mena-oecd investment programme · investment climate in particular - has accelerated as mena...

MENA-OECD Investment Programme

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TABLE OF CONTENTS

A. BACKGROUND ................................................................................................................................. 3 I. Introduction.......................................................................................................................................... 3 II. Current Status of the Egyptian National Investment Reform Agenda.............................................. 4

Simplifying Procedures and Enhancing Market Integrity ....................................................................... 4 Reinforcing Financial Sector Development............................................................................................. 5 Improving Transparency.......................................................................................................................... 6 Combating Bribery and Strengthening Investors & Consumers Rights .................................................. 6

B. NATIONAL INVESTMENT REFORM WORKSHOP AGENDA.................................................... 9 C. SUMMARY OF PROCEEDINGS .................................................................................................... 13

I. Opening.............................................................................................................................................. 13 II. Investment Policy – One Stop Shop............................................................................................... 14 III. Tax policy related to investment climate........................................................................................ 14 IV. Privatisation of state-owned assets ................................................................................................. 14 V. Capital market reform..................................................................................................................... 15

D. INVESTMENT SESSION: ESTABLISHING A SUCCESSFUL ONE-STOP-SHOP..................... 17 I. Issue Background – Business Licensing and One-Stop Shops .......................................................... 18 II. GAFI and the One-Stop Shop......................................................................................................... 20 III. Key Developments regarding the establishment of the One-stop shop.......................................... 21

Recent Improvements ............................................................................................................................ 21 Temporary License ................................................................................................................................ 21 Delegation of authority to the OSS........................................................................................................ 22

IV. Key Challenges and Recommendations ......................................................................................... 24 Reengineering the licensing competences ............................................................................................. 24 Implementing and clarifying the concept of temporary licenses ........................................................... 24 Branching Out........................................................................................................................................ 24 Concentrate on Operational Permits ...................................................................................................... 24 Enhance use of e-tools ........................................................................................................................... 24 Strengthen licensing authority ............................................................................................................... 24

E. TAXATION SESSION: SUCCESSFULLY IMPLEMENTING A NEW TAX LAW ..................... 27 I. Egyptian Experience with Tax Reform.............................................................................................. 28 II. Current Tax Policy Reforms........................................................................................................... 28 III. Planned Reforms ............................................................................................................................ 30 IV. Key Challenges in Tax Policy ........................................................................................................ 30 V. Recommendations to Assist Egypt Implement its National Reform Agenda in Tax Policy and Administration........................................................................................................................................... 31

F. PRIVATISATION SESSION: REFORMING STATE OWNED BANKS....................................... 33 I. Introduction........................................................................................................................................ 34 II. Privatisation in the Banking Sector ................................................................................................ 36 III. Panel Discussion............................................................................................................................. 37


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IV. Remaining Challenges and Recommendations .............................................................................. 39 G. FINANCIAL MARKETS SESSION: IMPROVING CAPITAL MARKET MECHANISMS......... 43

I. Development of the Capital Market................................................................................................... 44 II. The legal framework....................................................................................................................... 45

Legal Framework for Capital Market Regulation.................................................................................. 45 III. Recent Reforms .............................................................................................................................. 47 IV. Measures currently being considered ............................................................................................. 47 V. Summary of Panel Discussion........................................................................................................ 48 VI. Remaining Challenges and Recommendations .............................................................................. 48

H. NATIONAL INVESTMENT REFORM AGENDA FOR THE ARAB REPUBLIC OF EGYPT.... 51


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A. BACKGROUND

I. Introduction

1. Facing competition from other regions and growing domestic pressure from a young workforce, a number of Middle East and North African (MENA) countries have recognised the need to implement economic and regulatory reforms to increase the private sector participation in their economies. Investment climate reforms have been a key element of the economic restructuring policy undertaken by MENA countries in an effort to transform their economies from public sector dominated to private sector led economies. Since the end of 1990s and beginning of 2000, the pace of economic reform in general - and investment climate in particular - has accelerated as MENA governments have realised the need to attract private sector investment to reduce unemployment.

2. In 2004, countries in the region have invited the OECD to provide input in the process of investment policy reform and hence the MENA-OECD Investment Programme was established. Since then, one of the key objectives pursued by MENA countries, using the Programme as a resource and a platform, is to share good practice of investment policy reform.1 There have been two major avenues for doing so – regional workshops and activities of the Programme, and country specific activities which have been organised in the framework of National Investment Reform Agendas (NIRAs). Reflecting their reform priorities, the participating MENA countries have started developing NIRAs in 2004 and continued this exercise throughout 2005-2006.

3. The NIRAs specify investment reform issues being discussed by a specific country with the OECD, along with concrete implementation targets and deadlines. These reform agendas are developed by Country Teams in cooperation with the OECD Secretariat. The objective of the National Investment Reform Agendas is to provide a framework for MENA countries:

• To focus investment policy reforms on key areas;

• To improve their image as an attractive destination of investors;

• To provide a basis for regional dialogue and exchange of experience amongst MENA countries on investment policy reform and economic diversification;

• To focus international and regional donors' activities on supporting MENA countries to achieve their investment policy reform targets.

1 In this context, investment policy reform issues are thought of as encompassing areas covered by the five Working

Groups of the Programme, ranging from establishing a transparent investment climate to encouraging investment promotion agencies, to providing appropriate tax, financial sector and corporate governance frameworks.


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4. The first official presentation of NIRAs took place on the occasion of the first Ministerial Meeting of the Programme in February 2006 in Jordan, where several countries have presented their NIRA projects and the overall progress of investment climate reform. Following the Ministerial meeting, more countries have joined the effort to establish NIRAs with the Programme, and NIRA workshops have been organised starting in May 2006 to discuss concrete policy areas where OECD expertise and input was sought. Although adopting different formats, adaptable to country circumstances, NIRA workshops have generally focused on 2-4 specific policy issues where OECD and country technical experts have discussed and agreed on follow up actions. Following these discussions, pilot projects such as launching corporate governance codes or investment laws have been agreed upon in coordination with Government counterparts in respective countries. In the course of these projects, the Secretariat provides technical assistance requested by the Country team, and assists in the evaluation of progress of specified targets vis-à-vis the deadlines.

5. The following graphic demonstrates schematically the process followed by the Programme in its work on NIRAs with MENA countries:

6. It is important to highlight that the NIRA process, while aimed at individual country reforms, is indirectly linked with the Programme’s regional element of work. NIRA workshops conducted to date have highlighted several cross-cutting themes which can be integrated into regional activities of the Programme.

II. Current Status of the Egyptian National Investment Reform Agenda

7. Egypt has been strongly involved in the Programme since its establishment. In 2005, the Ministry of Investment and the Egyptian General Authority for Investment and Free Zones have discussed specific targets to attract private sector investment, in cooperation with the MENA-OECD Investment Programme. Consequently, the Egyptian government in cooperation with the OECD Secretariat has elaborated a detailed National Investment Reform Agenda with concrete reform targets the Ministerial Meeting held in February in Jordan received a presentation by H.E. Mahmoud Mohieldin, Minister of Investment, on the progress of implementation of set out targets. At the occasion of this high level meeting, the Minister presented key reforms undertaken by his Government, including:

Simplifying Procedures and Enhancing Market Integrity

• Establishing a ‘One-Stop-Shop’ at the General Authority for Investment Promotion (GAFI)

Establishing and agreeing on investment

reform targets

Presenting NIRAs at the first Ministerial

Meeting

September 2004-February 2006 February 2006

Holding National Investment Reform

Workshops and launching pilot

projects

May 2006-October 2007

Continuously revising targets and actions steps, developing policy recommendations, providing expertise

October 2007Discussing

progress of NIRA implementation &

launch peer dialogue at the

second Ministerial Meeting

Assess progress in reform; conduct second round of NIRA workshops

October 2007


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• Improving the Business Environment in Free Zones

• Providing Land for SMEs at preferential terms

• Reducing Land price in industrial cities by 40%

• Reducing Property Registration fees by 30% and drafting a law to reduce the fees even further to make it flat fees with a maximum of 150 euros

• Drafting a “Unified Construction Law”

• Amending the Labor Law

• Issuing a new Tax Law and reducing tariffs

• Establishing the Model Customs and Tax Centre (MCTC)

• Drafting a new unified building code

• Drafting a new Law on Real Estate Taxation

• Restructuring State-Owned Banks

• Privatizing State-Owned Banks and Divesting Public Shares in Joint Venture Banks

• Merging Small Banks

• Strengthening Banking Sector Supervisory Capacity

• Reform and Privatization Plan for the four State Owned Insurance Companies in Egypt

• Market Liberalization

• Strengthening the Supervisory Regime and Improving Management

• Legislative Reforms

• Issuing the Executive Regulation for the Securitization Law

• Issuing a Prime Ministerial Decree allowing the establishment of the Investor Protection Fund (IPF)

Reinforcing Financial Sector Development

• Re-shaping the organizational structure of the Capital market Authority (CMA) and establishing a Corporate Governance department

• Transferring all regulatory entities related to the non-banking financial services to the Smart Village


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• Introduction of the (i) the Primary Dealers System for Treasury Bond (ii) the 'Margin Trading' and the 'Short Selling'

• Introduction of Exchange Traded Funds (ETFs) which are going to be issued by Cairo and Alexandria Stock Exchange and introduction of financial derivatives

• Introducing an Egyptian Mortgage Finance Law (no.148) to set the regulatory framework and industry standards for the Mortgage finance activity in Egypt. Based on the law, a Mortgage Finance Authority (MFA) has been established and currently acts as a regulating body for the Mortgage finance activity in Egypt

• Establishment of an Egyptian Liquidity Facility (ELF) and the modernization of the system of Property Registration

Improving Transparency

• Introduction of the ‘Information Disclosure Law’

• Establishment of a statistics Unit has been established in the Ministry of Investment

• A new ‘Budget Classification System’

Combating Bribery and Strengthening Investors & Consumers Rights

• Signing the ‘United Nations Convention against Corruption’

• Establishing the ‘Institute of Directors’ with the aim of strengthening corporate governance

• Developing a ‘Guide for Corporate Governance’ which sets standards of Corporate Governance in Egypt in compliance with the Corporate Governance Principles of the OECD

• Issuing an ‘Antitrust Law’

• Setting up a 'Competition Council' with the mandate of ensuring the prohibition of anti-competition practices

• Establishing a ‘Central Audit & Control Agency’ to help combating bribery within public institutions

• Issuing a Ministerial decree (n.770 for year 2005) to allow the implementation of the executive regulations of law n.118 for year 1975 with regards to the protection of intellectual property rights

• Restructuring the Ministerial Committee for Dispute Settlement

8. These above reforms pursued by the Egyptian government were taken into consideration when defining the precise reform targets to be pursued by the Programme and the Government of Egypt, represented by the Ministry of Investment. As the topics were finalized, a NIRA workshop was held on May 17, 2006 in Cairo to discuss the selected areas (improving efficiency of the Egyptian One Stop Shop,


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the implementation of the new taxation legislation, capital market development and privatization of state-owned banks). This workshop was co-organised by the Programme in cooperation with the Ministry of Investment of Egypt. Following the recommendations of the OECD put forth during the workshop, the Egyptian Government has announced the introduction of a Corporate Governance Code for State Owned Enterprises in August 2006, modeled after the OECD Guidelines for State Owned Enterprises and commented on by experts working within the MENA-OECD Investment Programme.

9. The following document outlines the current Egyptian National Investment Reform Agenda2, and the background materials drafted for the NIRA workshop in May 2006. Please note that the content of these documents reflects the policy reforms considered by the Egyptian government as of May 2006, some of which have since been executed.

2 The NIRA presented below has been last updated following the NIRA workshop. A mission is scheduled for 2007 to

discuss follow up steps.


