technical support and co-sponsorship were provided by technical … · 2017-04-05 · technical...

Technical support and co-sponsorship were provided by Technical As-sistance for Policy Reform II (TAPRII) – a project of the U.S. Agency for International Development (USAID), under the terms of contract no. 263-C-00-05-000063-00. This report does not necessarily reflect the views of the U. S. Agency for International Development.

The Egyptian National Competitiveness Council (ENCC) would like to extend a special thanks to the sponsors of the 7th EgyptianCompetitiveness Report as shown below in alphabetical order.

Contact Information: 106 Gameat El Dowal El Arabia Street, Duty Free Shop Building, Fifth Floor,Mohandiseen, Giza, Egypt

P.O. Box 12311 Mohandiseen, Giza, Egypt

Tel: + 202 37493920 / 21 - + 2 0126800166 / 77

Fax: +202 33370045

Web Site: www.encc.org.eg E-mail: [email protected]. eg

Contact Persons:

Ethar Soliman

Fatma Abdul Wahab

Vision: The ENCC will become an instrument of influence on government policies, business climate, and public attitudes to make the nation’s institutions more globally competitive. It seeks to develop solutions for specific issues that will increase the productivity of business and workers.

Mission: To improve the quality of life for all Egyptians, the ENCC will achieve its vision by being an efficient and effective platform that will bring together stakeholders — business, govern-ment, academia and civil society — in order to raise awareness and advocate policies that will enhance competitiveness.

ENCC Founders and Board Members:

Prof. Hossam Badrawi M.D., M.P. Member of Parliament,(Shoura Council)Member of the Supreme Council for Human Rights in Egypt

Honorary Chair

Mr. Helmy Abouleish Managing Director, Sekem Group Chair

Mr. Alaa Hashim CEO, MAC Carpet Deputy Chair

Mr. Seif Allah Fahmy Chairman and CEO, Almona Inc. Wireless Dynamics Inc. Automationology Inc.

Treasurer

Mrs. Amina Ghanem Deputy Minister for International Relations, Ministry of Finance

Secretary General

Mr. Aladdin Hassouna Saba CEO, Beltone Financial Member

Dr. Iman El Kaffas, PhD President, Step Up International Consultancy for Education and Human Development

Member

Eng. Nehad B.Ragab Chairman, Siac Holding for Investments and Construction

Member

Mr. Shafik Gabr Chairman & Managing Director, ARTOC Group for Investment & Development

Member

EGYPTIANNATIONAL COMPETITIVENESS COUNCIL (ENCC)

ENCC MembersMr. Adham Nadim Executive Director, Industrial Modernization Centre

(IMC)

Mr. Ahmed Sabbour Managing Director, Al Ahly Real Estate Development Co.

Eng. Amr Assal Chairman, Industrial Development Authority

Mr. Hassan Mohamed El Khatib Managing Director, Carlyle Egypt

Mr. Hasssan Abdallah Vice Chairman and Managing Director, Arab African In-ternational Bank

Eng. Khaled Abd El Moniem El Mekati

Chairman, HM Stone Co.

Mr. Khaled Gamal El Din Mo-hamed Mahmoud

Chairman, MM Group for Industry & International Trade

Dr. Taher Helmy Managing Partner, Helmy, Hamza & Partner (Baker & Mckenzie)

Mr. Tamer Nassar Chairman & Managing Director, Sector Petroleum Ser-vices SAE

ENCC Honorary Member:

Dr. Samir Radwan Senior Economic Advisor, Egyptian Financial Supervisory Authority (EFSA)

ENCC’s Human ResourcesCompetitiveness Council (HRCC)

Chair

Prof. Hossam Badrawi M.D., M.P. Member of Parliament, (Shoura Council)Member of the Supreme Council for Human Rights in Egypt

Co-chair

Dr. Iman El Kaffas, PhD President, Step Up International Consultancy for Education and Human Development

Members

Dr. Ahmed Tolba Assistant Professor of MarketingDepartment of ManagementSchool of Business, The American University in Cairo (AUC)

Dr. Alaa ElGindy Professor and Head of Civil Engineering Department, University Of Helwan

Mr. Ali Kamel Senior Economic Advisor, USAID

Ms. Amal Mowafy Senior Programme Officer, ILO Sub Regional Office for North Africa

Ms. Amina Ghanem Deputy Minister of Finance for International Relations

Prof. Dr. Amr Abou-El-Ezz Vice Dean for Education and Student Affairs, Faculty of Oral and Dental Medicine, Cairo University

Dr. Amr Ezzat Salama University Counsellor, The American University in Cairo (AUC)Former Minister of Higher Educationand Scientific Research

Eng. Amr Gohar Vice Chairman, Egyptian Junior Business (EJB) Associa-tionPresident, Middle East Council for Small Business & En-trepreneurship (MCSBE)

Ms. Dina Abdel Wahab Chairperson & Managing Director, The Egyptian Child Care Corporation (EC3)

ENCC’s Human Resources Competitiveness Council (HRCC) Cont’d

Members

Dr. Essam Abdel-Aziz Sharaf Professor of Transportation Engineering, Faculty of Engi-neering-Cairo university

Mr. Hatem Shafie Chief Financial Officer and Board Member, SEKEM group

Prof. Heba Nassar Vice President ,Cairo University

Dr. Kadria Abdel Motaal, MD Vice- President, Heliopolis Academy

Mr. Medhat Mostafa El Madany Executive Board Member, Industrial Training Council

Dr. Mohamed S. Abdel Wahab Assistant Professor, Faculty of Law - Cairo UniversityVice-Chairman, Chartered Institute of Arbitrators (Cai-ro Branch)Senior Partner, Zulficar & Partners Law Firm

Dr. Mohsen Elmahdy Said Advisor to the Minister for International Cooperation

Prof. Nadia Badrawi Prof. of pediatrics, Cairo UniversityPresident of the Arab Network for Quality Assurance in Higher EducationBoard Member of the International Network for Qual-ity Assurance Agencies in Higher Education

Ms. Rasha Abdel Hakim Senior Economist and Team Leader, USAID

Prof. Wael Kortam Professor of Marketing, Vice Dean For Postgraduate Education, Research and Internationalization, Faculty of Commerce, Executive Director of Cairo University In-ternational Branch (CUIB)- Cairo University

Dr. Yasser El Shayeb Coordination of European Union Programs on Higher Education and Scientific Research

ENCC’s Travel and TourismCompetitiveness Council (T&TCC)

Chair

Mr. Ashraf Ahmed Ibrahim President, Clever Travel

Members

Dr. Adla Ragab Professor of Economics, FEPS, Cairo UniversityEconomic Advisor to the Minister, Ministry of Tour-ism, Egypt

Mr. Ahmed Sabbour Managing Director, Al Ahly Real Estate Development Co.


Mr. Ali Sedky President, Touring Club of Egypt

Mr. Amr Sedky Chairman, Creative Group for Tourism & Hotels


Eng. Hisham Shoukry CEO, ROOYA Group

Mr. Hisham Zaazou Senior Assistant Minister of Tourism, Ministry of Tour-ism

Mr. Hussein Badran Consultant of Human Resources Development & Training & Studies

Ms. Ingi Lotfi Senior Economist, USAID

Mr. Mounir Nakhla Managing Director, Environmental Quality Internation-al (EQI)

Dr. Mounir Soliman Neamatalla President, Environmental Quality International (EQI)

Mr. Seifallah Fahmy Chairman and CEO, Almona Inc. Wireless Dynamics Inc. Automationology Inc

Mr. Sherif El Ghamrawy Owner, Basata Ecolodge / Chairman, Hemaya NGO

ENCC’s AgricultureCompetitiveness Council (ACC)

Chair

Mr. Abdel Hamid Demerdash Managing Director, Magrabi, Agriculture Co.

Members


Eng. Ashraf Gazayerli General Manager, Levant, Iraq & Sudan Unilever Mashreq

Mr. Hatem El Ezzawy Operations Director, PICO

Mr. Helmy Abouleish Managing Director, Sekem Group

Mr. Hisham Mahmoud El Attal Executive President, Egyptian Traders Co. S.A.E

Mr. Hisham Mohamed Mebed Assistant to Minister of Agriculture

Ms. Manal El Samadony Senior Economist, USAID

Eng. Mohamed Aly Abd El Fadil Chairman, Venus International free zones for Grain & Ma-rine Services

Eng. Mohamed Ayman Kamal El Din Korra

Chairman & CEO at Consukorra Co.

Eng. Mohamed Tarek Z. Mo-hamed Tawfik Abdel Fatah

Managing Director, Cairo Poultry Co.

Prof. Salwa Bayomi President of Agriculture Committee at NDP, Member of Shoura Assembly, Vice-President of Agriculture Committee

Mr. Sherif EL Beltagy Chairman, BELCO, Egyptian International Co. for land Rec-lamation, Chairman, Agricultural Export Council

Mr. Abdel Hamid Demerdash Managing Director, Magrabi, Agriculture Co.

Dr. Adla Ragab Professor of Economics, FEPS, Cairo UniversityEconomic Advisor to the Minister, Ministry of Tourism, Egypt

Dr. Ahmed Tolba Assistant Professor of MarketingDepartment of ManagementSchool of Business, The American University in Cairo (AUC)

Dr. Alaa ElGindy Professor and Head of Civil Engineering Department, University of Helwan

Mr. Ali Sedky President, Touring Club of Egypt

Ms. Amal Mowafy Senior Programme Officer, ILO Sub Regional Office for North Africa

Prof. Dr. Amr Abou-El-Ezz Vice Dean for Education and Student Affairs, Faculty of Oral and Den-tal Medicine, Cairo University

Dr. Amr Ezzat Salama University Counsellor, The American University in Cairo (AUC)Former Minister of Higher Educationand Scientific Research, Ministry of Higher Education

Eng. Amr Gohar Vice Chairman, Egyptian Junior Business (EJB) AssociationPresident, Middle East Council for Small Business & Entrepreneurship (MCSBE)

Mr. Amr Sedky Chairman, Creative Group for Tourism & Hotels

Mr. Ashraf Ahmed Ibrahim President, Clever Travel

Eng. Ashraf Gazayerli General Manager, Levant, Iraq & Sudan Unilever Mashreq

Dr. Basel Hussein Roshdy General Manager & Chief Investment OfficerNile Capital Company

Ms. Dina Abdel Wahab Chairperson & Managing Director, The Egyptian Child Care Corpora-tion (EC3)

Dr. Essam Abdel-Aziz Sharaf Professor of Transportation Engineering, Faculty of Engineering-Cairo University

Mr. Galal Elzorba President, Federation of Egyptian Industry

Mr. Hatem El Ezzawy Operations Director, PICO


Prof. Heba Nassar Vice President ,Cairo University

Mr. Hisham Ezz Alarab Chairman and Managing Director, Commercial International Bank, Egypt (CIB)

Mr. Hisham Mahmoud El Attal Executive President , Egyptian Traders Co. S.A.E

Mr. Hisham Mekawy Chairman, BP

Mr. Hisham Mohamed Mebed Assistant to Minister of Agriculture

Eng. Hisham Shoukry CEO, ROOYA Group

Mr. Hisham Zaazou Senior Assistant Minister of Tourism, Ministry of Tourism

Mr. Hussein Badran Consultant of Human Resources Development & Training & Studies

Dr. Kadria Abdel Motaal, MD Vice- President, Heliopolis Academy

Mr. Kamel Magdy Saleh Partner Director, Saleh Barsoum & Abdel Aziz, Deloittee Touche Tohmatsu

Mr. Khaled Raafat Vice Chairman & Executive Director, Egyptian Company for Knitwear and Ready

Mr. Mansour Amer Chairman, HM Stone

Mr. Medhat Abouzeid Chairman, Egyptian Consulting House

ENCC’s Associate Members

Mr. Medhat Khalil Chairman & CEO, Raya Holding

Mr. Medhat Mostafa El Madany Executive Board Member, Industrial Training Council

Mr. Moataz El Alfy Chairman, Americana Group

Eng. Mohamed Aly Abd El Fadil Chairman, Venus International free zones for Grain & Marine Services

Eng. Mohamed Ayman Kamal El Din Korra

Chairman & CEO at Consukorra Co.

Eng. Mohamed El Mahdy CEO, Siemens, Egypt

Mr. Mohamed Halawa Managing Director, Best Cheese Company

Dr. Mohamed S. Abdel Wahab Assistant Professor, Faculty of Law, Cairo UniversityVice-Chairman, Chartered Institute of Arbitrators (Cairo Branch)Senior Partner, Zulficar & Partners Law Firm

Mr. Mohamed Samir Near East's General Manager, P&G

Eng. Mohamed Tarek Z. Mohamed Tawfik Abdel Fatah

Managing Director, Cairo Poultry Co.

Dr. Mohsen Elmahdy Said Advisor to the Minister for International Cooperation

Mrs. Mona Zulficar Chair Executive Committee, Shalakany Law Office

Mr. Monir Fakhri Abdel Nour Chair, Vitrac

Mr. Mounir Nakhla Managing Director, Environmental Quality International (EQI)

Dr. Mounir Soliman Neamatalla President, Environmental Quality International (EQI)

Mr. Mustafa Abdel Wadood Managing Director and Member of the Board of Directors of Area Capital

Prof. Nadia Badrawi Prof. of pediatrics, Cairo UniversityPresident of the Arab Network for Quality Assurance in Higher Edu-cationBoard Member of the International Network for Quality Assurance Agencies in Higher Education

Mr. Nassef Sawiris Chairman, Orascom Construction Industries

Mrs. Nevine Kashmiry Senior General Manager, Egyptian Gulf Bank, Head of Corporate Banking

Mr. Saeed El Alfi Chairman, Egyptian Consumer Protection Agency

Prof. Salwa Bayomi President of Agriculture Committee at NDP, Member of Shoura As-sembly, Vice-President of Agriculture Committee

Mr. Sameh Youssef Eltorgoman Chairman, Obelisk Asset Management

Mr. Sherif El Beltagy Chairman, BELCO, Egyptian International Co. for land Reclamation, Chairman, Agricultural Export Council

Mr. Sherif El Ghamrawy Owner, Basata Ecolodge / Chairman, Hemaya NGO

Dr. Sherif Waly Chairman, Pharma Mix

Prof. Tarek H. Selim, MBA, PhD Associate Professor of Economics, American University in Cairo (AUC)

Prof. Wael Kortam Professor of Marketing, Vice Dean For Postgraduate Education, Re-search and Internationalization, Faculty of Commerce, Executive Di-rector of Cairo University International Branch (CUIB), Cairo Uni-versity

Dr. Yasser El Shayeb Coordination of European Union Programs on Higher Education and Scientific Research

Mr. Yasser Zaki Hashem Managing Partner, Zaki Hashem & Partners

ENCC’s Associate Members (Cont’d)

DESIGNER Mohammad Maher Mansour

PRINTER Al Salam Press

CONTRIBUTION

EXECUTIVE DIRECTOR, ENCC Prof. Mona El Baradei

TECHNICAL ADVISORS Kevin X. Murphy, CEO, J.E. Austin Associates, Inc.

AUTHORS Executive Summary Mona El Baradei, Executive Director, ENCC

Chapter 1 Malak Reda, Senior Economist, The Egyptian Center for Economic Studies (ECES)

Chapter 2 Amina Ghanem, Deputy Minister for International Relations, Ministry of Finance

Chapter 3 Sherif Arif, Senior Environment Consultant and Former Regional Environmental Advisor at the World Bank

Chapter 4 Mohamed Salah El Sobki, Professor Electric Power Systems, Director, Energy Research Center (ERC). Faculty of Engineering, Cairo University

Alex MacGillivray, Senior Partner, AccountAbility

Chapter 5 Lobna Abdel-Latif, Head of the Economic Department, Faculty of Economics and Political Science, Cairo University

Nihal El Magharbel, Head of Economic Affairs, Decentralization Support Unit (DSU), Ministry of State for Local Development (MLD)

ENCC Proceedings ENCC Staff

ENCC STAFFHeba Zayed Deputy Executive Director - Research

Dina Kafafy Deputy Executive Director - Business Development

Dalia Abulfotuh Research Specialist

Ghada Sedky Business Association Manager

Reem Abu Zahra Research Specialist

Maged Farouk Financial Manager

Ethar Soliman Research Coordinator

Nehal Ismail Research Analyst

Fatma Abdul Wahab Secretary

EDITORNoha Abdelaziz

ACRONYMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

MINISTERIAL TESTIMONIALS

The Minister of FinanceDr. Youssef Boutros-Ghali . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

The Minister of PetroleumEng. Sameh Fahmi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

The Minister of Electricity & EnergyDr. Hassan Youne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

The Minister of State For Environmental AffairsEng. Maged George Elias . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

The Minister of InvestmentDr. Mahmoud Mohieldin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

The Minister of Housing, Utilities and Urban DevelopmentEng. Ahmed Magrabi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

The Minister of Trade and IndustryEng. Rachid M. Rachid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

The Minister of Agricultural and Land ReclamationMr. Amin Abaza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

The Minister of Water Resources and IrrigationProf. Mohamed Nasr El-Deen Allam . . . . . . . . . . . . . . . . . . . . . . . . 34

The Minister of TransportationEng. Alaa Fahmy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

PREFACE

by the Honorary Chair ofthe Egyptian National Competitiveness Council,Prof. Hossam Badrawi M.D., M.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

by the Chair of the Egyptian National Competitiveness Council, Mr. Helmy Abouleish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

CHAPTER I BENCHMARKING EGYPT’S COMPETITIVENESS- 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

. . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

. . . . . 1.2 Egypt’s Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

. . . . . 1.3 Egypt’s Performance on the 12 Pillars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

. . . . . 1.3.1 Basic Requirements Sub-Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

. . . . . 1.3.1.1 Pillar 1: Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

. . . . . 1.3.1.2 Pillar 2: Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

. . . . . 1.3.1.3 Pillar 3: Macroeconomic Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

. . . . . 1.3.1.4 Pillar 4: Health and Primary Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

TABLE F CONTENTS

. . . . . 1.3.2 Efficiency Enhancers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

. . . . . 1.3.2.1 Pillar 5: Higher Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

. . . . . 1.3.2.2 Pillar 6: Goods Market Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

. . . . . 1.3.2.3 Pillar 7: Labor Market Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

. . . . . 1.3.2.4 Pillar 8: Financial Market Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

. . . . . 1.3.2.5 Pillar 9: Technological Readiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

. . . . . 1.3.2.6 Pillar 10: Market Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

. . . . . 1.3.3 Innovation and Sophistication Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

. . . . . 1.3.3.1 Pillar 11: Business Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

. . . . . 1.3.3.2 Pillar 12: Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

. . . . . 1.4 Most problematic factors for doing business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

. . . . . 1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

CHAPTER II FISCAL POLICY LEVERS FOR COMPETITIVENESS AND INCLUSIVE GROWTH IN EGYPT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

. . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

. . . . . 2.2 Developments in the Egyptian Economy Between 2008 – 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

. . . . . 2.3 The Urgency of Implementing Competitiveness- and Growth-Enhancing Reforms . . . . . . . . . . . 75

. . . . . 2.4 Competitiveness-Enhancing Fiscal Policy: the Link Between Fiscal Policy, Competitiveness, Sustainable Growth and Poverty Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

. . . . . 2.5 Elements of a Sustainable Fiscal Policy For Competitiveness and Long-Term Inclusive Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

. . . . . 2.5.1 Macroeconomic Stability Related to Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

. . . . . 2.5.2 Manageable Deficits and Serviceable Debt Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

. . . . . 2.5.3 Improved Budget Formulation and Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

. . . . . 2.6 A Qualitative Analysis of The Impact of Egypt’s Fiscal Policy on Competitiveness and Durable Inclusive Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

. . . . . 2.7 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

CHAPTER III GREEN TRANSFORMATION:

Egypt’s New Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

. . . . . 3.1 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

. . . . . 3.2 Green Transformation: A Global Trend Important For Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

. . . . . 3.2.1 Definition of The Green Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

. . . . . 3.2.2 Importance of The Green Transformation to The Future of Egypt . . . . . . . . . . . . . . . . . . . . . . . 97

. . . . . 3.2.2.1 Economic Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

TABLE F CONTENTS

. . . . . 3.2.2.2 Environmental Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

. . . . . 3.2.2.3 Social Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

. . . . . 3.2.3 Other Countries are Moving Ahead Faster Than Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

. . . . . 3.3 Green Transformation Needs Strong Policy Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

. . . . . 3.3.1 Existing Policies in Egypt Towards the Green Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

. . . . . 3.3.2 Green Technology Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

. . . . . 3.3.3 Egypt’s Achievements Towards Green Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

. . . . . 3.4 Proposed Strategic Framework for Green Transformation in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . 108

. . . . . 3.4.1 VISION and Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

. . . . . 3.4.2 Making the Case For Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

. . . . . 3.4.3 Major Strategic Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

. . . . . 3.4.4 Roles and Responsibilities for Implementing the Green Strategy Framework . . . . . . . . . 111

. . . . . 3.4.4.1 National Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

. . . . . 3.4.4.2 Private Sector and Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

. . . . . 3.4.4.3 Education and Research Institutions, Civil Society and NGOs . . . . . . . . . . . . . . . 114

. . . . . 3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

CHAPTER IV COMPETITIVENESS OF EGYPT’S ENERGY SECTOR . . . . . . . . . . . . . . . . . . . . 117

. . . . . 4.1 Energy Competitiveness in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

. . . . . 4.1.1 The State of Energy In Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

. . . . . 4.2 Primary Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

. . . . . 4.2.1 Oil Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

. . . . . 4.2.1.1 Relative Positioning and Attractiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

. . . . . 4.2.1.2 Exploration, Development and Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

. . . . . 4.2.1.3 Attractiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

. . . . . 4.2.2 Natural Gas (Ng) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

. . . . . 4.2.2.1 Relative Positioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

. . . . . 4.2.2.2 Exploration, Development and Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

. . . . . 4.2.2.3 Attractiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

. . . . . 4.2.3 Hydro Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

. . . . . 4.2.4 Wind Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

. . . . . 4.2.4.1 Relative Positioning and Attractiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

. . . . . 4.2.4.2 Energy Generation Capacity Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

. . . . . 4.2.4.3 Current Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

. . . . . 4.2.5 Solar Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

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. . . . . 4.2.5.1 Relative Positioning And Attractiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

. . . . . 4.3 Secondary Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

. . . . . 4.3.1 Fossil Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

. . . . . 4.3.2 Natural Gas (Ng) Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

. . . . . 4.3.3 Electricity Generation From Fossil Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

. . . . . 4.3.4 Electricity Generation From Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

. . . . . 4.3.5 Electricity Generation From Solar Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

. . . . . 4.4 Transmission & Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

. . . . . 4.4.1 Fossil Fuel Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

. . . . . 4.4.1.1 Oil Fuel Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

. . . . . 4.4.1.2 Natural Gas (Ng) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

. . . . . 4.4.1.3 Regional Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

. . . . . 4.4.2 Electricity Grid And Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

. . . . . 4.4.2.1 Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

. . . . . 4.4.2.2 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

. . . . . 4.4.2.3 Regional Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

. . . . . 4.5 Egyptian Energy Policies: Impact On The Competitiveness Of The Energy Sector . . . . . . . . . . . . 136

. . . . . 4.5.1 Egypt: Doing Things Right? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

. . . . . 4.5.1.1 Fossil Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

. . . . . 4.5.1.2 Renewable Energy Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

. . . . . 4.5.1.3 The Electricity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

. . . . . 4.5.1.4 Expected Impacts Of The New Electricity Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

. . . . . 4.5.2 Egypt: Doing The Right Things? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

. . . . . 4.6 Moving Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

. . . . . 4.6.1 Motivations For Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

. . . . . 4.6.1.1 Urgency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

. . . . . 4.6.2 Towards What? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

. . . . . 4.6.3 What Needs To Be Done? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

. . . . . 4.6.3.1 Process Oriented Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

. . . . . 4.6.3.2 Specific Action Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

. . . . . 4.6.4 Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

. . . . . 4.6.4.1 The Subsidy Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

. . . . . 4.6.4.2 The Funding Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

. . . . . 4.6.4.3 The Technological Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

. . . . . 4.6.5 A National Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

TABLE F CONTENTS

. . . . . APPENDIX 4.A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

. . . . . APPENDIX 4.B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

. . . . . APPENDIX 4.C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

CHAPTER V COMPETITIVENESS OF THE CONSTRUCTION INDUSTRY:

A GREEN PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

. . . . . 5.1 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

. . . . . 5.2 Benefits of the Construction Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

. . . . . 5.3 Importance of the Construction Industry to Egypt’s Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

. . . . . 5.3.1 Impact of Construction on the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

. . . . . 5.3.1.1 Contribution to Gdp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

. . . . . 5.3.1.2 Contribution to Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

. . . . . 5.3.1.3 Contribution to Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

. . . . . 5.3.2 Contribution of The Construction Sector To External Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

. . . . . 5.3.3 The Profile of The Construction Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

. . . . . 5.3.4 The Housing Sector in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

. . . . . 5.3.5 Non-Residential Construction In Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

. . . . . 5.3.5.1 Industrial Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

. . . . . 5.3.5.2 Tourism Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

. . . . . 5.3.5.3 Agriculture Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

. . . . . 5.3.6 Infrastructure And Utility Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

. . . . . 5.4 Competitiveness Of The Construction Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

. . . . . 5.4.1 Measuring The Competitiveness Of The Construction Sector . . . . . . . . . . . . . . . . . . . . . . . . . . 171

. . . . . 5.4.2 Factors Affecting The Competitiveness Of The Construction Sector . . . . . . . . . . . . . . . . . . . 172

. . . . . 5.4.3 Strength, Weakness, Opportunities and Threats (Swot) Analysis of

The Construction Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

. . . . . 5.4.4 The Green Revolution In The Egyptian Construction Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

. . . . . 5.5 Strategic Framework For Improving Competitiveness Of The Construction Industry . . . . . . . . 178

. . . . . 5.5.1 Residential And Commercial Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

. . . . . 5.5.1.1 Implement Gradual Rent Decontrol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

. . . . . 5.5.1.2 Expand Coverage Of Long Term Mortgage Finance And Islamic Finance . . . . . 178

. . . . . 5.5.1.3 Formalize Arrangements Regarding Appropriate Access To Land . . . . . . . . . . . . . 178

. . . . . 5.5.1.4 Implement New Zoning Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

. . . . . 5.5.2 Civil Engineering And Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

TABLE F CONTENTS

. . . . . 5.5.2.1 Implement a Transparent Institutional and Legislative Framework

for Procurement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

. . . . . 5.5.2.2 Implement Public-Private Partnership (Ppp) Mechanisms . . . . . . . . . . . . . . . . . . . . . 178

. . . . . 5.5.3 Common Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

. . . . . 5.5.3.1 Prepare For A Liberalized Environment Under Gats . . . . . . . . . . . . . . . . . . . . . . . . . . 179

. . . . . 5.5.3.2 Improve Skills With A Focus on Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

. . . . . 5.5.3.3 Ease Access to Credit at Reasonable Cost with

Enforceability of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

. . . . . 5.5.3.4 Reduce Informality of Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

. . . . . 5.5.3.5 Launch Visible Green Building Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

. . . . . 5.5.3.6 Support Efforts of Egyptian Engineering Firms in

Boosting Service Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

. . . . . 5.6 Conclusion And Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

. . . . . APPENDIX 5.A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

ENCC Proceedings 2009-2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

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AC : Alternate Current AFD : Agence Francaise de Développement API : American Petroleutoem InstituteBP : British PetroleumBRE : Building Research Establishment CAPMAS : Central Agency for Public Mobilization and statisticsCBE : Central Bank of EgyptCCI : Climate Competitive IndexCDM : Clean Development Mechanism CIF : Climate Investment FundsCNG : Compressed Natural Gas COED : Cost of Environmental Degradation CPI : Corruption Perception IndexCSP : Concentrated Solar PowerDLR : German Aerospace AgencyECA : EgyptIan Competition AuthorityECGC : Export Credit Guarantee Corporation ECR : Egyptian Competitiveness ReportEDB : Export Development BankEEAA : Egyptian Environment Affairs Agency EEHC : Egyptian Electricity Holding CompanyEEI : Egyptian Education InitiativeEES : Egyptian Engineers SyndicateEETC : Egyptian Electricity Transmission CompanyEFCBC : Egyptian Federation for Construction and Building Contractors EFSA : Egyptian Financial Supervisory AuthorityEGAS : Egyptian Natural Gas Holding CompanyEGBC : Egyptian Green Building Council EGPC : Egyptian General Petroleum CorporationEHV : Extra High VoltageEIA : Energy Information AdministrationEMS : Environment Management SystemENCC : Egyptian National Competitiveness Council EOS : Executive Opinion SurveyEPA : Environment Protection Agency EPI : Environment Performance Index ETTC : Egyptian Electricity Transmission Company EU-MENA : European Union- Middle East and North AfricaFAO : Food and Agriculture Organization of the United NationsFDI : Foreign Direct Investment FIDIC : Fédération Internationale des Ingénieurs CivilsFY : Fiscal YearG-20 : Group of TwentyG-7 : Group of Seven GAFI : General Authority for Free Zones and Investment GANOPE : Ganoub El-Wadi Petroleum Holding CompanyGATS : General Agreement on Trade in ServicesGCI : Global Competitiveness IndexGCR : Global Competitiveness ReportGCR : Greater Cairo Region GDP : Gross Domestic ProductGEF : Global Environment FacilityGHG : Greenhouse Gas GNP : Gross National ProductGPRS : Green Pyramid Rating System GT : Green Transformation A

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GW : Giga WattGWh : Giga Watt hourHFO : Heavy Fuel OilHTF : Heat Transfer FluidHV : High VoltageHVDC : High Voltage Direct Current ICT : Information and Communication TechnologyIDA : Industrial Development Authority ILO : International Labor Organization IMC : Industrial Modernization Centre IMF : International Monetary Fund JDI : Japan Development InstituteLEED : Leadership in Energy and Environment Design LFO : Light Fuel EnergyLNG : Liquefied Natural GasLULUCF : Land Use, Land Use Change and ForestryMAC : Marginal Abatement Costs MDGs : Millennium Development Goals MIDOR : Middle East Oil RefineryMMSCM/D : Million Metric Standard Cubic Meter Per Day MOED : Ministry Of Economic DevelopmentMOF : Ministry Of Finance MOP : Ministry Of PetroleumMT : Mega-Tons NCUPD : National Council for Urban Planning and DevelopmentNG : Natural GasNHP : National Housing ProgramNPL : Non-Performing LoansNREA : New and Renewable Energy Authority O&M : Operations and MaintenanceOECD : Organization of Economic Cooperation and Development OHC : Orascom Housing Committees OME : Observatoire Mediterranean de l’EnergiePPA : Power Purchase AgreementPPP : Public- Private Partnership PSA : Production- sharing AgreementPV : Photovoltaic R&D : Research and DevlopmentRCA : Revealed Competitiveness AnalysisRE : Renewable EnergyRES : Renewable Energy Source SMEs : Small and Medium Enterprises SWEG : El Sewedy for Wind Energy GenerationSWOT : Strength, Weakness, Opportunities and Threats TDA : Tourism Development Authority TFP : Total Factor Productivity TOE : Ton of Oil Equivalent TREC : Trans-Mediterranean Renewable Energy CooperationTVET : Technical and Vocational Education and TrainingTWh : Tera Wat hourVAT : Value Added Tax WDI : World Development IndicatorsWEF : World Economic ForumWEO : World Economic Outlook WTE : Waste-to-Energy

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DR. YOUSSEF BOUTROS-GHALIMinister of Finance

For the seventh year, Egypt’s National Competitiveness Council continues to analyze a broad spectrum of important issues in the Egyptian competitiveness environment, pro-viding through its annual conference a platform for their discussion with policymak-ers, businesses and other stakeholders. The essays have provided useful insight into the challenges and opportunities that impact Egypt’s competitiveness performance, and have made significant efforts to change the face of the economy.

The theme this year——green transformation——is a global high profile issue, which once more underlines the importance of the Egyptian Competitiveness Report in bringing forward priority issues that impinge on businesses and the economy in general. The report makes clear that green transformation influences competitiveness in two ways: it addresses the sustainable empowerment of human resources in a way that durably increases their productiv-ity and raises their income potential.

The Egyptian Competitiveness Report 2010 is being published at an important juncture when the economy is recovering from the global downturn. Against this background, it becomes urgent for Egypt to deepen reforms and introduce innovative changes in order to improve its competitiveness while continuing to deal with the fallout from the global meltdown.

While the scale of reforms is challenging, but the scope for change is significant and the op-portunities are abundant.

Youssef Boutros-GhaliMinister of Finance

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MINISTERIAL TESTIMONIALSENG. SAMEH FAHMIMinister of Petroleum

Since the beginning of the 21st century, Egyptian Petroleum Industry has been wit-nessing remarkable developments indicating the success of our first integrated Year 2000 strategy. A total of 173 oil agreements with major oil companies have been final-ized resulting in 466 oil and gas discoveries boosting national reserves to 18.3 billion

barrels of oil equivalent (BOE). Total daily crude oil production, condensates and natural gas reached 1.9 million BOE. The Ministry also intensified exploration projects in Upper

Egypt resulting in new oil discoveries.

In addition, the Sector has implemented mega LNG export projects along with the Arab Gas Pipeline project to export Egyptian natural gas. Egypt managed to accomplish the first phase of the National Plan for Petrochemicals exporting various petrochemical products. As a result, oil revenues were maximized and oil trade balance surplus was achieved .

Foreign investments increased reaching $35 billion, and gas prices in agreements have been modified saving around USD 30 billion till end of 2009/2010. The sector manufactured pumps and 10 onshore and offshore rigs in cooperation with Japan and China. It also established the first factory producing pipes and drilling caissons and reached an agreement with Chinese inves-tors to erect the largest refinery in Egyptian history. Furthermore, natural gas pipelines were extended to different areas all over the country especially Upper Egypt to provide the neces-sary energy for development.

New companies working in different petroleum-related activities were established such as “Tharwa Petroleum Company” specialized in oil exploration and production; Egyptian oil com-panies now compete with multinationals to implement giant projects throughout the Arab world and Venezuela.

