Competitiveness and Private Sector Development-Egypt 2010-2510041e

Competitiveness and Private Sector Development

egyPtbuSineSS Climate DeveloPment Strategy As part of a far-reaching programme of economic reforms, the Egyptian government is seeking to improve its business climate to attract more investment and stimulate growth and job creation. The Egyptian Ministry of Investment has asked the OECD to carry out an in-depth assessment of Egypt’s business climate to identify policy priorities and actions needed to foster more domestic, regional and international investment. This report presents the results of that assessment. It also highlights Egypt’s key reform priorities and describes the challenges and opportunities in improving Egypt’s business climate to help Egypt realise its full potential as a high-growth economy.

The OECD assessment is the first phase of a Business Climate Development Strategy (BCDS) which identifies policy priorities and proposes specific reforms and actions to enable Egypt to achieve measurable improvements in its business climate. One key finding is that Egypt’s investment and trade policy reforms have moved the country’s business climate closer to best practice in OECD economies. However, the report notes that to attract further private investment, Egypt needs to improve the country’s anti-corruption measures, skills development, infrastructure and access to finance, especially for the country’s small and medium-sized enterprises. BCDS Egypt offers specific recommendations on how policies, institutions and regulations can be improved to increase predictability for investors and make Egypt a prime investment destination.

This review was carried out as part of the wider MENA-OECD Investment Programme. It uses a new BCDS methodology that evaluates the business climate in 12 policy areas and draws on core OECD instruments, such as the Policy Framework for Investment (PFI), which have been successfully applied in other countries. By helping countries prioritise their actions and build consensus among stakeholders, the BCDS process supports the successful implementation of reforms to develop the private sector in the MENA region.

For more information on the full results of the BCDS assessment, or to obtain additional information about the activities and publications of the MENA-OECD Investment Programme, please visit: www.oecd.org/MENA/investment.

The full text of this book is available on line via these links: www.sourceoecd.org/finance/9789264087392 www.sourceoecd.org/industrytrade/9789264087392

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www.oecd.org/publishingWith the financial assistance of the European Union

Competitiveness and Private Sector Development:

Egypt 2010

BUSINESS CLIMATE DEVELOPMENT STRATEGY

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The OECD is a unique forum where governments work together to address the economic, social

and environmental challenges of globalisation. The OECD is also at the forefront of efforts to

understand and to help governments respond to new developments and concerns, such as corporate

governance, the information economy and the challenges of an ageing population. The Organisation

provides a setting where governments can compare policy experiences, seek answers to common

problems, identify good practice and work to co-ordinate domestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic,

Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea,

Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,

Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The

European Commission takes part in the work of the OECD.

OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and

research on economic, social and environmental issues, as well as the conventions, guidelines and

standards agreed by its members.

ISBN 978-92-64-08739-2 (print)ISBN 978-92-64-87400-8 (PDF)

Series: Competitiveness and Private Sector DevelopmentISSN 2076-5754 (print)ISSN 2076-5762 (online)

Photo credits: Cover © Ramsey Arnaoot

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

© OECD 2010

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This work is published on the responsibility of the Secretary-General of the OECD. The

opinions expressed and arguments employed herein do not necessarily reflect the officialviews of the Organisation or of the governments of its member countries.

FOREWORD

Foreword

In 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.

COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT: EGYPT 2010 © OECD 20104

ABOUT THIS DOCUMENT

About this Document

This 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.


http://www.oecd.org/mena/investment

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


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’sBusiness 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

Figures1.1. 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


ACKNOWLEDGEMENTS

Acknowledgements

This 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.


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.


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.


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

The 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.


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


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

In 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


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


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


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 toestablish and maintain effective public institutions to oversee efficient markets andfavour sustainable private sector development. Based on recent work on economicgrowth and sustainable development a consensus has emerged among theinternational development community that private-sector led economicdevelopment strategies are essential to guaranteeing sustainable growth and long-term job creation.

