TRADE, INVESTMENT AND COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Enabling Private Sector Growth in Menya and Assiut, Egypt Enabling Private Sector Growth in Menya and Assiut, Egypt © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third- party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Maria Lopez / lopez.ten@gmail.com >>> Contents Acknowledgments 5 1. Executive Summary 6 2. About This Report 13 3. Private Sector Dynamics in Menya and Assiut 16 Socioeconomic Context 16 Structure of the Private Sector 18 Private Sector Performance 21 4. Sectoral Opportunities in Menya and Assiut 23 Agriculture 23 Manufacturing (including agriprocessing) 26 Other Promising Sectors 27 5. The Business Enabling Environment in Menya and Assiut 29 Overall Business Environment 29 Access to Output and Input Markets 32 Business Access to Basic Infrastructure 33 Business Access to Finance 34 Business Access to Labor, Skills, and Technology 35 6. Recommendations 37 Annex 1: COVID-19 Impact on Business Performance 43 Annex 2: Constraints to Growth of the Agribusiness and Manufacturing Sectors in Egypt 45 References and Other Resources 48 >>> Acknowledgments This report was prepared by a World Bank team led by Vincent Palmade (Lead Economist) and Ana Cristina Alonso Soria (Consultant), and with Hannah Messerli (Senior Private Sector Specialist), Alaa Fahmy (Consultant), Salma Rasem Mohammed El Gammal (Consultant), Manal Kelig (Consultant), Yosra Bedair (Consultant), and Sandra Lizeth Córdova Solís (Consultant), under the guidance of Ellen Olafsen (Senior Private Sector Specialist) and Jade Salhab (Senior Private Sector Specialist). The report includes inputs from Etienne Raffi Kechichian (Senior Private Sector Specialist), Manal Kelig (Wonders of Egypt), and Katherine Elizabeth Wolff Siess (Consultant). Special thanks to Mohamed Nada (Senior Urban Specialist), Fatma Aglan (Agriculture Specialist), Salma Abdel Fattah (Transport Specialist), Maha Hussein (Senior Operations Officer), Graciela Miralles Murciego (Senior Economist), Eric Raoul Philippe Dunand (Senior Digital Development Specialist), Fatma Ibrahim, and private sector actors and external experts interviewed. The authors thank Djibrilla Adamou Issa (Practice Manager) and Mark Eugene Ahern (Country Lead Economist) for their valuable guidance in finalizing this report. The authors thank the General Authority for Investment and Free Zones; the Micro, Small and Medium Enterprises Development Agency; the Industrial Development Authority; the Upper Egypt Local Development Program Coordination Office; Olam Egypt; the OTTOMAN Group; Ultra Medical Products; Giza Spinning and Weaving; Al Nady Travel Services; New Hermopolis; Amaken; Red Sea Trail; and all the firms that shared their insights for this report. Finally, the team wishes to acknowledge the United Kingdom, which provided the funding to prepare this report. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 5 1. >>> Executive Summary In 2016, following several years of political instability and exposure to domestic and external shocks, Egypt launched a bold and important reform program to improve macroeconomic stabil- ity, restore confidence in the economy, and enhance socioeconomic conditions. A series of new laws was adopted to improve the legislative framework and address long-standing challenges in the business environment. Despite these important improvements, challenges remain toward enabling a better overall business enabling environment. Key remaining constraints to Egypt’s competitiveness include factors pertaining to trade facilitation, connectivity, logistics and private sector concerns around competing on an uneven playing field. The private sector share of GDP reached almost 70 percent in FY2019, but the share of private investment in the economy is still considerably lower in Egypt than in its peer countries. Inflows of foreign investment remain low and declining, and Egypt continues to perform below its poten- tial in exports; export of goods and services reached 19 percent of GDP in 2018, compared to 30 percent in Turkey, and nearly 40 percent in Morocco and Tunisia (Egypt Country Private Sector Diagnostic 20201). Further, in Egypt, the spatial distribution of economic activity shows a high degree of geographic concentration. About 30 percent of private sector firms are located in the three governorates of Cairo, Giza and Alexandra. This contrasts with the low economic activity and limited employment opportunities in the Upper Egypt governorates, in which poverty rates are among the highest; their share in the number of firms in only 17 percent. 1. The CPSD can be downloaded on the following website: https://www.ifc.org/wps/wcm/connect/publications_ext_content/ ifc_external_publication_site/publications_listing_page/cpsd-egypt EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 6 Egypt has considerable potential to become a regional trade ment and accounts for about 50 percent of gross value added hub. A key challenge is how to leverage this potential to in both governorates. Menya is a national leader in the pro- achieve inclusive and sustainable growth that benefits the duction of wheat, maize, and sugar cane and an emerging country’s population at large. In alignment with Egypt’s deci- export hub for chickpeas, onions, and aromatic plants; Assiut sion to expand the Upper Egypt Local Development Program2 is a regional leading producer of pomegranates and aromatic from an initial focus on Sohag and Qena to also include Me- plants. Weather and soil conditions in these governorates are nya and Assiut, this paper focuses on identifying opportunities conducive to cultivation of high–oil content herbs and other and barriers to realizing inclusive and sustainable growth in agricultural products that command high prices in international these two governorates. The paper aims to inform the delib- markets. Menya hosts relatively larger plot sizes than many erations of the governorates recently established Economic other parts of the country, offering investors opportunities for Councils, as well as the continuous sub-sector specific public- larger economies of scale. Preliminary clusters identified in private dialogue, which forms part of UELDP. This paper thus Menya include grapes, potatoes, palm dates, and palm trees. serves as a starting point, and forth-coming dialogue could Clusters in Assiut include pomegranates, medicinal and aro- give rise to follow-on in-depth studies of sub-sectors of high matic plants, and dates. Most light manufacturing enterprises priority to the governorates. Indeed, “cluster competitiveness are in the food and beverage production industry. initiatives” – which focus on resolving sub-sector specific con- straints - are a part of the UELDP. Although the manufacturing sector is small, Menya and As- siut appear to offer cost-saving advantages for labor-intensive Menya is the fourth-lowest and Assiut the fifth-lowest produc- light-manufacturing industries that could be leveraged more tive governorates in Egypt as measured by gross value added fully. Evidence of these advantages is the relocation of lead per capita. There is thus a pressing need for measures to pro- firms in the apparel and medical supplies industries from Low- mote inclusive growth and competitiveness in the two gover- er Egypt to Menya and Assiut. Before COVID-19 (coronavi- norates. To this end, the governorates can leverage their posi- rus), these firms reported plans for large expansions. tion as leading producers in a diverse set of agricultural crops; their comparative advantages for the development of agripro- In tourism, Menya and Assiut each have a rich endowment cessing, resource-based manufacturing, and light manufac- of recognized and widely diverse sites distinct from other ar- turing; and their a rich endowments of recognized and widely eas of Egypt. From temples and necropolises dating back to diverse cultural heritage sites that are distinct from other areas Pharaonic times to Islamic sites to early Christian churches, of Egypt-and offer potential for tapping the domestic and inter- these areas host an unusual mix of cultural and historical heri- national tourism market. tage. The location of the region supports the expansion of op- portunities such as day trips and weekend tourism from Cairo, The private sector in Menya and Assiut is currently charac- and Menya and Assiut could be integral to travelers following terized primarily by necessity-driven micro enterprises, but the path of the Holy Family’s journey. The region thus offers pockets of larger, commercially driven firms are also estab- opportunities for domestic, regional, and international tourism. lished in the governorates. Most private sector firms operate Both sector-specific and economywide barriers prevent the in agriculture and retail trade, complemented by an emerg- growth potential of Menya and Assiut from being realized. ing manufacturing sector. A handful of renowned multination- Sector-specific challenges in agriculture include water- and als and exporting domestic firms are also present, including land management–related issues, limited availability of food manufacturers of medical equipment and textiles, illustrating safety and certification services and cold chain infrastructure, the relative attractiveness of the region. Menya and Assiut are and insufficient skills upgrading programs in high-value agri- also home to about 100 state-owned firms across a variety culture. In manufacturing, fully serviced industrial land is dif- of industries. ficult to secure. There are 12 industrial zones in Menya and Assiut, 8 of which are operational. Generally, however, the The main opportunity in the governorates is to leverage agri- industrial zones have insufficient basic infrastructure for man- culture and the emergent agriprocessing sector. The agricul- ufacturing, such as reliable energy, water, and sanitation. In tural sector currently provides about 30 percent of employ- tourism, key constraints include strict security measures for 2. The Upper Egypt Local Development Program is a World Bank financed program implemented by the Ministry of Local Development in collaboration with the Ministry of Investment, Trade and Industry and Ministry of Planning. For more information go to: vhttps://projects.worldbank.org/en/projects-operations/project-detail/P157395 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 7 group travel, unreliable access to sites, low number and poor In 2019, sales decreased across sectors and firms both na- quality of accommodations, and limited awareness of how to tionwide and in Upper Egypt. COVID-19 thus struck during an enable a participatory approach to sustainable and inclusive existing downward trend. Firms nationwide reported a decline tourism development. in annual sales of 8.7 percent, while firms in northern Upper Egypt reported a decline of 6.5 percent. No data are available Large regional differences in the business-enabling environ- on how COVID-19 is affecting firm performance in Menya and ment are evident. Business licenses and permits remain a sig- Assiut specifically, and which firms are the hardest hit. No data nificantly higher constraint in Upper Egypt compared with the are available on the awareness of, or uptake of, the COVID-19 national average. Indications are that the situation is worsening support programs the government of Egypt has launched to rather than improving. Improvements in these processes re- support micro, small, and medium enterprises (MSMEs) in the quire better coordination between local offices in the governor- wake of the crisis. ates and central offices located in Cairo and acceleration of the digital transformation process that the government has begun. Menya and Assiut, as much of Upper Egypt, face important barriers that have hampered the potential of the private sec- With regard to access to input and output markets, Menya tor to become a significant driver of jobs and economic op- and Assiut are relatively well connected to population centers portunity, but there is indication that these governorates are and ports, but key logistics constraints remain, especially in increasingly attractive for investment in the agribusiness, light secondary road infrastructure connecting farms to cities. Ex- manufacturing, and tourism sectors.3 Given the nature of the perts estimate that both river and rail transport could increase constraints, most of them cannot be overcome at the governor- dramatically if more multimodal platforms were implemented ate level alone, and solutions require a concerted, coordinated