Egypt is internationally cited as one of the most attractive regions for investment in explora-tion activities having so much potential in different domains such as refining, petrochemicals and mineral resources industries. Overall, the Petroleum Sector is developing plans to utilize current and future resources.

Sameh FahmiMinister of Petroleum

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The Egyptian electricity sector has succeeded in participating in infrastructure support and access to more than 99% of the population of Egypt.

The electricity and energy sector developed an integrated strategy until 2027, in-cluding the additional generated capacity of 58 thousands megawatts diversified be-tween steam, combined, nuclear, wind, solar thermal and photovoltaic technologies, with their requisite transformer stations, transmission and distribution networks on the various voltages.

And to support the efforts to transform into the green and sustainable energy, the electricity sector developed its strategy to increase renewable energies contribution in the generated electricity to 20% by 2020, and involving the private sector by not less than 60%.The experi-enced foreign investors have been invited to Build Own Operate (BOO) wind power plant.

The first solar thermal power plant of 140 megawatts is currently under implementation.

Egypt is also participating in supporting the international initiatives concerning how to make use of the solar energy including the Mediterranean solar plan and the Desertec initiative, and proposed several projects in the framework of the Mediterranean solar plan.

With the cooperation of German and Danish Governments and the European Union and with participation of (10) Arab countries including Egypt, a Regional Center in the fields of renew-able energy and energy efficiency has been constructed. The electricity sector is committed to the importance of energy conservation and started its program by activating the high efficiency lighting either at residential or at streets.

In October 2007, President Mubarak has launched a decision that executive steps should be taken for establishing several nuclear power plants for generating electricity in order to di-versify energy supply resources. The Nuclear and Radioactive Egyptian Act was issued, and according to this act, an independent Authority of Nuclear Regulatory will be established and also contracting with the project consultant.

The Ministry of Electricity and Energy, gives an importance for the local manufacture of electri-cal components in accordance with international standards.

In the framework of training, the electricity sector has a huge potential of advanced training capabilities including about 20 training and research centers in all fields which offers its experi-ences to the Arab and African countries.

Hassan Younes Minister of Electricity & Energy

DR. HASSAN YOUNESMinister of Electricity & Energy

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ENG. MAGED GEORGE ELIASMinister of State for Environmental Affairs

Egypt responsible competitiveness depends on the sustainable use of the available natural resources for the current and future generations. The country had achieved drastic progress through the past 20 years to build its national capacity to deal with

the complicated nature of the environmental issues. Being in a dynamic world, new emerging issues arise that require improved capacities to tackle those issues in an inno-

vative manner. Investing in human resources is a strong tool towards achieving economic growth. Nevertheless, every citizen still got the right to enjoy a clean environment.

Through collaborated efforts with different national institutions, Egypt was able to develop a set of national indicators to trigger the State of Environment in different sectors including air, water, marine environment, transport, energy, solid waste, and biodiversity. Those indicators are in line with indicators of MDG 7 for “Environmental sustainability” and depicted from UNEP’s methodology for developing indicators world wide. Now, Egypt is able to issue yearly its State of Environment report that is an effective tool to measure Egypt competitiveness among other countries.

The Road is still ahead of us, there is a need to shift into “Green transformation” which is simply a process for enhancement and improvement of mainstreaming environmental dimensions na-tionwide. This is applicable to individual, organizations, product and services provided in a way of shifting systems that turn threats into opportunities. The energy sector provides a potential vast opportunity for green transformation. Two years ago, green buildings concepts and techniques had been initiated in Egypt. It can provide a model that interlinks with other sectors such as energy, water, waste, transport, industry as well as providing opportunities for green jobs.

The report this year lays the foundation of the Green competitiveness strategy in Egypt with the aim to focus on large, medium, small scale green investment that provides services to the poor to enhance their quality of life. This strategy will only be applicable through multi stakeholder dialogue that ensures the country’s ownership to green transformation concepts, process and modes of operations.

To that end, “Green transformation” will focus on engaging Egyptian business community at the macro level and providing more sustainable green job opportunities especially for the youth at the micro level.

Maged George EliasMinister of State for Environmental Affairs

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DR. MAHMOUD MOHIELDINMinister of Investment

In today’s economic hardships, the Egyptian economy has held its ground firmly to-wards its Road To Recovery. Despite a slowdown in its real GDP growth to 4.7% in FY2008/09, Egypt has been doing well during FY 2009/10 and has been one of the fast-est growing economies among other emerging markets, thanks to its sound domestic macroeconomic indicators that served to keep the Egyptian economy afloat during the global financial crisis.

Globally, in this year’s World Economic Forum’s Global Competitiveness Index, Egypt ranked 70 out of 134 countries, up 11 places from last year. Also, in the IFC-World Bank’s “Do-ing Business Report”, Egypt has been amongst the Top 10 Reformers during four out of the last five years.

Over the past six years, Egypt has exerted extensive efforts to implement a vigorous, nation-wide economic reform program which covered a full spectrum of regulatory, institutional, finan-cial and business reform measures. The outcomes have been very assuring, and, as a result, our country has reached deeper and more advanced reforms in order to address ‘Quality Control’. We are looking forward to attain quality in investments, quality in labour, quality in education, and quality in social and healthcare services. We also aim to develop our infrastructure to cater for our citizens and to accommodate targeted investments.

With these objectives in mind, several schemes and modalities to consolidate and complement our reform efforts have been identified. We have already started to put such schemes in place to fulfill the objectives and aspirations of our citizens further. Accordingly, greater support will be given to SME’s; providing them with better access to finance, streamline their business pro-cesses, and reduce their transaction costs. We will expand the coverage of investment zones, and will implement public-private partnerships to induce the establishment of more projects, especially in infrastructure, transportation, clean energy, and logistics. We also aim to proceed with the streamlining of licensing procedures, and market exit policies.

It is worth noting in this regard, that this year a number of sovereign rating agencies maintained a stable outlook on Egypt. Among such agencies was Standard & Poor’s, who reflected the belief that “the Egyptian government will meet the challenge of weakened external demand without veering from its commitment to economic reform”. They also expected economic growth to rise steadily in Egypt from almost 5% in FY2009/10, to exceed 6% over the next two years.”

Mahmoud MohieldinMinister of Investment

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ENG. AHMED MAGRABI Minister of Housing, Utilities and Urban Development

It gives me pleasure to see that this year’s issue of the Egyptian Competitiveness Report addresses green construction as one of its main competitiveness focus areas. As emphasis on the problem of global warming and the importance of conserving

depleteable resources is gaining momentum in both developed and developed and developing countries, continuous public awareness needs to be created by all parties

to highlight all the urgency as well as the challenges of applying environmentally-friendly activities in all sectors, including construction.

This created awareness will ensure that emphasis be put on sustainable economic growth and development in every step of Egypt’s short-, medium- and long-term economic growth and de-velopment strategy, not just from the side of the government but from all stakeholders.

As indicated in the chapter on green construction, Egypt’s construction sector is a complex sec-tor with many relationships among various players and where the private sector already plays a large role in housing and private investment, and is expected to start playing an important role in infrastructure projects. Hence, the importance and appropriate timing of including the issue of green construction to guide not only private investments but also major infrastructure projects that are still in the public domain.

The area of green construction, as a technical area, is one of the main R&D areas of the Hous-ing Research Centre, the main research arm of the Ministry of Housing, Utilities and Urban Development. As a result of the Centre’s continued efforts in this direction in the past few years, I expect that in the near future, many building codes will be modified to include environ-mentally- conscious standards and specifications that will be gradually enforced in all housing and construction projects.

I look forward to the Egyptian Competitiveness Council’s continued role in this area and in its valuable contribution to all aspects of Egypt’s economic competitiveness in general.

Ahmed MagrabiMinister of Housing, Utilities and Urban Development

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ENG. RACHID M. RACHIDMinister of Trade and Industry

If economic competitiveness could be measured, even in part, by the resilience of an economy, there is little doubt that Egypt would score highly in that regard. As chal-lenging as the 2009 calendar year was for businesses and governments globally, Egypt maintained a solid Gross Domestic Product (GDP) growth rate that returned to an accelerated pace by year’s end while still moving up in the World Economic Forum’s Global Competitiveness Index. This was no small feat, as a variety of measures were implemented to ensure a growth trajectory both at the industrial manufacturing level and at the export level. Perhaps more importantly, businesses responded positively, even-tually expanding manufacturing in certain sub-sectors and experiencing growth in a number of key export sectors.

In business, the ability of a firm to adjust and successfully adapt—quickly—to shifting market conditions in an adverse economic climate is a measure of one dimension of ‘competitive-ness’; national economies are not much different. This year’s Egyptian Competitiveness Report (ECR), the seventh in the series, clearly demonstrates in facts and figures the resilience of Egypt’s economy during 2009, as well as actionable recommendations on how to continue eco-nomic growth in a sustainable manner.

Also, in this volume the Egyptian National Competitiveness Council (ENCC) has taken its previous work on environmental issues a step further, with a focus on subjects such as climate change and its role with regard to trade and industrial competitiveness. Given the Govern-ment’s planned reduction in energy subsidies and parallel advocacy of renewable energy and industrial energy efficiency as twin pillars of a more competitive industrial base, the seventh ECR is, as always, quite policy-relevant. Finally, the choice of energy and construction as two important sectors for the economy is certainly on the mark: together they capture well over 30% of industrial investment and reflect around 20% of the GDP, making a better understanding of these sectors crucial to Egypt’s economic development.

The continued push for a more competitive Egyptian economy will always depend on more competitive businesses in Egypt. That will always start with better information and more in-sightful analyses. Once again, the ENCC has produced an authoritative source on Egypt’s eco-nomic performance that both the public and private sectors must take stock of.

Rachid M. RachidMinister of Trade and Industry

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MR. AMIN ABAZA Minister of Agricultural and Land Reclamation

Agriculture has been an important part of Egypt’s culture and identity as well as an economic backbone. Assets like fertile soil and Nile water offer a unique comparative advantage and an important source of livelihood for ruler population

Despite its sizable contribution to GDP, employment and food security, the agriculture sector is facing threats notably a sharp fall in its share of investment. Moreover, the increas-

ing demand on scare resources must be countered by increasing productivity and efficiency from within the sector.

The increased agriculture competitiveness should include the creation of a stable macroeco-nomic environment, efficient legislation and institutions and regulations that achieve optimal resource allocation. Therefore, the adoption of a “Sector Transformation Strategy” by the gov-ernment represents a major step towards rebuilding sector competitiveness.

The strategy seeks to build on the existing strengths such as export potential, production growth and the availability of high quality natural resource inputs. The strategy focuses on promoting agro-industry and the intersection of the agricultural and industrial sectors to fos-ter growth. The second focus of the strategy is resource optimization which is vital for both sector’s productivity and sustainability. Better resource management can be a way to tap into higher value added markets of organic agriculture and reduce greenhouse emissions.

The twin crises of global food security and climate change brought about opportunities for the Egyptian agricultural sector revealing its economic potential. Over the next 10 years, 1,740,000 new jobs will be created in the agriculture and agro-industry sectors, a trade balance surplus of LE 26.2 billion will replace the current LE 8.6 billion deficit, and annual agriculture GDP growth will double to 5.25 % from the historical average of 2.16 %.

The report is a step forward towards realizing the aforementioned gains by fostering stake-holder dialog and disseminating information to raise the sector’s competitiveness.

Amin Abaza Minister of Agriculture and Land Reclamation

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PROF. MOHAMED NASR EL-DEEN ALLAMMinister of Water Resources and Irrigation

Egypt chiefly depends on the River Nile water. Other resources like groundwater and occasional seasonal rain account for less than 2% of its water budget. According to the agreement with Sudan in 1959 Egypt’s share of the Nile water is 55.5 billion m3 per year. As the population has grown from 25 million in 1959 to 80 million in 2009, the available amount of water per capita has decreased to a critical point. Faced with a steady growth of the population, Egypt now stands at the verge of a period of water scarcity. The challenge of providing sufficient water to the population, agriculture and industries is huge. As the opportunity to increase the available water resources is strictly limited, Egypt has to find ways and means to make more efficient use of the present resources, maximizing the benefits and reducing the losses.

The Ministry of Water Resources and Irrigation is therefore implementing a new strategy and a national plan for water resources that includes actions and requirements to ensure Egypt’s water security until the year 2017.

The strategy aims at rationalization of the use of all water resources by a number of measures, aiming at reducing excessive and unnecessary use of water through improving the efficiency of irrigation water distribution in the Valley and Delta; reducing the planting of crops that con-sume large quantities of water such as rice, banana, and sugarcane; preventing water resources violations, particularly pollution; enforcing the use of efficient irrigation methods and preventing unauthorized groundwater abstraction in addition to updating the legislation to support the new water resources strategy.

Mohamed Nasr El-Deen AllamMinister of Water Resources and Irrigation

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ENG. ALAA FAHMY Minister of Transportation

I would like to commend the council’s endeavors to promote the concept of competi-tiveness the government is keen on consolidating. Due to the importance of transpor-tation as an infrastructural pillar for development, the Ministry is embracing a long-

term vision for reform facing challenges and shortcomings experienced previously and addressing vulnerabilities. Transparency, tenacity and perseverance are three pillars

dominating our efforts to achieve our long-term vision.

We can walk a fine line to accommodate economic growth, public service and social develop-ment as well as laying the foundations for competitive market. We are also worried about the potential detrimental ramifications on an environment pleading for attention and protection.

We are implementing the national strategy targeting all the sectors affiliated to the Ministry of Transport such as maritime, roads and bridges, and inland waterways. We deemed it necessary to harness the relevant transport legislations to match international standards. Measures are being taken to establish the relevant legislative platform and develop comprehensive regulatory bodies to separate planning, regulation, ownership and operation.

The maritime sector stands as a testament in embracing reform and enhancing competitiveness witnessing paced reform through implementing Build, Operate and Transfer (B.O.T) projects.

Meanwhile, a comprehensive national transport plan targeting the year 2027 is underway. Road corridors and ring roads are two components in relieving congestions and addressing develop-ment requirements nationwide.

The railway system is witnessing some drastic changes to rejuvenate an ailing, yet a crucial sector which has all the necessary ingredients to support Egypt’s growth ambitions. Inland waterways also receive due attention, as river terminal development and fleet expiation are underway.

To conclude, the transport sector is currently “on the move” propelled by flexible investment rules and legislations. I believe the sector has the potential to provide Egyptian industries with integrated transportation service.

Alaa Fahmy Minister of Transportation

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PREFACE BY Honorary Chair ofthe Egyptian National Competitiveness Council

Prof. Hossam Badrawi M.D., M.P.

The sixth Egyptian Competitiveness Report (ECR) 2009 witnessed a stunning success. The report recommendations relating to the proper handling of the global financial crisis, cli-mate change and bringing about sustained and balanced economic growth have stirred a wide-spread social dialogue on the directions the state should be taking for reform.

The commission of the Egyptian National Competitiveness Council (ENCC) to develop Egypt’s competitiveness strategy (ECS) for the upcoming two decades by the Egyptian government is an evidence of the trust granted to civil society in supporting governments on the one hand and the competence of ENCC and its high quality output on the other.

I am certain that all future visions for Egypt are interlinked, interdependent and mutually-re-inforcing. We have to adopt a comprehensive and all-inclusive reform plans when looking at Egypt’s future. We believe that developing the human resources is the basis for an overall reform process. We also believe that enhancing the competitive ability of the society depends primarily on individuals’ and corporate capabilities that could be maximized through collaborative institu-tional work and the participation of active citizenry.

The state’s primary role should be building capabilities and providing opportunities to citizens and corporate through a clear strategy seen and known to all.

We consider Egypt’s eleven positions improvement in ranking of the Global Competitiveness Index (GCI) in the year 2010, 70th out of 133th, is still unsatisfactory and does not live up to our hopes and aspirations. It does not conform to our vision either. We have to have a minimal acceptable competitiveness status, but create no ceiling for our ambitions. This is exactly what we are trying to achieve through the national competitiveness strategy to be presented to the government by the end of this year.

Hossam Badrawi Honorary Chair of the Egyptian National Competitiveness Council

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PREFACE BY Chair of the Egyptian National Competitiveness Council

Helmy Abouleish

The world today is entering into the age of Green Transformation. This means a path-way towards a more resource-efficient economy, based on cleaner technologies and less dependent on non-renewable energy sources. This paradigm shift is driven mainly by dwindling supplies and rapidly growing demand of strategic resources and fossil

fuels resulting from industrial growth in developing countries like China and India. At the same time renewable energy sources are becoming more competitive every day with technological improvements and growing market scale. Another main driver is the

global concern about accelerating climate change.

In December 2009, 149 countries signed an accord in Copenhagen, Denmark declaring that ‘climate change is one of the greatest challenges of our time’ and pledging to enhance ‘long-term cooperative action to combat climate change.’ Business as usual is NOT an option anymore and we have to implement fundamental change in order to allow future generations and our country to thrive and develop. Decisions taken today will decide about success or failure in the future. Success, in terms of long-term prosperity and development, will depend on our ability to transform challenges into opportunities and on whether we can imagine how the world will change in the upcoming decades - and react today.

Incorporating the principles of sustainability and responsible competitiveness into Egypt’s devel-opment pathway has been a priority highlighted in the 5th, 6th and now again in the 7th Egyptian Competitiveness Report. The list of reasons is long. A green transformation of the economy enables us to generate jobs and to diversify the GDP, to save fuel and reduce costs, and to gain access to international financial support. Furthermore, the environment and the health of the Egyptian people would benefit. In line with international consensus, this theme will be recurring in this report and the work of the council in general.

Last year the Egyptian National Competitiveness Council (ENCC) promoted successfully a National Sustainable Development Strategy. Today, the ENCC is developing a comprehensive strategy for Egyptian competitiveness, where Green Transformation will feature prominently in each aspect of the nation’s future action plans for growth and development. As illustrated in this report, meeting international best practices and standards, more efficient use of natural resources, and industry innovation are now the key to Egypt’s competitiveness.

Helmy AbouleishChair of the Egyptian National Competitiveness Council

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EXECUTIVE SUMMARY

The 7th annual Egyptian Competitiveness Report (ECR) 2010 benchmarks Egypt’s competitiveness; provides an

update on the economy; introduces the topic of Green Transformation; and analyzes the energy and construction

industries. As with previous reports, the first chapter of the ECR ana-lyzes Egypt’s ranking on the Global Competitiveness Index (GCI). The

second chapter presents an update on the real economy with an in-depth analysis of macroeconomic policy. The third chapter introduces the Green Trans-

formation as the special thematic focus of ECR 2010. Chapters four and five focus on the competitiveness of the energy industry and the construction industry respectively while also analyzing their impact on the transition to the Green Economy. The authors of these chapters have assembled an impressive array of data, and readers will have in this report a comprehensive treatment of the issues and industries presented along with insights and analysis that provide strategies and specific recommendations.

The ENCC has consistently focused attention on the importance of competi-tiveness as the driver of sustainable economic growth and poverty reduction. Competitiveness involves the ability to improve productivity so that standards of living improve and benefits are passed through to all citizens. Competitiveness focuses on both the macroeco-nomic and the microeconomic factors driving sustainably high long-term growth and improved productivity. The ENCC believes that Egypt’s competitiveness requires a vision, a strategy and close and collaborative action by leaders in the public sector, private sector, academia, civil society and media. Many leaders have come together in recent years to improve the competi-tiveness of their respective industries or to address competitiveness priorities such as human resource development. These efforts and their results to date have been summarized at the end of this report.

In the 4th annual ECR, the ENCC focused on regulatory reform and helped lead to the establishment of ERRADA, the Egyptian Regulatory Reform and Develop-ment Activity. ERRADA has begun the process of regulatory rationalization and simplifica-tion. It has enlisted the support of Egypt’s civil service. It has also pioneered the system of dialogue and comment among public and private sector entities. Its objective is to build an ef-ficient Egyptian regulatory management system of public-private institutions based on openness and fairness and with the ultimate goal of promoting a competitive economy.

Two years ago, in its 5th annual ECR, the ENCC presented the issue of climate change, described its potential consequences for Egypt and noted the urgency of curbing its adverse effects. This has led to increased awareness and greater support for environmental contingency planning.

In 2009, the 6th annual ECR introduced the concept of Responsible Competitive-ness, an approach that produces long-term economic gains without compromising social and environmental goals with the objective of achieving sustainable development. Social responsibil-ity also gives companies a competitive edge in attracting talent and winning consumer loyalty in the marketplace.

This year, the 7th annual ECR introduces “Green Transformation” and the tran-sition to the Green Economy. The Green Transformation can be defined as the transition to sustainable economic development that is energy efficient, low-carbon emitting, environmen-tally responsible and that creates a healthy, safe and pleasant environment for people. Green Transformation does not refer to one narrow band of activity such as expanding agricultural land in Egypt or reducing pollution. Rather, it refers to transforming the entire economy of Egypt into a green economy, a concept that has been increasingly gaining ground worldwide. It involves strategies, investments and policies that achieve high economic growth, that do so

Mona El Baradei

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EXECUTIVE SUMMARY

sustainably and that do so while improving the environment and the quality of life for people. The following is an overview of each of the chapters in the 7th annual ECR.

Chapter 1: Benchmarking Egypt’s Competitiveness - 2010

Egypt’s rank on the Global Competitiveness Index (GCI) improved significantly from 81st place in 2009 to 70th place in 2010. Egypt’s financial sector, bolstered by improved supervision, remained healthy while the financial sectors in many other countries suffered reverses related to the global financial crisis. The new Egyptian Financial Supervisory Authority (EFSA) managed to push for financial regulatory reform that created confidence in the financial sector despite the global financial crisis. Fiscal and monetary authorities responded quickly and effectively to limit the downturn. Egypt also improved in its rankings related to infrastructure, higher education, training, business sophistication and technological readiness.

However, Egypt’s overall improvement in competitiveness rankings was in large part based on the deteriorating conditions in other countries. The composite com-petitiveness raw score for Egypt, on which the GCI is based, remained static with advances in some areas and reversals in others. Egypt has been suffering from severely uneven performance on the twelve pillars that make up the GCI. Scores were significantly low in areas related to human development, labor markets and macroeconomic stability. Government bureaucracy re-mains an impediment. In labor market efficiency, Egypt ranks 126th out of 133 countries. While educational access has improved, the quality of Egypt’s educational institutions ranks only 123rd

out of 133 countries.

The chapter provides evidence and support for greater investment in human re-sources, labor market reforms, macroeconomic discipline and improvements in the business environment. Attention to these areas would do much to lift Egypt’s overall competitiveness; otherwise, real development will not materialize. The chapter also benchmarks Egypt’s performance relative to similar emerging middle income economies such as Turkey, In-dia, Brazil, South Africa and Indonesia.

Chapter 2: Fiscal Policy Levers for Competitiveness and Inclusive Growth in Egypt

This chapter presents an overview of the main changes in the real economy and an analysis of fiscal policy and how it can be used to promote both competitiveness and inclu-sive growth. Inclusive growth is economic growth that has an important positive impact on poverty reduction.

The chapter notes that the fiscal, monetary and other measures taken by the Government of Egypt to address the global financial crisis were generally effec-tive. Pre-existing reforms in the Egyptian financial sector, including the strengthening of the macro-policy environment, improvement of the investment climate and wide-ranging structural reforms provided the government with fiscal space for a flexible policy response during the crisis. Economic stimulus cushioned the impact of the downturn while monetary policy helped ensure that credit continued to flow. Reduction of foreign debt in previous years also reduced Egypt’s vulnerability.

However, the crisis has strongly highlighted the vulnerabilities in Egypt’s mac-roeconomy that need to be addressed such as high inflation, high unemployment rates, weak shared growth, persistent poverty, high budget deficits and a high level of overall public debt even if less of this debt is now held in foreign hands. Unsustainably high deficits and debt would make responses to subsequent economic crises more difficult.

If these weaknesses are not addressed, Egypt’s ability to fully recover from the crisis may be jeopardized, leaving Egypt to struggle with deteriorating levels of growth and poverty. Accordingly, a sustainable fiscal policy would focus on achieving stable inflation rates, managing deficits and reducing debt levels as well as adopting a disciplined approach to budget formation.

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EXECUTIVE SUMMARY

Furthermore, the quality of fiscal spending still needs to be addressed. The chap-ter points out that too much of the government budget is used for operational salaries and subsidies and not enough is used for investment in human resources and infrastructure that can improve Egypt’s long-term competitiveness and lower poverty. Many of these subsidies are not actually well targeted towards the poor. The chapter proposes a macroeconomic policy that refocuses on achieving both sustainable and inclusive growth. For example, investing in the health and education of human resources boosts productivity while promoting equitable growth. Lowering the barriers to formal economic activity will create a level playing field. A sound fiscal policy will ease inflation, which takes a higher toll on the poor.

Chapter 3: Green Transformation: Egypt’s New Perspective

The chapter defines the Green Transformation and identifies its many economic, social and environmental benefits for Egypt. The chapter defines the Green Trans-formation as the transition to a low-carbon economy characterized by renewable energy and sustainable environmental practices that put Egyptian industries at the forefront of new growth industries. The Green Transformation will improve Egypt’s long-term renewable energy pros-pects, provide “early mover” advantages in global growth industries, create new jobs and pro-mote a healthier and more pleasant living environment for Egyptians. It will strengthen Egypt’s long-term national security by providing it with secure and abundant sources of renewable en-ergy. It will reduce future price shocks to Egypt’s businesses and consumers from energy price fluctuations. The transformation to a green economy will contribute to the sustainability and competitiveness of agriculture, manufacturing, construction, tourism and Egypt’s other indus-tries. It will attract investment in Egypt in areas related to tomorrow’s new growth-promoting industries such as renewable energy, energy-saving construction materials and environmental controls. The Green Transformation will improve the health and well being of people by creat-ing a cleaner environment and healthier lifestyle.

The Green Transformation can bring new jobs to Egypt. The Green Economy is also a potential source of new employment opportunities. The appropriate policy focus can help attract major new investments in growth-promoting industries related to the green transfor-mation, but only if Egypt’s government and business leaders take quick and visionary action to position Egypt in the forefront of these new industries. China, India, the EU and the USA have already targeted these new growth-promoting industries in their economic strategies.

The Green Economy is the solution to many current problems that threaten Egyptians’ livelihoods. The depletion of non-renewable energy resources, the shortage of water and the adverse impacts of the greenhouse effect (GHE) remain real threats to Egypt as described in earlier ECR reports. Many of these problems can be mitigated and addressed by some of the actions presented in this report.

The Green Transformation is multi-disciplinary, going beyond the scope of any single industry or area of research. It recognizes the need to take into account the interests of future generations. It also incorporates the environment into economic policy at both macro and mi-cro levels. The transformation to a Green Economy will only be possible if each sector of society plays its role. It involves choices of business leaders and the curriculum of schools.

Egypt is not yet catching the wave of this new global trend. The chapter also shows how other countries, such as Japan, Germany, the USA as well as emerging economies such as Brazil, India, China and Mexico, are moving ahead of Egypt to position themselves. Egypt is well placed to make a transition because of its location and natural advantages. Immediate action is required if Egypt is to be one of the countries in the vanguard of these important technological transitions.

The chapter proposes a strategic framework for action to move to a green econ-omy building on Egypt’s considerable strengths. The chapter provides concrete rec-ommendations and then presents the roles of government, private sector, civil society and education and research institutions in implementing them. Current subsidies for water and for

42

EXECUTIVE SUMMARY

non-renewable energy work against careful stewardship of these resources. However, Egypt has also taken important steps towards pioneering the exploitation of renewable energy such as wind power and solar power. Some 20% of electricity production is scheduled to come from renewable resources by 2020. Egypt has also begun to work on a green information and com-munication technology (ICT) strategy. Egypt also has successful examples of sustainable agricul-tural practices. Egypt has introduced natural gas to 99 percent of power plants and managed to become one of the relatively low emitters of GHGs. But many more steps will be needed to make the transition and the chapter presents specific recommendations for doing so.

Chapter 4: Competitiveness of Egypt’s Energy Sector

The chapter provides a comprehensive map of Egypt’s energy industry. It seg-ments the energy industry into electricity and fuel subcomponents and analyzes the competi-tiveness of the energy industry from exploration, development, secondary energy transmission and distribution to the final consumer.

The chapter highlights the threat of over-reliance on nonrenewable sources of energy. Egypt has a well developed oil and natural gas industry, but Egypt is no longer self-sufficient in oil and is rapidly drawing down its natural gas reserves. Demand is outstripping the supply of nationally generated energy resources. Egypt relies primarily on non-renewable sources for energy generation. About 96 percent of generated energy comes from fossil fuels, while only 4 percent comes from renewable sources such as hydro and wind energy.

The Government of Egypt is already taking important steps to develop renewable sources of electricity. The electricity energy market in Egypt will become more competitive with the issuance and implementation of the Unified Electricity Law. This chapter examines the impact of state policies on the competitiveness of the energy sector, concluding that Egypt is on the right track having clear plans and mechanisms to further improve the competitive allocation of resources and expand its energy sources. Involvement of the private sector in oil refining and gas processing will increase the competitiveness of that link in the energy supply chain.

This chapter argues that more can be done to jump start Egypt’s renewable energy resources. Subsidies currently discourage efficient use of non-renewable energy and work against investment in renewable energy. Yet Egypt has abundant potential sources of re-newable energy, especially from solar and wind power. Egypt is one of the most attractive sites worldwide for investment in both wind energy and solar energy. There may be opportunities for Egypt to benefit from international subsidies related to alternative energy given that these forms of energy can be produced more efficiently in Egypt than in the northern climates where they are currently being produced. Agreements between Egyptian firms and pioneering solar and wind energy firms could lead to early “roll-out” of these technologies in Egypt where there are natural competitive advantages. Longer term, large scale solar energy production could be sold into an electricity grid connecting Egypt to Europe, contributing to Egypt’s Green Trans-formation.

Chapter 5: Competitiveness of the Construction Industry: A Green Perspec-tive

Egypt’s construction industry is important to the economy, contributing be-tween 4-6% of GDP and 7-8% of total employment. The industry provides many jobs for both skilled and unskilled Egyptians. In recent years, the industry has been an important engine of growth. The construction sector provides Egypt with necessary infrastructure such as transportation, energy, water and sanitation systems. It also provides residential, commercial and industrial buildings. The construction industry has an enormous impact on how people live. It also influences Egypt’s energy consumption through the design of buildings, the choice of construction techniques and the use of construction materials.

The Egyptian construction sector is relatively competitive. The chapter uses Re-

43

EXECUTIVE SUMMARY

vealed Competitiveness Analysis (RCA) to show that the construction sector is competitive as a modest net exporter of engineering-related services. It is also a net exporter of construction materials. With the trend towards liberalization, the Egyptian construction sector will face the challenge of stiff international competition under the General Agreement on Trade in Services (GATS). However, there are potential opportunities that Egyptian firms could seize to expand their operations in regional markets.

A SWOT Analysis reveals both strengths and weaknesses in the construction in-dustry. The chapter analyzes the strengths, weaknesses, opportunities and threats (SWOT Analysis) and finds that Egypt has a strong human resource base that is also in demand region-ally. Furthermore, the size of the Egyptian market and the government commitment to funding both infrastructure and housing bode well for the industry. On the other hand, the industry has difficulties in access to land and finance, high cost of finance for those with access, the informal and non-registered nature of firms in the industry, complicated regulations and time-consuming permit processes.

The chapter provides recommendations for improving the competitiveness of the construction industry and for promoting “green construction” that will im-prove long-term energy efficiency. The housing industry could be improved by modern-izing the antiquated rent control policies. Long-term mortgage and appropriate Islamic financing instruments are needed. These two deficiencies dampen demand for residential construction and renovation. Improved vocational education, apprenticeship systems and training are needed to boost the skills of the construction workforce at all levels.

Green construction is essential for the future competitiveness of the Egyptian construction industry and to the Green Transformation of the Egyptian econo-my. First, the materials chosen and processes used in construction can be less energy intensive and less polluting. Second, the design features in buildings can make them far more energy ef-ficient. Third, the choice of technologies and inputs, such as solar water heaters, can make build-ings more efficient over their lifetimes. Fourth, by taking a holistic approach to urban planning, transportation, infrastructure, zoning and residential, commercial and industrial construction, one can reduce commuting time, reduce wasted fuel, improve quality of life and realize a new vision for urban living that is both more pleasant and more socially responsible from the point of view of energy, carbon emission and environmental stewardship.

Green construction will also enable Egypt to be more competitive regionally. The initiatives described above would not only benefit Egypt’s domestic construction industry but would make the industry more competitive throughout the Middle East and North African region. Gulf States, among others, are becoming increasingly interested in green construction. For Egypt to make this transition, different stakeholders need to cooperate. Government needs to adopt a green construction strategy. The private sector capacity for innovation and efficiency must be fully tapped. This chapter recommends convening public and private sector leaders in the construction industry to forge a consensus leading to specific strategic initiatives that will improve the competitiveness of the construction industry while putting into place standards and incentives for green construction that will be of long-term benefit to the economy and to all Egyptians.

1 Benchmarking Egypt’sCompetitiveness - 2010

1.1 INTRODUCTION Egypt’s ranking among countries included in the Global Com-petitiveness Index (GCI) rose from 81st place in 2009 to 70th place in 2010. Egypt’s notable improvements in scores for the financial sector were driven by a new supervisory and regulatory authority “The Egyptian Financial Supervisory Authority” (EFSA) that created greater confidence in the financial sec-tor, despite the global financial crisis. There were also notable improvements in infrastructure, higher education and training, business sophistication, technological readiness, with some progress in labor market efficiency, and major enhancements in financial market sophistication. Egypt’s improvement in country rankings pro-vides encouragement for leaders who have been at the forefront of recent initia-tives to improve the competitiveness of Egypt’s economy.