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B. NATIONAL INVESTMENT REFORM WORKSHOP AGENDA

May 17, 2005 Cairo, Egypt

Chairpersons of the meeting:

H.E. Mahmoud Mohieldin, Minister of Investment, Egypt

Mr. Richard Hecklinger, Deputy Secretary General, OECD

Dr. Zyad Bahaa El Din, Chairman of the General Authority for Investment and Free Zones

9:30-10:00 OPENING SESSION

Opening remarks by:

• Dr. Zyad Bahaa El Din, Chairman of GAFI • Mr. Richard Hecklinger, Deputy Secretary General, OECD • H.E. Mahmoud Mohieldin, Minister of Investment, Egypt

10:00 – 10:15 Press Break

10:15 - 11:30 SESSION I: Investment Session

This session will review Egypt’s progress in establishing a one stop shop at the General Authority for Investment and Free Zones (GAFI). It will focus on remaining issues facing GAFI in streamlining the relevant legislation and improving the image of Egypt as an attractive investment location. Presentation of the OSS of GAFI: current achievements & future plans • Dr. Zyad Bahaa El Din, Chairman of GAFI Evaluation of the Egyptian experience: existing problems and proposed solutions • Mr. Antonio Fanelli, South East Europe Investment Compact, OECD

• Dr. Jaffar Al Sayegh, Chief of Micro Economic Planning , Ministry of Finance, Bahrain

Private sector experience • Mr. Chandra P. Srivastava, CEO, Indo Egyptian Fertilizer Company


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Open debate

11:30 – 11:45 Coffee pause

11:45 – 13:15 SESSION II: Taxation Session

Following the issuance of a new tax law in Egypt in June 2005, this workshop will focus on the current efforts to modernise the Egyptian tax environment and in particular, the implementation of the new taxation legislation. New tax law: recent developments and next steps • Mr. Ashraf Al Arabi, Senior Advisor to the Minister of Finance for Tax

Policies Evaluation of the Egyptian experience: pros & cons of existing situation • Ms. Susan Himes, Tax Policy Consultant • Mr. Terence Murdoch, Component Lead, TAPR II

• Mr. Mark Gellerson, Ms. Amal Mowafy, USAID Private sector experience • Mr. Sherif Samir, Deputy Finance Director, Xerox International Open debate

13:15 – 14:45 Lunch

14:45 – 16:15 SESSION III: Privatisation Session

The following session will evaluate Egypt’s progress in privatising State-Owned Enterprises and in particular those in the banking sector. It will discuss the ongoing efforts to decrease public sector involvement in joint venture banks and the government’s plans relating to the ongoing sale of the Bank of Alexandria. Presentation of Egypt’s future privatisation programme • Senior level speaker from the ministry of investment or from banking sector Evaluation of the Egyptian experience: pros and cons of existing situation • Mr. Rainer Geiger, Deputy-Director, DAF/OECD, Head of MENA-OECD

Investment Programme • Dr. Fouad Shaker, Secretary General, Arab Union of Banks Private sector experience • Mr. Guy Poupet, Managing Director, NSGB Open debate


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16:15 – 16:30 Coffee pause

16:30 – 18:00 SESSION IV: Financial Markets Session

This session will focus on the recent developments in Egyptian capital markets, and in particular on mechanisms to improve capital market mechanisms, including measures such as Primary Dealers System for Treasury Bonds, Margin Trading and Short Selling, and introduction of financial derivatives. The plan to introduce an Egyptian Financial Services Center within a one stop shop framework will also to be discussed. Presentation on capital market developments and new financial tools • Dr. Hani Sarie El Din, Chairman, Capital Market Authority

Evaluation of the Egyptian experience: pros & cons of existing situation • Mr. Yosuke Kawakami, Senior Financial Sector Expert, OECD

• Mr. Francois J. Pepin, Deputy Chief of Party, Egypt Financial Services Project

Private sector experience Dr. Mohamed Taymour, member of AmCham Board, Founder of EFG Hermes, Chairman of Pharos Capital, and Head of Capital Market association Dr. Alaa Ezz, Secretary General, Confederation of Egyptian European Business Associations Open debate

19:00 - 20:00 Reception


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C. SUMMARY OF PROCEEDINGS

1. On May 17th, the MENA-OECD Investment Programme in co-operation with the Ministry of Investment of Egypt and the General Authority for Investment and Free Zones highlighted the progress on key issues of investment policy reform in Egypt. This workshop featured high level participation by Egyptian government officials across various ministries, representatives of international organizations, and private sector participants reflecting the items selected by the Egyptian Ministry of Investment as Egypt’s investment reform targets, including one-stop shops for investors, most recent tax law reforms, privatisation of state-owned banks and new capital markets instruments.

2. Each of the sessions featured a presentation on the reform progress and challenges by an Egyptian official, followed by commentary and suggestions by OECD and external experts, as well as a presentation by local investor who had interacted with a Ministry in question. A number of key organizations - including USAID, EU, CIPE, CAEU, the Hawakama Institute - working on improvement of investment climate and encouragement of greater private sector participation in the local economy attended and commented during the course of the day.

3. Private investor representatives such as the Arab Business Council and foreign investor organisations such as the American Chamber of Commerce in Egypt supported the event and challenged the interventions given by government officials in the four sessions.

I. Opening

4. The day was opened by a keynote speech of H.E. Mahmoud Mohieldin, Minister of Investment of Egypt, who summarised the progress of investment reform and outlined the connection between investment climate and economic development in Egypt. In his speech, the Minister suggested that the emphasis on the differences between MENA region economies and others can at times be misplaced, and that global standards need to be adopted in the region.

5. Another key message of the Minister was that despite the remaining challenges in improving the business climate in his country, there are certain advantages from starting late as Egypt is now in position to benefit from lessons learned by other states which have over the time encountered similar challenges. For instance, the OECD guidelines in different areas have benefited his country by serving as a benchmark in various areas.

6. Most recently, the OECD Guidelines on Corporate Governance have served as a basis for development of the first Corporate Governance Code to be issued in Arabic in the region. The Minister concluded his speech on an optimistic note, stating the need for Egypt to look to other emerging economies such as Mexico and the Czech Republic, who set ambitious long term goals for economic development, and accomplished them. He completed his speech by saying that a very long term goal for Egypt would be to “possibly join the OECD, or at least have a plan”.


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II. Investment Policy – One Stop Shop

7. Mr. Ziad Bahaa El Din, Chairman of the General Authority of Investment and Free Zones (GAFI) chaired the first session of the day on Egypt’s experience operating a One Stop Shop (OSS). He outlined Egypt’s accomplishments in streamlining procedures and its success bringing together the relevant agencies in a single operating framework.

8. From the discussions held, it appears that a key success factor for Egypt’s future efforts in this area will be for the OSS to successfully reengineer the company establishment and licensing procedures. The challenge in the coming year, as suggested by GAFI’s Chairman, will be to establish a process to deal with business establishment requirement which fall outside the 90-95% of cases which are covered by the standard procedure and have been streamlined already with remarkable success.

9. Another challenge facing GAFI will be to branch out and roll out the same quality of service in other parts of Egypt. Mr. Antonio Fanelli, a senior OECD expert on the topic, commented positively on Egypt’s physical set up of the one stop shop and its operational procedures.

III. Tax policy related to investment climate

10. Mr. Ashraf Al Arabi, Senior Advisor to the Minister of Finance on Tax Policy and one of the key authors of the new tax law highlighted Egypt’s progress in implementing the new taxation legislation in force since last year. This legislation supersedes Egypt’s previous income tax law. The goals of the new taxation legislation, as noted by Mr. Al Arabi, is to create a uniform tax for all taxpayers, to assure certainty over tax administration, and to remove tax obstacles to economic growth.

11. Mr. Al Arabi highlighted a number of advantages of the new legislation, including reduction of taxes to 20%, introduction of a thin capitalisation rule and a transfer pricing concept into the new legislation. According to Mr. Al Arabi, the new law has borne fruit – before introduction of the law, tax collection has yielded 1 million LE, whereas after this amount has increased to 4.5 million LE. It was also noted that the Egyptian government expects even better tax collection performance in coming years.

12. The Egyptian government is currently contemplating establishing a ‘MENA Regional Tax and Financial Management Training Center’ – a new regional institution to “help ministries of finance in the Arab world develop well trained highly qualified critical masses capable to carry and spread the swiftly ongoing reforms in their home institutions through vertical development of staff.” Ms. Susan Himes, an international tax expert from the OECD suggested that OECD’s expertise on international tax rules and revenue forecasting could be relevant to the dissemination of good practice envisaged as a mandate of this Center.

IV. Privatisation of state-owned assets

13. Ms. Naglaa El Bialy, Advisor to the Minister of Investment, presented on the remarkable success of Egypt’s Asset Management programme. She reported that from 1999 to June 2004, Egypt’s privatisation Programme has reached 216 transactions and yielded 17.9 billion LE, whereas from then to July 2005, the programme has encompassed 28 additional transactions, resulting in income of 5.6 LE billion.

14. Egypt’s planned privatisation for the coming year includes divestment from 45 publicly owned companies and 57 joint venture companies. Mr. Rainer Geiger, Director of the MENA-OECD Investment Programme, has noted the success of Egypt’s privatisation since 2004, suggesting however that with respect to financial institutions, the privatisation process is further complicated by removal of restrictions,


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regulatory reform and liberalisation of financial flows, suggesting the need to carefully manage transition in order to avoid banking crises. Dr. Nasser Saidi, Director of the Hawakama Institute for Corporate Governance, also conceded to the critical need to evaluate sequencing of reform in the financial sector, predicting that indigenous banking sector will grow in the next 2-3 years.

V. Capital market reform

15. The last panel of the day, dealing with capital market reform, was chaired by Dr. Hanie Sarie El Din, the Chairman of the Egyptian Capital Market Authority. In his presentation, Dr. El Din highlighted three main areas of reform being taken forward under his supervision: the capacity building of regulatory authorities, improving investor protection, and restructuring the capital market. Dr. El Din noted that despite many securities available and privatisation programs, the Egyptian market is still shallow, and the way forward would be through securities diversification.

16. In this context, Dr. Alaa Ezz, Secretary General of the Egyptian Businessmen Association, has noted that despite the thin capitalisation today, Egypt’s performance over the recent years has been rather strong and the current capitalisation is triple the 2003 figure. Dr. Ezz brought to the audience’s attention a number of other positive trends, highlighting that Egypt’s position rose last year in IMF ranking on financial sector development.

17. This workshop held in Cairo was timely given the speed of reforms witnessed in Egypt over the last 2-3 years, and has served to strengthen the co-operation between the OECD and its hosts, the Ministry of Investment and the General Authority for Investment and Free Zones. The workshop was a first in a series of country specific events, organized by the MENA-OECD Investment Programme which is currently chaired by the Minister of Investment of Egypt, focusing on progress of in investment climate reform in the region. To this end, the workshop has generated significant debate on the form and substance of investment climate reforms in Egypt and helped further specifying the Investment Reform Agenda of Egypt under the MENA-OECD Investment Programme.

18. The event received substantial media attention - the local and international press displayed a high level of interest in the event, asking the H.E. Mahmoud Mohieldin and Mr. Richard Hecklinger, Deputy Secretary General of the OECD to comment on a number of issues related to the current investment climate in Egypt and the measures envisaged for the coming months. A selection of articles covering the event is available below. For press release related to this event issued by the Ministry of Investment of Egypt, please visit:

http://www.investment.gov.eg/MOI_Portal/Announcements/OECD+lauds+Egypts+Reform+Programme.htm


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EGYPT NATIONAL INVESTMENT REFORM AGENDA WORKSHOP

D. INVESTMENT SESSION: ESTABLISHING A SUCCESSFUL ONE-STOP-SHOP

BACKGROUND PAPER FOR SESSION I

This document was originally drafted to provide a background for discussion of the National Reform Agenda Item ‘Establishing a Successful One Stop Shop’. The session focused on the recent efforts of the General Authority of Investment and Free Zones and the Ministry of Investment to simplify and streamline rules relating to company establishment. It has subsequently been updated in light of discussions held during the NIRA workshop in Egypt, and its recommendations will be incorporated in the National Investment Reform Agenda for Egypt.

Contact: Alexander Böhmer, +33 1 45 24 19 12 [email protected],.


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I. Issue Background – Business Licensing and One-Stop Shops

1. Time consuming and burdensome procedures for establishing a business remain one of the most often cited obstacles in business surveys on the investment climate in OECD and non-OECD countries alike. Requirements to acquire licenses for establishment and conduct of a business are used by all governments for a variety of reasons. However, amongst OECD members, data suggests that different countries use it to differing degrees, some administer a few hundred licences, while other, several thousand.3 There is a strong argument to reduce the burden on business caused by excessive use of licenses since they create barriers to new start-ups, hamper innovation and cause market distortions by the incentive to the investor to lobby regulators for anti-competitive practices. Transparency problems seem to be another key challenge faced by business confronted with licensing requirements.

2. The 2006 World Bank Doing Business Report highlights that 10 procedures are involved in establishing a business in Egypt, which take approximatively 19 days and cost 68,8% of average income per capita. The OECD average is 6 procedures, 16 days and 5,3 % costs. Egypt is heading in a very positive direction, but the case for ongoing reforms addressing these points remains strong.

3. The OECD and many MENA governments have been introducing reforms to ease the registration procedures for new businesses. One approach has been the establishment of so-called one-stop-shops (OSS) as part of the services provided – for example - by Investment Promotion Agencies. These business licensing services identify relevant licenses, provide application forms, contact details and may even have authority to grant the license itself. This way, the OSS can serve the purpose of facilitating the investors’ dealings with the licensing authorities by concentrating licensing authority in the agency itself or streamlining and co-ordinating the process with the different ministries and agencies involved in the registration process.

4. It has been highlighted in recent surveys on OSS though, that the concentration of competencies in the OSS proved unrealistic or simply duplicating responsibilities of line-Ministries with no easing effect for the investor. In the worst case, the OSS becomes only ‘one-more-stop’ for the investor to deal with. The same concern has been cited by Egyptian investors, who worry that within the one stop shop framework, the different Ministries involved will still maintain differing and cumbersome procedures.

5. What really seems to matter is a coherent programme aiming to simplify permits and licenses. Licenses can be abolished altogether, combined with similar licenses (“concentration effect of one license”) or the process can be re-engineered. OECD countries have followed certain policy criteria for licensing policies which include4:

• The use of licenses only where there are clear risks to the public associated with the conduct of the business and apparent information problems for consumers;

• Renewal requirements being adopted only where there is a substantial need to verify continued competence and suitability to undertake the business;

3 From Red Tape to Smart Tape, Administrative Simplification in OECD Countries, Synthesis Report, OECD 2003,

p. 32. 4 Ibd, p. 33-34.


