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Competitiveness and Private
Sector Development
egypt
business climate development
strategy
Competitiveness and
Private Sector Development:
Egypt 2010
BUSINESS CLIMATE DEVELOPMENT STRATEGY
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where governments work together to address the economic, social
and environmental challenges of globalisation. The OECD is also at the forefront of efforts to
understand and to help governments respond to new developments and concerns, such as corporate
governance, the information economy and the challenges of an ageing population. The Organisation
provides a setting where governments can compare policy experiences, seek answers to common
problems, identify good practice and work to co-ordinate domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,
Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The
European Commission takes part in the work of the OECD.
OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and
research on economic, social and environmental issues, as well as the conventions, guidelines and
standards agreed by its members.
This work is published on the responsibility of the Secretary-General of the OECD. The
opinions expressed and arguments employed herein do not necessarily reflect the official
views of the Organisation or of the governments of its member countries.
ISBN 978-92-64-08739-2 (print)
ISBN 978-92-64-87400-8 (PDF)
Series: Competitiveness and Private Sector Development
ISSN 2076-5754 (print)
ISSN 2076-5762 (online)
Photo credits: Cover © Ramsey Arnaoot
Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.
© OECD 2010
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at info@copyright.com or the Centre français d’exploitation du droit de copie (CFC) at contact@cfcopies.com.
FOREWORD
Foreword
I
n 2004, the Egyptian government launched a far-reaching economic reform process. Under the
leadership of the Prime Minister, Ahmed Nazif, the Egyptian government has undertaken reforms
specifically aimed at making the country more attractive to foreign investors by improving the
competitiveness of Egypt’s export sectors and its domestic market.
By increasing the flows of private international investment, the Egyptian government aims to
stimulate economic growth and job creation. Aware that success depends on offering an attractive
business climate, the Egyptian Ministry of Investment in late 2008 invited the MENA-OECD
Investment Programme to carry out an in-depth review of Egypt’s business climate.
Based on the OECD’s Policy Framework for Investment, the Business Climate Development
Strategy (BCDS) was designed by the MENA-OECD Investment Programme to support governments
in the Middle East and North Africa in the process of formulating and implementing priority reforms
specifically related to improving the business climate. It is a comprehensive assessment that from the
outset involved private stakeholders, government officials, and partners such as the European Union
and the World Bank. It covers the main policy areas that have an impact on the business climate
throughout the lifecycle of a company, divided into three main policy “spheres”: the operational
framework, the rule of law, and factor markets, divided into 12 policy dimensions. The BCDS then
helps determine priority policies and actions which can improve the business climate, in both the
near and medium term.
The BCDS is a process which has three distinct phases. The first phase provides a
comprehensive assessment of the business climate with specific policy recommendations. This
document summarises the key findings from the assessment phase. Phase two of the process
prioritises the recommendations and develops time bound projects, with proposed outputs, actions
and budgets. The third phase involves providing technical assistance to the Egyptian government to
assist it in carrying out the projects and recommendations identified by the assessment. In this last
phase of the BCDS, the MENA-OECD Investment Programme may also assist with the
implementation of relevant reforms.
The examiners’ report, conducted under the authority of the MENA-OECD Investment
Programme Steering Group, recognises the significant reform efforts already made by the Egyptian
government in many of the policy dimensions covered by the exercise. These include an improved
investment policy framework, an income-tax reform, reduced tariffs, improved customs services, and
far-reaching banking sector reforms to name but a few. However, the analysis has also unveiled
areas where specific attention is still needed, in some cases urgently. There remains a need for more
efficient public administration and increased transparency and predictability concerning
administrative decisions affecting businesses. There is a strong need for institutional and regulatory
reform in areas related to business regulation, inspections and licensing which would benefit from a
more streamlined, predictable implementation. Stakeholders need to be consulted more often and the
public-private dialogue needs to be improved and enshrined in more formalised structures. Greater
efforts in effectively communicating government policies to the general public are also required.
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
3
FOREWORD
There is also an urgent need to address specific policy dimensions such as access to finance for
small-and-medium sized companies, inadequate provision of infrastructure for many industrial
developments, difficulties in acquiring land, a lack of enforcement of anti-corruption policies, and
skills-mismatches and insufficient human capital development for the labour market, to mention a
few of the key findings from the BCDS.
If these challenges are not addressed, they will continue to hamper Egypt’s economic progress
by preventing the country from achieving its full potential as an attractive, competitive destination
for private investment, both foreign and domestic.
The findings from the BCDS should support policy makers in achieving measurable
improvements in the business climate that address the real concerns of investors and stakeholders
as identified by the BCDS review process. Moreover, by providing policy makers with a strategic
selection of policy priorities, the BCDS assists the government in the allocation of scarce resources.
The BCDS was prepared with the full participation of the Egyptian government, international
organisations and donors, and local stakeholders from the private sector. The review was undertaken
by the Investment Pillar of the MENA-OECD Initiative, using a methodology developed by the Private
Sector Development Division of the OECD Department for Financial and Enterprise Affairs. The
review was financed by the Egyptian Ministry of Investment and co-financed by the European Union
Delegation in Cairo and by the MENA-OECD Investment Programme, and received support from the
World Bank.
Initial fact-finding visits to Egypt for the first phase of the review (the assessment phase) were
carried out between April and July 2009. A conference with the Egyptian government and
stakeholders took place in Cairo on 12 October 2009. Finally, in March 2010, a series of in-depth
workshops that used the results from the assessment phase took place in Cairo with key government
officials, international donors, and private-sector stakeholders. The results of the workshops were
used to establish priorities for the recommended reforms. At the time of preparing this report, the
BCDS process was in the middle of phase two, focusing on turning the policy recommendations into
projects to support the Egyptian government’s reform efforts.
The third phase of the BCDS for Egypt, which will involve assisting the government in
implementing the carefully selected projects that have arisen from the review, will take place in the
second half of 2010 and in 2011.
4
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
ABOUT THIS DOCUMENT
About this Document
T
his document reviews the key findings (achievements, challenges, recommendations) to
emerge from Phase 1 of the BCDS business climate assessment. It describes the
methodology behind the assessment, which considers 12 areas, called “dimensions”, of the
business climate divided into 242 indicators. These are analysed to determine the areas
where Egypt should undertake reform to improve upon its recent achievements.
The document then describes the government’s reform programme since coming to
power in 2004 and then sets the macro-economic context in which Egypt must work to
reform its business climate and attract investors. It then considers the key findings of
assessment so far. The assessment devotes one chapter to each dimension. The twelve
individual chapters are not included here, only the key findings from the assessments.
The findings are of two kinds. Common or “cross-dimensional” findings that affect the
economy as a whole and findings specific to each of the 12 dimensions. It summarises the
cross-dimensional findings and provides a compendium of the dimension-specific
achievements, challenges, and recommendations.
The full assessment of the 12 policy dimensions covered, as well as the scores
obtained for the 242 indicators, will be available on-line, on the website of the MENA-OECD
Investment Programme: www.oecd.org/mena/investment.
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
5
TABLE OF CONTENTS
Table of Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Preface by H.E. the Minister of Investment, Mahmoud Mohieldin,
of the Arab Republic of Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
Preface by H.E. Ambassador Marc Franco, Head of the Delegation,
European Union in Egypt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
Chapter 1. Business Climate Development Strategy Framework –
The Methodology Used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
1. Business climate reforms constitute an important area for reform policy
intervention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. The BCDS methodology focuses specifically on business environment policies . . .
3. BCDS builds on OECD tools and instruments taken from the good practices
of other international organisations and adapted to the region’s needs. . . . . . .
4. Key substantive areas of business climate reforms were selected. . . . . . . . . . . .
5. The three-step BCDS process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Cross-cutting findings and summary of key recommendations per chapter . . .
21
21
23
24
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
Chapter 2. Recent Business Climate Reforms in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Privatisation programme and restructuring of state-owned enterprises . . . . . .
2. Trade liberalisation and trade facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Tax policy and tax administration reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Monetary and exchange rate policy reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Banking sector reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Infrastructure reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Land and property registration reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Policies towards foreign investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
28
29
30
31
32
33
34
34
Chapter 3. Macroeconomic Context of Egypt’s Business Climate Reforms . . . . . . . . . . .
1. GDP growth and job creation accelerated from 2004 to 2008, and Egypt has
weathered the global crisis comparatively well . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Budget deficit and public debt have been broadly contained . . . . . . . . . . . . . . . .
3. Inflation remains high. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Foreign direct investment increased significantly until 2008 but has fallen
back since . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Trade deficit persists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. The financial sector’s resilience has improved . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
20
20
36
38
39
40
41
42
7
TABLE OF CONTENTS
7. Major challenges persist for the Egyptian economy . . . . . . . . . . . . . . . . . . . . . . .
8. The global economic crisis has set the bar even higher. . . . . . . . . . . . . . . . . . . . .
42
44
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
Chapter 4. Business Climate Development Strategy: The Assessment of Egypt’s
Business Climate Key Findings from Phase 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Cross-cutting findings to all 12 dimensions assessed . . . . . . . . . . . . . . . . . . . . . .
2. Dimension-specific findings for the 12 areas of Egypt’s business climate . . . . .
47
49
58
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Chapter 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Egypt has made progress on business climate reform which has translated
into economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. More and further-reaching reforms are needed at the micro-economic level
in order for Egypt to maximise its potential as an investment location . . . . . . .
3. The next phase of the BCDS focuses on defining policy priorities
and on project implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
126
127
129
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
8
Figures
1.1.
3.1.
3.2.
3.3.
3.4.
3.5.
3.6.
3.7.
3.8.
3.9.
4.1.
4.2.
4.3.
4.4.
4.5.
4.6.
4.7.
4.8.
BCDS – a Comprehensive Assessment Framework for Egypt . . . . . . . . . . . . . . . . 22
Real GDP growth: % real change year on year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Unemployment rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Fiscal deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Current-account balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Inflation, CPI (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
FDI inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Trade position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Composition of budget by expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Egypt weighted dimension scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Investment Policy and Promotion: Scores by subdimension . . . . . . . . . . . . . . . . 65
Privatisation and public partnerships: Scores by subdimension . . . . . . . . . . . . . 70
Trade Policy and Facilitation: Scores by subdimension . . . . . . . . . . . . . . . . . . . . 77
Better Business Regulation: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . 82
SME Policy and Promotion: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . 88
Anti-Corruption: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Business Law and Commercial Conflict Resolution: Scores by subdimension . . . . 101
4.9.
4.10.
Infrastructure: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Access to Finance: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
ACKNOWLEDGEMENTS
Acknowledgements
T
his publication, “A Business Climate Development Strategy (BCDS) for the Arab Republic
of Egypt – Making Private Sector Reform Succeed”, is a collaborative effort of the MENAOECD Investment Programme and the European Union Delegation in Cairo, led by the
Egyptian Ministry for Investment. The MENA-OECD Investment Programme Steering Group
mandated the Programme to conduct BCDS assessments of partnering countries during
its 2007 Ministerial meeting in Cairo. The MENA-OECD Investment Programme would like
to thank the Egyptian Minister for Investment, His Excellency Dr. Mahmoud Mohieldin, for
his strong support during the length of this project.
The process of elaborating this assessment was supported by several ministries from
the Government of Egypt, Egyptian and foreign private-sector associations, and experts
from partner organisations such as the World Bank and the International Finance
Corporation. Ministries and agencies from the Egyptian Government involved in the
process were the Ministry of Investment, the Ministry of Finance, the Ministry of Trade and
Industry, the Ministry of Communication and Information Technology, the Ministry of
Transport, the Ministry of Electricity and Energy, the Ministry of Water Resources and
Irrigation, the Ministry of Housing, Utilities and Urban Communities, the Ministry of
Justice, the Ministry of Education, the Ministry of State for Administrative Development,
the General Authority for Investment and Free Zones (GAFI), the Industrial Development
Agency, and the Industrial Modernisation Centre.
A great many people collaborated with the BCDS team to carry out the assessment.
Unfortunately, it is not possible to mention everybody here. There is always a risk when
mentioning some persons that those not mentioned feel left out. However, every person
who contributed to this publication should know that the BCDS team is very appreciative
of the time and efforts given by individuals to help us carry through this project. The BCDS
team is sincerely grateful for the help, advice and support given to this project, especially,
but not only, from within the Egyptian Ministry of Investment. A special mention goes to
Dr. El Sayed Torky, Managing Director of the Egyptian Corporate Responsibility Centre, who
was very active in helping the BCDS team from the outset, and who worked tirelessly to
help organise the Cairo meetings. Our thanks go also to Yasser El Kady, First Assistant to
the Minister of Investment and coordinator of OECD cooperation projects, Abdel Hamid
Ibrahim, Mohamed Hassouna, Dr. Sherif Oteifa, Mona Zobaa, Mohamed Farid, and Eman
Abdel-Mawgoud, all from the Ministry of Investment. Many thanks also to Dr. Ziad Baha El
Din, the chairman of the Egyptian Financial Supervisory Authority and his staff. We would
also like to thank Osama Saleh, Chairman of GAFI, Neveen El Shafei, vice-Chairman of
GAFI, and all the staff from GAFI who were generous with their time.
Many thanks also to Hisham Ramez, Deputy Governor, and Lobna Helal from the
Central Bank of Egypt, Dr. Mohamed Omran and staff from The Egyptian Exchange, the
Export Credit Guarantee Company of Egypt, and the Egyptian Credit Bureau i-Score.
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
9
ACKNOWLEDGEMENTS
Private sector partners involved in the assessment included the American Chamber of
Commerce, the German-Arab Chamber of Commerce, the British Egyptian Businessmen’s
Association, and the Egyptian Junior Business Association.
Special thanks go to the persons who accepted to review and comment on the BCDS
findings and on this version of the publication. First and foremost to Andrew Stone from
the World Bank’s office in Cairo, who provided useful suggestions throughout the process.
The views of the report are however those of the authors and do not reflect the views of the
World Bank or its Board of Directors. Many thanks also to Dr. Ashraf Gamal from the Egyptian
Institute of Directors, Felipe de la Mota from the EU Delegation to Cairo, Ahmed Ragab,
Executive Director, UNDP Center for Transparency and Philippe de Meneval, Dahlia
Khalifa, Sebastian Molineus, and John Speakman, all from the World Bank, and to Rainer
Geiger, former Head of the Private Sector Development Division at the OECD (now retired).
Dr. El Sayed Torky also provided many useful insights during the review period.
Participants in the Cairo Workshops conducted in March 2010 included the Ministry of
Investment, the Ministry of Trade and Industry, the Ministry of Finance, and the Ministry of
Transport. In addition participated AIT Consulting, the American Chamber of Commerce in
Egypt, the American University in Cairo, Americana Group, Banque Misr, Beltone Private
Equity, the British-Egyptian Business Association, British Engineering Institutions-EGYPT
(BEIE), British Training Solutions, Business Development Services Support Project, Cairo
Poultry Group, Capital Investment Banking, CIDA – SME program, Citadel Capital,
Commercial International Bank, Construction Council, Consumer Protection Agency,
Credit Agricole Egypt, Delta Capital Investments, ECG Engineering Consultants Group,
Education for Employment Foundation – Egypt (EFE-Egypt) , the Egyptian Banking Institute,
the Egyptian Finance Supervisory Authority (EFSA), the Egyptian Institute of Directors, the
Egyptian Mortgage Refinance Company, Egyptian National Competitiveness Council, the
Entrepreneurs Business Forum, Entrust Development and Management Consultants,
ExpoLink, Export Development Bank of Egypt, the Delegation of the European Union to
Egypt, the Export Development Fund, FinBi – Finance and Banking Consultants
International, Helmy, Hamza and Partners, the Industrial Modernisation Center, the
International Development Research Centre (IDRC) Middle East/North Africa Regional
Office, International Investors, the International Labour Organisation, Investor Relations
Department, IT Ventures and IT Investments, the General Organisation of Import and
Export Control (GOIEC), Misr Information Services and Trading, Naeem Holding, the
National Bank for Development, Nile University, Obelisk Asset Management, Orascom
Telecom, Philip Morris Egypt LLC, Sciences-Po Paris/ENCC, Shetatex, Telecom Egypt, the
Egyptian Accreditation Council (EGAC), the Egyptian Organisation for Standardisation
and Quality Control, the Egyptian Competition Authority, the World Bank, Cairo, Zaki
Hashem and Partners, Railway Project 10 Ramadan, the International Financial
Corporation, the Central Administration of Plant Quarantine, and the Egyptian Credit
Bureau i-Score.
The BCDS assessment was conducted by the MENA Investment Team in the Division
for Private Sector Development of the OECD Directorate for Financial and Enterprise
Affairs. The indicators for the assessment were developed by Anthony O’Sullivan,
Alexander Böhmer, Nicola Ehlermann-Cache, Antonio Fanelli, Steven Clark, Ana CebreiroGomez, Milan Konopek, Alan Paic, Sara Sultan, Said Kechida, and Nada Farid.
10
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
ACKNOWLEDGEMENTS
The chapters on Egypt’s economic reforms and macro-economy were drafted by Ania
Thiemann, and the graphics were designed by Jean Arlet. The cross-cutting findings were
developed by Alexander Böhmer, Philip Szleslak and Anthony O’Sullivan with input from
Ania Thiemann. Chapter 1 was drafted by Milan Konopek, Marie-Estelle Rey, Alexander
Böhmer and Ania Thiemann. Chapter 2 was drafted by Nada Farid, Alexander Böhmer and
Ania Thiemann. Chapter 3 was drafted by Steven Clark and Ana Cebreiro-Gomez from the
OECD Centre of Tax Policy and Administration. Chapter 4 was drafted by Nada Farid and
Anthony O’Sullivan. Chapter 5 and 6 were drafted by Sara Sultan and Antonio Fanelli.
Chapter 7 was drafted by Nicola Ehlermann-Cache and Sophie Wernert. Chapter 8 was
drafted by Alissa Koldertsova. Chapter 9 was drafted by Alexander Böhmer and Said
Hanafy. Chapter 10 was drafted by Alan Paic. Chapter 11 was drafted by Korin Kane and
by Mohammed Bougroum and Patrick Werquin from the OECD Education Division.
Chapter 12 was drafted by Ania Thiemann, with suggestions from Said Kechida and
Anthony O’Sullivan. The final report was reviewed and edited by Anthony O’Sullivan,
Alexander Böhmer and Ania Thiemann.
The publication was finalised in July 2010 by Ania Thiemann and Jean Arlet.
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
11
PREFACE BY H.E. THE MINISTER OF INVESTMENT, MAHMOUD MOHIELDIN, OF THE ARAB REPUBLIC OF EGYPT
Preface by H.E. the Minister of Investment,
Mahmoud Mohieldin, of the Arab Republic of Egypt
T
he global economy has witnessed several crises during the past few years, ranging from
a crisis in food prices, an energy crisis, and finally the financial crisis and its aftermath.
These successive crises have posed challenges, yet created opportunities for developed and
emerging economies. The world economy is now reshaping itself, and countries that work
to create a balanced and stable investment environment for recovery and growth will be in
a better position in the future.
During the various crisis situations in recent years Egypt has positively differentiated
itself from its peers in the Middle East and North Africa, demonstrating its economic
resilience and commitment to macroeconomic stability through relentless reform efforts.
The government has implemented significant structural reforms in recent years. These
include reforming the financial sector to enhance its soundness and stability,
strengthening the supervisory and regulatory framework, modernising the institutional
infrastructure, liberalising trade, strengthening the monetary policy framework,
continuing fiscal consolidation, and a complete overhaul of the tax system. These reforms
have led to a friendlier investment climate, enhancing private sector-led growth, and
giving birth to a new trajectory of sustained and better diversified growth of the Egyptian
economy. Egypt is one of the most open and dynamic economies among the emerging
markets with real GDP growth increasing from an average of 3.5% during 2001–04 to around
7% between 2006 and 2008 – a national record compared to the previous twenty-five years.
The Egyptian economy managed to maintain real economic growth of approximately 5%
in 2009, despite the global crisis and, with a broad-based strong performance, growth is
estimated to have reached more than 5% in the fiscal year which ended on 30 June.
This progress has been reflected in international and regional agencies’ confidence in
the Egyptian economy’s performance. Egypt was, again, for the fourth consecutive year,
ranked amongst the Top 10 Reformer in the IFC/World Bank Doing Business Report. According
to the World Investment Report 2010, Egypt was ranked first in North Africa and second in
Africa in terms of FDI inflows, ranking 31st on the global level. Despite the difficult global
environment, FDI inflows to Egypt in 2008/09 far surpassed levels in 2005/06 and were
more than double the levels achieved in 2004/05.
The key to ensure that growth benefits the whole population and trickles down to the
less privileged will be to speed up reforms on the social front, especially with regard to
health and education. Providing citizens with good-quality and sustainable education will
enable them to exploit job opportunities and compete in a rapidly changing marketplace.
This should be done in partnership with the private sector that is keen to develop the skills
of their populations as part of their corporate social responsibility.
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
13
PREFACE BY H.E. THE MINISTER OF INVESTMENT, MAHMOUD MOHIELDIN, OF THE ARAB REPUBLIC OF EGYPT
Throughout the years, the Egyptian government, and in particular the Ministry of
Investment, have worked closely with the MENA-OECD Investment Programme, in order to
develop the Business Climate Development Strategy (BCDS). In its first of three phases, the
BCDS has carried out an in-depth analysis of the Egyptian investment climate and has
assessed the efforts made by the Egyptian government to improve its Business Climate, in
accordance with the OECD’s Policy Framework. The BCDS has also highlighted areas that
need further development.
The speed and magnitude of reforms will help prepare for the eventual sustainable
economic recovery. The path for high growth is paved by five fundamentals–openness and
integration with the rest of the world; macroeconomic stability and controlled budget
deficits; accumulation of savings allowing for infrastructure and human capital
investments; encouraging efficient markets and regulating them effectively; and
maintaining a strong state that protects citizens’ rights and ensures sustainable
development. However, such efforts are not going to be sufficient without global
cooperation, including within trade regimes, and they could be undermined by
protectionism, resistance to the freedom of investments, and the risk of a global crowdingout effect from the large budget deficits of big developed economies that will need
refinancing over the next couple of years. The small open economies of North Africa and
the Middle East need more than ever before a benign global environment in order for them
to sustain growth and development.
I would like to take this opportunity to thank the OECD for collaborating with the
Ministry of Investment, through the MENA-OECD Investment Programme, over the past
few years to assess and shed light on the efforts we as the Egyptian government have
exerted to improve our business climate. It is an outstanding document on both the
national and international fronts.
Mahmoud Mohieldin
Minister of Investment
The Arab Republic of Egypt
14
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
PREFACE BY H.E. AMBASSADOR MARC FRANCO, HEAD OF THE DELEGATION, EUROPEAN UNION IN EGYPT
Preface by H.E. Ambassador Marc Franco,
Head of the Delegation, European Union in Egypt
I
n September 2009, it was announced that Egypt had just been selected for the fourth year
in a row as a Top 10 Reformer by the World Bank Doing Business Report. During those same
years Egypt had achieved record rates of GDP growth – in several cases of over 7%.
This performance reflects the fact that Egypt is especially aware that it is crucial for
government to push a reformist agenda during the good times, particularly when these
reforms are aimed at easing the bureaucratic burden of doing business for companies and
allowing market players a more level playing ground. All this helps a country to achieve its
full economic potential.
This not only sends a key message to foreign investors and their much sought-after
investments, but also to local business people, the true core of any country’s sustainable
economic development. Investors in general are particularly eager for comparative
business climate studies to be published by independent international organisations. They
are fully aware that they accurately reflect which countries are serious about economic
reform.
The importance of such reform shows in times of crises, in particular in the case of
external shocks such as those we have been experiencing for the last two years. One of the
clear messages that Egypt can take out of the crisis is that reform of the business climate –
as well as strengthening the financial sector – pays off and that there should be no doubt
about the beneficial impact of future reforms in this area.
The reforms achieved by Egypt in the reform of its business climate are commendable.
This success should incentivise policy makers and stakeholders to press hard on the
reform path and consolidate the results achieved. Economic growth in the long term is
created by genuine reforms in all domains of the investment climate.
The Business Climate Development Strategy – to which the Ministry of Investment,
particularly His Excellency Minister Mohieldin, has lent such strong support and
cooperation – is a crucial instrument for taking stock of achievements and helping policy
makers set out the priorities for the path ahead.
I am confident that this report will provide more tools for the Government of Egypt to
continue on its successful reform path, which should ultimately have the benefit of the
Egyptian population and poverty reduction in mind.
Marc Franco
Head of EU Delegation
Cairo, Egypt
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
15
ACRONYMS
Acronyms
ACINET
BAC
BDC
BIAC
CBE
CET
CGC
CIDA
COMESA
CPI
ECA
ECS
EDB
EEHC
EEI
EEPC
EFSA
EIoD
ENR
EOS
ERRADA
ETTIC
EU
EWRA
ExpoLink
FDI
FTA
GAFI
GAFTA
GARBLT
GDP
GMU
GRU
ICA
IDA
IFC
IMC
IZ
Arab Anti-Corruption and Integrity Network
Business Advisory Committee
Banque du Caire
Business and Industry Advisory Committee
Central Bank of Egypt
Continuing education and training
Credit Guarantee Company
Canadian International Development Agency
Common Market for Eastern and Southern Africa
Consumer price index
Egyptian Customs Authority
Egyptian Commercial Services
Export Development Bank of Egypt
Egyptian Electricity Holding Company
Egyptian Education Initiative
Egyptian Export Promotion Center
Egyptian Financial Supervisory Authority
Egyptian Institute of Directors
Egyptian National Railways
Egyptian Organisation for Quality
Egyptian Regulatory Reform and Development Activity
Egypt Technology Transfer and Innovation Centres
European Union
Egyptian Water Regulatory Agency
Egyptian Exporters Association
Foreign Direct Investment
Free trade agreement
General Authority for Investment and Free Zones
Greater Arab Free Trade Area
General Authority for Roads, Bridges and Land Transport
Gross Domestic Product
Governmental Ministerial Unit
General Review Unit
Investment Climate Assessment
Industrial Development Authority
International Finance Corporation
Industrial Modernisation Center
Investment zones
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
17
ACRONYMS
JICA
MCC
MCIT
METR
MOF
MOI
MOTI
MPC
MSE
MSME
NCP
NREA
NSDP
NTRA
PFI
POGAR
PPP
RDI
RRI
SCHRD
SFD
SME
SNCF
SPS
TAS
TIC
TIN
TPAU
TRIM
TVET
UNCAC
UNDP
USTR
VC
VET
WEF
WG
WTO
18
Japan International Cooperation Agency
Modern customs centres
Ministry of Communications and Information Technology
Marginal effective tax rate
Ministry of Finance
Ministry of Investment
Ministry of Trade and Investment
Monetary Policy Committee
Micro and small enterprise
Micro, small and medium-sized enterprise
National Contact Point
New and Renewable Energy Authority
National Supplier Development Programme
National Telecommunications Regulatory Authority
Policy Framework for Investment
Programme on Governance in the Arab Region
Public-private partnership
Research, Development and Innovation (programme)
Regulatory Restrictiveness Index
Supreme Council for Human Resource Development
Social Fund for Development
Small and medium-sized enterprise
Société nationale des chemins de fer français
Sanitary and Phytosanitary
Trade Agreements Sector
Transparency and Integrity Committee
Taxpayer identification number
Trade Policy Analysis Unit
Trade-Related Investment Measures
Technical, Vocational, Education and Training
United Nations Convention against Corruption
United Nations Development Programme
United States Trade Representative
Venture capital
Vocational education and training
World Economic Forum
Working Group (OECD)
World Trade Organisation
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
Competitiveness and Private Sector Development: Egypt 2010
© OECD 2010
Chapter 1
Business Climate Development
Strategy Framework –
The Methodology Used
The recent global financial and economic crisis has starkly underlined the need to
establish and maintain effective public institutions to oversee efficient markets and
favour sustainable private sector development. Based on recent work on economic
growth and sustainable development a consensus has emerged among the
international development community that private-sector led economic
development strategies are essential to guaranteeing sustainable growth and longterm job creation.
The Business Climate Development Strategy (BCDS), developed by the Private
Sector Development Division at the OECD, builds on a number of tools referenced in
the OECD’s Policy Framework for Investment (PFI) and which provide a checklist of
important policy issues for consideration by any government interested in creating
an attractive business environment for domestic and international investors. This
chapter discusses how the BCDS methodology was derived and the criteria used to
establish the scores for the BCDS ranking system.
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1. BUSINESS CLIMATE DEVELOPMENT STRATEGY FRAMEWORK – THE METHODOLOGY USED
1. Business climate reforms constitute an important area for reform policy
intervention
Based on recent work on economic growth and sustainable development, which
includes the analyses of prominent academics such as Robert Barro, William Baumol and
Xavier Sala-i-Martin,1 a consensus has emerged among the international development
community that private-sector led economic development strategies are essential to
guaranteeing sustainable growth and long-term job creation.
Over the past two decades, the core paradigm for international development
institutions has been to encourage the state to play a reduced role in the economy, to
strengthen market liberalisation, and to increase competition. However, the recent global
financial and economic crisis has starkly underlined the need for the state to establish and
maintain effective public institutions. Such institutions are necessary to oversee efficient
markets and favour sustainable private sector development.
This publication summarises the findings of a recent assessment of the Egyptian
business climate carried out by the MENA-OECD Investment Programme. The assessment
forms the first phase of a three-step process whereby the assessment from the initial
phase (phase one) will be used to assist the Egyptian government establish priorities
among its economic reforms and formulate projects to carry these out (in phase two).
Finally, the third phase sees the implementation of these projects.
Hence, the Business Climate Development Strategy (BCDS) is a tool for regional
governments to focus their resources on key policy priorities. For a country such as Egypt,
government policies play an important role in ensuring that the benefits of economic growth
are reaped by larger sections of society. Translating immediate gains from an improved
business climate and private sector development into job creation and employment remains
an essential policy task after first-generation reform measures have been implemented. This
is essential to guaranteeing the political credibility of leaders and policy makers who promote
open market principles and a greater role for the private sector in pursuing ongoing reforms.
The MENA-OECD Investment Programme, one of the two pillars of the MENA-OECD
Initiative on Governance and Investment for Development, has been working with
governments in the region since 2005 to support their investment and governance policy
reform agendas and strengthen the positive momentum seen in many countries. Egypt
chaired the programme from 2006 to 2009 and provided important inputs for the programme’s
regional work. During this period, the need for more structured and detailed tools to assess
and analyse business climate reforms became apparent. The programme developed the BCDS
to cater to regional policy makers’ demand for better guidance in defining priorities for
investment and business climate reform that engaged all key stakeholders. The BCDS also
places strong emphasis on the institutional aspects of policy reform.
2. The BCDS methodology focuses specifically on business environment policies
The BCDS follows the latest approaches in policy support among international and
national organisations that work on economic development issues. Over the past two
20
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BUSINESS CLIMATE DEVELOPMENT STRATEGY FRAMEWORK – THE METHODOLOGY USED
decades, their support for private-sector-led growth policies has focused on three
overlapping and mutually reinforcing areas:
1. fostering macroeconomic stability, which includes fiscal and monetary reform;
2. advocating open markets for trade and investment, which entails sector-specific
deregulation and competition policies;
3. creating a supportive investment and business environment by reforming regulations,
institutions, and legal frameworks to improve economic governance.
The BCDS focuses mainly on the third area, working to improve the business climate,
to foster a more conducive climate for business. The scope of the analysis also takes into
account business incubators and services in addition to more cross-cutting business
environment policy advice, such as regulatory reform and anti-corruption measures. These
issues are strongly linked to the evolving governance reform agenda in MENA countries.
For instance, synergies can be identified between items such as the governance reform
agenda which includes the simplification of administrative procedures, government
procurement, public private partnerships, and integrity in the civil service.
3. BCDS builds on OECD tools and instruments taken from the good practices
of other international organisations and adapted to the region’s needs
Benchmarking countries and their business climate against general pre-established
standards quickly throws up limitations and can, in worst-case scenarios, divert scarce
resources to unproductive reform intervention. However, against the backdrop of worsening
global financial conditions, policy makers in emerging markets are in need of tools and
guidance as to what reforms to tackle first and how to go about their implementation.
International benchmarks can be useful in providing a framework for what has worked
elsewhere and issues that may not have been sufficiently addressed. In this sense, the BCDS,
developed by the Private Sector Development Division at the OECD, builds on a number of
tools referenced in the OECD’s Policy Framework for Investment (PFI)2 and which provide a
checklist of important policy issues for consideration by any government interested in
creating an attractive business environment for domestic and international investors.
The BCDS methodology also draws on a number of other OECD instruments such as the
OECD Principles of Corporate Governance and the Guidelines for Private Sector Involvement
in Infrastructure Financing. It also uses important tools from partner organisations such as
the World Bank and the policies that constitute the acquis communautaire of the European
Union. It is important to note that these tools have been vetted in the different working
groups of the MENA-OECD Investment Programme and appropriately adapted to reflect the
realities of MENA countries’ policy challenges more accurately.
The BCDS approach to business climate reform focuses on addressing issues that cut
horizontally across the three main components of economic governance – policy
strategies, laws, and institutions. The approach is driven by the belief that the most
effective way to stimulate market forces is to tackle horizontal policy obstacles such as a
lack of transparency, inefficient trade procedures, red tape in business registration and
licensing, and inadequate human skills development.
4. Key substantive areas of business climate reforms were selected
Drawing on the Private Sector Development Division’s previous experience in
emerging market regions, the MENA-OECD Investment Programme’s consultation process,
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1. BUSINESS CLIMATE DEVELOPMENT STRATEGY FRAMEWORK – THE METHODOLOGY USED
and advice from such key international partners as the European Commission and the
World Bank, it was decided to structure the BCDS into three main policy “spheres” (see
Figure 1.1):
1. the Business Operational Environment, covering the areas of economic governance at
the interface between the public and the private sectors;
2. elements of the Rule of Law that affect the business climate;
3. Factor Markets, which covers key market access facilitators.
These policy areas were broken down into “dimensions” which were inspired by the
chapters of the OECD’s Policy Framework for Investment mentioned above, but further
consideration was given to themes that were particularly relevant to the MENA region’s
evolving business climate reform agenda, such as:
●
Key issues at the interface between the public and private sectors, such as business
licensing, business inspections, public-private partnerships for infrastructure financing,
inclusion of the private sector in the reform process through consultation.
●
Business climate themes that reflect the openness and accessibility of MENA economies,
such as investment policies that allow for national treatment, trade and market
openness, competition policy, and fairness of investor admittance processes.
●
Key issues that impact on the broader investor perceptions of MENA countries and relate
to the transparency and predictability of the investment climate. These include better
corporate governance, anti-corruption and business integrity, tax policy and
administration, better business regulation, key business law regimes like insolvency
procedures, enforcement of contracts and property rights through an effective judiciary.