Malak Reda

46

Egypt’s relative improvement in rankings was in part, due to reverses suffered by other countries during the recent financial crisis and global economic downturn. The relative improvement of Egypt’s international ranking is an important achievement, and there were important improvements in a number of specific areas. But lest there be any complacency about the extent of progress, Egypt’s average total raw score has actually remained static in recent years as improvements in some areas were equally balanced by reverses in oth-ers. Meanwhile, a number of other countries suffered reverses on various fronts. The financial crisis, the global economic downturn and worsening macroeco-nomic indicators helped reduce the scores of other economies. For example, many countries experienced lower scores related to their financial markets while Egypt fared relatively well in this area. (1)

Competitiveness improvement is unequal across the pillars and scores were particu-larly low in areas related to human develop-ment and macroeconomic stability. The score and country ranking would have been even higher if Egypt had not suffered from several key weaknesses that continue to limit its performance. Important among these are macroeconomic imbalances, poor la-bor market efficiency, and weak quality of educational institutions. In labor market efficiency, Egypt ranked 126 out of 133 countries. The quality of Egypt’s edu-cational system ranked just 123 out of 133 countries. Improvements in macroeconomic indicators, quality of education and improved labor market efficiency would do much to boost Egypt’s competitiveness score in the future.

1 The number of countries decreased by one. Moldova was excluded due to data incompleteness.

This chapter explains Egypt’s results on the GCI, analyzes them relative to similar coun-tries, and presents conclusions that can be useful for policy makers. The chapter also re-views trends in key competitiveness indicators and cross-references the scores obtained in the GCI with independent data and the results of other studies. Unless otherwise stated, the present chapter dis-sects and analyzes Egypt’s rankings from the World Economic Forum’s Global Competitiveness Report (WEF’s GCR) 2009-10 in comparison to the GCR 2008-09.

This chapter also analyzes Egypt’s perfor-mance relative to comparator countries of Brazil, South Africa, Turkey, India and In-donesia. Benchmarking Egypt relative to compara-tor countries is a useful analytical tool. The selected emerging economies are all classified as middle in-come economies as per the World Bank definitions, where Brazil, South Africa and Turkey belong to upper middle income economies while India, Indonesia and Egypt are classified as lower middle income econo-mies. In 2008, the Gross National Income (GNI) per capita income for lower middle income economies ranged from USD 976 to USD 3,855, whereas the range for upper middle income economies was from USD 3,856 to USD 11,905.

This chapter aims to pinpoint areas where timely action can improve Egypt’s perfor-mance in the near future and lay the founda-tion for future economic growth. If Egypt can design and implement a comprehensive set of policies to improve competitiveness, Egypt’s ranking will not only improve relative to other countries but also in absolute terms, with its underlying raw scores serving as evidence.

47

Table 1.1: Egypt’s Performance on the Global Competitiveness Index

Rank Score (1-7)

GCI 2009-2010(out of 133 countries)

70 4


81 4


77 4


71 4

Source: World Economic Forum (WEF), the Global Competitiveness Report, 2009-2010, Geneva, 2009, hereafter referred to as “WEF 2009.”

Egypt ranked lower than most Middle East and North Africa (MENA) region countries although higher than Morocco, Algeria, Libya, Syria and Mauritania in the GCI 2009-2010 and Libya, Algeria and Mauritania in the GCI 2008-2009. In 2009-10, a number of MENA countries improved in the rankings: Algeria (16 po-sitions), Egypt (11 positions), U.A.E. (8 positions), Mauritania (4 positions), Qatar (4 positions), Libya (3 positions) and Turkey (2 positions). (Figure 1.1) shows Egypt’s ranking as compared to other MENA coun-tries.

Compared to other economies at similar lev-els of development, Egypt fares well on the quality of its institutions and infrastructure but lags in areas related to human resource

development and macroeconomic stability. Egypt’s income per-capita increased to USD 2,160 in 2008 as compared to USD 1,739 in 2007. As a result, the WEF now classifies Egypt as a country in transi-tion, moving from being a factor-driven economy to becoming an efficiency- driven economy. (Table 1.2) categorizes MENA countries according to stage of development and Gross National Product (GDP) per capita. Compared to MENA countries that are in the same stage of development, Egypt’s competitiveness lags behind Qatar, Saudi Arabia, and Kuwait but is ahead of Morocco, Algeria, Libya and Syria.

FIGURE 1.1: EGYPT’S RANK COMPARED TO OTHER MENACOUNTRIES IN 2008-09 AND 2009-10.

131127

22

23

27

28

38

39

40

41

50

61

70

73

83

88

78

91

99

73

81

63

48

38

35

37

26

31

23

27

36

0 20 40 60 80 100 120 140

GCI 2009-10 Rank (out of 133)GCI 2008-09 Rank (out of 134)

Qatar

U.A.E

Israel

Saudi Arabia

Bahrain

Kuwait

Tunisia

Oman

Jordan

Turkey

Egypt

Morocco

Algeria

Libya

Syria

Mauritania

94

Source: WEF 2009.

1.2 EGYPT’S COMPETITIVENESS Egypt’s competitiveness score has been stable over the last few years at 4.0 on a scale of 1 to 7 where 1 is the lowest and 7 is the highest. (Table 1.1) shows Egypt’s remark-

able stability in its average composite score in the last four years. While its rank has changed, its underlying raw score has averaged 4.0.

Table 1.2: MENA Countries Classified By Stage of Development and GDP per capita

Stage ofDevelopment

Stage 1Transitionfrom 1 to 2

Stage 2Transitionfrom 2 to 3

Stage 3

Factor driven Efficiency driven Innovation driven

GDP per capita (in USD)

< 2,000 2,000-3,000 3,001-9,000 9,001-17,000 > 17,000

MENA Countries Mauritania AlgeriaEgypt

KuwaitLibya

MoroccoQatar

Saudi ArabiaSyria

JordanTunisia

BahrainTurkey

UAEIsrael

Source: WEF 2009.

48

(Figure 1.2) presents a summary of Egypt’s results in the GCI 2009-10. Egypt’s ranking was particularly poor vis-à-vis the other 133 countries in the follow-ing pillars: macroeconomic stability and health and pri-mary education under the basic requirements index; and higher education and training and labor market efficiency under the index for efficiency enhancers.

FIGURE 1.2: EGYPT’S RANK ON THE 12 PILLARS OFTHE GCI 2009-2010 (HIGHEST=1, LOWEST= 133).

EfficiencyEnhancers

(80)

Higher Educationand Training

(88)

Goods MarketEfficiency

(87)

Labor MarketEfficiency

(126)

Financial MarketSophistication

(84)

TechnologicalReadiness

(82)

Market Size(26)

Innovation &Sophistication

Factors(71)

BusinessSophistication

(72)

Innovation(74)

BasicRequirements

(78)

Institutions(56)

Infrastructure(55)

MacroeconomicStability(120)

Health & PrimaryEducation

(84)

Source: WEF 2009

Where Did Egypt Improve?

Egypt witnessed improvement in several pil-lars with the most striking one being an in-crease in financial market sophistication of 22 places (Table 1.3). The pillars in which Egypt im-proved both in terms of score and ranking vis-à-vis other countries were infrastructure, higher education and training, labor market efficiency, technological readiness, market size, business sophistication and fi-nancial market sophistication.

Egypt’s scores improved somewhat in pillars related to human resources, but remain gen-erally low, indicating that this needs to be a continuing high priority. Egypt improved slightly as compared to the previous year, with a total in-crease of 15 places in aggregate rankings relative to other countries: four positions for health and primary education, three positions for higher education and training, and eight positions for labor market efficien-cy. However, Egypt continues to rank near the bottom in labor market efficiency at 126th place.

The most striking improvement was in finan-cial market sophistication, which jumped by 22 places. Egypt advanced 5 places in the business sophistication and infrastructure pillars, while the technological readiness rank increased by 2 positions. Infrastructure improvement coincided with a major expansion and improvement in airport infrastructure capacity, including a major modernization and expan-sion of the Cairo International Airport.

Egypt’s score for macroeconomic stability went down by 3 percent, but its rank among countries improved by 5 places, indicating that other countries suffered reversals. In-deed, budget deficits and public debt grew in many countries as a response to the economic crisis. As for the health and primary education pillar, Egypt’s rank rose 4 places, but the country’s score remained un-changed.

1.3 EGYPT’S PERFORMANCE ON THE 12 PILLARS While Egypt’s ranking improved in all three competitiveness sub-indices, the raw scores improved only in the sub-index related to efficiency enhancers. Egypt’s ranking in

all three competitiveness sub-indices improved in 2009-10 as compared to the previous year. Egypt moved up five places in the basic requirements index ranking, eight places in the efficiency enhancers’ index, and three places in its ranking in the innovation and sophistication factors index. The raw scores related to the efficiency enhancers sub-index improved by 5 percent. Understanding the underlying causes of the improvement in Egypt’s ranking requires an examination of the twelve pillars and the 140 specific indicators. Unless otherwise mentioned, Egypt’s results will be compared for the years 2009-10 and 2008-09.

49

Egypt is near the bottom of the country league tables in labor market efficiency (126) and macroeconomic stability (120) and is be-low average in five other pillars. Egypt’s com-petitiveness deteriorated in areas related to institu-tions and innovation, where rankings fell by 4 and 7

Table 1.3: Two-year comparisons of Egypt’s scores and ranks on the 12 pillars of the GCI

Score GCI2008-2009

Score GCI 2009-2010

% ChangeImproved ( )

Deteriorated ( )

GCI 2008-2009 Rank out

of 134

GCI2009-2010 Rank out

of 133

� in rankImproved ( )

Deteriorated ( )

1st pillar:Institutions

4.25 4.13 -3% 52 56 -4

2nd pillar:Infrastructure

3.74 4.07 9% 60 55 5

3rd pillar:Macroeconomic stability

3.56 3.46 -3% 125 120 5

4th pillar:Health & primary education

5.19 5.20 0% - 88 84 4

5th pillar:Higher education & training

3.56 3.62 2% 91 88 3

6th pillar:Goods marketefficiency

4.00 3.99 -0% - 87 87 0 -

7th pillar:Labor marketefficiency

3.26 3.46 6% 134 126 8

8th pillar:Financial market sophistication

3.68 4.01 9% 106 84 22

9th pillar:Technologicalreadiness

3.04 3.35 10% 84 82 2

10th pillar:Market size

4.67 4.81 3% 27 26 1

11th pillar:Businesssophistication

3.93 3.98 1% 77 72 5

12th pillar:Innovation

3.15 3.03 -4% 67 74 -7

*Score ranges between 1 and 7 where 1=worst and 7=best.Source: WEF 2009.

places, respectively. Analysis of these results reveals that Egypt needs to resolve its continued macro-economic imbalances. More importantly, it needs to improve human development (education, health and labor issues) as well as innovation.

50

1.3.1 Basic Requirements Sub-Index

The basic requirements sub-index includes four pil-lars: institutions, infrastructure, macroeconomic sta-bility, and health and primary education. These four pillars represent 60 percent of Egypt’s overall com-petitiveness score.

1.3.1.1 Pillar 1: Institutions

Overall Rank 52 56 2008/09 2009/10

Egypt ranks relatively high in terms of confidence in institutions, but confidence in public institu-tions fell with regard to security and “undue in-fluence” – a concern echoed in the Transparency International Corruption Perceptions Index (CPI).

Confidence in private institutions improved modestly thanks to improved accountability. The institutions pil-lar includes perceptions related to both public and private institutions. It evaluates perceptions of pub-lic institutions in key dimensions including property rights, ethics and corruption, and undue influence. As for private institutions, the evaluation includes per-ceptions of accountability and corporate ethics.

Egyptians surveyed had relatively more confidence in private institutions than in public institutions. His-torically, there has been high confidence expressed in the area of security, but such confidence declined this year. The protection of property rights score dete-riorated, while the ranking remained at the previous year’s level.

Egypt’s improvement in private institutions stems mainly from the 15 position improvement in account-ability, reflecting increased strength of auditing and reporting standards, efficacy of corporate boards and protection of minority shareholders’ interests. The recent strengthening of the financial regulatory au-thority in Egypt may further enhance confidence in accountability.

FIGURE 1.3: EGYPT’S SCORES ON KEY COMPONENTS OFTHE INSTITUTIONS PILLAR: 2008-09 AND 2009-10.

0 1 2 3 4 5 6

Score GCI 2009-2010Score GCI 2008-2009

2. Accountability

1. Corporate ethics

5. Security

4. Government inefficiency

3. Undue influence

2. Ethics and corruption

1. Property rights

A. P

ub

lic

inst

itu

tio

ns

B. P

riva

tein

stit

uti

on

s

4.75

4.37

5.29

3.75

3.39

3.3

4.18

4.56

4.41

5.6

3.64

4.08

3.18

4.32

Source: WEF 2009.

FIGURE 1.4: EGYPT’S RANKING ON THE KEY COMPONENTS OFTHE INSTITUTIONS PILLAR IN 2008-09 AND 2009-10.

0 10 20 30 40 50 60 70 80

Rank GCI 2009-2010 (out of 133)Rank GCI 2008-2009 (out of 134)

2. Accountability

1. Corporate ethics

5. Security

4. Government inefficiency

3. Undue influence

2. Ethics and corruption

1. Property rights

A. P

ub

lic

inst

itu

tio

ns

B. P

riva

tein

stit

uti

on

s

58

52

52

55

66

58

64

73

53

40

61

47

62

64

Source: WEF 2009.

Worries about undue influence in govern-ment in the Executive Opinion Survey (EOS) of the GCI were also echoed in Egypt’s 111th rank (out of 180 countries) on the Transpar-ency International (CPI). Transparency Inter-national publishes this index on an annual basis and ranks countries of the world according to “the de-gree to which corruption is perceived to exist among

51

public officials and politicians.” Corruption is defined as “the abuse of entrusted power for private gain.” Egypt’s score remained at 2.8 out of 10, similar to the previous year. Scores under 5 are said to indicate“a serious corruption problem.” Perceived corruption levels in Egypt are higher than many MENA coun-tries (Figure 1.5) as well as other emerging economies(Figure 1.6).

FIGURE 1.5: CPI: EGYPT’S RANK COMPARED TO OTHER MENACOUNTRIES IN 2009.

2230

3239

46

4961

636566

89111

111126

130130130

154176176

0 50 100 150 200

CPI Rank (out of 180 countires)

QatarU.A.E.Israel

OmanBahrainJordanTurkey

Saudi ArabiaTunisiaKuwait

MoroccoEgyptAlgeria

SyriaMauritania

LibyaLebanon

YemenSudan

Iraq

Source: Transparency International, CPI (2009).

FIGURE 1.6: CPI: EGYPT’S RANK COMPARED TO SELECT EMERGINGECONOMIES IN 2009.

111

111

84

75

61

55

0 20 40 60 80 100 120

CPI Rank (out of 180 countries

South Africa

Turkey

Brazil

India

Indonesia

Egypt

Source: Transparency International, CPI (2009)

On the other hand, Egypt had a key comparative ad-vantage vis-à-vis other countries in the perception of organized crime (15 out of 133), public trust of politi-cians (37 out of 133), and efficiency of legal frame-work in settling disputes (39 out of 133).

1.3.1.2 Pillar 2: Infrastructure

Overall Rank 60 55 2008/09 2009/10

Egypt’s perceived infrastructure improvement is mainly attributed to the amelioration of the qual-ity of its airports, ports, and electricity supply but concerns remain regarding the quality of roads.

Egypt’s rank in the infrastructure pillar improved by 5 places, moving it to 55 out of 133 countries, and the underlying raw scores also improved by 9 percent. (Figure 1.7) shows the ranking on key components of the infrastructure pillar in 2009-10 compared to 2008-09. Improvement in the perception of the qual-ity of airports and ports is well supported by major infrastructure projects such as the upgrading and ex-pansion of existing ports and the renovation and con-struction of new airports facilities, perhaps the most noticeable of which is the expansion of Cairo Inter-national Airport. Telephone landlines also continue to expand in Egypt.

FIGURE 1.7: EGYPT’S RANKING ON THE KEY COMPONENTS OFTHE INFRASTRUCTURE PILLAR IN 2008-09 AND 2009-10.

79

53

32

52

69

54

74

57

73

51

32

44

57

47

73

56

0 10 20 30 40 50 60 70 80


Telephone lines (hard data)

Quality of electricity supply

Availableseat kilometers (hard data)

Quality ofair transport infrastructure

Quality ofport infrastructure

Quality ofrailroad infrastructure

Quality of roads

Quality ofoverall infrastructure

Source: WEF 2009.

The worst infrastructure score was related to quality of roads, where Egypt ranked 73 out of 133 countries. It is worth noting that the low quality of roads under-mines Egypt’s potential as one of the leading global tourism destinations, thus hindering the improvement of Egypt’s travel and tourism competitiveness. Egypt ranked 64 out of 133 countries in 2009 as compared to 66 out of 130 in 2008 in the WEF Travel & Tourism Competitiveness Report. Road transportation also affects efficient movement of goods and people and negatively impacts the quality of life.

52

Egypt’s telecom infrastructure improved 6 places to 73 out of 133 countries in 2009-10. Egypt’s fixed tele-phone lines stood at 15.63 per 100 people in 2008 as compared to 14.3 per 100 people in 2006. Mobile phone penetration, which forms part of the techno-logical readiness score discussed later, is relevant to this discussion as well.

Similar to last year, Egypt had only two competitive advantages relative to other countries under the infra-structure pillar. The first is available air transportation as measured in seat kilometers, where Egypt ranked 32 out of 133 countries. This indicator measures the number of seats available on each flight multiplied by flight distance in kilometers for the weekly average. The second is the quality of air transport infrastruc-ture, where Egypt ranked 44 out of 133 countries. Egypt has invested heavily in expansion of airport ca-pacity, as reflected in these indicators.

1.3.1.3 Pillar 3: Macroeconomic Stability

Overall Rank 125 120 2008/09 2009/10

Macroeconomic stability continues to be a major factor that drags down Egypt’s competitiveness rankings. The low score is confirmed by hard data related to the fiscal deficit, high inflation, nega-tive real interest rates, and high government debt. The Government is seeking to grow its way out of the current deficit and is cognizant of the politi-cal realities affecting fiscal restraint—but the fact remains that Egypt continues to score poorly here.

Egypt was ranked 120th of 133 countries in the 2009-10 GCR for macroeconomic stabil-ity. While there may be extenuating circumstances for high government debt and continued deficits, the fact remains that Egypt is compared unfavorably to other countries. One notable improvement in this pillar was the narrowing of the interest rate spread between loan rates and deposit rates, which tightened to 5.7 percent from 6.4 percent. This may indicate greater efficiency in financial markets. Egypt’s rank in this indicator improved by 13 places to 68 out of 133 countries in GCI 2009-10 as shown in (Figure 1.8).

The hard data used for the macroeconomic stabil-ity pillar in the GCI 2009-10 dates back to 2008. At the time, the Government gross debt to GDP was very high at 85.9 percent in 2007-08. The inflation rate was also high relative to other countries, at 11.7 percent in 2007-08. According to data from the Cen-tral Bank of Egypt, annual inflation ballooned to 16.2 percent in 2008-09. It started falling gradually due to the slowdown of global demand and the drop in fuel and food prices, to reaching 13.6 percent in January 2010. Yet, inflation is still relatively high compared to

other countries and double-digit inflation is generally considered harmful.

FIGURE 1.8: EGYPT’S RANKING ON THE COMPONENTS OFTHE MACROECONOMIC STABILITY PILLARIN 2008-09 AND 2009-10.

126

124

121

81

68

122

101

128

70

80

0 30 60 90 120 150


Government debt(hard data)

Interest rate spread(hard data)

Inflation(hard data)

National savings rate(hard data)

Government budgetbalance (hard data)

Source: WEF 2009.

The Central Bank of Egypt’s (CBE) declared monetary policy goal is to achieve price stability. In this respect, new monetary instruments are in the development process with the aim to allow for a declared inflation-ary target. For example, in October 2009 the CBE launched its “Core Inflation Index” derived from the headline Consumer Price Index (CPI).

The gross domestic budget sector debt and the gross external debt totaled 84.4 percent of GDP in 2008/09, although this was down considerably from recent years. Total debt in a range of 30-50 percent of GDP is often considered manageable.

The budget deficit was 6.9 percent in 2008-09 and is expected to expand to 8.4 percent as the government adopts a counter-cyclical fiscal policy in 2009-10. This level of budget deficit is normally regarded as unsus-tainable in most countries.

To counter the adverse effect of the global financial crisis on the Egyptian economy, the Government took several measures to pre-vent a sharp decline in economic activity, such as the introduction of a stimulus pack-age of EGP 15 billion during 2008/09. Gov-ernment spending was concentrated in public invest-ments, primarily infrastructure projects related to water and sanitation. A one-year sales tax rebate on capital goods was also launched as part of the first stimulus package. The 2009-10 fiscal budget included some EGP 5.5-6 billion that can be considered part of a second stimulus package in which EGP 2.5-3 billion are accelerated or allocated to additional investment

53

expenditures that go beyond the normal increases in the annual investments budget. Most of the extra out-lays are directed to finance investment projects. In-vestments have also been made in export promotion and internal markets development.

In January 2010, the Prime Minister request-ed parliament’s approval for a third stimulus package of EGP 11.2 billion. Depending on the global outlook, there is a possibility that the Egyptian government will inject further stimulus into the econ-omy. The strategy of the government is to have the economy grow its way out of the current debt.

Egypt’s national savings rate as a percentage of GDP was among the lowest in MENA. Nega-tive real interest rates may have depressed savings.(2) The top ranked country in MENA is Kuwait with an average rate of savings of 58.8 percent of GDP (Figure 1.9). Banks in Egypt are too liquid, with lending to de-posits amounting to around 54 percent, signaling that banks are not fulfilling their intermediation role.

FIGURE 1.9: NATIONAL SAVINGS RATE AS A PERCENTAGE OF GDP:EGYPT VERSUS MENA COUNTRIES IN 2008.

0 10 20 30 40 50 60

National savings rate as a percentage of GDP (2008)

Egypt

Israel

Tunisia

Turkey

Syria

Morocco

Jordan

Bahrain

United Arab Emirates

Oman

Saudi Arabia

Qatar

Algeria

Libya

Kuwait 58.8

58.1

55.9

52.6

47.3

43.6

38

35.3

28

27.9

26

22.1

21.1

20.1

18.1

Source: WEF 2009.

Compared to select emerging economies, Egypt’s do-mestic gross savings as a percentage of GDP is close to that of South Africa, Turkey and Brazil, but it is much lower than India and Indonesia (Table 1.4). On a positive note, there has been a measurable upward trend in the Egyptian savings rate, which grew from 13 percent earlier in the decade to 17 percent in 2008.

2 Interest rate on deposits is around 9 percent, inflation is around 13 percent; hence real interest rate is negative.

Table 1.4: Gross domestic savings as a percentage of GDP for selected emerging economies (2000 to 2008)

2000 2001 2002 2003 2004 2005 2006 2007 2008

Brazil 16 17 18 19 21 20 20 19 19

Egypt 13 13 14 14 16 16 17 16 17

Indonesia 33 31 28 33 29 29 31 29 29

South Africa 19 19 20 19 17 17 17 18 18

Turkey 18 19 19 17 17 16 17 17 16

India 23 23 24 25 30 32 33 35 33

Source: World Development Indicator (WDI) Online Database 2009.

Egypt’s fiscal profile weaknesses not only include a high budget deficit and large public debt ratios but also budget rigidities. Budget rigidity is primarily at-tributed to subsidy expenditures, interest payments and public sector wages. Egypt’s budget rigidities con-strain efforts to improve infrastructure, health and education — the key sectors that lead to improved productivity and human capital. Limited budget space in a time of global financial crisis poses a serious chal-lenge to Egypt’s macroeconomic stability and overall competitiveness. Egypt’s macroeconomic instability and its implications will be discussed in depth in Chap-ter 2 of this report. While one can appreciate the political constraints and the issue of appropriate tim-ing, macroeconomic stability remains one of Egypt’s key challenges.

1.3.1.4 Pillar 4: Health and Primary Education

Overall Rank 88 84 2008/09 2009/10

Some improvements occurred in health and pri-mary education especially in the enrollment rate, yet the quality of primary education and health services remain a challenge.

Egypt’s overall rank in health and primary education improved by 4 places in 2009-10, and the score re-mained stable at 5.2 (on a scale of 1-7 where 7 is the highest). The most notable improvement was the very positive increase in the rate of primary enrollment. Net primary enrollment rates increased 2 points from 2006 to 2007 to reach 95.75 percent. This significant improvement helped boost Egypt’s global ranking for primary enrollment from 63 to 45, an impressive achievement. As a result, Egypt ranked higher than most other MENA countries in 2007 with the excep-tion of Bahrain (98.2 percent) and Israel (97.1 per-cent). Among emerging economies, Egypt preformed better than Indonesia (94.8 percent), Brazil (92.6 per-cent), Turkey (92.3 percent), India (88.7 percent) and South Africa (85.8 percent).

54

Egypt’s ranking in terms of education expenditure re-mained stable at 59 out of 133. Egypt’s expenditure on education as a percentage of GNI in 2007 (4.4 per-cent) was higher than Turkey (3.7 percent), India (3.2 percent), Kuwait (3 percent), Mauritania (2.8 percent), and Syria (2.6 percent).

However, Egypt ranks near the bottom in primary educational quality (124th) (Figure 1.10). In general, perceptions of quality problems in Egyptian educa-tion have been consistent over time and repeated in many separate sources. Educational quality has been a consistent complaint coming from industry, which frequently expresses dissatisfaction with the caliber of education and training provided to those entering the workforce. The seriousness of the problem seems to be well recognized as demonstrated by current ef-forts to address these issues of quality. This report underscores both the urgency and the importance of improving educational quality as a key priority.

FIGURE 1.10: EGYPT’S RANKING ON THE COMPONENTS OFTHE HEALTH AND PRIMARY EDUCATION PILLARIN 2008-09 AND 2009-10.

B. P

rim

ary

ed

uca

tio

nA

. He

alth

1

1

57

40

39

11

89

92

124129

45

59

0 20 40 60 80 100 120 140


Education expenditure(hard data)

Primary enrollment(hard data)

Quality ofprimary education

Life expectancy (hard data)

Infant mortality (hard data)

HIV prevalence (hard data)

Business impact of HIV/AIDS

Tuberculosis incidence(hard data)

Business impactof tuberculosis

Malaria incidence(hard data)

Business impactof malaria

52

61

60

42

32

88

89

63

59

Source: WEF 2009.

Problems pertaining to quality include overstaffing and inefficiency of teacher hiring and deployment, which impairs school quality, wasteful and inefficient textbook spending, and the inability to analyze bud-get data at the school level (public schools).(3) Inef-ficiencies also include high levels of non-teaching staff, low pay for teachers, low performance-related incen-tives, difficulty implementing innovative pedagogy and a highly centralized system with weak school-based management.(4) Targeting inequality is another prior-ity for improvement of Egypt’s educational outcomes.

The quality of primary education is assessed from the EOS, where executives are asked to give a score from

3 The World Bank Policy Note 2 (July, 2005):”Making Egyptian Education Spending More Effective.”

4 World Bank, 2007

one to seven describing the quality of primary schools in the country with a score of “1” indicating poor quality and “7” indicating that the quality of education in the country is among the best in the world. The highest score was 6.7 in Finland. Respondents scored Egypt at 2.4 in 2009-10, the lowest score for a MENA country. The Human Development Index also recog-nizes the severity of educational challenges in Egypt. Due largely to its low score of 0.697 in the education index, Egypt ranked 123 out of 182 countries in the 2008-09 Human Development Index, lagging behind Brazil (75), Turkey (79), and Indonesia (111).

A healthy population is both a moral imperative and a means of achieving a productive workforce that con-tributes to a nation’s competitiveness. Egypt’s rank position in the health and primary education pillar rose four ranks from 88 out of 134 countries in GCI 2008-09 to 84 out of 133 countries in GCI 2009-10.

Life expectancy was 68 years in 2007, indicating a room for improvement. Reducing the occurrence of prevalent diseases such as heart disease, cancer, dia-betes and Hepatitis B and C could improve life expec-tancy, particularly if coupled with public health cam-paigns to improve water quality, reduce air pollution and improve diets.

High infant mortality rates are another ongoing chal-lenge, as Egypt ranks 89 among 133 countries. Recent successful improvements in infant and maternal mor-tality rates give reason to believe that Egypt can con-tinue to improve in this area. According to the 2008 Ministry of Economic Development report “Egypt Achieving the Millennium Development Goals (MDG), a Midpoint Assessment,” mortality rates for infant and children under 5 declined by almost 50 percent be-tween 1990 and 2006. Egypt has already succeeded in achieving the MDG goal related to improved mater-nal health. The maternal mortality ratio declined by 66 percent, from 174 maternal deaths per 100,000 live births in 1992 to 84 maternal deaths per 100,000 live births in 2000. However, disparities in infant and child mortality by region, social class and gender remain a key challenge.

The Ministry of Health carries a heavy burden in pro-viding free health services. Investments in health ser-vices totaled EGP 4.7 billion during 2007-08, of which 60 percent was public(5). Planned reforms in the health insurance system as part of a nationwide health care reform strategy may help achieve the target goal of universal coverage for all Egyptians by 2012.

5 Data from Ministry of State for Economic Development

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1.3.2 Efficiency Enhancers

Half of the GCI’s 12 pillars fall under the efficiency enhancer’s index. These six pillars include higher education and training, goods market efficiency, la-bor market efficiency, financial market sophistication; technological readiness, and market size. These six pil-lars represent 35 percent of Egypt’s score on the GCI.

1.3.2.1 Pillar 5: Higher Education and Training

Overall Rank 91 88 2008/09 2009/10

Egypt’s ranking in the higher education and train-ing pillar advanced 3 places this year. Nonethe-less, critical factors for human development such as quality of higher education, secondary and tertiary enrollment rates, and on-the-job training continue to be an obstacle for greater competi-tiveness. Disparities in university access and re-sults of tertiary education vary, which means that regional, income, and gender access issues need to be urgently addressed.

Egypt’s rank in higher education and training im-proved by 3 positions to 88 out of 133 countries in the GCI 2009-10; furthermore, Egypt’s score in this pillar increased by 2 percent to reach 3.62. The higher education and training pillar is comprised of three sub-groups: the quantity of education, the quality of education and on-the-job training. (Figure 1.11) shows that the improvement in the overall rank of three po-sitions is a result of the slight amelioration of the per-ception of quality of non-primary education (+3) and on-the-job training (+5).

FIGURE 1.11: EGYPT’S RANKING ON THE COMPONENTS OFTHE HIGHER EDUCATION AND TRAINING PILLARIN 2008-09 AND 2009-10.

124

63

91

88

121

65

88

0 20 40 60 80 100 120 140


Higher educationand training

A. Quantity of education

B. Quality of education

C. On-the-job training93

Source: WEF 2009.

Egypt’s ranking in terms of quantity of ed-ucation fell by 2 positions to 65 out of 133 countries in 2009-10. The lower ranking is largely due to declining enrollment rates in secondary and ter-tiary education relative to other countries. In 2007, the secondary enrollment rate in Egypt stood at 87.8 percent, lower than Brazil (100 percent) and South Africa (97.1 percent). For the same period, the gross tertiary education enrollment rate in Egypt was 34.7 percent in 2007, higher than Brazil (30 percent), In-donesia (17.5 percent), South Africa (15.4 percent) and India (11.8 percent) but lower than Turkey (36.3 percent). The Government of Egypt has introduced a five-year plan for 2007-2012 that aims to increase en-rollment rates in higher education institutions, while also increasing the number of schools and reducing class density.

There is a notable inequality of access to higher education among regions and gender. As noted in a recent study, government educational expenditure “is not only unequal across educational stages but also between universities” with the rural universities such as Tanta, Zagazig and Helwan receiv-ing, “a smaller percent of the government budget than the percent of students they enrolled.” The more lim-ited funding on a per-capita basis for the rural univer-sities, “could mean lower quality, higher non-tuition costs and a generally lower private rate of return for the poor.”(6) As certain regions, such as upper Egypt, have three times higher percentages of poor or near poor, this regional difference results in a wider dispar-ity affecting lower income groups as well, and students from these areas tend to report high educational costs as a reason for not enrolling in school at various levels. The “gender gap” in rural tertiary education is also pronounced. While the role of women in tra-ditional and low-income households has some bear-ing on this under-representation, “once poor females complete basic education they are also more likely to complete their education than males who often drop out at secondary or tertiary education levels in order to find work” (El Baradei, 2002). Therefore, if greater effort is made to improve female access to education at all levels, higher completion rates can help offset this disparity. As the service economy continues to grow, more economic opportunities will open up for women, which in turn may provide incentives for fur-ther education.

Despite a slight increase in the overall rank-ing for higher education and training, Egypt remains among the world’s worst perform-ers in terms of quality of education. Within MENA, Mauritania and Libya are the only countries with a lower ranking than Egypt. Despite minor year-

6 El Baradei, Mona (March 2009), “Access, Equity and Competitiveness of Higher Education: The Case of Egypt”, Paper Presented to the Arab Regional Conference on higher Education (ARHCE + 10), Beirut Lebanon

56

to-year increases, Egypt has shown poor performance in the quality of the educational system, particularly in the quality of math and science education, the quality of management schools, and the quality of internet access in schools.

Despite increased Government expenditures on higher education, per-capita expenditures actually fell by 8 percent and Egypt spends only about USD 413 per student. Expenditures per student may be viewed as a proxy indicator of the quality of higher education. Adjusted for inflation, the Government of Egypt’s budgeted expenditure for education increased by 24 percent during the period from 1998 to 2006, even as expenditure per student fell by nearly 8 percent(7). Egypt averages USD 413 per student, an extremely low amount compared to university expenditure per student in countries with high-quality education such as the United States (USD 22,476), Australia (USD 14,000), United Kingdom (USD 12,000), or France (USD 11,000).

The discrepancy in educational outcomes is particularly acute for individuals in the two lowest income quintals. The 2007 World Bank “Education Sector Policy Note”(8) adds to the GCI findings regarding shortfalls in Egyptian higher educa-tion and training. The World Bank report found that despite Egypt’s progress in providing more education-al opportunities, the quality of education remains low and unequally distributed. To address weaknesses in educational quality and distribution, the report rec-ommends improving curricula and high-stakes tests to better teach and measure skills needed by the labor market, reforming the two-track system of Training and Vocational Education and Training (TVET) based on these tests, and re-aligning incentives in the educa-tion environment, namely teacher pay, accountability and private tutoring.

