Economic Research Forum (ERF)

The hidden potential of Jordan’s small firms for driving a green transition

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For Jordan, a green transition represents an enormous transformative opportunity. But a decade-long increase in the use of renewable energy has not freed the country of its economic woes. This column explores the currently underused yet potentially powerful force of micro, small and medium-sized enterprises – and proposes policies that could improve the investment climate and clear legislative and regulatory barriers.

In a nutshell

The green transition is as an opportunity for a fundamental, sustainable and inclusive economic transformation; that should involve empowering MSMEs, unleashing the potential of their highly educated labour force and their natural comparative advantage for producing green energy.

MSMEs should be invested in as nodes of renewable energy production and storage – especially since, as nimble and innovative enterprises, they offer a pathway for rapid assimilation of green technologies such as solar panels.

Government policies need to promote a drastic transformation of the green financing environment for MSMEs, primarily by increasing accessible capital and loans, as well as clearing regulatory and legislative barriers to access.

In recent years, Jordan’s policy agenda has begun to reflect the urgency of tackling climate change, with national strategies devised to commit the country to a green transition. An early example is the 2017 National Green Growth Plan, which has been followed by a suite of sectoral Green Growth National Action Plans launched in 2020.

But the potential of a green economy and the growth expected from such a transition in Jordan has not yet been fully realised. This largely results from a narrow focus on expected green outcomes with insufficient attention to the investments and enabling environment that they would require.

Countries in the Middle East and North Africa (MENA) not only have a natural comparative advantage in moving to renewable energy, but such a transition also offers crucial opportunities to overcome chronic stagnant growth in the region. This is particularly true for Jordan, which has seen year-on-year growth hovering around 2-3% over the past decade amid high structural unemployment and a rapidly growing population.

Jordan also currently imports 90% of its energy. Accordingly, it is all the more important for the country to identify the precise gaps between its green agenda and the realities of what implementation requires in order to seize the full opportunities of green growth and to achieve energy sovereignty.

Our research highlights precisely this gap for Jordan’s micro, small and medium-sized enterprises (MSMEs), which remain drastically underused in energy transition efforts. Here, we provide a brief overview of the role of MSMEs in Jordan’s energy transition, as well as policy recommendations on how to use their full potential, particularly to reach the green energy targets in the national Economic Modernization Vision.

In Jordan, over 99% of economic establishments are MSMEs – individual firms that employ fewer than 100 employees and fulfil additional turnover and asset maximums. MSMEs, in turn, employ around 60% of the workforce. Importantly, not only are these MSMEs very familiar with the idea of renewable energy, but they are also very receptive: we find that well over 70% of MSMEs agree that renewable energy technologies would enhance their daily operations, and over 85% of MSMEs agree that they would reduce their energy costs.

This represents a huge opportunity to drive the renewable energy transition. We believe that MSMEs should be invested in as nodes of renewable energy production and storage – especially since, as nimble and innovative enterprises, they offer a pathway for rapid assimilation of green technologies such as solar panels. This represents an opportunity to stimulate green manufacturing and installation and supporting industries that produce related components, as well as increasing demand for labour equipped with relevant technical skills.

But for this to happen, government policies need to promote a drastic transformation of the green financing environment for MSMEs, primarily by increasing accessible capital and loans, as well as clearing regulatory and legislative barriers to access.

Over the last decade, Jordan has undeniably progressed in use of renewable energy: from less than 1% in 2014 to 21% in 2021. The country’s financial incentives and favourable regulatory framework for investments in renewable energy have been particularly welcome in facilitating this shift. But they are insufficiently tailored to smaller firm sizes, falling short of meeting the increased demand of MSMEs in the renewables sector.

The issue remains that the domestic economic climate is still uncertain, and renewable investments are still unattractive, particularly given a lack of clarity about their terms of financing, monthly instalments and total payback periods.

The role for the state to encourage renewable investments is clear. While government-backed funding for energy enterprises, such as the Renewable Energy and Energy Efficiency Fund (REEEF), have been critical, there needs to be much more. Tax incentives, subsidies and other forms of state financial support should also be tailored to specific challenges facing MSMEs, such as the long-term nature of investments in renewable energy.

Just as important is the need to encourage the private sector and close the information gap with financiers and regulators. What is also necessary at banking institutions is developing specific financial products that are targeted to renewable energy investments and sensitive to their characteristics, such as longer payback periods and higher initial costs given the costs of upfront installation.

Both legislation and Jordan’s grid and other technical infrastructures must remain nimble to reflect technological advances in renewables – for example, accommodating those relying on battery storage for off-grid or hybrid applications.

Fluctuating laws and regulations, such as inconsistencies in net metering versus net billing policies, only add to potential investor uncertainty. Changes that may seem merely procedural, such as streamlining approvals for renewable energy systems, and clearing up the bureaucratic red tape, are in fact an important component of encouraging MSME investment and innovation. Facing the worsening climate crisis, the MENA region stands at a crossroads, and it must see the green transition as an opportunity for a fundamental, sustainable and inclusive economic transformation. Countries like Jordan must empower their MSMEs, unleashing the potential of their highly educated labour force and their natural comparative advantage for producing green energy.

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  • Ibrahim Saif
    Ibrahim Saif
    Former Minister of International Cooperation, Jordan
  • Ahmad Awad
    Ahmad Awad
    General Director, Phenix Center for Economic and Informatics Studies

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