Supporting SMEs in Egypt Ministry of Finance Rabat 10-12 March 2008

Outline MSMEs in Egypt Making a Distinction (The focus) Macro-economic outlook Structural characteristics Constraints Making a Distinction (The focus) MSMEs and Competitiveness Policy Formulation Process Policies Adopted Vision for the future

Macro-Economic Outlook The government has announced very aggressive growth targets for its 2007-2012 economic development plan. (an annual GDP growth of 8 percent and the creation of 2.8 million job opportunities-an average of 750,000 job opportunities per year). Most of the macro economic indicators have shown great improvements over the past nine years (e.g., GDP, GDP per capita, exports…etc.). However, much remains to be done with regards to income inequality, poverty and unemployment.

Private Sector Share of GDP

Unemployment and the Role of PSD Between 1999 and 2005, the absolute number of the unemployed has actually witnessed an average annual increase of approximately 4%, climbing from 1.6 million to almost 2.2 million. So far, the private sector has been unable to absorb the country’s growing labor force. In order for the private sector to expand, which is a necessary component of Egypt’s future growth, several improvements are needed in the business environment, including in the system of laws, property rights, competition frameworks, public services and infrastructure, the depth of financial markets, trade liberalization regime, and so on. In the future, as per the Human Development Report of 2005, the government is planning to reduce its employment by 100,000 jobs annually. In addition, it estimated that roughly 800,000 people will enter the labor market each year. Given the fact that almost one-third of the population is under the age of 14, there will be a growing pressure on job creation over the next 10 years

MSMEs The SME sector has effectively rarely been considered as part of the private sector, even though it accounts for 99.7 percent of the private sector enterprises, about 75 percent of private sector non-agricultural employment. From a political economy viewpoint, reforms aimed at fostering entrepreneurship and MSE development are particularly desirable because they create clear winners from reform and a broad social coalition in support of change. From a social viewpoint, MSEs secure livelihood for a large and ever expanding sector of the population. Almost three-quarters of Egypt’s labor force are employed in the MSE sector

MSMEs in Egypt SMEs Large Enterprise 99 . 70 % 30 30 SMEs Large Enterprise 71 % 19 10 Micro Small Medium Figure 1: Distribution of Employment of SMEs in Private Non-Agriculture Economic Activities Figure 2: Distribution of Non-Agricultural Economic Activities Between SMEs and Large Enterprises

Structural Features The markedly skewed size-based distribution of businesses in Egypt towards micro enterprises. MSMEs tend to have very small amounts of capital. Fifty-nine percent of MSEs with 1-4 workers have capital of less than 5,000 LE (defined as microenterprises) and only 6 percent of enterprises have invested capital of more than 50,000 LE (defined as small enterprises

Missing Middle

Structural Features Skewed Geographical Distribution, almost half of the private sector in the country is concentrated in the five governorates of Cairo, Giza, Dakahliya, Alexandria and Sharqiya. Skewed Activity Distribution, MSEs are predominantly concentrated in the trade sector, owing to the low entry barriers in terms of capital, skill and technology characteristic of the trade sector. Within the manufacturing sector, more than eighty percent of enterprises are concentrated in five activities.

Sectoral Distribution

Other Structural Features Low Share of MSMEs in Value Added High levels of informality Women in the MSME sector

Constraints Demand Related Constraints Input Constraints Weak Effective Demand Exports Lack of Linkages with Larger Firms Limited, Non-structured, and Uncoordinated Marketing Channels Input Constraints Technology Lack of Access to Finance Limited Access to Adequately Priced Inputs Lack of Access to Information Lack of Access to Business Development Services Process Constraints Legal and Regulatory Constraints Entrepreneurship Constraints

The Process Distinctions Socio-Economic focus Vs. only Social PSD Vs. MSME Development Micro Vs. Small and Medium High Road Vs. Low Road Income Generation Activities Vs. Growth Generation Activities Necessity Entrepreneurs Vs. Opportunity Entrepreneurs Existing Enterprises Vs. Start-ups The decision of having competitiveness as a theme for the strategy was inevitable under the global changes that is affecting Egypt and the challenges faced by SMEs in competing locally and globally, but global changes also open up opportunities for competitive SMEs. through the review of the international experiences, it came very clear that policies with a social focus does not work in the benefit of SMEs and thus the Economy, the document focuses mainly on the economic effect of SMEs, stress more on the fact that SMEs are actually a vehicle for economic growth which will have a social impact at the end (so the document shifts that traditional thinking of providing incentives to reducing burdens). That is the same reason that the document only address the Small and the Medium, as those sizes are the ones that have the potential to be competitive, but Egypt does not posses a substantial medium sized enterprise (missing middle syndrome), which poses a challenge that we have to address, and interventions in that area are needed to make the small grow to be in the medium size. the focus is also not on price competition (low road), but to upgrade SMEs to high-value links of the value chain (high road) which focus on improving products quality through improving skills, modern technology), this document used the right bottom-up approach, addressing the exact needs of SMEs, going through an extensive consultative process that involved all stakeholders This effort was a product of work that took over 2 years of preparation and had culminated in addressing 7 policy areas, accompanied by an action plan that listed the activities, responsibilities, and timeframe. The focus for us was always on having something that can be implemented and make a difference for SMEs.