The Business Climate Development Strategy (BCDS), developed by the PrivateSector Development Division at the OECD, builds on a number of tools referenced inthe OECD’s Policy Framework for Investment (PFI) and which provide a checklist ofimportant policy issues for consideration by any government interested in creatingan attractive business environment for domestic and international investors. Thischapter discusses how the BCDS methodology was derived and the criteria used toestablish 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 policiesThe BCDS follows the latest approaches in policy support among international and

national organisations that work on economic development issues. Over the past two



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 selectedDrawing on the Private Sector Development Division’s previous experience in

emerging market regions, the MENA-OECD Investment Programme’s consultation process,



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 Environment1. Investment Policy and Promotion2. Privatisation Policy and Public Private Partnerships3. Tax Policy and Administration4. Trade Policy and Facilitation5. Better Business Regulation6. SME Policy and Promotion

II. Rule of Law1. Anti-corruption2. Corporate Governance3. Business Law and Commercial Conflict Resolution

III. Factor Markets1. Infrastructure policy2. Human Capital development policy3. Access to Finance



5. The three-step BCDS processThe 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




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 chapterThe 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.



Notes

1. Prominent publications on economic growth include, but are not limited to: Barro, R. (2003), andX. 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 Richand 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/daf/ investment . The specific instruments are l isted at www.oecd.org/document/61/0,3343,en_2649_34893_33696253_1_1_1_1,00.html.


http://www.oecd.org/daf/investment

http://www.oecd.org/daf/investment

http://www.oecd.org/document/61/0,3343,en_2649_34893_33696253_1_1_1_1,00.html

http://www.oecd.org/document/61/0,3343,en_2649_34893_33696253_1_1_1_1,00.html


© OECD 2010

Chapter 2

Recent Business Climate Reforms in Egypt

Egypt’s business environment has improved substantially in recent years as a resultof a series of successful economic reforms, mainly at the macroeconomic level. Thereforms have been undertaken by the pro-business government formed under thePrime Minister, Ahmed Nazif, in 2004. This chapter discusses the substantial andtangible advances in many areas of the operational business environment andhighlights some of the major reforms that have taken place in Egypt since 2004, andwhich have played a positive role in improving Egypt’s business climate.

Arising from a need to stimulate economic growth and generate new jobs, thegovernment set out to improve Egypt’s overall economic performance in order toincrease its growth potential and favour sustainable development. Areashighlighted here that have showed noticeable improvements include thegovernment’s privatisation programme, taxation, trade tariffs, monetary policy, thebanking sector and infrastructure.

27

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 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 enterprisesAfter 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



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 facilitationThe 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 whileother companies are the responsibility of their respective ministries (Energy, Finance and so on).



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 reformsOne 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.



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 reformsThe 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.



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 reformsConsiderable 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%.



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 reformsInfrastructure 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.



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 reformsLimited 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 investorsIn 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.



© OECD 2010

Chapter 3

Macroeconomic Context of Egypt’s Business Climate Reforms

The macroeconomic environment is an important determinant of a country’sbusiness climate. Its soundness, stability and overall quality can sway decisions offoreign and local investors alike. Egypt’s macroeconomic environment has shownsignificant improvement since 2004, driven by the pro-business administration ofPrime 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. Structuralbottlenecks, high barriers to entry, and little growth potential were keepinginvestors away.

It is in no small measure the reform agenda implemented since 2004 that has setEgypt on the path to an improved economic performance. This chapter provides abrief overview of the macroeconomic environment in Egypt until end-2009,including the fiscal and banking sectors. It then takes a look at the main remainingchallenges to the economic performance against a backdrop of a more unpredictableglobal economic environment.

35

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 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.



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

Figure 3.1. Real GDP growth: % real change year on year

Source: Ministry of Finance.

Figure 3.2. Unemployment rate (%)

Source: Ministry of Economic Development.

%

20

15

10

5

0

-5

-10FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Real consumption growth Real investment growth Real GDP growth

FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY20101

12

11

10

9

8

7

6

%

9.36

9.8 10.0 10.1 9.99.5

9.1 8.9 8.8

9.3



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 containedSimplified 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).

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

Figure 3.3. Fiscal deficit

Source: Central Bank of Egypt.

120

100

80

60

40

20

0

12

10

8

6

4

2

0

10.2 10.49.5 9.6

8.27.5

6.8 6.9

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Fiscal deficit, LE billion Fiscal deficit, % of GDP

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



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.

