19 December 2012

Egypt: Why Good Policy Is Needed to Promote Inclusive Business Models in Egypt

Photo: This is Africa
Egyptian citizens


There are already good policy foundations on which to build in Egypt. Although there are still many business environment reforms yet to undertake, improvements in this area have given Egypt a relatively good basis on which to promote inclusive businesses (IBs).

According to the IFC's Doing Business Report, Egypt, along with Colombia, was the only country to be among the top global business reformers in four out of the seven years between 2002 and 2009. It also demonstrated a commitment to promoting social and environmental responsibility among businesses.

The launch of the national center for corporate responsibility in 2009 and the introduction of the Environment, Social and Governance (ESG) Index to incentivize sustainable business practices were also positive steps. However, while those business reforms were occurring, laws governing other sectors, such as the NGO law, were either kept the same or made even more restrictive. There is more to be done if businesses are to have the right incentives to not only respect the law and pay taxes, but to support efficient, sustainable and profitable models that create decent jobs and provide basic public goods and services that are missing for the poor.

The role of good policy in promoting IB has already been proven in the case of Egypt. A recent case study, which was part of the UNDP growing inclusive markets (GIM) database, reveals how the OHD's OHC housing project mentioned earlier was partly launched "to take advantage of the Egyptian Government's attempt to relieve the severe low-income housing shortage."

In 2005, the Egyptian government had launched a low-income housing scheme allowing developers access to cheap land and providing buyers with subsidies. In response, OHC has been able to successfully construct 12,000 units, though there is a need for at least 1.2 million with an annual increase of at least 150,000 units. Clearly, more needs to be done. Incentives like these encourage large businesses and others to invest in win-win opportunities, which are both profitable for them and help provide affordable, good quality products to the BOP. Interestingly, case studies commissioned by the UNDP GIM database of such models like OHD's in Egypt nearly all cite the "regulatory environment" as a main constraint to growth.

While many actors, including civil society, business, education and the media, have an important role to play in creating awareness about the nascent IB sector, there are two types of policy reforms in which the Egyptian government needs to play a leadership role: reforms to introduce IB options and reforms to allow for stronger intermediary support organizations (ISOs).

Introduce new hybrid legal models

There are many possible models upon which Egypt could base its own system. Successful examples include the frameworks in the U.S., U.K., Poland and Germany as well as those in emerging countries such as India, Turkey and Brazil. In regards to social enterprises receiving funds, the taxes for entrepreneurs willing to make positive social impact should be revised. There are various ways to accomplish this type of reform, whether by a blanket waiver from taxes for qualifying entities, reduced rates, exemption from taxes in relation to the qualifying activities, tax holidays, or exempting the beneficiaries/clients of such entities from certain taxes. In addition, as mentioned, there needs to be efforts to legalize the currently gray area that is the not-for-profit company option in Egypt.

Strengthen existing models (such as cooperatives)

To ensure a flexible, empowered and responsive cooperatives sector, laws need to be revised with a commensurate philosophy. The key demands of the cooperatives sector, summarized since 2008 after celebrating 100 years of existence in Egypt, included demands to: 1) Place cooperatives under a single, unified law while leaving enough space for each sector to develop its own internal regulations. The government's role ideally would be to provide the legal framework and, in some sectors such as agriculture, provide the information-sharing infrastructure; 2) allow freedom of registration; 3) prohibit government appointments of outside Board members except with prior consent and 4) increase access of cooperatives to soft loans and/or grants made available from international donor grants and funding. The majority of such funds is currently going to the government (Ministry of International Cooperation) while a smaller portion is allocated to NGOs but not cooperatives. In other countries, cooperatives are eligible for a whole range of such financing including through banks, government agencies, foundations and private grants, among others. Building on the fourth point, the revised law should allow for access to new forms of impact investment with lower interest rates and patient capital.

Amend the Capital Markets Law to promote impact investments

No current Egyptian law or provision allows for the formation of impact investment funds. Hence, none of the funds mentioned throughout this note that have operated in Egypt, or were planning to, have any legal presence in the country. According to the Brookings-Gates survey analysis, there are two main amendments needed: allowing such funds access to finance and tax benefits. In terms of access to finance, the law should expressly legalize donations to be given to an impact investment fund, allowing them to raise money flexibly. In terms of taxation, according to the Brookings-Gates survey and legal analysis, impact investment funds investing in social enterprises or IBs should be exempt from taxes or at least be eligible for reduced tax rates. Alternatively, and more preferably, tax benefits should be given to investors for their equity contributions. Benefits might include tax reliefs, tax credits or exemptions from capital gains. Following similar initiatives in the U.K., Australia, Sweden and Germany, commercial banks and other financial institutions could also be obliged by law to report on whether they take account of social, environmental or ethical factors in their investment decisions. Such changes will help avail sources of low interest rates and the patient capital for which Egyptian cooperatives and other inclusive BOP models have been in dire need.

Amend NGO law

As mentioned above, the current Law 84-2002 is restrictive and stifling for NGOs on many fronts, especially in terms of reaching financial sustainability and scale. After the January 2011 revolution, a number of competing draft NGO laws have been introduced by various official and independent entities, including the Human Rights Committee and Religious and Social Affairs Committee of the recently dissolved People's Assembly (the lower parliamentary house), the Ministry of Insurance and Social Affairs, and coalitions of civil society organizations.

With the Parliament dissolved, civil society experts find it difficult to articulate where the draft law really stands and who is pushing which draft. There continues to be discussion and speculation with regard to whether a new NGO law will be passed before or after a new Parliament is elected and which draft, among those currently circulating, will be pursued. With the exception of some recent discussion with human rights groups by the Minister of Justice, a unified draft law has not been officially circulated or consulted on since the Parliament was dissolved. It is hoped that a wider consultation would be organized for the drafting of a new, progressive NGO law in line with international standards and addressing several of the suggestions and concerns included in this policy brief.

Egypt's future in the coming years will be determined by its ability to reverse the cronyism of the Mubarak era and ensure that future growth is broadly distributed. It must perform this considerable feat in an environment of serious ambiguity surrounding the central government's authority and structure. Yet, Egypt has a key advantage in that it will be able to draw upon a deep reservoir of untapped entrepreneurial spirit and enthusiasm for civic and social engagement. The examples mentioned in this brief are but a sampling of the scope of expansion of projects, which could result from an enabling policy reform. Allowing these and new organizations to realize their full potential will not only spur job growth and economic development, but will help foster the sense of justice, equity and inclusivity required for Egypt's future progress and social peace.

Ehaab D. Abdou leads the MENA Development Marketplace program at the World Bank Institute which currently focuses on Egypt.

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