Competitiveness Competitiveness, is demonstrated by "the ability to meet the test of free international markets while expanding real income." It is based on generating more value through improved productivity, quality, service and innovation. So just to put this in a formal way competitiveness is the ability to meet the test of free international markets while expanding real income. That is what we want to achieve, expand real income

Global Trends (Characteristics) Fracturing value chain among several countries. Quality management. Standardization. Just-in-time (JIT) production. Networking of firms and suppliers. Highly and multi-skills workforce.

The Vision Developing a competitive SME sector able to compete in local and global markets and deliver its socio-economic and developmental benefits in the years to come, and thus improving the country’s trade balance. Separation in targeting policies Income generation Vs. Growth generation The vision that we had in the Ministry was aiming at both the social aspect, and the economic aspect, as enhancing competitiveness does not mean it is a buy off between social and economic, because one is simply the result of the other, but we have to put this fact in front of our eyes in order to just not disregard it

The Process Priority Policies 2000 Draft National Policy 1998 Done by the Ministry of Economy Listed and divided constraints into Financial and Non-Financial Proposed general Policy Actions Accepted by Stakeholders in a National Conference Prioritized Policies that were recommended in the 1998 Draft Was done through a consultative process Five policy areas were tackled (Update of Policy Framework, Definition, Access to Finance, Procurement, and Legal and Regulatory) Draft National Policy: The competitiveness SME National Strategy was the accumulation of a work that started in 1998 with the development of the First Document that addressed the constraints facing SMEs in Egypt. This effort was done by then the Ministry of Economy. The document was a first attempt to tackle the constraints that has long faced the development of the sector in Egypt, it divided the constraints into Financial, and Non-Financial, and recommended policy actions to overcome those constraints. This document, though never approved to be a National Policy, has been accepted by the stakeholders in a National Conference, had brought the attention to the importance of SMEs, and many organizations used it as a reference for their work. Priority Policy Issues for the Development of SMEs: Through the SMEPol Project under the Ministry of Economy and Foreign Trade, 5 priority policy issues were identified to be formulated during the course of the project. The prioritization was done through a consultative process (workshops, and questionnaires) with various stakeholders, which resulted in identifying 5 top priority policies as follows: Update of Policy framework, Definition, Access to Finance, Procurement, and Legal and Regulatory framework), Export Promotion was added to be a sixth area, after the change of the Mandate of the Ministry to be Ministry of Foreign Trade. In the first policy area “update of the Draft National Policy” it is clear that the competitiveness report is the result Priority Policies 2000 Draft National Policy 1998

Priority Policies Updating draft national policy (competitiveness) Definition Access to finance Procurement Legal and regulatory environment

Policy Process Policy Process Policy Consultation with Formulation 7 Policies Minister’s recom. Publicizing Results & Proposals March 2003 Workshop Consultation with Stakeholders Consultation on Action Plan Research & Assessment Discussion Paper Policy Process Competitiveness Process Finalization of Recommendation Finalization of Action Plan (Nov. 2004) Stakeholders Mapping & Involvement Research committee Synergy group Sub-donor group Formalization National Conference Implementation Policy Committee Problem & Issues Identification SME Focus Groups Identifying problems Revisions Revisions Monitoring & Evaluation Monitoring & Evaluation

Competitiveness Strategy Policies: Export Promotion Innovation and Technology Access to finance Organic Clusters Legal and regulatory environment FDI and inter-firm linkages Business Development Services Implementation mechanism: SME Policy Committees

Government Procurement The 10% in the MSE Law Inter-Ministerial committee on Procurement was established between the MoF and SFD to discuss methods of implementing the 10% Country Procurement Assessment Review M/SME procurement allocation system

Tax Law/Real state registration Special Accounting Standards for M/SMEs Tax exemption for M/SMEs acquiring loans from the SFD Review of the current real state registration, which will affect the use of assets as collateral for SMEs

Venture Capital Establishment of committee that includes key governmental stakeholders on the decision making level The purpose of the committee is to streamline regulations governing VC establishment in addition to creating a VC fund Recommendations to establish Private Equity, and Turnaround funds

Leasing Leasing roundtable that brought together US Expert Volunteers and the leasing companies currently active in Egypt to prioritize and agree on reform measures needed to activate the leasing industry. Upon finalization of the Leasing research study and approval by the Minister of Finance to publish and circulate the report, continued networking and pursuit of collaborative relationships by the Project led to an agreement with Financial Services Volunteer Corps (US Project) and the General Authority for Investment to co-host a roundtable discussion based on the SMEPol report. This brought together US Expert Volunteers and the leasing companies currently active in Egypt to prioritize and agree on reform measures needed to activate the leasing industry.

Vision for the future Market Access for SMEs through streamlining government procurement procedures

SME accounting standards in place Vision for the future SME accounting standards in place

Streamlining laws and regulations of the sales tax Vision for the future Streamlining laws and regulations of the sales tax

Vision for the future Access to finance for SMEs through creating a favorable environment for non-traditional financial mechanisms

More cooperation and collaboration between different stakeholders Vision for the future More cooperation and collaboration between different stakeholders

Strategic interventions Vision for the future Strategic interventions