Low private rates of return for education are further evidence of poor education qual-ity in Egypt.(9) In 1999-2000, the rate of return for an individual investment in secondary education was 2, while education investments at the university level and above experienced a much better rate of 9.(10) Based on 2006 data, the return on individual invest-ment in secondary vocational training is an abysmally low 0.047.(11) This rate is alarming, considering that 60

7 Lewis, Andrew (November, 2008). ENCC Policy Note “Higher Education Com-petitiveness: Achieving Better Quality and Better Equity.”

8 The World Bank Education Sector Policy Note (2007): “Improving quality, Equal-ity and Efficiency in the Education Sector: Fostering a Competent Generation of Youth.”

9 According to the OECD Glossary of Statistical Terms, the private rate of return for education is equal to the discount rate that equalizes rates the real costs of education during the period of study to the real gains from education thereafter.

10 El- Baradei, Mona (2003). “The Private Rate of Return to Education, Educational Inequalities and Poverty in Egypt”. Research Papers Series, Economics Depart-ment, Faculty of Economics and Political Sciences. Cairo University.

11 Said, Mona (2006). “The Fall and Rise of Earnings and Inequality in Egypt: New Evidence from the ELMPS”, 2006. Economic Research Forum, Cairo.

percent of students enrolled in secondary education are tracked into TVET secondary schools.

However, there are initiatives underway that seek to address educational quality issues. The Egyptian-European TVET reform program has es-tablished a new TVET strategy and infrastructure with the goal of improving technical and vocational training in Egypt. A comprehensive, coordinated national ef-fort to help upgrade career guidance and counseling methods, curricula, centers, schools, and teachers ac-cording to market needs and international standards, in addition to expanding cooperative forms of educa-tion, training, and centers of competence is crucial for improving Egypt’s performance in this pillar. (12)

There is now an emphasis on improving broadband access in preparatory schools. The Information and Communication Technology (ICT) industry development initiative, one of four tracks of the Egyptian Education Initiative (EEI), will help to fur-ther expand access by ensuring that all preparatory schools get connected to broadband by 2012 and by training teachers on integrating ICT into their cur-ricula.

Egypt’s on-the-job training ranking improved by 5 positions to place Egypt 88 out of 133 countries in the GCI 2009-10. Within this sub-group the country is making strides in perceived local availability of research and training services (+14),although Egypt’s relatively low rank in extent of staff training (106 out of 133 countries) (Figure 1.12) drags down overall performance. The low rank in extent of staff training can be partly attributed to limited pri-vate sector investment in developing human capital.

12 Helal, Mohamed (2010). “National TVET Reform and Egypt’s Competitiveness”. Education, Training and Competitiveness Conference

57

FIGURE 1.12: EGYPT’S RANKING ON THE VARIOUS INDICATORS OFTHE HIGHER EDUCATION AND TRAINING PILLARIN 2008-09 AND 2009-10 BASED ONTHE EXECUTIVE OPINION SURVEY.

123

124

114

95

78

106

126

128

116

99

0 20 40 60 80 100 120 140


Extent of staff training

Local availability ofspecialized researchand training services

Internet access in schools

Quality ofmanagement schools

Quality ofmath and science education

Quality ofthe educational system

92

96

Source: WEF 2009.

Higher education and training, if significantly improved, can boost Egypt’s competitiveness in the emerging knowledge economy. Higher education and training are closely related to productivity and affect results in all sectors, especially in knowledge-intensive job categories and industries. Despite being tuition free, access to higher education is unequal. While gender inequality has been reduced, it remains very significant in rural areas and perpetuates income inequalities. Yet, there are many talented people in these lower income groups and in rural areas. Egypt’s universities can be strengthened through efforts to commercialize re-search, diversify sources of funding, generate endow-ments, generate funding from philanthropic organiza-tions and develop rental schemes for excess property. These and other schemes could strengthen the long-term competitiveness of Egypt’s universities and their positive impacts on the Egyptian economy.

1.3.2.2 Pillar 6: Goods Market Efficiency

Overall Rank 87 87 2008/09 2009/10

Egypt’s overall score and rank remained stable for the goods market efficiency. Although the coun-try’s overall ranking declined as a result of per-ceptions of low market dominance, the quality of demand conditions improved notably as a result of perceived improvements in buyer sophistication.

Egypt’s overall score and rank remained stable in goods market efficiency. This pillar is comprised of two key components: competition (do-mestic and foreign) and quality of demand conditions. Egypt’s overall rank in competition deteriorated to 94 out of 133 countries as compared to 89 out of 134 countries in 2008-09 (-5). An increase in Egypt’s for-

eign competition ranking was offset by a decline in domestic competition (Figure 1.13) (Figure 1.14). The deterioration in domestic competition was largely at-tributed to poor performance in the extent of market dominance, which indicates whether corporate activ-ity is dominated by few business groups or spread among many firms.

FIGURE 1.13: EGYPT’S RANKING ON THE COMPONENTS OFTHE GOODS MARKET EFFICIENCY PILLARIN 2008-09 AND 2009-10.

B. Q

ual

ity

of

de

man

dco

nd

itio

ns

A. C

om

pe

titi

on

79

75

121

124

78

88

0 20 40 60 80 100 120 140


2. Foreign competition

1. Domestic competition

Source: WEF 2009.

FIGURE 1.14: EGYPT’S RANKING IN THE VARIOUS INDICATORSFOR COMPETITION IN 2008-09 AND 2009-10.

2. F

ore

ign

com

pe

titi

on

1. D

om

est

ic c

om

pe

titi

on 83

102

95

52

79

26

15

99

114

131

66

63

68

64

92

87

98

34

80

34

16

102

118

132

78

83

77

88

0 20 40 60 80 100 120 140


Imports as a percentageof GDP (hard data)

Burden ofcustoms procedures

Business impactof rules on FDI

Prevalence offoreign ownership

Tariff barriers (hard data)

Prevalence of trade barriers

Agricultural policy costs

Time required tostart a business (hard data)

Number of procedures requiredto start a business (hard data)

Total tax rate (hard data)

Extent and effect of taxation

Effectiveness ofanti-monopoly policy

Extent of market dominance

Intensity of local competition

Source: WEF 2009.

Egyptian consumers are becoming increas-ingly sophisticated in terms of quality, cost, and performance of the products they con-sume. However, stronger consumer protection and standards are needed. A driving force behind the improvement in Egypt’s improved rank in quality of demand conditions (78 out of 133) was the 24-posi-tion increase in perceived buyer sophistication. This is a notable improvement for Egypt, as local demand

58

conditions play a significant role in shaping company behavior; indeed, more sophisticated customers tend to push companies in new directions that may later become market standards. The simultaneous drop in customer orientation (-15), an area where Egypt has historically performed well, suggests a gap between more sophisticated consumers and the ability of sup-pliers to respond to their new demands.

According to both the 2010 World Bank “Doing Busi-ness Report” and 2009-10 GCR, Egypt continues to enhance the ease of starting a business. The country’s rank in the “Doing Business Report” improved by 10 points to position Egypt at 106 out of 183 countries in 2010. Notable successes included reducing the re-quired procedures for starting a business to 6 and the required days to 7, significantly below the MENA region average in both respects.

On the other hand, Egypt lags far behind other coun-tries in critical policy areas. Egypt is among the lowest quartile of countries in terms of perceived prevalence of trade barriers (114th) and tariff barriers (131st). Agricultural policy costs continue to be burdensome for the economy, as reflected in Egypt’s rank of 99 out of 133 countries.

Anti-monopoly policy remains low although it has im-proved slightly. Egypt’s rank advanced 3 positions to 95th place. However, Egypt’s score is still relatively low. More work must be done to improve the effec-tiveness and enforcement of anti-monopoly policies in order to promote competition. One tool for improv-ing competition is the Egyptian Competition Authori-ty (ECA). Established in 2005 following passage of the Anti-Monopoly and Fair Competition Act, the role of the ECA is to enforce the aforementioned act banning monopolistic practices while promoting competition and a healthy business environment.

1.3.2.3 Pillar 7: Labor Market Efficiency

Overall Rank 134 126 2008/09 2009/10

Labor market efficiency continues to be a major challenge for Egypt, even with subtle improve-ments in 2009-10. Heavy regulations combined with a brain drain and low female participation in the labor force continue to limit Egypt’s success in this area.

Egypt improved its overall ranking in labor market efficiency to 126 in GCI 2009-10, up 8 points from the previous year when the country was ranked last among 134 countries. The improvement is subtle however, and Egypt remains among the lowest per-forming countries overall.

FIGURE 1.15: EGYPT’S OVERALL RANKING IN THE LABOR MARKETEFFICIENCY PILLAR AND ITS RANKING IN ITS TWOCOMPONENTS IN 2008-09 AND 2009-10.

126

106

130

134

110

134

0 30 60 90 120 150


B. Efficientuse of talent

A. Flexibility

Overall Labormarket efficiency

Source: WEF 2009.

The labor market continues to suffer from imbalances resulting from its dual structure. A 2007 CAPMAS es-timate found that nearly half of the country’s workers are employed in the informal economy. The breadth of informal employment suggests that bureaucracy, human resource challenges and financial hurdles de-ter employers from taking on formal workers. To fill the gaps, a large and vulnerable population of informal employees has emerged. Unlike formal employees, informal employees have no legal rights, their work is not regulated, and they do not receive the benefits enjoyed by employees in the formal economy.(13)

The Egyptian labor market is perceived as highly inflexible, ranked 106 among 133 countries in GCI 2009-10 (Figure 1.15). The cost of firing an employee in Egypt measured in weeks of wages was 132 weeks in both 2008 and 2009.(14) Egyptian firing costs are about 78 weeks longer then the MENA average of 53.6 weeks, creating a strong disincentive for businesses to employ full-time work-ers.

Some initiatives, such as the 2003 Labor Law No.12 seek to address this. Improvements in Egypt’s ranking in labor-employer relations (46 out of 133 countries), rigidity of employment (43rd), hir-ing and firing practices (72nd), and flexibility of wage determination (56th) (Figure 1.16) provide hope that Egypt can address labor market inefficiencies through thoughtful policy changes. For example, the 2003 Labor Law No.12, which allowed greater working hour flexibility, fixed duration contracts and a more streamlined firing process, has been helpful for im-proving Egypt’s performance in these areas. In con-

13 Central Agency for Public Mobilization and Statistics (CAPMAS), Labor Sample Survey for 2007 – June 2008.

14 WEF 2008 data source the World Bank “Doing Business,” 2009.

59

trast to the law that preceded it, Labor Law No. 12 is quite flexible. For example, employers are allowed to use short-term contracts and partially or totally terminate employees in cases of force majeure or negative economic circumstances. In such cases, the emergency fund is responsible for providing a subsidy to terminated employees.

In viewing the labor market flexibility data, it is im-portant to recognize that Egypt’s rank in terms of ri-gidity of employment, hiring and firing practices, and wage flexibility does not reflect the existence of the informal labor market, which is characterized by total flexibility in hiring and firing labor and in determining salaries, given the country’s high unemployment rate.

FIGURE 1.16: EGYPT’S RANKING IN THE INDICATORS REFLECTINGLABOR MARKET FLEXIBILITY IN 2008-09 AND 2009-10.

46

56

43

72

121

52

79

50

62

40

92

119

34

80

0 20 40 60 80 100 120 140


Total tax rate (hard data)

Extent andeffect of taxation

Firing costs (hard data)

Hiring andfiring practices

Rigidity ofemployment (hard data)

Flexibility ofwage determination

Cooperation inlabor-employer relations

Source: WEF 2009.

Egypt ranks among the worst performing countries in efficient use of talent. The overall bleak performance is particularly severe in terms of female participation in the workforce, brain drain and reliance on professional management (Figure 1.13). The ratio of female to male participation in the labor force is very low at 0.4 as of 2007. Only six coun-tries have a lower female participation rate: Libya, Morocco, Syria, Pakistan, Saudi Arabia and Jordan.(15) Many highly skilled Egyptians continue to emigrate to other MENA countries or beyond in search of better opportunities. As a result, Egypt ranks 123rd in brain drain – making it the lowest ranked country among benchmark emerging economies and MENA, with the exception of Algeria. Egypt also performs poorly in reliance on professional management. The EOS found that senior management positions in Egypt are nearly as often filled by relatives or friends without regard to merit (score=1) as they are by professional managers

15 This data does not account for female participation in agricultural activities and the informal sector, where recent studies estimate female participation to be around 50 percent of total labor in both segments.

chosen for their qualifications (score=7); as a result, Egypt’s score of 3.7 in terms of reliance on profes-sional management is far below the GCI mean of 4.5 and among the worst scores held by MENA countries.

FIGURE 1.17: EGYPT’S RANKING IN THE INDICATORS REFLECTINGEFFICIENT USE OF TALENT IN 2008-09 AND 2009-10.

0 20 40 60 80 100 120 140


Female participationin labor force (hard data)

Brain drain

Reliance on professionalmanagement

Pay and productivity

133

129

124

114

93

106

123

127

Source: WEF 2009.

1.3.2.4 Pillar 8: Financial Market Sophistication

Overall Rank 106 84 2008/09 2009/10

The improvement in Egypt’s financial market so-phistication ranking is impressive. Perceived prog-ress in financing through the local equity market, ease of access to loans, venture capital availabil-ity, restrictions on capital flows and the strength of investor protection have contributed to this improvement. With an aggregate ranking of 84 among 133 countries, it is imperative that Egypt continues to persevere with targeted financial market reforms.

Egypt improved its ranking in all areas related to fi-nancial market sophistication in GCI 2009-10. As a result, the country’s overall rank made an impressive improvement rising 22 positions to place Egypt 84 out of 133 countries; the country’s score has also im-proved by 9 percent. Efficiency and trustworthiness and confidence, the two sub-categories of financial market sophistication, improved significantly to rank Egypt 54th and 107th respectively.

60

FIGURE 1.18: EGYPT’S RANKING ON THE FINANCIAL MARKETSOPHISTICATION PILLAR INDICATORSIN 2008-09 AND 2009-10.

B. T

rust

wo

rth

ine

ssan

d c

on

fid

en

ceA

. Effi

cie

ncy

69

55

66

123

80

98

86

0 20 40 60 80 100 120 140


Legal rightsindex (hard data)

Regulationof securities exchanges

Soundness of banks

Strength ofinvestor protection (hard data)

Restriction on capital flows

Venture capital availability

Ease of access to loans

Financing throughlocal equity market

Financial marketsophistication

111

67

80

8595

3446

44

79

2249

Source: WEF 2009.

Egypt has shown a particularly strong perfor-mance in financing through local equity mar-ket, ease of access to loans and venture capi-tal availability. For the second consecutive year, Egypt’s ranking in all three indicators of trustworthi-ness and confidence in the financial market improved, demonstrating steady progress in this area.

Despite these significant domestic improve-ments, Egypt ranks low in some specific sub-indicators. Egypt’s overall low rank in trustworthi-ness and confidence is related to the country’s poor performance in the legal rights index, where it is ranked 98 out of 133 countries (Figure 1.18). Egypt’s achievements and outstanding challenges are echoed by the 2010 World Bank “Doing Business” Report, in which Egypt scored 3 in the strength of legal rights on a scale of 0-10, up from a score of 1 in 2008, yet remaining lower than the MENA average of 3.3.

Egypt’s improved rankings relative to other countries (albeit from a low base) are largely due to Egypt’s re-siliencey during the first round effects of the global financial crisis. Egypt’s reformed banking sector and low integration into global financial markets helped ensure this resilience. Prudent regulatory surveillance and effective banking supervision reforms strength-ened under the 2004 banking sector reform program have helped ensured the stability of the banking sec-tor. Banks in Egypt are fairly liquid and well capitalized with an average loan-to-deposit ratio of 55 percent, ensuring that a high percentage of assets are short term and liquid. Because domestic banks do not invest in structured credit or other derivative products, they have had limited exposure to contagion from risky derivates and failing global financial institutions.

A particularly notable reform was Law No.10 of 2009 that established the EFSA, replacing the Capital Market Authority in July 2009. EFSA is responsible for supervising the non-bank fi-nancial instruments and markets including capital mar-kets, derivatives markets on financials and commodi-ties, activities related to insurance services, mortgage finance, financial leasing, factoring and securitization. This seems to be strengthening financial sector su-pervision and confidence in the financial sector. It is also encouraging modernization and further financial sector diversification. Egypt also undertook vari-ous reforms targeting non-bank financial institutions aimed at deepening the capital market, restructuring the insurance sector, developing the mortgage market and activating financial leasing and factoring services.

Carefully crafted, well-implemented financial reforms such as these are critical for continued improvements in Egypt’s financial market performance.

1.3.2.5 Pillar 9: Technological Readiness

Overall Rank 84 82 2008/09 2009/10

Egypt’s rank in technological readiness improved slightly, supported by a significant increase in Egypt’s rank in Foreign Direct Investment (FDI) and technology transfer and steady improvements in other measures of technological readiness.

Technological readiness measures the agility with which an economy adopts existing tech-nologies to enhance the productivity of its industries. ICT access and usage are included in this pillar as essential components of an economy’s overall level of technological readiness. Given that technol-ogy readiness emphasizes application, it is irrelevant whether the technology used was developed within the country.

Egypt’s technological readiness rank im-proved by 2 positions to 82 out of 133 coun-tries in GCI 2009-10. With the sole exception of availability of latest technologies, all indicators under this pillar improved from year to year. Particularly significant advancements occurred in FDI and tech-nology transfer (+25), firm level technology absorp-tion (+15), Internet users (+14), and laws relating to ICT (+13) (Figure 1.19). These improvements enabled Egypt to keep pace with other countries in the GCI as they too accelerated their technological readiness.

61

FIGURE 1.19: EGYPT’S RANKING ON THE TECHNOLOGICALREADINESS PILLAR INDICATORS IN2008-09 AND 2009-10.

66

60

48

51

30

97

78

84

82

63

55

106

92

90

86

64

0 20 40 60 80 100 120


Broadband Internetsubscribers (hard data)

Personal computers(hard data)

Internet users(hard data)

Mobile telephonesubscriptions(hard data)

FDI andtechnology transfer

Laws relating to ICT

Firm-leveltechnology absorption

Availability oflatest technologies

Source: WEF 2009.

Egypt has some comparative advantages rel-ative to other countries, namely firm-level technology absorption(16) and FDI and tech-nology transfer.(17) There has also been a rapid increase in mobile telephone subscribers. According to the Ministry of Communications and Information Technology, the total number of mobile subscribers in Egypt reached 53.7 million in November 2009, a mobile penetration rate of 70 percent. The number of Internet users also doubled between 2006 and 2008, reaching 16.4 users per 100 people.(18) Because these rates of increase were faster than in a number of oth-er countries, Egypt’s ranking also improved.

However, only 4.9 percent of people had ac-cess to personal computers in 2007,(19) and only 1 percent had broadband Internet sub-scriptions, a factor affecting innovation ca-pacity. These rates are quite low.(20) Egypt’s ICT policy aims to increase the number of households with broadband Internet connection to 1.5 million. Unless these rates improve dramatically, Egypt will fall behind other countries in the transition to the knowl-edge economy. Egypt’s ability to achieve a high level of innovation is directly affected by this access, and innovation is an important element of a national com-petitiveness strategy.

16 Egypt’s score in firm level technology absorption is 5.1, higher than the mean of all 133 countries of 4.8. Executives were asked: to what extent businesses in your country absorb new technology (1=not at all, 7=aggressively absorb new technology).

17 Egypt’s score from the EOS for FDI and technology transfer is 5.1, higher than the mean of all 133 countries of 4.7. Executives were asked: to what extent does FDI bring new technology into your country (1=not at all, 7=FDI is a key source of new technology).

18 Source: WEF, 200919 The highest country in terms of the number of personal computers per 100

people is Canada where it amounted to 94.6.20 The highest country with total fixed broadband internet subscribers per 100

population is Sweden where it reached 37.3.

1.3.2.6 Pillar 10: Market Size

Overall Rank 27 26 2008/09 2009/10

Egypt has a relative competitive advantage in terms of both domestic and foreign market size. Foreign market size improvement is partially due to the success of the country in accessing other markets and recent expansion of energy-related exports.

Egypt’s relatively large market size includes both its domestic market (which is growing) as well its access to foreign markets as mea-sured by export-related data. Egypt’s rank remained close to last year increasing by 1 rank to 26 out of 133 as compared to 27 out of 134. Egypt has a relative competitive advantage in terms of both domestic and foreign market sizes. Out of a scale from 1 (worst) to 7 (best), Egypt obtained a score of 4.6 in terms of domestic market size index and a score of 5.5 in the foreign market size index. As shown in (Figure 1.20) below, the biggest improvement was in foreign market size, a change of 14 places. (Figure 1.21) presents all the indicators of the market size pillar. Both imports and exports as percentage of GDP improved, increas-ing to 45.5 percent and 45.8 percent consecutively in 2008, up from 34 percent and 31.5 percent respec-tively, in 2007. Egypt has taken important steps to gain access on good terms to the EU, US, Gulf and Com-mon Market for Eastern and Southern Africa (COME-SA) markets and has boosted exports. Establishing new trade agreements and opening new markets can increase Egypt’s competitiveness even further.

FIGURE 1.20: EGYPT’S RANKING ON THE MARKET SIZE PILLARIN 2008-09 AND 2009-10.

25

25

26

39

0 5 10 15 20 25 30 35 40


B. Foreignmarket size

A. Domesticmarket size

62

Source: WEF 2009.

FIGURE 1.21: EGYPT’S RANKING ON THE INDICATORS OF MARKETSIZE PILLAR IN 2008-09 AND 2009-10.

B. F

ore

ign

mar

ke

tsi

ze

A. D

om

est

ic m

ark

et

size 25

25

64

65

26

25

26

88

87

39

0 20 40 60 80 100


Foreign market sizeindex (hard data)

Exports as a percentage ofGDP (hard data)

Imports as a percentage ofGDP (hard data)

GDP valuedat PPP (hard data)

Domestic market sizeindex (hard data)

Source: WEF 2009.

1.3.3 Innovation and Sophistication In-dex

Innovation is vital to the future competitive-ness of all of Egypt’s economic sectors. The innovation and sophistication index measures invest-ment in Research & Development (R&D) , availability of high-quality scientific research institutions, exten-sive collaboration in research between universities and industry, and the protection of intellectual prop-erty. Despite the importance of innovation in Egypt’s economic strategy going forward, the two pillars of business sophistication and innovation represent only 5 percent of Egypt’s GCI score. However, both of these areas are key to Egypt’s economic growth in the future, and Egypt does relatively well in both areas on the GCI.

1.3.3.1 Pillar 11: Business Sophistication

Overall Rank 77 72 2008/09 2009/10

Egypt’s business sophistication rank and score im-proved on both sub-components: networks and supporting industries and the sophistication of firm’s operation and strategy. However, Egyptian companies are perceived to have less control over foreign distribution of their products and services.

Egypt’s ranking in the business sophistication rose by 5 places to 72 out of 133 countries. The overall score improved by a modest 1 percent to 3.98. As shown in (Figure 1.22), the rank of the two components of this pillar, networks and supporting industries and sophistication of firm’s operation and strategy, im-

proved. Egyptian businesses are perceived as having a comparative advantage in two indicators: the state of cluster development (41out of 133) and willingness to delegate authority (31 out of 133).

FIGURE 1.22: EGYPT’S RANKING ON THE BUSINESSSOPHISTICATION PILLAR SUB-COMPONENTSIN 2008-09 AND 2009-10.

72

75

66

74

80

77

0 10 20 30 40 50 60 70 80


Overall Businesssophistication

A. Networks andsupporting industries

B. Sophistication offirms' operations and

strategy

Source: WEF 2009.

In terms of sophistication of firms’ operations and strategy, Egypt’s ranking improved in most of the indicators. Namely, it improved in terms of the na-ture of competitive advantage, value chain breadth, production process sophistication, extent of market-ing, willingness to delegate authority and reliance on professional management, as shown in (Figure 1.23). However, willingness to delegate authority still main-tains a low ranking. The only exception was for con-trol of international distribution, where Egypt’s rank deteriorated by 17 positions. Egypt’s score in control of international distribution(21) is 4 points lower than the mean score of all 133 countries of 4.1.

In terms of networks and supporting industries, Egypt’s ranking improved by 5 places to 75 out of 133 countries, as a result of improvement in the percep-tion of local supplier quantity and of the state of clus-ter development. Yet, Egypt’s ranking in local supplier quality fell by 1 place to 104 out of 133 countries due to perceptions of poor local supplier quality.

21 Executives are asked in the EOS: to what extent is international distribution and marketing from your country owned and controlled by domestic companies (1= not at all, they take place through foreign companies, 7=extensively, they are primarily owned and controlled by domestic companies).

63

FIGURE 1.23: EGYPT’S RANKING ON THE BUSINESSSOPHISTICATION PILLAR INDICATORSIN 2008-09 AND 2009-10.

B. S

op

his

tica

tio

n o

f fi

rms'

op

era

tio

ns

& s

trat

egy

A. N

etw

ork

s &

sup

po

rtin

gin

du

stri

es 71

104

69

72

66

56

31

106

41

86

103

49

105

73

49

61

8595

38

124

0 30 60 90 120 150


Reliance onprofessional management

Willingness todelegate authority

Extent of marketing

Production processsophistication

Control ofinternational distribution

Value chain breadth

Nature ofcompetitive advantage

State ofcluster development

Local supplier quality

Local supplier quantity

Source: WEF 2009.

1.3.3.2 Pillar 12: Innovation

Overall Rank 67 74 2008/09 2009/10

Egypt’s ranking in innovation deteriorated some-what in the innovation pillar. Egypt’s ranking re-treated on utility patents, availability of scientists and engineers, government procurement of ad-vanced technology products, university-industry research collaboration, and capacity for innova-tion.

Egypt’s ranking in innovation deteriorated by 7 places to 74 out of 133 countries. This year, Egypt’s rank-ing deteriorated in all the factors that determine the innovation score (intellectual property protection, utility patents, availability of scientists and engineers, government procurement of advanced technology products, university-industry research collaboration, and capacity for innovation), with the exception of company spending on R&D which improved by 3 places to 54 out of 133.

Egypt’s rank for the availability of scientists and engi-neers fell to 53 out of 133 countries as compared to 47 out of 134 countries the year before (Figure 1.24). Egypt’s score fell from 4.5 last year to 4.3, above the mean of 4.1, where 1= scientists and engineers are rare and 7 = scientists and engineers are widely avail-able.

FIGURE 1.24: EGYPT’S RANKING ON THE INNOVATION PILLARINDICATORS IN 2008-09 AND 2009-10.

96

101

54

96

72

53

86

58

85

96

57

79

57

47

70

60

0 20 40 60 80 100 120


Intellectualproperty protection

Utility patents(hard data)

Availability ofscientists and engineers

Government procurementof advanced technology

products

University-industrycollaboration in R&D

Companyspending on R&D

Quality of scientificresearch institutions

Capacity for innovation

Source: WEF 2009.

Egypt lags far behind other countries in terms of ca-pacity for innovation, university-industry research, and quality of scientific research institutions. Egypt’s score for capacity for innovation was 2.6,(22) below the mean of 3.3 in 2009-10. The top performer in capacity for innovation was Japan with a score of 5.9. Egypt comes behind several countries in the region including Israel, Saudi Arabia, Tunisia, Oman, Morocco, Bahrain, Qatar, Kuwait, Jordan and UAE. It also lags behind all of the select emerging economies in this indicator.

Egypt’s quality of scientific research institutions ranked 101 out of 133 countries. The score of Egypt was 3.2, below the mean score of all 133 countries. Egypt lags behind the selected comparator economies of India (25th out of 133), South Africa (29th out of 133), Brazil (41st out of 133), Indonesia (43rd out of 133) and Turkey (71st out 133).

Egypt’s university-industry research collaboration score is 3.1, again lower than the mean of all coun-tries (3.6). The best performer in this indicator is the United States with a score of 5.9, reflecting strong collaboration between the business community and local universities with attention given to commercial-ization of research.

One of the areas where Egypt made some improve-ment was company spending on research and devel-opment. Egypt’s rank improved from 57 out of 134 countries in 2008-09, to 54 out of 133 countries 2009-10. Yet, Egypt’s score of 3.1 is still below the mean of all countries (3.6 in 2009), signaling Egypt’s need to increase spending on R&D still further. Egypt’s

22 Scores range from 1 to 7 with 1= companies obtain technology exclusively from licensing or imitating foreign companies and 7= companies obtain technology by conducting formal research and pioneering their own new products and pro-cesses.

64

R&D expenditure as a percentage of GDP averaged 0.19 percent during the years 2000-2005, much lower than Israel, where the average expenditure on R&D

was among the highest in the world at 4.46 percent and also behind Tunisia, where average R&D expendi-ture as a percentage of GDP was 0.6 percent during the same period. (23)

23 Source: Human Development Report, 2007-08.

Results of the Business Barometer conducted by the Egyptian Center for Economic Studies (ECES) (Janu-ary, 2010) are somewhat similar to the WEF results concerning the major constraints facing businesses. According to the Business Barometer, the major con-straints are include an insufficiency in skilled workers, difficulty in obtaining credit, difficulty in dealing with government bureaucracy, and an insufficient demand. Businesses also expressed concern about insufficient access to capital, difficulty of export, and obscurity of legal procedures.

FIGURE 1.25: THE MOST PROBLEMATIC FACTORS FORDOING BUSINESS IN EOS 2009.

0.7

1

1.4

3.9

4.5

4.8

7

7.3

7.6

7.8

9.5

9.9

10.4

12

12.3

0 2 4 6 8 10 12 14

Percent of responses

Inefficientgovernment bureaucracy

Tax regulations

Inadequatelyeducated workforce

Inflation

Corruption

Poor work ethic innational labor force

Access to financing

Tax rates

Restrictivelabor regulations

Inadequate supplyof infrastructure

Crime and theft

Poor public health

Foreigncurrency regulations

Governmentinstability/coups

Policy instability

* From a list of 15 factors, respondents were asked to select the five most problematic for doing business in the country and to rank them.

Source: WEF 2009.

1.4 MOST PROBLEMATIC FACTORS FOR DOING BUSINESS According to the EOS 2009, the most problematic factor for doing business in Egypt is inefficient government bureaucracy. (Figure 1.25) shows the most problematic factors for doing business. Several factors were related

to the state of human capital development, namely an inadequately educated workforce, poor work ethic and poor health. Other problematic factors for doing business in Egypt included tax regulations, inflation, restrictive labor regulations and corruption.

65

Egypt’s rank in the overall GCI improved by 10 places moving it to 70th out of 133 countries. The most no-ticeable improvement occurred in the financial market sophistication pillar. Major improvements in supervi-sion and governance of Egypt’s financial sector stood in contrast to deteriorating confidence in other coun-tries in the wake of the global financial crisis. These were further bolstered by perceptions of improved financing through local equity market, ease of access to loans, venture capital availability, capital flows and strength of investor protection. The measures under-taken by the CBE before and during the global turmoil should be applauded, as the impacts of the financial crisis on Egypt were muted. Ongoing reforms related to the accountability of private institutions are also noted. Increased primary education enrollment rates were also very positive. Improvements in infrastruc-ture, especially ports and airports, are bearing fruit. Finally, improvements in access to land lines, mobile phones, the Internet, broadband and computers were positive. However, Internet, broadband and computer access still remain low. Expansion in both the domes-tic and export markets were positive.

Egypt’s rank continued to be poor in terms of mac-roeconomic stability and human development relat-ed pillars. Specifically, the weakest areas are primary education and health; higher education and training; labor market efficiency; and innovation. Other areas that also witnessed deterioration included worsened perception about public institutions, undue influence, security, and trustworthiness and confidence in the financial market.

A more competitive Egyptian economy would require a more stable macroeconomic environment and a more competitive workforce that is more literate, more efficient, healthier and better educated. It is critical to enhance efficiency of labor markets. Atten-tion should also be given to utilizing women more productively in Egypt’s economy.

To make a major positive impact on future competi-tiveness and growth, Egypt would do well to focus on educating and training productive people, improving the business environment so as to encourage more formal enterprises, and getting control over key mac-roeconomic indicators. Understanding these mac-roeconomic challenges and comparing the competi-tiveness results with the recent progress in the real economy is the subject of Chapter 2.

1.5 CONCLUSION The improvement in Egypt’s competitiveness rankings is encouraging, especially related to the financial sector, primary education enrollments, port and airport expansions, and other areas. Government efforts in these

areas are recognized in Egypt’s improved competitiveness ranking. However, many weaknesses remain, especially related to the quality of the workforce, labor markets, government bureaucracy and macroeconomic management. These continue to drag down Egypt’s overall performance.

2 Fiscal Policy Levers ForCompetitiveness and Inclusive

Growth In Egypt

This chapter provides an overview of results in Egypt’s economy over the last year and then focuses on fiscal policy reforms that can boost Egypt’s long-term com-petitiveness while promoting inclusive growth that specifically benefits the poor. A number of pre-existing strengths in Egypt’s economy have helped to soften the blow from the global financial crisis. However, the crisis has forcefully highlighted the weaknesses in Egypt’s macro-economy that need to be addressed. If not ad-dressed, these vulnerabilities could make Egypt’s post-crisis recovery painful as other countries grow rapidly out of their financial predicament, leaving Egypt be-hind to grapple with deteriorating levels of competitiveness, growth and poverty. In particular, the already high and worsening budget deficit has implications for the tenability of fiscal policy, while the unbalanced pattern of economic activity con-strains sustained growth and the inclusion of the poor in the creation and rewards of that growth. Nonetheless, the financial crisis provides Egypt with a golden op-portunity, that many advanced economies may not afford, adopting best practices in its fiscal policy. Such practices will create the fiscal space and the resources needed to achieve the twin goals of sustainable and inclusive growth. This chapter focuses on the role of competitiveness as an important means to increasing long-term economic growth and poverty reduction and investigates the role of fiscal policy in this regard.