●
Key policy areas dealt with in the MENA-OECD Investment Programme, and vetted by the
working groups and the Steering Group of the MENA Programme: Investment Policy and
Promotion; Tax Policies and Administration; Corporate Governance and Responsible
Business Conduct; Financial Regulation and Access to Finance; and SME Policy and
Human Capital Development.
Drawing on these identified themes and after consulting partners in the MENA region,
the European Union, and the World Bank, 12 “dimensions” of interest were identified. They
are listed in Figure 1.1 below.
Figure 1.1. BCDS – a Comprehensive Assessment Framework for Egypt
I. Business Operational Environment
1. Investment Policy and Promotion
2. Privatisation Policy and Public Private
Partnerships
3. Tax Policy and Administration
4. Trade Policy and Facilitation
5. Better Business Regulation
6. SME Policy and Promotion
II. Rule of Law
1. Anti-corruption
2. Corporate Governance
3. Business Law and Commercial
Conflict Resolution
III. Factor Markets
1. Infrastructure policy
2. Human Capital development policy
3. Access to Finance
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1.
BUSINESS CLIMATE DEVELOPMENT STRATEGY FRAMEWORK – THE METHODOLOGY USED
5. The three-step BCDS process
The BCDS methodology draws on prior OECD work in the area of business climate
assessment and strategy, such as the Investment Compact and the Euro-Mediterranean
Charter for Enterprise. The BCDS is a process and consists of three phases. Phase 1 is a
thorough assessment of the business climate, based on a set of indicators divided into
12 separate policy dimensions (see Figure 1.1 above). These indicators are used to
formulate key policy recommendations for each dimension. During the process of
assessment, stakeholders from both the private and public sector are brought in through a
series of meetings and workshops to vet the results of the assessment. Phase 2 focuses on
the development of a strategy document, which sets the policy priorities among the
recommendations identified in Phase 1 and which formulates business climate reform
projects based on the priorities. The process concludes with Phase 3 which will support
their implementation. This publication contains the results of the assessment phase
(Phase 1) and points to the priorities for Phase 2.
For the Phase 1 assessment, the 12 dimensions of Egypt’s BCDS were analysed in the
following 3-step process:
●
Scores and measurement of the BCDS indicators
A total of 242 indicators were defined
Each of the 12 dimensions is based on the assessment of between 15 and 25 indicators
that measure a particular aspect of business climate policy meaning that, for the
12 dimensions assessed, there are a total of 242 indicators. The majority of the
242 indicators follow a 5-level assessment of policy development, with “1” denoting little
or no domestic policy observed in the area, and “5” signifying policies that are in line
with international good practice and that have been implemented. The sum of the
242 indicators and their assessment criteria form the overall BCDS Assessment Grid (the
full grid for all 12 dimensions can be found on the MENA-OECD Investment Programme’s
website: www.oecd.org/mena/investment).
A top-down approach, going from policy to implementation
The main indicators for each dimension apply to “regimes” (i.e. policies, laws, institutions).
The first indicators in each dimension measure whether a strategy or policy for the issue
in question actually exists. If a legal framework is required, the next indicator assesses
whether the appropriate laws or regulations have been passed by Parliament or issued
by the government. The next indicators assess whether implementing institutions are in
place. Finally, other indicators cover related subjects, including actual implementation
of legislation and the existence of government programmes to facilitate citizens’ use of
a service.
Weighting the scores
During the assessment, performance against each indicator was scored using the
described 5-level approach. In order to compare chapters, an average score for each
dimension was calculated from all its scores. To arrive at meaningful comparisons,
indicators were then weighted.
The weights were assigned by the BCDS Review Committee internally in the MENA-OECD
Investment Programme and reflect the order of importance of each indicator according to
their relevance for the investors in terms of importance when making investment decisions.
Each indicator was assigned a weight from 1 to 3, with 3 reflecting a “necessary” condition
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
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1. BUSINESS CLIMATE DEVELOPMENT STRATEGY FRAMEWORK – THE METHODOLOGY USED
in the investment decision process, and 1 being “nice to have”. This means that the total
average score for a chapter is the result of all weighted scores for that dimension
(see chart p. 43).
●
Tripartite evaluation of the BCDS assessment grid
The BCDS Assessment Grid was assessed by three different types of stakeholders. The
Egyptian government conducted a self-assessment, using inputs from respective
ministries and government agencies. At the same time the private sector (mainly
business associations) was invited to assess the 12 BCDS dimensions. Finally, an
independent local consultant was contracted to provide a separate assessment of Egypt’s
business climate using the BCDS Assessment Grid. The Assessment Grid will be
available on the website of the MENA-OECD Investment Programme: www.oecd.org/mena/
investment.
●
Synthesis and clarification
On completion of the assessment grids, the OECD conducted an analytical review of the
responses, backed up by in-depth interviews for all 12 dimensions and making use of
secondary sources within and outside the OECD.
The initial findings and key recommendations were presented in a series of workshops
with Egyptian stakeholders on the various dimensions, in October 2009 and in
March 2010. These meetings were used to help prioritise the reform recommendations
from each chapter. They also discussed areas of intervention that could be targeted. The
suggestions arising from the workshops were integrated into the formulation of the
policy priorities and thus form part of this document.
6. Cross-cutting findings and summary of key recommendations per chapter
The detailed analysis provided for each indicator, together with the scoring system,
made it possible not only to formulate specific recommendations for each chapter, but also
to identify strategic, cross-cutting recommendations, common to several policy areas.
These findings call inter alia for the strengthening of core areas of governance reform,
enhanced transparency, predictability, and inclusive policy making, among others and are
discussed in-depth in this report.
To sum up, the BCDS is designed to support the Government of Egypt in the process of
identifying, prioritising and, finally, implementing priority business climate reforms. It
assesses policies in favour of businesses, be they local, regional or international, and
determines actions that may improve the business climate and help the implementation
of relevant reforms.
The BCDS for Egypt started with the implementation of Phase 1 (the Assessment
Phase) in January 2009. It was developed throughout 2009 at the request of the Egyptian
government and with support from the European Union Delegation in Cairo. Phase 2 began
during the first half of 2010 and was ongoing as this document was being prepared.
The following provides a summary of Egypt’s recent economic reform programme and
the macroeconomic context for ongoing and planned business climate reforms. It then
highlights the key findings that have emerged from the BCDS Assessment Phase, starting
with the cross-cutting findings and then moving on to discussing the achievements,
remaining challenges and recommendations for each of the 12 policy dimensions
assessed.
24
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BUSINESS CLIMATE DEVELOPMENT STRATEGY FRAMEWORK – THE METHODOLOGY USED
Notes
1. Prominent publications on economic growth include, but are not limited to: Barro, R. (2003), and
X. Sala-i-Martin. Economic Growth. Cambridge, Mass.: MIT Print.
Barro, R. (1997), Determinants of Economic Growth: A Cross-Country Empirical Study, MIT PressBaumol,
W. J. (2002), The Free-market Innovation Machine: Analysing the Growth Miracle of Capitalism, Princeton:
Princeton University Press. Helpman, E. (2004), The Mystery of Economic Growth, Cambridge M.A.:
Harvard University Press. Landes, D. S. (1998), The Wealth and Poverty of Nations: Why Some Are So Rich
and Some So Poor, New York: W. W. Norton.
2. For more information on the OECD’s Policy Framework for Investment, please go to www.oecd.org/
d a f / i n v e s t m e n t . T h e s p e c i f i c i n s t r u m e n t s a re l i s t e d a t ww w. oecd .o rg / do c um ent/ 61 /
0,3343,en_2649_34893_33696253_1_1_1_1,00.html.
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Competitiveness and Private Sector Development: Egypt 2010
© OECD 2010
Chapter 2
Recent Business Climate Reforms
in Egypt
Egypt’s business environment has improved substantially in recent years as a result
of a series of successful economic reforms, mainly at the macroeconomic level. The
reforms have been undertaken by the pro-business government formed under the
Prime Minister, Ahmed Nazif, in 2004. This chapter discusses the substantial and
tangible advances in many areas of the operational business environment and
highlights some of the major reforms that have taken place in Egypt since 2004, and
which have played a positive role in improving Egypt’s business climate.
Arising from a need to stimulate economic growth and generate new jobs, the
government set out to improve Egypt’s overall economic performance in order to
increase its growth potential and favour sustainable development. Areas
highlighted here that have showed noticeable improvements include the
government’s privatisation programme, taxation, trade tariffs, monetary policy, the
banking sector and infrastructure.
27
2. RECENT BUSINESS CLIMATE REFORMS IN EGYPT
E
gypt’s business environment has improved substantially in recent years as a result of a
series of successful reforms, mainly at the macroeconomic level. In July 2004, a new probusiness government was formed under the Prime Minister, Ahmed Nazif. Key economic
portfolios were given to a score of ministers with a background in the private sector who
reasserted Egypt’s commitment to economic reform and set out to reinvigorate the
economy. Arising from a need to stimulate economic growth and generate new jobs, the
government set out to improve Egypt’s overall economic performance in order to increase
its growth potential and favour sustainable development. Central to these ambitions was
the pledge by Nazif’s cabinet to improve public governance, raising the prospect of
significantly more effective policy formulation and execution. In addition, a key part of the
government’s reform programme specially aimed to improve the business environment in
order to attract more inward investment. Having started reform at the macro level – as
detailed below – the next step for the government is to address specific issues related to
the business environment at the micro-economic level, taking into account the real
operational needs of both local and foreign private investors.
In this context, the MENA-OECD Investment Programme’s Business Climate
Development Strategy (BCDS) has been a tool for the Egyptian government to help
assess the progress made so far and to measure the areas where improvement is still
needed.
As this chapter will discuss, there have been substantial and tangible advances in
many areas of the structural operational business environment. This section highlights
some of the major reforms that have taken place in Egypt since 2004 and which have
played a positive role in improving Egypt’s business climate. Even so, the country’s
business climate is still influenced by a strong legacy of years of heavy state intervention
in the economy and public sector domination. The subsequent chapters deal with the
findings of the first BCDS study carried out in Egypt and recommendations that have
flowed from this exercise in order to continuously improve Egypt’s business climate.
1. Privatisation programme and restructuring of state-owned enterprises
After coming to power in mid-2004, the government rapidly reaffirmed its
commitment to privatisation. A previous programme had been launched in the early 1990s,
but by the end of the decade it had stalled owing to a weakening of investor interest in the
wake of the 1998 Asian crisis, a significant worsening of domestic economic conditions,
and a general absence of attractive offers among the companies put up for privatisation. As
opposed to the late 1990s the privatisation process is now perceived first and foremost as
a means to increase efficiency, improve management and lower government expenditure
rather than as a means to raise revenue.
A far-reaching programme of state asset divestment was launched in late 2004 to
include Law 203* enterprises in addition to two important non-Law 203 state-owned
assets. These assets – an 80% share in Bank of Alexandria (then Egypt’s fourth-largest
28
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RECENT BUSINESS CLIMATE REFORMS IN EGYPT
state-owned bank) and a 20% stake in Egypt Telecom – were previously seen as too
complex and too sensitive to sell off. Other significant part-privatisations included two oil
companies, Alexandria Mineral Oils and Sidi Krir Petrochemicals. A state-owned flagship
department store, Omar Effendi, was also sold off. Sales of the state’s stakes in jointventure banks with foreign banking institutions have also been carried out. Only a few joint
ventures remain, mainly where the foreign partner is another government. At present,
most of the profitable, well-managed industrial companies earmarked for sale under
Egypt’s 1990s privatisation programme have been at least partly sold off.
The restructuring of state-owned enterprises (SOEs) and the application of corporate
governance principles in SOEs are the two main pillars of Egypt’s Asset Management
Programme, originally launched in 1993 and updated in November 2009. Most of the
remaining 150 state-owned enterprises under the umbrella of the Ministry of Investment
are undergoing full restructuring as part of the Egyptian government’s new programme.
Many of them remain overstaffed and equipped with outdated machinery and lack good
management.
After a hiatus in privatisations, in part caused by the international financial crisis
during 2008 and the first half of 2009, which limited the appetite for IPOs, the government
has been preparing a new law on the Asset Management Programme. The law will be put
to parliament in the 2010-11 session. Once the law has been passed, the programme will
resume. Key to the new law is the part-privatisation of minority stakes through the
Egyptian Stock Exchange (EXG), which will open up the capital of those companies to the
Egyptian public. Further details will be subject to parliamentary approval and could be
changed as per the debate in parliament. A final, important, part of the programme is the
creation of an asset management agency which will oversee the management of the nine
holding companies which currently control the remaining state-owned assets (divided into
sector). The new agency will hold the shares and decide upon managerial restructuring
and possible divestment of the companies.
2. Trade liberalisation and trade facilitation
The cabinet began to reduce import tariffs sharply almost immediately after taking
office, and tariffs have been reduced gradually since 2004, bringing down the average
weighted tariff rates from 14.6% to 5.5% in 2009. The government has also lowered tariffs
on capital (equipment) inputs into domestic industries, in order to stimulate the export
competitiveness of Egyptian businesses. A certain number of tariffs, specifically for semifinished inputs into domestic, exporting businesses, were further cut in 2009 in order to
maintain export competitiveness during the global economic downturn.
In general, the dismantling of industrial tariff is proceeding well in accordance with
Egypt’s obligations under the Association Agreement with the European Union (EU). That
said, since March 2008, the government has maintained an export ban on rice. The ban was
supposed to be lifted in April 2009, but has been maintained, with a very restricted number
of licences being granted for exporters. In addition, Egypt temporarily banned the export of
cement.
* So-called Law 203 assets are all the companies outside of the sensitive sectors, such as energy,
utilities and banks. Law 203 companies fall within the remit of the Ministry of Investment while
other companies are the responsibility of their respective ministries (Energy, Finance and so on).
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Although Egypt took these measures to prevent social and political instability, and in
the face the shortage of certain commodities, the country did however not follow the rules
of procedure for notification and consultation as laid down in Articles 17 and 25 of the
Association Agreement, according to the EU’s annual progress report. In addition, a certain
number of export tariffs were increased during 2009 in order to encourage Egyptian
business to sell their goods to the domestic market. The sectors touched by the new export
tariffs were mainly construction related, such as steel and cement, owing to strong
domestic demand and shortages.
Even so, Egypt continues, as a rule, to push for trade expansion as one of the key
drivers of economic growth. Since coming to power, the Nazif government has striven to
liberalise Egypt’s trade regime and to accelerate its integration into the global market,
partly through active WTO participation and partly through ratification of regional and
bilateral preferential trade arrangements (including GAFTA, Agadir, and an FTA with
Turkey). In addition, the trade provisions of the Egypt’s EU agreement are being
implemented over a 12-year period, which started in 2004. The agreement gave Egyptian
industrial goods immediate duty-free access to the EU market, expanded quotas for some
Egyptian agricultural exports, added new quotas for others not enjoying preferential
treatment, and extended the agricultural export calendar. Implementation of the accord
has been far-reaching and helped maintain the EU as Egypt’s largest trading partner (35%
of Egypt’s exports by value in fiscal year 2008-09 according to the Central Bank of Egypt).
In addition to cutting tariffs, the cabinet has taken significant steps to simplify and
reduce the number of customs procedures, once a major complaint among local and
foreign investors. The Egyptian Customs Authority (ECA) has made progress with the
implementation of the 2007 comprehensive reform announced for the customs sector. The
customs territory has been divided into three independent regions under the supervision
of the Customs Commissioner and aimed at simplifying customs procedures by reducing
their numbers. The number of required customs approvals has been cut from 26 to five.
Service fees and import surcharges have been abolished. In addition, the ECA has
introduced several modern customs centres (MCCs) which serve as one-stop shops and
have been coupled with logistic centres to enable faster and more streamlined customs
procedures. The MCCs have been established in the main ports and airports, including
Alexandria, Suez, Port Said, and Cairo. MCCs complete documentary customs procedures,
determine tariffs, and issue “release permits” that speed up the process of clearing goods.
Electronic treatment of customs procedures has already been implemented at the ports of
Alexandria, Port Said, Suez, Ain El-Sokhna, Cairo and Damietta.
3. Tax policy and tax administration reforms
One of the most significant policy reforms enacted by the government has been its
changes to taxation. Income taxes were dramatically reduced and effective from 2005-06
(1 July 2005 for state-owned firms and individuals, and 1 January 2006 for private
companies). Corporation taxes were cut from 40% to a flat rate of 20% for companies
outside the energy sector, while the maximum income-tax rate was fixed at 20% and the
lower threshold for paying taxes raised. In addition, filing procedures were significantly
simplified and streamlined, and the system of self-assessment coupled with random
checks was introduced.
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The tax cuts had an immediate effect on widening the tax base. More than two million
people filed their tax returns by the closing date of 1 April 2006 – up from 1.1 million in the
previous year, according to the Ministry of Finance – and income tax receipts rose by 15.7%
year on year in the period July 2005 to May 2006. The cuts stimulated private-sector activity
and increased compliance, raising taxable corporate and individual earnings. These trends
have continued since 2006 and have helped the government increase its fiscal leeway and
begin a process to gradually reduce the general government budget deficit.
Tax administration is also being overhauled. The government is rolling out farreaching administrative reform, involving changes in personnel as well as in systems. The
authorities have introduced a self-assessment and a random audit system instead of
auditing every tax return. From 2009, on-line filing of tax returns has been made possible
and tougher penalties are imposed for evasion. The government’s target is especially small
and medium-sized businesses as these have a poor record for compliance.
The tax authorities have been less successful with the implementation of a new
property tax reform which was initially introduced in 2007 and which was to have come
into effect in January 2009. After several delays, it is expected to have been gradually
implemented during fiscal year 2009-10. Initially, the draft law was meant to lower
property tax from around 60% to 10% in order to encourage more people to register their
property. This was to benefit both the mortgage market as well as the state budget.
However, the final law has been significantly watered down and a large number of
exemptions apply.
Houses and flats valued below EGP 450 000 will be exempted from taxes, while houses
valued at EGP 1 million would be taxed around 1% per year, according to the Ministry of
Finance. Individuals and corporations must submit their real-estate assets by end-year for
valuation. The valuation will take into account location, quality of construction, provision
of basic services and proximity to public parks, health and education facilities. Owners will
be able to appeal the valuation of their properties within 60 days of the decision and the
units will be appraised every five years. It is estimated that around 90% of all properties will
in effect escape the new tax. EGP 6 000 will be waived from the original evaluation, and 30%
of the total value of the property will be deductable for maintenance expenses. It is too
early as yet to determine what the overall effect on registration and tax returns will be.
4. Monetary and exchange rate policy reforms
The Central Bank of Egypt’s (CBE) monetary policy framework has been transformed
since the appointment of Farouk al-Okdah as governor in 2003. Under Mr. Okdah the CBE
has introduced a range of more sophisticated policy instruments, such as reverse repos,
and has begun to switch from its former policy of targeting broad money to targeting
inflation as its main policy goal. A Monetary Policy Committee (MPC) has been formed to
prepare for the move to official inflation targeting and the CBE now prepares regular,
detailed reports on monetary conditions to assist the committee in its decision-making.
The MPC meets every six weeks to set interest rates, and the schedule of the meetings is
made public to improve transparency and predictability. A managed float replaced the old
currency peg in 2003. The bank’s analytical capacities have also been increased. The CBE
now operates with a corridor system, fixing the overnight lending and deposit rate for
domestic banks. By publishing a press release after each meeting, the CBE is working to
enhance transparency and predictability in a bid to influence inflation expectations.
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As a result of these changes, and in step with an overall improvement in
macroeconomic conditions, the currency started to appreciate against the US dollar in
late 2004. This, together with the introduction of a new foreign-exchange market, led to
elimination of the black market by early 2006. The currency continued to broadly
strengthen against both the US dollar and the euro until end-2008. Despite increased
volatility, the currency has shown considerable resistance against a backdrop of a
challenging international financial situation, and has broadly stabilised around a central
equilibrium rate of around USD 1 to EGP 5.6 or 5.7.
That said, the overall effectiveness of the CBE’s current monetary policy tools remains
limited by the de facto managed float exchange-rate policy and weak transmission
mechanisms in the real economy. Thus the linkages between the CBE’s intervention rates
and money markets are not yet sufficiently close for the bank to fully be able to influence
borrowing costs. This is visible, inter alia, in the spreads that remain between the CBE’s
lending rates and the commercial banks’ lending rates.
A positive move for the Egyptian business climate was the decision, in late 2005, for
Egypt to fully subscribe to Article VIII, Sections 2, 3 and 4 of the IMF’s Articles of Agreement.
This obliges the monetary authorities to refrain from imposing any restrictions on payments
and transfers for current account transactions, or from engaging in discriminatory currency
arrangements or multiple currency practices without the IMF’s approval. Foreign investors
are thus allowed to freely repatriate profits and dividends. At end-May 2010, Egypt’s net
foreign-exchange reserves stood at USD 35.1 billion, up from USD 34 billion at endOctober 2009. This represents just over eight months’ worth of imports.
5. Banking sector reforms
Considerable progress has been made in reforming and consolidating the banking
sector – an important factor that helped shield Egypt from the immediate fallout of the
international financial crisis in 2008-09. A thorough banking reform programme is being
implemented in two phases (2004-08 and 2009-11). The 2003 Unified Banking Law raised
the minimum capital requirement for Egyptian banks to EGP 500 million from
EGP 100 million, and for foreign banks to USD 50 million from USD 15 million. Banks had to
comply by July 2005. The aim was for them to consolidate in order to further strengthen the
sector. The change in the law prompted a burst of mergers and acquisition activity in the
sector, both among public banks and the weaker private banks. The sale of the state’s
shares in joint-venture banks also contributed to a significant recapitalisation of Egypt’s
banks. The consolidation programme led to the number of banks in Egypt being reduced
from 57 in 2004 to 39 at end-2009.
A strengthened CBE has overseen a programme to lower the ratio of non-performing
loans on Egyptian banks’ balance sheets (from more than 25% in 2003 to around 10% by
end-2008). By end-2009 the ratio of provisions to non-performing loans (NPLs) exceeded
90% and all the NPLs of state-owned enterprises had been settled, either through cash
settlements (for around two-thirds of the outstanding loans) or through the transfer of
non-core assets. Liberalisation and privatisations have also stimulated overall competition
in the banking sector. Following the sale of Bank of Alexandria, there are only three stateowned banks left, and the state’s market share measured by bank assets has fallen to
around 45%.
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The second phase of the reform programme, which started in 2009, will focus on
improving access to finance, especially for small-and-medium sized enterprises, and on
fully implementing the international banking regulations known as Basel II. Thanks to the
early implementation of reform and the high degree of consolidation in the banking sector,
there was little contagion in Egypt from the international credit crunch (partly also as a
result of relatively little integration into the international financing system) and liquidity
remains ample in Egypt’s bank with a loans-to-deposits ratio of 50.9% at end-March 2010,
virtually unchanged from 51% at end-2009.
As a vital component in a country’s business environment, the soundness of the
Egyptian banking sector, following five years of reform, is a positive indicator of the general
progress and improvements in Egypt’s business climate, especially against a backdrop of
nearly two years of severe turmoil in international financial markets.
6. Infrastructure reforms
Infrastructure is a key part of a country’s business environment. While the
infrastructure dimension of the BCDS highlights this area as one of the main areas for
improvement for Egypt’s business climate, major advancement has already been made. For
instance, Egypt has leapfrogged several stages of development in telecommunications. The
sector has been fully liberalised in mobile telephony and partially liberalised in the Internet
sector. The mobile telephony sector is operated by three independent operators with
foreign investors: Vodafone Egypt (UK), Mobinil (France) and Etisalat (UAE). Internet service
provision is open to the private sector, even though bandwidth has to be purchased from
Telecom Egypt. There were plans to liberalise the fixed-line telephony sector through the
auction of a second fixed license in 2008, but this was postponed as the onset of the global
recession limited investors’ appetite.
Coming from a low base, major efforts have been made in the air travel sector, as a
support to the development of tourism and trade: airport facilities have been upgraded and
expanded, with new terminals for Cairo and Sharm El-Sheikh, and a new airport at Marsa
Alem in Upper Egypt (the south of the country). Air travel has been partially liberalised
(Open Skies agreement signed in 2000), even though barriers remain for charter and low
cost flights, notably to Cairo International Airport. The domestic routes will however be
opened for competition from 2010.
Some reform has taken place in the railway sector, restructuring the national
company, ENR, into separate subsidiaries for train operations in short-distance passenger
transport, long-distance passenger transport, freight, and infrastructure. However, privatesector participation continues to be restricted to new line construction and operation, and
no third-party access is foreseen for the time being. A PPP programme is under way and
will include upgrading and expansion of the railway network, new station buildings,
including retail and leisure space, and the purchasing of new rolling stock.
Reforms in the maritime ports sector started in 1997, introducing private sector
participation in many port services, including build-own-operate schemes for the
construction and handling of freight at East Port Said, which has been highly successful.
However, the unbundling of the public players is not yet completed, given that the
government controls most of the sector through cross-shareholdings between landlord,
regulatory and operating entities.
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2. RECENT BUSINESS CLIMATE REFORMS IN EGYPT
In the roads sector, the maintenance budget has been tripled in an effort to restore
basic quality to the previously poorly maintained network. New highways are being put out
for tender, including the Cairo-Alexander road, and there will be new opportunities for PPP
in the sector from the second half of 2010.
In the power sector, a new electricity law is in the making, which should allow for
increased competition in the sector. Water treatment is being upgraded, with the first
successful PPP tender for the construction of a waste-water treatment plant in New Cairo
having been completed in 2009, and three more projects under tender.
7. Land and property registration reforms
Limited availability of land for construction and industrial development – in particular
land with proper infrastructure – has been a major problem in Egypt. The Industrial
Development Authority (IDA) is building a database that will include all available land
(information that has been lacking) and a programme of registering properties (titling and
cadastre) is being rolled out. So far, only property registration has only been fully carried
out in two “new towns” around Cairo. The process involves mapping and measuring each
property, before establishing full ownership and recording this in a register. These will
eventually be transformed to electronic registers. The system of title deeds (as opposed to
personal deeds) for property is only gradually being implemented. The whole process of
registration is taking longer than originally planned and in all likelihood will take another
decade to complete.
Clear rules for tendering and acquisition of land are being established. Again, however,
the process is taking time. Under a Ministry of Investment initiative, the private sector has
been invited to acquire land within designated investment zones that have the necessary
infrastructure (utilities, access, and so on), and then to resell or rent out plots of land to
other investors. In fiscal year 2008-09 (1 July to 30 June), some agricultural land – which is
formally set aside for cultivation and may not be built on – was freed up in areas around
400 villages in Egypt with construction permits granted. This led to an immediate boom in
housing construction.
8. Policies towards foreign investors
In the first phase of reform, the government has focused its attentions on improving
the conditions for new businesses. The General Authority for Investment and Free Zones
(GAFI) has been transformed from being merely a regulator into an investment promoter
and facilitator for new businesses. GAFI has set up one-stop shops (investment portals) at
its premises in Cairo and in other locations, including in Upper Egypt. The one-stop shops
centralise the procedural steps necessary to create and set up a business, taking care of all
the paperwork and necessary permits. The authorities have also implemented a host of
business-friendly reforms, including a significant simplification of procedures and cutting
of red tape, with the specific aim of facilitating the creation of a company and attracting
foreign investors.
Before turning to the key findings of the MENA-OECD Investment Programme’s BCDS
assessment, these recent business climate reforms need to be put into a broader
macroeconomic context.
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COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
Competitiveness and Private Sector Development: Egypt 2010
© OECD 2010
Chapter 3
Macroeconomic Context of Egypt’s
Business Climate Reforms
The macroeconomic environment is an important determinant of a country’s
business climate. Its soundness, stability and overall quality can sway decisions of
foreign and local investors alike. Egypt’s macroeconomic environment has shown
significant improvement since 2004, driven by the pro-business administration of
Prime Minister Ahmed Nazif. Real GDP growth rose to 7.2% year on year in 2008.
However, in the early 2000s, the economy had suffered from sluggish growth rates,
averaging below 3% a year, high inflation and high unemployment. Structural
bottlenecks, high barriers to entry, and little growth potential were keeping
investors away.
It is in no small measure the reform agenda implemented since 2004 that has set
Egypt on the path to an improved economic performance. This chapter provides a
brief overview of the macroeconomic environment in Egypt until end-2009,
including the fiscal and banking sectors. It then takes a look at the main remaining
challenges to the economic performance against a backdrop of a more unpredictable
global economic environment.
35
3. MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
T
he macroeconomic environment is an important determinant of a country’s business
climate. Its soundness, stability and overall quality can sway decisions of foreign and local
investors alike. Egypt’s macroeconomic environment has come a long way since 2004,
driven by the pro-business administration of Prime Minister Ahmed Nazif. In the
early 2000s, the economy had suffered from sluggish growth rates, averaging below 3% a
year, high inflation and high unemployment. Foreign exchange reserves had fallen
significantly as capital inflows had dried up after an earlier wave of reforms in the 1990s
had run out of steam. Structural bottlenecks, high barriers to entry, an opaque investment
climate and a low growth potential were keeping investors away.
It is in no small measure the reform agenda implemented since 2004 that has set
Egypt on the path to a more solid macroeconomic framework and concomitant higher
growth rates. The remainder of this section provides a brief overview of the
macroeconomic environment in Egypt until end-2009 and the main remaining challenges
to the domestic economy and macroeconomic management against a backdrop of a more
unpredictable global economic environment.
1. GDP growth and job creation accelerated from 2004 to 2008, and Egypt has
weathered the global crisis comparatively well
Having fallen to below 3% in fiscal year 2001-02 (1 July to 30 June), Egypt’s real GDP
growth rate rose steadily from 2003-04 and averaged 7% in the three years from 2005-06
to 2007-08 on the back of economic reform and strong external demand which pushed up
export growth. Robust domestic demand, not least fast-rising investment, accounted for a
part of the increase in GDP growth.
During the global economic recession, which began in the last quarter of 2008, Egypt’s
real GDP growth slowed in 2008-09 to 4.7% year on year, still a very respectable
performance at a time when most developed economies were in recession. Although
investment demand fell sharply in 2008-09, private consumption remained buoyant,
especially in comparison with most OECD member states. Regionally, Egypt also outperformed
most of its peers, continuing to attract foreign investment and avoiding a steep slowdown.
Output across the MENA region as a whole, for instance, rose by just 1.4% in 2009, while the
world economy shrank by 0.8% and the OECD’s economies contracted by 3.3%.
The fact that economic growth rates remained positive during the world recession is
testimony to the importance of Egypt’s reform programme. By opening up the economy
and facilitating investment, domestic demand remained buoyant through a more
conducive macroeconomic environment and improved job creation (exceeding 3% growth
a year for the past four years). Moreover, the economy has started to recover, with data
from the Central Bank of Egypt indicating that real GDP growth increased by 5.1% in the
first three quarters of 2009-10 (July-March). Although these growth rates are far from the
peak of 7.2% reached in 2007-08, they nonetheless indicate that the economy has
weathered the global storm.
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3.
MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
Figure 3.1. Real GDP growth: % real change year on year
Real consumption growth
%
Real investment growth
Real GDP growth
20
15
10
5
0
-5
-10
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Source: Ministry of Finance.
Figure 3.2. Unemployment rate (%)
%
12
11
9.8
10
10.0
10.1
9.9
9.5
9.36
9.1
9
9.3
8.9
8.8
FY2008
FY2009
8
7
6
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2010 1
Source: Ministry of Economic Development.
The performance of the labour market is particularly noteworthy. Owing to rapid
population growth (around 2% annual growth for a population of just under 80 million),
Egypt’s labour market needs to absorb between 600 000 and 700 000 new entrants each
year. This puts enormous strain on public services and on the government to ensure that
jobs are not lost in a downturn. The official rate of unemployment fell from above 20% in
the late 1990s, to around 8.8% at end of 2008-09. It has however increased again, reaching
9.3% at end-2009. Moreover, the official rate of unemployment is likely to conceal
considerable hidden unemployment and under-employment, as a large share of the
population escapes statistics, either by simply not registering, or by working in the
informal economy.
The need for continuous and rapid job creation puts additional pressure on policy
makers. In order to create a sufficient number of jobs each year, it is estimated by local
analysts that real annual GDP growth needs to exceed 7% at current productivity rates (and
more if productivity increases). This factor alone should provide impetus to continue to
implement deep, structural reforms as such economic growth rates only can be achieved
COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
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3. MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
sustainably by continuing to liberalise the economy and dismantling structural
bottlenecks, especially in the labour market, one by one. In addition, this also creates the
need for a more efficient education system, especially as regards vocational and
continuous education, in order to respond to the need of the labour market.
2. Budget deficit and public debt have been broadly contained
Simplified tax procedures, lower income-tax rates, and improved enforcement in tax
collection have increased compliance and widened the tax base (see Dimension 3, “Tax
Policy and Administration”). With regard to government expenditure, the main culprit for
ongoing budget deficits, the government has taken steps to gradually reduce subsidies on
energy prices, by far the costliest. Although still expanding in absolute terms, the central
government budget deficit was reduced from 9.6% of GDP in 2004-05 to 6.8% in 2007-08
(see fiscal deficit figure1).
Figure 3.3. Fiscal deficit
General government fiscal deficit (% GDP)
Fiscal deficit, billion LE
Fiscal deficit, LE billion
120
10.2
Fiscal deficit, % of GDP
12
10.4
9.5
100
9.6
10
8.2
7.5
80
6.8
6.9
8
60
6
40
4
20
2
0
0
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Source: Central Bank of Egypt.
However, to prevent a steep economic slowdown at the height of the global financial
crisis, the government continued with its expansionary fiscal policy. A number of fiscal
stimulus packages were implemented both in fiscal year 2008-09 and in 2009-10. While
fiscal leeway meant that the general government deficit remained stable in 2008-09, rising
marginally to 6.9% of GDP, the deficit is estimated by the Ministry of Finance to have
widened in 2009-10, to around 8.4% of GDP. Even so, the Minister of Finance, Yousef
Boutros-Ghali, has emphasised that the government remains on course to achieve its
overall target of reducing the budget deficit by around one percentage point a year until it
reaches around 3% of GDP.
Moreover, the government’s debt management has significantly improved. Most of the
financing of the annual budget deficit is raised through domestic banks, with only about
20% of total public borrowing being owed abroad. Most foreign loans are contracted with
long maturities and on concessionary terms allowing for easy repayment schedules.
Despite the worsening of the public finances during the economic slowdown, general
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Figure 3.4. Current-account balance
Current-account balance
Current-account balance (% of GDP)
USD billion
6
Total trade, % of GDP
6
5.5
3.9
4
4
2.1
1.8
2
2
0.6
0
0
-2
-2
2.8
-4
-4
-6
-6
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Source: Central Bank of Egypt.
government debt was contained and stood at 79% of GDP in 2008-09, compared to 120%
in 2002-03. While fiscal policy remains a structural weakness overall, owing to the high
share of subsidies on energy and food – the cost of which cannot be controlled as they track
market prices – the achievements in tax policy and administration have been important
milestones. In addition, a government-wide scheme to put a cap on public sector hiring
and efforts to raise public sector productivity should eventually also help the government
contain its current expenditure.
