Egypt 2015: Powering up the private sector
Egypt’s government has made promoting the private sector a policy priority. Philip ter Woort of the European Bank for Reconstruction and Development explains why this is needed and what multilaterals can do to help.
AT FIRST GLANCE, Egypt – with its young, rapidly growing and predominantly Muslim population – has little in common with the former communist countries that the European Bank of Reconstruction and Development (EBRD) was set up to support.
On closer inspection, however, there are a number of similarities. Like emerging Europe after the fall of the Berlin Wall, Egypt is going through a period of transformation. It is also in urgent need of both infrastructure development and a bigger role for the private sector in the economy.
“For 50 years, economic growth in Egypt has been strongly state-led,” says Philip ter Woort, director for Egypt at the EBRD. “The country is now moving towards a more private-sector model and helping to make that sustainable is a key priority for us.”
Encouraging private enterprise is central to the remit of the EBRD, which began operations in Egypt in late 2012. The bank is particularly focused on promoting small and medium-sized enterprises (SMEs), a huge sector in Egypt but one that has traditionally been disconnected from formal support and financing.
Ter Woort notes that SMEs in Egypt contribute around 80% of GDP and account for 75% of private sector employment, but receive only 7-8% of bank lending. That compares with around 20% in countries such as Morocco.
“Increasing that figure is a major challenge for the financial community,” he adds. “This requires not only attention to the supply side but also on the demand side due to the strong tradition of informality in the sector.”
Small business support
To address this issue, the EBRD has established a small-business support team in Egypt to help SMEs and mid-caps boost their technical capabilities and improve their access to funding. “For example, we can help them prepare a suitable business plan to present to a local commercial bank,” explains ter Woort.
The EBRD also plays a role on the supply side by providing funds to Egyptian banks for on-lending to the SME sector. So far the bank has approved $130 million worth of credit lines for microfinance firms and SMEs in Egypt, including $20 million for a pilot Women in Business project designed to increase the participation of women in the economy.
The total also includes an allocation of $30 million for energy efficiency or small-scale renewable projects, both of which represent key planks of the EBRD’s development agenda. “Energy efficiency is a major focus for us,” says ter Woort, “and we have the wind on our back, so to speak, thanks to the programme of reforms to fuel and electricity subsidies launched by the Egyptian government last year.”
Another way in which the EBRD works to help smaller firms in all its countries of operation is by improving their awareness of and access to local capital markets. Egypt’s stock exchange has traditionally been one of the most dynamic in the developing world and in 2007 became the first in the Middle East and North Africa region to launch a dedicated exchange for small and mid-cap companies.
In the eight years since its opening, however, fewer than 40 companies have listed on the Nile Stock Exchange (Nilex). The EBRD is conducting a gap analysis to establish why so few SMEs are using the equity markets for capital raising and is also working on an initiative to identify suitable candidates for listing with a view to helping them to come to market.
The bank is also able to provide more concrete support to Egyptian companies planning an initial public offering (IPO) by acting as an anchor investor. “We are very interested in pursuing this option as we think it would not only benefit individual companies to have a reputable investor such as the EBRD on board but would also send a positive message to the outside world that Egypt is open for business again,” says ter Woort.
He adds that, after four years of relative stagnation and political unrest, there is clearly good potential for growth in the SME sector as the broader Egyptian economy recovers – particularly, in the immediate future, in the crucial tourism industry.
“The sector with the lowest threshold for growth from an SME perspective is probably tourism,” he says. “It is a relatively low capital intensive industry with a high proportion of SME providers, so it should offer a lot of opportunities as the environment improves.”
Ter Woort also identifies construction as an industry that will likely provide good growth opportunities for SMEs in the short term, thanks to both the recovery in consumer confidence in Egypt and the new government’s enthusiasm for major infrastructure projects.
“A sign of the renewed level of confidence in Egypt is that the building cranes, which had been standing idle for several years, have started moving again,” he says. “SMEs who are active in the building industry will benefit from this and also from projects such as the new Suez Canal.”
The EBRD is also playing a more direct role in infrastructure development in Egypt by providing funding for and encouraging private sector participation in projects across a range of sectors.
Projects recently approved or awaiting final approval include a €126 million loan to Egyptian National Railways for the purchase of new energy-efficient rolling stock, a $50 million loan to Egypt’s only private sector energy storage company for the development of a facility at the Red Sea port of Sokhna, and €55 million towards a large wastewater treatment programme in the Nile Delta governorate of Kafr El-Sheikh.
The EBRD is also very active in the power sector – which, as ter Woort notes, is crucial for both social cohesion and economic development. “It is very difficult to develop the private sector when electricity supplies are irregular,” he says. “Entrepreneurs need to know that there will be a reliable power supply to enable them to invest, grow their businesses, expand manufacturing capacity etc.”
There is enormous untapped potential here in the renewables sector and, with the reforms currently under way, it is probably one of the most attractive investment destinations globally for renewables
Philip ter Woort,
Ter Woort is particularly excited about the opportunities for the development of renewable energy in Egypt – an enthusiasm shared by President Abdel-Fattah El-Sisi, who has promised that by 2020 the country will obtain 20% of its power from sustainable sources. “There is enormous untapped potential here in the renewables sector and, with the reforms currently under way, it is probably one of the most attractive investment destinations globally for renewables,” says ter Woort.
As part of its drive to encourage the sector, the government last September announced generous feed-in tariffs for power generated by wind and solar sources. A bidding process to supply 4GW of renewable power has been launched and, of the 68 providers shortlisted by the authorities, the EBRD has approached nearly half with offers of funding support.
“We are awaiting the outcome of the bidding process, which will allow us to engage with individual sponsors, and we hope by the end of this year or the beginning of next year to be able to announce our first renewable projects in Egypt,” says ter Woort.
The EBRD has been very impressed, he adds, with the engagement of the current government in the development of the renewables sector. “The authorities have been very open and willing to listen to feedback from banks and private sector operators on how to develop a solid and bankable framework for the sector,” he says.
Ter Woort notes that this level of engagement between the public and private sectors on policy matters is “relatively new and very encouraging” – and something that is urgently needed in Egypt.
“Egypt has enormous infrastructure requirements but clearly, with a budget deficit projected this year of around 10%, the government will have a limited fiscal envelope to fill the needs through the budget,” he says. “The obvious answer is to consider PPP solutions.”
Traditionally, one of the major barriers to public-private dialogue in Egypt has been the difficulty of navigating the notoriously complex and multi-layered bureaucracy. While admitting this remains a challenge, ter Woort says the overall operating environment for the private sector is already notably more positive than under previous regimes.
He notes, for example, that the Ministry of Investment has actively followed up on projects announced at the Egypt Economic Development Conference in March “to ensure that the next steps are taken and progress is made” – a noteworthy occurrence in a country where in the past grandiose projects have more often been designed to make headlines than any real headway.
“Egypt appears to have turned a corner to more private sector engagement in the economy and is now on the upswing,” says ter Woort. “Of course, it is not possible to rectify overnight half a decade of economic mismanagement, but the first steps have been made and they are bold steps.”
He adds that this changing dynamic is also starting to build confidence among external investors, many of which opted to remain on the sidelines during Egypt’s political turbulence. “Overall the sentiment is positive, I believe,” says ter Woort. “International investors can see that Egypt has huge growth potential and they also now see a government that is proactive and willing to move forward with bold reforms that are many years overdue.”