Micro, small and medium enterprises (MSMEs) have always played a crucial role in Lebanon’s economy during the post-civil war era, comprising more than 90% of the country’s businesses and contributing to around 50% of its GDP[1]. This allowed them to become the beating heart of the Lebanese economy, acting as crucial engines to employment and economic diversification, even though their categorization (size/employee stratification) is yet to be officially recognized and defined in Lebanese laws[2]. 

This economic contribution was not just about numbers, as MSMEs operated in a wide range of industries. Their diversity bolstered the economy and made it more resilient against external shocks. Yet, the ongoing financial collapse since 2019, described by the World Bank as being among the top three most severe global crises in history, has resulted in a complex web of social, economic, and regulatory challenges for MSMEs, hindering their growth and prosperity and pushing them to operate in an environment of perpetual and overlapping crises.

Among those challenges were infrastructural bottlenecks, limited access to finance, complex regulatory frameworks and administrative procedures, and limited market access, all of which caused delays and financial burdens. These were also accompanied by the COVID-19 pandemic and the Russia-Ukraine conflict and its impact on food prices[3]. Not only that, but the brutal liberalization and subsidy removal on all basic services has caused an abrupt increase of all energy prices (electricity, gasoline, and diesel), adding pressure to MSMEs’ balance sheets.

MSMEs and the Energy Transition

A recently completed study by the Lebanese Center for Policy Studies (LCPS), Economic Research Forum (ERF) and Middle East Institute (MEI), just a few months before the Lebanon-Israel war, has shown that energy costs ranged between 10% and 40% of MSMEs’ total production costs.

The study implemented a multidisciplinary, mixed-method approach that relied on a nationwide, firm-level survey of 800 MSMEs, along with five focus group discussions (FGDs) and 24 key informant interviews (KIIs). The aim was to develop an understanding of how MSMEs are navigating the challenges of the energy transition amidst climate and economic crises, and the level of women and youth involvement in these transition processes.

According to the World Bank, 1 out of 5 Lebanese businesses have closed in the period between 2018 and 2022. Yet, some Lebanese MSMEs have proven themselves to be remarkably adaptable in the face of a polycrisis environment[4]. Results of the study have shown that some MSMEs have even become more self-dependent as entrepreneurs with the crisis-induced market changes. Smaller firms maneuvered better over the past years, and this may be related to their ability to better adapt to specialization, their proximity to markets, and their ability to better exploit new opportunities. However, these findings are context and sector specific.

This resilience has been evident in their diverse strategies for survival and growth, and particularly when it comes to supplying their energy needs, as energy constituted one of their biggest operational costs. Amid subsidy removal on energy products, ongoing hyperinflation, and market dollarization, MSMEs (more than 50% of the surveyed businesses) have resorted to solar energy to reduce their costs and reliance on diesel generators.

Participants in the FGDs acknowledged the cost-effectiveness and improved production stability of solar systems, and some MSMEs experienced a near-complete nullification of their electricity bills. Their financial gains ranged from $750 to $2,500 per month, with up to a 40% reduction in operation costs. In addition, the nationwide survey reported around 70% satisfaction when connected to solar power, while 39% expressed a lack of interest in expanding their current energy systems, due to space constraints or the high costs involved. 

These findings demonstrate the economic viability of renewable energy for enterprises, which has proven to be cost-effective. However, financing still constitutes the main challenge that most enterprises face when implementing renewable energy systems, and the need for additional support to encourage businesses to adopt sustainable technologies and energy efficiency measures is paramount.

Divers vs. Thrivers

The main weapon for MSMEs during the crisis was innovation. According to the Ministry of Economy and Trade, around 3,350 trademarks were registered in 2021 alone. Building on MercyCorps’ work during the crisis, the research sought to distinguish between MSME “thrivers” and “divers,” whereby drivers tried to innovate, but lacked the prior capability, capital, and technical know-how, while thrivers seized the crisis as an opportunity to flourish and deliver services or products that were in greater demand. 

Several sectors have experienced this shift. In addition to the swift increase in the number of companies working in the renewable energy (RE) field, two other sectors were remarkable to observe, namely the agri-food and the Information and Communications Technology (ICT) sectors. Although the support of international organizations played a significant role, these sectors have grown faster and built new opportunities as a result of socio-economic considerations, new business concepts, and adaptation strategies that kept them afloat (such as developing new products and services to meet the changing socio-economic conditions). For the agri-food MSMEs in particular, the large drop in operating costs linked to sourcing energy, employee salary, and an increased price (in LBP terms) for imported goods made locally production more attractive for locals facing a loss of purchasing power.

Yet, most of these accumulated benefits have already been wiped out with continued hyperinflation and market dollarization, thus the current business environment remains difficult and unsustainable.

Shifting Strategies

Lebanon stands today at a critical juncture when it comes to its energy transition path, and consequently the role MSMEs can play in this future. With a newly elected president and a functioning government, policy decisions made in coming period will impact what the country will look like for at least a decade from now, and those cannot be taken with the usual top-down approach that typically overlooks the challenges MSMEs are facing.

There is an urgent need to shift from the services and financial sectors to strengthen productive sectors, such as manufacturing, agriculture (including agri-food), and technology, so that these can play a bigger role in the economy. Strengthening MSMEs and enabling the environment for them to innovate fall in this direction, and our research underscored how integral they are for a clean energy transition. Government ministries and policymakers should operate in tandem rather than in silos when dealing with the energy transition, applying a holistic approach that integrates MSMEs, bottom-up opportunities, and the larger social and economic framework.

Engaging MSMEs as active partners in the transition would enable Lebanon to unleash these enterprises’ full innovative capacity, but this cannot happen without tackling the need for innovative financing mechanisms, a flexible non-bureaucratic regulatory framework, and the creation of competitive markets. Above all these elements, key entry points include restoring trust in both the banking sector (through restructuring) and in public institutions, fighting corruption, enhancing accountability, and addressing the issue of the informal sector.

Moreover, and among the lessons extracted from the years of crisis, is the crucial need to scale-up the support of distributed renewable energy solutions which have proven to be effective. Initiatives by municipalities to set up localized hybrid mini-grids combining solar with diesel generators or the national grid provided a boost to local economic activity previously constrained by crippling power deficits. 

Finally, the research emphasized the essential role capacity building, training, and certifications can play in creating a knowledgeable community of both public servants and private actors, who can realistically assess climate risks and take into consideration the associated impact of any future plans.

MSMEs continue to play an important role in the country’s energy transition, and the current situation can be an opportunity for an enhanced role for MSMEs to ensure a sustainable and equitable transition.

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