Amina Ghanem

68

The chapter is organized as follows: Section 2.2 dis-cusses developments in the Egyptian economy since the onset of the crisis. The strong fundamentals in the economy have helped maintain a relatively ro-bust growth rate since 2008. However, vulnerabilities relating to the macro-economy and fiscal policy risk could limit the potential for achieving the objectives of long-term growth and poverty reduction. Section 2.3 reviews some of the literature and best practices in the use of fiscal policy to achieve sustained and shared growth where the poor participate in growth creation and growth rewards, and makes the case for the urgency of fiscal reforms that promote shared and

The global economic slowdown that began in 2008 has dampened the strong growth that Egypt’s economy had enjoyed during the previous four years. Since July 2004, a number of factors had helped to spur Egypt’s economic growth rates, which increased from 4 percent in Fiscal Year (FY) 2003/04 to over 7 percent in FY 2007/08. A num-ber of factors fueled this growth, including the intro-duction of wide-ranging structural reforms, increased productivity, large foreign direct investment (FDI) inflows, a competitive real exchange rate following a significant devaluation in 2003, rapid growth in ex-ternal demand (IMF, 2010e) in response to a friendly international environment (favorable terms of trade, strong global demand and abundant international li-quidity) and prudent macroeconomic management (World Bank, 2009).

In the wake of the global financial crisis, Egypt’s Growth Domestic Product (GDP) growth fell from 7.2 percent in FY 2007/08 to 4.2 percent during FY 2008/09(1). Although Egypt’s banking sector proved to be relatively immune to the global financial crisis, the contagion from the

1 Egypt’s fiscal year starts in July and ends in June. For example, FY 2008/09 ends on June 30th, 2009.

sustainable growth. Section 2.4 discusses the main el-ements of a growth-and-competitiveness-enhancing fiscal strategy. In this context, Section 2.5 discusses Egypt’s fiscal agenda towards achieving these goals, including the 2008/09 and 2009/10 stimulus packages that helped promote economic activity during the crisis. Section 2.6 explores the challenges that limit the effectiveness of policy in achieving durable and inclusive growth, but also notes that many of these tests could be turned around into innumerable long-term opportunities to accelerate sustained inclusive growth and poverty reduction. Section 2.7 provides concluding remarks.

crisis buffeted Egypt’s economy in many other ways. Demand for Egypt’s exports by trading partners in high-income countries fell and Egypt’s exports de-teriorated by 7.7 percent between 2007/2008 and 2008/2009, accounting for almost all of the deterio-ration in the trade balance. Remittances saw a sub-stantial fall of 32 percent, while Suez Canal payments dropped more modestly by 9.6 percent. Tourism re-ceipts also fell by less than 3 percent.

During the same period, FDI also plummeted from US$13.2 billion to $8.1 billion. On the whole, the balance of payments surplus of US$5.4 bil-lion in June 2008 turned into a deficit of US$3.4 billion in June 2009 (MOF, 2010).

Despite these external shocks, the Egyptian economy fared relatively well(2). Egypt’s 4.2 per-cent growth rate compared favorably with the Middle East and North Africa (MENA) region’s growth rate of only 2.4 percent. Egypt’s growth also compared fa-vorably relative to a negative growth rate of -0.6 per-cent for the world economy as a whole. World eco-nomic growth was projected to recover to a relatively

2 Detragiache & Ho (2010) found in a study that countries that enjoyed high eco-nomic growth or high growth potential demonstrated stronger performance dur-ing a crisis.

2.1 INTRODUCTION This chapter will present an overview of Egypt’s economic results in the last year. It will then discuss Egypt’s fiscal policy for economic growth in the context of the post-crisis recovery. The argument is made that in order

for Egypt to improve its long-term competitiveness, it must seize the golden opportunities availed by the financial crisis to align its macro-fiscal policies with best practices that seek to achieve sustainable and inclusive growth.

2.2 DEVELOPMENTS IN THE EGYPTIAN ECONOMY BETWEEN 2008 – 2010

Egypt’s robust economic growth rates were negatively affected by the financial crisis that began in 2008. While pre-existing strengths in the economy have helped buffer the impact of the crisis, pre-existing weaknesses pose risks for regaining a durable job-creating growth. As a result of these vulnerabilities, the Egyptian economy continues to suffer from high unemployment rates, weak shared growth, persistent poverty and deteriorating competitiveness, despite strong pre-crisis growth rates. As the economy slows down, these indicators could very likely deteriorate.

69

healthy 4.2 percent by 2010, with emerging and de-veloping countries growing at 6.3 percent. However, the MENA region was expected to grow more slowly at 4.5 percent (WEO, 2010a, Table A1, p. 155). Again Egypt’s growth performance remained stronger; dur-ing the second quarter of FY 2010 (September-De-cember 2009), the Egyptian economy expanded by 4.9 percent, compared to 4.6 percent during the previ-ous quarter. The second quarter of 2009/2010 saw a surplus in the current account and an overall balance of payments. Exports grew by 13 percent, and most other indicators were also improving (MOF, 2010).

Egypt’s economic policy prior to and during the financial crisis explains the relatively re-silient performance of the economy during this difficult period. Between 2004 and 2008, the government of Egypt introduced a number of economic reforms that reduced fiscal, monetary and external vulnerabilities, providing space to engineer fiscal and monetary policies during the financial crisis. Timely fiscal and monetary response during the crisis, including the crisis response packages in 2008/2009 and 2009/2010, gave a boost to domestic demand and cushioned the impact of the slowdown.

Timely home-grown reforms included the strengthening of the macro-policy environ-ment, improvement of the investment cli-mate and wide-ranging structural reforms. These changes bolstered the economy during what might have been a more difficult economic period. It provided the government of Egypt with some fiscal space for a flexible policy response during the finan-cial crisis (IMF 2010e). The resilience of domestic de-mand (Figure 2.1) in petroleum extractions and the buoyancy of household expenditures in wholesale and retail activities (Table 2.1) helped to sustain growth. Other sectors, particularly tourism and to a lesser extent manufacturing and construction, saw sizable contractions in their contribution to growth (Table 2.1) The first half of 2010 provides evidence for an increasing contribution of external demand growth (Figure 2.1). Private consumption (Figure 2.2) held up in spite of rising unemployment , reflecting a sup-portive fiscal policy (IMF 2010e). With the drop in FDI flows during 2008/2009, the contribution of invest-ment demand to growth has been negative, but recent data show that the situation may be reversing as the impact of the fiscal stimulus package starts to show results (Figure 2.3).

FIGURE 2.1: ANNUAL PERCENT CONTRIBUTION OF DOMESTICDEMAND & NET EXPORTS TO GDP GROWTH(2002/2003 - 2009/2010).

-4 -2 0 2 4 6 8 10

Contribution of DomesticDemand toGDP Growth

Contribution of Net ExternalDemand to GDP Growth

H1-09/10

H1-08/09

2008/2009

2007/2008

2006/2007

2005/2006

2004/2005

2003/2004

2002/2003

Source: Ministry of Finance (MOF), 2010.

FIGURE 2.2: : ANNUAL PERCENT CONTRIBUTION OF PUBLIC &PRIVATE CONSUMPTION DEMAND TO TOTALCONSUMPTION DEMAND GROWTH(2002/2003 - 2009/2010).

0 1 2 3 4 5 6

Final Public Consumption Final Private Consumption.

H1-09/10

H1-08/09

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

Source: MOF, 2010.

70

FIGURE 2.3: ANNUAL PERCENT CONTRIBUTION OF INVESTMENTDEMAND & TOTAL CONSUMPTION TO THE GROWTHIN DOMESTIC DEMAND (2002/2003 - 2009/2010).

-4 -2 0 2 4 6 8 10 12

Final Consumption Demand Investment Demand

H1-09/10

H1-08/09

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

-4 -2 0 2 4 6 8 10 12

Source: MOF, 2010.

Table 2.1: Private and Public Sector Contributions to Real GDP Growth in 2007/2008 - 2008/2009

2007/2008 2008/2009

Public Private Public Private

Agriculture, Woodlands & Hunting

0 0.47 0 0.43

Extractions 0.41 0.12 0.62 0.28

Manufacturing Indus-tries

0.14 1.15 0.04 0.56

Electricity 0.11 0 0.07 0

Water 0.02 0 0.02 0

Construction & Build-ings

0.05 0.62 0.06 0.47

Transportation & Com-munication

0.21 0.6 0.18 0.56

Suez Canal 0.56 0 -0.26 0

Whole Sale & Retail 0.01 0.58 0.02 0.61

Financial Intermedi-aries & Supporting Services

0.19 0.11 0.12 0.06

Insurance & Social Insurance

0.28 0.01 0.19 0

Restaurants & Hotels 0 0.96 0 0.05

Real Estate Activities 0 0.1 0 0.1

Public Government 0.24 0 0.27 0

Education, health, social, cultural, enter-tainment & personal services

0.03 0.19 0.01 0.18

Sub-Total of Sectors 2.26 4.92 1.35 3.31

Total Real GDP Growth Rate

7.18 4.66

Source: MOF, 2010

Thanks to Ministry of Finance, efforts to con-sciously reduce external debt in recent years, the impact of the decline in capital inflows was cushioned and external debt does not pose a constraint in the foreseeable future. Capital inflows declined sharply by US$ 14 billion dur-ing 2008/09. External debt also has a favorable ma-turity structure, with almost 92 percent of external debt having medium and long-term maturities. As a ratio of current account receipts, foreign debt ser-vice stands at 4.9 percent of GDP while foreign debt is a relatively modest 15.4 percent of GDP (MOF, 2010, Table 1.1, p. 15). The composition and small size of Egypt’s external debt makes it relatively resilient to adverse external shocks. A large depreciation or a persistent adverse shock to the current account would only raise the projected path of external debt by between 5 and 9 percentage points of GDP by FY 2014/15. Even under an extreme risk scenario where there is a permanent shock in the form of substantial capital inflows, external debt is projected to increase by only 8 percentage points of GDP (IMF 2010e).

The Central Bank of Egypt (CBE) started the crisis with a strong international reserve po-sition. This provided a cushion against balance of payments shocks as investors pulled out of the equity and government debt markets following the financial meltdown, bringing about reductions in foreign T-bills holdings by over 80 percent during the same period. In the meantime, the CBE drew down on reserves and foreign country deposits with commercial banks in order to reverse the initial pressures on the depre-ciation of the pound, which caused reserves to decline from US$34.5 billion in 2008 to $31.2 billion during 2009. The Egyptian pound depreciated by 6 percent between October 2008 and March 2010 (IMF, 2010e). Capital inflows have resumed since March 2009 and international reserves have rebounded, reaching $34.3 billion in February 2010, covering 8.7 months of imports compared to 7.9 months in 2008 and 7.5 months in 2007. As a result, the pound has recently slightly appreciated.

The stock market saw losses reaching 70 per-cent between October 2008 and April 2009, but it had recovered more than half of these losses by November 2009 and has withstood the more recent Dubai crisis. Sovereign and commercial debt spreads have also tightened and remain well below their pre-crisis levels and, on average, below other emerging markets. In April, the Ministry of Fi-nance was able to issue a US$1.5 billion bond at in-vestment grade spreads(3) . The interest rate for the US$1 billion ten-year tranche was 5.75 percent and for the US$500 million was 6.9 percent (Ahram, April 2004, 2010). Overall, market sentiment vis-à-vis Egypt

3 See Ahram for a comparison with spreads on other emerging countries debts.

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remains relatively favorable, reflecting the limited vul-nerabilities (IMF, 2010e).

In the meantime, Egypt’s banking sector has weathered the global financial turmoil. Con-servative banking, healthy capital and liquidity buffers, moderate growth in private credit,(4) strong retail funding and limited exposure to foreign currency risk and sophisticated financial products all helped limit the build-up of balance sheet vulnerabilities in the banking sector. This prevented the need for the government to undertake bank recapitalization or other measures to shore up financial sector stability. Strong bank and corporate balance sheets, more robust than at any time in the past, thus helped support the economy. Non-performing loans (NPLs) stood at 14.7 percent of total loans in September 2009, virtually unchanged from before the crisis (IMF, 2010e).

Following the crisis, liquidity remains abun-dant, with a loan-to-deposit ratio holding at around 50 percent and substantial excess reserves, despite having declined since mid-2008 (MOF, 2010). Egypt has actually come through the financial crisis not only better than it did in past crises(5), but also better than many other countries throughout the world. While the spillovers from the financial contagion explain most of the decline in economic expansion in Egypt, they have been relatively smaller for Egypt than both advanced economies and other developing and lower-income ones (IMF, 2010e).

Another force that sustained Egypt’s eco-nomic growth was the prompt response to the financial fallout through fiscal and monetary interventions. In the second half of FY 2008/09, the Ministry of Finance implemented the first pack-age of extraordinary spending(6). The stimulus focused mainly on accelerating investment projects (costing 1 percent of GDP) and PPP investments (another1 percent of GDP). The first PPP project for a power plant was awarded in July 2009. A tender invitation for a Build, Operate, and Transfer (BOT) contract for a wind farm has also been launched. The FY 2008/09 budget included one-off transactions related to both revenue and expenditure (each about 3½ percent of GDP). Savings in the budget of 0.7 percentage points of GDP came from lower international food and en-ergy prices, which enabled the government to meet its June 2009 budget deficit target of 6.9 percent of GDP (MOF, 2010). A second package introduced in 2009/2010 included additional infrastructure spending of 0.8 percent of GDP to be carried out by the New

4 Overly rapid credit growth has tended to magnify the impact of negative external shocks in other countries (IMF, 2010e).

5 Three crises hit Egypt in 1996/97: the South East Asian Crisis, the Luxor inci-dent and the crash in oil prices. Growth rates fell from 5 percent to less than 3 percent. The economy started rebounding in 2004 with the sweeping reforms introduced by the new government.

6 See Chapter 2: The Egyptian Economy in the Face 0f the Global Financial Turbu-lence: Steady through the Storm? In the 2009 Egyptian Competitiveness Report.

Urban Communities Agency over a period of 5 years, although this had no immediate fiscal impact (www.mof.gov.eg).

Effective monetary interventions were also undertaken by the CBE. In October 2008, the CBE reiterated its 100 percent guarantee of local bank deposits to help maintain confidence and im-posed reporting requirements on overseas deposits and investment balances to help monitor unexpected movements in financial flows. The CBE also cut over-night deposit and lending rates six times between February and September 2009, by a cumulative 325 basis points and 375 basis points respectively. The CBE allowed the pound to depreciate by about 6 per-cent between September 2008 and March 2009; how-ever, the pound has been creeping up with resumed inflows.

Despite this performance, policymakers will have to address a number of pre-existing weaknesses that pose a challenge to Egypt’s future sustained, job-creating growth. One important hurdle is persistently high inflation. Since June 2004, consumer price inflation has been in the double digits. Inflation rates increased from 3.2 per-cent in June 2003 to 10.3 percent in June 2004 and continued their upward trend, reaching a peak of 19.6 percent in December 2008 despite a global environ-ment of low world prices. More recently, inflation has inched down but remained high at 13.3 percent in De-cember 2009. High inflation works against the poor and can in most cases be remedied through improved monetary and fiscal management (IMF, 2010c; 2010 d; 2010e).

A second important challenge concerns the exchange rate. The resumption of capital inflows could complicate monetary policymaking. First, inter-vention by the CBE to sterilize hot money inflows is expensive and is adding to Egypt’s domestic debt service. As discussed earlier, the domestic debt ser-vice burden is expected to jump from 15 percent of total spending in 2009 to 22 percent in 2010. Sec-ond, Egypt’s real effective exchange rate has recently appreciated in response to the resumption of capital inflows, which could cause long-term real apprecia-tion of the exchange rate. This reinforces the impor-tance of fiscal adjustment and productivity-enhancing reforms that would serve to make the exchange rate more competitive (IMF 2010e).

A third pre-existing risk that needs imme-diate attention is the persistence of a con-sistently large fiscal deficit and high public debt. Since 2004, Egypt’s fiscal deficit had been on a healthy downward trajectory to reaching 3 percent of GDP by 2012. The target for June 2009 had been to reduce the budget deficit to 5.9 percent (MOF, 2008).

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This trend was interrupted by the 2008 global finan-cial crisis, and the deficit was maintained at the June 2008 level (6.9 percent) as the Ministry of Finance implemented the extraordinary spending package. The budget deficit is now projected to increase to 8.4 percent in June 2010, reflecting a substantial cyclical fall in revenues from trade and the Suez Canal, the impact of wage increases adopted before the crisis and higher post-crisis debt service costs.

Government revenues have dropped by some 20.5 percentage points. The share of taxes in this decline was 6.5 percentage points, while other non-tax revenues accounted for the rest. Tax revenues fell by some 13 percent, with corporate taxes accounting for the bulk of the decline (10.6 percentage points). Sales tax receipts declined by 1.5 percentage points, while the decline in customs revenues and individual taxes were negligible at 0.5 percentage points each. Property tax revenues actually increased by 42 per-cent. The widening of the tax base could provide scope for financing growth-inducing spending.

Egypt’s public debt declined from 105.5 per-cent of GDP in June 2004 to 71 percent in June 2009, and is projected to further fall to 69.4 percent in 2010 (Table 2.2). The implementa-tion of a number of fiscal reform measures, including better targeting and streamlining of subsidies (OBG, 2010) and the widening of the tax base, should reduce the budget deficit to 3 percent of GDP and public debt to 50 percent of GDP by 2015 (Meeting with the Minister of Finance).

Table 2.2: Egypt’s Public Debt as aPercentage of GDP

4-Jun 5-Jun 6-Jun 7-Jun 8-Jun 9-JunJune 10

(projected)

Budget Sector Debt

67.4 72.5 72 64.2 53.5 54.1 54

External Debt

38.1 31.1 27.6 22.8 20.1 17 15.4

Total Public Debt

105.5 103.6 99.6 87 73.6 71.1 69.4

Source: MOF, 2010.

The reduction of the fiscal deficit and the high public debt ratios will be crucial for a stronger economic expansion in the future. The economic literature shows a strong correlation between high deficits and slower growth. As demon-strated by the experience of advanced economies in the 1970s, countries with high fiscal deficits tend to see a rise in both inflation and long-term interest

rates. When this occurs, maturing debt has to be refi-nanced at higher rates, hurting private investment and resource allocation. As government domestic debt continues to increase, real interest rates rise and pri-vate investment is crowded out, reducing economic growth. A slowdown in growth rates hurts the poor and creates social and political instability. In addition, prolonged high inflation is not easily contained once unleashed. In such a scenario, the rising cost of bor-rowing would be difficult to reverse for many years to come. The experience of emerging and developing economies with high inflation has been even worse (IMF 2010c; World Bank, 1993).

High budget deficits and the structure of government spending provide little room for needed investments for future growth. In addi-tion to the potentially negative impact of high budget deficits on Egypt’s future growth, the pattern of fiscal spending indicates a very rigid budget with limited fis-cal scope for creating resources for financing growth-promoting investments, making poverty-alleviating in-vestments or responding to future economic crises to stimulate economic growth (Blanchard, Dell’Ariccia, & Mauro, 2010). The profile of Egypt’s fiscal spending does not create fiscal space for these purposes, and the government was forced to temporarily postpone key reforms in order to afford financing the 2008/2009 stimulus package (IMF 2010e). In 2009/2010, the Min-istry of Finance was able to implement only a modest fiscal stimulus package of 0.7 percent of GDP, financed from the budget, because of the setback that revenues saw following the crisis. Even worse, capital spending in 2010 stands at LE 36.5 billion, that is LE 7 billion lower than the exceptional level of 2009 and LE 2.3 billion lower than its pre-crisis level in June 2008 (Ta-ble 2.3a).

Growth in government spending on subsidies has come at the expense of spending on in-vestment. The wage bill, debt service and subsidies comprised 64.4 percent of total government expendi-tures in June 2005. This share has gradually increased to reach almost 73 percent in 2009. The increase was in large part due to the growth in the share of subsidies, which doubled over the past 4 years from 18.4 percent of expenditures in 2005 to 36.1 percent. During the same period, the share of debt service fell from almost 33 percent to 15 percent. The share of the wage bill dropped from 26 percent in 2005 and remained stable at around 22 percent. Given that the share of the wage bill remained almost unchanged between 2005 and 2009 and that the share of debt service actually fell, the rising share of subsidies came at the expense of investment spending, which fell from 14.4 percent of total public spending to 12.2 percent.

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In 2010, the share of spending on the three rigid budget items from total expenditures will remain almost unchanged at some 72 percent and investment will fall to only 11.3 percent. The wage bill accounts for the largest share of spending at 27 percent, followed by debt service

at 22 percent and subsidies which will decline signifi-cantly to 23 percent. Investment rose briefly to 12.4 percent because of the fiscal stimulus package but will fall below the pre-crisis level of 2.4 percent of total spending.

Table 2.3a: Profile of Public Expenditure, Percent Share of Total Spending

L.E. BillionsJun 05

% total

Jun 06

% total

Jun 07

% total

Jun 09

% total

Jun 09

% total

Jun-10 (proj)

% total

Total expenditures 161.6 100 207.7 100 221 100 282.3 100 351.4 100 324.1 100

Wage bill 41.5 25.7 46.7 22.5 51.2 23.2 62.8 22.2 76.1 21.7 87.5 27

Govt purchases of G&S 12.6 7.8 14.4 6.9 17 7.7 18.5 6.6 25.1 7.1 27.4 8.5

Govt purchases of non-financial assets

23.3 14.4 21.2 10.2 25.5 11.5 34.2 12.1 43.4 12.4 36.5 11.3

Debt service 32.8 20.3 36.8 17.7 47.7 21.6 50.5 17.9 52.8 15 71.1 21.9

Subsidies 29.7 18.4 68.9 33.2 58.4 26.4 92.4 32.7 127 36.1 73.5 22.7

Other 21.7 13.4 19.7 9.5 21.2 9.6 23.9 8.5 27 7.7 28.1 8.7

Subtotal of wages, debt service & subsidies

64.4 73.4 71.2 72.9 72.8 71.6

Source: MOF, 2010

Table 2.3b: Profile of Public Expenditure, Percent Contribution to Growth in Spending

L.E. billions Jun05

Jun06

% cont. to chg

Jun07

% cont. to chg

Jun08

% cont. to chg

Jun09

% cont. to chg

Jun10

% cont. to chg

Total expenditures 161.6 207.7 28.5 221 6.4 282.3 27.7 351.4 24.5 324.1 -7.8

Wage bill 41.5 46.7 3.2 51.2 2.2 62.8 5.2 76.1 4.7 87.5 3.2

Govt. purchases of G&S

12.6 14.4 1.1 17 1.3 18.5 0.7 25.1 2.3 27.4 0.7

Govt. purchases of non-financial assets

23.3 21.2 -1.3 25.5 2.1 34.2 3.9 43.4 3.3 36.5 -2

Debt service 32.8 36.8 2.5 47.7 5.2 50.5 1.3 52.8 0.8 71.1 5.2

Subsidies 29.7 68.9 24.3 58.4 -5.1 92.4 15.4 127 12.3 73.5 -15.2

Other 21.7 19.7 -1.2 21.2 0.7 23.9 1.2 27 1.1 28.1 0.3

Source: MOF, 2010

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Total expenditures are expected to shrink by 7.8 percent in 2010 (Table 2.3b). This is being driven by the reduction in the cost of subsidies in the growth rate of government expenditures. However, reduction in government investment, also planned, does not bode well for future growth. The space cre-ated by a lower share of subsidies in the budget was not used to increase growth-inducing job-creating in-vestment. Rather, it was used to address an increase in debt service, which grew from 15 percent in 2009 to 22 percent in 2010. Addressing the budget deficit has come in part at the expense of capital investment, which can cause growth in output to lose steam. Meanwhile, well-targeted investments could address unemployment, which is still at 8.8 percent, down slightly from 8.9 percent (MOF, 2010). However, Ah-wani (2009) estimates unemployment to have risen to 10.5 percent given the contraction witnessed in vari-ous labor-intensive productive sectors following the deceleration in Egypt’s economic expansion.

(Table 2.1) illustrates that all major productive activi-ties that have traditionally driven growth have suffered in their contribution to growth. Real estate activities, education, health and entertainment were marginally affected. Wholesale and retail trade increased from 0.56 percentage points to 0.61, showing a consump-tion response to the stimulus package. The share of public and private mining and petroleum extraction activities also jumped from 0.41 and 0.12 percentage points to 0.62 and 0.28 percentage points respectively.

Economic growth continues to be unbal-anced, with much of the expansion taking place in capital-intensive industries rather than job-creating industries (Table 2.1). As dis-cussed in Chapter 2 of the 2009 Competitiveness Report, there are two problems with this pattern of growth. First, sectors such as manufacturing and extractions, which are key contributors to growth, are mostly capital intensive and thus do not create sufficient jobs. Second, the remaining labor-intensive sectors that are leading private sector growth (con-struction, communication, tourism and financial ser-vices) all require highly skilled labor, and although job opportunities are being created, the local labor force cannot adequately respond. The Egyptian Minister of Manpower and Immigration recently noted at an International Labor Organization (ILO) conference that the economy creates 40,000 jobs each month

but Egyptians lack the qualifications that could enable them to fill many of these employment opportunities. Only a small percentage of the labor force has been able to become highly skilled. Without addressing this situation, the remaining labor force and their children could remain trapped in a vicious circle of low skills, low incomes, low education and increasing poverty.

Fiscal policy has favored current spending at the expense of investment spending and various policies tend to encourages capital intensive and highly skilled sectors result-ing in a slowdown in poverty reduction. The high growth of the past years has not delivered high growth in jobs and has not sufficiently reduced pov-erty. Although average Egyptian income per capita has improved dramatically in recent years, the poor have not shared equally in this progress. A recent report estimated that 40 percent of Egypt’s poor receive only 22 percent of the nation’s GDP, despite the increase in overall annual incomes in Egypt from US$639 in 1990 to US$1,390 in 1999 (MoED, 2008) and to US$2,400(7) in 2008 (http://siteresources.worldbank.org/DATA-STATISTICS/Resources/GNIPC.pdf).

Egypt was one of 188 countries which em-braced the Millennium Development Goals (MDGs) and agreed to strive to reduce the percentage of people living below the pov-erty line from 20 percent to 15 percent by 2015. The World Bank estimates that strong growth during 2005-08 contributed to a 14 percent decline in the proportion of the population living below the poverty line in Egypt. Although Egypt remains on the right track to achieve this goal, and while poverty in urban areas of Lower Egypt is expected to go down to 6 percent, the crisis-induced slowdown has inter-rupted the planned poverty reduction trajectory. The situation for the urban poor in Upper Egypt may worsen, achieving a level of 39 percent by 2015. Re-ports also show that although the Egyptian govern-ment continues to give attention to critical areas of development, such as health and education, the pace of progress in poverty reduction needs to acceler-ate (MoED, 2008). When poverty is high, the economy becomes more vulnerable. In lower-income coun-tries, even small economic disruptions can challenge recovery (Lipsky, 2010a). On the other hand, poverty reduction will support economic recovery and com-petitiveness (MoED, 2008).

7 Using the Atlas Method. Per capita income is estimated to be US$5,470 in 2008 using the purchasing power parity method.

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Egypt’s budget deficit before the financial crisis was already high at 6.8 percent and will deteriorate further to 8.4 percent, delaying not only progress in deficit reduction but also the implementation of key reforms. Countries that entered the economic crisis with a solid macro-economic position could use fiscal stimulus packages without threatening their future long-term fiscal sta-bility (Blanchard, Dell’Ariccia, & Mauro. 2010). Coun-tries that entered the crisis with high levels of debt and high government deficits, such as Greece, have been particularly hard hit. In the process, budget defi-cits have deteriorated, government liabilities soared, and with them, risks of future losses (IMF, 2010d). Many economies used the crisis to make needed long-term investments in infrastructure and development of human capital.

Emerging economies that ran highly pro-cy-clical fiscal policies driven by consumption booms before the crisis were forced to cut spending and increase taxes, despite the unprec-edented global recession, because they did not have the fiscal space to support growth. Their narrow fiscal space limited their ability to use an aggressive fiscal policy to support sluggish growth during the crisis. The size of fiscal adjustment (after the recovery) will therefore be challenging (Blanchard, Dell’Ariccia, & Mauro. 2010).

Countries with pre-crisis economic funda-mentals are enjoying a stronger recovery. There are already indications that those countries that had the stronger pre-crisis fundamentals and could afford the fiscal space to spend aggressively are showing a stronger recovery, both relative to their initial performance during the crisis as well as relative to Egypt, although Egypt initially fared relatively well during the crisis.

World growth is expected to rebound from a negative growth rate of 0.6 percent in 2009 to 4.2 percent in 2010, reaching 4.6 percent in 2015. The United States and Asian countries are also witnessing a positive turnaround in their econo-mies. The United States’ economic contraction of 2.4 percent in 2009 is projected to shift to a solid growth

rate of 3.1 percent in 2010. Europe and Japan will re-cover more slowly, while other advanced countries will see rapid growth. Asia will continue growing by more than 8.5 percent through 2015, while the MENA region will grow in comparison at a much slower pace of 4.8 percent (WEO, 2010a, p. 155). Historically, there has always existed a high correlation between the rates of economic growth in Egypt and the Organi-zation of Economic Cooperation and Development (OECD) countries (World Bank, 2009).

Growth projections for Asian countries are particularly strong. Although not without risks, the fiscal outlook is stronger for many emerging economies, especially Asian countries, as opposed to advanced nations. This better outlook reflects more favorable structural primary fiscal balances during the crisis, which enabled them to implement sufficiently large public spending. As a result, they had smaller output losses than the rest of the world. In addition, several emerging economies will be starting fiscal con-solidation in 2010, as the withdrawal of crisis-related stimulus occurs, supported by stronger growth pros-pects. By 2013, debt ratios in emerging economies are projected to return to pre-crisis levels (IMF, 2010d).

Egypt’s economic strategy needs to focus on inclusive growth and structural reforms that build Egypt’s competitiveness. Egypt’s fiscal pol-icy has focused on rebounding economic growth to its pre-crisis levels (IMF, 2010e). However, economic growth is not an end in itself but a means to reduc-ing poverty and improving the living standards of Egyptians, an understanding that is shared by global economic leaders (Development Committee, 2007, p. 2). Egypt needs to focus on job-creating growth, growth that improves the livelihoods at the bottom of the economic pyramid, and the underlying com-petitiveness foundations of the economy that will en-able Egypt “to stay in the game in the long term”(8) . This will include policies to improve the human and physical infrastructure and the social safety nets that protect the poor and vulnerable (Lipsky, 2010a). Egypt needs to adopt a similar fiscal policy that promotes the long-term competitiveness agenda and creates jobs.

8 Term borrowed from Compete (2008).

2.3 THE URGENCY OF IMPLEMENTING COMPETITIVENESS- AND GROWTH-ENHANCING REFORMS

Egypt must adopt best practices in fiscal policy reform by freeing up fiscal space to invest in boosting the productive capabilities of low-income groups. Strong priority should be given to investments that boost future economic growth and competitiveness and that do so in ways which enable low-income populations to boost their ability to contrib-ute to economic growth and thereby increase their incomes in ways that are sustainable. Investments in future economic growth are necessary if Egypt is to compete in a global economy. But the constraints of the current fiscal budget deficits and spending rigidities currently limit Egypt’s ability to do so, while other countries will be in a better position to do so.

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Other countries are looking beyond short-term recovery to long-term job-creating growth. Many other countries understand that fis-cal and other macroeconomic policies can be geared towards achieving strong, sustainable and balanced growth and raising standards of living (G-20, 2009a). They have also agreed to share their medium-term policy frameworks, plans and projections for mu-tual assessment (G-20, 2009b). The Group of Twenty(G-20) countries have a clear policy framework that takes this into account:

In the short-run, we must continue to implement our stimulus programs to support economic ac-tivity until recovery clearly has taken hold. … Credible exit strategies should be designed and communicated clearly to anchor expectations and reinforce confidence … Subsequently, our

objective is to return the world to high, sustain-able, and balanced growth, while maintaining our commitment to fiscal responsibility and sustainability, with reforms to in-crease our growth potential and capacity to generate jobs(9) … We commit to put in place the necessary policy measures to achieve these outcomes (G-20, 2009a, p. 1).

Egypt has no choice but to adopt the same agenda and move faster than many of these countries simply to keep its competitive-ness position from deteriorating. As discussed in Chapter One, Egypt’s competitiveness position in 2009 improved relative to other countries. However, this was due more to reverses in other countries than an improvement in the net scores for competitiveness indicators in Egypt.

9 Author’s emphasis.

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Growth-oriented fiscal policy is re-emerging as a priority (G-20, 2009a; 2009b). During the past two decades, fiscal policy had taken a backseat to monetary policy, and its role had become second-ary compared to the goal of low inflation (Blanchard, Dell’Ariccia, & Mauro, 2010). While low inflation may be a necessary condition for sustainable growth, fis-cal policy can create sufficient conditions, and there-fore governments have recently been encouraged to design fiscal policies that explicitly seek long-term growth (Roy & Weeks, 2004).

Robust economic growth can be a powerful driver of poverty reduction, but only durable growth can achieve this. There is a demonstrated strong link between solid and rapid growth and pov-erty reduction (AFD et al., 2005; Development Com-mittee, 2007; Ravallion & Datt, 2002). However, the pace and strength of growth alone is not a sufficient condition for improving social indicators related to poverty. Only durable growth triggers lower poverty, and fiscal policy has an important role to play in assur-ing that growth becomes durable (Gomes and Law-son, 2003; Ianchovichina & Lundstrom, 2009).