outside the cities. Better transport would improve the produc- effort between central authorities and governorate administra- tivity of firms dependent on the shipping of goods. A multimod- tions. Furthermore, these efforts will require empowerment at al transport strategy could also improve conditions to better the level of subnational governments, which now suffer from leverage the tourism market. limited mandate and capacity. Menya and Assiut offer good access to skilled labor, but ini- The recommendations in table 1 were derived in an effort to tiatives to upgrade firm-level capability appear scarce. Assiut provide a starting point for public-private dialogue and deliber- University is well regarded and has made a deliberate effort ations between central agencies and governorate administra- to link with industry, and both governorates appear relatively tions. In many cases, the recommendations simply reinforce attractive within Upper Egypt for technical education. Howev- the need to accelerate reforms that have been initiated. For er, no consolidated overview of which organizations provide example, noticeable progress has been made across a range what type of firm-level capacity-building services to start-ups, of investment climate indicators since 2016, but important con- small and medium enterprises (SMEs), and larger investors, straints remain, and subnational difference appear evident. respectively, is in place. The recommended immediate next step is for each governor- Access to finance has generally improved in Egypt; however, ate to set up a small but world-class and dedicated private Upper Egypt remains the region with the highest level of fi- sector development team to initiate this dialogue, identify ar- nancial exclusion. According to the latest Enterprise Survey eas that need further analysis, and develop and oversee a (World Bank 2020b), 45 percent of firms interviewed in north- development plan, results framework, and implementation ern Upper Egypt cited access to finance as a major constraint matrix. Lessons from the implementation of the Upper Egypt to business. In fact, the perception of firms operating in north- Local Development Program implemented in Sohag and ern Upper Egypt is that access to finance has deteriorated Qena can be harnessed to inform this dialogue, planning and sharply since 2016. Collateral requirements appear to be implementation process. higher there, indicating a perceived higher risk associated with lending to firms in Upper Egypt, but the exact cause of these trends needs further analysis. 3. This is not an exhaustive list. Other promising sectors, such as minerals and construction, were not studied because of resource and time constraints. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 8 > > > T A B L E 1 - Recommendations for Enabling Private Sector Growth in Menya and Assiut 1. OVERALL BUSINESS ENVIRONMENT AND GOVERNANCE National Level Governorate Level a. Enhance opportunities for representative f. Provide opportunity for systematic dialogue private sector participation in the national with the local private sector on systemic reform dialogue challenges that inhibit growth b. Develop a transparent state ownership policy and governance framework, and make the financial information on state- owned enterprises available to enable informed private sector decision-making c. Improve processing time for business licensing and permits outside of Cairo d. Improve processing time for land allocation and for water, sanitation, and electricity connections within industrial zones e. Develop tourist-friendly security protocols with local communities, the private sector, and national government 2. FACILITATE ACCESS TO OUTPUT AND INPUT MARKETS National Level Governorate Level a. Ensure full and timely payment of duty e. Improve local roads to key sites drawbacks and export subsidies to (new agricultural land, clusters, industrial exporters zones, tourism areas) b. Develop, promote, support, and enforce f. Disseminate and enforce COVID-19 COVID-19 protocols for the manufacturing protocols for the manufacturing and and service sectors service sectors c. Expand national quality infrastructure to g. Disseminate information on COVID-19 enable greater certification and market support programs available to MSMEs access to high-value export agribusiness h. Invest in last-mile logistics infrastructure markets such as loading stations to enable greater d. Accelerate the design and implementation use of river and rail freight transportation, of an integrated multimodal transport and explore public-private partnership strategy that includes freight corridors possibilities for warehousing and attractive for their reliability and limited cold-chain investments to reduce waste congestion in the agribusiness sector i. Explore programs that aggregate small-scale farmers as suppliers to larger off-takers to facilitate market access and achieve market-driven skills building EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 9 3. FACILITATE ACCESS TO WELL-LOCATED AND SERVICED LAND National Level Governorate Level 3.1. a. Improve strategic planning and zoning, b. Advocate for and provide input to national- OVERALL starting with a map of agricultural level planning and improve local planning, production, industrial manufacturing and zoning, and land allocation and registration processing zones, logistics hubs, and processes transport systems 3.2. a. Invest in the development of water b. Assist with monitoring and enforcement of RURAL intelligence and water management water usage and water availability systems to measure water stress 3.3. a. Implement a monitoring and evaluation e. Conduct investor promotion (marketing) for INDUSTRIAL plan designed to obtain industrial zone the governorate and carry out an investor performance feedback from tenants and demand survey targeting potential investors prospective investors f. Facilitate access to labor by enabling b. Enable entry of more lead firms in the investment in transportation and daycare industrial zones outside of Cairo and services as well as by providing housing Alexandria by facilitating demand-led facilities near the industrial zones infrastructure and service upgrades. c. Facilitate access to industrial land for SMEs by providing plug-and-play or shared facilities in partnership with the private sector d. Clarify the industrial zone regulatory framework to clearly delineate the roles and responsibilities of IDA, the governorates and other governmental bodies, as well as the guiding framework for public-private partnerships for industrial zones. 4. ACCESS TO LABOR, SKILLS, AND TECHNOLOGY National Level Governorate Level 4.1. a. Develop an entrepreneurship and b. Conduct a gap analysis of firm-level OVERALL SME development facility that provides capacity constraints in key sectors performance-based financing to private compared with available capacity-building providers of capacity-building services to services, and develop a plan for upgrading entrepreneurs and SMEs capacity-building services for entrepreneurs and SMEs EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 10 4. ACCESS TO LABOR, SKILLS, AND TECHNOLOGY National Level Governorate Level 4.2. a. Explore mechanisms to provide incentives b. Explore cluster development opportunities AGRICULTURE to firms to invest in drip irrigation systems, focused on high–value added crops and hydroponics, and other water-saving organic agriculture agricultural methods already under c. Explore public-private partnership schemes and consideration by lead firms financing schemes to distribute costs of training and certifying small farmers and investments in mechanization and equipment 4.3. a. Address the skills gap by engaging the b. Promote shared facilities in partnership with MANUFAC- private sector in curriculum development lead firms to facilitate workers’ and SMEs’ TURING and training delivery in line with industry access to skills and technology standards 4.4. a. Develop a comprehensive tourism b. Engage with the local community around the TOURISM development strategy for Upper Egypt key heritage and natural sites to raise their at large with strong engagement of the awareness of tourism opportunities and their governorates and local communities knowledge of how to tap into them c. Identify opportunities for upgrading access to sites that can serve the domestic market in the near term 5. ACCESS TO FINANCE National Level Governorate Level a. Conduct a comprehensive financial sector e. Increase awareness of available MSME assessment to obtain up-to-date data and COVID-19 support facilities insights on access to finance f. Increase awareness of digital financial services b. Explore government support measures among MSMEs and consumers such as cash transfers, assistance with health costs, and advance purchase options through public procurement to protect vulnerable MSME segments in light of COVID-19 c. Improve the legal, policy, and regulatory environment for digital financial services to leverage them to achieve financial inclusion goals d. Expand access to finance for the agribusiness sector through trade financing and leasing facilities for MSMEs EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 11 6. GETTING IT ALL DONE National Level Governorate Level a. Make private sector data collected at the c. Establish a small, dedicated, world-class private national level available disaggregated by sector development team for each governorate firm size, sector, and geographic location to coordinate across the departments of and explore possibilities for expanding the governorate, the national government, availability of private sector performance the private sector, local communities, and data based on data that are already development partners being collected d. Build institutional capacity in the governorate b. Establish a dedicated reform team at the administrations to conduct effective public- prime minister’s office with dashboards private dialogue and coordinate the local that display the above private sector data economic development agenda. for each governorate Note: MSMEs = micro, small, and medium enterprises; SMEs = small and medium enterprises. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 12 2. >>> About This Report This paper focuses on identifying opportunities for growth and barriers to realizing that growth in Menya and Assiut, two of the poorest governorates in Egypt. The paper was prepared upon Egypt’s decision to expand the Upper Egypt Local Development Program4 to the two governor- ates, and it aims to serve as an input to continued policy dialogue between the governorates and national authorities, as well as between the private and public sector. This paper is a complement to the report “Creating Markets in Egypt: Country Private Sector Diagnostic” (CPSD)5. The CPSD provides an overview of the key drivers and constraints of Egypt’s competitiveness on a nation level, whereas this report focuses on the opportunities and constraints at the sub-national level, specifically in Menya and Assiut. Similarly to the CPSD, this paper takes sector analysis as the starting point for identifying sector- specific and cross-cutting policy issues along five enablers of private sector development: (1) the overall business environment and governance, along with business access to (2) output and input markets; (3) well-located and serviced land; (4) labor, skills, and technology; and (5) finance (see figure 1). 