3. Inflation remains highInflation (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

Figure 3.4. Current-account balance


Figure 3.5. Total debt


6

4

2

0

-2

-4

-6

6

4

2

0

-2

-4

-6

2.8

5.53.9

1.8 2.1

0.6

FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

USD billion Total trade, % of GDP

Current-account balance Current-account balance (% of GDP)

100

90

80

70

60

50

40

30

20

10

0

%

63

7177 80

87

76

6660 62

2935

43 3831

2823 20

17

FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Gross domestic public dept (% GDP) Gross external public dept (% GDP)



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.

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.

Figure 3.6. Inflation, CPI (%)

Source: CAPMAS.

2001 2002 2003 2004 2005 2006 2007 2008 2009

20

16

12

8

4

0

%

2.2 2.7 4.2

17.4

4.9

7.6

9.6

18.3

11.8



5. Trade deficit persistsTrade 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 3.7. FDI inflows


14

12

10

8

6

4

2

0

14

12

10

8

6

4

2

0

0.9 0.5

4.4

5.7

8.5 8.1

4.3

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

FDI inflows, USD billion FDI as % of GDP

FDI inflow – current prices FDI, % of GDP

Figure 3.8. Trade position


35

25

15

5

-5

-15

-25

-35

-45

-55

35

25

15

5

-5

-15

-25

-35

-45

-55

-13 -14 -12 -15 -17-16

FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Trade volumes, USD billion Total trade deficit, % of GDP

Trade deficit, current USD in millions Trade deficit, % GDPExports, current USD in millions Imports, current USD in millions



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 improvedAlthough 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.



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.

Figure 3.9. Composition of budget by expenditure


100

80

60

40

20

0

%

FY2006 FY2007 FY2008 FY2009

Interest payments

All others

Subsidies, grants and social benefits

Wages and salaries



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 higherThe 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



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 EgyptianCentral 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.


http://www.ft.com/cms/s/0/81ba8f80-a41d-11dc-a28d-0000779fd2ac,dwp_uuid=9140808e-a488-11dc-a93b-0000779fd2ac.html?nclick_check=1

http://www.ft.com/cms/s/0/81ba8f80-a41d-11dc-a28d-0000779fd2ac,dwp_uuid=9140808e-a488-11dc-a93b-0000779fd2ac.html?nclick_check=1


© 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 timelyinsights on structural policy reforms that should be introduced to further improvethe business climate and continue to attract investment into the economy. Thischapter summarises the findings of a recent assessment of the Egyptian businessclimate carried out by the MENA-OECD Investment Programme. The BCDS analysishas produced important insights into the state of Egypt’s current business climate.

The results presented here are grouped in two categories, going from broaderinsights to ones that are more specific and detailed. First, cross-dimensionalfindings are insights pertinent to several of the twelve BCDS dimensions. Theyidentify common challenges that have been encountered in different parts ofgovernment. These findings matter to policy makers since they typically representgovernance or managerial shortcomings that can be addressed and potentiallyleveraged across several topic areas.

Second, dimension-specific findings summarise the main achievements and keyremaining challenges and areas for improvement in the 12 dimensions covered bythe BCDS.

47

4. BUSINESS CLIMATE DEVELOPMENT STRATEGY: THE ASSESSMENT OF EGYPT’S BUSINESS CLIMATE KEY FINDINGS FROM PHASE 1

Against 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.



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 oftransparency 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



foreign investment lies in the inconsistent, unequal and preferential way policies areapplied. 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 marketopenness 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.



● 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 pushingforward 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



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



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 relatedservices 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



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, inthe 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,



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



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 climatereform. 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



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



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 andpublish 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 climateThe 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

Note: Both the Tax Authority and the Corporate Governance framework in Egypt are currently undergoing majoradjustments, making it difficult to score these policy dimensions in an accurate manner at the time of theassessment. The Human Capital dimension contains many indicators that cannot be scored according to the BCDS5-level approach, such as annual spending on secondary education per student, or participation in vocationaltraining by employees. For this reason, the BCDS Review Committee decided not to provide an overall score for thisdimension. For full details of the BCDS assessment framework (the “grid”), go to the website of the MENA-OECDInvestment 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 theweighting method.

0 1 2 3 4 5

2.12

2.39

2.60

2.70

2.71

3.03

3.28

3.52

3.73

Anti-Corruption

Infrastructure

Access to Finance

SME Policy and Promotion

Business Law and Commercial Courts

Privatisation Policy and Public Private Partnerships

Better Business Regulation

Trade Policy and Facilitation

IPP




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. Egypt has

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



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 toact 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.