Competitiveness and poverty reduction are mutually reinforcing. Investment in human capi-tal increases productivity, boosts competitiveness and enables the poor to improve their incomes. Fis-cal policies that help foster both inclusive growth and long-term competitiveness include improving access and rights to public education and health care servic-es (Commission on Growth and Development, 2008) and establish a friendly, level playing field for business opportunities. Better education and health stimulate broad-based acquisition of competence, thus enabling wider participation in the domestic and global mar-kets (competitiveness). A friendly investment environ-ment, in which barriers to entry are not artificially high because of inappropriate or unnecessary regu-lations, improves the access of the poor to jobs for themselves while creating conditions in which they can also start and develop their own economic activi-ties. Economic expansion that derives from equality of opportunity and empowerment is sustainable in the long run and has been found to explain 97 percent of the reduction in poverty (Kraay, 2004).

But while public spending can be used to stimulate competitiveness and growth, weak finances put these two objectives at risk. Low budget deficits and levels of public debt are essen-tial ingredients for economic growth—a pre-requisite for the reduction of poverty. The smaller the budget deficit, the lower the interest rate and the lower the risks are to debt service during an economic crisis (Clements, Gupta, & Inchauste, 2004). Permanently large fiscal deficits threaten to increase interest rates, crowding out private investment (IMF, 2002). Hence, a competitiveness-enhancing fiscal policy can only be implemented within a sustainable fiscal framework.

A sustainable fiscal policy is one that is growth-oriented while achieving low infla-tion and a manageable level of debt and debt-service. The first priority of a sound fiscal policy is maintaining low levels of inflation compatible with the macro-fiscal framework and growth targets, as many studies now confirm the significant relation-ship between inflation and increased poverty (Epau-lard, 2003; Datt & Ravallion, 2002). Second, the deficit must be manageable in the short term and the debt serviceable in the medium term (Roy & Weeks, 2004), with provisions for an adequate social safety net that includes health insurance and pension entitlements accounted for in fiscal sustainability. Given the recent crisis, economic leaders are recommending that debt levels be reduced below pre-crisis levels so as to al-low for policy response in case there is a future crisis (IMF, 2010a). Third, fiscal policies should focus more on investments and expenditures that build long-term competitiveness in terms of human capital, growth-enhancing infrastructure and structural reforms. In this way, fiscal constraints can be addressed while fo-cusing on future competitiveness and growth (Devel-opment Committee, 2007).

For growth to be robust, balanced and in-clusive(10), it must include all segments of the workforce and all sectors of the economy. The following section discusses the elements of a sus-tainable fiscal policy and the role it can play in achiev-ing a competitive economy and pro-poor, sustainable growth.

10 For the purpose of this chapter, “inclusive growth” is used interchangeably with other terms such as “broad-based growth”, “shared growth” and “pro-poor growth.” For the distinctions sometimes made between these terms, please re-fer to Ianchovichina & Lundstrom (2009).

2.4 COMPETITIVENESS-ENHANCING FISCAL POLICY: THE LINK BETWEEN FISCAL POLICY, COMPETITIVENESS, SUSTAINABLE GROWTH AND POVERTY REDUCTION

Fiscal policy can play an important role in promoting durable and equitable growth. Public spending should focus on im-proving competitiveness and productivity. The goal of equitable growth implies a fiscal policy that creates a level playing field for education, health and business opportunities (and regulations). However, a competitiveness-enhancing fiscal policy can only be implemented within a sustainable fiscal framework.

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2.5.1 Macroeconomic Stability Related to Inflation

An important ingredient of any fiscal con-solidation agenda is low and stable inflation. In Egypt, inflation has been persistently high since June 2004, and remained paradoxically high during the fi-nancial crisis at a time when global inflation was very low. A recent rise in headline inflation, driven by fruit and vegetable prices, is an added challenge. Contin-ued inflation would have two negative impacts. First, it could jeopardize fiscal consolidation as interest rates remain high, crowding out the private sector and re-ducing growth. Second, high inflation works against the poor.

It is also to the advantage of the budget au-thority to adopt a fiscal consolidation plan which would play a role in supporting the CBE to rein in inflation. A sustained high fis-cal deficit creates inflationary pressures and limits the future ability of the budgetary authority to use counter-cyclical fiscal policy. It increases the cost of debt service thereby, reducing future fiscal discretion-ary spending. Reliance on a tighter monetary policy would have adverse consequences on borrowing costs, further exacerbating the debt service burden. Conversely, a tightening of the fiscal stance does not necessarily complicate monetary management. Fiscal consolidation should therefore be a priority. Achiev-ing fiscal sustainability will be a difficult and prolonged process, making it imperative for consolidation to be-gin as soon as possible.

The evidence in the literature on the impact of inflation on poverty and growth is mixed. While a number of studies found a significant relation-ship between inflation and increased poverty (Epau-lard, 2003; Datt & Ravallion, 2002), others have found only a statistically insignificant relationship (Agenor 2002; Hafiz, 2004). Hafiz (2004) concluded that pov-erty is more sensitive to economic growth than pric-es, and when expansionary fiscal policies are used to stimulate growth, the resulting inflation may be less damaging to poverty.

While there is some evidence that macroeco-nomic instability does harm the poor, macro-economic policies that exclusively target price stabil-ity to focus on the macroeconomy are not necessarily good for reducing poverty (Blanchard, Dell’Ariccia, & Mauro, 2010). Without due emphasis on proactive policies to integrate the poor, macroeconomic poli-cies will fail to reduce poverty (Gomes and Lawson, 2003). However, a fiscal expansion that increases pub-lic investment in the form of capital accumulation and technological innovation achieves non-inflationary, long-term and sustainable human development, as well as lasting gains to the poor (Roy & Weeks, 2004). Nonetheless, it is important to note that low inflation is also important for the sustainability of fiscal policy (IMF, 2010c; 2010d).

2.5.2 Manageable Deficits and Service-able Debt Levels

The second important element is the adop-tion of an ambitious but gradual fiscal con-solidation strategy to reduce the deficit to man-ageable levels and ensure that debt is sustainable in the medium to long term. High debt can negatively affect growth and decrease the resilience of an econ-omy. It compromises the ability of fiscal policy to re-spond to a future crisis. In a number of countries (e.g., Italy), the response to the recent financial crisis was constrained by high government debt. Italy and Japan, the Group of Seven (G-7) countries with the highest debt ratios prior to the crisis, have experienced slow growth for at least the past two decades. This is also true for emerging markets. Econometric analysis by the IMF on a sample of advanced and emerging econ-omies showed that a 10 percentage point increase in the debt ratio would lead to a slowdown in annual growth by 0.2 percentage points (IMF 2010d). The IMF is now proposing a public debt to GDP ratio of40 percent as a healthy target as compared to its pre-crisis recommendation of 60 percent. Debt reduction would help reduce interest rates, foster sustained long-term economic growth and create space for a fiscal response should another crisis emerge.

2.5 ELEMENTS OF A SUSTAINABLE FISCAL POLICY FOR COM-PETITIVENESS AND LONG-TERM INCLUSIVE GROWTH

The three major components of a sustainable fiscal policy are low inflation, manageable debt and debt service levels and investments that lead to long-term inclusive growth and competitiveness. Reducing investment is not a wise approach to correcting fiscal imbalances, which is better addressed by reducing government consumption, inefficient transfers and high wage bills. Tax increases, in many cases, may reduce growth prospects in cases where the tax burden is already high. Reducing entitlements and subsidies, and their substitution with targeted income support for low-income population groups, will be a more effective way of creating budget space for investments in human capacity building, productivity and long-term inclusive growth. This implies improved budget formulation and execution.

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The second ingredient in a fiscal consolida-tion strategy is the reduction of the budget deficit and public debt ratios. Egypt’s high pub-lic debt increases its fiscal vulnerabilities and remains Egypt’s main macroeconomic risk, and more impor-tantly, undermines efforts to improve productivity and competitiveness. The reduction in Egypt’s public expenditure by 7.8 percent was not a healthy re-duction. The subsidy bill was streamlined, potentially creating 15.2 percentage points of space for fiscal consolidation (Table 2.3b). However, 9.4 percentage points were swallowed by debt service increases (5.2 percentage points), wages (3.2) percentage points, and other current spending (1 percent), providing only 5.8 percentage points of space for expenditure reduction. Because revenues had already seen a setback, the bud-getary authority made an unhealthy choice to create space through cutting down productive spending by 2 percentage points. A more sustainable option could have been implementing smaller increases in the wage bill (1 percentage point), thus creating 2.2 percent-age points for investment spending. The contraction in investment spending will only cause the growth in output to lose steam and job opportunities to decel-erate.

The sudden jump in debt service from 15 per-cent of total spending to 22 percent (Table 2.2a) will create a medium-term heavy burden on current public spending. In addition, gross public debt remains high by emerging market standards and fiscal financing requirements have averaged around 25 percent of GDP in recent years. Continued heavy reliance on domestic bank financing could impede fi-nancial sector development, raise the cost of financial intermediation and limit private sector access to fi-nancing. Finally, sustained high levels of budget deficit will not provide room to implement sufficiently large stimulus packages to sustain economic activity should global demand fail to pick up (IMF 2010e).

The International Monetary Fund (IMF) (2010e) believes that taking immediate steps to prepare a sustainable medium-term fiscal adjustment strategy would address fiscal vul-nerabilities while providing for the fiscal costs of pension and health care reforms. Such adjustment will be critical to maintain macroeconomic stability and foreign investors’ confidence and would create space for countercyclical fiscal policy in the face of a future shock. At the same, it is not impossible given that Egypt’s public debt stands at some 70 percent of GDP and its deficit at 8.4 percent, with both ratios compar-ing favorably to other post-crisis advanced countries. The experience of other countries shows that reduc-ing the overall deficit by 5 percentage points over five years would lead to a 15 percentage point decline in the debt-to-GDP ratio.

The Minister of Finance has already an-nounced a fiscal consolidation strategy an-choring reforms that increase the low tax revenue-to-GDP ratio and streamline energy subsidies in order to durably address Egypt’s main fiscal vulnerabilities. Priorities include adopting as a full-fledged Value Add-ed Tax (VAT), complementing energy subsidy reform with better-targeted transfers to the most needy and containing the fiscal cost of the pension and health care reforms. According to this scenario, the Ministry of Finance would be able to bring down the budget deficit from 8.4 percent of GDP to 3 percent of GDP by FY 2014/15(11)—a sizable adjustment, but critical to achieving private sector-led growth and reducing vulnerabilities. Reducing the overall deficit by about 5 percent of GDP over the next five years would lead to further declines in the debt-to-GDP ratio, reduc-ing gross public debt to a safer level of 60 percent of GDP. In addition, planned tax reforms such as the implementation of a full-fledged VAT in 2012/2013, collection of property taxes and a wider income tax base will help raise revenues by 3 percentage points of GDP.

Changes in debt management would also help reduce risks associated with the large rollover requirement. The substantial and rising short-term rollover requirement (above 20 percent of GDP) is a source of potential risk, should Egypt’s fi-nancing conditions deteriorate. Increasing the average maturity of government debt issues is already under way with assistance from the World Bank. Also, with Egypt’s relatively small external debt ratio, seeking external financing on favorable terms would help to lower financing costs and lengthen maturities, in addi-tion to reducing reliance on the banking system could free resources for the private sector (IMF 2010e). The Ministry of Finance was able to raise US$1.5 billion during April 2010 (US$1 billion in 10 year maturity and US$500 million in 30 year maturity) in the inter-national market at investment grade spreads. In light of this recent development, failure to address Egypt’s public debt would destabilize investors’ expectations and increase the risk of Egypt’s foreign debt.

When the level of public debt is high and un-sustainable, reducing the budget deficit can accelerate growth by bringing down interest rates and stimulating private investment. If def-icit or debt levels are high, then a continued increase in the government deficit in response to a downturn may have a small or even an adverse effect on eco-nomic activity. Fiscal contraction may actually increase growth because it will address debt sustainability, re-duce interest rates and encourage private investment (Clements, Gupta, & Inchauste, 2004; IMF 1996; 2001; 2002). When the public sector is dominant, the invest-

11 The pre-crisis date for the fiscal deficit target of 3 percent was 2011/2012.

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ment channel is not as critical. However, in a fiscally constrained situation, increases in public sector wages at the expense of capital spending retard growth (Cle-ments, Gupta, & Inchauste, 2004).

Successful fiscal adjustments in Brazil, Ire-land, Lebanon, Lithuania, Russia and South Africa in the late twentieth century and the early years of the new millennium were am-bitious in targeting fiscal deficit reductions between 6-11 percent of GDP (Tsibouris et. al., 2006). At the same time, gradual fiscal adjustment is more likely to be sustainable because it allows the introduction of higher quality and more durable measures with lower political resistance. Successful adjustments in Finland, Sweden and Spain during the late 1990s were carried out over periods of up to a decade. Successful “fis-cal adjustments” are usually defined as successive im-provements of the cyclically adjusted primary balance or the primary balance over 3 years, and “successful adjustments” as episodes associated with sustained improvements in the (cyclically adjusted) primary bal-ance or durable declines in public debt (IMF 2010e).

Growth can substantially improve macroeco-nomic stability, but a successful debt reduc-tion strategy cannot be built solely around growth projections. International experience shows that although a higher growth level is impor-tant for debt reduction, and hence fiscal sustainability, it was not the primary factor in the top ten largest reductions in debt ratios in advanced economies over the last three decades. No credible fiscal adjustment strategy can be built on optimistic growth projections alone, as there is too much uncertainty on both the magnitude and timing of the impact of structural re-forms on potential growth to build a credible fiscal adjustment strategy primarily around this. However, strong and sustained economic growth can have a potent effect on lowering debt ratios. Higher growth makes it easier for governments to run primary sur-pluses. Sustained higher growth raises tax revenues, and the effect on lowering debt ratios can be potent. But when coupled with expenditure restraint, a one percentage point increase in growth for 10 years low-ers government debt by 29 percentage points. Coun-tries using both growth and fiscal restraint achieved excellent results, especially those focusing on growth-raising structural reforms implemented as part of the fiscal consolidation strategy (Cottarelli & Viňals, 2009; IMF, 2010c, 2010d). Reforms included establishing more competitive goods markets and removing labor market and tax distortions. Such reforms should be initiated early on because of the lag in outcome and should have conservative growth projections (IMF 2010 d).

2.5.3 Improved Budget Formulation and Execution

The adoption of a sustainable macroeco-nomic policy of low inflation and manage-able deficits with the adoption of spending priorities geared to inclusive growth and competitiveness requires a disciplined ap-proach to budget formation and execution. This implies, among other things, the ability to impose multi-year expenditure ceilings. It also implies the abil-ity to provide informed support and sound options to the budgetary authority. It further implies institutional arrangements under which fiscal priorities can be set on the basis of their contribution to growth and pov-erty reduction. Finally, it presupposes the ability to manage political and social pressures related to subsi-dies and transfers that are not conducive of these two goals and to implement fiscal reforms in a way that is not overly disruptive.

The literature on fiscal policy and econom-ic growth provides specific lessons for fis-cal consolidation. The first lesson is that the size of the fiscal deficit matters for growth. When public debt is high, a reduction in the current public expendi-ture tends to increase growth, not reduce it. Cuts in current expenditure (government consumption, inefficient transfers and the wage bill) addressed fis-cal imbalances in a sustainable manner and triggered long-lasting expansionary growth more than adjust-ments based on revenue increases. Brazil’s successful adjustment in the late 1990s was based on reducing generous pension benefits and the strengthening of its social safety nets (Tsibouris et. al., 2006).

Successful fiscal reform focused less on in-creasing taxes and more on spending re-straint but without sacrificing needed public investments. Countries such as Australia, Canada, New Zealand, the United Kingdom and the United States that exercised expenditure restraint were more successful and more sustainable (WEO, 2001). Out of 62 countries that undertook fiscal consolida-tion, economic growth and jobs creation increased significantly in 14 countries that cut expenditures. A successful fiscal adjustment was one where the bud-get deficit fell by at least 1.5 percent of GDP in the first year, where public debt fell by 5 percent of GDP over the following three years and where the bulk of the deficit reduction (two-thirds) came from spending cuts largely in transfers, government consumption and government wages and not from public investment.

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Fiscal adjustment relying primarily on tax in-creases has not been highly successful. The re-maining 48 countries that failed to increase economic growth as reported by the World Economic Outlook (WEO) 2001 reduced the budget deficit mostly by increasing revenues. The spending cuts in these cases contributed to one-fourth of the reduction in the def-icit and were all in public investment. The unsuccess-ful adjustments were actually associated with reces-sions and did not lead to a permanent consolidation, making it necessary to face yet another adjustment later (Alesina & Perotti, 1995; 1997; Alesina, 1999; Mc-Dermott & Wescott, 1998). Fiscal adjustments based on excessive revenue enhancement are not successful in reducing budget deficits because they may depress private investment incentives and thus growth. In ad-dition, projections of increased tax revenues through economic growth are no substitute for fiscal reforms.

The approach to a sustainable policy should be viewed as broadly rationalizing expendi-tures to match revenues, not as increasing rev-enues to match expenditures, especially when the tax burden is high and there is no space to raise more taxes. As explained, no credible fiscal adjust-ment strategy can be built on an optimistic growth path that puts the burden of financing unsustainable expenditures on future streams of revenue increases based on unrealistic expectations of a certain level of economic activity. When future economic expansion is dubiously assumed as the means for the economy to grow its way out of the debt problem, it may turn out to be that the needed growth is much higher than estimates for debt sustainability. This is why there is no substitute for fiscal reform (IMF, 2010c; 2010d), especially when the tax burden is already high and the legislative authorities are unlikely to approve tax increases.

The third learning lesson is that it is not only the size of the deficit but the composition of public expenditure that matters in terms of growth and poverty reduction. A fiscal adjust-ment that relies disproportionately on deficit reduc-tions through cuts in investment or other productive expenditure may lower the growth trajectory of an economy. Clemente, Gupta & Inchauste (2004) cite a number of studies that maintain that during a pe-riod of fiscal adjustment that involves cuts in current expenditure, capital spending must be maintained. Protecting capital spending during fiscal adjustment episodes helps sustain fiscal consolidation. Efficiency-enhancing expenditure switching reforms are a pow-erful instrument in creating fiscal space for more pro-ductive spending, inducing a higher growth rate for the same expenditure level (Roy. Heuty and Letouzé, 2007). Recent studies have found that cutting unpro-ductive government expenditure and reallocating the savings towards education, health care and infrastruc-

ture raised the growth rate by 0.5 percent per annum. However, when total expenditure was increased by raising tax revenues, private investment growth de-clined by 0.4 percent (Development Committee, 2007).

The theory of “optimal expenditure” identi-fies productive (public services, health care, education, transport and communication) and non-productive (transfers, subsidies) fiscal expenditure. In empirical work on OECD countries, Kneller, Bleany and Gemmel (1999) found that productive expenditure tends to increase growth and that non-productive expenditure has a much more limited impact. In addition, Gerson (1998) and Roy & Weeks (2004) concluded pro-poor fiscal poli-cies are successful when the expenditure switching alters the pattern of government spending in favor of productive spending.

Increased spending on education, health care, infrastructure, business environment, labor flexibility and research and develop-ment can boost factor productivity and long-term growth (Clements, Gupta, & Inchauste, 2004). Increases in spending on health care and primary and secondary education as a share of total spending im-prove mortality and educational attainment, neces-sary ingredients to improved productivity and long-term growth. In the absence of productive spending, the pro-poor element in fiscal policy is reduced to counter-cyclical interventions, progressive taxation and re-distributive expenditure from the current bud-get. For this reason, public investment has come to be seen as the “sine qua non of a pro-poor growth strategy” (Roy & Weeks, 2004, p. 4).

Public investment, if constrained by resourc-es, can be pursued through PPPs to similar and perhaps better effect. PPPs can insulate public investment from the financing constraint. PPPs in infrastructure projects enable the implementation of public spending while sparing the impact on the budget. PPPs are becoming an increasingly important alternative to traditional public investment. An infu-sion of private capital and management not only re-duces the immediate strain on the government bud-get but may also introduce managerial efficiency. They allow the government to spread its investment cost over time. However, internationally accepted account-ing and reporting standards are still being developed and their treatment in fiscal accounts is still uncertain and arbitrary. If they are treated as public investments, their impact on the fiscal deficit would be overstated. If they are treated as private investments and their impact on the budget is understated, there is a risk that governments will resort to PPPs just to spread the cost of public investment over time rather than maximize efficiency gains (Development Committee, 2007).

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Non-productive spending, or social welfare programs that take the form of high public sector wages, subsidies, transfers, assistance with housing and food and unemployment benefits, do less for long-term growth. Overly generous unemployment benefits in Europe may have eroded the incentive to find a new job quickly and thus may not have helped alleviate long-term poverty. Employment subsidies designed to save jobs have little impact on employment because of the heavy dead-weight losses. Firms accept subsidies to hire workers that they would have hired anyway or replace non-subsidized workers with the subsidized workers with-out increasing total employment (WEO, 2001). Hence, a fiscal policy that relies on subsidies and transfers to protect vulnerable groups yields only short-lived protection. It ignores investing in the human capital and thus relinquishes the future permanent payback in terms of jobs, growth and poverty reduction that guarantees its sustainability (Development Commit-tee, 2007).

In contrast, wage moderation(12) has contrib-uted to periods of employment-intensive growth. Improvements in the regulatory environ-ment for labor, targeted cuts in Social Security contri-butions, as well as labor market policies that address labor skills, training programs and financial assistance for would-be entrepreneurs seem to boost job-rich growth (WEO, 2001). In advanced economies, the growing role of private businesses, especially in the services sector, was a main engine of employment generation because of the labor-intensive nature of service sector jobs. The public sector, by contrast, has acted as a drag on employment and growth because of its tendency to interfere with wage moderation. Wage moderation gave employers less reason to adopt labor-saving technologies. In Egypt, labor laws and regulations have impeded companies from enter-ing into full-time formal employment contracts and have prevented some Small and Medium Enterprises (SMEs) from becoming formal entities.

Excessive public sector wages, social insur-ance and unemployment transfers also raise the tax burden. A higher tax burden slows down economic growth and, in turn, job creation. As un-employment rises, a higher percentage of the popu-lation increasingly relies on government assistance, and there is a vicious cycle of political demand for continuing these programs (Alesina, 1999).

12 Wage moderation is defined as “an outward shift in the labor supply” (WEO, 2001).

Properly administered expenditure programs, such as social safety nets, can be highly ef-fective means of redistribution and income support for the poor. Lakin (2001) emphasizes that efforts to redistribute incomes via the tax system often prove to be unproductive, and thus the primary role of taxation should be for financing government expenditures, not redistribution. Similarly, the experi-ence of the UK in using fiscal policy for income re-distribution purposes shows the minimal impact of using tax policy for this purpose. When government expenditure was used in reducing income inequality, the impact was dramatic (Ferro, Rosenblatt, and Stern, 2002).

The literature shows a strong link between social spending, especially in education, pen-sions and health reform and health insur-ance, and the formation and distribution of human capital (McDermott & Wescott, 1998; Roy & Weeks, 2004). Social welfare programs that focus on pension and health entitlements are critical for durable pro-poor growth. Health and pension entitle-ments can however be quite costly, especially if de-mographic factors are not favorable. Pension reforms, for example, need to adjust for expanding longevity by increasing retirement ages or reducing the future growth of Social Security benefits of higher-earning workers (IMF 2010d). The effect of re-distributive tax polices tends to be small and in any case cannot be implemented without adequate financing.

Effective and efficient taxation is another element of fiscal reform. Egypt has already be-gun efforts to broaden the base of those taxed and to ease compliance. The Value Added Tax (VAT) is an efficient tax instrument and has the potential for boosting revenue. It is the most potent instrument for taxing services. In the short run, improving tax collec-tions may have to rely on an improved administration (Ferro, Rosenblatt, and Stern, 2002).

Improvements in institutions that administer state funds are another important compo-nent for sound fiscal management. Improving intergovernmental fiscal relations, having clear rules for transfers within the public sector and fostering institutions that encourage greater discipline at both the state and local levels—all of these are necessary for establishing fiscal responsibility at the state level.

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The fiscal stabilization and debt reduction scenario presented above focuses only on the quantity of fiscal expenditures and does not address their quality. As discussed in the previous section, the composition of fiscal spending is equally important, especially for low and middle-income countries that want to secure competitive-ness, long-term growth and poverty reduction. A sustainable fiscal policy to finance durable growth and poverty reduction in developing countries will require more than a quantita-tive reduction in debt ratios. In fact, questions have been raised about the approach that focuses on the overall balance and gross public debt. A concern is that this approach constrains the ability of coun-tries to undertake public investments, which could have adverse consequences on economic growth in the longer term. The focus on debt and deficit targets also diverts attention from taking advantage of op-portunities to improve the efficiency of spending (IMF, 2004) and create resources for growth conducive to poverty reducing investments.

It is important to assess fiscal sustainability in terms of whether fiscal space can be cre-ated and, more importantly, what it will be used for. If fiscal space is used to address long-term challenges relating to growth and development, the indicators used in developing countries to assess fiscal solvency and sustainability will be very different from those in advanced countries. In developing countries, a more long-term and dynamic approach should be used. This includes a focus on switching from non-pro-ductive spending to productive investments that im-prove labor productivity and competitiveness. It also requires a focus on spending that leads to sustainable private sector investments, more jobs, higher growth and better incomes. Such growth will also generate future tax revenues. If a forward-looking fiscal policy incorporates long-term objectives that create a future developmental payback (Rodriguez & Moreno, 2006), the short-term macro-economic impact of public spending should not be a binding constraint if these expenditures are conducive to sustainable growth (Roy, Heuty and Letouzé, 2007).

Egypt can learn about handling major eco-nomic downturns and financial crises from the very different approaches taken by Ja-pan, Sweden and Finland during the economic crises that hit their economies during the beginning of the 1990s. Due to their very significant extent and the structural implications for these economies, these were not considered to be “normal” downturns; they were combined with distress in the real economy. The financial crises in these three countries produced a very different evolution in the trend growth of poten-tial output in each one.

Japan mishandled the crisis, and was there-fore unable to effectively deal with the con-sequences. As a result, Japan experienced a long-run slowdown in potential growth, where output losses were not recovered following the end of the reces-sion. The growth rate of potential output, which aver-aged 3.5 percent in the decade preceding the disrup-tions in the financial sector and the bursting of the asset bubbles in 1992, dropped to only 1.3 percent on average after 1992. The protracted slump resulted in a period of deflation, and a full-fledged recession in the second half of the 1990s took its toll by reduc-ing the long-run growth of the economy’s productive capacity.

In Japan, the slowdown can be accounted for by trend productivity declines because the policy response was insufficiently strong. The protracted distress in the banking sector led to con-siderable uncertainty and misallocation of resources, resulting in a drop in investment. Consequently, the accumulation of capital slowed down sharply and trend Total Factor Productivity (TFP) suffered a sig-nificant decline. Unfavorable demographic develop-ments further aggravated the situation and became the most important factor dragging down potential output growth.

In contrast, the deep and abrupt recessions which started in Finland and Sweden in 1991 were relatively short-lived and did not result in a reduction in potential output growth. Sweden and Finland (1991) were able to reverse the

2.6 QUALITATIVE ANALYSIS OF THE IMPACT OF EGYPT’S FISCAL POLICY ON COMPETITIVENESS AND DURABLE INCLUSIVE GROWTH

Analysis of the fiscal expenditure profile shows that it is not conducive to competitiveness. Unproductive spending amounts to an unsustainably high amount of 73 percent of total expenditure. This leaves very little room for competitiveness-enhancing spending. And even though revenues dipped in the 2009/2010 budget, the public wage bill and debt service saw an unprecedented rise in the expense of capital spending. Egypt has an opportunity to turn its future challenges into opportunities if it pursues an aggressive increase in competitiveness/growth-promoting spending in the context of favor-able demographics.

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1991 slowdown in their economies by implement-ing productivity-enhancing policies that put their po-tential growth rate back on track (Costello, Hobza, Koopman, Mc Morrow, Mourre & Szekely, 2009). Both countries succeeded in resuming dynamic growth within 2-3 years after the beginning of the recession. The crisis acted as a catalyst for a significant restruc-turing of their economies and resulted in a long-run boost to potential output. Finland tackled the crisis better by accomplishing a reorientation in its areas of economic specialization and succeeded in restoring high pre-crisis potential growth rates of 2.5 percent, but recovered losses in the output level rather slowly, over a period of ten years.

Sweden fared even better. It managed to achieve post-crisis strong growth that considerably exceeded the pre-crisis growth rate. The acceleration in po-tential output growth helped to recover the losses in output levels quite rapidly and put the country on a higher growth trajectory. Average potential output growth in Sweden stood at 1.9 percent in the pre-crisis decade. After a drop in the growth of potential output in the period of the crisis, the pace quickly picked up and significantly exceeded the rates of growth experienced in the pre-crisis period. As a re-sult, the loss in potential output was recovered rap-idly. In the decade following the onset of the crisis, the average potential growth rate was around 2 percent, increasing to roughly 2.5 percent on average in the following 15 years.

The adjustment in the Nordic countries was mainly due to improvements in the compo-nents of trend productivity. Both capital deepen-ing and trend TFP increased their contributions to po-tential output growth and became the driving forces of Sweden’s recovery and long-term growth. On the other hand, capital deepening grew at a slower rate in Finland and changes in trend TFP did not change sig-nificantly compared to the pre-crisis. As opposed to Japan, the demographic developments were modestly favorable to potential growth and their contribution stayed roughly the same.

The European Commission report notes an interesting comparison between Japan and Finland. Significantly different policy strategies to address an essentially similar policy challenge in both countries resulted in a fundamentally different de-gree of restructuring of the economy. Despite their differences, both Japan and Finland were faced with the same policy challenge—how to react to the con-traction in output. Both countries used fiscal instru-ments to ease the short-term demand shortfalls and to restructure their economies in a way which would re-utilize the resources released from the shrinkage of specific industries (finance, construction, traditional manufacturing industries etc) in an economically ef-

ficient manner. However, Finland used the crisis as an opportunity for a radical restructuring of its manu-facturing sector away from resource-based materials and products to high-technology, ICT-driven product ranges. These new product ranges were also linked, in a complementary manner, with the expansion of ICT-related tradable services. In contrast, Japan’s response was characterized by a significant and sustained re-duction in the importance of its manufacturing sector. In addition, Japan failed to improve the participation of labor in growth.

The ultimate outcome of the crisis for Egypt will, to a very large extent, depend on policy reactions, especially regarding macroeco-nomic policy. Increasing the long-run growth po-tential of Egypt will not be easy and will not come without cost. Public spending on wages and subsidies may have to persist for some time in the absence of alternative social safety nets. Egypt should, how-ever, gradually raise the efficiency and effectiveness of public spending by redirecting resources from non-productive spending to productive investments that increase productivity over the long-term, such as infrastructure projects (through PPPs) and spending on human capital, Research and Development (R&D), innovation and green transformation. A second key policy will be to increase the participation of labor in economic growth.

The duration of the post-crisis recovery pe-riod for countries depends on strong policy responses that overshoot in the medium-term and stay at a higher rate than the pre-crisis period for some time. The overshooting in Egypt’s case was only for one year, which is insufficient to improve pro-ductivity and sustain the economic recovery into the future. While no data is available on the impact of the stimulus package on growth, other estimates for the EU show that a one percent increase in public invest-ment could increase output by just over 1 percent in the first year. Beyond boosting domestic demand, these measures, moreover, have a long-run positive impact on the level of output through the increase in the capital stock. Thus, public investments could raise output by 0.2 percent after 5 years (European Com-mission, 2009).

Thus while the stimulus packages may have helped to uphold economic activity during 2008-2010,(13) they were short-lived and have not resolved pre-existing structural problems in the economy. Strong growth in the Egyptian

13 The view of the World Bank (2009) is that the stimulus implied in the Govern-ment’s extraordinary spending package is lower than what would be needed to offset the full impact of the fall in external demand. Econometric analysis shows that the increase in public investment necessary to achieve a 1 percent growth in Egypt ranges between 2 and 4 percent of GDP. By this measure, the stimulus package of 1.5 percent of GDP (which includes public investment as well as other categories of public spending) will not be sufficient to restore growth to the 2008 level.

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economy has not had as large of an impact on job creation as might be hoped. Chapter 2 in previous Egyptian Competitiveness Reports has discussed in detail the reasons behind continued unemployment, which to a large extent owe to an unbalanced pattern of growth that favors growth in capital intensive sec-tors. Continued unemployment reduces labor force participation, and the most vulnerable groups are ex-cluded permanently from the labor market.

In addition, the present pattern of fiscal spending will only serve to undermine pro-ductivity and jeopardize future competitive-ness and shared growth. Evidence for Egypt shows that factor productivity falls when unsustainable poli-cies are adopted such as increased current spending that crowds out the private sector. Periods of falling productivity, such as in the 1980s, were characterized by a high ratio of public investment to private invest-ment. The decline in productivity was reversed in the 1990s with the growing importance of private invest-ment in overall capital formation. The ratio of private investment to public had reached a low of 0.34 in the early 1990s; this ratio rose to 1.0 by the end of the decade. Hence, the longer-term perspective of factor productivity indicates that reduction of the size of public-sector activities relative to the private sector should be an essential element of any policy package to increase productivity (World Bank, 2009).

A second channel for decreased productiv-ity will come from labor-intensive industries producing mainly for the domestic market, where wage moderation is not expected to occur. The sectors directly affected by the global crisis were restaurants and hotels (labor intensive, high skills), Suez Canal services (capital intensive), the natural-resource based (oil extraction and natural gas, high skills) sector, and manufacturing (mixture of la-bor and capital intensive). For this reason, the effect of the crisis on aggregate employment was smaller than in East Asian countries, where the crisis has re-sulted in the near-collapse of labor-intensive manu-facturing exports, or in Eastern European countries where credit disruption was severe and unemploy-ment widespread. Labor earnings are buffered by the low labor share in value added in these activities. However, wage rigidities will cause the productivity of Egypt’s labor force to decline.