4. The Upper Egypt Local Development Program is a World Bank financed program implemented by the Ministry of Local Development in collaboration with the Ministry of Investment, Trade and Industry and Ministry of Planning. For more information go to: https://projects.worldbank.org/en/projects-operations/project-detail/P157395 5. The CPSD can be downloaded on the following website: https://www.ifc.org/wps/wcm/connect/publications_ext_content/ ifc_external_publication_site/publications_listing_page/cpsd-egypt EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 13 > > > F I G U R E 1 - Analytical Framework High Potential Sectors Enablers Example of Policy Levers Agribusiness Manufacturing Tourism Security, macroeconomic stability, Overall business predictable policies, fair competition, ease environment of securing business permits and licenses, contract enforcement, and so on. Transportation and logistics, standards, Access to import and export regulations and output and procedures, digital infrastructure and input markets platforms, and so on. Access to Land allocation and property rights, ease well-located of access to quality utility services (energy, and service land water, and sanitation), and so on. Access to Labor market, education, business labor, skills, services, innovation and entrepreneurship and technology programs Financial sector regulation, financial Access to product and services innovation, financing finance facilities Source: Authors. This report focuses on three sectors selected based on their agribusiness, and manufacturing sectors operating in Menya potential to generate jobs and inclusive economic growth: and Assiut. Initial field work for the preparation of this report agribusiness, manufacturing, and tourism.6 The report first began with on-site interviews with private companies operat- presents an overview of the structure and performance of ing in industrial zones in Menya and Assiut conducted by a lo- the private sector in Menya and Assiut; second, an overview cal consultant and a tourism field study in September and Oc- of sectoral opportunities and constraints is provided; and tober 2019 to Menya, Qena and Sohag. A kick-off workshop third, cross-cutting policy issues are summarized. Finally, a with the participation of fourteen business executives from set of preliminary recommendations is provided, which are Menya and Assiut and development experts based in Cairo. intended to be inputs to policy dialogue among public and The team thereafter interviewed large exporting firms in the private stakeholders. agribusiness and manufacturing sectors. Firms interviewed in the tourism sector included travel services providers, accom- This report builds on the Country Private Sector Diagnostic modation providers, and tour companies. In parallel to remote (IFC 2020) and the Enterprise Surveys carried out by the World interviews with internal and external actors, the team hired a Bank Group in 2020, complemented by additional review of of- local consulting firm, Makary Consulting, to conduct an explor- ficial, publicly available data disaggregated by governorate, atory cluster analysis field work in Menya and Assiut, whose as well as interviews with private sector firms in the tourism, findings are incorporated in this report. 6. Other important sectors that were not analyzed because of resource constraints include minerals, construction, and digital services EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 14 3. >>> Private Sector Dynamics in Menya and Assiut Socioeconomic Context Boosting inclusive private sector growth in Menya and Assiut is a pressing need. According to the latest Household Income, Expenditure and Consumption Survey, conducted in 2018, Assiut is the poorest and Menya the fourth-poorest governorate in Egypt, and each has a significant share of the poorest villages in Egypt (CAPMAS 2019a). Approximately 45 percent of Menya’s villages and 88 percent of Assiut’s villages are among the country’s poorest. Poverty incidence as a percentage of total population in 2018 was 54.7 percent in Menya and 66.7 percent in Assiut, nearly double the national average of 32.5 percent (Table 2). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 15 > > > T A B L E 2 - Selected Economic and Demographic Indicators Indicator Menya Assiut Total Egypt Area 32,279 km2 25,926 km2 1,010,408 Population (2019) 5,745,212 4,587,577 98,101,011 Population Density (2019) 178: 1 km2 177: 1 km2 97: 1 km2 Urban/Rural (2017) 18% / 82% 26 % / 74% 42% / 58% Population Growth Rate (5 yr. avg, 2012-2017) 2.44% 1.76% 2.46% Share of population below poverty line (2018) 54.7% 66% 32.5 % Illiteracy rate (2017) 37% 35% 25.8% Unemployment (2018) Total: 6.1% Total: 11.6% Total: 11.8% Female: 14.6% Female: 22.7% Female: 23.2% Male: 3.8% Male: 7.7% Male: 8.2% Source: CAPMAS Egypt in figures 2019, Statistical Yearbook 2018: population, labor, education, HEICS; Annual Bulletin for labor force In Egypt, the spatial distribution of economic activity shows a employment (map 2)7. This contrasts with the low economic high degree of geographic concentration. Economic activity activity and limited employment opportunities in the Upper and employment opportunities in Egypt are concentrated in Egypt governorates, whose share in number of firms is only 17 Cairo, Giza, and Alexandria. About 30 percent of all private percent and share in private sector employment is less than sector firms are located in these three governorates (map 1), 14 percent. which also account for almost 40 percent of private sector 7. In map 1 and map 2, the numbers between parentheses reflect the number of governorates. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 16 > > > M A P 1 - Spatial Distribution of Private Sector Establishments, Thousands of Establishments > 85 (1) Cairo 70 to 85 (1) 55 to 70 (3) Menya 35 to 55 (3) Assiut 15 to 35 (9) 7 to 15 (3) 5 to 7 (2) < 5 (5) Source: World Bank staff based on CAPMAS (2017b). > > > M A P 2 - Spatial Distribution of Private Sector Employment, % of Total Private Sector Employment > 15 (1) Cairo 10 to 15 (1) 7 to 8 (0) Menya 4 to 7 (6) Assiut 2 to 4 (6) 0.5 to 2 (9) < 0.5 (3) Source: World Bank staff based on CAPMAS (2017b). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 17 Structure of the Private Sector Menya and Assiut host approximately 243,000 firms, about 50 percent of which are informal (table 3). Ninety percent of both infor- mal and formal firms in the two governorates are microenterprises with fewer than five employees, and fewer than 1 percent of all firms have more than 50 workers (CAPMAS, 2017b). The proportion of informal firms in the economy, and the proportion of micro, small, medium, and large firms largely mirrors that of Egypt at the national level. > > > T A B L E 3 - Registered and Unregistered Firms in Menya and Assiut Share of Share of Number of Number of Total number of unregistered registered Governorate unregistered registered establishments establishments establishments establishments establishments per governorate (%) (%) Menya 55,228 37.6 91,486 62.4 146,714 Assiut 52,200 54.5 43,638 45.5 95,838 Source: CAPMAS 2018b. The number of firms increased across all sectors in both the governorates. A preliminary analysis conducted by the governorates following the tumultuous period after the Arab International Finance Corporation indicates that some SOEs Spring. The rise in new firms appears largely motivated by in Egypt have advantages over private sector firms. For ex- lack of employment opportunities. The Global Entrepreneur- ample, according to the analysis, there is no explicit require- ship Monitor (2017/2018) indicates that “entrepreneurial inten- ment for SOEs to generate a positive rate of return, which may tions”8 in Egypt rose from 43.6 percent in 2012 to 65.5 percent undercut the pricing of private firms competing in the same in 2016. Importantly, however, the rate of “necessity-driven market; and certain exemptions under the tax, competition, entrepreneurship”9 increased from 34 percent to 43 percent and procurement laws provide special privileges to public in- and the rate of opportunity-driven entrepreneurship decreased cumbents operating in key sectors, thus feeding the percep- from 66 percent to 53 percent from 2012 to 2017, indicating tion of an uneven playing field (IFC 2020). that most new firms were established because of lack of other employment opportunities. Although Global Entrepreneurship After retail and wholesale trade, manufacturing is the second- Monitor data are not disaggregated by governorate, the trend largest category of firms in Menya and Assiut (figure 2 and 3). observed nationally is likely similar in Upper Egypt. As would be expected in an economy characterized mostly by informal and micro firms, wholesale and retail trade is by far As in other parts of Egypt, state-owned enterprises (SOEs) the largest category of firms in both governorates. Manufac- operate in the agriculture and manufacturing sectors in Me- turing is the second-largest category in both governorates, but nya and Assiut. Nationally, the public sector accounts for al- Assiut has substantially more firms in this category compared most one-third of GDP, and it operates in 23 industries. In Me- with Menya, along with a critical mass of firms in transport and nya and Assiut, 100 of the 243,000 establishments are state storage. Importantly, these statistics capture registered firms owned. Data on the output and performance of the SOEs are only. Therefore, a large number of small firms are not captured not available. The concern is, however, that their presence in this overview. could dampen the entry or growth of private sector firms within 8. The Global Entrepreneurship Monitor (2017/2018) defines “entrepreneurial intentions” as follows: the percentage of individuals aged 18–64 who are involved in an entrepreneurial activity, expecting to start a business within the next three years. 9. The Global Entrepreneurship Monitor(2017/2018) defines “necessity entrepreneurship” as follows: the percentage of individuals aged 18–64 who indicate that they have “no better choices for work.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 18 > > > F I G U R E 2 - Number of Establishments in Menya by Economic Activity, 2012/2013 vs 2017/2018 Other service activities Arts, entertainment, and recreation Health and social work activities Education Administrative and support services activities Professional, scientific, and technical activities Real Estate activities Financial and Insurance activities Information and communication Accommodation and food service activities Transportation and Storage Wholesale and retail trade, repair of motor vehicles and motorcycles Construction Water supply, sewerage, waste management and remediation activites Electricity, gas, steam, and airconditioning supply Manufacturing Mining and quarrying Agriculture, forestry , and fishing 10,000 80,000 60,000 90,000 30,000 50,000 40,000 20,000 70,000 0 Menya 2017/2018 Menya 2012/2013 Source: CAPMAS 2013, 2017b. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 19 > > > F I G U R E 3 - Number of Establishments in Assiut by Economic Activity, 2012/2013 vs 2017/2018 Other service activities Arts, entertainment, and recreation Health and social work activities Education Administrative and support services activities Professional, scientific, and technical activities Real Estate activities Financial and Insurance activities Information and communication Accommodation and food service activities Transportation and Storage Wholesale and retail trade, repair of motor vehicles and motorcycles Construction Water supply, sewerage, waste management and remediation activites Electricity, gas, steam, and airconditioning supply Manufacturing Mining and quarrying Agriculture, forestry , and fishing 10,000 60,000 30,000 50,000 20,000 40,000 0 Assiut 2017/2018 Assiut 2012/2013 Source: CAPMAS 2013, 2017b. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 20 Agriculture employs more than a third of the labor force in the two governorates, wholesale and retail trade employs almost 11 percent of the labor force, and manufacturing employs less than 10 percent of the labor force. Agricultural employment accounted for 37 percent of total employment in Menya and 29 percent of total employment in Assiut in 2018 (CAPMAS 2019b); and approxi- mately 5 percent of total employment in Menya occurs in the manufacturing sector, very similar to the contribution to employment of the manufacturing sector in Assiut (6 percent) in 2018 (CAPMAS 2019b). Nationwide, more than 42 percent of employment is concentrated in wholesale, retail, trade, and repair activity; and manufacturing industries, the next largest activity, provided 21 per- cent of private sector employment, illustrating the critical importance of the agricultural sector to the economy in Menya and Assiut. Private Sector Performance Data on gross value added (GVA) per capita have not been growth registered in Menya and Assiut, respectively. The updated since 2015/16, but at the time, the GVA per capita contribution of the manufacturing sector to GVA was 9.3 of the two governorates was very low, and it was driven by percent and 12.4 percent in Menya and Assiut, respectively, agriculture, manufacturing, and construction. In 2015/16, the for fiscal year 2015/16 (Ministry of Planning and Economic GVA of the two governorates was almost one-tenth of Cairo Development 2020). governorate’s productivity, making Menya the fourth-lowest and Assiut the fifth-lowest productive governorates in Egypt Firms in northern Upper Egypt experienced an average 6.5 as measured by GVA per capita. Agriculture, manufacturing, percent decrease in annual sales growth in 2019 before and construction made up more than two-thirds of the COVID-19 reached Egypt (figure 4). Similarly, at a national governorates’ GVA in 2015/16. Agriculture made the greatest level, annual sales were declining across all firm size categories contribution to GVA growth in both governorates from 2012/13 and sectors (figure 5) in fiscal year 2020, according to the to 2015/16, with 32 percent and 27 percent agricultural GVA 2020 World Bank Enterprise Survey (World Bank 2020b).10 > > > F I G U R E 4 - Percentage Change in Annual Sales by Region, 2019 -3.4% Southern Upper Egypt -5.0% Suez Region -6.5% Northern Upper Egypt -8.7% Greater Cairo -10.3% Middle and East Delta -10.7% West Delta -12 -10 -8 -6 -4 -2 0 Percentage Change Source: World Bank 2020b. 10. The data for the 2020 World Bank Enterprise Survey were collected between December 2019 and April 2020. Only 13 interviews were conducted after March 31, 2020. As of March 31, there were 710 COVID-19 cases in Egypt. However, all questions pertained to the last fiscal year, which equals the 2019 calendar year. The 2020 survey data are thus a good indication of what the economic situation was like before the impact of COVID-19. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 21 > > > F I G U R E 5 - Percentage Change in Annual Sales by Sector, 2019 Petroleum products, plastics, and rubber -5.6% Services of motor vehicles, wholesale, -6.0% and retail Hospitality and Tourism -6.7% Machinery and equipment, electronics -7.6% and vehicles Nonmetallic mineral products -8.6% Other services -8.7% Leather products -9.0% Food -9.2% Chemicals and chemical products -10.8% Construction -12.4% Basic metals and metal products -14.3% Wood products, furniture, paper, and -15.1% publishing Textile and Garments -15.4% -16 -14 -12 -10 -8 -6 -4 -2 0 Percentage Change Source: World Bank 2020b. COVID-19 thus hit the private sector when it was already PMI for Egypt dropped sharply during April 2020 to its low- struggling, and data on the effect of COVID-19 on firm-level est level on record. It steadily improved until November 2020, performance nationwide in Egypt are very scarce. Worldwide, but then started declining again in line with fears about the the COVID-19 pandemic is affecting otherwise healthy firms effects of the second wave of COVID-19. UNIDO’s Industrial through four channels: demand-side shocks, supply-side Performance Index, for which 1,300 manufacturing firms12 shocks, financial shocks, and uncertainty (see annex 1). Expe- were surveyed in the period April to June 2020, indicates a rience to date illustrates that COVID-19 is having a very hetero- net negative impact of COVID-19 on the manufacturing sec- geneous impact on firms. Therefore, it is critical to collect data tor, manifested particularly in the form of decreased sales and that are representative at the sectoral, size, and spatial levels. exports and declining labor productivity.13 In line with the drop in the PMI and the UNIDO Industrial Performance Index find- The Purchasing Managers’ Index (PMI)11 and UNIDO’s In- ings, the number of employed individuals nationally declined dustrial Performance Index (UNIDO 2020) provide an indica- by 2.7 million from April to June 2020, pushing unemployment tion of the impact of COVID-19 on business performance in to 9.6 percent from 7.7 percent the previous quarter, with job Egypt; however, neither source provides data disaggregated losses, especially among informal workers, reported mainly in by region or governorate. Many countries witnessed a drop retail and wholesale trade, manufacturing, tourism, transport, in their PMI when as COVID-19 spread internationally. The and construction. 11. The PMI is based on a monthly survey of business executives. It is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment. The headline PMI is a number from 0 to 100. A PMI greater than 50 represents an expansion when compared with the previous month. A PMI reading of less than 50 represents a contraction, and a reading at 50 indicates no change. The further away from 50, the greater the level of change. 12. The firms were split 49 percent micro and small enterprises, 30 percent medium enterprises, and 21 percent large enterprises 13. The Industrial Performance Index recorded 0.41, which means a negative impact of COVID-19 on the manufacturing sector. The most diminished sub-indices are Sales and Exports at 0.26 and Employment at 0.286. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 22 4. >>> Sectoral Opportunities in Menya and Assiut Agriculture Nationally, the agribusiness sector is a key contributor to Egypt’s GDP, employment, and exports, and there is significant untapped potential for further growth.14 Agribusiness is currently the largest contributor to Egypt’s manufacturing exports (figure 6). The World Bank estimates that approximately US$10 billion in export potential in agriculture and food remains untapped in Egypt (Jaffee et al. 2019). Egypt’s large domestic consumer market— the largest in the Middle East and North Africa region—is also not fully exploited. Total annual spending on food is estimated to reach about US$90 billion by 2021, up 36 percent from 2016 (World Bank 2018), illustrating significant opportunity for private sector growth and job creation in the sector. 14. The sector encompasses all firms engaged in input supply and commercial agriculture that involves some transformation activities. It includes smallholders and microenterprises in food processing and retail to the extent that they are market oriented. See World Bank (2013b] EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 23 > > > F I G U R E 6 - Subsectors Driving Exports in the Manufacturing Private Sector in Egypt 2.5% 5.5% 3.4% Agribusiness 5.5% 5.4% A&T 5.8% Metals Furniture 7.4% 22.6% Wood & wood products Other manufacturing Plastics, rubbers & chemicals 8.3% Stone Printing 8.6% Paper & packaging 19.4% Machinery & equipment 8.8% Other Source: World Bank staff based on CAPMAS Establishments Survey 2017 The World Bank estimates that approximately US$10 billion in Analysis of agricultural subsectors suggests that horticulture export potential in agriculture and food remains untapped in products are most competitive globally (figure 7). An analysis Egypt (Jaffee et al. 2019). Egypt’s large domestic consumer conducted by the International Trade Centre, combining an market—the largest in the Middle East and North Africa assessment of on-farm competitiveness (comparison of yields region—is also not fully exploited. Total annual spending on in Egypt versus the world average) with an assessment of food is estimated to reach about US$90 billion by 2021, up 36 export competitiveness shows that the top five products are percent from 2016 (World Bank 2018), illustrating significant all horticulture products: dates, sugar beets, olives, onions, opportunity for private sector growth and job creation in and other fruits. The next five products are citrus, dry beans, the sector. sorghum, broad beans, and other pulses. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 24 > > > F I G U R E 7 - Export Potential15 for Egypt’s Agricultural Products Egypt’s Products with Potential Fruits Food products n.e.s. (processed or preserved) Fertilizers Vegetables Sugar Dairy Products Cereals (processed) Vegetable oils & fats Pulses Vegetal residues & animal feed Coca beans & products Beverages (not alcoholic) Crops n.e.s Oil seeds Spices Skins, leather & products thereof Fisg & shellfish Seeds for sowing Eggs, honey and edible animal products n.e.s. Live animals (except poultry) Wool & animal hair (fabric) Tea & mate Flax, hemp and natural fabrics n.e.s. Wood & vegetable material Flowers Cereals (except wheat & rice) Processed Meat Fish product (processed) Meat (except poultry) Animal products (not edible) Meat (poultry) Animal fat Nuts 500 mn 1 bn 2 bn 2 bn 3 bn 3 bn Export in $ Export potential Actual exports Potential to actual export gap Source: International Trade Centre Export Potential Map, https://exportpotential.intracen.org/en. 15. The methodology for calculating export potential is explained here: https://www.intracen.org/uploadedFiles/intracenorg/Content/Country/Export%20Potential%20(How%20 to%20read).pdf EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 25 Menya and Assiut are leading producers of a diverse set of ment; limited availability of supporting infrastructure (certifica- agricultural crops. Menya is a national leader in the production tion and food safety standards and cold chains); and scarce of key food security crops (for example, sugar cane, wheat, technical assistance for the development of high–value added and maize) and is an emerging export hub for chickpeas, onion agricultural clusters and value chains. Many of these challeng- pickling, and aromatic plants. Assiut is the leader among Upper es are similar to those observed nationwide. No comprehen- Egypt governorates in fruit production, primarily pomegranate sive overview is available of all the agricultural subsectors in and aromatic plants. A preliminary analysis of firm concentration which SOEs operate. However, SOEs are operating in several in Menya and Assiut indicates a significant presence of firms of the subsectors in which Menya and Assiut appear to have a in the grapes, potatoes, sesame, dairy, black honey, and palm comparative advantage, and any concerns about unfair com- tree value chains in Menya, and in the pomegranate, aromatic petition should be assessed. Annex 2 provides an overview of herbs, palm tree, honey, and poultry value chains in Assiut. some of the subsectors SOEs operate in, as well as the key constraints to growth of the sector nationally. Compared with other governorates in Upper Egypt, plot sizes in Menya are relatively large, enabling large-scale agriculture. This is an advantage compared with other parts of the country Manufacturing where land is very fragmented. A long tradition of cultivation of specialty herbs and other niche products also puts Menya at (including agriprocessing) an advantage for value added export-oriented firms focused on the European Union and Arab markets. Examples of export- ing companies already operating in Menya and Assiut are the Nationally, the manufacturing sector’s share of GDP and of multinational, OLAM, and Egyptian vertically integrated com- employment has been stable at 16.6 percent and 12 percent, panies such as Daltex and Royal Herbs, among others. These respectively, over the past five years since 2015. The latest fig- firms source crops from local farmers through contract farming ures available on a governorate level are from 2016; in 2016, and they also operate their own farms in Menya and Assiut. Menya’s private industrial production amounted to only 0.68 billion Egyptian pounds, or the equivalent of 0.1 percent of pri- The most significant obstacles to the development of the agri- vate industrial production in Egypt and 0.5 percent of total pri- business sector in Menya and Assiut are water management, vate industrial production in Upper Egypt (Annual Bulletins of land fragmentation, and lack of transparency in land manage- Industrial Production of Public and Private Sectors, CAPMAS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 26 (2017a, 20181). Private industrial activity in Assiut amounted to alone make up 86 percent of total investments into the indus- 1.56 billion Egyptian pounds, or the equivalent of 0.16 percent trial zones. In Assiut, the six operational zones enjoy high oc- of total private industrial production in Egypt and 1.15 percent cupancy rates, mostly from food and beverage, chemical, and of total private industrial production in Upper Egypt (Annual textiles industries. Factors that make the zones in Menya at- Bulletins of Industrial Production of Public and Private Sectors, tractive for investors include the presence inside the zones of CAPMAS (2017a, 2018a). institutes for teaching advanced and medium skills,18 location of an investor service center in Al Matahra, and ease of access The manufacturing sector in Menya and Assiut are dominated to two key ports, namely the Alexandria port (to the US and by industrial activity by the public sector through SOEs. Public European markets) and the Sokhna port. The relatively higher sector industrial activity accounted for 56 percent of total indus- occupancy in Assiut industrial zones is likely related to the his- trial output in Menya and 92 percent in Assiut in 2016 (Annual tory of Assiut as a trade hub for Upper Egypt, where many cur- Bulletins of Industrial Production of Public and Private