Competitiveness and Private Sector Development: Egypt 2010 by OECD

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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

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ISBN 978-92-64-08739-2 (print)
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Series: Competitiveness and Private Sector Development
ISSN 2076-5754 (print)
ISSN 2076-5762 (online)


Photo credits: Cover © Ramsey Arnaoot



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                                                                                                             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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          20
                2. The BCDS methodology focuses specifically on business environment policies . . .                                                         20
                3. BCDS builds on OECD tools and instruments taken from the good practices
                   of other international organisations and adapted to the region’s needs. . . . . . .                                                      21
                4. Key substantive areas of business climate reforms were selected. . . . . . . . . . . .                                                   21
                5. The three-step BCDS process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        23
                6. Cross-cutting findings and summary of key recommendations per chapter . . .                                                              24
                Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   25

         Chapter 2. Recent Business Climate Reforms in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                        27
             1. Privatisation programme and restructuring of state-owned enterprises . . . . . .                                                            28
             2. Trade liberalisation and trade facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 29
             3. Tax policy and tax administration reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                     30
             4. Monetary and exchange rate policy reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                       31
             5. Banking sector reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      32
             6. Infrastructure reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    33
             7. Land and property registration reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                  34
             8. Policies towards foreign investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            34

         Chapter 3. Macroeconomic Context of Egypt’s Business Climate Reforms . . . . . . . . . . .                                                         35
             1. GDP growth and job creation accelerated from 2004 to 2008, and Egypt has
                 weathered the global crisis comparatively well . . . . . . . . . . . . . . . . . . . . . . . . . . .                                       36
             2. Budget deficit and public debt have been broadly contained . . . . . . . . . . . . . . . .                                                  38
             3. Inflation remains high. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     39
             4. Foreign direct investment increased significantly until 2008 but has fallen
                 back since . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           40
             5. Trade deficit persists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  41
             6. The financial sector’s resilience has improved . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                      42



COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010                                                                                           7
TABLE OF CONTENTS



              7. Major challenges persist for the Egyptian economy . . . . . . . . . . . . . . . . . . . . . . .                                           42
              8. The global economic crisis has set the bar even higher. . . . . . . . . . . . . . . . . . . . .                                           44
              Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    45

       Chapter 4. Business Climate Development Strategy: The Assessment of Egypt’s
           Business Climate Key Findings from Phase 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                        47
           1. Cross-cutting findings to all 12 dimensions assessed . . . . . . . . . . . . . . . . . . . . . .                                             49
           2. Dimension-specific findings for the 12 areas of Egypt’s business climate . . . . .                                                           58
              Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

       Chapter 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              125
           1. Egypt has made progress on business climate reform which has translated
               into economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     126
           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 . . . . . . .                                                       127
           3. The next phase of the BCDS focuses on defining policy priorities
               and on project implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            129

       References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131



       Figures
         1.1.       BCDS – a Comprehensive Assessment Framework for Egypt . . . . . . . . . . . . . . . . 22
         3.1.       Real GDP growth: % real change year on year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
         3.2.       Unemployment rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
         3.3.       Fiscal deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
         3.4.       Current-account balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
         3.5.       Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
         3.6.       Inflation, CPI (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
         3.7.       FDI inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
         3.8.       Trade position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
         3.9.       Composition of budget by expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
         4.1.       Egypt weighted dimension scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
         4.2.       Investment Policy and Promotion: Scores by subdimension . . . . . . . . . . . . . . . . 65
         4.3.       Privatisation and public partnerships: Scores by subdimension . . . . . . . . . . . . . 70
         4.4.       Trade Policy and Facilitation: Scores by subdimension . . . . . . . . . . . . . . . . . . . . 77
         4.5.       Better Business Regulation: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . 82
         4.6.       SME Policy and Promotion: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . 88
         4.7.       Anti-Corruption: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
          4.8.      Business Law and Commercial Conflict Resolution: Scores by subdimension . . . . 101
          4.9.      Infrastructure: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
         4.10.      Access to Finance: Scores by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122




8                                                                           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 MENA-
         OECD 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 Cebreiro-
      Gomez, 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 crowding-
        out 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          Arab Anti-Corruption and Integrity Network
         BAC             Business Advisory Committee
         BDC             Banque du Caire
         BIAC            Business and Industry Advisory Committee
         CBE             Central Bank of Egypt
         CET             Continuing education and training
         CGC             Credit Guarantee Company
         CIDA            Canadian International Development Agency
         COMESA          Common Market for Eastern and Southern Africa
         CPI             Consumer price index
         ECA             Egyptian Customs Authority
         ECS             Egyptian Commercial Services
         EDB             Export Development Bank of Egypt
         EEHC            Egyptian Electricity Holding Company
         EEI             Egyptian Education Initiative
         EEPC            Egyptian Export Promotion Center
         EFSA            Egyptian Financial Supervisory Authority
         EIoD            Egyptian Institute of Directors
         ENR             Egyptian National Railways
         EOS             Egyptian Organisation for Quality
         ERRADA          Egyptian Regulatory Reform and Development Activity
         ETTIC           Egypt Technology Transfer and Innovation Centres
         EU              European Union
         EWRA            Egyptian Water Regulatory Agency
         ExpoLink        Egyptian Exporters Association
         FDI             Foreign Direct Investment
         FTA             Free trade agreement
         GAFI            General Authority for Investment and Free Zones
         GAFTA           Greater Arab Free Trade Area
         GARBLT          General Authority for Roads, Bridges and Land Transport
         GDP             Gross Domestic Product
         GMU             Governmental Ministerial Unit
         GRU             General Review Unit
         ICA             Investment Climate Assessment
         IDA             Industrial Development Authority
         IFC             International Finance Corporation
         IMC             Industrial Modernisation Center
         IZ              Investment zones



COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010                  17
ACRONYMS



      JICA    Japan International Cooperation Agency
      MCC     Modern customs centres
      MCIT    Ministry of Communications and Information Technology
      METR    Marginal effective tax rate
      MOF     Ministry of Finance
      MOI     Ministry of Investment
      MOTI    Ministry of Trade and Investment
      MPC     Monetary Policy Committee
      MSE     Micro and small enterprise
      MSME    Micro, small and medium-sized enterprise
      NCP     National Contact Point
      NREA    New and Renewable Energy Authority
      NSDP    National Supplier Development Programme
      NTRA    National Telecommunications Regulatory Authority
      PFI     Policy Framework for Investment
      POGAR   Programme on Governance in the Arab Region
      PPP     Public-private partnership
      RDI     Research, Development and Innovation (programme)
      RRI     Regulatory Restrictiveness Index
      SCHRD   Supreme Council for Human Resource Development
      SFD     Social Fund for Development
      SME     Small and medium-sized enterprise
      SNCF    Société nationale des chemins de fer français
      SPS     Sanitary and Phytosanitary
      TAS     Trade Agreements Sector
      TIC     Transparency and Integrity Committee
      TIN     Taxpayer identification number
      TPAU    Trade Policy Analysis Unit
      TRIM    Trade-Related Investment Measures
      TVET    Technical, Vocational, Education and Training
      UNCAC   United Nations Convention against Corruption
      UNDP    United Nations Development Programme
      USTR    United States Trade Representative
      VC      Venture capital
      VET     Vocational education and training
      WEF     World Economic Forum
      WG      Working Group (OECD)
      WTO     World Trade Organisation




18                                     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 long-
         term 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.




                                                                                                 19
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                                                COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
                                        1.   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,


COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010                                          21
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                            II. Rule of Law
                   1. Investment Policy and Promotion                             1. Anti-corruption
                   2. Privatisation Policy and Public Private                     2. Corporate Governance
                      Partnerships                                                3. Business Law and Commercial
                   3. Tax Policy and Administration                                  Conflict Resolution
                   4. Trade Policy and Facilitation
                   5. Better Business Regulation
                   6. SME Policy and Promotion




                                                    III. Factor Markets
                                                    1. Infrastructure policy
                                                    2. Human Capital development policy
                                                    3. Access to Finance




22                                                               COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
                                        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


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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                                                COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
                                              1.   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.




COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010                                                                             25
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 pro-
        business 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                                                COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
                                                                         2.   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 joint-
         venture 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 semi-
         finished 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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2. RECENT BUSINESS CLIMATE REFORMS IN EGYPT



             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 far-
         reaching 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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2. RECENT BUSINESS CLIMATE REFORMS IN EGYPT



             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 end-
        October 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 state-
        owned banks left, and the state’s market share measured by bank assets has fallen to
        around 45%.




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                                                                         2.   RECENT BUSINESS CLIMATE REFORMS IN EGYPT



              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, private-
         sector 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.




34                                                 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

                                         10.0         10.1
                              9.8                                  9.9
           10
                   9.36                                                           9.5
                                                                                                                              9.3
                                                                                             9.1
                                                                                                        8.9       8.8
            9


            8


            7


            6
                 FY2001     FY2002      FY2003       FY2004   FY2005         FY2006        FY2007     FY2008    FY2009      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

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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
                                 Fiscal deficit, billion LE                                General government fiscal deficit (% GDP)
        Fiscal deficit, LE billion                                                                                         Fiscal deficit, % of GDP
          120                                                                                                                                 12

                      10.2             10.4
          100                                            9.5          9.6                                                                   10

                                                                                     8.2
           80                                                                                       7.5                                     8
                                                                                                                   6.8           6.9

           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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                                                                      3.   MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS



                                                 Figure 3.4. Current-account balance
                                   Current-account balance                              Current-account balance (% of GDP)
          USD billion                                                                                                      Total trade, % of GDP
             6                                                                                                                             6
                             5.5
                                                3.9
              4                                                                                                                               4

                                                                  1.8                 2.1
              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