As a result, the crisis is affecting employment indirectly by reducing demand for labor in the slowing sectors, and overall employment growth will likely decelerate over the next two years. The employment growth rate is expect-ed to fall to 2.3 percent, down from the 4.6 percent average registered between 1998 and 2006 (Ahwani, 2009; World Bank, 2009). Sectors with the largest contribution to jobs generation are government (30

percent of the total), construction and building (18.3 percent), manufacturing and agriculture (each with around 13 percent), and trade, transport and finan-cial services (13 percent). Approximately 40 percent of the employed population is in the informal sector, and one-half of the wage-worker population is in the public sector (World Bank, 2009).

Reduced capital spending could result in low-er growth, lower job creation and an increase in the size of the informal labor market. Inter-national evidence shows that sudden stops in capital flows result in higher job destruction and lower job creation, with the impact being stronger in countries with more rigid labor regulation. In addition to the ef-fect of the sudden stop on job flows, the World Bank (2009) estimates that large manufacturing firms are reducing employment more than small firms, mak-ing it likely that informal employment will increase. In emerging economies, the informal labor market ex-pands as economic activity contracts, but the quality of jobs will be lower, thus increasing poverty. The ex-pected increase in informality is the result of two fac-tors: a) wages are more flexible in the informal sector, and hence falling productivity results in a larger hiring drop in the formal sector; and b) the shock has been primarily to the tradable sector, composed mostly of formal-sector firms (World Bank, 2009).

Employment in small enterprises has been af-fected more than in big enterprises. Sales of small enterprises fell by 32 percent, while those of large firms dropped by 19 percent. The lack of access of small firms to credit makes them unable to smooth out transitory shocks, which forces them to adjust faster than larger firms. If output contraction in small enterprises continues, the rise in unemployment will be larger than anticipated. Any policy should, how-ever, be directed towards increasing productivity in these units rather than artificially maintaining unpro-ductive ones in operation (World Bank 2009).

Nevertheless, Egypt is in a much better posi-tion than many other countries to implement reforms that can deal with these challenges and achieve shared growth. The crisis has result-ed in a major increase in the fiscal deficits and public debts of the advanced economies. Their gross govern-ment debt-to-GDP ratio is projected to rise from 75 to 115 percent during 2008-2014. By 2014 debt ratios will exceed 90 percent in all G-7 economies except Canada. The scale of the problem is wider than in emerging countries. If a fiscal adjustment by these countries is started in 2011, it will take 10 years to achieve 8 percentage points of GDP fiscal adjustment to reduce public debts in these countries to below 60 percent (Cottarelli & Viňals, 2009).

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Allowing the fiscal stimulus to expire will only reduce deficits in advanced economies by 1.5 percentage points of GDP, the rest of the debt overhang reflects revenue losses as economic activity plunged. In addition, both the scope for raising more taxes and for making spending more efficient in or-der to create resources to finance growth inducing spending would be narrow. Most advanced countries already have high revenue-to-GDP ratio which mean that most of the adjustment, as opposed to Egypt, will have to take place on the spending side, with impli-cations for future growth. However there is scope for generating some revenues from carbon taxation (Cottareli & Viňals, 2009).

As the advanced economies recover, there is a risk that their high debts will cause interest rates to rise and that their debts will have to be inflated away. While the effects on the world economy (including on real interest rates) of having many advanced economies running debt ratios in the vicinities of 100 percent are unknown, it is pos-sible that debt maturities could shorten. This would increase risk premia, which could give rise to a refi-nancing crisis—this time with the public sector—and growth could weaken considerably. Avoiding this pes-simistic scenario for developed economies requires placing the fiscal accounts on a path much stronger than before the crisis, in order to ensure the resil-ience of the fiscal accounts to the expected demo-graphic shock.

Demographic trends in the advanced coun-tries are working against fiscal improve-ments. The global financial shock could not have hit them at a worse time: when they were targeting fis-cal reforms to prepare for the demographic shock of ageing societies. The net present value of future in-creases in spending due to ageing is more than ten times as large as the fiscal cost of the crisis. A number of structural reforms must be started to affect the long term spending trend on entitlements (Cottareli et al., 2009).

Nonetheless, Egypt also has great scope for implementing a pro-poor growth fiscal poli-cy. First Egypt has favorable demographic trends, with many people now entering their most productive years. Second, policy reforms at the microeconomic level, including improvements in the business environ-ment and regulatory reform, hold much promise for eliciting new investment and boosting productivity.

Subsidies represent a potential source of pro-growth investment. For the marginalized groups, the social safety net in the form of subsidies was sup-posed to address poverty. This approach could have

worked as long as growth was strong and there were increasing resources to be used for expanding spend-ing on the social sector. But as we saw throughout the Chapter, it has failed to sufficiently support the productive activities of the poor and hence has not promoted inclusive growth. In addition, targeted social protection is weak.

However, there is potential for faster and sustainable growth if the composition of ex-penditures begins to shift towards productive investments such as education, health and infrastructure. Efficiency gains from unlocking and redirecting resources from such unproductive spend-ing to the productive sectors could be used to finance a number of productivity-enhancing measures.

In the case of energy subsidies, reducing and streamlining subsides will positively impact competitiveness. Despite the post-crisis decline in international oil prices, more than a quarter of Egypt’s primary spending and about two-thirds of govern-ment subsidies still go to a few petroleum products (gasoline, diesel, Liquefied Petroleum Gas (LPG), kero-sene, and fuel oil).

Subsidies on diesel and gasoline are highly regressive and crowd out other social and in-frastructure spending that would have great-er impact on poverty reduction. Studies by the World Bank provide evidence of the disproportionate benefits to higher-income households (almost twice as much than for low-income households) who use subsidized diesel and regular gasoline. In addition to several ad-hoc domestic fuel prices adjustments since 2004, the government launched a plan in late 2007 to bring energy prices close to actual costs by 2010. The plan entailed an immediate increase in the en-ergy prices for energy-intensive industries and a one-year grace period for non-energy intensive industries. However, during late 2008 and in the context of the crisis, the government postponed the streamlining of energy subsidies until 2014 (IMF 2010e). Energy sub-sidies represent a potential source of fiscal space and they would be consistent with the goal of inclusive growth.

Reductions in the current budget can create resources to finance future productive in-vestment. In the case of public sector wages being used as a form of income redistribution, high wages encourage rigidities in the supply of labor to the pri-vate sector. In addition, they encourage a mismatch between supply and demand for skills. Disparities also exist across regions and by age group. Youth unem-ployment tends to become higher than adult unem-ployment. Unemployment among women is higher than among men, and unemployment rates differ con-siderably across regions (http://www.capmas.gov.eg).

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The focus of economic policies should there-fore be on increasing productive employ-ment, not income redistribution through gov-ernment jobs, as a means to sustainably increase the incomes of marginalized segments of the popu-lation. Continuous high unemployment punishes the economy in the future more than it punishes it today, and may cause permanent damage to employability. As businesses slash investment spending during a crisis, the economy’s potential for years to come is compromised. Not only is the economy’s potential in trouble, but high unemployment falls disproportion-ately on young workers — and those who enter the work force in years of high unemployment suffer per-manent career damage, never catching up with those who graduated in better times (Krugman, 2009).

Spending on education and training to im-prove labor skills would contribute to both poverty reduction and improved productiv-ity. Recent studies have noted the twin effect of spe-cific types of investment that boost the incomes of the poor while improving productivity (Lanchovichina & Lundstrom, 2009). Productivity led growth lends resilience to an economy because output grows not through longer hours spent at work but through bet-ter and more effective hours (IMF, 1998b). The heavy weight of current spending in total public expendi-ture at the expense of empowering investments such as education, health and infrastructure will continue to undermine growth in the productivity of Egypt’s labor force. Although labor productivity in Egypt has seen significant increases, it has stalled more recently. According to the ILO (2009), productivity in Egypt, measured by GDP per engaged person, increased in 2007 alone by 4.4 percent compared to 1.5 percent growth between 1979-1997, and 2.6 percent growth between 1995-2008. In 2008 productivity grew by 4.5 percent only.

Further declines in productivity took place during the financial crisis. The external demand shock has resulted in lower output, while input uti-lization, especially of labor, has been slow to react; this implies lower factor productivity or, alternatively, higher real costs per unit of output. The most se-verely affected sectors were: plastic, tourism services, non-metal industries, metal industries, and hotels. Ca-pacity utilization fell by 21 percent on average, from 70 percent utilization to 55 percent. The largest falls occurred in chemicals (from 80 percent to 50 per-cent) and metallic industries (from 79 percent to 60 percent). Hence, while output (measured by sales) fell quickly, employment has been slow to adjust, and the capital stock remains fixed, increasing the cost per unit of output (World Bank, 2009).

A cyclical fall in productivity must be framed within a longer-term perspective. Experiences in many advanced countries show that productivity shows a stable long-run trend, and deviations from it are reversed through time. However, in emerging economies, the productivity trend is more volatile, and hence shocks tend to be more persistent. For instance, in Mexico, factor productivity recovered its pre-Tequila level only five to six years after the shock (World Bank, 2009).

Many spending priorities could more ef-fectively achieve the twin goals of inclu-sive growth and sustainable competitiveness through improving productivity. The proposed spending priorities mentioned below represent an il-lustrative set of activities that would meet both objec-tives. They would focus on increasing the productive capacity of the economy in a sustainable way and they would simultaneously focus on inclusive growth in ways that reduce poverty.

The key approach to increasing productivity in Egypt is to improve educational attain-ment because it is associated with a produc-tive, skilled, adaptable workforce, and en-courages higher labor market participation rates (European Commission, 2009). This entails spending on all forms of education to increase the competences of the labor pool, as well as establishing a new policy environment that leads to new jobs and income for the labor force, whether in the form of wages from firms or from self-employment in small businesses (Ianchovichina & Lundstrom, 2009).

Financial incentives aimed at enhancing la-bor supply are important because they can help protect the most vulnerable groups of the labor force from long-lasting exclusion from the labor market. Spending on youth employment schemes to facilitate their entry into the workforce is one very important productivity-en-hancing fiscal measure (European Commission, 2009). Improving the educational attainment and skills acqui-sition of children and youth as well as those of work-force age is a priority, as is the expansion of access to computers and the Internet as well as training in how to use them for those who are not computer literate.

Labor market reforms and active labor mar-ket policies that facilitate labor market tran-sitions will encourage employment genera-tion. Targeted and temporary hiring subsidies may help advance employment creation. Other active labor market policies would include training to make the process of matching workers to jobs more effective, and increasing vocational retraining programs. Coun-

tries are also moving from rigid labor policies to a “flexicurity” approach, which helps laid off workers to retrain for and find new jobs and to operate in flexible labor markets (Costello, Hobza, Koopman, McMorrow, Mourre & Szekely, 2009). Such policies could help in easing the necessary restructuring of the Egyptian economy during the crisis, enhancing the labor supply, smoothing the adjustment in labor mar-kets (from government jobs to private sector jobs, and from services to manufacturing) and strengthen-ing the growth potential through boosting innova-tion (WEO, 2010a). They would also serve to reduce structural unemployment in addition to enhancing the longer-run reallocation of resources in the economy and serving to boost competitiveness and adjustment capacity.

Fiscal spending on infrastructure is crucial to promoting the contribution of private invest-ments to growth. One positive impact of the fis-cal stimulus package has been its impact on increased private investment in construction, infrastructure and manufacturing, despite lower FDI. A number of com-panies have announced expansions to their plants or a resumption of their investment plans (Beltone, 2010).

Policies promoting innovation, entrepre-neurship and R&D help boost productivity in existing industries and can help to develop new industries. Promoting the commercialization of research at Egypt’s private and public universities is one approach. Tech parks and incubators are another. Improving the policy environment for entrepreneurs is also important, and this approach would most likely not require public spending but rather regulatory re-form.

While these fiscal policies would help in-crease productivity, other supportive mea-sures would need to be implemented. One key reform would be to address the current pattern of unbalanced growth discussed in the last two Egyptian Competitiveness Reports of 2008 and 2009. Macro-policies in Egypt have promoted fast growth in sec-tors that need highly skilled labor. At the same time, the education system does not equip the majority of workers with the skills needed by the market in these sectors. Thus there is a significant gap of skills in Egypt’s workforce.

Providing incentives to direct some FDI to more labor intensive sectors would help ad-dress the economy’s unbalanced pattern of growth that favors growth in capital inten-sive sectors and opportunities requiring high skills that the workforce does not possess(14) . Empirical studies have shown that the predominance

14 Please refer to Chapter 2 in the 2008 and 2009 Egyptian Competitiveness re-ports for a detailed discussion

of capital contribution over that of labor and TFP growth explains growth performance in the MENA region, not only Egypt, during the period 1960-97. In comparison with other regions of the world, TFP growth was the least important source of growth in the MENA region (World Bank, 2009).

Attracting more FDI and the associated tech-nology transfers will boost productivity and potential output growth. As Egypt’s economy grows strongly and more inclusively, it will be able to counteract persistent appreciation pressures on the pound that could undermine competitiveness and be counterproductive (IMF, 2010e).

Labor skill shortages are a key constraint on growth in Egypt and the MENA region. Page and Gelder (2001) and Karshenas (2001) argue that a prominent feature of the MENA economies, inherited from the past experience of development, is the low stock of labor skills and human capital compared to other countries with similar levels of per capita in-come. While MENA countries use low labor costs as a selling point to potential investors, many businessmen find this low cost illusory due to a shortage of work-ers with the appropriate skills.

Reducing the labor skill shortage would re-quire major changes in national strategies on education to cater more to the needs of the private sector, perhaps with greater private sector participa-tion in both the provision and financing of education. In addition, a longer-term strategy of vocational train-ing and improving syllabi in schools would need to be implemented. Studies have estimated the following impact of an increase in the share of medium-skilled workers (through retraining activities): a 1 percentage point increase leads to almost a 0.2 percent increase in the long-run output level. A 1 percentage point in-crease in the share of high-skilled workers (through upgrading medium-skilled workers) bolsters the long-run output level by 0.3 percent (European Commis-sion, 2009).

Increased business investments in general are important for ensuring rapid productivity in-creases. More business investments can lead to high-er productivity growth through an enlarged capital base. Over the long run, gains from faster productivity growth should be shared among people equitably, as higher productivity translates into a virtuous circle of more jobs, higher incomes, increased investments and rising productivity (Weller & Logan, 2008). Improving the business climate also influences the formalization of the informal sector and increased private sector employment (AfD, 2005). If improvements in the in-vestment climate target small and medium companies,

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it is likely that larger firms will benefit as well (Ferro, Manuela; Rosenblatt, David; and Stern, 2002).

One of the most powerful levers will be that of lowering the real cost of capital through the sound fiscal stewardship mentioned above. Credible reductions in interest rates that are seen as sustainable and driven by the market will do much to encourage investment and jobs. While a reduction in the cost of capital would help encour-age private investments, it has to be accompanied by increased lending to the private sector. Lending rates to the private sector have been low despite ample liquidity in the banking sector.

The losses in the financial sector a few years ago have led to an increase in risk aversion in Egyptian banks and a lasting re-evaluation of all forms of risk premium, including the more expensive cost of bank loans. This may have an adverse effect on investment and potential growth. Improving the func-tioning of financial markets will also have a powerful effect on potential output. It will facilitate resource re-allocation toward the fast-growing sectors during the recovery. In addition, according to estimates from the EU (European Commission, 2009), an increase in the loans supply by 10 percent could increase real activity by as much as 4 percent.

The issue of access to credit must also be given a priority, especially for small and me-dium enterprises that continuously have dif-ficulty getting access to formal bank credit. Many firms are also hesitant to become formally reg-istered, which also impedes their access to finance and thus forces them to recur to individual loans. SMEs heavily rely on bank loans as their main source of funding, but such funding is rare in Egypt, available only through traditional micro-lending from the Social Fund for Development.

Longer-term measures to increase access to finance could include establishing public credit information registries, or preferably pro-active government promotion of private credit registries or bureaus (Miller, 2003). In many countries establishing a complete and reliable land cadastre and a mechanism to ensure clear titles to land and property, expanding the pool of assets to be used as collateral, and strengthening lender’s property rights and enforcement could also help to significantly reduce the access to finance constraint over the long-term

Policies that promote wage moderation and aim at reducing nominal wage rigidities re-sult in reductions in structural unemploy-ment and are a key to boosting competitiveness and adjustment capacity (European Commission, 2009). The persistence of high unemployment risks become entrenched over the medium term (even though job creation may increase) (WEO, 2010). As such, combat-ing unemployment through wage moderation and the alignment of wage increases with productivity growth would be a key policy reform. The experience of EU countries has been that a reduction of 1 percentage point in wages boosts potential output by over 0.3 percent (European Commission, 2009).

Another growth-enhancing measure would be to improve labor policies. The first policy fo-cus would be to improve the labor force participation rate. The second would be to increase the participa-tion rate of labor in economic growth. Such labor policies are pro-poor because they serve to enhance the supply of labor through a variety of incentives. Spending on such policies has not been sufficient dur-ing the crisis and is assigned limited resources under a couple of programs. On the other hand, the gov-ernment should resist protectionist temptations that would reduce labor market participation, such as early retirement schemes, because they could significantly reduce the level of potential output. In addition to being fiscally costly, these policies have proven to be ineffective, as reduced labor participation may harm future growth (European Commission, 2009).

There is also a need to address the two-tier labor system in Egypt and reduce barriers to formal employment. Egypt’s labor market suffers from a number of non-fiscal barriers to promoting productivity. The labor market in Egypt is segmented (two-tier), with employment legislation providing high and strict protection for permanent government em-ployees. Many benefits provided for in the law act as disincentives for the private sector to hire permanent workers and provide them with job security. This has resulted in a complex system of open-ended insecure contracts in the private sector with minimal protec-tion for workers. Increasing employment security gradually with tenure could help reduce the negative impact of temporary employment contracts on hu-man capital formation and the lack of unemployment benefit coverage for such workers. Reforming the environment governing labor regulations is crucial to reducing the dependency on the public sector to be the major provider of employment by making private work economically attractive.

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The Green Transformation(15) is an impor-tant growth strategy. As presented elsewhere in the ECR 2010, investments in green technologies and a comprehensive approach to positioning Egypt in these new industries could create “early mover” advantages for Egypt and create sustainable jobs. Well-designed and targeted innovation policies in the area of green technologies could play an important role in stimulating productivity growth and boosting invest-ment coming out of the present, deep economic cri-sis. Furthermore, many of the existing environmental technologies are beginning to mature, with a signifi-cant additional efficiency potential being available due to economies of scale and learning curve effects in advanced economies. A push for the development of such technologies and their deployment in combina-tion with standards and incentives (for households, buildings, and transport), would lead to significant capital formation by businesses and households and would provide a boost to TFP (European Commis-sion, 2009).

There are many potential sources of financ-ing for these growth-enhancing public ex-penditures. There is scope for improving revenue generation from its current low levels in order to fi-nance Egypt’s growing expenditures. Tax mobilization is below its potential, with the ratio of tax revenues to GDP standing at a moderate 25 percent (MOF, 2010). This compares to 36 percent for OECD countries and 32.5 percent for Turkey. Hence, there is scope for wid-ening the tax base through continued tax administra-tion reform and the fighting of tax evasion. Increasing coverage will also play an important role by providing incentives for formalizing small businesses and the in-formal sector. A full-fledged VAT would be a powerful revenue generator. Efficiency gains from streamlining and better targeting of subsidies would be another. Efficiency gains could be redirected to productive ac-tivities. In addition, the balance between investment and recurrent expenditure could be further enhanced to allow for more productive spending.

Given the potential for raising addition-al revenues through a widening of the tax base, some increases in education and health spending can be achieved. Expenditure on edu-cation is low, standing at 1.4 percent of GDP in 2010, almost unchanged from its 2008/2009 level. Spend-ing on health has also increased marginally from 3.7 percent of GDP to 3.9 percent. Improvements in education outcomes are much needed to improve labor skills and the competitiveness of the economy, especially when 33 percent of the population is below the age of 14 (CAPMAS). Improvements in educa-tion outcomes could be achieved if education takes a higher share of subsidies than allocations toward

15 Climate and the environment are addressed in Chapter 3

teaching material, teacher training, and other educa-tional services.

Cutting current spending in Egypt will prove difficult especially when expenditure items include government wages, subsidies, and “treatment” at the expense of the state. All three items are politically attractive. In addition such spending benefits a number of influence groups such as government employees and Members of Parlia-ment. Not only is such spending very difficult to cut, but is also expected to increase every year as more people join the government for employment, and as the growing population relies on subsidies.

Another source of financing would be to re-balance growth from external sources to do-mestic sources and to run smaller balance of payments surpluses in the future. In countries where the current account surplus narrowed signifi-cantly in response to macroeconomic policies that stimulated domestic demand, such narrowing reflect-ed both a significant fall in saving and a sharp rise in investment(16) . Surplus reversals in these countries were associated with higher lower growth in output and employment. Average output growth in the three years following the start of a reversal of a current ac-count surplus was higher than in the preceding three years by 0.4 percent. Demand frequently shifted from external to domestic sources, with rising consump-tion and investment offsetting a fall in net exports. The level of employment increased as the increase in em-ployment in the non-tradable sector more than offset the decline in employment in the tradable sector. The quality of growth improved as the balance between external and domestic demand and between growth in the tradable and non-tradable sectors improved (WEO, 2010a). There is space for Egypt to make use of the strength of its balance of payments. During the crisis, the current accounts surplus turned to a deficit of a mere 0.7 percent of GDP. Egypt can still afford further widening of the deficit to improve productiv-ity.

There is potential for pro-poor fiscal policy in Egypt when Parliament enacts the new pension law. The new draft Pension law aims to strengthen the sustainability of Social Security and its efficiency by establishing a new defined-contribution system, plus substantial parametric reform of the ex-isting defined-benefit system. Health reform seeks to improve quality and unify the fragmented financing and delivery of health services by adopting universal health insurance. The underlying threat to fiscal sus-tainability likely to come from forthcoming increases in relation to pension reform is mitigated by favor-able demographics. The pension social security defi-

16 Although exchange rate appreciation was a common feature in many surplus reversals, overshooting rarely occurred.

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cit is --- percent of GDP and is likely to go down as retirement ages increase. Given the relatively sizeable adjustment, the gradual approach set in the Pensions Law lends credibility to the feasibility and durability of the change in direction of fiscal policy. In this regard, reliance on tax revenue-enhancing measures should help improve sustainability (IMF 2010e).

All these changes will require a strong po-litical commitment. The heavy spending from the current budget on wages and subsidies has served for years as a short-term social safety net. Egypt’s pro-poor fiscal agenda reflects pressures in developing countries to increase such spending in the absence of an efficient system of pensions, social assistance and other entitlements. These pressures serve to raise the overall level of expenditure and shift spending away from growth-related and productivity-enhancing ex-penditure. This pattern of spending cannot be con-sidered to be a component of a long-term pro-poor growth strategy because lower spending on produc-tive spending reduces access to education and hence to high-paying quality jobs.

Changing the composition of budget expen-diture in the favor of pro-poor policies is not sufficient; governance structures are needed to foster a level playing field for businesses to enhance productivity and competitive-ness. The budgetary institutions in Egypt need to be strengthened in order to be able to manage the medium-long term fiscal consolidation strategy. Embedding a longer term growth objective in a fiscal strategy requires a high degree of planning, coordination and implementation. Equally important would be the development of effective institutions for revenue mobilization (Development Committee, 2007).This long term perspective is meant to comple-ment—not replace—fiduciary assessments focused on short-term fiscal solvency and sustainability which may underestimate the future payback from produc-tive spending.

The budget authority would have to establish rules and norms within the long-term fiscal framework that specify the total package of quality public investments (education, health, infrastructure and defense) that can be demonstrated to provide significant long-term returns to the economy (Cottareli & Viňals, 2009; IMF, 2004). In addition, it would be important to add a fis-cal rule that recognizes the distinction between cur-rent and capital expenditure and assures that when-ever fiscal restraint is needed, the first resort is to discourage growth in current spending and maintain growth in the aggregate public capital stock. Thus, the long-term and non-negotiable policy target for fiscal responsibility in a long-term fiscal framework would be that all current expenditures must be financed en-tirely out of current revenues.

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Expenditures and taxation policies in Egypt reflect political economy choices and institutional arrange-ments of the country; but they address only the short term perspective of growth. Fiscal policy can play a much better role in improving Egypt’s competitive-ness and sustainable pro-poor growth if the planning and fiscal institutions take a longer term and transpar-ent outlook for determining policy decisions.

Regarding fiscal sustainability, a mere reduction in the budget deficit and public debt levels that is not ac-companied by improvements in the composition and efficiency of public expenditure will not achieve the goals of competitiveness, inclusive growth and pover-ty reduction. Strong and sustainable economic growth in Egypt could be enhanced by shifting funding from unproductive government programs to segments that impact productivity, such as education, health and in-frastructure. However, the shorter term perspective has dominated, and the practice has been to direct fiscal policy towards achieving short-term unsustain-

able pro-poor gains in the form of current spending on wages, subsidies and transfers. This short-term spending has been at the expense of growth related spending in the form of capital and competence en-hancing expenditures. Such spending pays off in the future because it increases long term productivity, improves competitiveness and triggers durable job-creating growth.

Better budget execution and project management would also ensure that the re-allocated spending is ef-ficiently translated into productive investment. In this regard, fiscal institutions and budget processes are key elements that affect the efficiency of fiscal policy.

Finally, while identifying the flaws of existing policy is relatively easy, defining a new macroeconomic policy framework is much harder. Egypt, however, has a gold-en opportunity to start paving the way for improving the competitiveness of its economy in order to real-ize sustainable and shared growth.

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European Commission. 2009. Europe 2020. Intelligent, sustainable and inclusive growth. Impact of the current economic and fi-nancial crisis on potential output. Occasional Papers, Staff of the Directorate-General for Economic and Financial Affairs. http://ec.europa.eu/economy_finance/publications/publica-tion15479_en.pdf

Ferro, Manuela; Rosenblatt, David; and Stern, Nicholas Stern. 2002. Policies for Pro-Poor Growth in India. Cornell University.

Fox, Louise. 2000. Making Fiscal Policy Work for the Poor. The World Bank.

G-20 Leaders’ Meeting. 2009 a). A Framework for Strong, Sustain-able, and Balanced Growth. The Pittsburgh Summit. Sep-tember 24 – 25, 2009.

G-20 Finance Ministers and Central Bank Governors’ Meeting. 2009b). A Framework for Strong, Sustainable, and Balanced Growth: Developing the ‘Mutual Assessment Process’. St. Andrews, Scotland, November 6-7, 2009.

Garelli, Stéphane. 1996. Winning the Competitiveness Race. Economic Reform Today, Volume 2.

Gerson, Philip. 1998. The Impact of Fiscal Policy Variables on Output Growth, IMF Working Paper 98/1. Washington, D.C.: Inter-national Monetary Fund.

Ghanem, Amina. 2009. The Egyptian Economy in the Face of the Global Financial Turbulence: Steady through the Storm? In Beyond the Financial Crisis: Competitiveness and Sustainable Develop-ment, Chapter 2. Cairo: Egyptian National Competitiveness Council).

Gomes, Rafael; and Lawson, Max. 2003. Pro-poor macroeconomic policies require poverty and social impact analysis. Economic Policy Empowerment Programme.

Gupta, Sanjeev; Verhoeven, Marijn; and Tiongson, Erwin. 2004. The Effectiveness of government spending on education and health-care in developing and transition economies. In Sanjeev Gupta, Benedict Clements and Gabriela Inchauste, eds., Helping Countries Develop: The Role of Fiscal Policy. Washington, D.C.: International Monetary Fund.

Ianchovichina, Elena, and Lundstrom, Susanna. 2009. What is Inclu-sive Growth. World Bank. http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-218567884549/WhatIsInclusiveGrowth20081230.pdf

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GREEN TRANSFORMATIONEgypt’s New Perspective

3.1 EXECUTIVE SUMMARY Governmental spending on health is steadily rising and a growing population is put-ting pressure on the resource supply. Global competition is tough and Egypt needs new engines of growth to drive its economy and job market. What if there is only one answer to all these challenges: the Green Transformation?

This chapter defines the term “Green Transformation” and jus-tifies its importance for the future of Egypt. It presents international experiences that show how other countries, including many developing countries, are moving faster than Egypt to take advantage of the upcoming opportunities. With Egypt’s high abundance of solar and wind resources, it is extremely impor-tant for the nation to position itself in a way that allows it to fully benefit from what many politicians, the media and scientists all over the world are calling the next big era in human history, after the Industrial Revolution and the Information Age.

* Sherif Arif is a Senior Environment Consultant and Former Regional Environmental Advisor at the World Bank and has advised many governments in the Middle East and North Africa region on environmental policy.

The ENCC would also like to recognize a number of experts and commentators who have provided inputs on this topic and who have reviewed and commented on the Green Transformation chapter, especially Dr. Hussein Abaza, former Chief of the Economics and Trade Branch-United Nations Environment Program (UNEP), Mr. Philipp Maximilian Boes, Sustainability Project Manager-Sustainable Entrepreneurship Centre-Heliopolis Academy and Ms. Yasmine Fouad, head of GEF Unit/CEO office- Egyptian Environmental Affairs Agency (EEAA).

Sherif Arif *

3

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Climate change poses a severe challenge for humankind and all nations must act. There is now broad consensus about the danger of climate change. Business as usual is simply not an option any longer. People must realize that in 30 years the world will change dramatically. The coming Green Revolu-tion will involve impacts on the economy and on daily life, comparable in scope to the introduction of the Internet in its impacts. The Green Transformation will change all aspects of life.

The Green Transformation will bring eco-nomic, environmental and social benefits to Egypt while helping to improve the com-petitiveness of Egypt’s industries. A successful Green Transformation of Egypt’s economy offers mul-tiple, simultaneous and interrelated benefits that will boost Egypt’s competitiveness economically, socially and environmentally.

Economic Benefits – Green technologies can help Egypt to compete in global markets, satisfy rising envi-ronmental standards, attract foreign direct investment and stimulate high-end technology industries. Sustain-ability and environmental soundness is no longer seen as an economic burden. It is now increasingly under-stood that pollution represents wasted resources and inefficiency. Lower energy consumption can be an im-portant driver of savings. Furthermore, sustainability is increasingly being linked to innovation. Industries tied to the Green Transformation will generate eco-nomic growth and jobs in Egypt. Meanwhile, specific industries such as tourism, agriculture, manufacturing, construction, logistics and others will improve their productivity and product quality. As a result, the Egyp-tian economy will become more competitive inter-nationally. The Green Transformation will also reduce Egypt’s vulnerability to future energy price shocks and expand Egypt’s energy independence.

Environmental Benefits – Taking the path to-wards a low-carbon society, the Green Transforma-tion will be Egypt’s unique contribution to mitigating climate change, a threat to which Egypt is especially vulnerable. Egypt can become more competitive and play a leadership role in the global effort if it is seen as taking a leadership role in confronting this problem at home. Furthermore, Egypt suffers from air pollution, water pollution, water quality waste management problems and land degradation. If no actions are taken to reverse the degradation, pressure on Egypt’s natu-ral resources will increase under severe population pressure. The over-exploitation of natural resources will affect the quality of life of all segments of society, especially the poor.

Social Benefits – The Green Transformation will also have positive effects on people’s health through reduced air pollution, less harmful production pro-cesses and cleaner water, which in turn will decrease costs for the public health system. Also, greener and cleaner cities improve the quality of life. The Green Transformation will mean a more pleasant living and working environment. Reduction of stress and pol-lution in the daily commute will have benefits for physical and mental well-being. Green Transformation could be an engine for job creation. As an example, re-newable energy projects could provide jobs both for private sector and the local community. Through both an increased living standard and reduced unemploy-ment, the Green Transformation is going to improve the overall well-being of the Egyptian people and is thus an important factor in ensuring Egypt’s political and social stability.

This chapter presents a vision and strategy for the Green Transformation of Egypt. The implications of this strategy for the government, private sector, aca-demia and NGOs are presented. This strategy con-tains implications for the national government, the private and business sector and civil society. The gov-ernment should set the course towards the Green Transformation with the following steps:

a. Make a clear and comprehensive policy statement and back this with financial commitments

b. Realign the existing regulatory and institutional framework

c. Design an incentive system for green investments

d. Establish a task force on green transformation and a “one-stop” office for green investment promotion

e. Promote education on green opportunities, tech-nologies and sustainable growth

f. Raise public awareness of green technologies

g. Establish a benefit tracking system to evaluate Egypt’s transition towards a greener economy

The Egyptian National Competitiveness Council (ENCC) will explicitly incorporate a Green Transfor-mation component into the national competitiveness strategy it is preparing at the request of the Prime Minister and will host workshops to elicit inputs from a broad cross-section of private, public and civil soci-ety leaders, leading to the implementation of a com-prehensive Green Transformation program.

It is intended that this Egyptian Competitiveness Re-port (ECR) launchs a national dialogue on the Green Transformation of Egypt leading to concrete changes in policies, strategies and behavioral patterns that en-able Egypt to play a leadership role in what will be one of the major economic transitions of the 21st century.

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3.2.1 Definition of the Green Transfor-mation

The Green Transformation can be defined as the transition to a low-carbon economy characterized by new and renewable energy and sustainable environmental practices. It will profoundly improve people’s quality of life. It will also involve new technologies and new industries that will become the growth industries of the 21st cen-tury. Countries and companies that catch this wave early on will participate in this economic growth. The Green Transformation will affect all industries and will have particularly important impacts on energy, con-struction, transportation, agriculture, manufacturing, tourism and retail. It will also have major implications for the financial and information technology sectors.

The Green Transformation refers to the change in mindsets, attitudes, values and principles that create the conditions for sus-tainable development. Green Transformation describes the economic, social and technical prac-tices that improve the local and global environmental quality. Green Transformation is also the strategy by which governments and businesses proactively make the transition to a future characterized by resource efficiency, new and renewable energy and healthy en-vironmental practices. The Green Transformation is inevitable as non-renewable resources become scarce and as more value is placed on the quality of life and on human health.