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• Qualification requirements being directly and substantively related to the ability to carry out the business without risks to the public;

• Informational and procedural requirements being restricted to the minimum necessary to verify the above.

6. For the specific case of business start-up registration requirements, a number of recommendations have been developed to streamline one stop shops and increase their efficiency. The key recommendation is to streamline the overall process of business registration. Best practice recommendations for the specific purpose of business start-up registration are laid out in Box 1. For the business registration process the most relevant streamlining effect can be achieved if the court registration requirement is dropped. This requirement typically causes the greatest delay and involves the judiciary unnecessarily into an administrative procedure.

Box 1.

Good practice in business registration

• Courts are not used for registration, instead administrative personnel is taking care of it

• Online registration in a countrywide database is available, instead of using a newspaper publication requirement

• Costs involved are only a fixed registration fee

• Standardised registration forms re used

• The capital requirement is nominal or zero

• Use procedural flowcharts showing step-by-step necessary requirements

• Use e-government tools (maintain an electronic exchange of data amongst agencies

Good practice business operating licensing

• Use procedural flowcharts

• Consolidate project licenses in a single agency when possible

• Introduce a risk-assessment approach focusing higher administrative requirement on sensitive cases

Source: World Bank, Doing Business 2005/2006, adapted.

7. The recommendations mentioned in Box 1 underline the point that a key recommendation for establishing an effective OSS is to re-engineer licensing procedures themselves. It is also commonly suggested that the remaining agencies maintain an electronic exchange of data. This way the necessary


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documents flow within the public system and do not force the investor to go from one authority to the next one.5

8. The connection with the business registration procedure and the process of granting operating licenses shows that the success of an OSS is not only an administrative or organisational challenge. An OSS can only be as powerful as the IPA hosting it and its effectiveness relies on the political will to reform the administrative procedures involved with the licensing process. This underscores the need of a strong policy advocacy function for the IPA. OSS which have been successful in the past where operated by IPAs with strong support, even up to the Prime Minister level. In this sense, the OSS is to be seen as an expression of a government’s commitment to investment policy reform for all government ministries and agencies involved in the investment promotion.

II. GAFI and the One-Stop Shop

9. In Egypt, most firms of significant size will register under either the Company Law (No. 159/1981) or the Investment Law (No. 8/1997). Egypt accords national treatment to foreign investors, so the registration requirements spelled out in the different laws applies to domestic and foreign investors alike with very few exceptions. While the procedures and documentary requirement for the investor are almost identical under the two laws, differences remain.

a) A registration under the Investment Law is handled by the General Authority for Investment and Free Zones (GAFI) through its OSS which enables eligibility for investment incentives spelled out in the Law.

b) A registration under the Companies Law requires the investor to apply directly to the Companies Department, where an approval does not lead to the automatic application of benefits.

10. Regarding the legal formation the current system unifies the procedures under both laws with GAFI being the central authority for the formation process. The passage of the new Code of Commerce, Customs law and a new Tax Law further eliminate many of the differences between the two procedures.

11. The new legislation eliminated exemptions and tax holidays stipulated in the Investment Incentives and Guarantees Law (Law 8 for 1997), and has replaced them with new ones. The exemption cancellations were not applied retroactively. This had already an effect on the number of companies using the two different legal procedures for establishment. While in 2005 3569 companies were established under the investment law No.8, 1612 companies under the company law No.159, the numbers for 2006 where 973 and 924 respectively.6

12. GAFI data on business licensing suggests that in Egypt the number of ministries that participate in business licensing is 22, the number of other governmental and non-governmental entities that participate in business licensing is 78 and the total number of required approvals, licenses and permits is 349. The average number of licenses a business registration project requires range from 12-25 licenses.

13. The Egyptian Cabinet approved already in 2001 to establish an OSS and to empower GAFI to be the authority that provides a facility to attain required permits, licenses and approvals from the competent authorities in the government. More importantly, presidential decree no. 79/2002 authorised GAFI to 5 F. Sader, Do “One-Stop Shops “ Work? FIAS, World Bank, 2002 6 Numbers from GAFI, 2006.


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establish the OSS in its Cairo headquarters and its branches and with decree No. 636/2002 from the prime minister a system of delegate and liaison officers of ministries and other authorities was established inside GAFI’s OSS.

III. Key Developments regarding the establishment of the One-stop shop

Recent Improvements

14. GAFI is now operating for some time an OSS, first introduced in the Cairo head office in December 2004, opened in Alexandria in 2005 and in three other governorates (Assiut, Giza and Ismailia). The key purposes of the OSS are:

• Facilitate the procurement of business licenses;

• Offer technical advice and information to clients planning;

• Introduce a transparent and reasonable fee structure;

• Improve the quality and timeliness of related government agencies;

• Bringing all relevant ministries/agencies under one roof;

• Simplifying procedures;

• Providing greater transparency of rules.

15. Regarding simplification of licensing, permit and approval procedures, the newly installed system of company formation has taken shape now and considerably reduced the investor’s information gap, and – most importantly - enhanced greatly the transparency of the process. The key new features are:

• A unified legal formation system for both establishment processes, under the company law No.8 and the investment law No. 159;

• One authority to establish all companies: GAFI and its branches;

• Businesses/the investor have to deal only with one GAFI representative who then follows up internally with the respective delegates/liaison officers from ministries/authorities;

• All the fees for the various licenses required are paid in one sum only one time through the branch of the Alexandria Bank located in GAFI.

Temporary License

16. Another important element introduced by law No.13/2004 amending the investment law No. 8/1997 relates to the concept of temporary licenses. This tool is meant to encourage the investor to start implementing the project until the permanent license from the competent authority has been issued. The temporary license can have a concentration effect in that it encompasses all licenses required for a specific project. The issues to be tackled involve the question to which degree the investor can derive a legitimate expectation from a temporary license that the authority will grant finally a favorable license and with what


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qualifications. The possibility of judicial review of the final licensing decision can be an issue of importance for the investor – domestic or international.

Delegation of authority to the OSS

17. One of the key challenges for the implementation of a successful OSS is the authority of the OSS over representatives of other ministries/agencies who are situated in the OSS’s offices. Another aspects addresses the relation between the sending agency (principal) and the representing official in the OSS (agent). The questions which have to be answered in any OSS are: does the OSS have authority over the representatives of ministries/agencies? Secondly, are the representative themselves independent from the institution they represent?

18. It is important to have realistic expectations here on what an OSS can deliver. The principal will certainly not transfer competences for screening and approval procedures to the OSS in an unqualified manner. The authority of the OSS will much depend on its leadership and political backing.

19. Also, the agent is certainly not to be seen as empowered to take decisions which overstep the competences of the principal – i.e. the sending ministry/agency. At the same time, the agent can exercise his own discretion while deciding on applications. It reflects good practice, if the agent is empowered by the principal to decide the majority of applications autonomously using a risk assessment approach in the screening stage of the application procedures.

20. Furthermore, the efficiency of the agent’s work is not dependent on his autonomy but on his ability to communicate with the sending institution. Use of electronic data transfers and electronic files can be a key step for improving this communication challenge.

21. Other realistic expectations as to what can be delegated to an OSS are as crucial for the success of the OSS as the authority exerted by its leadership. This aspect relates to the point mentioned above: the OSS can only be as effective and powerful as the IPA hosting it.

22. The OSS in the Cairo headquarter gathers representatives from 34 Ministries and government agencies authorised to provide an investor with almost all necessary licenses and approvals required for the establishment of businesses (according to law n. 8 for 1997, and law no.159 for 1981). This includes in-house approval of business licenses. In cases where the approval has to be referred to the responsible parent Ministry, GAFI acts as an intermediary which receives applications and then forwards them to the responsible Ministry or agency (see Annex). Offices of commercial registry have been also transferred to the OSS.

23. The key difference between the delegates and the liaison officers rests in the competence transferred to the OSS. The delegate from a Ministry of an authority can act as a real licensing authority within the OSS in that it presents the business licensing that his authority requires and has the power to approve any licenses, decrees, procedures, documents and contracts on behalf of his authority. The liaison officer, on the other hand, has only the competence to receive the investor’s application, documentation and fees and transfer it to its ministry/authority. The approval procedure itself is still handled there. In the OSS of GAFI a total of 9 ministry/authority representatives have approval authority.

24. There are first successes which can be reported. Until the introduction of the OSS by GAFI, delays in obtaining licenses reached up to one year and investors had to visit an average of 25 Ministry departments to obtain a license. The last Doing Business study of the World Bank still estimated 19 days for a company to start a business in Egypt. According to GAFI, company establishment takes now 3 days


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maximum in 90-95 % of all cases. This shows that the approach taken – concentrate on facilitating the majority of cases, while leaving more sensitive ones to a more extensive screening procedure – is successful. The remaining challenge will be working on streamlining procedures for the 5-10% sensitive cases. But the key point is that from an investor’s point of view the number of procedures to register a business in the OSS has been cut from 19 to 3 steps: presentation of the required documents to the establishment unit, lump sum payment of all the required fees on the GAFI’s premises, follow up by the GAFI officer with the relevant bodies (lawyer syndication, capital market authority, public notary, union of trade chambers, commercial registry). The number of services provided by the OSS in 2005 are listed in Box 2.

Box 2. Figures of Services Provided by the newly established One stop shop in (2005)

• Information (35000)

• Company establishment (5000)

• Ratification of minutes of meetings (6000)

• Residency permits (4000)/ work permits (4000)

• Branches of companies (150)

• Joint committees (1500)

• Tax Registration (1000)

• Industrial registration (250)

• Commercial registry (15000)

Source: GAFI, 2006.

25. Another issue which had to be tackled in implementing an OSS relates to the need to separate back and front offices in the One stop shop. Investors should not be permitted and do not have to circulate in the back office. The offices in the Ministry of Investment in Cairo consist of a front end dealing directly with the investor while the remaining staff at the back office only engages in support activities. This reduces the private interaction between the applicant and the officials and helps enhancing the overall transparency of the process and the possibility for corruption.

26. The OSS concept in Cairo is to be replicated in the rest of the governorates. It is planned to use partner agencies at the governorate level as outlets to connect to GAFI’s main offices. The Ministry of Investment is keen to enlist the participation of business associations in the licensing process to facilitate procedures and save time and effort.

27. GAFI signed a Memorandum of Understanding to give the association authority to handle some of the registration procedures at their premises on GAFI's behalf. A pilot project has begun with the 10th of Ramadan Investors Association.


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IV. Key Challenges and Recommendations

Reengineering the licensing competences

28. The Egyptian OSS has been established relatively recently. An assessment of its effectiveness should now focus on how to improve the interaction with other government ministries and agencies who have or have not yet representatives based in the OSS. The number of representatives from line-ministries in the OSS should be increased and the possibility of concentrating licensing requirements in one single license issued by a single official should be assessed. Furthermore, the process regarding the 5 % sensitive applications currently not benefiting from the improved procedures should be streamlined.

Implementing and clarifying the concept of temporary licenses

29. The concept of temporary licenses can play an important role in unblocking investment projects especially in more sensitive sectors which are stronger regulated. However, rights of the investor and the scope of his legitimate expectations must be clearly defined. Judicial review of final decisions of the licensing authority should be possible.

Branching Out

30. The communication of the key services offered by the existing OSS to potential investors should be improved and the OSS approach needs to be replicated in GAFI offices outside Cairo. The services need to be rolled out in other parts of the country. The challenge is to maintain the same level of service as in the Cairo headquarters. Operation manuals can be helpful to achieve this end.

Concentrate on Operational Permits

31. Workshops could be organised including international experts with the Ministries and agencies not involved in the OSS procedure so far. This should include authorities responsible for licensing on land acquisition and property development.

Enhance use of e-tools

32. Further use of electronic tools and e-transfer of data to enhance the communication flow between the OSS and the Ministries/Agencies is proposed.

Strengthen licensing authority

33. Investors would benefit from a further extension of the direct licensing authority of the ministries/agencies represented at the OSS. This is especially true for utility service connections which still cause a major practical obstacle to business establishment in Egypt. We recommend further working on convincing Ministries and agencies to further delegate licensing authority to representative in the OSS using a risk assessment based approach to concentrate tighter approval requirements only to a small number of sensitive cases.


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ANNEX I - BUSINESS LICENSING REPRESENTATION WITHIN THE ONE-STOP SHOP


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Source: UNCTAD, Report on the Implementation of the Investment Policy Review Egypt, October 2005, Annex 1.


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E. TAXATION SESSION: SUCCESSFULLY IMPLEMENTING A NEW TAX LAW

BACKGROUND PAPER FOR SESSION II

This document provides a background for discussion of the National Investment Reform Agenda Item ‘Enhancing Market Integrity - Issuing a New Tax Law’. It highlights the significant changes introduced to the tax environment in Egypt, the measures implemented by the Egyptian government, as well as the anticipated challenges. It has subsequently been updated in light of discussions held during the NIRA workshop in Egypt, and its recommendations will be incorporated in the National Investment Reform Agenda for Egypt.

Contact: Alexander Böhmer, +33 1 45 24 19 12,[email protected] or Alissa Koldertsova,+33 1 45 24 83 05, [email protected],.