Figure 3.5. Total debt
Gross domestic public dept (% GDP)
%
Gross external public dept (% GDP)
100
90
87
80
77
70
60
80
76
71
66
63
60
62
50
40
43
30
20
35
38
31
29
28
23
10
20
17
0
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Source: Ministry of Finance.
3. Inflation remains high
Inflation (consumer price index, CPI) averaged 11.8% in 2009, a significant
improvement from the 18.3% recorded during the previous year. Whilst monthly inflation
(urban measure) peaked at 23.6% (year on year) in August 2008, it had fallen back to 9% by
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3. MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
August 2009, helped by significant base effects from the year before and the tight monetary
policy adopted by the Central Bank of Egypt (CBE) during 2008.
Figure 3.6. Inflation, CPI (%)
%
20
18.3
17.4
16
11.8
12
9.6
7.6
8
4
2.2
2.7
2001
2002
4.9
4.2
0
2003
2004
2005
2006
2007
2008
2009
Source: CAPMAS.
With international commodity prices having fallen during 2009, inflation appeared to
be contained during the year, allowing the CBE to begin to loosen its monetary policy and
start cutting its intervention rates for the first time since 2006. Interest rates were cut six
times in 2009, taking the overnight deposit rate to 8.25% and the overnight lending rate to
9.75%, representing cuts of 325 and 375 basis points, respectively. However, with the
government resuming the reduction in energy subsidies and downward price rigidities in
domestic product markets, caused by monopolies, inflation is likely to rise again for the
calendar year 2010. In addition, stronger economic growth and rising domestic demand
have led the CBE to keep its interest rates on hold since November 2009.
4. Foreign direct investment increased significantly until 2008 but has fallen
back since
Inward FDI grew 50-fold between 2003 and 2007, to reach USD 13.2 billion in fiscal
year 2007-08 (July to June), which represented 8.1% of the country’s GDP. Even as it was
faced with the crisis in international financial markets and the associated liquidity
squeeze, Egypt still held its own, receiving FDI inflows of USD 8.1 billion in fiscal
year 2008-09, a respectable amount in a challenging international climate.
However, in a worsening international climate for project financing, and with the
economic reform programme seemingly petering out, inward investment flows have
slowed since mid-2009. It is estimated that the total amount of FDI in fiscal
year 2009-10 could fall to around USD 5 billion.
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MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
Figure 3.7. FDI inflows
FDI inflow – current prices
FDI, % of GDP
FDI inflows, USD billion
14
FDI as % of GDP
14
12
12
10
10
8.5
8.1
8
8
5.7
6
6
4.4
4.3
4
2
4
2
0.9
0.5
0
0
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Source: Central Bank of Egypt.
5. Trade deficit persists
Trade has grown significantly over the last half decade, as a consequence of tariff cuts
and multilateral and bilateral trade agreements. For example, the 2004 EU-Egypt
association agreement led to a doubling of the parties’ trade volume within four years.
Egypt has diversified its exports to include more non-energy products. Despite strong
export growth in recent years, Egypt operates a structural deficit on its merchandise trade
account partly owing to a high dependency on imported wheat and other food stuffs.
(Egypt only produces around half of its annual needs of around 14 million tonnes in wheat
and imports the rest.) Egypt also has a heavy deficit on trade in capital equipment and
vehicles. Capital goods constitute quite a significant portion of merchandise imports,
reaching 20% in 2008-09 (including transport equipment). Strong-paced domestic demand
growth in recent years was to a large extent for a demand for capital goods (equipment)
Figure 3.8. Trade position
Exports, current USD in millions
Trade deficit, current USD in millions
Imports, current USD in millions
Trade deficit, % GDP
Trade volumes, USD billion
35
Total trade deficit, % of GDP
35
25
25
15
15
5
5
-5
-5
-15
-13
-14
-12
-15
-17
-16
-15
-25
-25
-35
-35
-45
-45
-55
-55
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Source: Central Bank of Egypt.
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3. MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
which enter into Egypt’s productive sector, a fact that bodes well for continued future
growth. Moreover, until 2007-08, Egypt maintained an overall current account surplus,
thanks to invisibles (non-merchandise) revenues such as tourism and Suez Canal receipts.
However, as both tourism and Suez Canal transport have been negatively affected by the
global economic downturn, the current account balance and the overall balance of
payments have fallen into deficit, with the balance of payment recording a deficit of
USD 4.4 billion for 2008-09.
According to data from the Central Bank of Egypt, the trade balance improved
somewhat in the first three quarters of fiscal year 2009-10 (July to March). The trade deficit
narrowed slightly to USD 18.5 billion (from USD 19.5 billion in the same period a year
earlier). However, the improvement was caused by a dual fall in export receipts and import
payments. Both oil and non-oil exports fell. In addition, the surplus on the services account
continued to narrow, to USD 8.8 billion (against USD 9.6 billion). Investment income
receipts fell as did Canal Suez Receipts on the back of still slow global trade. However,
indicating a small rebound in the European economies after the steep recession, tourism
revenues rose by 10.1% to USD 8.7 billion (from USD 7.9 billion).
6. The financial sector’s resilience has improved
Although the capitalisation of Egyptian stock market’s main index, EGX 30, fell by 42%
in 2008-09, Egypt has been relatively well sheltered from financial contagion during the
global liquidity crisis, partly thanks to Egypt’s limited insertion into the global financial
system, but also thanks to reforms in the banking sector prior to the crisis which turned
out to be prescient. Consolidation in the sector and the implementation of higher
minimum capital requirements mean that the Egyptian banking sector is fundamentally
sound. Moreover, the fact that consumer credit and mortgage lending remain
underdeveloped means that the Egyptian banking sector has not been exposed to so-called
“toxic” assets. Furthermore, financial products remain relatively simple, with the Egyptian
Stock Exchange not allowing short selling and trading in most types of derivatives. Taken
together, these factors helped shelter the Egyptian financial sector from the brunt of the
fall-out from the credit crunch and liquidity remains ample, with extremely low loan-todeposit ratios.
7. Major challenges persist for the Egyptian economy
Despite promising successes and a sustained reform momentum, Egypt continues to
struggle with important economic and social challenges. These are long-standing and
structural and have been exacerbated by the global financial crisis. Three themes stand out.
First, Egypt’s labour market is widely recognised to be a main structural weakness and
constraint.2 The World Economic Forum (Global Competitiveness Report) ranked Egypt last in
a global evaluation of 134 labour markets. Extreme rigidities (e.g. firing and dispute
settlement) are only part of the picture, however. There is also a structural human capital
challenge, with an educational system unable to cater for the needs of the private sector.
Past policy mistakes, such as job guarantees for university graduates,3 have contributed to
today’s bottlenecks in, for example, engineering. With strong population growth, a very
young population and an underperforming educational system, Egypt faces the steep
policy challenge of large-scale job creation, which will not only define the labour market,
but Egypt’s social contract will depend on it.
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3.
MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
Figure 3.9. Composition of budget by expenditure
%
All others
Wages and salaries
Interest payments
Subsidies, grants and social benefits
100
80
60
40
20
0
FY2006
FY2007
FY2008
FY2009
Source: Ministry of Finance.
Second, fiscal policy, despite the progress outlined above, is still a very vulnerable part
of the Egyptian economy. The public sector employs a quarter of the country’s workforce,
while struggling with low productivity and high cost. Moreover, Egypt’s economy relies on
government subsidies for food and fuel (2% and 5% of GDP, respectively, amounting to
approximately EGP 75 billion in 2008-09). The sum of wages, interest payments and
subsidies – largely rigid components of the budget – account for over 70% of Egypt’s
budget.4 Much of this structural spending is integral to social policy and helps maintain
social cohesion. Thus there is little room for additional spending – e.g. in the areas of
education and infrastructure – without stoking debt and inflation. The government is
aware of these constraints and has begun to take steps to gradually reduce energy
subsidies. It is also looking at other options, such as switching from subsidising staples,
such as bread and sugar, to providing direct income support in line with established good
OECD practice. However, this requires a better performing population registry, a way to
means test households and a more sophisticated payments system.
Third, inflation could pose a renewed challenge. Recurring spikes, along with high
volatility, have temporarily dashed hopes for a permanently lower trend rate. In 2008,
rising global food and fuel prices pushed the inflation rate to a peak of 23%, with food price
inflation registering spikes of up to 40% and above, triggering sporadic outbursts of social
unrest. Only part of Egypt’s inflation is “imported”, however. The money supply grew 20%
annually between 2002 and 2007 and inflationary expectations have long driven price/
wage spirals. Inflation continues to undermine economic activity and its regressive effects
have the potential to threaten Egypt’s social contract. Moreover, with the positive base
effect falling away towards the end of 2009, the annual rate of inflation started rising again
in the last months of 2009 and in the first quarter of 2010. If the government carries out
its – much needed – announced policy of reducing energy subsidies for industrial users
there is a risk that new spikes of inflation could occur. Apart from the social component, a
high-inflation environment can also have a destabilising effect on the business
environment, as it removes some of the predictability that investors seek. Moreover, there
are also negative effects on the real exchange rate, and the authorities therefore need to
continue to keep an eye on inflation.
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3. MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
Finally, the promised “trickle-down” effect of positive growth into the poorer strata of
the population has failed to materialise. At present, 20% of Egypt’s population remains
below the World Bank’s poverty level. This in itself makes it difficult for the government to
scrap subsidies on key items, such as flour and bread, as witnessed in early 2008 when high
prices on wheat in international markets led to a temporary shortage in subsidised bread
and flour. Moreover, the absence of tangible economic benefits for the wider Egyptian
population following five years of solid economic growth could potentially undermine the
government’s message of greater liberalisation and a more open, market-driven economy.
It therefore remains a key challenge for the government to ensure that the wider
population starts seeing the benefits of an expanding economy. Improving the business
climate at the micro-level and helping private investors and small and medium sized
companies – which make up the lion's share of Egypt's production – is therefore an
important next step.
8. The global economic crisis has set the bar even higher
The global economic recession of 2009 has complicated Egypt’s macroeconomic policy
challenge. So far, the impact of the crisis on Egypt has been mixed. On the one hand, as
mentioned above, the impact of the crisis on the Egyptian financial sector has been mild.
On the other hand, Egypt has to some degree been affected by the recession in the real
economy in North America and Europe, which together account for 62% of its export
markets. This has affected the export-oriented part of Egypt's manufacturing sectors,
while there has also been a marked reduction in investment flows (down 43% since 2008).
Even so, domestic demand has remained robust, helping buoy real GDP, which grew by 4.7%
in fiscal year 2008-09 and by 5.1% in the first three quarters of 2009-10. This comparatively
positive outcome has been helped by the government's well-targeted fiscal stimulus
package, which has been applied mainly to existing infrastructure projects (thereby
ensuring a quick transmission process), especially in roads, railways and water treatment
plants. A strong internal dynamic in Egypt – with its population of some 78 million – also
contributed to maintaining growth during the global slowdown.
The government responded quickly and decisively to the slowdown in international
markets as of the second half of 2008 by passing a stimulus package worth EGP 15 billion in
fiscal year 2008-09. A second portion, of around EGP 8 million was added to the 2009-10
budget. In addition, the government is making use of existing policy tools, such as
channelling EGP 300 million to the Egyptian Export Guarantee Company to help exporters,
most directly affected by the crisis. While these measures are important and useful, they
are putting further strain on government finances and will reduce room for fiscal
manoeuvre. As a result of the additional fiscal expenditure, the fiscal deficit is estimated
by the government to have widened again this year, going against the government's
objective of reducing the deficit by 1 percentage point of GDP a year. However, it could be
argued that by targeting infrastructure with its spending programme it will prepare Egypt
for a higher growth path once the global economy takes off again. Previously, during the
years of fast growth, bottlenecks had started to appear, especially with regard to transport
and logistics, adding to inflationary pressures.
That said, the strain on public finances will be felt acutely in the near term, as the
difficult financing climate means that some privatisation projects have been put on hold.
This includes the planned privatisation of the third-largest state-owned bank, Banque du
Caire (BdC), which was postponed indefinitely in mid-2008 when the government rejected
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MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS
a bid which it deemed too low. The broader privatisation programme, of between 80 and
150 medium-sized companies is also on hold while the government finalises its revised
Asset Management Programme. There have been indications from the Egyptian
government that the privatisation programme will resume later in 2010 along with a new
push for PPP in infrastructure projects. Inward investment has fallen as access to finance
has been restricted in international financial markets, and investment demand in the
domestic economy contracted by 10% in fiscal year 2008-09.
In this context, the impact of the global crisis has underlined the importance of
successful macroeconomic management and highlighted the need for escalating business
climate reform in Egypt in order to ensure continued private investment and concomitant
economic growth and job creation. Having successfully managed to improve Egypt's
macroeconomic framework, the focus should now be on improving the day-to-day
operational environment for Egypt's businesses and foreign investors alike. The next
chapter, which summarises the findings of the first phase of the Business Climate
Development Strategy (the assessment) in Egypt, will discuss where this reform effort
should be focused.
Notes
1. All charts based on IMF, EIU, UNCTAD, Ministry of Investment, Ministry of Finance, and Egyptian
Central Bank.
2. World Economic Forum, 6th Egyptian Competitiveness Report, Financial Times, World Bank.
3. Judith Cochrane; Education in Egypt; Croom Helm; London; 1986; page 66.
4. www.ft.com/cms/s/0/81ba8f80-a41d-11dc-a28d-0000779fd2ac,dwp_uuid=9140808e-a488-11dc-a93b0000779fd2ac.html?nclick_check=1.
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Competitiveness and Private Sector Development: Egypt 2010
© OECD 2010
Chapter 4
Business Climate Development
Strategy: The Assessment of Egypt’s
Business Climate Key Findings from
Phase 1
The Business Climate Development Strategy (BCDS) assessment can provide timely
insights on structural policy reforms that should be introduced to further improve
the business climate and continue to attract investment into the economy. This
chapter summarises the findings of a recent assessment of the Egyptian business
climate carried out by the MENA-OECD Investment Programme. The BCDS analysis
has produced important insights into the state of Egypt’s current business climate.
The results presented here are grouped in two categories, going from broader
insights to ones that are more specific and detailed. First, cross-dimensional
findings are insights pertinent to several of the twelve BCDS dimensions. They
identify common challenges that have been encountered in different parts of
government. These findings matter to policy makers since they typically represent
governance or managerial shortcomings that can be addressed and potentially
leveraged across several topic areas.
Second, dimension-specific findings summarise the main achievements and key
remaining challenges and areas for improvement in the 12 dimensions covered by
the BCDS.
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4. BUSINESS CLIMATE DEVELOPMENT STRATEGY: THE ASSESSMENT OF EGYPT’S BUSINESS CLIMATE KEY FINDINGS FROM PHASE 1
A
gainst the backdrop of a weaker global economic environment, turmoil in international
financial and capital markets, and with evidence of some impact of the financial crisis on
the Egyptian economy, the Business Climate Development Strategy (BCDS) assessment can
provide timely insights on structural policy reforms that should be introduced to further
improve the business climate and continue to attract investment into the economy.
This publication summarises the findings of a recent assessment of the Egyptian
business climate carried out by the MENA-OECD Investment Programme. The assessment
forms the first phase of a three-step process whereby the assessment from phase one will
be used to assist the Egyptian government establish priorities among its economic reforms
and formulate projects to carry these out (in phase two). Finally, the third phase sees the
implementation of these projects.
The BCDS analysis has produced a great many insights into the state of Egypt’s current
business climate. Some of these findings speak of impressive progress in key policy areas,
while some point to necessary improvements. Occasionally the findings highlight urgent
reform needs. This chapter synthesises the key insights arising from the analysis.
The results presented here are grouped in two categories, going from broader insights
to ones that are more specific and detailed. They differ also in their implications for policy
makers and how they can address challenges in the current business climate.
First, cross-dimensional findings are insights pertinent to several of the twelve BCDS
dimensions. There is not necessarily a causal relationship between the simultaneous
presence of one of these themes in several of the dimensions analysed. Rather crossdimensional findings identify common challenges that have been encountered in different
parts of government and affect the efficiency of policy making and which therefore call for
reform. These findings matter to policy makers since they typically represent governance
or managerial shortcomings that can be addressed and potentially leveraged across several
topic areas.
Effective business climate reform depends on sustained efforts within government,
involving its leadership, line ministries and dependent entities. Given the diversity of the
business climate when taken as a whole, these reform efforts often become decentralised
and rest with one or more separate ministries. Within the ministries, the reform process is
then handed over to different departments and agencies which are tasked with separate
aspects of the business climate. While this is necessary to enact political decisions, it also
carries the risk of leading to a silo effect, with the reform effort ending up piecemeal and
ad hoc, rather than following a broader, overall strategy. This is why most of the BCDS
dimensions look at the institutional set-up and the management of policy implementation
that underpin a particular area of business climate reform.
Second, dimension-specific findings summarise the main achievements and key
remaining challenges and areas for improvement in the 12 dimensions covered by the BCDS.
Prioritising these policy recommendations forms part of Phase 2 of the BCDS, and a strategy
document with policy priorities by dimension is published separately from this publication.
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1. Cross-cutting findings to all 12 dimensions assessed
1.1. Predictability and transparency of government policy impacting the private sector
Despite recent progress in economic policy reform, Egypt still performs less well than
other emerging markets in attracting private investment and posting consistent high rates
of economic growth. According to the cross-dimensional findings of the BCDS, part of the
reason why Egypt continues to lag behind may be accounted for by an overall lack of
transparency and predictability with regard to its policy environment.
The World Bank MENA Development Report, From Privilege to Competition, points out
that there is a discrepancy in the region between the existence of rules and how they are
interpreted and implemented. Egypt does not escape this. One consequence is that reform
is often met with scepticism in the private sector, in itself an obstacle to change. Policy
uncertainty, the arbitrariness of regulations, and business law differences across industries
translate into investor fear and a poor environment for competition.
The Egyptian business environment has improved over the course of this decade.
Trade and investment restrictions have been loosened, regulations simplified, and access
to finance widened. Having started near the bottom, Egypt now ranks in the middle of the
pack according to most business-climate indicators for emerging markets. It even
surpasses some high-growth developing countries in areas such as trade policy.1 Some
areas of concern persist, where Egypt’s ranking remains low. Broadly speaking, however,
Egypt's business indicator scores with many international organisations, such as the World
Bank, are close to those in high-growth countries. The gap is therefore too small to explain
the differences in output growth and private investment.
In the last decade, there has been a positive private sector reaction to reforms, as seen
with high rates of FDI inflow, increasing from 0.5% of GDP in 2003-04 to 8% in 2007/08.
Nonetheless, the majority of FDI today remains concentrated in energy (66% of all FDI
in 2008/09), not in manufacturing and technology-intensive industries. Furthermore,
domestic private investment rates have been unresponsive. From 1990 to 2006, private
investment declined by 4%2 in relative terms despite considerable changes in public
legislation. In light of this observation, two explanations are possible: i) an ineffective
combination of reforms, ii) the unpredictability and unequal enforcement of laws and
regulations. The BCDS assessment indicates that the latter explanation is the more likely.
Despite rising macroeconomic stability, the primary concern for Egyptian firms is – by
far – political instability (38% of respondents in 2008, according to the World Bank Enterprise
Survey). Data also suggests that the application of rules varies according to the size of firms.
For instance, 50% of small firms expect to have to hand out “gifts” for a construction permit,
in comparison with just 27% of large firms (World Bank Enterprise Survey). It also takes SMEs
twice as long to obtain construction and import permits as it does their larger counterparts.
As a result, entrepreneurs and executives alike are likely to believe that regulations will not
be consistently applied, leading to lukewarm investment responses at best towards policy
reform. Issues related to the rule of law and its enforcement and application are among the
top concerns for Egyptian firms, undermining the very fundamentals that any sound
business climate is based on. Indeed, corruption, informal practices, and regulatory and
policy uncertainty all rank in the top five issues cited by Egyptian businessmen as areas of
concern. This is reflected in the BCDS scores for those dimensions.
To sum up, the BCDS and other survey results suggest that a major obstacle for
Egyptian business climate reforms to achieve their goal of increasing private domestic and
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foreign investment lies in the inconsistent, unequal and preferential way policies are
applied. More has to be done to make the “rules of the game” clearer, more predictable and
better enforced in order to increase government credibility.
Recommendations
The government should take all necessary measures to ensure that rules, laws and
regulations are applied evenly and consistently. A vital step in this direction is through
effective, clear and concise information both to external users of the system (citizens, local
businesses and foreign investors) and to the government at state, regional and local level.
If every citizen or business is aware of the laws and government agents are aware that they
will be held answerable for their actions, progress will be tangible.
In addition, as described in the chapter on anti-corruption, incentives to individual
inspectors and institutions to levy additional “fees” should be removed through better
training, more transparent procedures, and the reduction of bureaucratic hoops that must
be jumped through to obtain licences and permits.
With regard to the government and legislators, it is important to avoid sudden policy
reversals, especially if they are not fully and openly discussed prior to implementation, or
have not been preceded by consultation. Seemingly arbitrary decisions, such as price or tax
increases, and the imposition of new permits or rules are detrimental to the reputation of
a country’s business environment. Any change in policy that will have a direct (and
negative) impact on a sector or a business should be preceded by consultation and full
disclosure in the press and other mass media.
1.2. Market openness and access
The BCDS analysis highlights the existence of remaining problems with regard to market
openness and access in Egypt. Internal product markets are still not fully open to competition
with technical barriers, domestic monopolies and cases of collusion still impeding access for
traders. This is reflected in the still-high rate of headline urban inflation which continues to
hover around 10% despite the best efforts of the Central Bank of Egypt. Non-tariff trade
barriers, complex licensing procedures and rules for inspection also hinder competition
(discussed in more detail later in this chapter). The absence of a level playing field means that
competition for new market opportunities remains curtailed for new firms in many sectors,
including construction and many consumption goods. Areas identified cover:
50
●
Investment and trade openness. Egypt is, formally speaking, party to multilateral and
regional investment and trade agreements that opening its markets. However, non-tariff
barriers for traders – mainly as a result of domestic technical barriers, norms and
standards – as well as burdensome start-up procedures for investors, continue to create
de facto obstacles to market openness. Moreover, many areas remain off-limit to foreign
investors, especially with regards to the provision of services.
●
Competition policy. Market contestability is jeopardised by horizontal or vertical
restraints and by dominant market players in domestic product markets. These practices
continue to limit the free entry and exit of firms into markets and can lead to excessive
prices and abuse of monopoly power. The government of Egypt reacted to this challenge by
introducing a new competition policy in 2005. The Egyptian Competition Law No. 3/2005
establishes a competition authority. However, the new Egyptian Competition Authority
has not been consistent in its enforcement of competition rules.
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●
Market entry procedures for new businesses, including availability of land. In many
countries an efficient cadastre is part of a comprehensive spectrum of government
services. The lack of an efficient cadastre in Egypt has effects across the business climate.
In terms of access to finance, this gap makes it harder for firms to provide collateral when
applying for bank finance. This is particularly problematic for foreign investors who
perceive a weak cadastre system and lack of titling as an issue affecting their legal security.
Recommendations
While the government continues to make improvements with regard to openness of trade
and market-entry procedures for new business, more emphasis should be put on pushing
forward competition policy, not least with regard to enforcement. Solidly applied and
enforced competitions policies in all areas of the business environment will help strengthen all
reform processes, improving market access and openness for most market actors.
In addition, an awareness campaign would help explain the necessity of such policies
to help overcome engrained resistance to open-market policies. The BCDS team suggests
that the emphasis in such a campaign should initially be put on allowing businesses to
understand the culture of competition policy; a second phase should focus on generating
support for the work of the newly created competition authority while encouraging a
culture of increased market openness.
The new Egyptian Competition Authority (ECA) should cultivate a culture of
competition. Over time it should encourage the business sector to monitor and report anticompetitive conduct of other businesses and encourage internal compliance programmes.
It should provide opinions on governmental laws and regulations that stifle competition as
well as analyse the conduct of State Owned Enterprises.
Remaining barriers to trade in internal product markets should be lifted. Many
domestic technical norms and standards which are applied to foreign investors who which
to import products for sale on the domestic market, or have them produced locally,
especially in retailing, are still preventing full market access. Simplifying and
standardising domestic technical standards would improve the business climate.
Sectors that remain barred for foreign investors should be opened. This is especially
true for the construction sector where more competition would benefit the domestic
housing sector in particular. In addition, the services sector should be progressively
opened for foreign entrants. Other restrictions to national treatment, as set out in the
OECD Guidelines for Investment, should also be progressively lifted, as discussed in
Dimension I.1 “Investment Policy and Promotion”.
A harsher approach to suspicions of collusion would also be beneficial. Two initial
cases in the cement sector and steel sector yielded mixed results. In 2007, the ECA found
evidence of anti-competitive practices, essentially price fixing, in the cement sector.3
However, in 2009 the ECA found “no evidence” of a local steel manufacturer, El-Ezz Steel
Rebars, exercising monopoly powers, despite the company’s controlling 58% of the
domestic steel market and the presence of above-market prices.4
1.3. Institutional overlap and a lack of co-ordination
A key finding from the BCDS analysis is the high degree of institutional overlap. This
does not refer to overlapping functions between business climate dimensions. Rather,
within a number of areas, there is evidence of governmental institutions competing with
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4. BUSINESS CLIMATE DEVELOPMENT STRATEGY: THE ASSESSMENT OF EGYPT’S BUSINESS CLIMATE KEY FINDINGS FROM PHASE 1
each other in the same area, as well as insufficient coordination between them. Key
examples include:
●
SME support. Multiple entities are tasked with support for and development of Egypt’s
SMEs. One source counted five ministries involved in policies towards the SME sector.
The result of this is a fragmented policy framework towards SMEs and a lack of coordinated horizontal reforms with a concomitant negative impact on the potential for
SMEs to develop.
●
Anti-corruption. Multiple agencies are responsible for detecting and dealing with
corruption: these include agencies which are overseen by the Prime Minister, the
President, the Ministry of Justice, and the Ministry of Interior, in addition to a
department within the Ministry of Investment. Insufficient co-ordination amongst these
institutions can render them overall less effective.
●
Public-private partnerships (PPP). There is a dual assignment of PPP institutional and
promotional tasks. The promotion of public-private partnership projects with the
private investors’ community is assigned to the Ministry of Investment, while the
Central PPP Unit – in charge of co-ordinating and advising PPP projects throughout the
administration – is located within the Ministry of Finance. This division of
responsibilities, in addition to limited co-operation and communication between the
Central PPP Unit and line ministries, has hampered progress in this area.
●
Export promotion. Multiple agencies are tasked with export promotion in Egypt: At least
four different agencies provide export promotion support to businesses, including the
Ministry of Investment, and the Ministry of Trade and Industry, which also oversees the
work of some agencies. There is little co-ordination among these bodies, which prevents
Egypt from optimising its export promotion activities as well as the branding of Egypt as
an investment location.
●
Investment zones. There is some overlap between the roles of the General Authority for
Investment (GAFI) and the Industrial Development Authority (IDA) with regard to the
allocation of investment zones (special economic zones for investors). Co-ordination
between the two institutions is not always optimal and prevents the best allocation of
land for potential investors.
For business climate reforms, a unified and centrally managed policy strategy helps to
ensure political support, coherence of approach, and reform momentum. At times, a
decentralised approach can be justified, e.g. when relevant competencies are decentralised
or deliberately separated from an institutional point of view. In such instances, however,
the key factor for success remains good co-ordination and co-operation between agencies.
Frequently the BCDS has revealed that co-ordination can be minimal, resulting in suboptimal outcomes. For instance, it was noted in the Dimension I.4 “Trade Policy and
Facilitation” that co-operation does not exist between promotion agencies and institutions
tasked with technical standards, even though the latter can help exporters understand and
meet difficult product requirements in overseas markets.
Recommendations
At the aggregate level the following four recommendations can be considered likely to
strengthen inter-institutional co-ordination:
●
52
First, a policy co-ordination commission can be used in key areas of business climate
policy, representing the bodies in question, other stakeholders close to the reform, and
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parliamentarians. Co-ordinating commissions should operate with a view to support
structural changes and make recommendations to convert synergies into savings and
streamlined structures.
●
Second, in terms of structural re-design, a shift towards one-stop provision of related
services has been successful in other areas of business climate reform (e.g. GAFI in
investment allocation). It would be useful to replicate such successes for facilitating cooperation between different government services in other areas.
●
Third, explicit, publicly communicated task assignment should be used to minimise
overlap and the perception of such by stakeholders. The process of task assignment can
also expose institutional overlaps, paving the way for fundamental reorganisation.
●
Fourth, existing tools for inter-ministerial consultation and management should be
leveraged, such as those developed by OECD work in this area. This includes managing
the consultation process by the sponsoring ministries, which should instigate a dialogue
with other ministries concerned, and prepare responses to queries. Enhanced
transparency and inter-ministerial openness will favour exchanges and policycoordination.
1.4. Pervasiveness of the informal sector
Another very important cross-dimensional finding that comes to light from the BCDS
concerns the scale of the informal economy and its negative effect on the overall business
climate. The assessment suggests that the current state of Egypt’s business laws and
regulation, together with problems related to access to finance and tax policy, encourage
businesses and entrepreneurs to bypass formal institutions. Informality, or the presence of
the “grey” economy, was one of the key reasons cited by stakeholders to explain a poor
competitive environment.
In general, the presence of a large informal sector has severe negative implications for
economic growth and the general welfare of the state. Among the negative consequences
of informality can be mentioned low rates of innovation; unfair competition or an
uncompetitive environment; and lower tax receipts for the state (and concomitant lower
spending on infrastructure and publicly provided services such as health and education).
While the size of Egypt’s informal sector has declined in the last decade, it was still
estimated to employ 49% of all non-agricultural employment between 2000 and 2007 (from
55% in the 1990s) – a few percentage points over the MENA average.5 In monetary terms,
the Word Bank’s 2005 Doing Business Report suggested that nearly one-fifth of Egyptian
business takes places at the informal level. Domestic estimates are higher, at around 40%.
Moreover, the share of paid employment in informal employment has been on the rise
since 2000, averaging 65% against 50% in the 1990s. These numbers are likely to have
increased during the economic slowdown, as informal employment becomes a viable
solution for families in need of an alternate income source when a family member is laid
off during the slump.
Observations greatly vary from one sector to the other. The reduction of start-up costs
and red tape for businesses since 2004 has contributed positively to reduce informality, as
the percentage of self-employed in informal employment, which stood at 49.7% in the mid1990s, was reduced by 15% in the mid-2000s, falling to 35.5% in the latter part of the decade.
On the other hand, the share of paid employees in informal employment increased by 14%
over the same period, reaching 65% in the mid-2000s. Finally, while males are now less
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likely to work informally, there is a new tendency for women to enter the labour market
through undeclared practices.
Informal employment represents a major challenge for Egypt because it is likely to be
associated with lower efficiency and reduced productivity. Furthermore, informal
employment translates into a narrower tax base and distorts the capacity of the state to
address social objectives (e.g. improving health and unemployment protection). Informal
jobs remain vital for millions of Egyptians, and removing them abruptly would have dire
consequences. Instead, a gradual transition from informal to formal has to be insured. To
do so, it is essential to comprehend what drives workers into informal employment.
Usually it is the result of two outcomes:
●
Exclusion from the formal sector. People are excluded from mainstream jobs owing to
skills mismatches or lack of adequate training opportunities, and the informal sector
becomes the only solution to remain in the labour market. This is a common observation
in countries at the development stage. Nevertheless, economic growth does not suffice
to fix the problem and active labour market policies are necessary (e.g. skills
development and vocational training).
●
Incentive structures. Informal employment is a deliberately chosen way of circumventing
taxes and regulatory burdens. Policies may in fact have a distorting effect on business
practices and law enforcement may be too mild to compel employers to declare their
activities.
The latter issue is particularly problematic in Egypt. Empirical evidence has shown
that small entrepreneurs in the informal sector earn approximately 1.8 times more than
the average national wage. Furthermore, small informal businesses pay salaries that are on
average 80% lower than the average national wage, confirming that the informal sector is
more profitable from a SME standpoint. Policies to address and tackle the informal issue
have not as yet been up to the task of changing the incentive structure. Tellingly, the
relevant indicators of the BCDS assessment, with regard to Tax Policy, Business Law and
Regulation, Access to Finance and Anti-Corruption all scored Level 3 or below.
Recommendations
To help reduce informal employment, more efficient structures ought to be put in
place to encourage workers to join or return to formal employment. More flexible rules are
indispensable (with regard to business law and regulation), particularly for small
businesses which have to cope with high costs in company registration. Broader access to
finance must also be secured so that financial requirements need not to be met though
unofficial sources. Reducing informal employment also requires stronger enforcement
instruments, particularly with regards to tax policy and anti-corruption measures. A rigid
labour market with high transaction costs for new entrants, and difficulties for employers
to shed labour adjust their labour force to suit market conditions will also tend to favour
the existence of a large informal labour market.
Finally, it is important that the state should provide an adequate social safety net, in
the form of unemployment benefits, disability pensions and the ability for retraining; the
existence of such measures would help encourage more people join the formal labour
market. Employers should receive help and co-funding for employee retraining schemes,
while contributing to unemployment benefits should be shared between the state,
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employers and employees through levies on salaries as is the case in some Nordic
countries, such as Denmark.
In addition, to combat informality, particular emphasis should be placed on the
regulatory matters to diminish incentives to evade the state. Among the areas that the
state should focus its attention on can be mentioned:
●
Tax policy. Egypt is no longer plagued by high income tax-rates for business or
individuals. The vast amount of evasion is therefore likely to be caused by the
opportunity to cheat. Effective and enforceable measures to fight evasion will act as an
important deterrent. As such, relevant taxation indicators with regards to the informal
sector are i) the assessment of tax compliance costs and remedial measures, and
ii) compliance assessment and risk management. Egypt averaged a score of 2.75 for both
indicators, stressing the need for better targeted tax policy.
●
Better business regulation. Improvements have been made in speeding up the company
registration process, its costs and capital requirements. Although Egypt achieved high
scores in the sectors (nearly 4), there must be further efforts to make the formal sector
less costly for entrepreneurs and SMEs.
●
Anti corruption. Tax and customs administration received a low score of 2, reflecting the
relative ease with which business can bypass labour laws. Anti-corruption measures at
all levels must consequently be improved.
●
Business law and commercial conflict resolution. The average score for all the relevant
indicators with regard to the informal sector was 2.8. Results were particularly poor in
the sub-dimensions of land rights and collateral law, areas in which government should
step up its work to minimise incentives to circumvent rules.