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 investmentpromotion. 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



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 nationaltreatment. 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.



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. The Egypt ian government

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 investmentpromotion 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.



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



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.

Figure 4.2. Investment Policy and Promotion: Scores by subdimension

-

0 1 2 3 4 5

0 1 2 3 4 5

50 1 2 3 4

Subdimension 1: FDI policy

Subdimension 2: Promotion and facilitation

Subdimension 3: Transparency

International arbitration

International Investment Agreements

Guarantees against expropriation

Intellectual Property

Titling and cadastre

Land ownership

Performance requirements

FDI incentives

Transfer of FDI-related capital

Admittance of business personnel in

Approval procedures

Restrictions to national treatment

Free economic zones

Aftercare services

Policy advocacy

Client relationship management

One stop shop

FDI-SME linkages

National and sub-national co-ordination

Monitoring and evaluation

Institutional support

Strategy

Procedural transparency

Prior notification and stakeholder consultations

Publication avenues and tools



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 1990s6 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.



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



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



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 recommended that the

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.



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.

Figure 4.3. Privatisation and public partnerships: Scores by subdimension

0 1 2 3 4

0 1 2 3 4 5

5

Subdimension 1: Privatization policy

Subdimension 2: Trade liberalisation and trade openess

Ownership restrictions

Communication and consultation

Privatisation strategy

Cost benefit analysis

PPP consultations

PPP unit

PPP legislation

PPP monitoring



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



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 tax wedge

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.



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



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. Egypt 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.



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,



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 tobetter 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.



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

0 1 2 3 4 5

0 1 2 3 4 5

0

0

1 2 3 4 5

51 2 3 43.5 4.52.51.50.5

Subdimension 1: Trade policy strategy and evaluation

Subdimension 2: Trade liberalisation and trade openness

Subdimension 4: Pro-active trade policy

Subdimension 3: Non-tariff barriersTBT – Institutional and legislative framework

for standardisation

SPM – Institutional and legislative framework for SPS

TBT – Transposition of international standards

Monitoring and evaluation of the impact of trade measures

Public/private consultation

Institutional co-ordination

Quantitative restrictions

Custom duties on capital goods

Regional trade agreements

WTO membership

ABT – Accessibility of customs laws and regulations

ABT – Licenses

ABT – Time and documents for import

ABT – Time and documents for export

SPM – Transposition of international standards for SPS

TBT – Certification

Export promotion programmes

Export promotion agencies



The central export promotion agency requires more resources, and a one-stop exportpromotion 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 andregulation. 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



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.



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 publicadministration and the business community. While the reform programme may

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 reviewunit. 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



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) andclosing 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”).



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

Figure 4.5. Better Business Regulation: Scores by subdimension

0 1 2 3 4 5

0 1 2 3 4 5

Subdimension 1: Better legislation and admistrative simplification

Subdimension 2: Cheaper and faster start-up

Cost-benefit analysis of new enterprise legislation and regulation

Elimination of redundant legislation and regulations

Review and simplification of current legislation

Clear task assignment for the review and simplificationof legislation and administrative procedures

Strategy for the simplification of legislation,and administrative procedures

Institutional framework for regulatory reformand administrative simplification

On-line registration

One stop shops (regional investment centres, …)

“Silence is consent” applied to company registration procedures

Cost required to close a business

Time required to close a business

Minimum capital requirements for limited liability companies(% of GNI per capita)

Costs connected with registration for limited liability companies(% of GNI per capita)

Number of steps to complete the overall registration process,including compulsory licenses for standard business activities

Number of days to complete the overall registration process,including compulsory licences for standard business activities

Number of days for compulsory company identification number(s)

Administrative identification numbers

Official costs to obtain the company registration certificate

Number of administrative steps to obtain the companyregistration certificate

Number of days to obtain company registration certificate



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 whereinstitutions are active but work in isolation from each other and are sometimesill-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.



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 andinhibits 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 industrialenterprises over younger, smaller enterprises with high-growth potential operating inthe 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



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 mainbeneficiaries 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.



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’



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



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.