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I. Egyptian Experience with Tax Reform

1. Egypt has historically relied on high tax rates to maintain its revenue base. At the same time, it has introduced tax incentives to compensate for the high tax rates and other deficiencies in the enabling environment for investment. These incentives over time became more and more generous as Egypt competed with other countries for similar attractive investments. This has resulted in a cumbersome tax administration, identified as one of the key impediments to investment and, in particular, foreign direct investment in Egypt.

2. In the World Bank Investment Climate Survey of Egypt (2004), which surveyed close to 1000 enterprises, tax-related issues were ranked as ‘severe’ by almost 80% of the participants, ahead of all other regulatory complaints. A key finding of this survey was that tax administration officials exercised substantial discretion in applying rules in most areas of enterprise regulation or public service access. Additionally, the survey concluded that tax inspections imposed a strikingly large time and resource cost on firms – over 8 inspections per firm in 2004.7 The result of relying on high tax rates and generous incentives, while at the same time imposing costly administration was significant revenue loss, has been fiscal imbalances, unintended economic distortions and low tax compliance.

3. The Egyptian Government recognised that without significant structural tax and incentive reform, investment would be diverted to other regions, economic growth would stagnate and unemployment would grow. With the help of leading international and resident experts, the Government analyzed all aspects of tax policy and administration and developed a set of tax reforms to transform the Egyptian tax system into modern and efficient system that supports direct investment in Egypt. The Egyptian Parliament enacted this comprehensive tax law on June 20th 2005.

II. Current Tax Policy Reforms

4. The chief objectives of the new law is to attract additional investment and reduce the scope for tax evasion by the grey economy through lower tax rates, limited incentives and improved tax administration. The key principles of Egypt’s current tax design are:

• Simplification: low rates applied to a very broad tax base, expected to lead to fewer economic distortions and greater certainly for the taxpayer

• Fairness: vertical equity and horizontal equity

• Removal of tax obstacles to growth: creation of a simple regime aiming to deter taxpayers from engaging in tax motivated activities.

7 Over 60% of small firms identified tax administration as a major or very severe constraint, while over 50% of

medium and large firms identified it as a serious constraint.


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Box 2. Features of the New Tax Law

• Cut the top tax rate for individuals and corporations to 20%

• Removed on a prospective basis many of the overly generous tax exemptions and incentives.

• Introduced the principle of self-assessment with risk based audit process.

• Established accelerated depreciation at a rate of 30% as an investment incentive for assets.

• Introduced residence-based taxation for domestic corporations, with foreign tax credits up to the amount of Egyptian domestic tax to prevent double taxation.

• Provided clear definitions of a ‘permanent establishment’ and promulgated the concept of ‘place of effective management based on OECD principles.

• Promulgated anti-abuse rules, including ‘thin capitalisation’ and ‘transfer pricing’ rules.

Source: Income Tax Law 91 (2005), Ministry of Finance, Egypt, 2006.

5. From the private sector perspective, the most important achievement was the reduction of the corporate tax rate from 42% to 20%, applicable to all commercial and industrial activities.8 This significant reduction in the corporate tax rate increases Egypt’s competitiveness within the MENA region as well as with other countries that attract foreign direct investment. Investor surveys and analysis have shown clearly that low “headline’ statutory rates help send out a clear signal to investors of a competitive and stable tax environment.

6. Taken alone, low corporate tax rates could result in revenue shortfalls requiring increased borrowing and public debt to fund infrastructure development and other key public expenditures required to address impediments to investment. To maintain revenue yield, the law broadened the base by restricting incentives for new investment and phasing out incentives for existing investment.

7. To bring the tax system in line with modern international tax practices and to provide domestic investors with an incentive to invest in Egypt, rather than abroad, the new law introduces residence-based taxation for corporate taxpayers. Previously, Egypt levied tax only on income generated within their borders; a system known as source taxation. Adoption of a residence based system coupled with credits for foreign source tax paid should help Egypt retain domestic investment.

8. The new law also introduces significant new international tax provisions and tax base protection rules to guard against aggressive tax planning and to enable collection of a fair and reasonable share of tax revenue from foreign investment. These include transfer pricing rules, thin capitalisation rules and definitions of permanent establishment and royalties.

8 However, oil exploration and production companies are taxed at 40.55%.


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9. Another important aspect of the new law is the reduction of the maximum personal income tax to 20% from the previous 32%. Furthermore, this legislation restructured income tax brackets (subject to tax rates of 10%, 15%, 20%) as well as raised the personal exemption to EP 10,000, thus eliminating taxation for thousands of the lowest paid workers.

10. This new tax law also encompasses elements to increase compliance and modernise tax administration in general. The law fundamentally revamps the enforcement of the legal framework, introducing random audits and high penalties for violators instead of the previous system of bonuses for inspectors. The Egyptian government hopes that by introducing a lower rate of tax and a stricter enforcement system, the incident of tax evasion will decline. The Government has also issued key regulations and other critical guidance to educate taxpayers on the benefits and goals of the new tax law.

11. As a result of these reforms, it is anticipated that Egypt will have a stable revenue base, transparent and effective policymaking and a more modern and efficient tax administration regime: in short, the fiscal environment necessary to attract investment. While this law is a significant achievement, accomplished over a short period of time, many challenges remain as the law is implemented and taxpayers will shortly file their first tax returns under the new law.

III. Planned Reforms

12. The tax reform agenda of Egypt includes the following items9:

• Sales tax reform: implementation of a VAT, unification of tax rates, generalization of tax credit, unification and increasing the registration threshold, the rationalization of exercises.

• Stamp Duties Reform: abolition of all fiscal stamps and limiting the imposition of the proportional stamp duties to a very limited number of activities.

• Property tax reform: Waving away all tax exemption and city zones, improving property tax revenue that is currently underutilized; change the tax arte from the current 46% to 10%; improving valuation procedures.

• Large Taxpayers Office: Further strengthening this office to improve control over revenue and administer taxes more effectively.

13. In addition, the Egyptian government is contemplating establishing the MENA Regional Tax and Financial Management Center to support Egypt’s and regional tax modernisation efforts. The Center’s ultimate goal would be to assist Ministries of Finance in the Arab world to develop qualified professionals capable of carrying and spreading the ongoing reforms in their home institutions. The Center is envisioned to cover the following topics: direct and indirect taxation, international taxation, budget formulation and execution, cash management and debt management.

IV. Key Challenges in Tax Policy

14. With the passage of the tax law, the Government is faced with three important priorities to ensure the law accomplishes its tax policy objectives. First, the Ministry of Finance is committed to developing further its internal analytical capacity to estimate the likely revenue effects of the new law, the marginal

9 Based on the presentation of Mr. Ashraf Al Arabi, Senior Advisor to the Minister on Tax Policy.


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tax burden placed on various types of investment and the cost of ongoing incentives. Establishing a specialized unit for tax analysis will ensure that policy decisions are based on full information about their likely impact. Over time, the Ministry could introduce tax expenditure budgeting, entailing the measurement and reporting of revenue lost through the main tax incentive programmes. With the introduction of tax expenditure budgeting, tax incentives would be considered alongside direct public expenditure amounts targeted at similar activities to see how much public funds are being allocated to a given area.

15. Another challenge is implementing the new residence based system and anti-abuse rules for corporate taxpayers. Residence based taxation is much more complicated than the previous source based system. This change, coupled with the sophisticated anti-abuse rules, such as transfer pricing and thin capitalisation, will require significant retraining of tax inspectors and outreach and education for corporate taxpayers. In addition, Egypt will make more use of the exchange of information procedures in their double tax treaties to curb aggressive cross-border tax planning. While the Ministry of Finance is in the process of retraining staff and conducting workshops for taxpayers and auditors, much more training is needed to ensure these important changes are understood and complied with.

16. Export zones, a particularly popular type of investment incentive in Egypt and throughout the MENA region, is another area to be addressed. While these zones have attracted significant foreign investment to Egypt, more analysis is needed to determine whether these zones adversely affect local domestic markets and impede efforts to attract foreign investment outside the zones. At the same time, discrimination between companies on the basis of nationality or sectors should be eliminated in favour of objective criteria to access the benefits of the zone.

V. Recommendations to Assist Egypt Implement its National Reform Agenda in Tax Policy and Administration

17. The following recommendations were based on presentations by Mr. Al-Arabi on the new tax legislation and implementation goals, USAID (Ms. Amal Mowafy) and BearingPoint (Mr. Terence Murdoch) on their extensive technical assistance programme in tax, and a representative from Xerox-Egypt (Mr. Sherief Samir) and the panel discussion which followed their presentations. Specifically, the discussion focused on areas in which the OECD could assist Egypt implement its new legislation without duplicating efforts of others. The four areas identified include:

• Tax treaties: Revision of existing tax treaties to reflect new residence-based system for companies. Egypt has been will be invited to send two representatives to the treaty seminar in Dubai which will be held later this year.

• New International Tax Rules: Implementation, including policy dialogue with tax officials and company representatives, on the new international tax rules e.g., on the new rules governing permanent establishments, definition of resident and royalty.

• Tax Analysis: Assistance with building the capacity of a new MOF tax analysis unit, once it is established.

• Anti-abuse rules: Implementation, including policy dialogue with tax officials and company representatives on new transfer pricing, CFC, and thin capitalisation rules.


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18. These co-operative efforts could take place at the MENA Regional Tax and Financial Management Centre, described in section III above.


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F. PRIVATISATION SESSION: REFORMING STATE OWNED BANKS

BACKGROUND PAPER FOR SESSION III

This document was originally drafted to provide a background for discussion of the National Reform Agenda Item ‘Privatisation of State Owned Banks and Divesting Public Shares in Joint Venture Banks’. It highlights Egypt’s history of privatisation, along with recent efforts of the Egyptian government to reduce its ownership in the banking sector, and the key challenges it faces in doing so. It has subsequently been updated in light of discussions held during the NIRA workshop in Egypt, and its recommendations will be incorporated in the National Investment Reform Agenda for Egypt.

Contact: Alexander Böhmer, +33 1 45 24 19 12, [email protected], or Alissa Koldertsova, +33 1 45 24 83 05, [email protected].


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I. Introduction

19. Over the last half a century, the path towards privatisation in Egypt has been a challenging one. The years 1960-1961 witnessed mass nationalisation of commercial enterprises and it is only in 1974 with the issuance of Law 120 that ownership restrictions on enterprises in the banking sector became more relaxed, and private banks and foreign banks were permitted to open branches in Egypt. This law has above all liberalised public banks from rigid governmental regulations, eased foreign exchange rules, and strengthened the authority of the Central Bank. The Government of Egypt has embarked on a comprehensive reform program since the late 1980s with the target of transforming the economy from the central planning system to free economy ruled by market forces.

20. The privatisation then proceeded at a relatively slow pace until approximately 1981 when a national conference on economic reform was held to discuss infrastructure reform, reform and modernisation of publicly owned companied, and the possibility of private sector participation in certain sectors. The next significant milestone in Egypt’s path towards privatisation was ten years later, in 1991 when the economic reform and structural adjustment programme (SAP) was implemented by the International Monetary Fund. The SAP explicitly included privatisation among the policies to be adopted. Although the programme achieved remarkable improvement especially on the demand side, the Egyptian government was still reluctant to implement the suggested privatisation program planned to commence in 1994.

21. The visible progress of the Egyptian privatisation program started with the passage of Law 203 in June 1991. This law created a new structure for the public sector by removing State-Owned Enterprises (SOEs) from control of the sectoral ministries and placing them under the supervision of holding companies designed to manage them with greater autonomy. The privatisation program was launched in 1991 as the corner stone of the overall economic reform agenda. It started with 314 companies distributed over 27 holding companies. In 1992, a list of candidate firms was made public – 20 of them were scheduled to be privatised in 1991-1992, 25 in 1992-1993 and 49 in the following year.

22. The progress of implementation of this plan over the years has been ambiguous. Egypt had planned to have all its public enterprises privatised by February 2002, but the Ministry of Public Enterprises continued to own 181 companies by the end of 2002. Since 2000, the process slowed down due partly to valuation problems and partly to the restructuring of companies before privatisation. By the end of June 2002, the government had completed 132 major and 57 partial privatisations out of 314 public enterprises scheduled for privatisation, gathering revenue of EP 14.4 billion.

23. These transactions included the sale of majority stakes in 38 companies and minority stakes in 16 companies through a public offering, the liquidation of unviable companies, as well as other means. The privatisation process has gained momentum since 2004 with the Cabinet restructuring and change of Central Bank management. In July 2004, the new reformist cabinet headed by Prime Minister Ahmed Nazif, introduced drastic reforms in order to expedite the process of privatisation of state-owned enterprises in Egypt. The process has accelerated markedly during the last 2 years, with the total revenue from the sale of public companies reaching $947 million last year, which is more than double than in the previous four years combined. During the first 12 months of office of the new Cabinet (the year to June 2005), the government has sold about EP 5.6 billion of state assets, including a 20% stake in Telecom Egypt.

24. These reforms were accompanied by internal restructuring. In July 2004, a month after the new cabinet was appointed, the new government gathered all relevant actors, including GAFI, the capital


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market authority and the stock exchange under a single agency, now known as the new Ministry of Investment. In parallel with this restructuring, the Minister of Investment, H.E. Mahmoud Mohieldin, has developed a set of ambitious targets related to government divestment from a number of wholly and partially owned enterprises. These targets were encompassed in the new initiative - the Asset Management Programme. The Asset Management Program offered a diversified portfolio of investment opportunities in the form of public enterprise companies, public shares in joint ventures, unutilised assets in public enterprises, affiliated companies to other Ministries where Ministry of Investment could provide technical assistance in the sale process.