●
Access to finance. Access to finance is still difficult for SMEs and entrepreneurs. They
continue to rely on family funding, which in turn leads to a lack of formal hiring owing
to a lack of means. Cadastre, banking sector outreach, registration systems and collateral
requirements all score below 3 and must be subject to more scrutiny. Open Reform
Processes: Consultations
1.5. Licensing requirements
Another cross-dimensional theme points to onerous licensing requirements. Across
the board the BCDS assessment found strongly negative perceptions in the business
community with regard to licensing issues. These include industrial licensing, fire and
safety licensing, and overall start-up procedures, land registration and titling, and
construction permits. The way the issue of licensing and registration requirements is
handled by the authorities can easily lead to confusion. Furthermore, licensing authorities
may suffer from capacity issues, excessive discretion, and understaffing, while their
personnel are inadequately trained for the ambitious tasks set by the administration.
At least 4 systems must be differentiated in Egypt:
●
Commercial registry. Companies need to be constituted and registered in a company or
commercial registry. This step constitutes the company as an independent entity – in
many cases as an independent judicial person. Requirements can be overly burdensome
and donor funded programmes are working on reforming the company registrar in Egypt.
●
Other business registration requirements. These may be tax, customs registration, and
statistical registration requirements, often collectively known as “licensing”. Best
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practice is to require only a few, although a mature system needs to have some
knowledge of its company population. Obtaining such statistics can obviously be timeconsuming.
●
Sector-specific licenses. For special public policy purposes (environment, safety, health,
sanitary, construction, planning, zoning requirements, consumer protection, etc.),
Egyptian line ministries and agencies have established a net of licensing requirements
for companies. Although each of the licensing requirements is reasonable, the
cumulative effect might be just overly burdensome for a company. Three recommendations
can be made:
1. Creation of a one stop shop with delegated officials from line ministries/agencies who
have real licensing powers (otherwise pure “single window” function).
2. Implementing an “administrative simplification” strategy in most burdensome line
ministries trying to bring down licensing turnaround time. This is a core governance
issue, but it is the real issue behind the problem.
3. More sophisticated tools: countries use so-called “concentration licenses”, licenses
which if granted include other licensing requirements. When a company applies for a
construction license for a new factory, the agency issuing construction licenses does
the environmental impact assessment for the environmental and safety license
automatically.
●
Industrial licenses. Egypt also requires a number of “industrial licenses” for many
investment projects. Here, two cases in particular should be considered:
1. If the additional licensing requirement is purely for the purpose of controlling core
business activities not related to any additional benefits granted to a company, the
licensing should be critically reappraised or abolished.
2. If the additional licensing requirement is needed to monitor a subsidy scheme –
e.g. subsidies granted in an industrial zone – a more nuanced view is necessary. There
can be a legitimate need to monitor the use of subsidised products, e.g. to preventing
the direct sale for production purposes of goods imported or produced with a state
subsidy. Some licenses can also be an entry requirement for industrial zones
benefitting from particular subsidy schemes.
1.6. Strategy formulation and communication
The final cross dimensional theme to emerge from the BCDS analysis relates to stated
policy strategies within individual dimensions, and their communication to stakeholders.
This theme is particularly relevant for the processes and conduct of business climate
reform. While key business climate reforms often receive attention at the highest political
level, comprehensive strategy documents support only some reform efforts or are not
visible enough for stakeholders to follow reform developments. In addition, questions
remain about the overall quality of the reform process even if some reforms have been
carried out with impressive speed and effectiveness. Several issues are observed here:
1. a lack of inclusiveness in reform processes (“process inclusiveness”) means that
stakeholders are not been consulted on their views on the impact of reform;
2. a lack of consistency in the reform programme (“process consistency”), with
consultation cycles not being scheduled or announced in advance; and
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3. the need for “process transparency” – the open communication of results in an
accessible manner.
Evidently, not all reform efforts warrant an explicit strategy document – BCDS alone
covers more than 200 business climate aspects of varying significance. Rather, these highstake, horizontally connected policy areas require explicit strategy design, consultation
and full transparency.
Key examples of existing challenges under this item include:
●
Anti-corruption. Despite good efforts, there is no central policy document or statement
outlining how existing institutions and processes will be used to build a broader
government agenda tackling anti-corruption policies.
●
Infrastructure. Overall priorities remain unclear and unspecified, in particular in the
context of a significant budgetary increase for infrastructure spending as part of the fiscal
stimulus package. In particular, with regard to transport, there is no integrated strategy for
freight or passengers, which would ensure long term prospects of sustainable logistics and
mobility in the extremely densely populated Nile Valley. However, a new urban planning
strategy (including infrastructure planning) has recently been announced.
●
Business law reform. The absence of a comprehensive business law reform strategy
backed by a powerful central law commission can become a challenge to efficient
business law reforms in Egypt. A strategy and a centralised institution would enable
reformers to tackle various business law reforms at the same time and would guarantee
that the interconnectedness of law reforms across different ministries and agencies and
issue areas is fully acknowledged.
●
Business regulation: The government has been driving an ambitious programme to
simplify regulatory requirements across the Egyptian economy – Egyptian Regulatory
Reform and Development Activity (ERRADA). However many key private sector players
(e.g. major business associations) are not aware of ERRADA, illustrating the lack of
inclusion, outreach and communication.
●
Privatisation. Despite a clear privatisation strategy which was announced in 2004,
information on the remaining key assets and the preferred schedule for divestiture has
not been clearly communicated to investors. This was in part caused by the government
taking time out in 2008 and 2009, as the global economy slowed down and investor
interest diminished, to decide on the next step in the process. Several schemes have
been debated, which has kept the conventional programme on hold. The government
intends to communicate clearly the future of privatisation in Egypt once a final decision
is reached on a new asset management plan, most likely in early 2010.
●
Trade policy. While consultations with sector-specific business organisations seem to be
mainly institutionalised, openness of trade policy information could still benefit from
inclusion of additional stakeholders. Further outreach to representatives from SME
associations, trade associations and consumers is recommended.
Recommendations
The MENA-OECD Investment Programme recommends installing review mechanisms
to ensure all major reform processes comply with the good practices of inclusiveness,
consistency, and transparency of process. Decisions should be taken as a consultative
process and should include the conducting of cost-benefit analyses which involve
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consultations with stakeholders. Among such stakeholders should be businesses, trade
unions, and non-governmental organisations affected by the decisions. This approach is
nonetheless limited by the need for balance between efficiency (limiting the number of
actors involved) and legitimacy (ensuring a wide buy-in from stakeholders).
This process would be helped by government renewing efforts to draw up and
publish individual strategies for major interconnected policy areas. Written strategy
documents (white papers) should include policy aims, a discussion of the instrument for
their realisation and a roadmap or schedule. Based on open consultative processes these
strategies can bring the necessary transparency and make government agencies more
accountable for their stated policy aims.
2. Dimension-specific findings for the 12 areas of Egypt’s business climate
The following chapter summarises the key findings that have emerged from the BCDS
assessment phase for each of the 12 dimensions of the analysis. The 12 dimensions are:
Investment Policy and Promotion, Privatisation Policy and Public Private Partnerships, Tax
Policy and Administration, Trade Policy and Facilitation, Better Business Regulation, SME
Policy and Promotion, Anti-Corruption, Corporate Governance, Business Law and
Commercial Conflict Resolution, Infrastructure policy, Human Capital development policy,
and Access to Finance (see also p. 18 for a fuller description of the 12 dimensions and the
reason for their selection).
An overview of the results for the different BCDS policy dimensions reveals that
Investment Policy and Promotion and Trade Policy are the most advanced policy areas for
Egypt. The dimensions that require the most urgent improvements are Anti-Corruption,
Infrastructure, Access to Finance, SME Policy and Business Law. A close examination of
each policy dimension is provided in the following section of the report.
Figure 4.1. Egypt weighted dimension scores
3.73
IPP
Trade Policy and Facilitation
3.52
Better Business Regulation
3.28
Privatisation Policy and Public Private Partnerships
3.03
Business Law and Commercial Courts
2.71
SME Policy and Promotion
2.70
Access to Finance
2.60
Infrastructure
2.39
Anti-Corruption
2.12
0
1
2
3
4
5
Note: Both the Tax Authority and the Corporate Governance framework in Egypt are currently undergoing major
adjustments, making it difficult to score these policy dimensions in an accurate manner at the time of the
assessment. The Human Capital dimension contains many indicators that cannot be scored according to the BCDS
5-level approach, such as annual spending on secondary education per student, or participation in vocational
training by employees. For this reason, the BCDS Review Committee decided not to provide an overall score for this
dimension. For full details of the BCDS assessment framework (the “grid”), go to the website of the MENA-OECD
Investment Programme: www.oecd.org/mena/investment.
1. Scores are given on a scale from 1 to 5, where 5 implies full compliance with established international best
practices. The overall dimension scores have been weighted. See the discussion on p. 19 for more detail on the
weighting method.
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2.1. Dimension 1: Investment Policy and Promotion
Creating a business environment that is conducive to attracting all forms of
investment is an important policy challenge for emerging market economies. The benefits
of private investment are widely recognised and include the expansion of productive
capacity, job creation, technology diffusion, enterprise development and, thereby,
improved living standards. Under the current pro-business government, led by Prime
Minister Ahmed Nazif since 2004, Egypt has embarked on a process of thorough economic
reform. The reform programme has a high content of policies particularly focused on
improving the country’s business climate in order to attract more private investment –
both foreign and domestic – and help create sustainable economic growth and generate
new jobs.
To that end, the Ministry of Investment – impelled by the reform programme – has
rolled out a wide-ranging policy framework to promote and support investment. Specific
measures to enhance Egypt’s business climate, to facilitate inward investment and to
streamline bureaucracy have been enacted. This chapter takes an in-depth look at the
progress achieved to date in investment policy and promotion and identifies areas where
improvements can still be made. Two broad areas were assessed: Foreign Direct Investment
Policy and Investment Promotion and Facilitation.
Achievements in Investment Policy and Promotion
Investment policy in Egypt increasingly conforms to international standards. E g y p t h a s
demonstrated an ability to anchor important policy reforms by acceding to multilateral
organisations and instruments (see below) and agreeing to transpose important
investment provisions into national law. Against this background, Egypt’s scores on the
OECD Regulatory Restrictiveness Index (RRI) improved from 2000 to 2006, when it was first
measured. Moreover, the score has continued to improve. On a scale where 0 denotes a
fully open economy and 1 a totally closed one, the RRI for Egypt was 0.191 in 2006 and
0.104 in 2010.
Egypt has progressively relaxed restrictions on foreign ownership of land and property,
with Prime Ministerial Decree 548/2005 removing restrictions on foreign ownership in a
number of tourist and urban areas. Investor protection in Egypt is strengthened through
the negotiation of 111 bilateral investment treaties (BITs), including 25 with OECD
countries.
Egypt has signed the OECD’s Declaration on Investment. In 2007, Egypt became the first
Arab country to sign the OECD Declaration on International Investment and Multinational
Enterprises (followed in late 2009 by Morocco). As signatory, Egypt is bound to comply with
a certain number of measures to facilitate investment in accordance with OECD good
practice. As a result, there is considerable clarity with regard to the country’s investment
policy framework, which helps enhance the predictability and transparency of its business
climate. One of these positive elements is the fact that – with a few clear and
comparatively well defined exceptions – foreign investors in Egypt are treated in the same
way as domestic investors (also known as “national treatment”).
Egypt is a member of the WTO and several regional trade agreements. Egypt has acceded
to several other multilateral organisations and instruments in addition to the OECD
Declaration on Investment. They include the World Trade Organisation (WTO) and
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negotiated regional trade arrangements such as the Common Market for Eastern and
Southern Africa (COMESA), the Agadir Agreement on Free Trade, and the Greater Arab Free
Trade Area (GAFTA), all of which contain important investment provisions. Egypt has thus
demonstrated its ability to anchor important policy reforms.
Approval and screening procedures are generally clear and transparent. Foreign investors
are not, in general subject to discrimination in approval and screening procedures, and
Egypt’s investment environment is generally transparent for foreigners.
There are no restrictions on capital transfers. Egypt has signed Article VIII of the IMF
Articles of Agreement, thereby accepting full conversion of capital accounts. Foreign
investors can freely repatriate profits and dividends and there are no restrictions on capital
transfers in or out of Egypt.
FDI incentive schemes are clear and transparent. A number of incentives exist to attract
investors into particular free economic and investment zones. Outside the economic
zones, foreign investors are subject to the same treatment as nationals. The 2005 tax law
caps the income and corporation tax rates at a rate of 20% for both nationals and
foreigners. The tax regime has been considerably simplified and rules are clear for most
businesses. A separate chapter of the BCDS deals with tax policy.
Egypt has a well-functioning investment promotion agency and one-stop shop. The
government’s efforts to promote itself as an investment destination and to co-ordinate its
investment policies benefit from the work of a national investment promotion agency
(IPA). The General Authority for Investment and Free Zones (GAFI) is not only Egypt’s IPA, it
has also implemented a significant number of policies to facilitate and streamline
procedures while acting as a one-stop shop for foreign investors. GAFI also oversees the
free economic zones. It is a well-structured institution, and benefits from stable funding
through the free economic zones. Its guidelines and strategy for investment promotion are
relatively clear and investors generally benefit from a centralised port of call when they
approach the government.
Challenges in Investment Policy and Promotion
Despite these important achievements, Egypt must address a number of challenges if
it is to maximise its potential as an investment destination. Foreign private investment still
only accounts for 25% of all investment. Most importantly, there are still obstacles to
making the overall investment policy framework more transparent for investors, and more
work could be done to optimise the investment promotion effort.
Rules for the employment of foreign nationals and for company ownership continue to
act as an impediment to investment in some sectors. Egyptian regulations stipulate a
10% ceiling on quotas of non-national employees. Moreover, foreign nationals are
prohibited from working in professional services. Foreign investors are not allowed to set
up and manage companies under the rules of sole proprietorship and simple partnership,
although they may participate in, but not manage the latter.
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Egypt’s trade regime is not entirely transparent with regard to content requirements.
Egypt occasionally imposes temporary trade-related content requirements. For instance,
during 2009, additional tariffs and export and import bans were imposed, albeit
temporarily, on goods such as rice, sugar, cement, and steel. Although most of these
measures were not in violation of WTO rules, they appeared arbitrary to investors and
impinged on the overall transparency and predictability of Egypt’s trade regime.
Access to land remains a general problem for investors. Access to and ownership of
land for business purposes is a general problem facing investors, both domestic and
foreign, in Egypt. Much land is in effect off-limits, while local rules and delimitations are
not always clear. Moreover, registration remains a lengthy, cumbersome process. Finally,
the government’s current project to create a central electronic property register is taking
far longer to roll out than initially thought, creating overlaps between the new and old
systems and adding to confusion for foreign and domestic investors.
Protection of intellectual property rights remains weak. Egypt remained on the United
States Trade Representative’s (USTR) Intellectual Property Watch List in 2009 with nearly
60% of PC software being pirated. The USTR identifies serious concerns about weak
copyright enforcement and the US copyright industries describe the illegal copying of
books, music, and films as “virtually unchecked”. In addition, Egypt has failed to ratify a
number of important international agreements on the protection of intellectual property.
Intellectual property legislation is poorly enforced and courts remain inactive in the area.
There is a backlog of pending patent applications, a lack of protection against unfair
commercial use of data generated to obtain marketing approval. Nor is there an effective
co-ordination system between Egyptian health and patent authorities to prevent the
issuance of marketing approvals for patent-infringing pharmaceutical products.
Dispute settlements can take several years. Egypt’s courts remain slow, and dispute
settlements can take several years. Moreover, even though Egypt is a signatory to all major
international arbitration treaties, domestic courts do not always enforce awards granted to
foreigners, and the process can be dragged out for years. This is a serious impediment to
the attractiveness of Egypt’s business climate. However, GAFI has opened a centre for the
resolution of disputes with investors, and this may help speed up proceedings specifically
related to investments.
Co-ordination and communication problems still exist with regard to investment
promotion. Despite the general excellence of GAFI as an IPA, it is not fully efficient. There
is no formal separation of functions and powers between, on the one hand, its investment
promotion and facilitating efforts and, on the other, its regulatory and overseeing role. For
inward and local investors, it remains difficult to obtain permits at local government level.
Policy co-ordination outside GAFI’s remit is also problematic at times, and communication
between ministries occasionally appears non-existent. The outreach capacities of GAFI
also show there limits, and a general, overarching strategy for targeting key markets or
sectors is not in evidence. In addition to these lacks with regard to its investment
promotion efforts, GAFI and the Ministry of Investment do not always involve all
stakeholders in their consultation processes. Foreign investors in particular seem to be
frequently excluded from consultations. The MOI and GAFI tend to hold consultations in
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an ad hoc manner and the results of consultations are not routinely summarised or made
publicly available.
Recommendations in Investment Policy and Promotion
In view of this assessment, the MENA-OECD Investment Programme recommends a
number of steps and measures to advance Egypt’s business climate:
Foreign Direct Investment policy: Review and lift remaining restrictions to national
treatment. As part of its undertakings under the OECD Declaration on International
Investment and Multinational Enterprises, Egypt should review its whole body of
investment policies in order to remove the remaining restrictions to national treatment.
Egypt should not wait for free-trade negotiations to be the impetus for such reviews.
Restrictions should be lifted progressively in sectors where Egypt falls significantly behind
OECD averages, such as construction, electricity, and transportation. Lifting the national
treatment restriction in the construction sector is likely to have an immediate, beneficial
effect on inward investment and would also send a generally positive signal to foreign
investors. Lifting other restrictions, such as those for foreigners providing professional
services, and those restricting the number of foreign employees to 10% of a company’s total
workforce, would also be beneficial for the country’s business climate. It would be useful,
in this context, to carry out a cost-and-benefit evaluation of the cost to the economy of
leaving restrictions in place.
Maximise the benefit of Egypt’s free zones. Egypt does not make the most of its free
zones. First of all, there is some confusion among investors regarding the various types of
zones that exist, with some zones now directly competing for inward investment.
Incentives offered in Egypt’s public and private free zones are considered an excessive tax
relief in terms of revenue forgone and windfall gains, and they are detracting away
investments from the newly established Investment Zones which are not based on tax
incentives. The BCDS team invites the Egyptian government to harmonise the incentives it
offers in the various types of free zone programmes in order to prevent zones from
competing against each other. The focus should be on optimising the benefit derived from
the new Investment Zones. Egypt’s offer to investors should be harmonised, with tax
incentives being gradually phased out and replaced with real services offered to
businesses. With regard to the Investment Zones in particular, a better targeted policy with
sector-specific incentives would help foster the development of clusters and improve the
linkages with the local economy, especially the many small-and-medium sized enterprises
(SMEs) that make up the lion’s share of the domestic economy.
In order to best target the incentives structure and assess the value-added of the
various free zones, Egypt needs to undertake regular cost-benefit assessments of the
incentives offered, regardless of their nature. The performance of companies in the free
zones should be assessed against the performance of enterprises operating outside them
in order to assess the real impact of the incentives. This is especially the case for the zones
that offer tax and fiscal incentives. In addition, processes in the Investment Zones need to
be improved in order to increase their effectiveness and attractiveness within the investor
community. These processes include: land designation, establishment approval
procedures, one-stop shop services, utilities provision and industrial licensing.
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Speed up property registration. Egypt must accelerate the process of registering
property in the new electronic cadastre. At the moment, there are about 24 steps to register
a property. The aim should be, at the very least, to halve these. Registration can take
anything from three to 18 months. The length should be brought down to around one
month. Priority areas for registration should include urban areas and areas where foreign
investors have expressed an interest in establishing operations.
Implement and enforce international arbitration. Egypt must speed up the process of
enforcing international arbitration rules and grants through its domestic courts. Ensuring
that awards by international arbitration are properly enforced by domestic courts should
be a priority. In addition, the new economic courts, which started operating during 2009,
should be given priority in the allocation of staff, training, and equipment in order to
absorb the backlog of economic and business-related cases.
Better enforce the protection of intellectual property.
Priority areas for action should
include removing the backlog of pending patent applications and increasing customs
inspections to prevent the transhipment of counterfeit goods through Egypt. The
government should clamp down hard on the illegal copying of software. Co-operation
should be enhanced between ministries and organisations such as the Egyptian Centre for
Intellectual Property and Information Technology in order to train law enforcement
officials and develop information campaigns that raise awareness of the negative
economic effects of piracy.
Ensure that expropriation is adequately recompensed. T h e E g y p t i a n g ov e r n m e n t
should take steps to ensure prompt, adequate, and effective compensation for
expropriation by governorates. The Ministry of Investment in particular could undertake
reviews of cases where governorates have failed to pay compensation.
Investment Promotion and Facilitation: Enhance the effectiveness of Egypt’s investment
promotion strategy. Egypt could still take several steps to significantly enhance its
investment promotion strategy. A better mapping of Egypt’s internal investment potential
would help and a better target potential investors that fit domestic needs. First, a sectorspecific analysis needs to be undertaken to i) determine where Egypt’s competitive
advantages are and ii) obtain feed-back from key players in Egypt’s economic sectors on
where sector-specific barriers to investment remain. Second, GAFI should then use its key
policy advocacy role to initiate the lifting of these barriers. Following these steps, detailed
sector-specific action plans can be put in motion which will help focus investment
promotion campaigns. The results of such campaigns should be carefully monitored and
regular cost-benefits analyses undertaken.
To improve communication, efforts should be made to unify the many disparate
elements of Egypt’s investment promotion strategy into a single document that can be
used both internally and externally, to communicate with potential investors. This would
add a degree of coherence which is currently lacking. Internal and external policy coordination would help Egypt communicate its investment offer more effectively and, by the
same token, improve the investment offer itself. In addition, internal co-ordination
appears to be lacking with regard to Egypt’s domestic Promotion and Facilitation
Framework, with investment promotion strategies and activities between central
government and the governorates not always fully coherent.
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Make GAFI a leading IPA. GAFI’s role as an investment promoter could be optimised by
an internal organisation of the Investment Promotion function. Following a sector-specific
analysis (see above), GAFI could then be organised into departments by economic sector.
This would help the follow-up work after promotion campaigns and help guide the
promotion efforts. Separately, GAFI, as an IPA, would benefit from a more effective system
for tracking foreign investor interest by region and country. Improvements to the system
should involve training staff and providing better resources, such as dedicated software.
Client-relation-management software is being implemented, but it is unclear how efficient
it is at present.
In addition, GAFI should consider customising its presentations and other
promotional campaigns to the needs of investors by country and by sector. This should be
helped by carrying out such a sector-specific analysis as suggested above. Presentations
should be tailored to each sector in industry and the services – e.g. by providing
comparative information on sectors’ market sizes, growth rates, labour costs, productivity,
and any remaining policy constraints. Furthermore, all sector-specific presentations
should be posted on the website. GAFI should adopt an internal policy of following up
foreign investor inquiries within a fixed time frame. Client management could be
improved through follow-up visits and questionnaires, while feedback should be recycled
throughout the organisation. Work could also be done to improve staff motivation and
ensure complete buy-in to the process of improving Egypt’s business climate.
Ensure the genuine separation of powers and functions within GAFI. GAFI is the regulator,
the executor, and the main arbiter of Egypt’s investment policy and promotion. To
maximise Egypt’s investment promotion efforts and to ensure the total transparency and
fairness of all investment processes, the various functions of GAFI should be allotted to
separate bodies or, at the very least, to separate directorates. A series of “Chinese walls”
should be erected inside the organisation to ensure there is no overlapping and reduce
opportunities for improper business conduct. Separate strategies should be developed for
each of these directorates, with clear mandates and strategies mapped out for each of
them.
To optimise Egypt’s Investment Promotion efforts, while ensuring that GAFI fulfils its
multiple roles, it may be useful to separate out the Investment Promotion arm of GAFI. This
would enable resources to be channelled specifically to well-targeted promotion
campaigns, without drawing on resources needed elsewhere in the organisation. A unique
Investment Promotion Agency would have the added advantage of serving as a single focal
point for investors who can be confused by the plethora of investment promotion
campaigns and offers conducted simultaneously by several ministries.
2.2. Dimension 2: Privatisation and Public-Private Partnerships (PPPs)
The government renewed its commitment to privatisation in 2004, with a positive
effect on the number of privatisation transactions and the value of proceeds during the
period 2004-07. The objectives of the privatisation programme have been outlined in the
Asset Management Programme (AMP) guidelines which were updated in late 2009. AMP
guidelines state that transparency of the programme is enhanced by publishing the annual
sales programme and the minutes of the annual meetings of the nine public holding
companies. Foreign participation in privatisation in Egypt has been strong, and most of the
government stakes in Joint Ventures have been sold to foreign investors. The largest
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Figure 4.2. Investment Policy and Promotion: Scores by subdimension
Subdimension 1: FDI policy
Restrictions to national treatment
Approval procedures
Admittance of business personnel in
Transfer of FDI-related capital
FDI incentives
Performance requirements
Land ownership
Titling and cadastre
Intellectual Property
Guarantees against expropriation
International Investment Agreements
International arbitration
0
1
2
3
4
5
Subdimension 2: Promotion and facilitation
Strategy
Institutional support
Monitoring and evaluation
National and sub-national co-ordination
FDI-SME linkagesOne stop shop
Client relationship management
Policy advocacy
Aftercare services
Free economic zones
0
1
2
3
4
5
4
5
Subdimension 3: Transparency
Publication avenues and tools
Prior notification and stakeholder consultations
Procedural transparency
0
1
2
3
privatisation transaction in Egypt was the sale of an 80%-share of Bank of Alexandria for
around USD 1 billion to the Italian Bank Saopaolo. Non-discrimination has been
strengthened by Egypt’s adherence to the OECD Declaration on International Investment
in 2007.
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Egypt has undertaken PPP projects in infrastructure since 1990. The most successful
of these have been within the transport sector. A new PPP strategy was launched in 2006
and a new framework PPP law was finally adopted by parliament in 2010. A Central PPP
Unit has been established in the Ministry of Finance. Since its establishment, the PPP Unit
has been working on five pilot projects: a PPP schools project (Education), an Alexandria
University Hospitals project (Health), a Cairo Wastewater Treatment Plant, and two
transport projects (Shubra/Banha Highway Project and Rod El Farag Access Project). The
first successful PPP tender for a waste-water treatment plant in New Cairo was signed in
mid-2009 and construction will begin in 2010. There are other pilot projects in the pipeline
where three tenders have been opened, four are currently under preparation, and
10 projects are in the pipeline across sectors.
Achievements in privatisation and Public-Private Partnerships
A clear legal framework. Egypt has had some success with its privatisation programme,
having established a clear legal framework for the process. A series of laws and regulations
from the early 1990s 6 set out guidelines for the privatisation programme. Initially,
314 state-owned enterprises (SOEs)*7 were put up for sale and grouped into 27 holding
companies, each one with a specialisation.8 In addition, since September 2002, it has also
been possible for the government to sell state-owned shares in joint-venture companies.9
From 1993-2004, nearly 200 SOEs were fully or partially privatised.10
In addition to SOEs and government stakes in joint ventures – which are sold under
the Asset Management Programme (AMP) operated by the Ministry of Investment – other
companies can be privatised, too. These are referred to as “non-law 203” companies and
they are dealt with by their line ministries, rather than the Ministry of Investment.
Essentially, non-law 203 companies are so-called “strategic” companies in sectors such as
electricity, telecoms, aviation, banks, all companies under the Suez Canal Authority, and
large companies like the Arab Contractors.11
A positive result from initial privatisations. The first wave of privatisations yielded
positive results, allowing the state to gradually withdraw from the economy and usher in
more private-sector initiative, competition, and a more transparent investor climate,
especially in the manufacturing and banking sectors.
Privatisations accelerate under the new government 2004-08. Under the Ahmed Nazif
administration the privatisation programme was revived and brought under Ministry of
Investment. In 2005-06 and 2006-07 privatisation receipts represented 2.5% and 1.9% of GDP
respectively. This increase was primarily due to the two large non-law 203 privatisations:
the sale of a state-owned bank, the Bank of Alexandria, and the part-privatisation of
Telecom Egypt, which alone accounted for 0.9% and 1.3% of GDP respectively.
No restrictions on foreign ownership of privatised companies. There are no restrictions
on foreign investor participation in privatisation projects in Egypt. There remain some
sectors where foreign investment is only allowed in the form of joint-venture companies in
which foreign equity does not exceed 49%. Such sectors are construction, maritime
transport, air transport and courier services, all considered strategic and associated with
national security issues.
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Foreign participation in privatisation in Egypt has generally been strong, and most of
the government stakes in joint ventures have been sold to foreign investors.
The PPP programme finally has its legal framework. Egypt’s results with regard to its
PPP programme have been slower to emerge. However, some important results have been
achieved. These include the formulation of an overall PPP strategy in 2006 and the putting
in place of a number of mechanisms, such as the PPP Central Unit which is in charge of
planning and managing PPP projects. The progress of PPP in Egypt will be greatly enhanced
by the passing of the PPP framework law in June 2010.
Challenges in privatisation and Public-Private Partnerships
The privatisation programme has stalled and the government’s plans remain unclear.
The privatisation programme stalled in 2008, against the backdrop of the mounting
international financial crisis. The programme was halted, pending the reformulation of the
government’s privatisation strategy, and this has brought some confusion to the investor
community. A scheme to distribute, free of charge, a number of shares to Egypt’s adult
citizens, was shelved in late 2009. A new strategy is under formulation and a new draft law,
which maps out the responsibilities of the Asset Management Fund and the new Fund for
Future Generations, was made public in late 2009. However, until the new law has been
passed – most likely during the 2010-11 – parliamentary session, confusion will continue to
surround the direction of the government’s policy.
The scope of the privatisation programme is too wide. Egypt’s privatisation policy
framework in its current format is too ambitious. It seeks to meet multiple and at times
conflicting objectives, such as both improving efficiency and creating jobs, which gives rise
to a large number of cross-cutting policy issues. These need to be identified, prioritised,
and adequately addressed. As regards the overall strategy and objectives, these have still
not been made public, continuing to create suspicion among the population.
The privatisation programme lacks transparency. With regard to the privatisation
process itself, an overall lack of transparency is also problematic. There is a lack of
important details, such as exactly how many public enterprises are to be privatised and
when they will be offered for sale. The government does indicate on its website that it
guarantees transparency through the distribution of fact sheets and summaries of the
companies and major assets governed by Law 203. However, investors and the private
sector community have reported cases where the government had announced that it was
putting public enterprises up for privatisation, only to withdraw them without justification
or explanation.
The key principle of the AMP is to operate within a “clearly announced and well
communicated programme”. Although the government has communicated the benefits of
the privatisation process before and attempted to address public concerns over
employment, it will need to clarify its intentions and the key elements of its strategy in
order to revitalise the process again.
The PPP Central Unit has encountered resistance from line ministries. With regard to
the government’s PPP programme, the Central PPP Unit has encountered some initial
problems. These include ensuring the buy-in of portfolio ministries and the successful
establishment of satellite PPP units; finalising the draft PPP legislation; providing capacity
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building to other government entities, and finalising and completing the initial pilot
projects. There has been resistance from the line ministries against the idea of a central
unit with an overall co-ordination function. This may well signal a communication
problem. The line ministries have not yet seen the value added of the PPP Central Unit and
are uncertain of the benefits that it can provide.
Some PPP pilot projects have failed to attract investor interest. Issues have also arisen
regarding the choice of pilot projects – an initial, and very ambitious, project to find a
private investor to build and manage 150 schools failed to attract any interest. There are
also question marks over the availability of sufficient funding through local commercial
banks, while the strict independence of outside consultants has also been raised.
Recommendations in privatisation and Public-Private Partnerships
In view of the challenges that still remain if Egypt is to successfully implement its
privatisation and PPP programmes, the MENA-OECD Investment Programme has a number
of suggestions.
Strategy. The government should put in place and make public a clear privatisation
strategy, which would spell out the objectives and details of its privatisation programme. It
should also insert the programme into Egypt’s broader economic reform effort and, in
particular, look at ways for private sector involvement to improve the economic
performance of the chosen companies and sectors. The new strategy should be made
public through an effective communication plan which would target both the general
public and private investors in order to ensure support for the programme and mobilise
investors. Moreover, a full public debate prior to the passing of the new framework law
would enhance the government’s image and improve transparency.
Transparency. The transparency and efficiency of the privatisation programme should be
enhanced by announcing the sales schedule in official newspapers and on the Ministry of
Investment’s website to ensure it is made public and reaches all investors. Other means of
increasing transparency are: select advisors and buyers through a competitive process; put
conflict-of-interest guidelines in place; and ensure that competition and regulatory
frameworks are in place prior to sale (e.g. enact a new competition law or amend the
existing one, if necessary).
Resources. Sufficient resources should be made available to address the challenges of the
new privatisation programme identified in the strategy. These can relate to staffing, to staff
training, to communication, and to the drawing up of the proper guidelines and regulatory
framework.
Competitive processes. To ensure the best market access for investors, advisors should
be hired openly and transparently through a competitive bidding process. In this respect
the government needs to ensure that advisors represent its or the holding company’s
interests only and that they do not work with potential bidders and are not related to them
in any capacity. The government also needs to ensure that the pay structure does not
create incentives for advisors to work against it, in particular when it comes to
commissions that could skew the advice in favour of options that are against government
objectives. In all dealings with external advisors the government needs to develop an
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intelligent “customer capability” to avoid being taken advantage of. This is achieved by
developing sufficient knowledge of the issues at hand with the aid of OECD guidelines and
expertise.
Effective communication with stakeholders. Prior to launching privatisations, the
Egyptian government would benefit from designing and implementing a more coordinated, formal approach to consultation with a broad cross-section of stakeholders on a
regular basis. Moreover, the results of consultations should be made public. The timing and
availability of official bulletins should be shared, along with seminars and other
conferences on the issue organised by the government. To ensure support from the trade
unions and minimise resistance, more effort should be put into working closely with the
unions in the affected companies and proposing the retraining and redeployment of staff
where applicable. This could be part of a wider approach to upgrading and retraining
Egypt’s manufacturing workers, as Denmark did when it undertook a privatisation
programme in the late 1980s and early 1990s.
Improving the performance of the PPP Central Unit. I t i s r e c o m m e n d e d t h a t t h e
government should formalise co-ordination between the central PPP unit and satellite
units in the line ministries, as well as with the Ministry of Investment which remains in
charge of other aspects of PPP in Egypt. The roles and responsibilities of the Central Unit in
the Ministry of Finance and the PPP unit in the MOI should be clearly assigned. The PPP unit
could, for instance, be given a well defined portfolio for promotional activities.
In order to build the capacity of the PPP Central Unit and improve its performance,
competent advisors should be hired to help select PPP projects. Further measures could be
to improve the PPP unit’s human capital capacity through more training and hiring staff
with wider expertise in PPP. (The expertise should come from sectors that are likely to
benefit from PPPs, such as road, rail sea freight and passenger transport.)