            80                                                                 87
                                                                 80
            70                                        77                                     76
                                       71
            60                                                                                             66
                        63                                                                                               60              62
            50

            40
                                                      43
                                                                 38
            30                         35
                        29                                                     31
            20                                                                               28
                                                                                                           23
                                                                                                                         20
            10                                                                                                                           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


                                                               4.9
          4               2.7        4.2
                 2.2


          0
                2001     2002     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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                                                                         3.   MACROECONOMIC CONTEXT OF EGYPT’S BUSINESS CLIMATE REFORMS



                                                              Figure 3.7. FDI inflows
                                          FDI inflow – current prices                                  FDI, % of GDP
          FDI inflows, USD billion                                                                                                  FDI as % of GDP
             14                                                                                                                               14

             12                                                                                                                               12

             10                                                                                                                               10
                                                                                                8.5
                                                                                                                 8.1
              8                                                                                                                               8

                                                                               5.7
              6                                                                                                                               6
                                                              4.4                                                                   4.3
              4                                                                                                                               4

              2                                                                                                                               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                           Imports, current USD in millions
                                     Trade deficit, current USD in millions                     Trade deficit, % GDP
          Trade volumes, USD billion                                                                                    Total trade deficit, % of GDP
             35                                                                                                                                 35

             25                                                                                                                                25

             15                                                                                                                                15

              5                                                                                                                                5

             -5                                                                                                                                -5

            -15                                                         -12                                                          -16       -15
                          -13                    -14                                    -15                      -17
            -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-to-
       deposit 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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                                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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         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-a93b-
             0000779fd2ac.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.




                                                                                               47
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 cross-
        dimensional 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:
        ●   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 anti-
         competitive 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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        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 co-
            ordinated 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 sub-
        optimal 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:
        ●   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 co-
             operation 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 policy-
             coordination.

         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 mid-
         1990s, 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 time-
            consuming.
        ●   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 high-
         stake, 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

                                                         IPP                                                                        3.73

                                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 sector-
         specific 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 co-
         ordination 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 linkages
                                                              -
                                                  One stop shop

                                 Client relationship management

                                                Policy advocacy

                                              Aftercare services

                                           Free economic zones

                                                                    0    1           2             3           4     5



                                                                              Subdimension 3: Transparency



                                  Publication avenues and tools




                 Prior notification and stakeholder consultations




                                        Procedural transparency



                                                                    0    1            2            3           4     5



         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 co-
         ordinated, 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, risk-
        taking, 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 self-
         assessment 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 Sub-
        Committee.

        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 sub-
         committees. 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



                                                                                        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              4         5



                                                                                     Subdimension 4: Pro-active trade policy



                                          Export promotion agencies




                                      Export promotion programmes



                                                                         0   0.5    1      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 end-
         March 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 long-
        term 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 cost-
         benefit 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, micro-
         finance 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 policy-
         related 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 high-
        value 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 co-
         ordinate 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 micro-
        enterprises. However, when it comes to medium-sized enterprises and those with high-
        growth 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 co-
        ordination 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 co-
             ordination 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


                                                                               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               4     5



        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 in-
        depth 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 anti-
        corruption 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 MENA-
        OECD 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 non-
        government 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 anti-
         corruption 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 anti-
         corruption 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-à-
        vis 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

                                                                               0           1             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

                                                                               0           1             2             3            4            5

                                                                                    Subdimension 5: Private sector actions to stem corruption

                                                          Codes of conduct


                                                  Compliance programmes


                                                    Non-financial reporting

                                                                               0           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 non-
         financial 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, non-
        governmental 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 non-
             discrimination 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             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 high-
        speed 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



                                                                            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               4   5



                                                                             Subdimension 3: Power


                            Electricity network performance



                            Electricity regulatory framework



                                Energy and the environment


                                                               0   1              2           3               4   5



                                                                       Subdimension 4: Water and sanitation



                           Water and sanitation performance




                  Water and sanitation regulatory framework



                                                               0   1              2           3               4   5




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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 non-
        performing 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 wide-
        ranging. 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 paper-
         based 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 export-
         oriented 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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         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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                         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
                                                                                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              4             5
                                                                              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
                                                                                   Subdimension 4: Early-stage finance

                                 Availability of risk capital
                                 Business angels network
                                    Micro-finance facilities
                                          Leasing facilities
                                        Factoring facilities

                                                                0              1             2            3              4             5
                                                                                   Subdimension 5: Guarantee schemes

                                 Credit guarantee schemes


                                Export guarantee schemes

                                Credit information services

                                                                0              1             2            3              4             5
                                                                                    Subdimension 6: Improving skills


                                          Financial literacy



                                     Management training


                                                                0              1             2            3              4             5




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         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 anti-
             competitive 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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                                                    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 high-
         growth 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. Foreign-
       exchange 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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                                                                                              5.   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 know-
         how 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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140                                                      COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 2010
OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16
                     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.




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