25. The Asset Management Programme adopted three main pillars:

• Offering public assets, shares and companies for sale with overall consideration of public welfare and labor rights;

• Restructuring public enterprises according to scientific, economic and technical feasibility studies;

• Emphasising the Corporate Governance principles and guidelines in operating state-owned companies.

It has generated impressive results, and has therefore been lauded as a best practice example across the region.

Achievements of Egypt’s privatisation Programme

Source: Presentation of Ms. Naglaa El Bialy to the NIRA Workshop, 17th May, 2006.

The goals of the Asset Management Programme remain as ambitious as its strong performance over the past two years. For the year 2005-2006, the operational plan includes the sale of 45 publicly owned companies and in 57 joint ventures operating in different and attractive sectors such as petrochemicals, banking, tourism, chemical industries, construction, etc.

Years Proceeds from Sale Number of Transactions

From 1991 – June 2004

17.9 LE billion 216

From July 2004 - June 2005

5.6 LE billion 28

July 2005 – May 2005

14.5 LE billion 57


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II. Privatisation in the Banking Sector

26. Privatisation of the banking sector has been slower than the overall progress of the privatisation process. The sale of state-owned banks was first forecast for 1998, when the banking industry was dominated by four state-owned banks, which accounted for 80% of commercial deposits in the country. The privatisation objectives related to the banking sector have not been realised as quickly as originally envisioned. More than 60% of the market was controlled by the State as of 2005, through direct ownership or participation. When the government of Ahmed Nazif was appointed in July 2004, it came with a plan to sell one of four state owned banks privatise 38 joint venture banks and force the country’s weak banks to be overtaken by stronger institutions. Since 2005, the government has been engaged in a serious programme to privatise state owned banks. To date, State’s shareholdings in 12 of the 17 joint venture banks have been sold, including 33.8% in Egyptian American Bank (EAB), and a sale of MIBank. From July 2004 to May 2006, the Egyptian Asset Management Programme, in cooperation with the Central Bank of Egypt has supervised and monitored the sale of the four major Joint Venture Banks, including the NSGB bank, MIBank, EAB, and CIB for a total of 3,696.6 LE million.

27. The banking sector continues to be at the centre of the new government’s reform agenda and is expected to become more privatised and deregulated, in particular against the backdrop of a five year reform plan for the banking industry. This overhaul of the banking industry is due to the fact that it is not performing as efficiently as it could. Profitability has been about 0.5% on assets over the last years; nonperforming loans officially exceeded 20% of total loans in 2004 and less than 60% was provisioned.

28. The banking sector currently represents around 80%-90% of the total Egyptian financial sector. It is comprised of four public sector banks (Banque Misr, Bank of Alexandria and Banque Du Caire, and the National Bank of Egypt), as well as three specialized public sector banks such as the Egyptian Arab Land Bank. There are also 11 private-sector joint ventures banks, which are classified as business and investment banks, and 14 foreign bank branches.

29. The Bank of Alexandria (BOA) is the first wholly government owned institution set for sale, which is indicative of the seriousness of the ongoing reform of the financial sector. In the history of bank privatisation in Egypt, the planned sale of the currently wholly owned BOA is perhaps the most significant since the bank the third largest commercial bank in Egypt with assets of 6.51 billion. Interest in this sale is expected to be significant from both domestic and foreign institutions, particularly given the recent positive performance of the BOA, which has been boosted as a result of government repayment of $1.2 billion in loans that were owned by public sector companies and a reduction of its investments in other local banks, notably the Egyptian American Bank.

30. The privatisation process of the bank is now well advanced, the bid end period being April 2006. The privatisation is scheduled to take place by the end of 2006 through government divestment of 75-80% of the banks’ share capital through a structured sale process. The Ministry of Investment intends to sell the bank to a single strategic bidder, make shares representing up to 5% of Bank of Alexandria’s share capital available to the bank’s employees and sell the residual shareholding (15-20%) through an IPO process on the Cairo and Alexandria Stock Exchange. The Egyptian Government has sourced on the expertise of the Citigroup who will be screening the bids in against predefined criteria for a ‘Qualified Purchaser’.10

10 A prospective purchaser must be an established and reputable financial institution, possessing a commercial

banking license and having sufficient resources to ensure that Bank of Alexandria is financially and commercially strong after the privatisation.


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31. In addition to the privatisation of the BOA, a plan has been initiated to restructure the main public banks, including the National Bank of Egypt and Banque Misr. To do so, the government has already implemented measures to reduce the non-performing loans in the public sector. In January, the Ministry of Investment announced that the non-performing loans of public sector enterprises were sold to the National Investment Bank (the government’s investment arm) for 6.9 billion EP. Recently, a new scheme was introduced to address bad loan problems as they remain a significant concern for the profitability and attractiveness of Egyptian banks as investment targets.

32. The government has also decided to continue reducing its ownership in joint venture banks by selling related outstanding public shares. Together, the privatisation of the Bank of Alexandria and the divestiture of public shares in Joint Venture Banks are scheduled to be completed before the end of 2006 and are expected to reduce overall state ownership from 58% to 40%.

33. Other recent and relevant reforms of the banking sector included:

• The introduction and enforcement of a new minimum capital requirement in July 2005. This has encouraged consolidation in the sector reducing the total number of banks operating in Egypt from 57 in September 2004 to 43 currently.

• The appointment of international accountancy firms to conduct full audit reviews of the four public sector banks in accordance with International Financial Reporting Standards. The audit review of the Bank of Alexandria was finalised in 2005 by the KPMG Hazem Hassan and the audits of the other three banks are scheduled for completion by June 2006.

• The launch of a resolution plan for the four public sector banks’ portfolios on public enterprise non-performing loans.

• The creation of a non-performing loan unit at the Central Bank of Egypt to expedite non performing loan resolution and monitor the establishment of banks’ non performing loan functions in order to improve loan work out policies. Settlements representing 46% of non performing loans have been made.

• The upgrading the Central Bank of Egypt’s banking supervision unit to enable the banking sector to be supervised in accordance with international best practices (under a 2.5 year programme signed with the European Central Bank). The CBE is working with banks to comply with Basle II standards by 2006.

• The restructuring of the insurance sector to offer one of its companies for sale.

• Restructuring within the Ministry of Investment to create one agency to monitor and coordinate the sale process, endorse valuations, etc.

III. Panel Discussion

34. The panel was moderated by Mr. Rainer Geiger, Deputy-Director, DAF/OECD, Head of MENA-OECD Investment Programme and discussants included Ms. Naglaa El Bialy, Advisor to the Minister of Investment of Egypt; Dr. Fouad Shaker, Secretary General, Arab Union of Banks; and Dr. Nasser Saidi, Executive Director, Hawkamah Corporate Governance Institute. Private sector input was provided by Mr. Guy Poupet, Managing Director, NSGB, Egypt.


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35. Ms. Naglaa El Bialy, Advisor to the Minister of Investment, presented on the remarkable success of Egypt’s Asset Management programme. She reported that from 1999 to June 2004, Egypt’s privatisation Programme has reached 216 transactions and yielded 17.9 billion LE, whereas from then to July 2005, the programme has encompassed 28 additional transactions, resulting in income of 5.6 billion LE. Egypt’s planned privatisation for the coming year includes divestment from 45 publicly owned companies and 57 joint venture companies. In the financial sector, the targets for privatisation for the 2006-2007, include the privatisation of the Egyptian Saudi bank and the restructuring of the insurance sector in order to offer one of its companies for sale.

36. Mr. Rainer Geiger, Director of the MENA-OECD Investment Programme, has noted the success of Egypt’s privatisation since 2004, suggesting however that in the financial sector, the privatisation process is further complicated by removal of restrictions, regulatory reform and liberalisation of financial flows. Mr. Geiger has suggested the need to carefully manage transition in order to avoid banking crises, noting that liberalisation typically follows privatisation. He has further commented that the sale of Bank of Alexandria to a strategic bidder is logical given the need to bring in expertise in the domestic market.

37. Dr. Nasser Saidi, Director of the Hawakamah Institute for Corporate Governance, commented on the history of bank nationalisation and privatisation in Egypt and the MENA region as a whole, stressing the need to revitalise banking sectors in order to improve economic development. Dr. Saidi agreed with the OECD representative on critical need to evaluate sequencing of reform in the financial sector, predicting that indigenous banking sector will grow in the next 2-3 years. Dr. Saidi suggested that the ultimate end of privatisation in Egypt would be to bring the services to the population.

38. Dr. Fouad Shaker, Secretary General of the Union of Arab Banks presented Egypt’s privatisation trajectory since 1961. Dr. Shaker presented the factors facilitating and impeding the privatisation process in Egypt (refer to Appendix I) and commented on the soundness of the Egyptian financial system.

Figure 1. Financial System Soundness (2004-2005)

7.7%9.2%27.0%NPLS/total loans

14.8%15.5%12.0%BIS ratio

8.6%9.5%5.3%Capital/Assets

15.9%15.5%10.6%ROE

1.4%1.5%0.6%ROA

Total WorldEmerging Countries

Egypt

7.7%9.2%27.0%NPLS/total loans

14.8%15.5%12.0%BIS ratio

8.6%9.5%5.3%Capital/Assets

15.9%15.5%10.6%ROE

1.4%1.5%0.6%ROA

Total WorldEmerging Countries

Egypt

Source: Arab Union of Banks, Dr. Fouad Shaker, Presentation to the NIRA Workshop, May 17th. 39. Mr. Guy Poupet, Managing Director of NSGB, a joint venture between National Bank of Egypt and French-based Societe Generale, detailed his experience of participating in the first bank privatisation transaction in Egypt under the Asset Management Programme.

40. In addition to discussion the history and experience of bank privatisation in Egypt per se, the discussion during the panel focused on the following themes:


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• Implementation of appropriate accounting standards and judicial framework for settlement of disputes;

• Measures to deepen capital and bond markets;

• The challenges in delivering services such as microfinance or credit to individuals (loan/deposit ratio estimated at <30%);

• The impact of privatisation on microfinance (i.e. microfinance is currently not being offered by foreign or venture banks);

• The deficiency in the local mortgage market, the associated impediments to registering a property;

• High interest rates in the banking sector as a legacy of public sector lending crowding out private sector lending.

IV. Remaining Challenges and Recommendations

41. Despite the accelerated speed of banking sector reform and privatisation, the Egyptian financial sector still suffers from insufficient private sector participation. While the need to privatise remaining SOEs and joint venture banks is clear, several obstacles in the process will need to be addressed in the near future if this project is to succeed.

• Challenge: The state owned banks will need to continue improving their performance with respect to non-performing loans if they are to become a lucrative investment targets. This hinges on the extent to which Egyptian government will be prepared to absorb the burden of bad debts in the banking system, estimated by some local observers to be as high as 30%.

Recommendation: Begin assessing, on a case-by-case basis, the recoverability of loans made by pubic sector banks in order to develop a realistic scenario of the costs which would be entailed if the government were to wholly or partially absorb these costs.

• Challenge: Pubic discontent with the potential consequences of the privatisation process, including loss of state employment, etc. Avoiding such sentiments represents a challenge given that commercial bank services are not largely used11 and that public sector employees see bank privatisations (as other privatisations) as threatening to employment

Recommendation: Communication to affected domestic constituencies will be necessary to ensure that they are aware of and understand the need for reform. Wide consultations with stakeholders affected by bank privatisation will be required to ensure greater level of acceptance of this process by the general public may alleviate negative perceptions.

11 Currently, 25% of Egypt’s population collects regular salaries and it is estimated that 10% of the population has a

bank account. As a result, 97% of transactions involve hard currency.


40

• Challenge: Defining appropriate corporate governance practices for public and private financial institutions and monitoring the privatisation process to ensure banks remain adequately supervised.

Recommendation: Begin implementing the newly developed Corporate Governance Code for State-Owned Enterprises in institutions which remain under public control.

42. Other recommendations which emerged during the course of the discussion included:

• Sequencing of financial sector reform in terms of liberalisation and privatisation should be carefully considered.

• Implementation of accounting standards in line with international standards will be necessary to increase investor confidence.

• Implementation of an insolvency framework for public and private sector financial institutions.

• Further restructuring of the insurance industry in order to increase its efficiency through private sector participation.


41

ANNEX I

POSITIVE AND NEGATIVE FACTORS FOR BANK PRIVATISATION IN EGYPT

Negative Positive Negative cultural perception of privatisation among local population; resistance from opposition and labor force

Capable decision makers for change management as required in strong and transparent manner without being hindered by precedent social commitment

The increasing government budget deficit resulting from subsidies, specially in energy prices

Explicit and wide involvement of private sector in the economic reform policies

Investor fears stemming from the instability of laws and regulations in Egypt

Strong formal commitment towards privatisation

The strong dominance of public sector as investor in market place threatening private investors

The existence of well prepared privatisation program, that is consistent with the overall economic reform program and preserves the rights of all parties

Insufficient transparency in activities of companies which are candidates for the privatisation process

Full political support of the ruling National Democratic Party

Slow movement in supply and weak domestic demand for money

Young internationally experienced and well educated decision makers

Weak contribution of banks to recovery process and weaknesses of financial soundness indicators against other emerging markets indices

The aggressive banking reform plan, which includes strengthening regulatory framework, good corporate governance, selling or merging weak banks to well capitalized and strong investors

Source: Arab Union of Banks, Dr. Fouad Shaker, Presentation to the NIRA Workshop, May 17th.