A full cost-benefit analysis of the projects undertaken. A cost-benefit analysis should
take into account all alternative modes of delivery (e.g. divestiture, concessions,
management and service contracts) as well as costs and benefits over a project’s life cycle,
whether financial or non-financial (e.g. sustainable development). The cost-benefit
assessment should include analysis of the degree to which costs can be recovered from
end-users and, in the event of shortfalls, what other sources of finances can be mobilised.
The cost-benefit analysis should also include a risk assessment based on the public
interest – for example, shifting too much risk on to the private sector may result in higher
prices for consumers to offset that risk. Finally, there should be an assessment of the
potential public finance implications of sharing responsibilities with the private sector –
e.g. the fiscal implications of issuing guarantees, even in the event of macroeconomic crises.
An assessment of alternative modes of delivery is lacking from the economic
feasibility studies currently conducted in Egypt. It should be added to the cost-benefit
analysis.
The preparation and procurement of PPP projects is more complex and costly than
publicly procured infrastructure projects. The costs often put a burden on the budgets of
line ministries that are involved in implementing PPPs. To that end, the government is
encouraged to establish a PPP Project Preparation Fund as a means of strengthening the
supply side of the market for PPP projects.
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Figure 4.3. Privatisation and public partnerships: Scores by subdimension
Subdimension 1: Privatization policy
Privatisation strategy
Communication and consultation
Ownership restrictions
0
1
2
3
4
5
Subdimension 2: Trade liberalisation and trade openess
PPP monitoring
PPP legislation
PPP unit
PPP consultations
Cost benefit analysis
0
1
2
3
4
5
2.3. Dimension 3: Tax Policy and Administration
Tax reform is an ongoing process, with tax policy makers and tax administrators
continually adapting tax systems to changing economic, social, and political
circumstances. In this process, tax reformers worldwide find themselves working towards
competing goals. While tax revenues provide governments in most countries with
essential funding to meet their social (education, health, social security) and infrastructure
needs, they also affect economic decisions in areas like investment, production, labour
supply and demand, and savings.
Recognising these challenges, most structural tax reforms in recent decades have tried
to foster a more competitive fiscal environment: one which encourages investment, risktaking, and entrepreneurship, and provides increased incentives to work, while broadening
the tax base by, for example, discouraging non-compliance (tax avoidance and evasion).
Achievements in Tax Policy and Administration
A clear focus for incremental reform. Egyptian tax reforms have been mainly focused on
improving tax legislation and modernising and improving the efficiency and efficacy of tax
administration. Moreover, there are plans to strengthen the analytical capacity of the
Ministry of Finance by creating a Higher Council for Taxes in 2010.
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A centralised tax authority has been created. The integration in 2006 of the Income and
Sales Tax Departments into a single unified body, the Egyptian Tax Authority, contributed
to making Egypt’s revenue authorities more efficient and effective. In addition, the
Egyptian tax authorities took their first steps towards a more “client-oriented” approach by
establishing the Large Taxpayer Centre in 2005. Further steps in that direction are to be
encouraged.
A taxpayer identification number has been introduced. The introduction of a taxpayer
identification number (TIN) for income tax, general sales, and customs duty in 2005
improved taxpayer data collection. Further progress in centralised systems of collection
(gathering, cleaning, recording, and updating) and assessment of taxpayer information are
to be encouraged.
The use of self-assessment has increased trust in the system. The introduction of selfassessment and random audit systems have helped strengthen trust between taxpayers
and revenue authorities, improve the Egyptian tax authorities’ compliance strategy, and
reduce administrative costs.
Access to information is much improved. There has been impressive progress in efforts
to improve taxpayers’ access to information and support documentation and to provide
small businesses with assistance in understanding and complying with the tax system.
The Large Taxpayer and the Sales Tax Authority in particular stand out. Further efforts in
this direction are strongly encouraged.
More sophisticated analytical tools are being used. Egypt currently maintains aggregate
tax revenue forecasting models for all main taxes, and systems are in place to monitor
revenues and public expenditures on a regular basis. These analytical tools are essential for
sound management of public finances and play a key role in the process of restructuring
Egyptian public finances in support of fiscal consolidation.
Lowering and streamlining the income tax rates has led to higher revenue. Egypt’s
movement to a broader base and lower rate corporate income tax (20% rate and very
limited use of tax incentives) has simplified the tax system and contributed to
increased investment, tax compliance and tax revenues.
Challenges in Tax Policy and Administration
Fiscal position and planning needs to be strengthened. Egypt does not maintain a
corporate income tax (CIT) micro-simulation model for analysing the revenue impact of
alternative tax regimes or the disaggregate revenue effect of the current tax regime. Egypt
does not currently prepare tax expenditure estimates of revenues foregone for each of the
main corporate tax incentives for investment.
Tax evasion remains high. A large number of businesses in the small-and-medium sized
sector continue to evade tax. Many SMEs are not registered and continue to operate in the
informal sector, leading to a significant loss of potential revenue each year. This is
particularly worrisome at a time when the budget deficit has been widening.
Tax treatments are not evenly applied. Although the Egyptian taxation system has been
significantly improved in recent years, certain areas are still not as clear-cut as others. It
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appears that certain structures and entities are subject to varying tax treatments.
Examples include: interest income earned by non-banks being taxable (but not taxable for
banks), thus limiting the use of mezzanine financing from structuring transactions; and
exemption of listed companies from capital gains tax. As such, obtaining a listing before
exiting an investment becomes lucrative and hence possibly subject to speculation.12
A tax wedge model is needed to understand the effect of tax changes. A t a x w e d g e
model to analyse how tax distortions affect employment decisions is not currently
maintained in Egypt. This basic (parameter-based) analytical tool could be particularly
useful for assessing the impact of taxation on the labour market participation and work
effort (number of hours worked) decisions of low-wage workers. Egypt is encouraged to
incorporate the tax wedge model into its policy toolkit within 1-2 years.
Tax distortions may not be fully accounted for. Egypt does not maintain a marginal
effective tax rate (METR) model for analysing tax distortions on investment and the
implications of alternative tax reform proposals. Egypt is encouraged to assess how tax
may distort the earnings payout decisions (business income, dividends, interest and
capital gains) of closely held corporations. This assessment may help inform decisions
about tax rates on different types of income.
More work on SME taxation is needed. Detailed analyses have not yet been carried out
in Egypt to assess either how alternative loss treatment may affect investment in small
firms with relatively high-risk business ventures or how it may affect the scope for tax
avoidance (mischaracterisation of personal consumption expenses as business expenses).
There is no evidence that Egypt has conducted any detailed compliance cost
assessments. Nevertheless, although it has apparently not considered the potential of
alternative income regimes for reducing SME compliance costs, Egypt has recently
implemented a simplified tax regime for SMEs.
Egypt introduced thin capitalisation rules for resident foreign-controlled companies
in 2005. Egypt is encouraged to assess companies’ debt-to-equity structures and
strengthen thin capitalisation rules to protect the domestic tax base from aggressive tax
planning.
Recommendations in Tax Policy and Administration
Improve tax collection. In order to address some of the budgetary shortcomings
discussed in the macro-economic overview, Egypt needs to improve its tax collection. The
new Tax Law from 2005 did broaden the tax base, but evasion remains widespread and
more efforts and resources should be put into addressing this. Widespread tax-avoidance
is linked to the following issue: the fact that many companies are not registered.
Encourage small-and-medium sized companies to register. The vast majority of Egypt’s
SMEs continue to escape tax collection as a result of their remaining in the informal
economy. The administration should provide more incentives to SMEs to register,
preferably using a carrot-and-stick approach. A first step has been taken through a new law
which will impose the issuance of a receipt for any transaction, no matter how small.
However, other incentives should be used, such as improved services for SMEs; the creation
of local “tax booths” to help with filling in tax returns; and the possibility of a tax-amnesty
for a certain period for early-bird registrations.
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Improve simulation tools. A corporate income tax (CIT) micro-simulation model should
be implemented. Local interest is high and some steps have been already taken towards
implementing it. Egypt’s work on implementing a CIT micro-simulation model will enable
it to prepare tax expenditure estimates to guide tax incentive policy. Other analytical
tools – e.g. METR analysis – could also be incorporated into Egypt’s tax policy toolkit within
3-5 years.
A framework for non-resident tax payments should be considered. Egypt is encouraged
to implement a framework for measuring and analysing non-resident withholding tax on
interest, royalties, dividends, and other payments. Such a framework would be useful for
assessing the possible consequences of reducing non-resident withholding tax rates,
particularly with regard to related-party cross-border payments.
The way forward. Senior tax officials from the Egyptian Ministers of Finance have been
actively engaged in a regional dialogue on tax matters under the MENA-OECD Investment
Programme. Under the umbrella of the Working Group 3 (WG3) on Tax Policy Analysis,
information and experience on the design and implementation of tax systems have been
shared since 2004, when this group was created. The implementation of the analytical
frameworks described in this chapter will allow Egyptian tax officials to guide tax policy by
assessing alternative tax policies and implementation options and to build political
support for tax reform by basing policy recommendations on international recognised
framework for policy analysis. Moreover, these frameworks will strengthen the regional
dialogue and enable cross-country comparisons by building tax measures based on
international recognised methodologies. By request of the WG3 members and subject to
availability of funding, tax administration issues will be also incorporated in this regional
forum on taxation.
The Egyptian government is carrying out an in-depth revision of its tax administration
in fiscal year 2009-10. The MENA-OECD Investment Programme will pursue its work on the
BCDS for this dimension following the completion of the reform.
2.4. Dimension 4: Trade Policy and Facilitation
Trade policy plays an important role in attracting more and better quality investment.
It affects both domestic and foreign businesses, facilitating their integration into global
supply chains, and helping boost productivity and rates of return. It is therefore critical to
a country’s business climate. An open and effective trade policy in itself is important, but
even more so are its impact on the business climate and its ability to attract more
investments. Four main areas of Egypt’s trade policy were assessed:
●
trade policy formulation and evaluation,
●
trade liberalisation and trade openness,
●
non-tariff barriers,
●
pro-active trade policy.
Trade has played a significant role in Egypt’s economic development. Exports of goods
and services have been a motor for economic growth, and export-led growth was a key
factor in the economic recovery which took place between 2004 and 2008. The results of
the assessment indicate that Egypt has achieved substantive reforms in almost all areas of
trade policy affecting its business climate. However, to bring it up to the next level of
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excellence, Egypt must tackle some remaining challenges, particularly in areas such as
sanitary and phytosanitary measures, export promotion, public-private consultation, and
monitoring and evaluation.
Achievements in Trade Policy and Facilitation
Foreign trade has increased relative to GDP as tariffs have been lowered. E g y p t
has
considerably liberalised its economy and opened it up to foreign trade. It has expanded its
network of regional and bilateral trade agreements and protocols with its main trading
partners, the EU and the US. Foreign trade (exports and imports) has increased from just
over 30% of GDP in 2003-4 to 56.9% in 2008-09. The signing of regional trade agreements has
led to rising trade with neighbouring Arab countries in the last decade. Indeed, in 2008-09,
Arab countries represented an 11.4% share of Egypt’s total trade, up from 8.9% in 2003-04
and 5.3% in 2000-01.
Egypt is implementing its WTO commitments and has been a leading negotiator in the
Doha Round. It has cut custom duties as well as a multitude of different charges and levies
and numerous tariff schedules. It has reduced its tariff rates on several imported items,
including capital goods, which brought down the average weighted tariff rate from 21%
in 1997 to 5.5% in 2009, with an average tariff rate of 5% on capital goods.
Top-level political commitment drives co-ordination with regard to trade policies.
Political commitment at the highest level has supported and strengthened institutional
co-ordination mechanisms. Ministerial committees, like the Ministerial Economic Policies
Committee, have been formed to co-ordinate trade policy formulation, while others
co-ordinate implementation by area of trade, e.g. the Sanitary and Phytosanitary SubCommittee.
Establishing a more formal private-public consultation has prompted valuable reform
input from the business community. Public-private consultations have been further
formalised with channels put in place to receive private-sector feedback. They include the
Export Councils and the Business Advisory Committee (BAC). Public-private consultation
has led to many important private sector contributions in areas like the Egyptian
Regulatory Reform Activity (ERRADA) and in recent amendments to tariff rates.
Finally, a Trade Policy Analysis Unit (TPAU) has been established within the Ministry of
Trade and Industry’s Trade Agreements Sector (TAS). Its purpose is to evaluate the costs
and benefits of bilateral, regional, and multilateral trade agreements and to monitor trade
flows.
Cited by the World Bank as a “top reformer” in improving customs procedures.
According to the World Bank’s annual “Doing Business” reports, Egypt has streamlined
paperwork and procedures for processing of goods in customs. Egypt has also brought
most of its domestic quality standards into compliance with international requirements.
Egypt has made significant progress in reducing administrative and other non-tariff
barriers to trade, although most of these have been specifically linked to customs
procedures. As a result, it has consistently been nominated a “top reformer” in the World
Bank’s annual Doing Business reports. Egypt is currently rolling out its TradeNet electronic
trade document system to connect all agencies to a single electronic point of transaction.
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The institutional and legislative framework for adopting technical standards has
improved significantly. The national body in charge of technical standards, namely the
Egyptian Organisation for Quality (EOS), has played a major role in raising exporters’ and
importers’ awareness of commitments under the Technical Barriers to Trade Agreement.
The EOS ran an ambitious harmonisation programme that has brought current Egyptian
standards into line with international standards. The number of conformity assessment
bodies increased dramatically from around three before 2003 to 273 in 2009.
Phytosanitary measures have strongly improved. Egypt has also come a long way in the
area of Sanitary and Phytosanitary (SPS) measures. It has developed a framework based on
the WTO SPS Agreement to which it is a signatory, while two ministerial decrees have
established mechanisms to co-ordinate the work of all the bodies involved in SPS
measures.
An export promotion agency is in place, while a wide range of programmes addresses
critical aspects of export promotion. Export promotion is one of Egypt’s primary
concerns and a critical component in its trade strategy. Egypt has set up a national export
promotion agency, the Egyptian Export Promotion Center, and increased the number of
export promotion programmes, which provide services for exporters ranging from
marketing to funding. Examples of such programmes are those run by the Industrial
Modernisation Center (IMC), Egyptian Commercial Services, the Egyptian Exporters
Association (ExpoLink), and the Export Development Bank of Egypt (EDB).
Challenges in Trade Policy and Facilitation
Public-private consultation needs to have a broader reach. Although Egypt boasts many
successful examples of a public-private consultation process, it still lacks a system with a
broader sweep that would embrace academia, think tanks, private sector groups, and other
members of civil society. The aim would be to ensure that smaller business interests also
have a voice in dialogues with the government. Moreover, not all consultations take place
on a regular basis, and some are more formalised than others.
Monitoring and evaluation remain weak. Monitoring trade agreements and policies is a
highly complex issue and requires sophisticated econometric models, highly technically
skilled staff, and substantial institutional capacity. Even though there is a dedicated agency
within MOTI, the Trade Agreements Sector (TAS) which, along with its affiliated units,
monitors and evaluates trade policy in Egypt and its micro- and macro-economic impacts,
there is not enough available capacity to undertake such a huge task. Moreover, the
government is more focused on monitoring trends than on evaluating such policy impacts
as those on employment and growth and on different sectors. In general, there is no
existing arrangement for systematically monitoring and evaluating the effects of trade
policy in all sectors before or after policy has been introduced.
Sanitary and phytosanitary measures are still weak. In the field of SPS there are many
new developments. Even though the government has drawn up and put in place an
institutional framework and processes, they have not yet delivered effective
implementation and compliance with international standards. The main problem is the
insufficient technical capacity of the secretariat of the SPS Sub-Committee. In addition,
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SPS-related international standards have not yet been fully transposed into domestic
regulations.
There are too many export promotion players. Despite the government’s efforts to put
in place export promotion agencies and programmes, the institutional set-up remains
fragmented. In addition to the Egyptian Export Promotion Center (EEPC), the main
governmental export promotion agency, numerous other players offer services which
overlap or duplicate each other. The EEPC does not have the capacity to co-ordinate the
multiple export promotion players or to ensure that programmes match the overall export
promotion strategy. Moreover, there has recently been a demand for training programmes
on standardisation and SPS measures that remains unmet.
Recommendations in Trade Policy and Facilitation
The recommendations below may help the Egyptian government to bring its trade
policy up to the next level of excellence.
The government should consult the private sector more widely and more regularly to
better target its efforts in the area of trade policy. In order to include all stakeholders in
the public-private consultation process, the government should consider bolstering the
existing export councils with a broader advisory body that brings together business groups,
exporters’ associations, trade experts, civil society representatives, trade unions, financial
institutions, and a greater number of SMEs. The government should also consider
consulting private sector organisations such as the Business Advisory Committee (BAC) on
a more regular basis. Such dialogue would encourage a steadier flow of prompt feedback
rather than merely in response to regulatory questions. One model that MOTI could
consider – and which does all of the above – is the Trade Civil Society Dialogue created by
the European Commission. MOTI could further enhance the effectiveness of public-private
consultation on trade policy by sharing more information about how to access the different
mechanisms in place. It should also make the outcomes of consultation more easily
available, which would increase the transparency of the consultation process.
More resources are needed for regular evaluation and monitoring. If MOTI is to be able
to fully evaluate the potential and actual economic, social and environmental effects of
different trade policies, it needs to further develop and strengthen staffing levels and
expertise (analytical and econometric) in the Trade Agreements Sector and the Trade Policy
Assessment Unit (TPAU). Monitoring and evaluation should incorporate systematic ex post
and ex ante analysis of trade policy and agreements in all sectors of the economy.
Furthermore, results should be disclosed in discussions with civil society representatives,
which would contribute to the wide stakeholder dialogue advocated in the
recommendation above. In fact, monitoring and evaluation results should also be publicly
communicated to all stakeholders by posting them all on a single website for ease of
access.
The government should phase out tariff escalation. In order to stay in line with bound
custom duty rates and increase the competitiveness of Egyptian industry, the government
should reduce all escalated tariffs on finished and semi-finished goods.
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Greater institutional capacity and effective co-ordination is needed in SPS measures.
To comply more fully with its domestic obligations under the WTO SPS Agreement, the
government should strengthen the institutional capacity of the SPS Sub-Committee’s
Technical Secretariat and improve co-ordination between the two ministerial SPS subcommittees. The government should also use the export promotion agency to step up
targeted training and awareness programmes for industries affected by SPS measures.
Figure 4.4. Trade Policy and Facilitation: Scores by subdimension
Subdimension 1: Trade policy strategy and evaluation
Institutional co-ordination
Public/private consultation
Monitoring and evaluation of the impact of trade measures
0
1
2
3
4
5
Subdimension 2: Trade liberalisation and trade openness
WTO membership
Regional trade agreements
Custom duties on capital goods
Quantitative restrictions
0
1
2
3
4
5
4
5
Subdimension 3: Non-tariff barriers
TBT – Institutional and legislative framework
for standardisation
TBT – Transposition of international standards
TBT – Certification
SPM – Institutional and legislative framework for SPS
SPM – Transposition of international standards for SPS
ABT – Time and documents for export
ABT – Time and documents for import
ABT – Licenses
ABT – Accessibility of customs laws and regulations
0
1
2
3
Subdimension 4: Pro-active trade policy
Export promotion agencies
Export promotion programmes
0
0.5
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1.5
2
2.5
3
3.5
4
4.5
5
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The central export promotion agency requires more resources, and a one-stop export
promotion shop should be created. To make its trade policy more pro-active, the
government needs to empower the EEPC and provide it with the resources it needs to meet
its mandate and co-ordinate export promotion programmes. Moreover, it should fund it
sufficiently to ensure the sustainability of its programmes. Even if the EEPC does not
implement export promotion programmes, it should co-ordinate them to avoid duplication
and make sure some programmes offer what others do not. It should also act as a one-stop
shop with the capacity to offer the full range of export promotion services and
programmes. And it should ensure that export promotion programmes are in line with the
export promotion strategy and able to meet its objectives.
The government should set up a help desk to improve the overall flow of information.
As a general recommendation for improving the flow of information about all areas of
trade policy to the wider public and across government, MOTI should put in place a help
desk. It would provide facts and figures on questions like regional and bilateral trade
agreements and preferences, standards, technical regulations and conformity assessment,
and export promotion programmes.
2.5. Dimension 5: Better Business Regulation
There is a strong, positive correlation between high-quality business regulation and
strong foreign and domestic investment, trade, and enterprise growth and creation. Lower
legislative, regulatory and procedural burdens for businesses promote sustainable
economic development by enhancing competition and boosting efficiency, bringing down
prices, and stimulating innovation. In contrast, complex procedures and heavy regulatory
compliance requirements hinder private sector development: they slow enterprise growth
by diverting resources away from the creation of value-added activities to non-productive
ones.
This dimension of the BCDS assesses Egypt’s reform efforts with regard to:
a) designing policies for “Better Legislation and Administrative Simplification” to help
business operations, focusing on policies aimed at reducing regulatory burdens; and
b) improving the three main components of the business establishment process, from
incorporation and registration to notification and compliance through “Cheaper and
Faster Start-Up”.
The assessment in this section of the BCDS for Egypt builds on and updates results
from a regional assessment of enterprise policy published in 2008 as the Report on the
Implementation of the Euro-Mediterranean Charter for Enterprise. It was conducted in
partnership with the European Commission, European Training Foundation and the
European Investment Bank as part of the Euro-Mediterranean Charter for Enterprise. This
bilateral BCDS assessment goes deeper than the 2008 assessment which was regional in
scope. It would therefore be meaningless to compare outcomes.
Achievements in Better Business Regulation
A programme has been created to streamline and reduce excessive legislation and
regulation. Egypt has set about improving the business climate through managing its
heavily regulated economy, burdened by a bloated and often inefficient public
administration, particularly at local level. Since 2007 the government has given priority to
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reform and has laid the foundations for regulatory reform through its Egyptian Regulatory
Reform and Development Activity (ERRADA). ERRADA aims to create a system of regulatory
management to promote a competitive Egyptian economy. It has established a three-step
review process to systematically review, simplify and eliminate legislation related to
business regulations and has successfully conducted an initial review, compiling a list of
30 000 regulations which affect business across 12 ministries (data correct as of endMarch 2010; the review and collection process is ongoing).
The entire plan will require a considerable amount of time and resources to complete,
and careful consideration on how to implement its broad multi-year reform programme.
Business start-up procedures have been simplified. Egypt has made a number of reforms
to simplify business start-up procedures. According to Doing Business, the survey published
by the International Finance Corporation and the World Bank, Egypt improved its
performance from the world’s worst business environment reformer in 2005 to the best
in 2007. In the World Bank’s 2008 and 2009 reports, Egypt was also ranked among one of the
world’s top ten performers for starting businesses after implementing reforms which have
considerably reduced the time, number of steps, and costs related to the overall process of
company registration. The reforms included a successful pilot project in Alexandria to
streamline company registration and industrial licensing procedures through an
integrated one-stop shop system.
Minimal capital requirements have been scrapped. A notable reform has been the
scrapping of minimum capital requirements for company registration. To put this move in
perspective: average paid-in minimum capital is 331.4% of GNI per capita in MENA
countries and 19.7% in OECD economies.
Challenges in Better Business Regulation
Despite these reform efforts, a significant number of reforms remain to be completed
to make it easier to do business in Egypt.
Slow approval procedures still dog the business climate. Delays continue to be caused
by slow approval procedures continue to deter the market entry of Egyptian firms by
adding uncertainty and costs to business start-ups and new investments. The World
Bank’s 2008-09 Investment Climate Assessment (ICA) of Egypt indicates that senior
management spend up to 16% of their time dealing with regulations. The private sector
also reports that businesses face difficulties in registering due to uninformed civil servants
who manage the registration process. In general, entrepreneurs are interested in the
performance of the overall process – from the preparation of documentation to the start of
business activity.
Several regulatory obstacles to starting a business remain. Other factors create further
obstacles to starting a business, e.g. poor land provision; lengthy procedures for obtaining
licenses and work, land, and building permits; access to infrastructure, the legal
environment; and corruption. These important issues should be tackled by policy makers
to facilitate operations, as described under several other dimensions of the BCDS.
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Recommendations for Better Business Regulation
The following recommendations are preliminary recommendations on ways in which
future reforms to business regulation policy would improve the business climate. They are
derived from the BCDS assessment process.
Keep reform on track – set targets for simplification and elimination of regulations.
Despite achievements to date, the strategy that will impact most beneficially on the
business community is the Egyptian Regulatory Reform and Development Activity, or
ERRADA (dealt with extensively in Chapter II.3, “Business Law and Commercial Conflict
Resolution”). If fully implemented, it will do more than any other measure to simplify
administrative procedures and ensure the success of the regulatory reform policy.
To stay on track and maintain the momentum of the reform process, Egypt should use
timelines and specific, measurable targets. They should be reasonable so as to assure
quality regulatory management, which will require Egypt to assess its technical capacities.
Political will and support for reforms are needed to co-ordinate reforms with public
administration and the business community. W hi le t h e re f o r m p ro g ra m m e m ay
produce significant economic returns, it also carries potential risks. Results become
tangible over the medium term, as administrative changes require quite significant
implementation times, while changes in the public administration structure often only
materialise if the entire process is completed. At this stage, administrative structures in
Egypt are unable to keep up with the rapid pace of reforms.
In order to achieve successful implementation of the programme, a high level of
political support is necessary. It is also critical to inform and engage with the business
community.
Designing a sustainable institutional framework – institutionalising the general review
unit. As the programme for regulatory reform continues in keeping with strategy, the role
of the General Review Unit (GRU) and its implementing units, the Governmental Ministerial
Units (GMUs), will evolve. This evolution is natural and unfolds as the reform process
becomes more advanced and begins to impact on the legal and regulatory environment.
However, the future role of the GRU should be carefully assessed so as to ensure the longterm sustainability of the ERRADA initiative and the high quality of regulation. The current
plan to permanently integrate GMUs into RIA units is pragmatic: it makes use of existing
resources and ensures that staff are adequately familiar with the administrative and
legislative history of the ministry. However, GMU staff should undergo additional training
to ensure that officials are adequately prepared to conduct impact analyses.
OECD experience demonstrates that in certain types of institutional settings, a
centrally placed oversight body is an important factor in ensuring the success of an
ambitious regulatory reform programme. A centrally placed oversight body would be
particularly beneficial in Egypt where great store is set by administrative hierarchy.
Going forward – implementation of regulatory impact analysis (RIA). Systematic and
consistent cost-benefit analysis should be applied to the drafting of legal instruments to
optimise their efficiency and effectiveness and ensure they meet their intended objectives
at minimum cost and with the fewest unintended negative consequences. This type of
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analysis – regulatory impact analysis (RIA) – greatly improves business-related policy
instruments and spares unnecessary legislation and regulations.
A targeted RIA is a useful way to manage scarce financial and technical resources. One
possibility would be a simplified, lightweight RIA which could be used for the quicker costbenefit analysis of pieces of legislation.
Improve performance – establishing businesses (industrial licenses and registration) and
closing businesses. While administrative barriers have been considerably reduced by
speeding up company registration, obtaining licenses for industrial activities remains a
barrier. By law, all industrial manufacturing projects or related services require the
additional approval of the Industrial Development Authority (IDA) for land assignment,
project establishment, industrial registration, and operating licences. Obtaining the
necessary approvals poses an additional bureaucratic hurdle and is a lengthy and costly
process for businesses. The pilot project launched in Alexandria should be extended to all
GAFI one-stop shops.
The time and costs for closing a business should be reduced by implementing reforms
in the bankruptcy process, such as reducing appeals that suspend the bankruptcy process;
introducing time limits for procedures; and establishing specialised procedures to deal
with bankruptcy. (Chapter II-3, “Business Law” deals extensively with bankruptcy.)
It is vital that the Egyptian government and business associations work together.
Consulting with stakeholders and organising formal, mixed public-private review bodies
would help to identify and address barriers and inefficiencies in the business
establishment process and any remaining regulatory bottlenecks.
Use IT Platforms to improve efficiency – electronic company registration. An electronic
system for company registration would considerably decrease time, costs, and the number
of procedures involved required by company registration. Governments that adopt
information and communication technology (ICT) approaches to the provision of services
reduce their own costs and enable enterprises to reduce the costs of meeting legal
requirements. Moving towards a model of e-government will increase the efficiency of the
public sector. A detailed proposal weighing the costs and benefits of introducing online
registration should be commissioned.
There may be a few factors that constrain the success of such an initiative. They
include broadband penetration, poorly served rural areas, and parallel processes for
company registration (GAFI versus the Social Fund for Development [SFD]). All would
have to be resolved. The take-up of ICT solutions could bring swift progress in speeding
up the company registration procedure if the government is determined to cut through
the web of regulations and procedures, and if it is willing to adopt flexible and innovative
solutions, in addition to being ready to invest in the information technology
infrastructure for company e-registration. The regulation enabling e-signature should
also introduce the launch of e-company registration. However, building the e-signature
capability will require significant investment and should therefore be carefully considered
(see Chapter III-1, “Infrastructure”).
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Figure 4.5. Better Business Regulation: Scores by subdimension
Subdimension 1: Better legislation and admistrative simplification
Institutional framework for regulatory reform
and administrative simplification
Strategy for the simplification of legislation,
and administrative procedures
Clear task assignment for the review and simplification
of legislation and administrative procedures
Review and simplification of current legislation
Elimination of redundant legislation and regulations
Cost-benefit analysis of new enterprise legislation and regulation
0
1
2
3
4
5
Subdimension 2: Cheaper and faster start-up
Number of days to obtain company registration certificate
Number of administrative steps to obtain the company
registration certificate
Official costs to obtain the company registration certificate
Administrative identification numbers
Number of days for compulsory company identification number(s)
Number of days to complete the overall registration process,
including compulsory licences for standard business activities
Number of steps to complete the overall registration process,
including compulsory licenses for standard business activities
Costs connected with registration for limited liability companies
(% of GNI per capita)
Minimum capital requirements for limited liability companies
(% of GNI per capita)
Time required to close a business
Cost required to close a business
“Silence is consent” applied to company registration procedures
One stop shops (regional investment centres, …)
On-line registration
0
1
2
3
4
5
2.6. Dimension 6: SME Policy and Promotion
Micro, small and medium-sized enterprises (MSMEs) account for over 90% of active
enterprises in Egypt and contribute to over 80% of GDP and 75% of total employment.13 Yet
they remain at a clear disadvange vis-à-vis larger businesses. According to a survey
conducted by NILEX (the Egyptian stock exchange for growing medium and small
companies), SMEs account for only 10% of total capital accumulation in Egypt and, while
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75% of SMEs apply for banking loans, 92% of applications are rejected. The result is that
loans to SMEs account for only 6% of the total loan portfolio of Egyptian banks.
Nevertheless, Egypt has a vibrant entreprenurial population with strong potential for
growth. The Global Entrepreneurship Monitor’s 2008 report on Egypt ranked it 11th out of
43 countries for entrepreneurial performance. Of the Egyptian adult population 13.1% were
either actively trying to start a business in 2008, or already owned and managed one that
was less than three years old.14
Achievements in SME Policy and Promotion
Egypt has developed a policy framework to support MSMEs. Egypt has recognised the
importance of a policy framework to support SMEs. Under the terms of a 2004 law on SMEs,
it has developed a structured policy framework for small and micro-enterprises (MSEs). It
is the responsibility of the Social Fund for Development (SFD), the main public player and
policy co-ordinator for the micro and small segment of the SME population. In parallel, the
SFD has developed targeted policy tools to help MSEs establish and grow their businesses.
The SFD provides a range of programmes, including business support services, microfinance activities, and a network of business incubators.
Egypt has made considerable improvements in delivering targeted policy to enhance
SME innovation through dedicated centres and networks – namely, the Egypt Technology
Transfer and Innovation Centres (ETTIC). Egypt also performs well in helping to improve
SME operations through start-up and growth services provided by the Industrial
Modernisation Centre (IMC). The government has successfully transformed the National
Supplier Development Programme (NSDP) from a pilot project to an operational linkage
platform which works actively to connect foreign investment with small firms.
A dedicated SME Unit has been created inside the General Authority for Investment
(GAFI). In early 2010 a new, specialised unit was formed inside GAFI to specifically target
the needs of SMEs. In addition, GAFI is planning to roll out local SME “one-stop shops”
across Egypt, with a unit in each of the 29 governorates. The Canadian International
Development Agency (CIDA) is currently working with GAFI to train local staff in helping
assess the financing needs of SMEs and be able to allocate the right resources to them.
Challenges in SME Policy and Promotion
This BCDS assessment reveals that there are still a number of institutional and policyrelated challenges and gaps that limit the ability of the government to solve co-ordination
issues or address the specific market failings that affect SMEs’ growth and development.
There is a policy gap as regards SMEs with high-growth potential, a sector where
institutions are active but work in isolation from each other and are sometimes
ill-equipped to meet the needs of fast growing SMEs. The insitutional setting of SME
policy is complex, encompassing a range of ministries and specialised agencies.
Ambiguities in the delegation of responsibility and task assignment pose a risk of policy
gaps, overlaps, and the duplication of policy measures. There are five institutions that have
a prominent role in shaping SME policy in Egypt: the SFD, the Ministry of Trade and
Industry, the Ministry of Investment (MOI), the Ministry of Finance (MOF), and the Ministry
of Higher Education and Research. Yet there is no dedicated inter-ministerial committee or
body to co-ordinate policy initiatives in the SME field.
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In practice, there is a significant level of co-operation through a high-level economic
committee, chaired by the Prime Minister, which meets monthly to co-ordinate economic
policies. Participants include line ministries (in charge of policy execution) and include
executive agencies (i.e. SFD, the General Authority for Investment [GAFI], the Industrial
Modernisation Centre [IMC] and the Industrial Development Authority). Although the
economic committee ensures programme co-ordination, there is a policy vacuum as
regards enterprises with medium- and high-growth potential – a critical segment of the
SME population. Several institutions are active in this area (e.g. GAFI, MOTI), but do not
share a common framework, vision or definition of SMEs and high-growth enterprises. SFD
has a mandate to cover micro enterprises.
As a result, the opportunity to develop synergies and complementarities between
different programmes is often missed. The SFD operates with a broad mandate focusing on
poverty reduction and social and regional inequalities. Its approach is not well suited to
addressing the issues of high-growth and medium-sized enterprises which demand access
to credit beyond micro-finance and specific business support services. The Small and
Medium Sized Investments Strategy recently proposed by GAFI is a first positive step
towards addressing this issue. (Dimension I-1, “Investment Policy and Promotion”
discusses GAFI’s investment strategy role at length.)
The high number of informal businesses in the SME sector distorts competition and
inhibits the effectiveness of government policies. A second, more structural, weakness
is related to the high level of informality in the SME sector. According to a recent study,
enterprises that operate informally constitute nearly 82% of total economic units, while
informal employment constitutes nearly 40% of the total.15 Such a high level of informality
distorts competition in the SME sector and greatly reduces the effectiveness of government
policies. So far, the government has not drawn up an action plan to curb SME informality.
