a consultative approach, being flexible and ensuring research quality. The SMEPOL project addressed these exceptionally well on the whole, thus enabling the project to achieve its objectives.

MSME Policy Development in Egypt: Suggestions for Next Steps for IDRC
Egypt still has some way to go before it has a supportive operating environment for MSMEs. The legal and regulatory environment remains complex, access to finance is limited and the costs of informality (and barriers to formalization) remain high. The problems - and many of the solutions - are well known. Many are outlined in the comprehensive policy document 'Enhancing Competitiveness of MSMEs in Egypt' issued by the Ministry of Finance and developed as part of the SMEPOL project. However, the political and policy context remains uncertain - with a poor SME Law and the limited effectiveness of a key government agency.

We have considered a wide range of options for Canada to continue policy development interventions in this area. We have assessed them according to a set of criteria including widespread impact, sustainability, technical feasibility, political feasibility and Canadian niche. Based on our assessment of the current context and the merit of different options we make three particular recommendations for possible future work in Egypt.

First, in the short term, we think the priority is for SMEPOL staff (and IDRC and CIDA) to ensure SMEPOL findings and strategy are included in the National Strategy currently being developed.
Second, in the longer term, it would be beneficial for IDRC and CIDA to support work on implementing areas of the Competitiveness Strategy which are the core responsibility of capable Ministries. In particular we would recommend continuing to work with the Ministry of Finance - most importantly on issues of legal and regulatory reform that are within their area of mandate.
Third, we recommend that IDRC might help develop and provide initial support for regular, credible, timely statistical data on key policy relevant issues facing the MSME sector (perhaps on an annual or bi-annual basis).
We believe these interventions would be beneficial to the MSME sector in Egypt and would enable IDRC and CIDA to pursue their niche and comparative advantage.

Replicating MSME Development Projects: Recommendations for the MENA Region
Both IDRC and CIDA highlight the issue of Private Sector Development as a priority and are considering how to develop further programming in this area. In the report, we provide a framework for assessing whether a country exhibits the need and threshold conditions for considering direct policy development interventions. We focus on the context criteria identified above (reform agenda, need, mandate / authority, etc) as well as considering issues of development need (income per capita), governance context and Canadian niche. We provide preliminary assessment for selected countries in the Middle East and North Africa (MENA) region.

Our initial analysis suggests that the countries could be divided into the following categories regarding the need for and value of direct SME policy development interventions (or more indirect interventions) or lack of need or value of interventions. Our analysis suggests that IDRC and CIDA should:

Consider direct SME policy development interventions in: Jordan and perhaps Sudan - although in Sudan in particular further detailed assessment would be needed and the partnership model should be different due to wider governance concerns.
Consider an indirect approach to policy influence through undertaking research and influencing activities as appropriate: Algeria, Morocco, Syria, West Bank and Gaza, and Yemen. While the specific focus in each country would vary, activities could be managed as part of a regional policy influence programme.
Refrain from policy development activities at this point:
- Turkey and Iraq (since little comparative advantage or value added for Canadian interventions).
- Lebanon and Tunisia (since no clear need - though it might be worth learning and promoting the experiences of Tunisia across the MENA region).

The bottom line is that we are suggesting direct policy intervention projects only where we think there is actually a problem with overall MSME policy, the contextual factors appear to be in place and there would be value added in a Canadian intervention.

Our assessment suggests a number of conclusions regarding the broader applicability of the SMEPOL experience. First, that Egypt is not a unique state in a sense that would prevent its experience from being adapted elsewhere (in MENA and beyond). Where threshold conditions exist, it should be possible to carry out policy development projects similar to SMEPOL (although they will need to be adapted). Where threshold conditions do not exist, the key is for donors to assess the context and put in place relevant programmes - whether research, consulting stakeholders or influencing key policymakers - to help spur change. Second, country contexts vary considerably (in terms of specific needs and political contexts) and more effort to understand the political context and mechanisms or drivers of change would help maximize the chances of policy influence. Third, there remain broader issues about governance in some of the countries (Yemen and Sudan) that would question whether an MSME intervention is really the key issue - and would significantly affect how any interventions should be carried out.

Responding to different contexts we outline two generic policy development models.

Direct Policy Development (DPD) Projects: Where the key foundational characteristics are present - that is i) context of reform; ii) need for policy development; iii) organizations with a mandate and authority; and iv) champions - then direct policy development projects similar to SMEPOL could be explored. We believe that these four factors are the critical and necessary conditions needed to ensure a direct policy development project has a reasonable chance of success. We suggest a model for a direct "partnership" policy development approach. Similar to SMEPOL or other experiences, the focus is on large policy development projects (with a supporting role for research, communications and training) and working with government closely. The exact approach and choice of components depends on the context.
Indirect Policy Influence (IPI) Projects: Where one or more of these four key foundational characteristics are not present then a partnership model for direct policy change, similar to SMEPOL, is unlikely to be successful. Alternative strategies can however be developed and there is still strong potential for Canadian value added. In particular, a realistic approach would be to move towards a more limited "policy influence" model. The package of interventions here might include research, networking, communications and influencing activities - i.e. with the objective to help develop the threshold contexts for policy development. These would generally be significantly smaller than direct policy development projects.

How should IDRC structure their programmes to best address these challenges? If the primary focus is on direct policy development (and much IDRC work does not have such an explicit policy focus), our view is that a country-level intervention is most appropriate. Having a country capacity makes it much more straightforward to work on assessing the specific problems and context, conducting research, consulting stakeholders and influencing key policymakers. A presence in a country and a good reputation are particularly important (often vital) for direct policy development projects - where the degree of partnership is higher and the need to manage risks more critical.

In many ways, the same structural considerations also broadly apply to policy influence projects. As with direct policy development, the bottom line is that "proximity is destiny" - many policy influencing activities cannot be done effectively at a distance. Any activities in each country will need to be focused on the context and needs in that country. This questions the rationale for regional programmes on specific issues. We do think, however, that there is scope for an IDRC regional programme for managing a stream of work on private sector issues with an MSME focus (perhaps a Policy Development Facility for Private Sector Policy Development). Our analysis suggests that the programme should focus on Algeria, Morocco, Syria, West Bank & Gaza and Yemen although the specific country activities should be different. A regional programme makes sense for a number of reasons. There would be some benefits in terms of learning. Furthermore, the need for constant interaction and risks of indirect policy influence projects (research, pilot projects, and networks) are lower than for direct policy work. The North Africa component could also form part of Canada's contribution to the new Investment Climate Facility for Africa (ICF).