42


43


G. FINANCIAL MARKETS SESSION: IMPROVING CAPITAL MARKET MECHANISMS

BACKGROUND PAPER FOR SESSION IV

This document provides a background for discussion of the National Investment Reform Agenda Item ‘Capital Market Reform’. This session will focus on the recent developments in Egyptian capital markets, and in particular on measures to improve capital market mechanisms, such as Primary Dealers System for Treasury Bonds, Margin Trading and Short Selling, and financial derivatives. It has subsequently been updated in light of discussions held during the NIRA workshop in Egypt, and its recommendations will be incorporated in the National Investment Reform Agenda for Egypt.

Contact: Alexander Böhmer, +33 1 45 24 19 12, [email protected], or Alissa Koldertsova, +33 1 45 24 83 05, [email protected].


44

I. Development of the Capital Market

1. Established in 1903 and 1883 respectively, the Cairo and Alexandria exchanges showed no significant activity until the 1990s. In fact, the Egyptian capital market was underperforming until the passage of the Capital Markets Law that removed restrictions on foreign investment and introduced changes into primary and secondary markets, and the re-opening of the Cairo and Alexandria stock exchange in 1993. After the enactment of the law, the Cairo and Alexandria exchange started growing rapidly, encouraged by changes in the regulatory environment and privatisation.

2. Since the 1990s, the market has been experiencing a revival. In 2002, market capitalisation as a % of GDP reached 29%, up from 21% in 1996. Market capitalisation has been particularly on the rise in recent years and as of 2005 it rose to 85%. Investor confidence has increased substantially, in part due to the resumption of the privatisation program by the new Cabinet and the launching of several high-profile initial public offerings. Foreign investor participation in the market has also improved noticeably, from a daily average of 16% in 2001 to 35% in 2005.

3. In 2006, the market is witnessing a more active trading activity, even as compared with 2004 and 2005, with a total number of transactions for the period January-April reaching 2.2 million and average monthly value traded reaching EP 29,480 million. Market activity in the recent years has been fostered significantly by privatisations, IPOs and new listings that began with Raya Holding, and continued with Alexandria Mineral Oil, Sidi Krir Petrochemicals and Telecom Egypt. These IPOs attracted more than 200,000 new investors to the market, substantially enlarging the investment base.12 While many listed companies originated from Egypt’s privatisation program, the State continues to play an important ownership role in many listed companies to date.

4. International indices also show that the performance of the market increased by 278.6% on average during 2005. Local return on CASE 30 rose to over 110% for the period January-October 2005. Volume and value of trading have also been demonstrating tremendous growth. Value of trading reached EP 83.5 billion in comparison to EP 32.4 billion in the previous year (a growth rate of 158%). Additionally, foreign purchases reached EP 19.8 billion in comparison to sales of EP 12.3 billion, implying that foreigners are net buyers in the Egyptian stock exchange.

5. However, the activity of the capital market has been uneven in the recent months. After two years of relatively constant growth, the market witnessed a slowdown and even a gradual dip of nearly 20 percent in February, but most analysts attributed the decline to profit-taking and believed there was still room for growth. The Egyptian capital market has dropped by 16% on March 14 this year in a market correction which has caught investors surprised. The drop in March was so abrupt as to halt the trading session. The reasons for the sudden drop of the Egyptian stock market have been disputed.

6. Market participants in Egypt have long called for the introduction of new mechanisms and instruments to reactivate the market, and are keen to remove the current limits imposed on intraday trading. To pave the way for their introduction, the Minister of Investment, H.E. Mahmoud Mohieldin, issued ministerial decree No. 192 in June 2005, which adds a new section to the executive regulations of Capital Market Law no. 95 of 1992 to organize margin trading and short selling. Market players are positive about the perceived benefits of margin trading, same-day trading, and short selling.

12 All three offers were heavily oversubscribed.


45

II. The legal framework

7. A key legislation regulating the Egyptian capital market is the Capital Market Law 95 of 1992. This legislation also provides the framework for supervision of the stock exchange and market intermediaries. The Capital Market Authority can draft new secondary regulations, which are issued as decrees of the Minister of Foreign Trade. Executive rules and regulations have been issued to address disclosure, stock exchange listing, minority shareholder rights, and securitization. The Central Depository Law 93 of 2000 regulates shareholder record keeping, clearing and settlement. The following table outlines in detail the legal framework for capital market regulation.

Legal Framework for Capital Market Regulation

Source: Cited from IMF-World Bank Report Observance of Standards and Codes, March 2004.

8. The Capital Market Authority (CMA) is the securities market regulator, reporting to the Minister of Foreign Trade. The CMA has broad administrative sanction powers, including warnings, delistings,


46

suspending/revoking licenses, and other punitive measures. The CMA is responsible for the enforcement of Capital Market Law, the supervision of capital market development, and the regulation and monitoring of market activities. The CMA has specific powers to protect minority shareholders through the Capital Markets Law. Shareholders who represent 5 or more of the capital have the right to raise a complaint to the board of directors of the CMA.

9. Cairo and Alexandria Stock Exchange (CASE) is a quasi governmental body operating under the supervision of the CMA responsible for monitoring compliance with listing rules, and may impose penalties on companies that do not meet disclosure requirements. CASE is responsible for supervising sanctions that include downgrading listing status, trade suspensions, delisting and monetary penalties. Until 2002, CASE had 3 listing tiers: the official schedule, the unofficial schedule, and the unofficial schedule 2. CASE listing rules were updated in August 2002, and were implemented in September 2003. CASE is the first Arab stock exchange to issue derivative products on its in-house index instead of listing on international indices such as S&P or FTSE.

10. Misr Clearning, Settlement and Central Depository Company (MCSD) is Egypt’s central depository responsible for clearing and settlement of CASE-executed transactions. MCSD was established in accordance with the Capital Market Law 95, and now operates as a self-regulatory entity, subject to CMA supervision. Members of MCSD include banks and financial institutions that carry out brokerage or custodial activities.

11. The General Authority for Investment and Free Zones (GAFI) supervises companies incorporated under Investment Law 8. It approves and maintains on file a number of company documents such as company charters, the minutes of board meetings, etc.

12. The Ministry of Public Enterprises is charged with partially and fully state-owned companies incorporated under the Public Business Sector Law (No.203 of 1991). As soon as private ownership in a company reaches 51%, it becomes subject to the provisions of the Company Law (No.159).


47

III. Recent Reforms

13. The following other reforms have been introduced recently and presented by H.E. Mahmoud Mohieldin during the Ministerial Meeting of the MENA-OECD Investment Programme on February 14, 2006 and further elaborated by Dr. Hani Sarie El Din during the NIRA workshop:

• Issuing executive regulation for the Securitization Law;

• Issuing a Prime Ministerial Decree allowing the establishment of the Investor Protection Fund (IPF), an insurance fund that would help investors hedging their positions against non-commercial risk;

• Amending the Corporate Law to allow the introduction of 'Employee Stock Option Plans' (ESP) to the financial market;

• Re-shaping the organizational structure of the Capital market Authority (CMA) and establishing a Corporate Governance department;

• Issuing Codes of Ethics and Conduct for brokerage and fund management activities;

• Issuing in May 2002 the Minister of Finance a No. 480 establishing the Primary Dealers System to allow financial institutions registered with the Ministry of Finance to underwrite primary issues of government securities Primary Dealers is allowed to trade government securities on the open market after notification to CASE of their purchase or sale of securities.

• Institutional changes have been introduced in 2002 including listing and delisting regulations and Over-the-Counter Trading;

• Introducing intra-day trading, in which the settlement for selected stocks would be T+0 on selected stocks instead of T+2/3 for other stocks. A set of requirements are set for applying this new mechanism on the stocks in terms of activity market capitalization;

• Establishing an electronic link between the Stock Exchange and the Clearing House. This link is designed to facilitate better market surveillance and permit margin trading, short selling and intra-day trading.

• A new project to introduce commercial paper loan market has also been recently introduced.

IV. Measures currently being considered

14. Transferring all regulatory entities related to the non-banking financial services to the Smart Village with view of establishing a 'One Stop Shop' which includes all financial services related authorities in Egypt. This centre is envisioned to include the Capital Market Authority (CMA), the Mortgage Finance Authority (MFA), the Egyptian Insurance Supervisory Authority (EISA), Cairo and Alexandria Stock Exchange (CASE), and Misr for Clearing, Settlement and Depository (MCSD). This centre would be the cornerstone for the establishment of the Egyptian Financial Services Authority (FSA) in the future, which would also be responsible for bank supervision.


48

15. As described, a number of new financial instruments and mechanisms have been introduced to the Egyptian market, including the Primary Dealers System, margin trading and the short selling. Other new developments are in the pipeline such as the introduction of Exchange Traded Funds (ETFs) which are going to be issued by Cairo and Alexandria Stock Exchange and the introduction of financial derivatives. The Egyptian government hopes to accomplish these objectives by the end of 2006.

V. Summary of Panel Discussion

16. The last panel of the day, dealing with capital market reform, was chaired by Dr. Hanie Sarie El Din, the Chairman of the Egyptian Capital Market Authority (CMA). In his presentation, Dr. El Din highlighted three main areas of reform being taken forward under his supervision: the capacity building of regulatory authorities, improving investor protection, and restructuring the capital market. He also discussed measured recently introduced by the CMA including new membership rules for the stock exchange, new licening system for corporate entities to ensure segregation of accounts, and new rules on capital adequacy. El Din noted that despite many securities available and privatisation programs, the Egyptian market is still shallow, and the way forward would be through securities diversification.

17. In this context, Dr. Alaa Ezz, Secretary General of the Egyptian Businessmen Association, has noted that despite the thin capitalisation today, Egypt’s performance over the recent years has been rather strong and the current capitalisation is triple the 2003 figure. Dr. Ezz brought to the audience’s attention a number of other positive trends, highlighting that Egypt’s position rose last year in IMF ranking on financial sector development.

18. Mr. Yosuke Kawakami, a senior expert in the OECD Financial Outreach Unit commented positively on the history and recent progress of the Capital Market Authority in Egypt, and noted that the capital market in Egypt is relatively developed, with market capitalisation at 70% of GDP (as of September 2005). Mr. Kawakami noted however, that in terms of other measures of market depth, the Egyptian capital market does not perform particularly strong given that 10-20 firms dominated the majority of trading. In conclusion, Mr. Kawakami noted three deficiencies: promoting sale of shares to the general public, promoting participation of institutional investors and developing asset backed and mortgage backed securities.

19. Mr. Francois Pepin, a representative of the USAID’s presented his experience working on development of the Egyptian financial sector and in particular highlighted the Egypt Financial Service Project (EFS) which aims to create a secondary mortgage market support, as well as non-bank and low-cost sources of finance to businesses with new financial instruments and secured lending. Mr. Pepin commented on Egypt’s success in building a capital market infrastructure, highlighting CASE trading volumes, investor confidence, and strong CMA leadership, among other factors which have contributed to the development of the Egyptian capital market. The strategy of the EFS has been to focus on improving transparency and investor confidence, increasing the range of financial sector instruments, facilitating both domestic savings and international investment into productive enterprise, and mobilising longer term investment of insurance funds and pension funds. In terms of the capital market sector specifically, the EFS project looks to promote market infrastructure laws, diversify investment securities for domestic and foreign investors, increase the role of the industry in promoting its reputation, and periodically drive reform.

VI. Remaining Challenges and Recommendations

20. The following section summarises some of the remaining challenges in developing the Egyptian capital market, reflecting the commentary made by panel participants.


49

• Challenge: Implementation of corporate governance guidelines as part of the listing requirements in the CASE has not yet been accomplished, and according to Dr. Hani Sarie El Din, is part of the reform agenda for the near future.

Recommendation: It is understood that a Corporate Governance department is being created within the current structure of the Capital Market Authority. Develop a corporate governance framework for private sector enterprises, based on similar good practice examples, and incorporate it in the listing process.

• Challenge: According to Dr. Alaa Ezz, Chairman of the Egyptian Businessmen Association, the interest rates on loans in Egypt are estimated not to be competitive with other countries in the region, particularly if one includes additional charges levied by banks on loans. This could present a substantial obstacle to businessmen in Egypt, given the relative lack of alternative means of financing such as private equity.

Recommendation: Conduct a study to review interest rates and administrative charges charged by local and foreign banks for business loans and benchmark against regional performance.

• Challenge: As discussed during the panel, although the stability of the Egyptian capital market has been strong relative to the recent significant corrections in the region, the depth of the stock market is not reflective of the size of the Egyptian economy. Out of the currently 650 listed companies, only 100 are traded and only 40-50 are actively traded, despite increases in market capitalisation (36% of GDP in 2000, 83% in 2005). According to Dr. Alaa Ezz, only 2.2% of local shareholding companies are listed on the stock exchange. As a result of this high concentration, CASE trading on certain days can be dominated by one or two stocks.