Sectors, rent investors made the backward integration move from trade CAPMAS (2017a, 2018a). to manufacturing and trade. In both governorates, most industrial production and employ- The main constraints mentioned by leading firms interviewed ment is associated with the food and beverage subsector. for this report were the inconsistency in payment of the export Aside from the food and beverage industry, which accounted subsidy, which amounts to about 15 percent of sales for goods for 54 percent of total production in Menya in 2018, the next exported from Upper Egypt; “red tape” around the licensing most important industry is building materials (31 percent of to- regime at both the national (Industrial Development Authority) tal production). The food and beverage industry accounted for and local government levels; and inadequate utilities (energy, 55.2 percent of industrial sector employment in Menya in 2018, water, and sanitation). Annex 2 provides an overview of the key followed by building materials (18 percent), and textiles, cloth- constraints to growth for key manufacturing sectors nationally. ing, and leather (14 percent). In Assiut, leaving aside produc- As illustrated in the Business Enabling Environment in Menya tion of the state-owned oil refining company, 50.8 percent of to- and Assiut section of this paper, there are striking differenc- tal production in 2018 corresponded to the food and beverage es in the experiences of manufacturing firms across regions industry, followed by building materials (38 percent). In Assiut, within Egypt. the food and beverage industry accounts for 44.7 percent of total employment, followed by basic chemicals (17.7 percent). Menya and Assiut exhibit comparative advantages for the de- Other Promising Sectors velopment of agriprocessing, resource-based manufacturing (including petroleum-derived products), and light manufac- turing.16 Competitive labor costs, abundant labor, good soil In addition to agriculture and light manufacturing, other sec- quality, and improved road connectivity make Menya and As- tors such as minerals, construction, transport and storage, and siut attractive locations for labor-intensive industries and ag- tourism may offer opportunities for further growth in the two riculture.17 Evidence also shows that Assiut is becoming the governorates. medical hub of Upper Egypt, with a number of medical supply factories with complex export operations in Arab El Awamer Menya and Assiut are both endowed with mineral resources industrial zone, including Ultra Medical and the International that support a wide array of downstream uses, including con- Company for Medical Necessities. struction. In Menya, 2,500 quarries are in operation focused mainly on marble and white sand processing (HLB Egypt The industrial zones, within which all industrial firms are obli- Makary Consulting 2020). Assiut has significant sources of gated to operate, host firms predominantly in the food, chemi- limestone, marble, and alabaster. Basalt rocks, sand, and flint cals, construction materials, and textiles industries. In Menya, (used in the tiles industry) are also available in the area. Clay, investments by the food and construction materials industries mostly used in the production of bricks, cement, and ceramics, 16. Light manufacturing’ refers to less capital and heavy-equipment-intensive (or more labor-intensive) industries, such as textile and apparel, consumer electronics and appliances and furniture. These industries are characterized by relatively lower complexity than other manufacturing industries (for example automotive, advanced and complex electronics, chemicals and pharmaceutical industries). 17. Upper Egypt has lower labor costs than Lower Egypt. According to interviews with key industry players, this labor cost differential amounts to more than 6 percent of sales. The labor cost advantage thus far outstrips the transportation penalty for being located further away from the main export ports, which represents an additional 1 percent of sales. This apparent net 5 percent margin advantage—if verified—is very significant in the competitive light manufacturing industry, with average profit margins of about 5 percent. 18. High institute for architecture and technology, High institute for management, and High institute for languages. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 27 is widespread in western Assiut (HLB Egypt Makary Consulting ing for the first time to returning culture aficionados seeking 2020). Minerals factories in Menya work in white cement, grey new, in-depth experiences with Egypt’s traditional and modern cement, bricks, basalt wool and basalt yarns, production of cal- cultures. For example, Menya and Assiut could be attractive to cium carbonate paste, production of sand bricks, and marble travelers following the path of the Holy Family’s journey or as cutting and polishing. This review does not include an analysis part of an uninterrupted cruise covering Cairo to Luxor featur- of the minerals and construction sector, but it could be an op- ing visits to diverse attractions. Overland travel by road on new portunity for future exploration. or improved roads can support such visits to “undiscovered” and less visited sites of interest. Transport and storage are simultaneously opportunities for growth in themselves and critical enablers across industries However, the potential of the tourism sector in Menya and in Menya and Assiut, as discussed further in Access to Output Assiut is constrained by a number of sector-specific factors. and Input Markets section of this paper. These detriments include, first, unreliable and delayed access to cultural sites caused by inadequate roads, inconsistent sig- For tourism, Menya and Assiut each have rich endowments of nage and operating hours, and unnecessarily time-consuming recognized and widely diverse sites distinct from other areas approvals to travel. Second, highly visible security measures of Egypt that could serve as the basis for development of the and movement limitations discourage international travelers. tourism industry. From revered temples and necropolises dat- Any international group travel in Egypt requires government ing back to Pharaonic times (including Amarna, Akhenaten’s permission. In Menya and Assiut, all international groups, once capital) and Islamic sites to early Christian churches, colonial itineraries are registered and approved, are escorted by armed era buildings, and intangible heritage (for example, handi- security. Although intended to create a sense of security, the crafts, wood products, traditional and modern culture mani- obvious and pervasive presence of security raises travelers’ festations), these areas host an unusual mix of cultural and concerns. Third, there is both a physical and an intangible dis- historical heritage. Menya and Assiut thus have the potential connect between the sites and the local communities, which “resources” to offer a more diversified tourism experience of hinders the development of an authentic cultural experience interest to both domestic and international travelers compared for tourists and minimizes economic empowerment opportuni- with many other areas of Egypt. This is a critical advantage at ties at the community level. Residents in Menya and Assiut a time when the country’s policy makers, at the highest levels, need increased awareness of the rich diversity of jobs and pro- have articulated a priority to diversify and expand tourism offer- fessional career opportunities in tourism, as well as programs ings in varied locations. that equip them with the skills to tap into market opportunities. Fourth, tourism in Menya and Assiut is hindered by the low Menya and Assiut are also strategically located along the Nile number and poor quality of hotel rooms. There are no 5-star River between Cairo and Luxor, both tourist destinations. A hotels in either governorate and those in the 3- and 4-star relatively new road has improved ease of access to Menya range do not meet international standards. The limited num- and Assiut, which are now a 3.5-hour and a 5-hour drive from ber of hotel rooms contributes to inflated pricing, which in turn Cairo, respectively. This proximity supports expanding oppor- leads to minimal stayovers—and much lost revenue (in accom- tunities such as weekend tourism, particularly from densely modation, meals, experiences, and so on). Finally, although populated Cairo. In the short to medium term, there is potential Menya and Assiut are strategically located on the Nile River to develop a new tourism offering comprising “off the beaten and could therefore tap into river-based tourism, the potential path” excursions to less visited sites. This type of tourism could for these governorates to directly serve international travelers be attractive to a variety of segments, such as domestic (Egyp- involves addressing air access constraints and developing tian tourists) and international visitors ranging from those visit- seamless transport arrangements. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 28 5. >>> The Business Enabling Environment in Menya and Assiut For the purposes of this assessment, the “business enabling environment” is defined as the confluence of the five business enablers included in the analytical framework used for this report: overall business environment and governance; access to output and input markets; access to well-located and serviced land; access to labor, skills, and technology; and access to finance. Each of these factors – as they pertain to Menya and Assiut - are discussed in detail below. Overall Business Environment At the national level, Egypt’s overall score in the World Bank Doing Business report improved steadily from 54.7 in 2015 to 60.1 in 2019. As illustrated in Figure 8, in 2019, the highest scoring indicators were Starting a Business, Getting Electricity and Dealing with Construction Permits respectively, while the lowest scoring indicators were Enforcing Contracts, Trading Across Borders and Registering Property. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 29 > > > F I G U R E 8 - Egypt’s Doing Business Scores (0-100) 87.8 71.2 77.9 55.0 Starting a Business Dealing with Getting Electricity Registering Property Construction Permits 65.0 64.0 42.2 Getting Credit Protecting Trading across Borders Minority Investors 40.0 42.2 Enforcing Contracts Resolving Insolvency Source: World Bank 2020a. The 2020 World Bank Enterprise Survey19 indicates that at a appears to remain a significant challenge in all regions other national level, only 14 percent of firms now identify business than Greater Cairo and West Delta. Importantly, it appears licensing and permits as a “major” constraint. However, as in- that the situation is worsening rather than improving in the dicated in figure 9, obtaining business licenses and permits Suez Canal and in southern and northern Upper Egypt20. 19. Business owners and top managers in 3075 firms were interviewed from December 2019 through April 2020 for the World Bank 2020 Enterprise Survey in Egypt. 1639 of the interviewed firms were small (5-19 employees), 967 firms were medium (20-99 employees) and 469 firms were large (100+ employees). The regional break-down of the firms interviewed is as follows: Greater Cairo (1158), Middle & East Delta (719), West Delta (534), Northern Upper Egypt (256), Southern Upper Egypt (209), Suez Region (199). 20. Menya and Assiut are considered part of northern Upper Egypt. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 30 > > > F I G U R E 9 - Percentage of Firms That Identify Business Licenses and Permits as a Major Constraint, 2016 and 2020 Suez Canal 37 14 Southern Upper Egypt 30 13 Northern Upper Egypt 32 25 5 West Delta 16 Middle and East Delta 18 19 Great Cairo 3 24 0 5 10 15 20 25 30 35 40 Percentage of Firms 2020 2016 Source: World Bank 2016, 2020b. In Egypt, most business licenses and permits are managed by while assigning the Industrial Development Authority to be the central agencies, and the government has made a concerted sole entity responsible for business licensing; and setting a effort to improve its business licensing and permits regime. time limit for processing industrial licenses (30 days) (Federa- Business permits and licenses managed by central agen- tion of Economic Development Associations 2019). Data are cies include business registration (managed by the General not available on the average processing time for industrial li- Authority for Investment and Free Zones), as well as operat- censes, and it is not clear what the differences in processing ing licenses and industrial licenses (managed by the Indus- time are between governorates. trial Development Authority). On average, it takes 12–13 days to register a new business in Egypt, and Egypt improved its In Egypt, all manufacturing firms must locate within industrial “Starting a Business” score in the 2020 Doing Business report zones. Firms indicate that obtaining a land allocation within published by the World Bank (World Bank Doing Business, a zone is a cumbersome and lengthy process. Oversizing of 2020). In 2020, 168 company incorporations were issued in space and inconsistent pricing of land also appear to be chal- Menya and 330 company incorporations were issued in Assiut. lenges. To address the land allocation process, in 2017, the The registration process includes several steps and respon- Industrial Development Authority was assigned to allocate sible authorities, and governorate-level data are not available land to enterprises in these zones (or elsewhere). Data on the to discern whether it takes longer than the national average to average number of days to allocate land in an industrial zone complete the registration process in Menya and Assiut. in Menya and Assiut are not available. In an effort to improve the efficiency of issuing industrial At the governorate level, the District Service Centers (DSCs) licenses, the government of Egypt issued a new Industrial Li- provide one type of business license and one type of busi- censing Law no. 15 in 2017. Key improvements made in the ness permit, that is, shop licenses and construction permits. new Industrial Licensing Law include reducing the number of In Menya the average processing time appears to be 45 days entities that investors have to engage with to obtain a license, for shop licenses and 91 for construction permits.21 In Assiut, 21. Data on the processing time for shop licenses was available for five out of nine DSCs, and data on the processing time for construction permits was available for eight out of nine DSCs. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 31 the average processing time appears to be 27 days for shop corridors attractive for their reliability and limited congestion licenses and 70 days for construction permits.22 There are sig- (World Bank 2018). nificant differences in the processing time between DSCs in each governorate, and not all DSCs have the ability to elec- Within the national context, Menya and Assiut are relatively tronically monitor the processing time. well connected to population centers and ports. According to firms in the region, the recently improved connection to inter- The government of Egypt has recognized that digitization national ports of exit through national highways has substan- of government-to-business (G2B) services may provide ef- tially increased the governorates’ ability to attract investment, ficiency gains, and advances are being made toward digital and the time of transit has been reduced by half in most cases. platforms for government service delivery at both the central For exits for international trade, the closest commercial sea- and governorate levels. The government embarked on an ports for Upper Egypt are Alexandria, Sokhna, and Port Said. ambitious digital transformation strategy in in 2018, guided by The two main ports to which Menya has access are Alexandria Egypt Vision 2030.23 These efforts are now being accelerated, and Sokhna. Menya and Assiut also have access to Port Said. fueled by the closure of government institutions under CO- VID-19 and recognition that digitization is critical for business River transportation plays a somewhat larger role in Upper continuity. The government of Egypt portal (BAWABA), avail- Egypt than in the rest of Egypt, with 27 percent of goods able in Arabic and English, provides a centralized repository being shipped by boat on the river. The river transportation of information on most government documents and services, system moves about 5.7 million tons per year, of which 26.9 and efforts are now under way to digitize a range of services, percent comes from the Menya region. According to trans- including those related to health insurance, tax collection, and port experts in the region interviewed for this report, the full other government-to-citizen (G2C) and G2B services. Cairo, potential of transporting goods via river is yet to be tapped, Menya, Qena, Sohag, and Dakahlia are the first five gover- and it is estimated that river shipping services could triple if norates to participate in an initiative to offer local government more multimodal platforms were to be implemented. Current- services online. Thus far, however, few G2B services have ly, the most common use of river transport is for touristic and been fully digitized; information on G2B services is becoming personal purposes. more readily available, but digitized transactions, for example, submission, processing, issuance, and monitoring, are still at The railway system has undergone several reforms to mod- a nascent stage. ernize infrastructure and increase the quality of service; however, limited last-mile infrastructure prevents usability for transport of goods from Menya and Assiut. The railway system Access to Output and in Upper Egypt is mainly used to transport people rather than goods. According to Menarail Transport, about 1 percent of Input Markets firms in Upper Egypt use the railway system to transport their goods compared with 4 percent nationally. Two major chal- lenges for greater use of rail for transport of goods persist in Egypt has an ambitious vision to position itself as a trade hub, Upper Egypt: (a) the lack of multimodal platforms and load- and has significant room for improvement in logistics,24 par- ing stations outside the cities and (b) inadequate location of ticularly for reducing port inefficiencies; increasing access to the rails, which in many cases pass through residential ar- roll-on, roll-off (Ro-Ro) services and high-quality logistics fa- eas. Considering the lack of loading platforms, firms must hire cilities; and increasing the efficiency of border management other services—such as trucking—to complete their routes, processes and customs clearance (IFC 2020). Increasing which is inconvenient and costly. multimodal connectivity, linking the airports, ports, railways, and metro and bus stations to provide opportunities for ad- Assiut has an operating international airport, but it carried only ditional passenger travel routes would boost tourism. For 2 percent of national air traffic in 2016. The number of passen- freight, Egypt would benefit from specially developed freight ger aircraft in Upper Egypt as a region decreased by 0.6 per- 22. Data on the processing time for shop licenses was available for 5 out of 13 DSCs, and data on the processing time for construction permits was available for all 13 DSCs. 23. Egypt Vision 2030 was launched in 2016. The Ministry of Planning, Monitoring and Administrative Reform is in the process of updating the vision to set targets to reflect the country’s bold aspirations. 24. For the purposes of this assessment, “logistics” is defined as efficient, effective forward and reverse flows and storage of goods, services, and related information between the point of origin and the point of consumption to meet customers’ requirements. Five factors influence logistics: (a) the efficiency of ports, (b) air cargo capacity, (c) the infrastructure that connects the hinterland to the ports and national population centers, (d) services to carry the goods from the hinterland to the ports and national population centers, and (e) border control and management, including customs clearance for trading across borders. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 32 cent from 2016 to 2017. This decrease is even more notable of Al Matahra industrial zone has grown significantly, from 72 in the Assiut region, with a contraction of 14.3 percent during factories in 2018 to 187 operational factories as of January the same period. 2020. New Menya is a small industrial zone managed by the New Urban Communities Agency. In 2018 it hosted 107 estab- As indicated, adequate logistics would be a key enabler for lishments, mostly small workshops and warehouses. There is further development of the agribusiness sector. Egypt has the very little activity in the two remaining zones in Menya. In As- highest rejection rate of any country for fruit and vegetable siut six zones are in operation: A’rab Al A’wamer, Al safa, Sa- imports by the European Union (Jaffee et al. 2019), and waste hel Seleem, Elzaraby, Dashlout and New Assiut. Occupancy rates for products caused by lack of adequate transportation, in Dashlout and New Assiut is approaching 40 percent, and warehousing, and cold chain capacity are estimated at 15–20 occupancy in the other 4 zones is close to 100 percent. percent for nonperishable and 25–50 percent for perishable crops (IFC 2020). Based on interviews with tenant firms, it appears that the in- dustrial zones in Menya and Assiut suffer from poor basic infra- structure; the supply of electricity to most factories is unstable Business Access to and insufficient, and many plants have therefore had to invest in their own generators. Sewage services also appear to be Basic Infrastructure insufficient (lacking adequate treatment plant facilities), and there is a lack of public transport from villages to the zones which discourages both workers and investors. According to All industrial activity in Egypt is restricted to industrial zones. current investors, resolving these challenges would positively There are 12 industrial zones in Menya and Assiut, 8 of which affect the utilization rate of existing factories, which currently are operational. In Menya, the Al Matahra and New Menya averages 50–60 percent. industrial zones are currently operational. The occupancy rate EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 33 Electricity appears to be a more significant challenge to businesses in Upper Egypt than in other parts of the country (figure 10). In northern Upper Egypt, 16 percent of firms report experiencing electricity outages. However, 44 percent of firms in northern Upper Egypt report that electricity is a “major” challenge for their business, compared with 12.9 percent of firms in Cairo, for example. This suggests that some combination of the ease of access (that is, obtaining an electricity connection), the cost of electricity, or the quality of electricity (that is, voltage) may be more deficient in Upper Egypt than in other parts of the country. Those who own or share a generator report that about 20 percent of their electricity comes from a generator. > > > F I G U R E 1 0 - Percentage of Firms Identifying Electricity as a Major Constrain Suez Canal 20.4% Southern Upper Egypt 56.8% Northern Upper Egypt 43.6% West Delta 2.5% Middle and East Delta 21.8% Great Cairo 12.9% 0 10% 20% 30% 40% 50% 60% Source: World Bank 2016, 2020b. operating in southern Upper Egypt cited access to finance as a major constraint to business. The perception of firms operat- Business Access to Finance ing in northern Upper Egypt and southern Upper Egypt with regard to access to finance has deteriorated sharply since 2016, when 22 percent and 29 percent, respectively, viewed Nationwide, access to finance as a constraint to business has access to finance as a major constraint. The lead firms inter- improved across all sectors according to Enterprise Survey viewed for this report did not mention access to finance as data (World Bank 2016, 2020b). In 2020, 15 percent of firms a constraint, which is markedly different from the views ex- in the manufacturing sector and 14 percent of firms in the ser- pressed by “average” firms in the World Bank Enterprise Sur- vices sectors nationwide reported access to finance as a ma- vey, likely indicating that the constraint is higher among SMEs jor constraint to business, compared with 27 percent and 21 than among large firms. percent, respectively, in 2016. Collateral requirements appear to be higher in northern Upper However, Upper Egypt has the highest levels of financial ex- Egypt compared with other regions (figure 11), an indication clusion, with almost half of firms perceiving access to finance that firms are viewed as higher risk or that lending practices to be a major constraint to business. According to the 2020 are more conservative in northern Upper Egypt. Whereas col- Enterprise Survey (World Bank 2020b), 45 percent of firms lateral requirements average 165 percent in Greater Cairo, interviewed in northern Upper Egypt and 46 percent of firms they average 250 percent in northern Upper Egypt. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 34 > > > F I G U R E 1 1 - Value of Collateral Needed for a Loan Suez Canal 188.2 Southern Upper Egypt 193.6 Northern Upper Egypt 250 West Delta Middle and East Delta 227.8 Great Cairo 165.6 0 50 100 150 200 250 Percentage of Loan Amount Source: World Bank 2020b. Digital financial services could expand financial inclusion improve the use of digital financial services were introduced in Upper Egypt. However, even at the national level digital when the COVID-19 epidemic hit Egypt. Implementation of the financial services are only now emerging. The latest data fintech strategy began in the second half of 2019 with critical collected from the Central Bank of Egypt25 indicate that initiatives targeted for completion by the first half of 2021. The nationwide, there were approximately 12 million mobile Central Bank of Egypt also launched a Regulatory Sandbox wallets in November 2019 but only 2 million of them were in June 2019 to keep pace with developments in the market, active. The dominance of cash is illustrated by that 55 percent to provide a favorable environment for promoting innovation of e-commerce purchases in Egypt are settled in cash26, and and financial inclusion, and to encourage the adoption of global companies (such as Uber) have had to switch to cash- innovative products and services in the Egyptian financial based payments upon entering the Egyptian market (Cairo sector. The new Central Bank and Banking Act (law 194 of was the seventh city in the world where Uber had to accept 2020) was passed in 2020 and provides more clarity around cash payments). Overall, only 6 percent of Egyptian adults digital payments. Efforts are thus underway that could offer reported making a digital payment in the past year, including opportunities for increased financial inclusion in the Upper using a debit or credit card, using a mobile phone to make a Egypt governorates. payment from an account, using the internet to pay bills or to buy something online, and paying bills or sending domestic remittances directly from a financial institution account or Business Access to Labor, through a mobile money account (Demirguc-Kunt and others 2018). This rate is much lower than in most other economies, Skills, and Technology with the average in the Middle East and North Africa region at 28 percent and the world average at 45 percent. Data for Upper Egypt specifically are not available. Menya and Assiut lag behind other regions in basic education outcomes. Almost 40 percent of Egypt’s illiterate live in this In 2019, the Central Bank of Egypt launched a financial region and illiteracy rates are far worse for females in both technology (fintech) strategy, and several measures to governorates, specifically the rural female population. Almost 25. Central Bank of Egypt data are based on the World Bank’s latest Financial Inclusion Global Initiative mission in November 2019. 26. PPRO: https://www.statista.com/statistics/980465/egypt-share-of-payments-ecommerce-purchases-by-method/ EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 35 half of rural female population in Menya and Assiut are Both governorates seem to be relatively attractive within illiterate, exceeding the Upper Egypt average of 45%. In both Upper Egypt for those with a technical education, especially governorates, 24% of the urban female population is illiterate, in the fields of industry and agriculture, based on the number in line with the rest of Upper Egypt. Meanwhile, 17% of the of graduates in 2018. Close to 6.3 percent of Egypt’s industrial urban male and 32% of the rural male population are illiterate. secondary education graduates are in Menya, the highest Although the share of illiterate females in both governorates share in Upper Egypt. Students specializing in textiles, crafts, is very high, the trends are positive. In 1996, female illiteracy and electronics make up more than two-thirds of the total rates were 70% in Menya and 66% in Assiut, going down to industrial education graduates. Similarly, because of their 53% and 49%, respectively in 2006 and further to 46% in Menya strong agricultural sectors, agriculture technical education is and 42% in Assiut in 2017. Gender inequality is also evident also popular in both governorates, constituting the highest in employment participation: female unemployment is four shares of graduates nationwide (12 percent in Menya and 10 times higher than male unemployment in both governorates percent in Assiut). as a result of cultural and social constraints. However, there are some promising examples of industries with high female There is no consolidated overview of which organizations labor participation in the region, for example in the apparel provide what type of firm-level capacity-building services and textiles sector. to start-ups, SMEs, and larger investors. Such services are, however, provided by the Egyptian Micro, Small Despite very poor outcomes at the basic education level, and Medium Enterprises Development Agency and the university education outcomes for Assiut are some of the Industrial Modernization Center, as well as by international best nationwide. Assiut accounts for 5.3 percent of Egypt’s organizations such as the European Bank for Reconstruction total public university graduates, which is higher than its and Development, the German Corporation for International demographic weight. Assiut University is ranked sixth or Cooperation (GIZ), the International Labor Organization, the seventh domestically and is one of seven universities (and United Nations Development Programme, and the United the only one from Upper Egypt) to consistently be included Nations Industrial Development Organization. in international rankings. Menya accounts for 2.7 percent of Egypt’s total public university graduates, with much of the school-age population either not seeking university education or attending higher ranked universities in the region. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 36 6. >>> Recommendations Significant opportunities for inclusive growth in Menya and Assiut are to be found in the agribusiness, light manufacturing, and tourism sectors. However, key constraints must be overcome to unlock that growth. Given the nature of the constraints, most of them cannot be overcome at the governorate level alone, and solutions require a concerted, coordinated effort between central authorities and governorate administrations. Furthermore, the private sector’s confidence needs to be restored for investments to follow. A commitment to more transparency can improve certainty around investment decisions, and more active engagement of the private sector in setting policy priorities is likely to result in more effective policies. Therefore, as stated in IFC (2020, 16), “Egypt’s overarching priorities in promoting private sector development should focus on establishing a culture of transparency and a participatory approach in policy making.” This is something both central authorities and governorate administrations can contribute to. The analysis in the previous sections and the recommendations in table 4 were derived in an effort to provide a starting point for public-private dialogue and deliberations between central agencies and governorate administrations. The recommended immediate next step is for each governorate to set up a small but world-class and dedicated private sector development team to initiate this dialogue process, identify areas that need further analysis, and develop and oversee a development plan, results framework, and implementation matrix. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 37 > > > T A B L E 4 - Recommendations for Enabling Private Sector Growth in Menya and Assiut 1. OVERALL BUSINESS ENVIRONMENT AND GOVERNANCE National Level Governorate Level a. Enhance opportunities for representative f. Provide opportunity for systematic dialogue private sector participation in the national with the local private sector on systemic reform dialogue challenges that inhibit growth b. Develop a transparent state ownership policy and governance framework, and make the financial information on state- owned enterprises available to enable informed private sector decision-making c. Improve processing time for business licensing and permits outside of Cairo d. Improve processing time for land allocation and for water, sanitation, and electricity connections within industrial zones e. Develop tourist-friendly security protocols with local communities, the private sector, and national government 2. FACILITATE ACCESS TO OUTPUT AND INPUT MARKETS National Level Governorate Level a. Ensure full and timely payment of duty e. Improve local roads to key sites drawbacks and export subsidies to (new agricultural land, clusters, industrial exporters zones, tourism areas) b. Develop, promote, support, and enforce f. Disseminate and enforce COVID-19 COVID-19 protocols for the manufacturing protocols for the manufacturing and and service sectors service sectors c. Expand national quality infrastructure to g. Disseminate information on COVID-19 enable greater certification and market support programs available to MSMEs access to high-value export agribusiness h. Invest in last-mile logistics infrastructure markets such as loading stations to enable greater d. Accelerate the design and implementation use of river and rail freight transportation, of an integrated multimodal transport and explore public-private partnership strategy that includes freight corridors possibilities for warehousing and attractive for their reliability and limited cold-chain investments to reduce waste congestion in the agribusiness sector i. Explore programs that aggregate small-scale farmers as suppliers to larger off-takers to facilitate market access and achieve market-driven skills building EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 38 3. FACILITATE ACCESS TO WELL-LOCATED AND SERVICED LAND National Level Governorate Level 3.1. a. Improve strategic planning and zoning, b. Advocate for and provide input to national- OVERALL starting with a map of agricultural level planning and improve local planning, production, industrial manufacturing and zoning, and land allocation and registration processing zones, logistics hubs, and processes transport systems 3.2. a. Invest in the development of water b. Assist with monitoring and enforcement of RURAL intelligence and water management water usage and water availability systems to measure water stress 3.3. a. Implement a monitoring and evaluation e. Conduct investor promotion (marketing) for INDUSTRIAL plan designed to obtain industrial zone the governorate and carry out an investor performance feedback from tenants and demand survey targeting potential investors prospective investors f. Facilitate access to labor by enabling b. Enable entry of more lead firms in the investment in transportation and daycare industrial zones outside of Cairo and services as well as by providing housing Alexandria by facilitating demand-led facilities near the industrial zones infrastructure and service upgrades. c. Facilitate access to industrial land for SMEs by providing plug-and-play or shared facilities in partnership with the private sector d. Clarify the industrial zone regulatory framework to clearly delineate the roles and responsibilities of IDA, the governorates and other governmental bodies, as well as the guiding framework for public-private partnerships for industrial zones. 