Figure 4.6. SME Policy and Promotion: Scores by subdimension

0 1 42 3 5

0 1 2 3 4 5

Subdimension 1: Institutional framework for SME policy

Subdimension 2: Targeted policy tools

Business establishment support services

Business incubators

Financial support for innovative SMEs

Establishment of innovation andtechnology centres and networks

Linkages/supplier development programmes

Monitoring and evaluation

Public-private consultation

Coordination with other ministries

Clear task assignment to legislation draftingand implementation

SME development strategies

Delegation of responsibility for SME policy



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.)



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-corruptionpartner. 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



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. The Egyptian

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.



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.



Figure 4.7. Anti-Corruption: Scores by subdimension

0 1 2 3 4 5

50 1 2 3 4

0

0

0

51 2 3 4

51 2 3 4

51 2 3 4

Subdimension 1: Anti-corruption strategy

Subdimension 2: Criminalisation of corruption

Subdimension 4: People and public institutions involved in the fight against corruption

Subdimension 3: Enforcement of domestic anti-corruption provisions

Subdimension 5: Private sector actions to stem corruption

Non-financial reporting

Compliance programmes

Codes of conduct

The media: A means to expose malfeasance

Awareness raising and public education

b) Reducing corruption risks

a) Framework and process

Public procurement

Customs administration

Tax administration

Inter-agency co-ordination and co-operation

Accountable, responsible institutions to fight corruption

Independence of the judiciary

Implementation and enforcement of sanctions

Collection of statistics on corruption offences

Reporting

Immunities

Control and detection

International co-operation: Mutual legal assistance, extradition

Sanctions and confiscation

Actors involved in bribery

Criminal offences

Stakeholder participation

Existence of an anti-corruption strategy

Stocktaking of the corruption situation



Corporate governance regulation has been upgraded. A new legal framework, the

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.



Boards need to be made independent of their controlling shareholders, and annualreports 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 beseparated 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.



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.



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 acoherent business law reform. The absence of a comprehensive business law reform

strategy backed by a powerful central law commission, or a similar reform supervisory



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.



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



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.



Figure 4.8. Business Law and Commercial Conflict Resolution: Scores by subdimension

0 1 2 3 4 5

0

0 1 42 3 5

0 1 42 3 5

1 42 3 5

1 42 3 50

Subdimension 1: Business law reform

Subdimension 3: Traditional business law

Subdimension 2: Fundamental business law

Subdimension 4: New generation business law

Subdimension 5: Enforcement capacities/Arbitration system

Insolvency law

Collateral law

Company law

Intellectual property rights

Land titling system

Land rights

Personal property rights

Contract law

Central law commission

Strategy of business law and enforcement reform

Arbitration

Economic courts

Leasing and factoring laws

Market contestability- abuse of dominant position

Market contestability- anti-competitive behaviour

Planning and construction law

Environmental law

Tax law

Labour law



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



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. Reform of

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-transferschemes (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



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 independentregulation. 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 waitingtimes 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- andcontent-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.



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



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 inprogress. 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 newcapacity. 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.



Congestion is an increasing problem due to the lack of an intermodal transportscheme. 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.



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. Very dynamic economic

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. Egypt ’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.



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 operatingcompanies. 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



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 andskills. 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. New pol icy

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. Review

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.



Figure 4.9. Infrastructure: Scores by subdimension

0 1 2 3 4 5

50 1 2 3 4

0 1 2 3

0

4 5

1 2 3 4 5

Subdimension 1: Telecommunications

Subdimension 3: Power

Subdimension 4: Water and sanitation

Subdimension 2: Transport

Water and sanitation regulatory framework

Water and sanitation performance

Energy and the environment

Electricity regulatory framework

Electricity network performance

Maritime transport performance

Maritime transport regulatory framework

Air transport performance

Air transport regulatory framework

Rail network regulatory framework

Rail network performance

Road network regulatory framework

Road network performance

Internet performance

Mobile voice performance

Mobile regulatory framework

Landline voice performance

Landline regulatory framework



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 firststeps towards a human resources development policy with a wide cross-section ofstakeholders 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



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-centralisedbudget management leads to a fragmented, exclusive approach to developing humancapital. 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 retainteachers. 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



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 developmentstrategy, adopt inclusive practices to involve stakeholders, and use the existing SCHRDframework 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.