Recommendation: It is understood that the current listing requirement on the CASE is 5 million EP. This may be a high requirement given the average size of local enterprises. Consideration should be given to reviewing the listing requirements and other measures related to increasing the number of IPOs on CASE.

• Challenge: Lack of financial literacy among financial press and new investors can contribute to erratic trading, as recent experience has demonstrated. As acknowledged by panel participants, the local media does not have sufficient understanding of capital market trends to provide illuminating analysis covering local trends and movements. Compounding this problem, inexperienced investors may invest in the stock market without due understanding of company fundamentals.

Recommendation: The CMA has planned to host a workshop on understanding capital markets for the financial press. This move would be important in addressing the skills gap of financial journalists in Egypt, and should involve key local media organisations.

21. Insofar as new investors in the stock market might lack the understanding of financial products and trends, presence of sophisticated money managers and mutual fund advisors could improve the functioning of the capital market. Development of skills relating to financial management should be made a priority in local universities, and attraction of foreign talent could likewise be pursued.

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aw i

s to

attr

act

addi

tiona

l in

vest

men

t and

redu

ce th

e sc

ope

for t

ax

evas

ion

by

the

gray

ec

onom

y.

The

Egyp

tian

Parli

amen

t in

the

sum

mer

of

2005

ena

cted

thi

s co

mpr

ehen

sive

tax

re

form

. Th

e ne

w

law

sw

itche

s go

vern

men

t's a

ppro

ach

from

pro

vidi

ng

tax

ince

ntiv

es t

owar

ds a

n ov

eral

l ta

x re

duct

ion.

It

redu

ces

pers

onal

an

d co

rpor

ate

inco

me

taxe

s, an

d ra

tiona

lises

ta

x ex

empt

ions

. It

also

in

trodu

ces

a 50

% re

duct

ion

in p

erso

nal

tax.

The

sta

ndar

d co

rpor

ate

tax

rate

has

be

en r

educ

ed fr

om 4

2% to

a m

axim

um

rate

of

20%

. To

mai

ntai

n th

e re

venu

e ba

se a

nd m

oder

nize

the

ir ta

x sy

stem

, th

e la

w

cont

ains

a

num

ber

of

sign

ifica

nt i

nter

natio

nal

tax

prov

isio

ns

and

anti-

abus

e ru

les,

incl

udin

g re

side

nce-

base

d ta

xatio

n w

ith f

orei

gn

tax

cred

its,

intro

duct

ion

of

trans

fer

pric

ing,

th

in

capi

talis

atio

n ru

les

and

defin

ition

s of

per

man

ent

esta

blis

hmen

t an

d ro

yalti

es.

Furth

erm

ore,

the

new

tax

leg

isla

tion

redu

ces

the

scop

e fo

r di

scre

tion

and

com

plic

ated

com

plia

nce

proc

edur

es.

Gov

ernm

ent A

ctio

n St

eps:

R

evie

w

of

the

new

ta

xatio

n le

gisl

atio

n an

d its

ap

plic

atio

n in

re

latio

n to

the

free

zon

es. (

May

200

6)

Egyp

t is

al

so

in

the

proc

ess

of

esta

blis

hing

a M

ENA

Reg

iona

l Ta

x an

d Fi

nanc

ial M

anag

emen

t Cen

ter.

Pr

ogra

mm

e A

ctio

n St

eps:

O

ECD

to

pr

ovid

e ex

perti

se

on

impl

emen

ting

the

new

le

gisl

atio

n en

surin

g tra

nspa

renc

y, s

impl

icity

and

co

mpe

titiv

enes

s of

Egy

pt (

Febr

uary

20

06).

A

ssis

t w

ith t

he e

stab

lishm

ent

of a

la

rge

taxp

ayer

s O

ffic

e, in

add

ition

to

auto

mat

ing

and

mec

hani

zing

the

Tax

Aut

horit

y (F

ebru

ary

2006

).

Tbd

In p

rogr

ess

Acc

ompl

ishe

d

The

Prog

ram

me

is

prov

idin

g su

ppor

t fo

r th

e es

tabl

ishm

ent

of

the

Cen

ter.

Egyp

t in

vite

d to

the

tax

tre

aty

wor

ksho

p or

gani

sed

by

the

OEC

D

Taxa

tion

Dire

ctor

ate

(Jun

e 20

06).

At

the

NIR

A w

orks

hop,

it

was

ag

reed

th

at

the

OEC

D

will

pr

ovid

e Eg

ypt

with

exp

ertis

e in

th

e ar

eas

of

tax

treat

ies,

new

in

tern

atio

nal

tax

rule

s, ta

x an

alys

is, a

nd a

nti-a

buse

rule

s.

Larg

e ta

xpay

ers o

ffic

e es

tabl

ishe

d (M

ay 2

006)

. O

ne o

f th

e se

ssio

ns o

f th

e N

IRA

W

orks

hop

for

Egyp

t to

add

ress

th

e in

stitu

tiona

l en

viro

nmen

t su

rrou

ndin

g th

e in

trodu

ctio

n of

Tax

Dep

artm

ent,

Min

istry

of

Fi

nanc

e

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

54

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y

th

e ne

w ta

xatio

n le

gisl

atio

n.

Mr.

Ash

raf A

l Ara

bi,

Seni

or A

dvis

or to

the

Min

iste

r of

Fina

nce

on T

ax P

olic

ies,

has

pres

ente

d on

the

prog

ress

of t

ax

refo

rm in

Egy

pt a

nd th

e fe

atur

es

of th

e ne

w ta

xatio

n le

gisl

atio

n.

3.

D

evel

opm

ent

of

Cap

ital M

arke

t Th

e Eg

yptia

n C

apita

l m

arke

t ha

s be

en

an

early

de

velo

per

by

regi

onal

st

anda

rds.

The

Cai

ro-A

lexa

ndria

sto

ck

exch

ange

reo

pene

d in

199

3 w

ith t

he

enac

tmen

t of

the

Cap

ital

Mar

ket

Law

th

at r

emov

ed r

estri

ctio

ns o

n fo

reig

n in

vest

men

t, in

trodu

ced

chan

ged

into

pr

imar

y an

d se

cond

ary

mar

kets

, etc

. In

1999

, th

e st

ock

exch

ange

has

sta

rted

elec

troni

c tra

ding

act

iviti

es.

Gov

ernm

ent A

ctio

n St

eps:

Tr

ansf

errin

g al

l re

gula

tory

en

titie

s re

late

d to

the

non

-ban

king

fin

anci

al

serv

ices

to

the

Smar

t V

illag

e w

ith

view

of

es

tabl

ishi

ng

a 'O

ne

Stop

Sh

op'

whi

ch

incl

udes

al

l fin

anci

al

serv

ices

rel

ated

aut

horit

ies

in E

gypt

('E

gypt

ian

Fina

ncia

l Se

rvic

es

Cen

tre‘)

. (M

arch

200

6)

Few

new

fin

anci

al i

nstru

men

ts a

nd

mec

hani

sms

have

bee

n in

trodu

ced

to

the

Egyp

tian

mar

ket.

Thes

e in

clud

e (i)

the

Prim

ary

Dea

lers

Sys

tem

for

Tr

easu

ry

Bon

d (ii

) th

e 'M

argi

n Tr

adin

g'

and

the

'Sho

rt Se

lling

'. (M

arch

200

6)

Ong

oing

C

ompl

eted

The

follo

win

g ot

her r

efor

ms

have

be

en in

trodu

ced

mor

e re

cent

ly:

- Is

suin

g th

e Ex

ecut

ive

Reg

ulat

ion

for

the

Secu

ritiz

atio

n La

w

- Is

suin

g a

Prim

e M

inis

teria

l D

ecre

e al

low

ing

the

esta

blis

hmen

t of

th

e In

vest

or

Prot

ectio

n Fu

nd

(IPF

), an

in

sura

nce

fund

tha

t w

ould

hel

p in

vest

ors

hedg

ing

thei

r po

sitio

ns

agai

nst n

on-c

omm

erci

al ri

sk

- A

men

ding

the

Cor

pora

te L

aw

to

allo

w

the

intro

duct

ion

of

'Em

ploy

ee S

tock

Opt

ion

Plan

s' (E

SP) t

o th

e fin

anci

al m

arke

t -

Re-

shap

ing

the

orga

niza

tiona

l st

ruct

ure

of t

he C

apita

l m

arke

t

Cap

ital

Mar

kets

A

utho

rity

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

55

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y O

ther

new

dev

elop

men

ts a

re i

n th

e pi

pelin

e su

ch a

s; (

i) th

e in

trodu

ctio

n of

Exc

hang

e Tr

aded

Fun

ds (

ETFs

) w

hich

are

goi

ng to

be

issu

ed b

y C

airo

an

d A

lexa

ndria

Sto

ck E

xcha

nge

and

(ii)

the

intro

duct

ion

of

finan

cial

de

rivat

ives

(Mar

ch 2

006)

. Pr

ogra

mm

e A

ctio

n St

eps:

C

ondu

ct a

n ev

alua

tion

of th

e se

lect

ed

com

pone

nts

of t

he f

inan

cial

sec

tor

base

d on

th

e In

vest

men

t R

efor

m

Inde

x.

One

of

the

sess

ions

of

the

NIR

A

Wor

ksho

p fo

r Eg

ypt

to a

ddre

ss t

he

deve

lopm

ents

in

Eg

yptia

n ca

pita

l m

arke

ts a

nd m

easu

res

to i

ncre

ase

its

dept

h.

to b

e ac

hiev

ed b

y th

e en

d of

200

6 20

07

17 M

ay 2

006

(acc

ompl

ishe

d)

Aut

horit

y (C

MA

) an

d es

tabl

ishi

ng

a C

orpo

rate

G

over

nanc

e de

partm

ent

- Is

suin

g C

odes

of

Ethi

cs a

nd

Con

duct

for

bro

kera

ge a

nd f

und

man

agem

ent a

ctiv

ities

-

Mar

gin

Trad

ing

and

shor

t se

lling

has

bee

n in

trodu

ced

(Dec

isio

n 82

/200

6 of

the

CM

A

Cha

irman

); m

argi

n se

lling

ope

n to

bro

kers

-

Leg

isla

tion

has

been

pas

sed

to

allo

w I

nves

tmen

t fun

ds to

be

set

up b

y br

oker

s Th

e G

over

nmen

t is

cu

rren

tly

cons

ider

ing

the

esta

blis

hmen

t of

a

com

mod

ity fu

ture

s exc

hang

e.

Dr.

Han

i Sa

rie

El

Din

ha

s pr

esen

ted

the

prog

ress

of

ac

hiev

ed

by

Egyp

t in

ca

pita

l m

arke

t re

gula

tion

and

OEC

D

will

be

iden

tifyi

ng fu

ture

way

s to

co

oper

ate.

A re

pres

enta

tive

of th

e Eg

yptia

n go

vern

men

t w

ill

be

atte

ndin

g a

wor

ksho

p on

Su

stai

nabl

e C

apita

l M

arke

ts

Dev

elop

men

t on

July

24,

200

6.

The

USA

ID is

cur

rent

ly w

orki

ng

with

in

the

fram

ewor

k of

th

e Eg

yptia

n Fi

nanc

ial

Serv

ices

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

56

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y Pr

ojec

t on

in

trodu

cing

ne

w

finan

cial

in

stru

men

ts

in

the

Egyp

tian

capi

tal m

arke

ts.

4.

Pr

ivat

izat

ion

of

Stat

e ow

ned

Ban

ks a

nd

Div

estin

g Pu

blic

Sh

ares

in

Jo

int

Ven

ture

Ban

ks

The

gove

rnm

ent

anno

unce

d in

Mar

ch

2005

that

it w

ill d

ives

t of

its s

take

s in

al

l jo

int

vent

ure

com

pani

es a

nd j

oint

ve

ntur

e ba

nks.

No

rest

rictio

ns w

ill b

e pl

aced

on

FDI

in t

hese

tra

nsac

tions

. Th

e fu

ll pr

ivat

izat

ion

of t

he B

ank

of

Ale

xand

ria (

B.A

.) –

the

four

th l

arge

st

Stat

e ow

ned

Ban

k in

Egy

pt –

has

bee

n an

noun

ced.

Priv

atis

atio

n of

oth

er S

tate

ow

ned

Ban

ks i

n Eg

ypt

is e

xpec

ted

to

follo

w s

uite

. The

gov

ernm

ent

has

also

de

cide

d to

redu

ce it

s ow

ners

hip

in Jo

int

Ven

ture

B

anks

by

se

lling

re

late

d ou

tsta

ndin

g pu

blic

shar

es.

The

proc

ess

of p

rivat

izat

ion

is im

pede

d by

the

high

am

ount

of

non

perf

orm

ing

debt

s w

hich

the

pub

licly

ow

ned

bank

s ca

rry

on th

eir b

alan

ce s

heet

s (e

stim

ated

at

30%

).

Gov

ernm

ent A

ctio

n St

eps:

Su

ppor

t the

priv

atiz

atio

n in

itiat

ives

of

the

Gov

ernm

ent

of

Egyp

t, pa

rticu

larly

w

ith

rega

rd

to

esta

blis

hing

a

fram

ewor

k fo

r ad

equa

te

corp

orat

e go

vern

ance

of

ba

nks.