4. ACCESS TO LABOR, SKILLS, AND TECHNOLOGY National Level Governorate Level 4.1. a. Develop an entrepreneurship and b. Conduct a gap analysis of firm-level OVERALL SME development facility that provides capacity constraints in key sectors performance-based financing to private compared with available capacity-building providers of capacity-building services to services, and develop a plan for upgrading entrepreneurs and SMEs capacity-building services for entrepreneurs and SMEs EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 39 4. ACCESS TO LABOR, SKILLS, AND TECHNOLOGY National Level Governorate Level 4.2. a. Explore mechanisms to provide incentives b. Explore cluster development opportunities AGRICULTURE to firms to invest in drip irrigation systems, focused on high–value added crops and hydroponics, and other water-saving organic agriculture agricultural methods already under c. Explore public-private partnership schemes and consideration by lead firms financing schemes to distribute costs of training and certifying small farmers and investments in mechanization and equipment 4.3. a. Address the skills gap by engaging the b. Promote shared facilities in partnership with MANUFAC- private sector in curriculum development lead firms to facilitate workers’ and SMEs’ TURING and training delivery in line with industry access to skills and technology standards 4.4. a. Develop a comprehensive tourism b. Engage with the local community around the TOURISM development strategy for Upper Egypt key heritage and natural sites to raise their at large with strong engagement of the awareness of tourism opportunities and their governorates and local communities knowledge of how to tap into them c. Identify opportunities for upgrading access to sites that can serve the domestic market in the near term 5. ACCESS TO FINANCE National Level Governorate Level a. Conduct a comprehensive financial sector e. Increase awareness of available MSME assessment to obtain up-to-date data and COVID-19 support facilities insights on access to finance f. Increase awareness of digital financial services b. Explore government support measures among MSMEs and consumers such as cash transfers, assistance with health costs, and advance purchase options through public procurement to protect vulnerable MSME segments in light of COVID-19 c. Improve the legal, policy, and regulatory environment for digital financial services to leverage them to achieve financial inclusion goals d. Expand access to finance for the agribusiness sector through trade financing and leasing facilities for MSMEs EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 40 6. GETTING IT ALL DONE National Level Governorate Level a. Make private sector data collected at the c. Establish a small, dedicated, world-class private national level available disaggregated by sector development team for each governorate firm size, sector, and geographic location to coordinate across the departments of and explore possibilities for expanding the governorate, the national government, availability of private sector performance the private sector, local communities, and data based on data that are already development partners being collected d. Build institutional capacity in the governorate b. Establish a dedicated reform team at the administrations to conduct effective public- prime minister’s office with dashboards private dialogue and coordinate the local that display the above private sector data economic development agenda. for each governorate Note: MSMEs = micro, small, and medium enterprises; SMEs = small and medium enterprises. Lessons from implementation of the Upper Egypt Local Development Program in Sohag and Qena can be harnessed to inform the reform dialogue, planning and implementation in Menya and Assiut. Figure 1 provides an overview of the key characteristics of the Upper Egypt Local Development Program. > > > B O X 1 - The Upper Egypt Local Development Program The Upper Egypt Local Development Program aims to improve the business enabling environment for private sector de- velopment and strengthen local government capacity for quality infrastructure and service delivery in select governorates in Upper Egypt. Implementation of the Program started in 2017, with a focus on Sohag and Qena. The Program is financed by the World Bank and the Government of Egypt, and is implemented by the Ministry of Local Development in collaboration with the Governorates of Sohag and Qena, and the Ministry of Trade and Industry and the Ministry of Planning. Key features of the Upper Egypt Local Development Program include: • Performance-based funding: the governorates receive financing upon achieving clearly defined performance targets related to improvement of the business enabling environment and infrastructure and service delivery; • Inter-agency agreements between governorates and central agencies: the governorates enter interagency agree- ments with central government authorities in areas that are beyond the governorates’ mandates. For example, the governorates of Sohag and Qena have entered interagency agreements with the Industrial Development Authority to improve the competitiveness of key industrial zones located in the governorates, and with the Micro, Small and Medium Enterprise Development Authority and the Industrial Modernization Centre for facilitation of firm-level capacity building. • Participatory planning and public-private dialogue: citizens and the private sector are actively engaged in the governorates planning processes. For example, the governorates have launched “Cluster Competitiveness Initiatives” (CCIs). Through these CCIs, the governorates engage firms in a sector of priority to the governorate in a bottom-up consultative process to identify priority actions needed to boost the resilience and growth of the sector. Additionally, the governorates have established socio-economic advisory councils comprised of non-governmental representatives to provide strategic inputs to the governors, and citizens are actively involved in the governorates’ prioritization of capital investments through regular local consultations and feedback. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 41 • Program management and governance representing local and central government: a Local Implementation Unit (LIU) has been established in each governorate administration. Additionally, the Ministry of Local Development has appointed a Program Coordination Office (PCO), which support the LIUs with program planning, implementation, monitoring and reporting. A Steering Committee, comprised of the Ministry of Local Development, the Governorates, the Ministry of Planning and the Ministry of Trade and Industry provides strategic guidance and support to the PCO and LIUs. • Capacity building of local government staff: the Program assigns significant emphasis to building institutional capacity at governorate level across a range of areas including investment planning, public-private dialogue, environ- mental and social safeguards, life-cycle asset management, and more. Core activities included in the Program to promote private sector development in the two governorates include: 1. Cluster Competitiveness Initiatives, which aim to boost the resilience and competitiveness of priority sectors in the governorate; 2. Industrial Zone Upgrading, which aims to boost the attractiveness of the governorates as a destination for investors and to unlock the growth potential of firms already located in the zones; 3. Government-to-business Services, which aim to increase the efficiency of issuance of licenses and permits issued at local level. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 42 >>> Annex 1: COVID-19 Impact on Business Performance Indications are that COVID-19 (coronavirus) is affecting business performance worldwide through the following four channels: 1. Demand-side shocks • Negative impact on final consumption and export demand • Lower demand from other firms that are themselves experiencing a drop in demand, or buyers or customers going into bankruptcy resulting in payment delays and defaults 2. Supply-side shocks • Decline in the availability of labor because firms must stay closed and workers’ lives are disrupted • Decline in firm productivity because workers are less efficient as they adapt to new working hours and modalities of work, and as firms use new combinations of inputs • Lack of intermediate goods as value chains are disrupted, particularly for those businesses relying on imported inputs 3. Financial shocks. Funding strains for private sector firms, in particular • MSMEs that are fully reliant on bank funding or commercial lending • Corporations with high debt levels and US$-denominated funding • Larger corporations that have funded themselves, but are dependent on backup lines of bank credit • Deterioration of credit conditions from banks and nonbank financial institutions • A rush to prematurely force businesses into liquidation as a debt collection tool by other firms feeling the effects of the crisis 4. Uncertainty • Lower investments • Lower appetite for risk associated with innovation and entrepreneurship EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 44 >>> Annex 2: Constraints to Growth of the Agribusiness and Manufacturing Sectors in Egypt The Country Private Sector Diagnostic published by the International Finance Corporation (IFC) in 2020 provides an in-depth analysis of constraints to growth of the agribusiness and manufacturing sectors in Egypt. Table 5 summarizes the key findings. > > > T A B L E 5 - Sector-Specific Constraints to Growth of Agribusiness and Manufacturing in Egypt Agribusiness SOEs in agriprocessing (60% of wheat Textiles milling, 75% of sugar-refining capacity, 25% SOEs, state footprint of domestic milled rice production); SOEs in production, processing, and marketing of dates, fisheries, and potatoes, creating unfair competition for private operators Fertilizer subsidies encourages overuse Interdiction for farmers to sell wheat to Competition, and affects yields; price controls on private sector; tariff protection barriers to entry wheat and sugar to ensure affordable, available staples Protective tariff regime, reducing overall incentive to export; Inadequate transport facilities, bonded warehousing capacity; weak cold-chain infrastructure Trade and logistics Export bans; restricted imports of seed; weak food SPS measures; use of fresh water for aquaculture prohibited, preventing exports to certain markets Poor local training infrastructure for specialized skills for export -oriented cultivation Skills and processing Pressure on available land and water resources, inefficient distribution and salinity Constraints of water; limited use of water-efficient equipment and techniques; misaligned pricing; Other critical agriculture cooperatives law limited in its ability to permit commercially oriented market constraints linkages for small farmers. affecting sector competitiveness Agri finance dominated by a SOB, lack of land-based collateral market, limited role of nonbank finance companies and microfinance institutions. Manufacturing Textiles Chemicals Automotive Dominance in upstream Large state presence sectors (fiber and yarns) including in refineries, SOEs, state footprint some of which are inefficient and loss-making SOEs not organized Close links between Lack of clear government as commercial entities; policy makers and SOEs, strategy Competition, unlevel playing field, with creating an inherent barriers to entry SOEs receiving financing conflict of interest between at low or no cost and regulatory, policy, and other benefits operational bodies EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 46 Manufacturing Textiles Chemicals Automotive Tariff and nontariff barriers Inconsistent application Trade facilitation issues of tariffs to import raw (Ro-Ro); inability to Trade and logistics materials in subsectors establish base for just- Limited use of Authorized such as plastics in-time delivery; inverted Economic Operator tariffs Constraints Lack of required skills to Lack of access to critical Lack of R&D, skills, and help move it to higher- inputs, including skills and technology Skills value-added activities; technology outdated curricula in academic institutions Lack of quality factor Fragmentation, with many Lack of scale among Other critical inputs; lack of social and MSMEs; lack of access to producers and suppliers constraints environmental compliance markets; limited water and affecting sector energy efficiency competitiveness Difficult access to finance Source: IFC 2020. Note: MSME = micro, small, and medium enterprises; R&D = research and development; SOB = state-owned business; SOE = state-owned enterprise; SPS = sanitary and phytosanitary. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT | ENABLING PRIVATE SECTOR GROWTH IN MENYA AND ASSIUT, EGYPT <<< 47 >>> References and Other Resources CAPMAS (Central Agency for Public Mobilization and Statistics). 2013. “Establishments Census.” Cairo. CAPMAS (Central Agency for Public Mobilization and Statistics). 2017a. “Annual Bulletin of Industrial Production of Public/Public Business Establishments of year 2015/2016.” Cairo. CAPMAS (Central Agency for Public Mobilization and Statistics). 2017b. “Establishments Census.” Cairo. CAPMAS (Central Agency for Public Mobilization and Statistics). 2018a. “Annual Bulletin of Industrial Production of Private Sector Establishments of year 2016.” Cairo. CAPMAS (Central Agency for Public Mobilization and Statistics). 2018b. “Economic Census.” Cairo. 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