Introduce procedures to monitor the teacher recruitment and retention strategy and putin 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 toall 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 incontinuing 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



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



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



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. Large spreads

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. One year af ter the

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



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. Many of the

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



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. Early stage f inance remains re lat ively

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



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 offinancial 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.



Figure 4.10. Access to Finance: Scores by subdimension

0 1 2 3 4 5

5

5

50 1 2 3 4

0 1 2 3 4

0 1 2 3 4

0 1 42 3 5

50 1 32 4

Subdimension 1: Effective institutional and regulatory framework

Subdimension 4: Early-stage finance

Subdimension 3: Access to capital markets

Subdimension 2: Access to bank finance

Subdimension 5: Guarantee schemes

Subdimension 6: Improving skills

Collateral and provisions requirements

Registration systems for movable assets

Cadastre

Competition in the banking system

Banking sector outreach

Domestic credit to private sector

Non-performing loans

Capital market authority

Stock market depth, liquidity, and access

Development of the corporate bond market

Sophistication of financial instruments

Availability of risk capital

Business angels network

Micro-finance facilities

Leasing facilities

Factoring facilities

Credit guarantee schemes

Export guarantee schemes

Credit information services

Financial literacy

Management training



Notes

1. In the 2007 World Bank Doing Business report, Egypt scores over 60 on the trade policy index, incomparison to an average of 52 for high growth countries (China, Malaysia, Poland, Thailand andTurkey).

2. Benhassine, Najy. From Privilege to Competition: Unlocking Private-led Growth in the Middle East andNorth 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 companiesworking in the production of steel rebars in violation of Article 6 of the anti-monopoly law couldnot be proven. There was also no evidence to show that local steel giant Ezz Steel had abused itsdominant 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 WestAsia.

6. The main law is Public Sector Law 203/1991, which governs the State-Owned Enterprises (SOEs), inaddition 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 particularto 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 2004when the Ministry of Investment was established and took over the entire Asset ManagementProgramme.

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 andDevelopment in Egypt”, MPRA Paper, No. 13034, 27 January 2009.

16. OECD (2009), “Credit Guarantee Schemes: A Tool to Promote SME Growth and Innovation in theMENA 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 beenconfirmed by Egyptian sources in the case of electric connections (EGYPTERA audit), there hasbeen no confirmation for water connections. In the case of telecommunications, Telecom Egyptquotes a maximum delay of 5 days whereas the 2008 World Bank Enterprise survey quotes85.5 days on average. Because data were communicated late, the OECD Secretariat was unable toinvestigate 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 andtesting to schools, colleges, employers and other places of learning in the UK and internationally,www.edexcel.com/Pages/Home.aspx.


http://www.bi-me.com/main.php?id=15015&t=1

http://www.dailystaregypt.com/article.aspx?ArticleID=19424

http://www.thedeal.com/newsweekly/community/egypt's-reforms-inspire-investments.php

http://www.edexcel.com/Pages/Home.aspx


© OECD 2010

Chapter 5

Conclusion

Egypt has made impressive strides with regard to improving its businessenvironment in recent years. So far, much of the government’s reform effort hasfocused on improving the macro-economic framework. This is the case with regardto policies such as banking sector reform, income-tax reform, improving themonetary policy framework, opening up the capital account and allowing free andunhindered 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 itsgeographical position. Foreign investment still accounts for less than one-third of allinvestment, and FDI inflows fell between mid-2008 and end-2009. The competitionfor global investment is fierce and a country such as Egypt should no longer counton low costs to attract investors. To attract high value-added investors, a betteroverall investment climate is needed. This chapter presents the conclusions to theBusiness Climate Development Strategy findings for Egypt and finishes by invitingthe Egyptian government to pursue its reform efforts in order to achieve its growthobjectives.

125

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.


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


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


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

Environment Committee to oversee the implementat ion of cross-cutt ing

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.


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.



© OECD 2010

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Aiman, R. and M. Omran (2006), “Accounting Information, Value Reference and Investors’ Behaviour inthe Egyptian Equity Market”, Review of Accounting and Finance, Vol. 5 (2006), Issue 3, pp. 279-297.