The MOF has conducted initial work in this area and is currently working on increasing tax
compliance among SMEs. But the issue of informality goes beyond tax policy and
administration: it requires a concerted effort from different institutions to co-ordinate
their action.
Targeted policy tools appear to favour medium-sized, well established industrial
enterprises over younger, smaller enterprises with high-growth potential operating in
the services. Egypt does not lack tools and programmes to address targeted policy areas.
It has an active, well structured Industrial Modernisation Programme (IMP) which includes
specific measures to foster backward linkages. The Ministry of Trade and Industry also
operates a network of technology transfer centres (ETTICs) to promote technology
absorption and diffusion among small and medium-sized industrial enterprises. The
Ministry of Higher Education and Research has launched a research, development and
innovation programme (RDI) with the support of the European Union (EU). It has many
elements in common with EU innovation policy.
The scope of the Research, Development and Innovation (RDI) programme is still
limited and access requirements for grant applicants are sometimes too restrictive. The
RDI programme seems to favour medium-sized and well-established enterprises over
younger, smaller, enterprises with higher growth potential. Most of the targeted enterprise
support programmes are limited to industrial enterprises and do not embrace the highvalue service sector sufficiently. In general, there is a disconnect between business support
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service activities and access to finance (this is also discussed in the chapter on “Access to
Finance”). Finally, access to services is still concentrated in the Greater Cairo and
Alexandria urban regions.
A lack of co-ordination between institutions results in MSMEs not being the main
beneficiaries of support programmes. The above set of challenges is related in part to
weak institutional linkages between the different programmes targeting SMEs. In other
words, there is little opportunity for maximising synergies and complementarities
between public programmes to generate positive spill-over effects. The risk is that well
established companies that are in the know and already members of an industry network
may benefit from the services provided by the ETTICs, the IMC or the RDI programme.
Furthermore, lack of co-ordination means that there is a disconnect between business and
innovation support policies on one hand and investment localisation on the other.
Technical centres, laboratories, and training facilities can act as catalysts for industry/
sector aggregation and support the establishment of clusters and specialised investment
zones.
Recommendations for SME Policy and Promotion
Taking into consideration existing institutions, targeted SME support programmes,
and the challenges faced by SMEs in Egypt, a number of preliminary recommendations
were formed.
An interministerial committee on SME policy should be created. Provision of unified,
centralised services would be enhanced by an interministerial committee on SME policy
that would report to the Prime Minister’s office. It should bring together key economic
ministries (Finance, Trade and Industry, Investment, Labour) and the SFD. Its job would be
to formulate a coherent policy towards SMEs and review all legislation that affect them. It
would secure the cooperation of other institutions, co-ordinate communication between
them, and monitor how they implement policy. In this way the interministerial committee
could overcome the obstacles caused by the segmentation of SME policy.
The committee would meet only a few times a year, but its permanent secretariat in
Prime Minister’s office would keep operations running between meetings. It would coordinate the flow of information between ministries, conduct technical consultations, and
follow up interministerial meetings.
One of the first tasks of the committee would be to draft a document setting out the
perspectives for SME policy. It would define a coherent common policy framework to
support programmes and horizontal actions across the full spectrum of the SME
population.
Another useful reinforcement to the institutional setting would be an advisory body
with members drawn from ministries and agencies, SME organisations, the Chamber of
Commerce, expert bodies and academia. Such a cross-section would enhance dialogue and
policy making and help to improve the monitoring of policy implementation and its
impacts on SME programmes. This SME advisory committee would supply input to the SME
Interministerial Committee and to individual ministries and government agencies.
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The institutional setting of MSME policy should be reconfigured. A single interministerial
body should oversee and co-ordinate the work of ministries, while a one-stop shop
arrangement for assisting and informing SME should be rolled out across Egypt’s regions
Within the SME institutional and legal framework the SFD has clear responsibility for
drawing up, co-ordinating, and implementing policy directed at small and microenterprises. However, when it comes to medium-sized enterprises and those with highgrowth potential there is a gap. The institutions active in this area do not co-ordinate their
work or share a common strategy or vision. There is a need to reconfigure the institutional
framework for SME policy by harmonising approaches to policy-making and co-ordinating
the work of institutions active in implementing policy.
The key recommendation to emerge from the BCDS process was that institutional coordination and cooperation should be further strengthened in an effort to close the policy
gap and create synergies between programmes. Such a move would not change the
mandates and roles of the institutions and agencies already operating in the SME policy
area. Co-ordination and co-operation could, therefore, be tightened within the current
legislative framework to make operations more efficient, policy planning and formulation
more inclusive, and monitoring more effective.
SME one-stop shops would increase institutional efficiency. They would be SMEs’ sole
ports of call when seeking assistance and information about government support
programmes. Building on the experience of Morocco’s Regional Investment Centres, the
contact points would identify an SME’s needs, direct it to the right institution or
organisation, and help entrepreneurs in completing forms. GAFI is currently establishing a
network of SME centres across the country. They could act as single-window contact
points, storing and channelling information about all the government’s SME programmes.
In addition to this, a single on-line portal should be created. This would offer SMEs a
customised information service. They could browse it for the information they need and
check out links to the websites of other organisations for further information.
The SME sector, dominated by informal businesses, needs to be formalised. As highlighted
throughout this report, most SMEs remain in the informal sector. A task force from the
Ministry of Finance should take a comprehensive, carefully co-ordinated approach towards
the informal sector that combines incentives to encourage formality. The high number of
SMEs that operate informally has major implications for the medium-term growth of this
vital segment of the enterprise population. Informality affects the quality and
sustainability of development, distributes its benefits unequally, and impairs the
effectiveness of every component of government policy towards SMEs (taxation,
regulations, innovation, labour). It is, therefore, vital that the government develop a
comprehensive, co-ordinated strategy for reducing informality among SMEs, looking
beyond non-compliance to a specific set of laws, regulations, and budgetary implications.
A successful approach should build on the rigorously analysed risks and rewards of
informal business operations and aim at modifying the behaviour of economic agents
(enterprises, employees, and customers) through a combination of incentives and
penalties.
The government should designate an institution to lead and co-ordinate government
action. It would be supported by a task force of key players and stakeholders (from key line
ministries, the Office of Statistics, executive agencies, chambers of commerce, employers’
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federations, small business associations, and NGOs). The MOF is well placed to play this
central role, as tax evasion is a key driver of the informal economy and its SME unit has
conducted initial work in this area with the support of a highly representative working
group. One of the task force’s objectives could be to draw up a new definition of “MSME”. It
would have a single meaning that would be accepted across administrations and
programmes and would incorporate the measurement issues related to high levels of
informality.
Going for growth and innovation: the next big step. Egypt should improve its service
provision and financial support to innovative SMEs by establishing linkages, promoting
synergies between different support programmes, and by developing alternative financing,
guarantee schemes, and R&D funds
The Egyptian government is developing a number of measures to promote and
support innovation and upgrade technology in the private enterprise sector. In order to
enhance those programmes it should:
●
Establish a system of communication and co-operation between the institutions and
private sector organisations operating in the area of technological upgrading,
innovation, finance, technical standards, public procurement, and education and
training (see BCDS Dimension III-2, “Human Capital Development”).
OECD experience shows that significant progress is achieved in this area by developing a
continuous, effective dialogue among all the key players. This generates enhanced coordination effects and addresses potential policy inconsistencies. In a number of
countries the task has been the work of a competitiveness council operating under the
authority of a business-related ministry. Such councils have a cross-section of members
from the public and private sectors, including representatives from young, innovative
enterprise networks and civil society (universities, economic and scientific research
bodies).
●
A key element of innovation policy in Egypt should be, rather than supporting advanced
R&D, to enhance SMEs’ technology absorption capacity and to diffuse and adapt existing
technology and innovative management tools. A considerable effort has been put into
developing the ETTIC network and work is currently under way to incorporate it into the
Enterprise Europe Network established by the EU.
It would be useful to conduct an evaluation of the ETTIC network’s impact in order to
learn from the lessons of its more successful sector-specific centres and benchmark
them against international good practice. Another valuable move would be to widen
ETTIC’s scope to high-value service sectors and redefine its role in the national strategy
for innovation, technology upgrading, and investment.
●
A critical element in an effective innovation strategy is the establishment of links
between support services and programmes and access to funding. Recently, there have
been initial positive developments in this area, particularly in relation to the availability
of equity. However, the banking sector’s lending practices remain conservative. As a
result, innovative enterprises with intangible instead of real estate assets in their
balance sheets have limited access to finance (see BCDS Dimension III-3, “Access to
Finance”). It is critical to explore alternative avenues, such as new credit and equity
guarantee facilities for SMEs. (This issue is addressed in a forthcoming OECD publication
on innovation and credit and equity guarantee facilities in the MENA region.)16
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Figure 4.6. SME Policy and Promotion: Scores by subdimension
Subdimension 1: Institutional framework for SME policy
Delegation of responsibility for SME policy
SME development strategies
Clear task assignment to legislation drafting
and implementation
Coordination with other ministries
Public-private consultation
Monitoring and evaluation
0
1
2
3
4
5
4
5
Subdimension 2: Targeted policy tools
Linkages/supplier development programmes
Establishment of innovation and
technology centres and networks
Financial support for innovative SMEs
Business incubators
Business establishment support services
0
1
2
3
2.7. Dimension 7: Anti-Corruption
Government attitudes toward markets and the efficiency of their operations are an
essential component of the business climate. It is a well established fact that corruption
and excessive bureaucracy and red tape – which lead to fraudulence in public contracts,
lack of transparency and trustworthiness, and the political dependence of the judiciary –
place a significant economic burden on businesses and keep countries from achieving their
economic growth and employment potential. The shift of resources from the public purse
to private hands means a loss of funds for much needed public projects such as
infrastructure, education, and other public services. Corruption is a major factor in the
widening of the income equality gap: elites all too often use their access to political power
to manipulate economic decisions which ultimately benefit their own rents.
According to independent observers, Egypt is confronted with both grand and petty
corruption. Corporate surveys testify that corruption is a major obstacle to business
operations and growth in Egypt. International organisations, too, have persistently pointed
to the seriousness of the problem.
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Achievements in Anti-Corruption
Egypt has started to take action to strengthen and empower its institutions in the fight
against corruption. Such efforts are critical as the country seeks to bring the issue of
corruption to the fore and develop effective tools within a strong anti-corruption
framework.
Officialdom acknowledges the urgent need to fight corruption. High-ranking Egyptian
officials have recently acknowledged that the fight against corruption should be a policy
priority. Accordingly, the government has taken steps to improve integrity in public life and
business operations. Cabinet Resolution No. 24 of 1 February 2007 put the fight against
corruption high on the government’s agenda of policy objectives.
Building on a legislative framework which has criminalised bribery and related
corruption offences for decades, Egypt ratified the United Nations Convention against
Corruption (UNCAC) in early 2005. Ratification binds it to implementing a wide range of
legal and institutional anti-corruption provisions.
Egypt has strengthened its institutional anti-corruption arsenal. It was traditionally
the role of a certain number of government bodies and agencies to prevent, detect, and
prosecute corruption. However, to step up the fight and enhance integrity-related action,
additional institutions were created in 2007:
●
The Minister of State for Administrative Development set up the Transparency and
Integrity Committee (TIC) to study and recommend means and mechanisms of
enhancing transparency, accountability, and the fight against corruption at central and
local government levels.
●
The Ministry of Investment established a Transparency Unit. Supported by the UNDP, its
task is to improve the investment climate through legislative amendments that
strengthen freedom of information and transparency, raise public awareness and
stakeholder engagement, and build capacity and knowledge management.
●
The Ministry of Investment put in place a National Contact Point (NCP) after Egypt signed
up to the OECD Declaration on International Investment and Multinational Enterprises.
The NCP’s mandate is to implement the declaration’s Guidelines for Multinational
Enterprises, which contain a chapter on business integrity. The NCP should also assist
businesses in developing strong ethical practices in their dealings with the government,
other firms, and the public.
Key government departments have cut red tape. Government departments, particular
those administering taxation and customs, have undertaken reforms to reduce red tape
and enhance service performance. One key move has been the introduction of one-stop
shops to streamline company registration procedures. Reform has helped curb the
discretionary powers of civil servants, thereby reducing person-to-person contacts with
members of the public and business community. This, in turn, has had a positive impact
on integrity and anti-corruption. (Chapter I.1, “Investment Policy and Promotion”, attached
in the appendix, discusses the one-stop shops put in place by the investment promotion
agency GAFI. Indeed, GAFI and the benefits of its one-stop shop service are considered
throughout that chapter.)
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Egypt has joined in international action to fight corruption. Egypt has been involved in
a number of international initiatives and projects to strengthen integrity and fight
corruption. They include the MENA-OECD Task Force on Anti-Bribery, OECD Good
Governance for Development in Arab Countries Initiative, the Arab Anti-Corruption and
Integrity Network (ACINET), and the UNDP-POGAR project to support the Ministry of
Investment in the fight against corruption. The government’s interest in sharing with and
learning from their peers demonstrates its desire to address the problem of corruption.
Challenges in Anti-Corruption
Whereas the Egyptian government is of the view that its legislative and institutional
framework is adequate for detecting, investigating, and prosecuting corruption offences,
the current BCDS assessment concludes that much more remains to be done, particularly
as regards political will, legal provisions, and institutional arrangements.
No sign of a nationwide strategy to fight corruption. The government has not as yet
developed or agreed to a nationwide anti-corruption strategy which would build on an indepth stocktaking of corruption and set a clear timetable for action.
The Penal Code is ill equipped for the full range of bribery-related offences. The Egyptian
Penal Code fails to take into full account the growth of white-collar crime. Penalties focus
on passive bribery, while the prosecution of active bribery and related corruption offences
is fraught with difficulty. The Penal Code, for example, provides for very long prison terms
and very low fines (between USD 18 and 360). It does not explicitly state that the bribery of
foreigners is an offence and there is no corporate liability. It is also noteworthy that a high
number of government officials enjoy immunity from prosecution.
Anti-corruption provisions are enforced only irregularly. The enforcement of anticorruption provisions is reported to be haphazard. This may be due to an unclear
regulatory environment that is ill-defined in scope, does not deter, and takes second place
to discretionary decisions by the prosecuting authorities. However, although the MENAOECD Investment Programme received insufficient information on co-ordination and
resource allocation, there are grounds for suspecting that the lines of communication and
co-operation between investigation and enforcement units are blurred. It may also be
inferred from informal statements that investigation and enforcement authorities lack
adequate manpower and technical and financial means to discharge their duties
effectively and efficiently.
The authorities have not really sought to raise awareness. The government has made
only limited efforts to raise awareness. Its initiatives have not been widely communicated,
possibly because of restrictions on freedom of information and inadequate transparency
legislation. It is also noteworthy that reforms undertaken to enhance competition in public
procurement procedures are not widely publicised.
The government does not appear to consider the private sector as anti-corruption
partner. The Egyptian government has barely engaged in any dialogue with nongovernment stakeholders. The private sector has so far had little opportunity for regular
exchanges with the public sector on the legislative environment and best practices in
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fighting corruption in business. Egyptian civil society and the media are engaged in anticorruption campaigns, but dialogue with the government is almost non-existent.
Recommendations for Anti-Corruption
A comprehensive national strategy involving all echelons of government. T h e E g y p t i a n
government should consider drawing up and engaging in a comprehensive national
strategy to fight bribery and corruption. The highest echelons of the state should commit
to such a strategy, which federal, regional and local governments would co-ordinate and
implement on the ground. As part of its strategy, the Egyptian government may consider
developing and publicising an action plan that sets out clear milestones to chart progress.
Part of this effort would be to ensure that the ERRADA programme, to cut red tape and
streamline legislation and procedures, is effectively implemented and that it is allowed to
run its full course.
Re-establish a culture of integrity. The Egyptian government should re-establish a
culture of integrity in society at large. It should join forces with the private sector against
corruption. Public awareness of corruption and long-term strategies to educate and inform
people about the importance of integrity should be a shared responsibility between
government and non-governmental actors.
Anti-corruption agencies should be revitalised and empowered. The role and functions
of the different anti-corruption agencies should be streamlined and their lines of
communication and co-operation well defined. Some agencies may lack a sense of duty
and responsibility in the absence of clearly defined remits. In addition, the human,
technical, and financial resources they need to do their job should be determined and
allocated to them.
Identify the areas of public administration most prone to corruption. The government
should seek to identify those areas of the civil service most prone to the risks of corruption.
It should then run an economic simulation to assess the shortfall in the income of each
department of the civil service and the losses for the overall civil service budget. It should
also estimate how much the country at large loses as it fails to attract foreign investment
and misses trade opportunities.
Improve and increase dialogue with business, civil society, and media stakeholders.
The government should deepen and widen dialogue with Egyptian business associations,
civil society, and the media with a view to defining an appropriate, effective anticorruption framework and taking action to prevent and fight corruption.
Review Egypt’s legal framework against international standards. The government is
encouraged to conduct a very detailed review of Egypt’s legal framework, benchmarked
against the most state-of-the-art international anti-corruption standards. Such a review
would certainly help amend legislation and factor into it the most recent developments in
white collar crime. The Egyptian government could, notably, avail itself of the OECD’s
advice to build a functional system of punishments that fit crimes of corruption.
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Determine and implement policies in line with international standards and practices.
Corruption is not a purely domestic problem. It frequently has international links and
ramifications. Egypt’s adherence to the UN Convention against Corruption (UNCAC) and
other agreements, together with its greater participation in meetings on international
integrity and anti-corruption should help the government determine and implement
policies and measures compatible with international standards and practices. The OECD
would encourage the government to develop adequate means of further institutionalising
international legal co-operation. The OECD, together with other international
organisations, would be available to assist the Egyptian government in learning about
international good practices, thereby bringing it into full compliance with the
requirements of UNCAC.
2.8. Dimension 8: Corporate Governance
The concept of corporate governance has been gaining prominence on the agenda of
policy makers in the Middle East and North Africa (MENA) region over the last decade. The
Egyptian regulators are clearly among the regional leaders in recognising the value of good
corporate governance and of promoting the concept within corporate circles. This is
unsurprising given the overall level of development of the Egyptian capital markets vis-àvis the rest of the region and the strong political support given to advancing the corporate
governance agenda in the country. In their effort to improve governance practices in their
country, the Egyptian authorities have been cooperating with the OECD since 2003. This
project further reinforces the longstanding partnership between Egypt and the OECD.
Egypt has also been cooperating with the World Bank and the IFC since 2004.
Achievements in Corporate Governance
Awareness of corporate governance has increased significantly. Reforms and related
initiatives implemented in recent years by the Egyptian government have been effective in
raising awareness of the benefits of good corporate governance. A number of corporate
governance-related initiatives have been implemented. These include establishing the
Egyptian Institute of Directors under the umbrella of the Ministry of Investment, the
introduction of two governance codes (namely the Egyptian Code of Corporate Governance
for Listed Companies in 2005 and Code of Corporate Governance for instate Owned
Enterprises in 2006), both based on the OECD guidelines, the amendments to the
Companies and the Capital Markets Laws and the tightening of the Listing Rules. The
corporate governance framework in Egypt is expected to be significantly improved by the
ongoing revision of the Companies Law and the Egyptian Code of Corporate Governance.
The regulatory framework is much improved. With regard to the institutional landscape,
the creation of single non-bank financial regulator (the Egyptian Financial Supervisory
Authority [EFSA]) and the establishment of a local institution to advance the corporate
governance agenda (the Egyptian Institute of Directors [EIoD]) are important developments.
The EFSA is responsible for investigating instances of shareholder abuse and is seeking to
increase its oversight and enforcement capacities. The EIoD in particular has been very
active in promoting the corporate governance agenda in Egypt, by raising awareness of the
benefits of corporate governance and by providing training to directors.
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Figure 4.7. Anti-Corruption: Scores by subdimension
Subdimension 1: Anti-corruption strategy
Stocktaking of the corruption situation
Existence of an anti-corruption strategy
Stakeholder participation
0
1
2
3
4
5
Subdimension 2: Criminalisation of corruption
International co-operation: Mutual legal assistance, extradition
Sanctions and confiscation
Immunities
Actors involved in bribery
Criminal offences
0
1
2
3
4
5
Subdimension 3: Enforcement of domestic anti-corruption provisions
Control and detection
Reporting
Collection of statistics on corruption offences
Implementation and enforcement of sanctions
1
0
2
3
4
5
Subdimension 4: People and public institutions involved in the fight against corruption
Independence of the judiciary
Accountable, responsible institutions to fight corruption
Inter-agency co-ordination and co-operation
Tax administration
Customs administration
Public procurement
a) Framework and process
b) Reducing corruption risks
Awareness raising and public education
The media: A means to expose malfeasance
1
0
2
3
4
5
Subdimension 5: Private sector actions to stem corruption
Codes of conduct
Compliance programmes
Non-financial reporting
0
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1
2
3
4
5
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Corporate governance regulation has been upgraded. A n ew l eg a l f ra m ewo r k , t h e
Companies Law and its Executive Regulations, is a major step. These address issues such
as
●
Shareholder participation and voting in general and extraordinary shareholder
meetings.
●
Appointing and removing the board.
●
Sharing in the profits of the company, and other important governance issues.
●
Increasing the power of the board of directors. Based on concerns expressed by
shareholders owning at least 5% of a company’s shares, the board may halt the
resolutions of the general assembly deemed to be in favour of a certain category of
shareholders.
●
Protecting the rights of single shareholder to lodge a complaint with the EFSA which it
then has to investigate.
Governance of state-owned enterprises is also gradually being improved. In terms of
the government’s efforts to improve the governance of state-owned enterprises (SOEs),
the Code of Corporate Governance for State-Owned Enterprises, a first of its kind in the
region, is of great importance. In addition, the Public Business Sector Law outlines a
number of provisions regarding the governance of both holding and affiliate companies in
Egypt, including appointing members of boards, disclosure requirements, and
performance monitoring.
Progress in improving governance arrangements in SOEs is particularly evident in
those SOEs which operate under the umbrella of the nine holding companies established
under the Ministry of Investment. However, the governance arrangements of other SOEs
have not been subject to the same standards and may therefore not have improved as
rapidly. That said, competition between state- and privately-owned companies has been
on the rise and lending by banks to other SOEs curbed.
Challenges and recommendations for Corporate Governance
Tackling the high concentration of listed companies would increase policy options.
The ownership landscape in Egypt remains extremely concentrated, even in comparison
with other markets in the region. Free float is estimated at less than 10%, which is below
the free-float estimates of other emerging market countries. The concentrated ownership
landscape renders meaningful minority investor participation difficult.
Further improvement would be welcome within the listed companies sector. That
said, the extremely concentrated ownership landscape limits the available policy options.
Increasing the free float of companies remains a priority, as does minority investor
protection. The development of block holders able and interested in taking an active role in
corporate governance and with the power to challenge, if necessary, the decisions of
controlling owners is essential.
Other measures would strengthen the ex ante protections available to minority
shareholders, such as strengthening the framework around related party transactions,
establishing an investor association, and introducing “majority of minority” approvals for
some transactions. The strength of ex post protections is difficult to evaluate given the
recent introduction of economic courts, but is vital.
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Boards need to be made independent of their controlling shareholders, and annual
reports should contain more information on boards’ operations. A related area concerns
the operation of boards in Egypt and, in particular, their lack of independence from
controlling shareholders. In general, board reports remain relatively uninformative, and
details of boards’ operations are difficult to access, as is indeed the case in other countries.
An in-depth review of the legal framework and its application leads to the conclusion that
boards are dominated by insiders and are not as qualified and objective as may be hoped.
The only committee that listed companies are required to have and whose composition is
stipulated in the listing rules is the audit committee.
Achieving board independence – from the majority owners in private companies, and
from the state in SOEs – remains a challenge. The ability of the board to maintain
independence from management is also uncertain, especially given that the separation of
the Chairman of the Board and CEO posts are not mandatory. In addition, the lack of a
sufficient number of qualified independent directors is also a serious challenge.
Institutional investor participation in governance and their disclosure of voting
practices, even when they are acting in a fiduciary capacity, is insufficient and needs to be
subject to additional requirements.
Duties and rules for board members should be clarified and specified. The duties and
responsibilities of the members of the board are not specified in the Egyptian corporate
governance framework. Rules should tighten the framework on related party transactions
and establishing minority investor associations.
Disclosure rules need to be further strengthened. The disclosure of listed companies
remains unsatisfactory, particularly with regard to non-financial disclosure. Though the
disclosure framework has been reinforced in recent years, its requirements remain
incomplete and its implementation has been lagging, in particular with respect to nonfinancial disclosure (i.e. foreseeable risks, executive remuneration, etc.). The disclosure of
shareholder agreements and information and share classes also needs to improve.
The accounting and auditing professions need improved oversight. A significant related
weakness that has been identified concerns the framework for oversight of the accounting
and auditing profession in Egypt. This is only addressed by the regulators on an ad hoc
basis. The regulation of the accounting profession is currently fragmented and requires
further educational and standard-setting efforts. In 2009, the Capital Markets Authority,
now EFSA, created an Auditors’ Supervisory Board, which is a step in the right direction,
but it is too early as yet to see the results of this.
Ownership and regulatory functions for state-owned holding companies should be
separated further. A number of observations highlighted in this report are applicable to
state-owned enterprises (SOEs), since they comprise a substantial portion of market
capitalisation of the Egyptian Stock Exchange. In addition, some governance challenges are
unique to SOEs. In particular, the report discusses the appointment processes for boards of
“holding” and “affiliate” companies and suggests that authorities should further separate
the ownership and regulatory functions.
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The establishment of an ownership or co-ordination entity which is currently under
way, will go some way to address this issue, but care should be made to ensure this new
entity also improves the ability of the state to fulfil its ownership obligations effectively.
2.9. Dimension 9: Business Law and Commercial Conflict Resolution
In order to remain competitive in the global marketplace, countries also compete
against each other with regard to the attractiveness of their legal systems, and especially
with their business law regimes. Maintaining a sound, clear and transparent legal
framework for the conduct of business activities is thus not only a prerequisite for being
competitive in the international market place, it is also a major challenge for business
climate policy makers.
Successful reform in countries such as Egypt would lead to a lowering of the risk
perceptions of inward investors. The process through which business laws and regulations
are conceptualised, drafted, enacted, and enforced should be transparent and interactive.
The process of reforming existing legislation while also introducing new business law
regimes is complex and requires consensus building. It is an incremental process which
should involve the executive and legislative branches, law reform commissions, nongovernmental organisations, academia, and a broader circle of stakeholders.
With regard to Egypt in particular, business law reformers are confronted with a
combination of modern business law regimes and traditional sources of business law – a
setting typical of the MENA region. This can add complications for policy makers trying
simultaneously to tackle the reform of existing legal regimes and the introduction of new
ones in response to changing market realities.
Although Egypt has recently embarked on a number of revisions of both traditional
and modern business laws, there are a number of areas where legislation is still inadequate
and fails to meet modern business needs. Areas such as land rights, collateral, and
insolvency regimes stand out.
Business law reformers in Egypt are faced with the inherent inter-institutional
complexity of business law reforms and systemic resistance. To overcome these requires
strong political and strategic guidance and inter-institutional co-ordination – both still
underdeveloped.
Furthermore, the best rules will not improve performance if other factors lead to their
being flouted or impede compliance in other ways. The BCDS assessment of the Business
Law regime therefore highlights the fact that the process of business law reform in Egypt
requires that not one, but all issues need to be addressed, either simultaneously, or one
after the other.
Moreover, there are several aspects of business law that in fact are related to other
components of the business climate. Modern company law reforms must encompass the
latest corporate governance standards (Chapter II-2), while collateral law and land rights
reforms are pertinent to better access to Finance (Chapter III-1), and a strategic approach to
business law reform in general benefits from regulatory reform initiatives as discussed in
the chapter on better business regulation (Chapter I-5). Common to all these policy areas is
their strong impact on formality in that clearly drafted, modern business law regimes that
support business needs can strengthen incentives for businesses to register and formalise
their operations.
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Achievements in Business Law and Commercial Conflict Resolution
Political awareness and commitment have grown. Political commitment to business
law reform has become stronger in Egypt. There are ongoing government efforts to
modernise the country’s legal infrastructure and to continue implementing business law
reforms. Promising initiatives, such as ERRADA, are in place.
Recent amendments to business laws have been mainly positive. Egypt has been actively
undertaking reform of its business laws throughout the past decade. The first wave
included laws on capital markets, banking, privatisation, commercial laws, and others that
constitute the cornerstones of a vibrant market economy.
Specifically, a number of fundamental business laws have recently been amended:
●
regarding access to land and property rights, Law 94/2005 asserts the principle of nondiscrimination for foreign-owned companies (though agricultural land is still exempt);
●
regarding collateral law, the New Commercial Code of 1999, the Mortgage Law of 2001,
the Unified Banking Law of 2003 have improved the legal frameworks necessary to
facilitate access to bank finance as well as consolidated and improved supervision of the
banking sector.
In addition, a number of more traditional business laws have been revised:
●
with respect to labour legislation, reforms were introduced in 2003-05, while dispute
settlement was also the subject of recent reform;
●
as for planning permission and construction, Building Law 119/2008 was passed in 2008.
It provides, in a clear and transparent manner, the conditions and procedures for
obtaining building licenses, and determines building requirements in a manner which
should restrict significantly the discretionary powers of government bureaucrats in
issuing such licenses;
●
Environmental Protection Law 1994/2009 brought improvements to the process of
attaining an environmental license by a business operation.
There is increased awareness of the issue of enforcement. There is growing awareness
of the need to increase enforcement capacities by continuously training judges and
improving court clearance rates. Specialised economic courts have been introduced to deal
with more complex commercial law cases often requiring knowledge of international
private law and foreign legal systems.
Challenges in Business Law and Commercial Conflict Resolution
The BCDS assessment of business law regimes in Egypt has identified a number of key
challenges. Most apply to emerging markets at a similar stage to Egypt in the development
of their economic law environment. However, Egypt has a strong legacy of state
domination, which has concomitant effects on public administration and private sector
regulation. This makes it particularly resistant to modernising and reforming business law
regimes, often considered as driven by a “capitalist” or free market approach. With this in
mind, a number of key challenges have been highlighted in the assessment.
Comprehensive strategy and centralised reform supervision are key conditions for a
coherent business law reform. The absence of a comprehensive business law reform
strategy backed by a powerful central law commission, or a similar reform supervisory
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institution, is a major challenge to business law reform in Egypt. Given the strong need to
co-ordinate the line ministries involved in business law reforms and to involve Parliament
from an early stage, the absence of a comprehensive business law reform strategy and
central co-ordination unit constitutes a major shortcoming.
Collateral law needs to address modern business needs. As highlighted in Chapter III.3,
“Access to Finance”, an efficient collateral law regime has a strong impact on access to
credit for investors in Egypt. The issue is related to the soundness of movable and
immovable property laws, available titling procedures, and the land register. Reforms in
this area can have a tremendously important impact on the loan market and on
investment decisions in Egypt. Egypt’s principal challenges are the lack of a unified law on
secured transactions able to offer collateral protection in line with the requirements of a
modern business community.
Land laws and land titling act as basis for investor security. Land rights provisions are
scattered across the body of law and the public land management still awaits
improvements. Land titling requires not only technical procedures to be in place, but costs
to be reasonable and its benefits communicated to the public in a convincing way. Even if
only partially correct, estimates that suggest a mere 2% of eligible properties are registered
(i.e. titled) put the spotlight on the huge challenges for the business climate that stem from
unclear land ownership rights and missed opportunities for using land as collateral for
finance.
Modernisation of insolvency law needs to take priority. The recently enacted insolvency
law reforms some core principles and concepts in a system that had prevailed for over a
century. Although the law has brought welcome changes, they have fallen short of
overhauling the entire system and complaints from the business community continue.
The non-enforcement of business law regimes remains a major obstacle. The general
lack of any administrative and judicial enforcement capacity remains a deep-seated obstacle
to doing business in Egypt. Contract law, property rights (including intellectual property rights),
and competition law all need viable enforcement mechanisms if they are not to be just laws in
the statutes books. Egypt is notorious for the inefficiency and complexity of its commercial
court system – the single biggest grievance of foreign and local investors alike. While there
have been positive developments, e.g. the introduction of the new economic courts, further
efforts to strengthen law enforcement must be undertaken.
Strengthening the court system and developing alternative dispute resolution
techniques have been mentioned as priorities for reform. This is confirmed by the
interviews the OECD-MENA conducted for the purpose of this BCDS assessment. Most
interviews said that modern legal frameworks exist but that the critical issue is the
institutional incapacity to enforce the law. Other interviews argued that Egypt’s main
challenge is the legal training of judges, practitioners, and lawyers, who need to be
educated in modern business requirements for flexibility and mobility.
Recommendations for Business Law and Commercial Conflict Resolution
To meet the challenges outlined above, the government of Egypt and experts involved
in business law reform should take a number of measures, all of which should be backed
by strong political commitment and adequate resources.
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The formulation of a comprehensive strategy and centralised reform supervision. A general
strategy driven by a centralised institution would enable reformers to tackle different
business law reforms at the same time, while ensuring that ministries and agencies
acknowledge the interrelatedness of law reforms. Such a strategy should not be restricted
to collecting and reviewing legislation. It should also test how useful existing business law
is to the needs of modern business operations.
Key requirements in the strategy would be:
●
High-level political commitment and leadership.
●
Constant, formalised input from business representatives.
●
A programme to improve the legal expertise of all players involved in reform. This would
require close co-operation with law faculties, lawyers’ organisations, judges, and other
professionals operating in the judicial system.
●
A central law commission that is accountable to the public and other stakeholders and
reports directly to senior echelons of government. The commission would be invested
with sufficient authority to review, suggest, and follow up the implementation of its
recommendations. It should co-ordinate its work with all relevant ministries (Ministry of
Justice, Ministry of Legal and Parliamentary Affairs, and other ministries and ministerial
bodies whose work relates to business).
Improving collateral law. Egypt should consider introducing a unified law governing
secured transactions and the use of collateral in business transactions. The framework
should be clear, simple, and rapidly enforceable. The law should seek to achieve a balance
that takes into account the interests of debtors, creditors, and third parties.
Three issues should be addressed prior to the introduction a unified collateral law:
1. the kind of lending activity that the law should cover;
2. whether the law should cover all forms of property, including land, or should be
restricted to personal property;
3. whether the law should apply to any transaction that serves as security (including credit
and the seller’s security) or whether it should be limited to securities that secure the
payment of debts.