(Feb

ruar

y 20

06)

Beg

in a

sses

sing

, on

a c

ase-

by-c

ase

basi

s, th

e re

cove

rabi

lity

of

loan

s m

ade

by p

rivat

e se

ctor

ban

ks in

ord

er

to d

evel

op a

rea

listic

sce

nario

of

the

cost

s w

hich

wou

ld b

e en

taile

d if

the

gove

rnm

ent

wer

e to

ab

sorb

th

em

(May

200

6).

Prog

ram

me

Act

ion

Step

s:

Prov

ide

expe

rtise

rela

ted

to c

orpo

rate

go

vern

ance

of

St

ate

Ow

ned

Ente

rpris

es.

Com

mun

icat

ion

to a

ffec

ted

dom

estic

co

nstit

uenc

ies

will

be

nece

ssar

y to

en

sure

tha

t th

ey u

nder

stan

d th

e ne

ed

for r

efor

m. (

May

200

6).

Ong

oing

O

ngoi

ng

Pend

ing

The

priv

atiz

atio

n of

the

Ban

k of

A

lexa

ndria

is

on

goin

g an

d is

ex

pect

ed to

be

com

plet

ed b

y ye

ar

end.

A 3

7% s

take

in th

e Eg

yptia

n Sa

udi B

ank

is a

lso

expe

cted

to b

e co

mpl

eted

by

year

end

. To

geth

er t

he p

rivat

izat

ion

of t

he

Ban

k of

A

lexa

ndria

an

d th

e di

vest

ure

of

publ

ic

shar

es

in

Join

t-Ven

ture

Ban

ks a

re g

oing

to

be c

ompl

eted

bef

ore

the

end

of

2006

and

are

exp

ecte

d to

red

uce

over

all

shar

es

of

Stat

e ow

ned

Ban

ks in

tota

l dep

osits

from

58%

(a

s of t

oday

) to

40%

.

A

sem

inar

on

co

mm

unic

atin

g re

form

s in

bein

g pl

anne

d fo

r

Min

istry

of

In

vest

men

t

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

57

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y O

ne o

f th

e se

ssio

ns o

f th

e N

IRA

W

orks

hop

for

Egyp

t to

add

ress

the

pr

ogre

ss

and

next

st

eps

in

priv

atiz

atio

n of

Egy

ptia

n st

ate

owne

d ba

nks.

D

efin

e ap

prop

riate

co

rpor

ate

gove

rnan

ce p

ract

ices

for

pub

lic a

nd

priv

ate

sect

or b

anks

. ( 2

007)

.

Ong

oing

Egyp

t ha

s el

abor

ated

th

e fir

st

Ara

bic

Cod

e of

C

G

for

Stat

e O

wne

d En

terp

rises

du

e to

be

re

leas

ed

by

the

end

of

the

sum

mer

200

6. T

he O

ECD

and

IF

C h

ave

com

men

ted

on th

e dr

aft

text

an

d ha

ve

orga

nise

d a

conf

eren

ce

to

disc

uss

the

prop

osed

text

.

5. G

uide

lines

for

Cor

pora

te G

over

nanc

e of

SO

Es

The

OEC

D G

uide

lines

on

Stat

e-O

wne

d En

terp

rises

re

pres

ent

the

first

in

tern

atio

nal

benc

hmar

k to

as

sist

go

vern

men

ts

in

impr

ovin

g th

e co

rpor

ate

gove

rnan

ce o

f SO

Es a

nd h

ow

they

eva

luat

e an

d im

prov

e th

e w

ay

they

per

form

thei

r ow

ners

hip

func

tion.

Th

e O

ECD

G

uide

lines

ad

dres

s th

e St

ate

as a

n ow

ner,

and

repr

esen

t w

hat

OEC

D g

over

nmen

ts a

gree

are

the

core

el

emen

ts

of

a go

od

corp

orat

e go

vern

ance

re

gim

e fo

r SO

Es.

They

pr

ovid

e st

anda

rds

and

good

pra

ctic

es,

as w

ell a

s gu

idan

ce o

n im

plem

enta

tion,

an

d sh

ould

be

adap

ted

to t

he s

peci

fic

circ

umst

ance

s of

ind

ivid

ual

coun

tries

an

d re

gion

s.

Gov

ernm

ent A

ctio

n St

eps:

D

evel

op

the

first

co

mpl

ete

and

deta

iled

Ara

bic

Cod

e of

Cor

pora

te

Gov

erna

nce

of

Stat

e O

wne

d En

terp

rises

ba

sed

on

the

OEC

D

Gui

delin

es

on

Stat

e-O

wne

d En

terp

rises

. Pr

ogra

mm

e A

ctio

n St

eps:

C

omm

ent

on t

he d

raft

subm

itted

to

the

OEC

D.

Com

plet

ed

The

first

Cod

e fo

r St

ate

Ow

ned

Ente

rpris

es

in

Ara

bic

was

de

velo

ped

in E

gypt

and

off

ered

fo

r co

mm

ents

to

the

OEC

D a

nd

the

IFC

. A

co

nfer

ence

of

ex

perts

, in

clud

ing

OEC

D

repr

esen

tatio

n w

as c

ondu

cted

in

July

200

6 to

fin

alis

e th

is te

xt. T

he te

xt is

was

su

bseq

uent

ly

trans

late

d an

d fin

aliz

ed.

The

initi

al

text

,

Min

istry

of

In

vest

men

t

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

58

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y A

num

ber o

f OEC

D g

over

nmen

ts h

ave

unde

rtake

n si

gnifi

cant

re

form

s in

ad

dres

sing

co

rpor

ate

gove

rnan

ce

of

SOEs

as

gl

obal

isat

ion,

te

chno

logi

cal

chan

ges

and

liber

alis

atio

n ha

ve m

ade

it ne

cess

ary

to re

adju

st a

nd/o

r res

truct

ure

the

stat

e-ow

ned

sect

or.

Man

y no

n-O

ECD

co

untri

es

are

also

lo

okin

g to

war

ds th

e O

ECD

exp

erie

nce

to g

uide

th

eir o

wn

refo

rms

in th

is re

gard

as

they

ha

ve s

igni

fican

t sta

te s

ecto

rs. I

n Eg

ypt,

even

giv

en r

ecen

t pr

ivat

izat

ion

effo

rts

man

y co

mpa

nies

re

mai

n in

st

ate

owne

rshi

p. T

he e

ffec

tive

gove

rnan

ce o

f th

ese

com

pani

es

is

as

impo

rtant

as

de

finin

g fu

rther

se

ctor

s fo

r on

goin

g pr

ivat

izat

ion

effo

rts.

how

ever

, ap

plie

s no

t to

al

l Eg

yptia

n St

ate

Ow

ned

Ente

rpris

es.

RE

FOR

M M

EA

SUR

ES

EN

VIS

ION

ED

FO

R 2

007

6. E

nhan

cing

C

ompe

titio

n Po

licy

Egyp

t’s c

ompe

titio

n la

w w

as i

nitia

lly

draf

ted

in

1995

. Th

e Eg

yptia

n Pa

rliam

ent

has

appr

oved

Egy

pt's

first

A

nti-M

onop

oly

and

Fair

Com

petit

ion

Act

(la

w 3

of

2005

) in

Jan

uary

200

5 an

d it

ente

red

into

for

ce in

May

200

5.

The

new

le

gisl

atio

n ad

dres

ses

horiz

onta

l re

stra

ints

, ve

rtica

l re

stra

ints

As t

he n

ew c

ompe

titio

n la

w is

ap

plie

d, a

revi

ew o

f the

im

plem

enta

tion

regu

latio

ns o

f the

ne

w c

ompe

titio

n la

w a

nd

iden

tific

atio

n ke

y ob

stac

les i

s re

com

men

ded.

Th

e co

mpe

titio

n la

w is

a fi

rst o

f a

kind

in

Egyp

t’s h

isto

ry.

Und

er

the

law

, an

y co

mpa

ny h

oldi

ng

over

25%

of

mar

ket

shar

e in

a

give

n in

dust

ry,

can

be

inve

stig

ated

for

ant

i-com

petit

ive

The

Egyp

tian

Com

petit

ion

Aut

horit

y

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

59

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y an

d ab

use

of d

omin

ant

posi

tion.

The

la

w d

oes

not a

ttem

pt to

con

trol m

erge

rs

and

acqu

isiti

ons.

Th

e C

ompe

titio

n La

w,

appl

ies

to a

ll tra

nsac

tions

and

bu

sine

ss

invo

lved

in

co

mm

erce

(c

over

ing

both

tra

de a

nd s

ervi

ces)

. It

also

app

lies

to a

ny a

ctio

ns c

omm

itted

ab

road

if

thos

e ac

tions

res

ult

in t

he

prev

entio

n or

rest

rictio

n of

the

free

dom

of

com

petit

ion

in E

gypt

. It

does

not

ap

ply

to p

ublic

util

ities

man

aged

by

the

stat

e.

The

Com

petit

ion

Law

al

so

prov

ides

for

a c

ondi

tione

d ex

cept

ion

from

its

appl

icat

ion

in th

e lim

ited

case

w

here

th

e pu

blic

in

tere

st

and

the

inte

rest

s of

th

e co

nsum

ers

are

obvi

ousl

y af

fect

ed i

n su

ch a

man

ner

beyo

nd

any

cons

ider

atio

ns

of

free

co

mpe

titio

n.

The

Egyp

tian

Com

petit

ion

Aut

horit

y (E

CA

) ha

s be

en

esta

blis

hed

as

an

inde

pend

ent

gove

rnm

ent

body

who

se

dutie

s in

clud

e de

tect

ion

of a

cts

that

ob

stru

ct f

ree

com

petit

ion

and

issu

ing

orde

rs to

take

act

ion

in th

is re

gard

.

beha

viou

r.

The

ECA

has

rece

ived

is re

porte

d to

ha

ve

rece

ived

its

fir

st

com

plai

nts

and

the

ECA

w

ill

repo

rt th

em

to

the

Prim

e M

inis

ter’

s of

fice,

w

ho

wou

ld

then

con

sult

with

the

Min

istry

of

Trad

e an

d In

dust

ry a

nd M

inis

try

of Ju

stic

e.

The

ECA

w

ill a

lso

act

as a

n ad

viso

r to

the

gove

rnm

ent o

n th

e is

sue

of p

rice

cont

rols

.

7. E

ncou

ragi

ng

Bus

ines

s Ass

ocia

tions

The

Gen

eral

Aut

horit

y fo

r In

vest

men

t an

d Fr

ee Z

ones

ini

tiate

d in

200

5 an

ou

treac

h pr

ogra

m

for

Bus

ines

s A

ssoc

iatio

ns.

This

in

itiat

ive

was

im

plem

ente

d by

si

gnin

g a

Prot

ocol

Ass

ess

the

desi

gn a

nd l

aunc

h of

thi

s ou

treac

h pr

ogra

m.

GA

FI

ME

NA

-OE

CD

Inve

stm

ent P

rogr

amm

e

60

Ref

orm

obj

ectiv

e It

em D

escr

iptio

n R

equi

red

Act

ion

Step

s (d

ate

of

esta

blis

hmen

t of t

arge

t)

Tim

elin

e Pr

ogre

ss

Res

pons

ible

A

genc

y w

ith

two

Ass

ocia

tions

, na

mel

y A

lexa

ndria

Bus

ines

s A

ssoc

iatio

n an

d th

e 10

th

of

Ram

adan

In

vest

ors

Ass

ocia

tion.

Th

e m

ain

aim

of

th

is

prog

ram

is

to

qu

alify

an

d pr

ovid

e ca

paci

ty b

uild

ing

for

thes

e en

titie

s so

as

to a

ct a

s an

inte

rfac

e be

twee

n G

AFI

an

d pr

ivat

e se

ctor

repr

esen

tativ

es.

8.

MIG

A's

Tec

hnic

al

Ass

ista

nce

Pro

gram

me

for

Inve

stm

ent

Prom

otio

n

MIG

A's

TA

Prog

ram

me

incl

udes

in

tern

atio

nal

best

pr

actic

es

and

inco

rpor

ates

a m

echa

nism

to e

nsur

e th

e cr

eatio

n an

d im

plem

enta

tion

of

an

inve

stm

ent

prom

otio

n un

it (E

gypt

In

vest

Pro

gram

- E

IP)

with

in G

AFI

. Th

is p

rogr

amm

e w

ill a

llow

GA

FI t

o ac

cess

int

erna

tiona

l be

st p

ract

ices

tha

t w

ill

subs

tant

ially

in

crea

se

the

prob

abili

ty o

f su

cces

s of

its

pro

gram

s. It

has

9 m

odul

es in

clud

ing

inst

itutio

nal

prom

otio

nal

capa

city

im

plem

enta

tion

plan

, bu

sine

ss

plan

an

d st

rate

gy,

train

ing

and

deve

lopm

ent

to

attra

ct

FDI.

Prov

ide

tech

nica

l as

sist

ance

in

the

impl

emen

tatio

n ph

ase.

9. M

oder

n in

solv

ency

la

w

A m

oder

n in

solv

ency

law

as

a ba

sis

for

cred

itors

’ pr

otec

tion

and

ente

rpris

e fin

anci

ng

oper

atio

ns

has

been

id

entif

ied

as

a m

issi

ng

elem

ent

in

Egyp

t.

mena-oecd investment programme · investment climate in particular - has accelerated as mena...

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