Arnt, M. and R. Assaad (2005), “Constrained Geographical Mobility and Gendered Labor MarketOutcomes Under Structural Adjustment: Evidence from Egypt”, World Development, Vol. 33, No. 3,pp. 431-454.

Artadi, E. and X. Sala-i-Martin (2002), “Economic Growth and Investment in the Arab World”, The ArabCompetitiveness Report, New York: Oxford University Press.

Blanke, J., F. Paua and X. Sala-i-Martin (2004), “The Growth Competitiveness Index: Analyzing KeyUnderpinnings of Sustained Economic Growth”, in The Global Competitiveness Report: 2004-05,M. Porter et al. (eds.), Oxford: Oxford University Press.

Botero, J. et al. (2004), “The Regulation of Labor”, MIT Quarterly Journal of Economics, Vol. 119, No. 4,pp. 1339-1382.

Bremer, J. and N. Elias (2007), “Corporate Governance in Developing Economies – the Case of Egypt”,International Journal of Business Governance and Ethics, Vol. 3, No. 4.

Busse, M. and J. Groizard, (2006), “Foreign Direct Investment, Regulations and Growth”, World Economy,Volume 31, Issue 7, pp. 861-886.

Dahawy, K. and K. Samaha (forthcoming), “An Exploratory Study of the Observance and Determinantsof Corporate Governance Disclosure in Annual Reports of Actively Traded Listed EgyptianCompanies”.

Djankov, S., C. McLiesh, R. Ramalho (2006), “Regulation and Growth”, Economics Letters 92, pp. 395-401.

Eifert, B. A. Gelb, V. Ramachandran (2008), “The Cost of Doing Business in Africa: Evidence fromEnterprise Survey Data”, World Development, Vol. 36, Issue 9, pp. 1531-1546.

Financial Sector Team (2005), “Do Credit Guarantees Lead to Improved Access to Financial Services?Recent Evidence from Chile, Egypt, India and Poland”, Policy Division Working Paper, Policy DivisionDepartment for International Development, London, February.

Gallagher, D. (2009), “Building Public-Private Coalitions to Promote Regulatory Reform”, DevelopingAlternatives, issue devoted to “Grounds For Growth: Enhancing the Competitiveness Impacts ofBusiness Environment Reform”, Volume 13, Issue 1, Winter 2009.

Hisarciklilar, M., S. Kayam, O. Kayalica (2006), “Locational Drivers of FDI in MENA Countries: a SpatialAttempt”, MPRA Paper, No. 2085, Istanbul Technical University Faculty of Management, May.

Hoekman, B. and K. Sekkat (2009), “Deeper Integration of Goods, Services, Capital and Labor Markets:A Policy Research Agenda for the MENA region”, Economic Research Forum, PRR No. 32, July.

Hocking, B. (2004), “Changing the Terms of Trade Policy Making: From the ‘Club’ to the ‘Multi-stakeholder’”, Model World Trade Review, Vol. 3, No. 1, pp. 3-26

Jones, C.I. (2007), “The Weak Link Theory of Economic Development”, Hong Kong Institute for MonetaryResearch Working Paper, No. 4., Hong Kong, China.

Khaled, S. (2009), “Firm-Specific Determinants of the Extent of Compliance with InternationalAccounting Standards in Corporate Annual Reports of Companies Listed on the Egyptian StockExchange: A Positive Accounting Approach”, Afro-Asian Journal of Finance and Accounting, Volume 1,No. 3.

Limao, N. and A. Venables (2001), “Infrastructure, Geographical Disadvantage, Transport Costs andTrade”, World Bank Economic Review, Vol. 15, No. 3, pp. 451-479.

Moawad, A. (2009), “The Informal Economy as an Engine for Poverty Reduction and Development inEgypt”, MPRA Paper, No. 13034.

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Shahira, S. (2003), “Does Ownership Structure Affect Firm Value? Evidence from the Egyptian StockMarket”, Working Paper Series.

Wilmsmeier, G., J. Hoffmann, R. Sanchez (2006), “The impact of port characteristics on internationalmaritime transport costs”, Research in Transportation Economics, Vol. 16, K. Cullinane and W. Talley(eds.), Elsevier, 2006.

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Law reviews

Abdel Wahab, Dr. M. S. (2008), “An Overview of the Egyptian Legal System and Legal Research”,Globalex, www.nyulawglobal.org/globalex/Egypt1.htm.