A single, unified law on secured transactions. To ensure legal simplicity and practical
clarity, Egypt should consider issuing a unified law on secured transaction and the taking
of collaterals in business transactions. As stated by both the UNCITRAL Legislative Guide
and the EBRD Model Law, the framework should be both simple and clear and capable of
speedy enforcement. The law should aim at providing a balanced regulation that takes into
account the interests of debtors, creditors, and third parties. Egypt should approach the
reform process pragmatically by trying to find a balance between the needs of the parties
without adhering to any theoretical, historical, or ideological guidelines.
The greatest need is for the introduction of non-possessory charges over movables,
which would facilitate the provision of credit. A high degree of formality hinders the
granting of security. Policy makers should opt for minimal formal requirements. Given the
importance of registration, and considering that the success of non-possessory charges
rests upon an efficient registration system, it is imperative that an efficient registration
system should be instituted. Access to the registry should be unrestricted. Nobody should
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be required to prove their relationship to a borrower or obtain permission in order to search
public records for information on the borrower.
Other suggestions include the introduction of a single and unitary form of security.
Having a simple structure is needed for both legal simplicity and practical clarity. In this
regard, all pre-existing forms of security should be abolished.
Clarifying and simplifying land laws and land titling. In the interests of clarity, all the
currently scattered provisions governing land rights and land categories should be merged into
a single piece of legislation which clearly sets out all existing rules. It would inform
stakeholders as to their rights and permissible and non-permissible transactions.
The real challenge facing Egypt is to implement modernised cadastre system and use it to
bring all new urban and existing urban areas, rural zones, and informal settlements into the
ambit of the law. It would be a cultural revolution as well as an exercise in legal reform, which
would require:
●
A comprehensive awareness campaign to inform the general public of the benefits of
registering property.
●
A campaign to inform people of the challenges of the exercise and explain how the
government would deal with competing claims on a single property in the light of the
current ambiguity of the system.
●
Formalising the property registration system and applying it throughout the country. This is
an absolute necessity if a well functioning, formal market economy is to be created.
Formulating and passing a new insolvency law. A new insolvency law would be the single
most useful piece of legislation for rapidly improving the business climate and ensuring easy,
speedy access to finance.
Egypt needs to introduce a unified law on secured transaction. The objectives of the law
could be achieved by a variety of legal techniques. Rules on liquidation should:
●
prevent debtors from fraudulently concealing or transferring their assets to the detriment of
the creditors;
●
provide equality between creditors by preventing preferential payments to any of them;
●
sell the bankrupt’s assets expeditiously and at a fair price.
Procedures should be simple and designed to avoid delays. The person in charge of the
liquidation procedures should be adequately compensated. The law might consider setting
maximum time limits for the length of the different procedural steps involved in the process.
A new law should be passed to acknowledge the concept of reorganisation. Reorganisation
(as opposed to liquidation) is a system of legal rehabilitation that protects the interests of
investors, safeguard the interests of employees, and protect enterprises of national
importance. Reorganisation may, in fact, be more financially rewarding for the parties involved
than liquidation. Such benefits, including the possibility of maintaining employment, have
made corporate rescue procedures a common feature of modern insolvency legislation.
The legislator could also consider the introduction of the concept of private agreement
concluded between the debtor and main creditors and sanctioned by the courts. Finally,
improvement of the infrastructure governing bankruptcy is an absolute must for a
smoothly operating legal framework.
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Figure 4.8. Business Law and Commercial Conflict Resolution:
Scores by subdimension
Subdimension 1: Business law reform
Strategy of business law and enforcement reform
Central law commission
0
1
2
3
4
5
Subdimension 2: Fundamental business law
Contract law
Personal property rights
Land rights
Land titling system
Intellectual property rights
Company law
Collateral law
Insolvency law
0
1
2
3
4
5
Subdimension 3: Traditional business law
Labour law
Tax law
Environmental law
Planning and construction law
0
1
2
3
4
5
Subdimension 4: New generation business law
Market contestability- anti-competitive behaviour
Market contestability- abuse of dominant position
Leasing and factoring laws
0
1
2
3
4
5
Subdimension 5: Enforcement capacities/Arbitration system
Economic courts
Arbitration
0
1
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2
3
4
5
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Continuing to improve enforcement. Whilst the new special economic courts are a
welcome development, it remains to be seen whether, in practice, they will deliver the
expected results. At the moment, a major problem remains selecting and training
commercial court judges and digitising the Egyptian court system in order to reduce
administrative obstacles and simplify procedures.
2.10. Dimension 10: Infrastructure
A robust body of international evidence demonstrates that achieving rapid economic
growth requires sustained investment in infrastructure. Countries wanting to evolve from
factor-driven development (which seeks cheap natural resources and labour) to the next
stage of investment-driven development (based on massive investment) must create
conditions that optimise investment productivity in order to attract capital. Infrastructure
is a major driver of such efficiency: an export-oriented industry needs high-performance
rail and maritime transport links, tourism needs efficient air travel, and all economic
activity needs high-quality power transmission and distribution and telecommunications.
Egypt is in transition between factor-driven and investment-driven development. It is
developing a diversified economy that encompasses a strong energy exporting sector,
heavy industry, tourism, and services (especially offshore services) – which makes the
infrastructure issue particularly important.
The government of Egypt is aware of the critical importance of infrastructure, as
exemplified by the EGP 15 billion (USD 2.7 billion) stimulus package it announced in
November 2008 in response to the global economic and financial crisis.17 It then doubled that
amount to EGP 30 billion (USD 5.4 billion), earmarking half of it for infrastructure. In addition,
the government is actively seeking public-private partnership (PPP) schemes to help increase
its total investment in infrastructure. (For a more detailed discussion of Egypt’s PPP policy, refer
to Chapter I-2, “Privatisation Policy and Public-Private Partnerships”.)
Within the BCDS framework, infrastructure has been defined to encompass
telecommunications, transport (road, rail, air and sea), electricity, wastewater treatment
and sanitation. Before assessing each sector separately, it might be useful to consider some
of achievements, challenges, and recommendations that are valid for most or all sectors of
infrastructure.
General infrastructure achievements
Widely available provision. Egypt provides more basic infrastructure than many
comparable countries. Fixed telephone line density is higher than in most North African
countries, rural road accessibility is also much higher than average, and the 40% modal
split of passenger rail travel is higher than in most OECD countries. Electricity and water
are also very widely available, covering respectively 99% and 98% of the population.
Competitive cost. Not only is the infrastructure available, but it is cheap. International
benchmarks on domestic telecommunications prices, road tolls, railway tickets, shipping,
electricity and water prices invariably show Egyptian prices to be much lower (often by a
factor of two, three, or more) than regional averages.
General infrastructure challenges
Alarming state of disrepair leads to safety problems. Much of Egypt’s infrastructure
suffers from chronic underinvestment, due primarily to socially motivated pricing which
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does not offer a sustainable financial basis for correct maintenance and precludes new
investment. The consequences can sometimes be dramatic.
Inadequately maintained, underinvested water systems lead to poor quality drinking
water that causes infant mortality through diarrhoea. Antiquated railway signalling
systems and substandard rolling stock have been blamed for railway accidents, insufficient
power plant capacity causes rolling blackouts, and the lack of homogeneity between
telecommunications networks slows Internet download speeds. Even though budgets have
been increased and restructuring projects aimed at improving safety and professionalising
management are ongoing, Egypt still has a lot of ground to make up.
Reforms remain unfinished and regulatory agencies lack independence. R e f o r m o f
infrastructure sectors has been only partial and has not made regulatory agencies truly
independent. While reform is most advanced in the telecommunications sector, the
Ministry of Communications and Information Technology (MCIT) still has a stake in the
governance of the National Telecommunications Regulatory Authority (NTRA). In other
sectors, the government’s presence is even more strongly felt. It intervenes as policy
maker, regulator, and shareholder in operating companies across the infrastructure
spectrum from ports to water and sanitation, electricity, and roads.
Private sector participation is restricted to new builds and build-own-operate-transfer
schemes (BOOTs). Private investor participation is limited mostly to new build projects,
as there is a perception that it leads to higher prices for the consumer. In the rail sector,
private companies may only build new track and operate trains on it solely under BOOT
schemes. The same restriction applies to electricity distribution and may soon be extended
to optical fibre networks and satellite systems for rural connectivity. Private sector
participation has yielded success in mobile telephony, where everything had to be built
from scratch.
With the exception of its port sector, Egypt has little experience of outsourcing
management contracts or operating concessions to private businesses.
The economic benefits of competition and private sector participation thus benefit
only new builds, creating a divide between new housing, with its modern electric and
telecommunications infrastructure, and the existing installed base which continues to
suffer from underinvestment.
New connection times are excessively slow. In Egypt it takes two or three times longer
than the MENA regional average to connect new users to the power grid, telephone land
lines, and water system.18 This seriously inhibits greenfield investment.
General infrastructure recommendations
Adjust pricing to market levels. Egypt should consider adjusting all infrastructure user
fees to market levels, while distributing cash subsidies to the poor so as to offset any hike
in prices. OECD best practice views infrastructure subsidies as inefficient, since they
mostly end up subsidising the rich and encouraging overconsumption of artificially cheap
goods, commodities, and services.
Expand the scope of private sector participation. Private sector participation should be
envisaged in forms other than BOOT deals. Management contracts or operating and
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maintenance concessions can bring beneficial private sector know-how to fixed line
telephony, power distribution, water and sanitation, the operation of railways, etc. For
example, some Moroccan cities have seen improvements in the quality of their utilities
since they began outsourcing electricity distribution, water, sewage, and garbage collection
to private operators.
Continue restructuring towards a three-tier governance structure and enforce independent
regulation. Reforms should be continued to ensure full unbundling of the three tiers of
governance: policy making at ministry level; an independent regulatory agency; and a
corporatised operating company, possibly with private participation and contracts open to
competitive bidding.
Telecommunications
Telecommunications has been reforming faster than other infrastructure sectors and
generally performing on a par with its peers.
Telecommunications achievements
Reforms and investment bring good quality service at low prices nationally. Land line
penetration (15 lines per 100 inhabitants) is in line with the MENA average and one of the
highest in North Africa. Telecom Egypt has introduced digital switching, which has brought
excellent reliability (0.1 faults per 100 lines). Similarly, domestic mobile telephony shows
mostly good quality at competitive rates. The mobile telephony market has been
liberalised and is open to foreign investors (Vodafone, Mobinil and Etisalat.)
Internet usage is rising – in 2007 it had reached 14%, close to the MENA average of 17%.
This trend was a result of the excellent progress in PC penetration, which climbed from one
to five PCs per 100 inhabitants between 2000 and 2007,19 bringing Egypt almost up to the
MENA average of six. Fixed and mobile telephone and Internet access prices in Egypt are
among the lowest in the region – two or three times below the regional average.
Telecommunications challenges
Telecom Egypt’s land line monopoly keeps international call costs high and landline waiting
times long. A second fixed line telephone licence was to be awarded in 2008, but has
been delayed. International phone calls are not competitive – a call to Europe costs
EUR 0.30 per minute in 2010. Businesses have access to VoIP only over virtual private
networks or at night time. Only BPO businesses enjoy VoIP access round the clock.
According to the 2008 World Bank Enterprise Survey, the waiting time between applying for a
land line and being connected is unacceptably high (85 days against the 28-day MENA
average). Telecom Egypt claims the waiting time is five days.
Egypt lags behind its peers in its roll-out of broadband Internet for network- and
content-related reasons. Broadband penetration was 1.36% in January 2010, lagging
behind the average for lower middle income countries which was estimated at 2.2%
in 2007. With only 20% of SMEs reportedly using the Internet in 2008, Egypt is also below
the regional average for Internet take-up by businesses. Download quality is variable
because of the domestic infrastructure’s lack of homogeneity. Nationally provided Internet
content is scarce and e-commerce is still in its infancy.
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The regulator has not gained independence from the ministry. The MCIT continues to
exert control over the telecom regulator NTRA. Even though its board represents all
stakeholders, it is still not free of government influence. International best practice
suggests that this may lead to conflicts of interest.
Telecommunications recommendations
End Telecom Egypt monopoly on land lines. The government should award additional
licenses and ensure carefully regulated third-party access. It should also consider fully
liberalising VoIP in order to improve the competitiveness of international phone calls.
Shorten new line connection times. If the waiting time of 85 days advanced by the World
Bank Enterprise Survey20 for new landline connections is confirmed, Egypt must takes steps
to streamline the connection procedure and bring it into line with good practice.
Enforce full independence of regulator in order to minimise conflict of interest issues.
International best practice suggests that the NTRA has to become fully independent from
the MCIT in order to guarantee the fair trading conditions in which competition may
flourish. Although the NTRA’s Board of Directors represents all stakeholders, the lingering
influence of the MCIT may cause conflicts of interest.
Speed up broadband Internet uptake. Telecom Egypt should continue to improve its
business operations by investing in network upgrades. Measures should be introduced to
boost PC penetration in small and medium-sized businesses (e.g. by introducing tax breaks
on PC purchases and training). State-owned enterprises should be encouraged to develop
e-commerce sites, while policies should be designed to attract private companies into
e-content creation and distribution.
Transport
With the exception of airport infrastructure, upgraded to support the development of
tourism, transport infrastructure has traditionally suffered from lack of maintenance and
investment. In recent years, the situation has deteriorated to the point where safety is
threatened, as evidenced by tragic rail and ferry accidents. Since 2007, however, increased
funding has been allocated to roads and railways, and PPPs have been used to finance the
development of port infrastructure. The 2009 economic stimulus package further
increased that spending, putting transport infrastructure catch-up high on the political
agenda.
Achievements in transport
A liberalised, well-functioning air transport sector. Airport infrastructure is regularly
upgraded and offers state-of-the-art air travel facilities. Cairo International is becoming a
regional hub directly linked to 91 domestic and international destinations served by
65 airlines. Egypt is a signatory to the Open Skies Agreement, which considerably
liberalised international air travel. Air freight rates, too, are competitive.
Dense networks and low costs in road and rail. Egypt’s road and rail networks are
relatively dense: its rural accessibility index in 1999 was 77%, higher than the 59% MENA
average. The rail network also serves most large urban areas and is dense with respect to
the populated area of Egypt. Road tolls and railway fares are very low compared to the
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MENA region and other countries. Egypt’s 40% modal share of railway passenger transport
is among the highest in the world.
High levels of current investment. Investment in roads is currently at an adequate level,
representing 0.7% of GDP. The figure is higher than in some comparable countries
(e.g. Belarus, Ecuador and Ukraine which range from 0.16% to 0.5%), but lower than in
Morocco with 1.24%. Railways have seen investment in signalling systems and rolling
stock.
A decentralised, partially reformed road and highway sector and railway reform in
progress. Road authorities have been decentralised, while public-private consultations
ahead of reforms are organised from the bottom up. A highway agency (GARBLT) is
responsible for supervising all planning, construction, operating, maintenance, and safety
works for main roads and bridges all over the Egyptian intercity network. Railway reform
has been undertaken, with internal restructuring of Egyptian National Railways (ENR)
preparing the ground for future corporatisation.
Port infrastructure is competitive and the private sector is driving investment in new
capacity. Egypt practices highly competitive rates in Mediterranean container traffic:
in 2004 the Port of Alexandria charged USD 67 per TEU compared to USD 212 at Tunis,
Istanbul’s USD 340 and Casablanca’s USD 370. Efforts have been made to simplify port
procedures and paperwork and one-stop shops have been introduced. Egypt has been
successful in attracting private investment in new port terminals through PPP schemes.
The country’s ports have already drawn USD 4 bn of investment and a figure of USD 9 bn is
expected by 2012. There has been partial unbundling of regulatory and operating activities,
with some port services being opened up to the private sector.
Challenges in transport
Safety is a major concern in road, rail and maritime transport. Egyptian roads are very
dangerous: 156 fatalities per 100 000 vehicles, compared to the OECD average of 15 per
100 000 vehicles. This poor record is due primarily to the non-enforcement of existing road
safety regulations. The rail network also has safety problems, as evidenced by major
accidents in 2002, 2006 and 2009, in spite of ongoing investment in rail signalling and a
twinning project with French railways to improve safety. Ferry accidents also occur all too
often, the latest being in December 2009 on the River Nile.
The infrastructure is in disrepair due to inadequate financing. Road maintenance has
long been neglected. It used to have a budget of only 0.05% of GDP (now increased to 0.15%),
compared to 0.24% in Morocco, Ecuador’s 0.23%, and 0.45% for Ukraine. In addition, the
highway authority (GARBLT) monitors the quality of maintenance work inadequately,
according to industry experts.
The railway network tracks are in a poor state of repair, and rolling stock has only been
partly upgraded. Even after recent increases, investment levels in the rail network remain
modest: EUR 350 million per year in contrast to Morocco which spends EUR 400 million per
annum on its conventional rail network and another EUR 400 million annually on its highspeed train system.
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Congestion is an increasing problem due to the lack of an intermodal transport
scheme. Congestion is an increasing problem, especially in Greater Cairo where
commutes of 60 to 90 minutes force companies to allow work from home. The situation is
bound to worsen with increasing car ownership in a country where the population density
of the most heavily inhabited areas is 1 500 inhabitants/km2. Even though Cairo boasts the
continent’s only metro, public transport is not sufficiently co-ordinated and comfortable to
be attractive. For freight, there is not yet an integrated scheme that would encourage
intermodal rail-road-river transport. Roads account for 97% of freight traffic, while rail
carries just 3% and barge traffic on the River Nile is yet to emerge after years of dredging.
Regulatory reform is still at an early stage. Although there are port and highway
regulatory agencies in place, they are not independent. The blurring of lines between the
government’s roles as policy maker, regulator, and shareholder in operating companies is
not conducive to good governance or to the private sector participation which would drive
efficiency. For example, GARBLT is both the highway regulator and the holding company of
the four largest road and bridge construction companies. Similarly, the state acts
simultaneously as landlord, regulator, and operator in most ports.
Recommendations for transportation
Safety first. The Ministries of Transport and the Interior must take co-ordinated action to
enforce current road safety legislation and possibly pass new laws to improve road safety.
In the railway sector, a twinning programme with the SNCF (French rail company) to
improve safety is in progress. However, in the wake of the Al Ayyat accident in 2009, the
programme needs to be audited and reinforced.
Plan multimodal transport for passengers and freight. The mobility study performed by
the Japan International Cooperation Agency (JICA) on traffic flows in Greater Cairo in 2003
should be updated to reflect changes in mobility patterns since then. The Public Transport
Authority should build its modelling know-how in order to continuously adapt public
transport to evolving needs.
The MENA-OECD Investment Programme believes that similar reforms should
eventually be envisaged in Alexandria and other large cities and that a national mobility
plan could be implemented in the Nile Valley to enable seamless multimodal public
transport travel between and within cities.
Implement the national logistics and supply chain strategy, which involves building
road-rail-river transhipment terminals, as well as encouraging the emergence of integrated
point-to-point logistics providers. Examples to be borne in mind are those of the German
and French national railways. They have acquired large trucking companies in order to
provide seamless door-to-door logistics service.
Continue reforms. A project is currently under way to reform highway institutions. Egypt
should separate the regulatory and operational activities of the highway authority GARBLT.
It should enjoy full independence and focus on building its skills. The railway reform effort
should continue so as to introduce competition among train operators, which, according to
OECD best practice, brings large gains in costs and quality, even on loss-making public
service routes.
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Egypt should also leverage private investment through PPPs. Novel financing
schemes – including operating subsidies – may be needed for roads and highways with low
intrinsic profitability. In air travel it is important to lift such remaining barriers to free
competition as restrictions on low-cost and charter airlines and on domestic traffic.
Create a sustainable financing scheme for transport infrastructure. Infrastructure needs
sustainable financing, whether from user charges or subsidies, or from a combination of
both. Debt financing is not a solution unless the source of debt repayment has been
identified and secured. Financing must be in line with international benchmarks,
otherwise the required level of maintenance and investment cannot be secured.
Introducing private sector participation in non-profitable sectors such as regional rail or
less-travelled highways can help reduce the total cost to the taxpayer, but needs a clear
framework for the allocation of an operational subsidy to the operator.
Electricity
Achievements in electricity
Very good overall electrification at very competitive prices. Egypt has one of the highest
electrification ratios in the region: 99% of the population has access to electricity. Egyptian
electricity rates for industrial usage are in the range of EUR 0.02-0.04/kWh while most
emerging countries’ rates are between EUR 0.06 and EUR 0.18/kWh.
Ambitious renewable energy strategy. A renewable energy strategy exists alongside the
ambitious goal of producing 20% of power needs from renewables by 2020, paralleling
European Union efforts in that direction. An agency for renewable energy is fully
operational – the New and Renewable Energy Authority (NREA).
Unbundling of electricity sector achieved. The incumbent operator has been restructured
into separate subsidiaries with responsibilities for production, transmission and
distribution. The private sector participates, albeit only in the form of BOOT contracts with
take-or-pay commitments.
Challenges in electricity
Very long lead times for new electricity connections. It can take new customers up to
143 days to be connected to the power grid in Egypt. This is in sharp contrast to an average
waiting time of 55 days in the MENA region.
Frequent brownouts due to insufficient reserve capacity. Ve r y d y n a m i c e c o n o m i c
growth in 2004-08 brought an acceleration of electricity demand, which grew at up to 12%21
in some years, although it has now levelled out at an annual rate of 6.5%. The result has
been a shortage of reserve capacity (now only 2% instead of the required 20%) and the
practice of rolling blackouts for residential customers.
Very low electricity pricing reduce incentives for energy efficiency initiatives. E g y p t ’s
low energy prices, combined with low income levels, do not encourage renewable energy
schemes or energy efficiency initiatives. Furthermore, they continue to encourage
investment in highly energy-intensive industries such as steel and cement.
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Reform has been stalled for a decade. The Egyptian electricity sector has been through
many transformations. The latest was in 2000 when the EEHC holding company was
formed, with separate subsidiaries for the production, transmission and distribution of
electricity. The privatisation of these subsidiaries was originally planned, but never
implemented, and the ministry still has a decisive role in operating decisions. A new
electricity law has been drafted, but not yet passed. In the meantime, no wholesale
electricity market exists and private sector participation is limited to BOOT schemes with
take-or-pay commitments.
Recommendations for electricity
Implement the electricity reform and push for independent management of operating
companies. The new electricity bill must become law very quickly and the right
conditions for its full deployment must be put in place. The minimum requirements are
that regulated power prices for large customers should be adjusted to a full cost basis and
that the complete independence of the transmission system operator (TSO) should be
ensured. In addition, the governance of the EEHC should be freed from all political
influence by putting in place professional management with an explicit mandate.
Create conditions for the implementation of renewables and energy efficiency targets.
Establish the NREA and implement feed-in tariffs in order to incentivise private sector
investment in renewable energies.
Revise prices upwards to reflect full market rates (which includes adjusting gas prices
to international levels). The poor could be given cash subsidies to offset energy price rises.
Another possible measure would be to introduce a white certificate trading scheme to
encourage the reduction of energy consumption.
Accelerate the new connection process. Streamline the connection procedure to reduce
the unacceptably long waiting times between applying for a new connection and
obtaining it.
Water and sanitation findings
Achievements in water and sanitation
Freshwater connections widely available with good reliability and at very low prices.
Ninety-eight per cent of the population has access to an improved water source. The water
supply is reliable – four days of insufficient supply per month vs. the MENA average
of 7.2 days. International comparison reveals that, at EGP 0.30 (EUR 0.04) per cubic metre
in 2008, drinkable water for domestic use is priced very low. However, such pricing covers
less than 35% of the actual cost.
Water sector reform in progress. The water sector has been partially unbundled. The
Egyptian Water Regulatory Agency (EWRA) has been established, while a holding company,
EWRA, operates and maintains 70% of Egypt’s water supply facilities.
Opening up to private sector participation. Egypt is starting to introduce private sector
participation. Contracts to build new facilities are being tendered as PPPs. The first one was
signed in mid-2009, while two more are scheduled for the end of 2009, and a further two
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will be announced in 2010. In addition, the ministry plans to award concessions and
management contracts for existing installations.
Challenges in water and sanitation
Drinking water quality is a serious challenge, due to a lack of sustainable financing and
skills. The sanitary quality of water is a serious challenge in both rural and urban areas
of Egypt, according to independent sources. The notable exception is Cairo, which has
adopted international quality standards. Water-borne diarrhoea causes 17 000 infant
deaths every year. One main cause is that very low pricing precludes adequate financing
for investment. The result is inefficient water treatment plants and ageing mains. Another
problem is the lack of technical skills required for operating and maintaining water
treatment plants, and for adapting them to the different types of pollution encountered.
Scarce overall water supply. The River Nile accounts for 95% of all Egypt’s water supply.
Global warming could affect the river’s future flow, so aggravating water scarcity. At the
same time, ever greater volumes of water are needed for large desert irrigation projects in
order to meet the objectives of expanding inhabitable land.
Underdeveloped sanitation. Sanitation is poor: only 70% of the total population and 58%
of the rural population have access to sanitation. Over 23 million people had no access to
improved sanitation in 2005.
Long lead times for new water connection. Obtaining a new water connection in Egypt
takes 117 days, which is double the MENA average of 56 days.
Water sector reform not yet finalised. The water agency, EWRA, still depends directly on
the Ministry of Housing. No solution to financing the upgrade and upkeep of water
infrastructure has been found. A policy document is being drafted and should be published
by mid-2010. It will define how the water sector should be financed and will give greater
importance to private sector participation.
Recommendations for water and sanitation
Public health first. Egypt needs to intensify its efforts to upgrade water supply
installations and human capacity in order to improve drinking water quality. The results of
water quality monitoring should be made public.
Pursue water reform and continue encouraging private sector participation. N ew p o l i c y
must bring sustainable solutions to the problem of adequate funding for water
infrastructure and the regulator, EWRA, must enjoy complete independence.
The Egyptian water and sanitation sector needs private sector know-how in order to
improve its skills level comprehensively. The government should thus continue
encouraging private sector participation through PPP schemes, concessions, and
management contracts.
Reconsider overall priorities of water usage with regards to available sources. R ev i ew
irrigation plans with respect to overall water resources. Evaluate all resources and needs,
then draw up scenarios for long-term uses in order to design policies for water resource
management and irrigation projects that meet the resources and needs identified.
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Figure 4.9. Infrastructure: Scores by subdimension
Subdimension 1: Telecommunications
Landline voice performance
Landline regulatory framework
Mobile voice performance
Mobile regulatory framework
Internet performance
0
1
2
3
4
5
4
5
4
5
4
5
Subdimension 2: Transport
Road network performance
Road network regulatory framework
Rail network performance
Rail network regulatory framework
Air transport performance
Air transport regulatory framework
Maritime transport performance
Maritime transport regulatory framework
0
1
2
3
Subdimension 3: Power
Electricity network performance
Electricity regulatory framework
Energy and the environment
0
1
2
3
Subdimension 4: Water and sanitation
Water and sanitation performance
Water and sanitation regulatory framework
0
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2.11. Dimension 11: Human Capital
A country’s human capital is a key component of its business climate. It affects it in
two ways: directly, through its function as a factor of production and, indirectly, through
the influence it exercises over all other spheres of business activity.
Improving human capital in Egypt is a vital element for the overall improvement of the
business climate. The analysis covers three sequential, interdependent levels: the initial
“production” of human capital (schooling, education), how it is then used and/or exploited,
and how it is maintained. The first level involves the initial educational and training
system. The second level considers the different ways of mobilising human capital in the
labour market. The third looks at continuing education and training that allows individuals
to strengthen and enrich their investment in their own human capital. The assessment
covers five main areas:
1. workforce skills development strategy;
2. inputs to initial education;
3. vocational education and training;
4. continuing education and training; and
5. human capital outcomes.
Egypt is characterised by the large size of its population, especially the under-25s, and
its density distribution. With a population exceeding 80 million, it is the most populous
country in the Arab world. More than half of the population is younger than 24 years old.
These demographic characteristics reinforce the role of human capital as an entry point for
improving the business climate, and also highlight the inherent challenges they pose. In a
context characterised by strong pressure on the educational system, the labour market and
other basic social services (such as health, housing, and transportation to name but a few),
Egypt needs to further develop and implement its policies on investment in human capital.
Achievements in Human Capital
Egypt has introduced workforce skills development strategies and has taken the first
steps towards a human resources development policy with a wide cross-section of
stakeholders involved in formulating it. Egypt has put in place several strategies
pertaining to the development of human capital, both in the general education system and
through vocational education and training (VET). These strategies all aim to reduce the lack
of knowledge, skills, and expertise voiced repeatedly by employers in the formal sector.
Moreover, Egypt has established the Supreme Council for Human Resource Development
(SCHRD) with the mission of creating a national human resources development policy. The
strategy formulation process involves a wide cross-section of players, including ministries,
international donors, and private businesses.
Inputs to initial education focus on educating the educators. The National Strategy for
Education Reform, launched in 2007 by the Ministry of Education, includes policies for
reforming teacher training and careers in addition to a separate teacher recruitment and
retention strategy. The strategy includes a plan for teachers’ professional development.
A pioneering vocational education and training system. Egypt has put in place a VET
system – the Technical, Vocational, Education and Training system (TVET). It is a pioneer in
the MENA region. The scheme establishes vocational schools with curricula that meet
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technical needs. Courses are designed according to developmental plans and local
circumstances. The Egyptian Ministry of Education states that it administers 1 600 TVET
programmes, and the Ministry of Higher Education 47 middle technical institutes.
Public-private partnerships drive new initiatives in continuing education and training.
Public-private partnerships in the area of continuing education and training (CET) have
gained momentum in Egypt since the creation of the Supreme Council for Human Resource
Development. The Ministry of Higher Education recently signed a memorandum of
understanding with Edexcel22 to create the Integrated Technical Education Cluster Project
in Cairo. The project is designed to train engineers to meet the needs of industry. The
government has also undertaken other initiatives, such as the Egyptian Education
Initiative (EEI), developed as part of a private-public partnership with the World Economic
Forum’s ICT community.
Challenges in Human Capital
The lack of an overarching skills development strategy combined with over-centralised
budget management leads to a fragmented, exclusive approach to developing human
capital. There is no single overall national strategy for workforce skills development.
Several are in place, with each being designed to respond to an immediate need (e.g. skills
shortages in specific sectors, rising unemployment). The result is a fragmented,
uncoordinated approach to human capital development. In addition, despite TVET, there is
no clear, well designed plan to determine the areas of projected vocational needs over the
next 30 years. Nor is there any real estimate of the skills available in the Egyptian market.
With the current lack of comprehensive, accurate data, Egypt will be unable to formulate
its human capital requirements in specific areas of development.
Moreover, despite the creation of the Supreme Council for Human Resource
Development – the only platform where all the relevant stakeholders are represented –
inter-ministerial co-ordination seems to be lacking. The sole evidence of inclusiveness in
the strategy formulation process is the TVET system. Otherwise, it is absent from the
education and training system as a whole.
Centralised budget management creates unequal resource distribution. Furthermore
the attention that officials give to certain areas, while neglecting others, results in the
marginalisation of most institutions and areas in Egypt. The currently adopted generic
approach (one size fits all) is outdated and threatens to weaken the rural areas, as most of
the educational programmes are designed to meet the needs of the urban population.
Inputs to initial education do not include an effective strategy to recruit and retain
teachers. Despite the government’s efforts to formulate and put in place a teacher
recruitment and retention strategy, the procedures for monitoring it are lacking. As a
consequence, teachers remain under-qualified, underpaid and inexperienced, and often
find themselves in charge of classrooms of 60 to 100 pupils. The salary scales are dismal
and have led to a parallel schooling system, where tutoring take place outside the school
premises at the homes of students in return for a fee. This means that state schools at the
elementary system are basically failing their purpose.
As for strategies to develop teachers’ skills and careers, they exist in Egypt. But the
government does not give them high priority and the teacher-training system has grown
fragmented. In addition, the lack of incentive in almost all on-the-job training modules
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with exposure to modern teaching techniques has led to a stagnating system where
talented teachers are rare.
Vocational education and training takes second place to general secondary schools.
Although the TVET system in Egypt is highly developed, the Ministry of Education gives
secondary education priority over vocational education and training. The proof lies in the
relative budget allocations. In addition, the VET system lacks tools to identify the needs of
the labour market and employer expectations. To that extent, resources are not used
effectively, which leads on to the fact that the market does not absorb graduates from the
VET system as much as it should. The obvious immediate consequence is that they
experience long-term unemployment and turn to the informal labour market.
Continuing education and training lacks direction, vision, and a certification system.
While there are many continuing education and training programmes in place, they lack a
common direction. In addition, reform efforts lack a holistic vision and proper follow-up
mechanisms. The reform of the TVET system was supposed to create a continuing
education system responsive to market needs. It has not done so and the current system
lacks the evaluation mechanisms necessary to improve. Nor are conditions required to
develop the TVET programmes in place. They include:
●
an appropriate financial framework;
●
an effective and operational national qualifications framework (NQF) that gives
credibility to CET;
●
a broader, contextualised definition of CET that considers basic literacy and post-literacy
programmes as CET activities eligible for financial support and for recognition within
the NQF.
Recommendations for Human Capital
Egypt should appoint a single institution to co-ordinate its workforce skills development
strategy, adopt inclusive practices to involve stakeholders, and use the existing SCHRD
framework to build a holistic approach to education and training. Egypt should improve
implementation of its workforce skills development strategy, which will require greater
institutional leadership to co-ordinate efforts. It should also adopt a more holistic vision of
human capital development and increase collaboration between the main stakeholders
and institutions. Rather than eliminating inertia by bypassing stakeholders, efforts should
be made to move strategies forward by including them. Egypt should build on the existing
SCHRD framework and integrate pre-primary, primary, and secondary education into the
national human resources development strategy. The government should develop an
action plan, a timeline, and a budget to implement the SCHRD strategy. It is important that
the strategy should offer a holistic perspective that builds on an analysis of the knowledge,
skills, and expertise required by each sector in the labour market (administration, public
enterprises, formal private sector, informal private sector).
A mechanism should be put in place to make consultations a regular fixture rather
than ad hoc meetings – e.g. convening working groups on a regular basis between
ministries, the private sector, employees, and the SCHRD. To make such consultations
effective and foster participants’ commitments, officials should incorporate private sector
recommendations directly into policy development.
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Introduce procedures to monitor the teacher recruitment and retention strategy and put
in place training and incentives for teachers. Egypt should put in place effective
procedures for monitoring the teacher recruitment and retention strategy. This would help
produce an overall picture of the teaching situation in Egypt, e.g. the size and nature of
teacher shortages. The authorities could use this information to adjust their action plans
and implement the strategy accordingly in order to, for example, make teaching in state
schools a more attractive career prospect than in private schools.
Teachers also need to receive proper training, which includes training in the ethics of
the profession. More importantly, teachers need to receive wages that fit the current
economic situation of the country.
If properly functioning schools are in place, parents will reallocate their financial
resources to the formal schooling process and away from private tutoring. Teacher
recruitment and retention will improve as the career becomes more lucrative and talent is
rewarded.
The government should make vocational training a desirable option that is available to
all school pupils. Egypt should ensure that TVET is available to all students in all main
fields (demand outstrips supply), implement training programmes for teachers, incentivise
employers, and develop an effective monitoring and evaluation system. Schools guidance
and counselling services need to be improved so that TVET is not considered a second-best
option. The government needs to enhance the geographical coverage of TVET and reduce
discrepancies between rural and urban and private and public. It also needs to inject
advanced technologies into the system in order to bring training programmes up to the
grade required by the market.
Egypt should stimulate and reward both employees and employers who engage in
continuing education and training. In order to design a work-related system of
continuing education and training, an initial assessment of both the national strategy and
the TVET provision should be conducted. Furthermore, a new strategy that encourages
effective demand for CET should be put in place. It would involve a reward system for
people who wish to receive continuing education and training. This would help to foster a
new culture of constantly upgraded skills, knowledge and competencies, which would in
turn make it easier to periodically modernise sectors of trade and industry. Other
suggestions include:
●
incentives for employers to engage in continuing training;
●
a sustainable, operational financial scheme to increase the involvement of stakeholders
in continuing training;
●
the basic literacy and post-literacy programmes that would act as key levers to develop
CET;
●
an information management system for non-formal learning.
2.12. Dimension 12: Access to Finance
There is a strong and positive connection between the development of the financial
sector and economic growth and development both from a theoretical and an empirical
perspective. The development of the financial services sector contributes to improved
economic outcomes in numerous ways. These include the channelling of resources to
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appropriate projects, stimulating savings and investment, lowering transaction costs, and
thereby indirectly contributing to creating jobs – one of the major challenges for developing
economies. Nonetheless the presence of financial services does not mean they are
necessarily accessible to the different types of users within an economy. Thus, the focus on
access to finance, especially for small and medium-sized enterprises, as part of the BCDS,
is integral to our analysis.
In Egypt, access to finance, both for individuals and for businesses remained
underdeveloped well into the 2000s compared with regional peers (mainly in the Gulf) and
other emerging markets. The scope and variety of financial services was limited and the
banking system was hampered by a poor regulatory environment, capital controls, an
inadequate central bank and a poorly adapted monetary policy framework. A wide-ranging
reform programme and a new law (the Unified Banking Law), started altering this
from 2004, and Egypt’s financial services environment is one of the areas of its business
environment that has seen the most and the deepest changes over the past five years. Even
so, there is still room for progress. It is estimated for instance that only around 10% of
Egypt’s population has a banking account and the use of payment cards remains very
limited, which continues to restrict general access to finance.
This section takes a look at some of the very significant achievements of the reform
programme since 2004 and some of the remaining challenges.
Achievements in Access to Finance
A broadly successful financial sector reform programme. Significant steps to transform
the financial sector in Egypt have been taken since 2004 under the first phase of the
Financial Services Reform Programme (privatisation, restructuring of state-owned banks,
strengthening of Central Bank supervision). Concentration has been greatly reduced with
the largest three banks (all state-owned) currently controlling around 45% of assets,
compared with 60% in 2006.
Many weaknesses in Egypt’s financial regulatory environment have been addressed.
Banking sector reform has been particularly successful, where reforms undertaken as part
of the Financial Sector Reform Programme have addressed a number of issues, including
financial and managerial restructuring of state-owned banks, the reduction of nonperforming loans (NPLs), and considerable consolidation of the sector (see the chapter on
Egypt’s economic reforms), with the number of banks being reduced from 57 in 2004
to 39 at end-2009.
A new centralised authority now oversees all non-banking financial services. The creation
of the new Egyptian Financial Supervisory Authority (EFSA) in July 2009 should further
improve the regulatory environment and oversight. EFSA will support the development of
a well-regulated capital market, and support further developments in the financial sector
by creating a more conducive regulatory framework, and gradually improving capacity to
oversee financial services. The creation of EFSA shows Egypt’s continued determination to
modernise and improve the oversight and functioning of financial markets.
The stock market has been thoroughly overhauled. The country’s stock market reforms
undertaken under the supervision of the then Capital Markets Authority were wideranging. The merger of the Cairo and Alexandria Stock Exchanges into one single entity
(EGX) in 2008 stands out. It has improved liquidity and efficiency, making the Egyptian
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stock market a liquid, effective means of raising equity finance for both small and large
firms. The EGX has also performed upgrades in IT, developed an improved trading
platform, and opened a specialised index for small capitalisations, the NILEX. Market
capitalisation in the EGX rose from EGP 171.92 billion (USD 30.7 billion) at end-2003 to
EGP 499.6 billion at end 2009. That, however, was below the peak reached at end-2007, prior
to the financial crisis, when market capitalisation stood at EGP 768.3 billion. The NILEX,
which was formally launched in 2009, so far has nine companies listed, but two more are
expected to be listed by end-2010.
The risk capital environment is beginning to develop. A key source of finance for small
and early-stage businesses is risk capital. Here, the government has attempted to enhance
the venture capital industry, principally through granting venture-capital firms tax
exemptions. Microfinance has been available in the country for a number of years, and is
provided though specialised organisations and NGOs. The sector has demonstrated good
progress in the past few years, increasing its outreach extensively.
The usage of credit guarantee schemes has increased. Attempts to widen access to
credit to small enterprises and export-oriented businesses through guarantee schemes
have had some success; the Credit Guarantee Company (CGC) has reached the critical size
necessary achieve an impact on lending practices to SMEs in Egypt. The capital of Egyptian
Export Guarantee Company (EEGC) capital was increased in late 2008 as a response to the
slump in exports during the global economic crisis, which should help protect more
exporters from non-payment by foreign clients.
There have been important credit information improvements. Under the auspices of
the Central Bank and with the support of the International Finance Corporation and the
technological support of Dun and Bradstreet, Egypt’s first credit bureau was launched
in 2005 and has been fully functional since 2007. Branded i-Score, the venture is funded by
a consortium of 25 banks and the Social Fund for Development. i-Score is a private sector
enterprise that has been very successful in ensuring greater credit transparency. This has
helped improve the quality of information flow, which had previously used only paperbased records for major loans held by the Central Bank of Egypt (CBE).
Steps have been taken to set up a new cadastre. As part of reforms to Egypt’s land
registration system, a new cadastre, with GPS support and electronic data management, is
progressively being implemented.
Improvements in Egypt Post has helped small savers. A very positive development is
the recent performance of Egypt Post, which also providers rudimentary financial services.
With a large network of branches, recently updated IT systems, and a newly acquired right
to invest savers’ deposits in financial markets, the postal agency is in a unique position to
improve access to finance for large parts of the population.
Challenges in Access to Finance
Despite the great strides that the Egyptian authorities have made in addressing
weaknesses in the country’s financial regulatory environment in recent years, there
remain gaps to be addressed. These concern both the regulatory environment and
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practices in granting access to finance, especially for SMEs and start-ups looking for
venture capital.
Bank lending remains skewed towards the public sector. All indicators reveal that a
significant share of bank lending continues to go to the public sector and that this share
has increased in recent years. At end-March 2010, lending to the public sector by domestic
banks represented 47.6% of total bank lending (42.7% to the government). This is an
increase on pre-crisis 2007, when lending to the public sector accounted for 38.2% of the
total. This is in part caused by the fact that the government, for historical reasons and ease
of access, finances around 80% of the general government budget deficit through domestic
banks, mainly in the form of T-bills. High risk aversion among Egypt’s bank is also part of
this problem, and when it comes to lending profiles risk aversion appears to have
increased since the financial crisis. This continues to crows out lending to the domestic
private sector.
Significant issues remain regarding collateral. Although Egypt’s collateral system
appears, on paper, to comply with good practices, smaller borrowers typically face
disproportionately high collateral requirements, and deficiencies in the legal system and
cadastre mean that many types of assets cannot in fact be used.
Banking reform still has some way to go to improve competitiveness. L a rg e s p r e a d s
over the CBE’s discount rates and among banks’ lending rates indicate that lending in
particular, but also other bank services, are not fully driven by competition. Banks prefer to
continue to lend to the state, with the public sector absorbing roughly 47% of total
domestic bank lending as of end-March 2010.
EFSA has been slow to gather speed and needs more capacity. O n e y e a r a f t e r t h e
formal merger of the Capital Markets Authority, the Mortgage Finance Authority and the
Insurance Authority, EFSA is only now finalising its internal restructuring and still needs to
come fully into its own as a regulator. With staff of around 800 persons, many of whom
deal with internal issues, there is a strong need for more capacity building inside the
authority. EFSA now oversees not only Egypt’s capital markets, but also mortgage finance,
insurance, leasing, factoring, and all other non-banking financial services. This will require
highly skilled and trained staff. Although an internal training programme of “excellence”
was launched in 2009, it has so far only produced 36 “graduates” who still need further
training.
The corporate bond market remains underdeveloped. In non-bank finance, Egypt’s
stock market reforms have been impressive. Not so its corporate bond market, which
remains in a nascent stage of development, with no secondary markets, few bond
issuances, and a weak institutional framework. The advent of EFSA should gradually
improve this, and in early 2010 there have been more corporate bond issuances than in
previous years. It will still be quite a while, however, before bonds become a central source
of corporate financing.
Venture capital may not always be used for its intended purpose. The efforts made by
the Egyptian government to enhance the venture capital industry have yet to pay off.
Currently venture capital appears to be more attractive to those who want to avoid tax
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rather than those wishing to provide finance, and risk capital remains far from abundant.
However, the venture capital sector is still in its infancy, and an increasing number of funds
are being set up. The market for venture capital also suffers from a lack of financial literacy
among potential beneficiaries (see the last two points under “Recommendations” below).
Although the microfinance industry is long established, the market suffers from low
penetration: specialised MFIs are still not in place and the range of microfinance products
and services is limited. While leasing is gaining significant ground, factoring, another
important tool for broadening access to finance, is almost non-existent.
Information problems mean that lending remains constrained and guarantee schemes
are not optimal. Attempts to widen access to credit for small enterprises and exportoriented business through guarantee schemes have had some success but there have been
some concerns regarding additionality, the magnitude of guarantees, which usually cover
only 50% of loan value, and reliance on public sector financial institutions for allocation.
Part of the reason for the limited extension of guarantees is information problems. While
this, in time, should be addressed by i-Score, this system currently still covers only a small
part of the population.
Financial literacy remains a key issue for borrowers and lenders alike. M a ny o f t h e
above problems could be resolved by increased financial literacy among the population.
However, no national strategy to improve financial literacy, either through training
programmes or mass-media coverage, is yet in place.
Recommendations for Access to Finance
A single universally applicable law for collateral. In terms of the regulatory environment,
the lacunae in the collateral system should be addressed and all aspects of loan collateral
should be regulated through a single, universally applicable law. Such a law should be
explicit about potential collateral ceilings and permissible types of collateral. The
government has prepared a new law on a Moveable Assets Registry, which is an important
step in the right direction, but it would be even better to have a fully unified law on all types
of collateral.
As far as information is concerned, I-Score is an excellent step in the direction of
improved information flow, and actions to extend it to a wider user base should be
continued. In addition, the government should strongly support plans to add a registration
system for moveable assets.
Updating and modernising Egypt’s bankruptcy laws. The existence of an outdated legal
framework for bankruptcy, with laws dating back to the 1960s and even earlier, is a key
hindrance to bank lending and is a major contributing factor to the excessive guarantees
and collateral demanded by lenders. Scrapping the existing laws and imposing new rules
for bankruptcy – an issue addressed in Chapter II.3, “Business Law and Commercial
Conflict Resolution” – would be a significant means to rapidly facilitate access to finance
for businesses, especially small and family-owned ones.
More work could be done to increase competition in the banking sector. With the opening
up of the banking sector to foreign banks through privatisation, advantage should be taken
of foreign expertise in order to improve skill sets and loan appraisal procedures. Improved
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competition would also have the benefit of lowering interest rate spreads, improving the
range of financial services and widening access to finance.
The outreach of the banking sector should be enhanced. Efforts should be made to
encourage a general culture of bank-based savings and payment habits. This should
happen through targeted media campaigns and through the diversification of financial
products. A recent change in legislation which will enable banks to sell life insurance
products for the first time is an important step in the right direction, but is not sufficient.
Rules should be implemented to impose bank transfer payments for large purchases
to gradually move away from the culture of purchasing large items (housing, private
vehicles) in cash. This would also help establish electronic trails and assist the government
in its desire to fight the informal economy.
Amplify and accelerate capacity building inside EFSA. A targeted training and hiring
scheme should be implemented over and above the efforts already carried out in EFSA.
Egypt’s expanding financial services landscape, and the rapidly evolving international
financial system will require more and better trained staff in a shorter timeframe than the
one currently envisaged.
Encourage more direct financing by facilitating access to Nilex. The authorities should
seek to increase the share of financing provided by direct interaction between providers
and users of funds. In addition to promoting efficiency, this would free up more bank
lending capacity for those who are not able to tap the markets directly, such as small
businesses. From an equity finance perspective, the Nilex could be made more attractive
through a further simplification of procedures, especially with better adapted capital and
listing rules. These still remain heavy from an SME perspective, and not least costly. A
programme with the IMC to subsidise the listing cost is useful, but only applicable to
manufacturing industries. The government should explore the possibility of GAFI’s SME
Unit, or other body, performing the same services for non-manufacturing SMEs.
With regard to debt finance, the continued weakness of the bond market could be
addressed through a programme of promotion and awareness raising for potential
providers and users of funds. This could form part of a wider need to introduce sounder
risk management and financial engineering skills in Egyptian financial markets (see final
point on a national entrepreneurship competition).
Promote risk capital through publicity. E a r l y s t a g e f i n a n c e r e m a i n s r e l a t i v e l y
undeveloped in Egypt. The authorities should seek to promote the use of venture capital
through seminars, conferences, and business sites. The government should introduce
plans to encourage and foster business angel networks, including foreign business angels.
Furthermore, banks should be encouraged to engage with the microfinance sector in order
to encourage the development of sustainable, competitive microfinance institutions that
offer various financial services. This would also have the benefit of giving rise to greater
outreach.
Broaden the coverage of guarantees. To improve the effectiveness of guarantees in
providing access to finance, CGC’s operations should be restructured, with the explicit goal
of achieving additionality. This could include giving potential borrowers direct access to
CGC when applying for guarantees, and increasing the guarantees to cover a more
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4.
BUSINESS CLIMATE DEVELOPMENT STRATEGY: THE ASSESSMENT OF EGYPT’S BUSINESS CLIMATE KEY FINDINGS FROM PHASE 1
substantial part of loans (over 60-70%). Providing a government counter-guarantee could
attract greater participation from commercially motivated private banks.
As regards export credit guarantees, the Egyptian government has already increased
the capital of the EEGC. It could consider extending EEGC’s coverage to all commercial and
non-commercial risks, possibly with private funding, while reserving government funds
for non-marketable risks and channelling them through the same agency.
Develop a national framework for the improvement of financial literacy. Last but by no
means least, the authorities need to create and implement a national framework for the
improvement of financial literacy, using extensive surveys to identify and prioritise
financial literacy issues. A public database on management training programmes should
be created. National media and information campaigns should aim to provide adequate
coverage of relevant issues and disseminate usable, easily understandable self-help tools
for all Egyptians.
Organise a national entrepreneurship competition to foster better understanding of
financial services. In order to raise public awareness and understanding of financial
services, a national small business and entrepreneurship competition could be organised.
The authorities might also include financial literacy training in social welfare programs.
Special programmes targeting young people and women would probably be the most
efficient way of producing good results and transforming entrepreneurship into a tool of
economic and social advancement.
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4. BUSINESS CLIMATE DEVELOPMENT STRATEGY: THE ASSESSMENT OF EGYPT’S BUSINESS CLIMATE KEY FINDINGS FROM PHASE 1
Figure 4.10. Access to Finance: Scores by subdimension
Subdimension 1: Effective institutional and regulatory framework
Collateral and provisions requirements
Registration systems for movable assets
Cadastre
0
1
2
3
4
5
4
5
Subdimension 2: Access to bank finance
Competition in the banking system
Banking sector outreach
Domestic credit to private sector
Non-performing loans
0
1
2
3
Subdimension 3: Access to capital markets
Capital market authority
Stock market depth, liquidity, and access
Development of the corporate bond market
Sophistication of financial instruments
0
1
2
3
4
5
4
5
4
5
4
5
Subdimension 4: Early-stage finance
Availability of risk capital
Business angels network
Micro-finance facilities
Leasing facilities
Factoring facilities
0
1
2
3
Subdimension 5: Guarantee schemes
Credit guarantee schemes
Export guarantee schemes
Credit information services
0
1
2
3
Subdimension 6: Improving skills
Financial literacy
Management training
0
122
1
2
3
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4.
BUSINESS CLIMATE DEVELOPMENT STRATEGY: THE ASSESSMENT OF EGYPT’S BUSINESS CLIMATE KEY FINDINGS FROM PHASE 1
Notes
1. In the 2007 World Bank Doing Business report, Egypt scores over 60 on the trade policy index, in
comparison to an average of 52 for high growth countries (China, Malaysia, Poland, Thailand and
Turkey).
2. Benhassine, Najy. From Privilege to Competition: Unlocking Private-led Growth in the Middle East and
North Africa. Washington, DC: World Bank, 2009. Print.
3. www.bi-me.com/main.php?id=15015&t=1 Business Intelligence Middle East.
4. www.dailystaregypt.com/article.aspx?ArticleID=19424, “The Egyptian Competition Authority (ECA)
said in a statement released on Wednesday that the existence of agreements between companies
working in the production of steel rebars in violation of Article 6 of the anti-monopoly law could
not be proven. There was also no evidence to show that local steel giant Ezz Steel had abused its
dominant position in the sector in violation of the law, nor had smaller firms collaborated in anticompetitive practices. According to the ECA, Ezz Steel holds 58 per centof Egypt’s steel market.”
Daily News Egypt, 29 January 2009.
5. According to the Heintz and Chang (2007) and Charmes (2008), the informal sector employed 47 %
of all non-agricultural employment between 2000 and 2007 for the whole of North Africa and West
Asia.
6. The main law is Public Sector Law 203/1991, which governs the State-Owned Enterprises (SOEs), in
addition to the guidelines of the Asset Management Programme (AMP) from 1993.
7. For detailed discussion of SOEs refer to the Chapter II-2, “Corporate Governance”, and in particular
to Sub-Dimension 2.5, “Corporate Governance of State-Owned Enterprises”.
8. World Trade Organisation (WTO) (2005), Trade Policy Review, Egypt.
9. The Ministry of Public Enterprises was responsible for the privatisation programme until 2004
when the Ministry of Investment was established and took over the entire Asset Management
Programme.
10. World Trade Organisation (2005), Trade Policy Review, Egypt.
11. Information provided by the Ministry of Investment, 2009.
12. www.thedeal.com/newsweekly/community/egypt's-reforms-inspire-investments.php, The Deal Magazine,
2 June 2009.
13. United Nations Development Programme, Egypt Human Development Report, 2008.
14. Global Entrepreneurship Monitor (2008), Egypt Entrepreneurship Report, Hala Hattab.
15. Attia, Sayed Moawad (2009), “The Informal Economy as an Engine for Poverty Reduction and
Development in Egypt”, MPRA Paper, No. 13034, 27 January 2009.
16. OECD (2009), “Credit Guarantee Schemes: A Tool to Promote SME Growth and Innovation in the
MENA Region – Report and Guidelines”, MENA-OECD Investment Programme Working Paper.
17. Bank Audi (2008), Egypt Economic Report, Business Intelligence Middle East, Audi Saradar Group.
18. The data referred to are from the World Bank Enterprise Survey. While these data have been
confirmed by Egyptian sources in the case of electric connections (EGYPTERA audit), there has
been no confirmation for water connections. In the case of telecommunications, Telecom Egypt
quotes a maximum delay of 5 days whereas the 2008 World Bank Enterprise survey quotes
85.5 days on average. Because data were communicated late, the OECD Secretariat was unable to
investigate and reconcile these conflicting reports.
19. This is equivalent to 10 PCs per household according to the new ICT recommendations.
20. The World Bank Enterprise Survey quotes an average lead time of 85.5 days for a new fixed line.
Telecom Egypt quotes five days.
21. Interview with representatives of EGYPTERA.
22. Edexcel is a British awarding company that offers academic and vocational qualifications and
testing to schools, colleges, employers and other places of learning in the UK and internationally,
www.edexcel.com/Pages/Home.aspx.
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Competitiveness and Private Sector Development: Egypt 2010
© OECD 2010
Chapter 5
Conclusion
Egypt has made impressive strides with regard to improving its business
environment in recent years. So far, much of the government’s reform effort has
focused on improving the macro-economic framework. This is the case with regard
to policies such as banking sector reform, income-tax reform, improving the
monetary policy framework, opening up the capital account and allowing free and
unhindered capital transfers, and the lowering of average weighted tariffs.
Despite these improvements, Egypt still does not fulfill its potential as a highgrowth economy, or to become the prime investment location warranted by its
geographical position. Foreign investment still accounts for less than one-third of all
investment, and FDI inflows fell between mid-2008 and end-2009. The competition
for global investment is fierce and a country such as Egypt should no longer count
on low costs to attract investors. To attract high value-added investors, a better
overall investment climate is needed. This chapter presents the conclusions to the
Business Climate Development Strategy findings for Egypt and finishes by inviting
the Egyptian government to pursue its reform efforts in order to achieve its growth
objectives.
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5. CONCLUSION
1. Egypt has made progress on business climate reform which has translated
into economic growth
Egypt has made impressive strides with regard to improving its business environment
in recent years under the reform impetus of the pro-business government which came to
power in mid-2004. The progress is reflected in the fact that Egypt has consistently been in
the World Bank’s Doing Business list of “Top Reformers” over the past five years.
So far, much of Egypt’s reform effort has focused on improving the macro-economic
and overall structural framework of the economy. This is the case with regard to policies
such as the first phase of banking sector reform, income-tax reform, improving the
monetary policy framework, opening up the capital account and allowing free and
unhindered capital transfers, and the lowering of average weighted tariffs for imports.
In addition, efforts have been put into improving the investment climate in particular,
through the implementation of reforms at the micro level. These have been helped through
having a dedicated Ministry of Investment and incorporating the General Authority for
Investment (GAFI) into the ministry. This has enabled GAFI to become a one-stop shop and
gradually improve Egypt’s appeal to foreign investors. Other reforms and policies have
been implemented in areas as diverse as privatisation and public-private partnerships,
new phytosanitary rules, consumer protection, measures to improve corporate
governance, steps to tidy up and reduce Egypt’s reams of red tape, the modernisation of tax
administration, initiating infrastructure improvements, and starting to address the issue
of access for finance for small and medium-sized enterprises (SMEs).
As a result of the government’s sustained efforts, GDP growth rose steadily
between 2004 and 2008, averaging 7% a year in the three years preceding the international
financial crisis. Tax receipts increased and compliance started to rise. The general
government budget deficit narrowed and public debt was reduced (although the
government’s counter-cyclical fiscal policy has meant that the deficit has widened again
since the onset of the financial crisis). Foreign direct investment (FDI) rose to
USD 13.2 billion in fiscal year 2007/08, the year preceding the global recession. Foreignexchange reserves rose significantly in step with larger inflows of FDI and rising receipts
from tourism and transit through the Suez Canal.
All told, the progress since the economic reforms were launched in 2004 has been
impressive and tangible benefits can be observed in Egypt’s improved economic
performance and rising FDI flows. The improved macro-economic climate did enable Egypt
to broadly escape the most crippling effects of the global recession: the economy slowed,
but did not contract, with real GDP growth remaining around the 5%-mark, and domestic
banks have retained ample liquidity. Since the onset of the crisis, however, inward
investment has been affected by the squeeze on credit in international financial markets
and rising global competition for investment. This is one of the reasons why Egypt needs
to pursue its reform programme.
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CONCLUSION
2. More and further-reaching reforms are needed at the micro-economic level
in order for Egypt to maximise its potential as an investment location
Despite these improvements, Egypt still does not fulfil its potential as a high-growth
economy, or to become the prime investment location warranted by its geographical
position at the crossroads between Europe, Africa and Asia. Foreign investment still
accounts for less than one-third of all investment, and FDI inflows fell between mid-2008
and end-2009. The competition for global investment is fierce and a country such as Egypt
should no longer count on low costs to attract investors. This is especially true if
investment is also sought to help upgrade local skills and achieve improvements in knowhow through transfers of skills and technology. To attract high value-added investors, a
better overall investment climate is needed.
The in-depth assessment of the Egyptian business climate, carried out under the
Business Climate Development Strategy (BCDS) process by the MENA-OECD Investment
Programme has revealed several areas where more progress is needed in order to maximise
Egypt’s potential as a prime business location. Many of these findings are related to the
business climate in general, and therefore are relevant to domestic and foreign businesses
alike. The Egyptian government now – more than ever – needs to focus its energy on
maintaining the reform momentum.
The BCDS findings and recommendations have been structured around 12 policy
dimensions and a number of “cross-cutting” findings, common to most of the dimensions
assessed. In general stakeholders report an absence of predictability and transparency in
policy making. This is made worse by the fact that existing rules are not always evenly
applied, and by a general lack of institutional enforcement capacities. This has led to a
degree of scepticism towards the government’s reform programme among investors, both
domestic and foreign.
The problem of non-predictability is made worse by the pervasiveness of the informal
sector. The presence of a large informal sector prevents competition policy from achieving
full impact, undercuts domestic regulatory work and hinders effective tax collection.
Linked to this are continued difficulties with achieving full market openness and access.
Quasi-monopolies continue to operate in domestic product markets, including for
construction materials, and technical barriers to market entry remain high, preventing
competition policies from being effective, especially in the retail sector. The provision of
professional services still remains closed to non-Egyptians. The absence of genuine
competition in domestic markets is reflected in a still-high inflation rate which continues
to hover around 10%. The government needs to push forward the enforcement of its
recently enacted competition policy framework. The new Egyptian Competition Authority
has yielded mixed results: more clarity and consistency in its rulings would be beneficial.
In addition, remaining non-tariff and technical barriers to trade should be progressively
listed to ensure full competition in Egypt’s domestic product markets, especially, but not
exclusively, for foreign retailers.
Moreover, the individual BCDS findings reveal that investors are still struggling to
navigate the Egyptian investment landscape: local and foreign investors continue to feel a
need for improvement at the operational level of doing business. Among some of the key
findings and recommendations, we can mention:
Obtaining licences, permits, and gaining access to land remain significant obstacles,
as does the provision of infrastructure for businesses. Clearer and simpler licensing rules
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5. CONCLUSION
are still needed and bureaucracy is still overwhelming at the local level. Pushing forward
with the government’s programme to streamline regulation (ERRADA) would be a positive
step in this direction. Moreover, business inspections continue to pose problems owing to
their high number and arbitrary nature. Each such interaction between government and
the private sector bears costs to the firm in terms of regulatory compliance and
uncertainty. Petty corruption (and grand, too) continues to hamper the smooth conduct of
business. Sudden policy reversals and haphazard, uneven application of the laws at the
local level continue to underpin deep scepticism with regard to the effectiveness of
government reform. An inadequate legal framework in some cases cannot cope with the
needs of modern finance. The creation of the new economic courts is an important step in
the right direction, but to fully mitigate the inadequacies in the system, they need to be
given the proper means. Their work is still hampered by the fact that judges have not been
trained in the complex issues in modern international business. A dedicated training
budget should be allocated to the judges in order to help speed up the process.
Small-and-medium sized companies still face difficulties in obtaining the necessary
financing; while many small entrepreneurs and the population at large lack the necessary
skills to use the measures already in place to help small businesses. There is an acute lack
of financial literacy and general skills needed to run a business which in turn make banks
reluctant to lend. Some of these issues may be addressed through more focused work by
the new SME units that are being created by GAFI (see below). SME units should also help
companies file tax returns and offer positive incentives to companies if they register and
leave the informal economy.
Human capital is underused, and hiring is hampered by significant skills mismatches
in many sectors. The human capital issue remains a significant problem with regard to the
overall quality of Egypt’s business climate. Even so, fast results could be obtained through
better-targeted vocational and on-the-job training programmes. In many of these areas,
targeted training programmes and workshops to build capacity would assist the
government in overcoming some of the obstacles. Other efforts would aim at enhancing
the government’s outreach abilities; this is especially needed with respect to
communicating its policies efficiently.
Generally speaking, much progress could be achieved by better co-ordination between
ministries (interministerial co-ordination) and between line ministries and agencies or
local government. There is a strong need for the government to improve its
communication – both with stakeholders directly affected by policies and with the
population and the business community at large.
Finally, there is still scope to improve Egypt’s investment promotion strategy and
framework. A detailed analysis of Egypt’s most competitive sectors, focusing on key
competitive advantages and employment opportunities would help focus and target
investment promotion efforts, especially with regard to selecting potential private
investors (countries and/or individual investors). This could be helped by spinning off the
Investment Promotion function of the General Authority for Investment (GAFI), which also
has regulatory functions and serves as company registry, in addition to allocating
investment. A dedicated Investment Promotion Agency would significantly improve
Egypt’s investment promotion efforts and help serve as a focal point for potential investors.
The investment promotion efforts should also be linked to an overall improvement of the
newly created Investment Zones. The services on offer should be improved, and their
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5.
CONCLUSION
development should be specifically geared to the creation of competitive clusters in order
to attract high-value added investments. This would also have positive ramifications for
the local economy through involving small and medium sized enterprises in the supply
chain.
What stands out most of all from the BCDS exercise is the importance of continuing
the work already set in motion. Stakeholders still complain about the business climate, but
most agree that improvements, although insufficient, have been tangible and measurable.
The BCDS findings and recommendations aim to offer support to the government in its
drive to address these concerns and to achieve better targeted reforms.
3. The next phase of the BCDS focuses on defining policy priorities and on
project implementation
Having concluded the first phase of the BCDS – the main findings of which have been
discussed in the previous chapters – the next phase of the process consists of drawing out
the policy priorities from the numerous recommendations that have emerged and making
these recommendations operational through targeted projects. The most important
recommendations will be formulated as project proposals to include objectives, concrete
action steps, a timeline and a budget.
To this effect a series of workshops have already been held in Cairo, where the
recommendations were presented to, and discussed by, stakeholders from both the public
and private sectors, including international donors and private investors. The results of
these consultations have already been incorporated into the recommendations presented
here. They have also helped the BCDS team draw out the priorities for each of the
12 dimensions covered by the BCDS.
In light of the fact that the exercise has been going on since the beginning of 2009 and
that there has been continuous dialogue between the MENA-OECD Investment Programme
and the Egyptian government, some of these recommendations have already been taken
on board and implementation has begun. This is the case with regard to the nine holding
companies that control the remaining state-owned companies. It was recommended that
the holding companies be gathered into a single entity. This entity is currently being
formed and will become operational during 2011 once the relevant law has been passed.
Improving access to finance for SMEs is another point. The BCDS suggested the
creation of one-stop outlets to better focus the delivery of services to SMEs at the local
level, outside of Cairo. Early in 2010, GAFI set up an SME Unit and is now working on rolling
out local “one-stop shops” for SMEs in Egypt’s 29 governorates. A programme to train the
staff for these SME outlets is currently being implemented with the help of the Canadian
International Development Agency (CIDA).
The BCDS team recommends that an Inter-governmental Committee be formed to
oversee the implementation of key business-climate projects where they impact several
ministries or government agencies. For instance, the Moroccan government, which has
conducted a BCDS process in parallel with the one in Egypt, has set up a National Business
E nv i r o n m e n t C o m m i t t e e t o ov e r s e e t h e i m p l e m e n t a t i o n o f c r o s s - c u t t i n g
recommendations. In Egypt, such a committee could be formed in the Office of the Prime
Minister, or under the auspices of the Ministry of Investment which already oversees
investment policies.
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5. CONCLUSION
In Egypt, this first experience of the BCDS has been an exciting and challenging task.
The MENA-OECD Investment Programme is grateful for having taken part in the work done
by the Egyptian government as it seeks to push forward with its reform programme in a
difficult national and international economic context. It is vital that the reform
momentum does not stop now. The international financial crisis and increasing global
competition for investment mean that a government needs to seize the opportunities
offered to reform their domestic business climates and ensure they remain on the map.
The post-crisis global market is likely to be a very different place from the 2008 heydays of
fast growth and easy money. By maintaining its business climate reform programme, Egypt
will give itself a better chance to become a high-growth economy and thereby ensure a
better future for its large, young population.
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Competitiveness and Private Sector Development: Egypt 2010
© OECD 2010
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PRINTED IN FRANCE
(25 2010 04 1 P) ISBN 978-92-64-08739-2 – No. 57549 2010
Competitiveness and Private Sector Development
egypt
business climate development strategy
As part of a far-reaching programme of economic reforms, the Egyptian government is seeking to
improve its business climate to attract more investment and stimulate growth and job creation. The
Egyptian Ministry of Investment has asked the OECD to carry out an in-depth assessment of Egypt’s
business climate to identify policy priorities and actions needed to foster more domestic, regional
and international investment. This report presents the results of that assessment. It also highlights
Egypt’s key reform priorities and describes the challenges and opportunities in improving Egypt’s
business climate to help Egypt realise its full potential as a high-growth economy.
The OECD assessment is the first phase of a Business Climate Development Strategy (BCDS) which
identifies policy priorities and proposes specific reforms and actions to enable Egypt to achieve
measurable improvements in its business climate. One key finding is that Egypt’s investment and
trade policy reforms have moved the country’s business climate closer to best practice in OECD
economies. However, the report notes that to attract further private investment, Egypt needs to
improve the country’s anti-corruption measures, skills development, infrastructure and access
to finance, especially for the country’s small and medium-sized enterprises. BCDS Egypt offers
specific recommendations on how policies, institutions and regulations can be improved to increase
predictability for investors and make Egypt a prime investment destination.
This review was carried out as part of the wider MENA-OECD Investment Programme. It uses a
new BCDS methodology that evaluates the business climate in 12 policy areas and draws on core
OECD instruments, such as the Policy Framework for Investment (PFI), which have been successfully
applied in other countries. By helping countries prioritise their actions and build consensus among
stakeholders, the BCDS process supports the successful implementation of reforms to develop the
private sector in the MENA region.
For more information on the full results of the BCDS assessment, or to obtain additional information
about the activities and publications of the MENA-OECD Investment Programme, please visit:
www.oecd.org/MENA/investment.
The full text of this book is available on line via these links:
www.sourceoecd.org/finance/9789264087392
www.sourceoecd.org/industrytrade/9789264087392
Those with access to all OECD books on line should use this link:
www.sourceoecd.org/9789264087392
SourceOECD is the OECD online library of books, periodicals and statistical databases.
For more information about this award-winning service and free trials ask your librarian, or write to us
at SourceOECD@oecd.org.
With the financial assistance
of the European Union
www.oecd.org/publishing
isbn 978-92-64-08739-2
25 2010 04 1 P
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