Law for the Regulation of Non-Banking (2009), Financial Markets and Instruments.

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Middle East Library for Economic Services (2009), Decree Promulgating the Executive Regulations of theCompanies Law.

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Country reports and reviews

Amnesty International (2009), Report: Working to Protect Human Rights.

Bank Audi (2008), Egypt Economic Report, Business Intelligence Middle East, Audi Saradar Group.

Bertelsmann Transformation Index (2008), Egypt Country Report.

Business Software Alliance (2008), Sixth Annual BSA-IDC Global Software Piracy Study (08),Washington, DC.

Carnegie Endowment for International Peace (2007), Arab Political Systems: Baseline Information andReforms – Egypt, www.carnegieendowment.org/files/egypt_aps.doc.

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Center for International Private Enterprise (2009), Egyptian Citizens’ Perceptions of Transparency andCorruption – Preliminary Report.

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Egyptian-British Chamber of Commerce (2010), Tax Policies in Egypt.

Egyptian Junior Business Association (2006), Corporate Governance Manual for Family Businesses.

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Hassan, Hazem (2009), Presentation to the Third Annual Meeting of the Egyptian Institute of Directors, Cairo.

Investment Committee for South East Europe (2008), “Improving Regulatory Quality in South EastEurope”, Findings from Two Working Group Meetings on Reform in South East Europe.

International Federation of Accountants (2004), “Assessment of the Regulatory and Standard-SettingFramework”, completed by the Egyptian Society of Accountants and Auditors.

MENA-FATF (2009), Mutual Evaluation Report – Egypt, Anti-money Laundering and Combating the Financingof Terrorism, www.menafatf.org/images/UploadFiles/MER_Egypt_ForPublication.pdf.

Public Private Infrastructure Advisory Facility (PPIAF) (June 2009), MENA Regional Update.

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OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16

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(25 2010 04 1 P) ISBN 978-92-64-08739-2 – No. 57049 2010


egyPtbuSineSS Climate DeveloPment Strategy As part of a far-reaching programme of economic reforms, the Egyptian government is seeking to improve its business climate to attract more investment and stimulate growth and job creation. The Egyptian Ministry of Investment has asked the OECD to carry out an in-depth assessment of Egypt’s business climate to identify policy priorities and actions needed to foster more domestic, regional and international investment. This report presents the results of that assessment. It also highlights Egypt’s key reform priorities and describes the challenges and opportunities in improving Egypt’s business climate to help Egypt realise its full potential as a high-growth economy.

The OECD assessment is the first phase of a Business Climate Development Strategy (BCDS) which identifies policy priorities and proposes specific reforms and actions to enable Egypt to achieve measurable improvements in its business climate. One key finding is that Egypt’s investment and trade policy reforms have moved the country’s business climate closer to best practice in OECD economies. However, the report notes that to attract further private investment, Egypt needs to improve the country’s anti-corruption measures, skills development, infrastructure and access to finance, especially for the country’s small and medium-sized enterprises. BCDS Egypt offers specific recommendations on how policies, institutions and regulations can be improved to increase predictability for investors and make Egypt a prime investment destination.

This review was carried out as part of the wider MENA-OECD Investment Programme. It uses a new BCDS methodology that evaluates the business climate in 12 policy areas and draws on core OECD instruments, such as the Policy Framework for Investment (PFI), which have been successfully applied in other countries. By helping countries prioritise their actions and build consensus among stakeholders, the BCDS process supports the successful implementation of reforms to develop the private sector in the MENA region.

For more information on the full results of the BCDS assessment, or to obtain additional information about the activities and publications of the MENA-OECD Investment Programme, please visit: www.oecd.org/MENA/investment.

The full text of this book is available on line via these links: www.sourceoecd.org/finance/9789264087392 www.sourceoecd.org/industrytrade/9789264087392

Those with access to all OECD books on line should use this link: www.sourceoecd.org/9789264087392

SourceoeCD is the OECD online library of books, periodicals and statistical databases. For more information about this award-winning service and free trials ask your librarian, or write to us at [email protected].

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www.oecd.org/publishingWith the financial assistance of the European Union

Competitiveness and Private Sector Development-Egypt 2010-2510041e

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