The Green Transformation applies to all eco-nomic sectors. The Green Transformation applies to a number of specific sectors beyond the transition to new and renewable energies. It includes conser-vation and efficiency of conventional energy. Green transportation also refers to the use of hybrid vehi-cles or those using clean-burning Compressed Natu-ral Gas (CNG). Green agriculture refers to the use of organic crops and sustainable water management. Green building deals with environmentally friendly materials and energy efficient fixtures. Green growth refers primarily to the growth in human prosperity and quality of life.

The Green Transformation is relevant to ev-ery Egyptian industry. It applies to manufacturing and mining. It also applies to information technology, tourism and even retail. In environmental terms, it means improving efficiency in the use of energy, water and materials. It means reducing pollution. It refers to policies that lead to careful stewardship of water and energy, as well as savings from more efficient practices that can be channeled into social services and other welfare enhancements. This requires a transformation from traditional economies into economies that are climate-friendly and sustainable.

3.2.2 Importance of the Green Transfor-mation to the Future of Egypt

The Green Transformation, one of the 21st century’s important economic revolutions, could bring important economic, social and environmental benefits to Egypt. Timely action will help to ensure that Egypt benefits from this revo-lution. However, lack of action could bring negative consequences for Egypt’s economy and the industries and companies that get caught by surprise.

3.2.2.1 Economic Benefits

The Green Transformation will have favor-able economic impacts for all Egyptian in-dustries that either use energy, need to re-duce waste or need to compete on the basis of modern, global environmental standards. It will also enable Egypt to compete in new growth industries related to renewable energy production and maintenance. As noted in chapter four of the 2010 ECR, Egypt has considerable comparative ad-vantages in both wind and solar power. Smart policies to encourage the transition to these sources, even in advance of the immediate price signals coming from global markets, can help to ease this transition and position Egyptian firms as players in this future global industry.

Egyptian industries and investors can benefit by being part of new global growth industries related to alternative energy, environmen-tal controls and other technologies. Globally, renewable energy has been increasing annually at be-

3.2 GREEN TRANSFORMATION: AN IMPORTANT GLOBAL TREND FOR EGYPT

This chapter encourages Egyptian leaders to consciously adopt the goal of making a successful “Green Transformation” in Egypt. The concept of a “Green Transformation” is still relatively new in Egypt. By making this the central focus of the 2010 ECR, the ENCC seeks to create awareness and stimulate dialogue leading to effective government policies, industry strategies and educational initiatives that will enable Egypt to play a leading role in this global transition. Many economic, environmental and social benefits underscore the importance of the Green Transformation approach for the future of Egypt.

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tween 15 and 30%. This growth occurs mostly in wind power, which has surpassed solar photovoltaic (PV) power and other technologies, and is followed direct-ly by bio-diesel.

The Green Transformation will improve the productivity and efficiency of the economy by reducing waste. Pollution is not only damaging to people and the environment, it represents a dra-matic loss of resources. Green Transformation poli-cies applied to transportation and housing can reduce the waste of both time and precious fuel in Cairo’s infamous traffic congestion. Smart solutions to these difficult problems can improve the productivity of people through shorter commuting times. They also improve the productivity of transportation by reduc-ing the unnecessary waste of fuel. In many cases, green efficiency also means reducing operational costs due to lower energy consumption.

The Green Transformation will help to en-able the industrial sector to lower its produc-tion costs, guarantee future access to energy, and thereby compete globally. Currently, Egypt’s non-petroleum exports make up only 7.3% of the GDP.(1) Non-oil exports can be a motor for Egypt’s economic growth and job creation. As noted in the Industrial Competitiveness Report of 2009, industri-alization is extremely important for most emerging economies. It creates jobs, builds prosperity and mod-ernizes the workforce. That report also notes that cli-mate change will reduce productivity in many African countries, losses that can in part be offset through in-dustrialization. Green Transformation will help Egypt’s industrialization.

Green Technology will create good qual-ity jobs and jobs for highly educated Egyp-tians, among whom unemployment rates are relatively high. Although Egypt’s rank improved on the Global Competitiveness Index (GCI) this year, it is ranked quite low on labor market efficiency, and brain drain has been identified as a particular weak-ness. The Green Transformation will create jobs for skilled Egyptians. Creating attractive jobs for the edu-cated and for recent graduates is also an important policy goal, as unemployment is 33% among people with an intermediate educational background (11% for those with university education and only 0.4% for illiterates).(2)

Competitiveness and strong environmental performance do not work at cross-purposes but are mutually reinforcing. Empirical evidence shows that strong environmental performance is positively correlated with competitiveness. Esty and

1 This is the average in the fiscal years 2000 to 2009. Calculations are based on CBE data.

2 Rivilin, 2009, p. 102

Porter, in their report on the National Environmental Regulation and Performance rankings,(3) demonstrated that countries with a strong environmental regulatory regime are also those that rank highest on the GCI. International experience has proven that stronger and well-crafted environmental regulations reduce costs for business, create green markets, diminish business risk, drive innovation, increase confidence in the mar-ket and create competitive markets and jobs.(4)

The Green Transformation can help to reduce future energy shocks and thereby safeguard the future competitiveness of all of Egypt’s other industries. Egypt’s businesses and industries depend on efficient and cost-effective sources of en-ergy. As noted in another chapter of this ECR, Egypt is no longer self-sufficient in oil-based energy. Natural gas is being depleted at a relatively high rate com-pared to the depletion rates in other countries. In international trade, petroleum revenues are very vola-tile and have fluctuated between 2.8% to nearly 10% of GDP in Egypt’s balance of payments statistics, in the fiscal years 2000 and 2005, respectively.(5) However, investments in such alternative energy sources do not come to fruition overnight. To avoid energy shocks, planning must begin today.

The Green Transformation can provide a long-term and definitive solution to Egypt’s energy dependency. Renewable energy is the fast-est growing energy source in Egypt, and by 2030, it is expected to account for 25% of Egypt’s total energy needs. As prices of non-renewable energy sources in-crease and as technological breakthroughs bring the costs of renewable energy down, one can now per-ceive a future where self-sufficiency in renewable en-ergy is possible for Egypt. Energy security is equated with national security, which will be based on the abil-ity to fill the gap that will grow between the demand for energy and the supply of hydrocarbons. Chinese, Japanese, American and European firms are all focus-ing on renewable energy technology. The Govern-ment of Egypt and Egyptian business leaders should be commended for their foresight in convincing the global energy industry that Egypt is an ideal location for these industries to be developed and for solar and wind energy to be rolled out.

3.2.2.2 Environmental Benefits

Green Transformation implies a shift to clean growth. Economic growth refers to an increase in the quantity of goods and services produced. It is as-sociated with an increase in Greenhouse Gas (GHG) emissions. However, in the future, environmental deg-radation will decrease productivity and therefore low-

3 Esty and Porter 20004 Network of Heads of European Environment Protection Agencies, 20055 This calculation is based on CBE data.

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er economic growth. Some countries have succeeded in reducing their GHG emissions and increasing their economic growth by restructuring their economies and readjusting their energy prices. Such countries have selected a pathway of clean growth, which means achieving economic growth by using clean technology and allowing for sustainable development.

Emissions by Egypt in 2005 were in the range of 220 mega-tons (Mt) CO2e and are expected to grow to around 550 Mt CO2e by 2030, at which time Egypt will be contributing 0.9% of global CO2 emissions.

FIGURE 3.1: EGYPT'S OVERALL GHG ABATEMENT POTENTIAL

0

500

450

600

400

250

350

550 ∼ 550

300

∼ 350

-36%

BAUReferencecase

Emissionsafterabatementpotential

2005

2010

2015

2020

2025

2030

2035

MtC

O2

ep

er

year

Source: CAITdatabase on Egypt; POLES projections; CIDIAC; Enerdata; IEA Egypt profile; Global Insight; McKinsey Global GHG Abatement Cost Curve V2.0; Local experts interviews; team analysis.

Egypt’s per capita carbon emissions in 2005 were in line with other developing regions, such as India, Latin America and the Middle East. Without abatement, they are expected to increase through 2030, following the pattern of most developing countries to date.

According to the McKinsey report, the five main sectors that contribute to GHG emis-sions are power, building, cement, road trans-port and agriculture, which altogether accounted for about 75% of total emissions in 2005. These are expected to increase to 77% by 2030. Overall indus-try-related emissions accounted for approximately 29% of total emissions in 2005 and are expected to increase their relative share to about 36% by 2030.

Egypt could reduce the growth of its GHG emissions by 200 Mt by 2030, a very significant reduction of about 36% compared to current levels, if Egypt ad-opted the right policies and incentives, according to a recent study by McKinsey and Company commis-sioned by the Government of Egypt. The abatement potential is large, although somewhat smaller than the potential of other countries at a similar level of development because Egypt relies heavily on natural gas for electricity production. Many of these oppor-tunities for GHG reduction can be implemented with partial economic benefits.

Water heating replacement of electric, residential

Electronics -consumer, residential

Abatement costEUR per t CO2e

-80

-40

-200

-160

-120

80

40

160

120

0

2030; Societal perspective

Abatement potentialMtCO2e

Agriculture

Power

Buildings

Industry

Transport

Alternative fuels -Waste

Residue management

Lighting -switch incandescentsto LEDs, residential

Cropland nutrient managementLDVGasoline bundle 3

Street lighting -HE bulbs and controls

LDVGasoline bundle 4Appliances -residential

Switchgrass

Electronics –office, commercial

LDVGasoline full hybrid

Clinker substitutionby Other MIC

SugarcaneLDVGasoline pluginhybrid

WasteSmall hydro

Petroleum and gas

Cookstoves–Replacementwith HE stoves

Other industryNuclear

Solar conc.

Off shore windOn shore wind

Solar PV

Iron and steelPost combustionCCS-New capacity

Post combustionCCS-Retrofit

New build efficiency package, commercial

Gas CCSretrofit

Biomass dedicatedGas CCS new built

MDVDiesel bundle 4

MDVDiesel bundle 3

New build efficiencypackage, residential

1010 2020 3030 4040 5050 6060 7070 8080 9090 100100 110110 120120 130130 140140 150150 160160 170170 180180 190190 200200 21021010 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210

FIGURE 3.2: GHG ABATEMENT POTENTIAL AND ECONOMIC BENEFITS

Source: McKinsey GHG V2.0 models; team analysis

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There is great potential for Egypt to be a com-petitive, low-carbon economy. Egypt moved up 17 ranks in the Environment Performance Index(6) (EPI), from 85th place in 2006 to a rank of 68th among 163 countries in 2009. As shown in (Figure 3.3), Egypt scored low on environmental health and ecosystem vitality due to the effect of its air and water pollution on people and the ecosystem. This assessment was consistent with observed environmental degradation. It is also interesting to note that Egypt also moved up 11 places to 70th in the GCI of 2009-2010,(7) thus confirming the correlation between competitiveness and environmental performance.

This correlation implies causality in both directions. Improved economic competitiveness allows Egypt to invest in better environmental protection. Improve-ments in the environment also build the underlying competitiveness of Egypt’s industries. More data and research are required to verify and better understand this correlation.

6 Environment Performance Index, 20107 WEF, 2009–2010

Table 3.1: The GCI and EPI correlation

Egypt’s Rank 2008 2009-2010

Global Competitiveness Index 81 70

Environment Performance Index

71 68

Source: World Economic Forum (WEF), the Global Competitiveness Report (GCR) 2008-2010. Environment Performance Index (EPI) by Yale University 2008-2010. http://epi.yale.edu/Countries/Egypt

The Cost of Environmental Degradation (COED) in Egypt was recently quantified. In addition to the COED study of 2002, a series of COED studies were undertaken by METAP and by the World Bank at the sectoral and local levels, and are summarized in (Table 3.2). All of these environ-mental costs are high. They are not only affecting the Egyptian economy, but also actually reducing the cur-rent welfare of Egyptian society.

FIGURE 3.3: ENVIRONMENTAL PERFORMANCE INDEX SCORES OF EGYPT AND MENA COUNTRIES

EnvironmentalPerformance Index

AlgeriaMoroco

SyriaIsrael

TunisiaIran

LebanonJordan

Saudi ArabiaKuwait

Libyan Arab JamahiriyaQatar

YemenSudan

OmanBahrain

IraqUnited Arab Emirates

Egypt 62.8

Environmental HealthEcosystem Vitality

Env. Burden of DiseaseAir Pollution (effect on Humans)

Water (effect on Humans)

Climate ChangeWater (effects on ecosystem)

Biodiversity & HabitatAgriculture

Air Pollution (effects on ecosystem)FisheriesForesty

Score for EgyptAverage for region

Average for income group Score Score

EPI (Mid. East and N. Africa)

0 020 2040 4060 6080 80100

100

Source: EPI (2010). “Egypt”. http://epi.yale.edu/Countries/Egypt

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Table 3.2: Cost of Environmental Degradation (COED) in LE at the Sectoral level

SectorCost of environment degrada-

tion (COED) in LE Percentage of GDP

COED in case no actions are taken in LE billion/year, percent of GDP

Water Quality(8) 5.35 billion (2003) 1.8 percent9.5 billion in 2014, 3.2 per-

cent of GDP

Energy and agricultural resi-dues(9) 6.5 billion (2000) 2.2 percent

8 billion by 20114.3 percent of GDP

Waste water along the Medi-terranean Coast(10) 1.9 billion (2005)

1.8 percent GDP of coastal areas

2.8 billion by 2015, 3.8 percent of GDP (2005)

Coastal zone in Alexandria(11) 1.5 billion (2006)6.5 percent of

Alexandria GDP

Sources: The World Bank 2005a, The World Bank 2005b, The World Bank 3003, METAP (2009), METAP (2006), German Aerospace Center.

Tourism is increasingly important to Egypt’s economy, but environmental conservation will be increasingly important to its success. Tourism revenues contributed to almost 6% of the GDP and made up 18% of Egypt’s external revenues in the fiscal years 2000 to 2009, on average. The tour-ism industry has also made a serious commitment to develop ecotourism, which is responsible travel that simultaneously conserves the environment and improves the welfare of the local people. Conserva-tion and education efforts are already underway to protect valuable coastal reefs, the white sands and historical and cultural assets. It would be tragic if cli-matic disasters and environmental degradation take a toll on this promising industry, which has the potential opportunity for ecotourism as well as direct involve-ment of the private sector.

3.2.2.3 Social Benefits

The Green Transformation can lead to clean-er skies and cleaner water, which in turn can have positive impacts on Egyptian life ex-pectancy and health. The Green Transformation will also improve Egyptian standards of living, both by supporting economic growth and by improving the quality of life. Living in a clean environment, the Egyp-tian people will become more satisfied with their life and overall situation. In the World Happiness Index, an international method to evaluate a country apart from the GDP, Egypt currently ranks relatively low, falling in the bottom quarter compared to the rest of the world.(12) Increased satisfaction again will be ex-pressed in improved social rest and political stability. Since the Green Transformation approach will ensure the security of Egyptian society, it is a genuinely im-portant strategy for the Egyptian government and an investment in its future reliance.

8 Arab Republic of Egypt, 20059 The World Bank, 200310 METAP Policy Note, 200911 METAP Policy Notes, 200612 See World Happiness Index, University of Leicester, United Kingdom.

Environmentally-related health problems also dimin-ish people’s productivity. Conversely, advancements in health will improve Egypt’s relatively low ranking of 84th place on the health and education pillar of the GCI. Egypt’s poor environmental performance not only exposes its citizens to severe risks, it also diminishes the competitiveness of Egypt’s economy. This means that Egypt will not be able to strike a path of sustainable development without overcoming the health problem, in part with a new approach to the environment.

The Green Transformation refers not only to technology but also to methods of planning and organization. For example, more rational ap-proaches to housing, transportation and urban devel-opment will lead to shorter commuting times, more pleasant transportation experiences and less stress. It will also lead to higher productivity and enjoyment of life as these benefits of a cleaner and quicker com-mute become benefits experienced by all people liv-ing in greater Cairo. A clean city with clean water will provide a major boost to the quality of life of Egyptians in the future, as the Green Transformation becomes a reality.

3.2.3 Other Countries are Moving Ahead Faster than Egypt

Many countries mainstreamed renewable en-ergy into their energy and sustainable devel-opment policies. The EU member countries have set a target of having 20% of their final energy come from renewable resources by 2020. China has set a target of 15% of its primary energy coming from renewable sources. Egypt has revised its target from 14% to 20% of its electricity coming from renewable energy sources by 2020. Wind energy is expected to reach 8 GW by 2020. These need to be seen as in-terim goals in the context of a larger strategic plan over a longer time span.

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Other countries are assuming a leadership role in the Green Transformation. Industrial-ized countries such as Germany and Japan, and de-veloping countries such as China and India, have ad-opted proactive policies to move forward with the Green Transformation. As a result, investment flows in renewable energy have increased by nearly six-fold from 2001-2007. Globally, an estimated total of USD 71 billion has been invested in renewable energy in 2007 alone. Some 47% was invested in wind technolo-gies, 30% in solar PV and 9% in solar water heaters, with the remaining 14% in biomass, small hydro and geothermal power.

Germany, China, the United Sates, Spain, Ja-pan and India are making sizable investments in renewable energy. In 2007, Germany invested USD 14 billion on wind and solar photovoltaic ener-gy. China has invested USD 12 billion in hydropower and wind power. The United States invested USD 10 billion. These investments could not have happened without government financial and technical supports by way of tariff increases, capital subsidies and invest-ment and production tax credits. Similarly, Green Transformation in the construction sector is growing at a record pace. In the United States, USD 15 bil-lion worth of green buildings are currently being con-structed, which represents less than 5% of total US construction, but the dollar amount is increasing by 75% yearly. The Ministry of Construction in China es-timates that the benefits of “greening” existing public buildings are huge and would reduce the use of coal by 135 million tons a year.(13) In 2003, green buildings in India covered a surface area of 25,000 square feet. This increased to 25 million square feet by 2007 and is projected to increase to one billion square feet by 2010.

Industrialized countries and some develop-ing countries such as Brazil, China, India and Mexico have turned these challenges into op-portunities through policy reforms and technology innovations that will enable them to increase growth, reduce pollution, create jobs and remain competitive in the market. In this process, private companies have also played an important role. They have adopted a three-pronged strategy: (i) reducing the environmen-tal risks of their business and maintaining compliance with environmental regulations; (ii) incorporating en-vironmental externalities into their business and in-vestment decisions; and (iii) promoting social environ-mental responsibility at home and overseas.

13 Chhabara, 2009

Due to its strategic location and natural re-sources, Egypt is well-placed to make this Green Transformation. Renewable energy in Egypt has the potential for being a fast-growing source of energy and by 2020 is expected to provide 20% of Egypt’s total installed electricity generation capacity. The Red Sea Coast of Egypt includes highly efficient windmills using the latest technology, and these will be supplying increasing amounts of renewable wind energy to the grid. This region is known as one of the leading areas for wind energy generation.

Egypt should explore creative economic ar-rangements with the EU on “solar swaps” and “solar offsets,” which would allow Egypt to ramp up its renewable energy industry. Egypt already has one of the largest Concentrated Solar Power (CSP) facilities in the world, which is in-stalled in the El Kureimat power plant 95 km south of Cairo. Egypt can be a major exporter of renewable energy generation, including solar electricity to Eu-rope. A study on the Trans- Mediterranean Intercon-nection has shown the feasibility of valuable and pow-erful solar energy resources in the Middle East and North Africa (MENA) region for export to Europe by means of a combination of the conventional Alternate Current (AC) grid and High Voltage Direct Current (HVDC) power transmission.(14) The site at El Kharga in Egypt represents the best energy yield (85-100%) in the MENA region. EU countries such as Germany are currently subsidizing solar energy production in their countries at high cost, whereas Egypt could de-velop solar power at a lower cost than in Germany and northern Europe. Egypt should explore the pos-sibility of “solar swaps” where solar energy produced and consumed in Egypt could be offset by exports of other energy sources to Germany. These creative arrangements could allow Egypt to ramp up its wind and solar production.

14 German Aerospace Center (DLR), 2005

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On March 26, 2007, the Egyptian Constitu-tion was amended to include a new article, Article 59, which states that “Environment preservation is a national duty,” and that “the Law shall regulate measures needed to maintain sound environment.” Consistent with the changes in the Constitution, Egypt amended its environmental protection laws. Law Number 4 of 1994 was amended by Law Number 9 of 2009, which created the High Council for the Protection of the Nile and other Wa-ter Ways. The Council is chaired by the Prime Min-ister and coordinates work for decreasing pollution in the Nile and other waterways. The law also places the Egyptian Environment Affairs Agency (EEAA) in charge of enforcement of pollution emissions and discharges of waste. It also imposes a prohibition on waste burning. It further requires environmental im-pact assessments. New environmental executive regu-lations were issued to be effective as of July 2010.

Egypt has established a National Committee for Sustainable Development, chaired by the Minister of State for Environmental Affairs and includes other sector ministries as well as representatives of the private sector and NGOs. One of the roles of the “National Commit-tee for Sustainable Development is to coordinate between the sectoral strategies, plans and programs while integrating into them the environmental and so-cial aspects.” The Committee prepared its National Framework for Sustainable Development,(15) the ob-jective of which is to increase economic growth while decreasing pressures on the environment and natural resources and ensuring social justice in resource dis-tribution, education, services and social integration. The framework has provided a vision for Egypt’s sus-tainable development, consisting of 11 objectives de-fined by the sector ministries and institutions, and 16 guiding principles for developing the policies related to these objectives. Egypt is currently preparing its national strategy for sustainable development that will ensure mainstreaming of Egypt's potential competi-tiveness.

15 http://www.eeaa.gov.eg/english/reports/NSDSF.pdf

The Egyptian policy for sustainable devel-opment provides a framework for ambitious and comprehensive action but will require inter-ministerial coordination. The framework also calls for the reuse of agricultural waste and the use of new and renewable energy resources in irriga-tion, energy, electricity and agricultural sectors. This will require the explicit commitment of the entire government and a participatory approach for setting priorities and making choices. These choices will need to be informed by in-depth economic and financial studies. It is likely that the implementation of this am-bitious program will require consensus-building and tradeoffs so as to harmonize economic growth and environmental objectives.

3.3.2 Green Technology Challenges

The main drawback of Renewable Energy Source (RES) systems continues to be their current cost compared to conventional ener-gy sources. The cost of generating electricity from wind turbines in average conditions is at least 5 cents (USD) per kilowatt hour (KWh), followed by solar thermal and biomass at slightly higher cost ranges. Solar PV or wave and tidal power currently cost at least 18 or 20 cents per KWh. The cost of producing electricity from conventional sources is typically 3 to 5 cents per KWh.

Government policy currently subsidizes the consumption of water and the use of non-renewable energy, and this works against the Green Transformation. The first step towards a Green Transformation should be correcting the dis-incentives that currently subsidize un-economic and indiscriminate use of water and non-renewable en-ergy. This will need to be phased in with due consider-ation, given the social as well as political implications of doing so. Studies have demonstrated, however, that subsidies for energy do not primarily benefit the poor, and the savings from phasing out these subsidies could free up resources for targeted subsidies that really do

3.3 GREEN TRANSFORMATION NEEDS STRONG POLICYSUPPORT

3.3.1 Existing Policies in Egypt Moving Towards the Green Transformation

President Mubarak has committed the Government of Egypt to a path of sustainable develop-ment and this was made part of Egypt’s political agenda. In 1997, Egyptian President Hosni Mubarak stated, “It is imperative that we change our general attitude towards the environment. [We must] deal seriously with these problems and enforce environmental regulations strictly and without hesitation.” In 2002, during a meeting to discuss the Egypt’s environment strategy, President Mubarak stated, “environmental work is not a luxury but a necessity to protect our natural resources for the generations to come.”

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focus on the poor, as mentioned in Chapter 2. Much of Egypt’s energy is now sold below its opportunity cost. In some cases, for understandable reasons, the cost passed on to Egyptian citizens was based on the recovery and transformation costs of Egypt’s hydro-electric, oil and natural gas resources, rather than on global market prices.

Energy prices now involve considerable sub-sidies, which are estimated at about LE 42 billion in 2005/06, or about USD 8.5 bil-lion(16). This represents close to 10% of Egypt’s GDP and about 30% of public expenditures.(17) It also rep-resents five times the public spending on health, and seven times the public spending on education. As a result of the increase in oil prices, fuel subsidies were expected to cost LE 57 billion (about USD10.7 bil-lion). Such subsidies are encouraging excessive energy use and are delaying market penetration of new, clean technologies. The government is taking steps to re-duce subsidies that benefit large consumers and phase out electricity and gas subsidies for the 40 largest en-ergy-intensive industries. However, energy subsidies remain the most important constraint to the devel-opment of renewable energy.

3.3.3 Egypt’s Achievements to Date on Green Transformation

Research carried out by Industrial Modern-ization Centre (IMC) shows that multiple sources of alternative energy are becom-ing increasingly viable in Egypt. The analysis stresses different support needs in terms of R&D, demonstration and market development for five types of renewable energy technology. These include large- and small-scale solar thermal, photovoltaic, wind and biomass energy.

Despite the constraints mentioned above, Egypt can establish policies to promote a low-carbon market. There have been significant steps taken at the policy and investment levels. At the policy level, the Egyptian Supreme Council of Energy approved the “Long-Term Plan for Wind Energy” and fixed a target to meet 20% of electricity needs with renewable energy, with 12% coming from wind energy. As noted elsewhere in the ECR, Egypt has consider-able comparative advantage in wind power. Egypt also established the New and Renewable Energy Authority (NREA) and is taking the lead in the establishment of the Regional Renewable Energy and Energy Efficiency Center, supported by EC, GTZ and DANIDA. To pro-mote investments, the Ministry of Electricity and En-ergy is planning to introduce a tax break and feed-in tariffs that will encourage development.

16 Ain, 200817 Government of Egypt, 2007. Egypt imports a substantial amount of energy (in

particular fuel oil and liquefied petroleum gas [LPG]) and is increasingly purchas-ing fuel from foreign partners active in oil and gas production in Egypt.

The Government has introduced natural gas in 99% of its power plants as a power source, as well as in the industrial, housing and trans-port sectors. A successful incentive system was put in place for private taxis to switch to natural gas, and a fund for LE 300 million was established by the Min-istry of Environment and Ministry of Finance as an in-centive system for modernizing the taxi fleet in Cairo. This will contribute to an improvement in air quality. An eco-labeling program has been introduced in Egypt and covers refrigerators, air-conditioners and wash-ing machines. Furthermore, Egypt has installed 225 MW of wind-energy capacity under power purchase agreements with the Egyptian Electricity Transmission Company (EETC) and has projects for installing an-other 720 MW. The wind power plants in Zaafarana are performing well and have a capacity of over 40%, one of the highest in the world.

Egypt has a wealth of demonstration projects for renewable energy technologies and a num-ber of commercial applications on the market (some of which are manufactured locally), as well as a solid institutional basis (represented by the NREA) and re-search initiatives. A number of established manufactur-ers produce domestic water heaters and photovoltaic modules. By 2010, through foreign investments, there will be 630 MW of wind capacity installed in the Zafa-rana area, and a target of 3500 MW installed capacity has been set for 2025. There is long-term potential for technological excellence in the field of STE follow-ing the construction of the 150 MW solar-integrated Koreimat plant in 2005.(18)

The Government of Egypt’s National Indus-trial Strategy seeks to enhance technological excellence, attract foreign direct investment and become a leader in the export of medi-um-technology engineering products in the MENA region. Energy is and will continue to be a vital component of the Egyptian economy. A projected doubling of domestic electricity demand by 2030 and the plans for a sustained increase in gas exports are the main drivers for the transition towards a more diverse and efficient energy system in the mid- and long-term. In turn, these constitute the main drivers for the development of renewable energy technolo-gies. Renewable energy is a priority area for short- and long-term industrial promotion. Finally, energy-related environmental problems and likely post-Kyoto emission reduction quotas are increasingly prominent in the policy agenda.

There are many examples of successful sustainable agriculture practices in Egypt and around the world. In other countries, agriculture is criticized more and more for its negative impact on human health, for en-vironmental degradation and for the excessive usage

18 NREA, 2005

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of scare natural resources (minerals, energy, water, ar-able land). Organic agriculture, on the other hand, has lower energy needs (30 - 50 %),(19) lower water de-mands (30 - 50%)(20) and very limited negative impacts on the environment and health, due to the absence of pesticides and chemical fertilizers. In Egypt, the or-ganic sector has experienced high growth in both do-mestic usage and export. Yet, there is still a great po-tential for sustainable agriculture. More research and development and training are needed to increase the understanding of sustainable agricultural practices. Detailed studies are needed to assess the real costs aligned with conventional agriculture and to identify levers where shifts to more sustainable practices have positive, net present values. But such agricultural in-novations have positive implications such as:

Lower water demands can overcome the limited water availability

Healthy soils can widen the arable land and se-quester carbon dioxide

Lower energy demand can reduce pollution, lower carbon emissions and ease fiscal restraints for en-ergy subsidies

Closed nutrient cycles, intercropping and complex ecosystems can reduce the demand for limited natural resources.

A study carried out by Cairo University showed that there are opportunities for Egypt to manufacture renewable energy technolo-gies locally. Examples include solar water heaters and bio-digesters. Recently, a contract was signed be-tween an Egyptian and an international company, to manufacture wind energy equipment.

Egyptian leaders are beginning to realize that climate change poses a potentially seri-ous problem for Egypt. In the 2007 ECR, Egypt’s vulnerability to climate change was graphically pre-sented. Climate change threats to Egypt remain. Re-newable energy opportunities have also been studied in the NEECC report of 2009, as well as in the En-ergy Competitiveness chapter in this report. These reports present a detailed description on the available options and technologies. The goal is to reduce GHGs in the different sectors (power, oil and gas, construc-tion, transport and industry waste.) There should be an incentive system that provides a sufficient rate of return on these investments. There has also been a call for Egypt to direct its economy towards low-car-bon growth. The economic costs of the impacts due to climate change cannot be easily quantified, but the consequences need to be carefully assessed.(21)

19 FAO, 2007a20 FAO, 2007b21 Buchner et al, 2006

Although overall Egypt is a relatively low emitter of GHGs, its GHG per unit of GDP is among the highest in the region. Egypt contrib-utes only 0.5% of the world’s CO2 emissions. How-ever, per unit of GDP, Egypt’s GHG emission level is among the highest in the region. The main reduction in such emissions would come from changes in the five key sectors (power, construction, cement, trans-port, and agriculture) that contribute about 75% per-cent of GHG emissions and could account for 80% of total CO2 abatement between now and 2030.(22)

Technologies for reducing GHGs have been identified and the financing mechanisms may already exist for their implementation. A re-view of the technologies for reducing greenhouse emissions has been analyzed as part of the National Strategy Studies,(23) where the objective is to “to de-velop options and opportunities presented by poten-tial international markets for GHG emission reduc-tions through the Clean Development Mechanism (CDM) of the Kyoto Protocol.” Egypt may be able to benefit from the CDM Projects. Developed countries could finance the usage of the CDM by selling certi-fied emission reductions on the international market.

The NSS study identified different classes of projects that are replicable and have the potential to reduce GHG emissions. The study reviewed the methodologies for assessing abatement costs, such as top-down estimates assuming general economic equilibrium and project-based assessments using Marginal Abatement Costs (MACs). Projects were classified under the headings: Renewable Energy Applications in Electricity Generation, Other Renew-able Energy Applications, Transportation Projects, En-ergy Efficiency, Solid Waste Management and finally, Land Use, Land Use Change and Forestry (LULUCF).

The key prioritized options included the following:

a. Co-generation in textile, chemicals, food, beverage, metals, buildings and hotel sectors;

b. Energy efficiency in textile, chemicals, food and bev-erage, metals, buildings and hotel sectors;

c. Fuel switching to natural gas in industry and trans-port;

d. Organic waste management and municipal solid waste methane utilization;

e. Wind energy;

f. Integrated solar power combined cycles.

Two of the options were further analyzed to deter-mine the environmental costs and benefits resulting from (a) energy efficiency and (b) agricultural waste.

22 McKinsey, 200923 www.eeaa.gov.eg

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Burning of agricultural wastes and current energy supply policies result in costly pollu-tion and environmental degradation, making policy initiatives economically justifiable. As mentioned elsewhere in this chapter, there are sig-nificant social and environmental impacts related to energy supply and the burning of agricultural residues. The average estimate of local damage costs due to air pollution from these two sources was LE 6.5 billion in 1999/2000. This represents 45% of the damage costs from all environmental degradation. It represented a real cost to the Egyptian economy of approximately 1.5% of GDP in 2000, corresponding to approximately LE 100 per person per year.

The environmental advantages from substi-tuting natural gas for heavy fuel oil could outweigh the benefits of exporting natural gas. The mitigation costs are different from the deg-radation costs, as they depend on air quality standards and the choice of technology. The different methods to reduce degradation are: to switch to cleaner fuels, improve energy efficiency while reducing pollutants from the fuels and/or substituting fuels with renew-able energy resources. These measures cannot be studied in isolation. Energy efficiency measures alone cannot substitute for the construction of new power stations.

A recent study identified low-carbon policies that have a positive cost-benefit ratio, even with existing market prices. A recent World Bank study examined the economics of various low-carbon initiatives and found that some of these have attractive cost-benefit ratios, even at existing market prices. Nineteen policies were analyzed using cost-benefit analysis. There are nine operational policies within Category ‘A’ that are financially viable and would benefit the environment. There are eight policy measures that would not be economically viable un-less the local damage costs are included to make the policy cost-effective. Finally, there is one policy mea-sure for the promotion of renewable energy, which cannot be cost-effective unless local and global dam-age costs are included. There are five key policies that have the potential to reduce local damage costs by at least LE 100 million/year:

Policy 6 - Fuel Substitution: Fund for Conversion of Industrial Facilities [LE 805 million/year reduc-tion in 2010/11];

Policy 4/5 - Promotion of Industrial Energy Effi-ciency (Fund &ESCOs) [LE 470 million];

Policy 9 - Exhaust Emissions Standards for Existing Vehicles [LE 430 million];

Policy 15 - Centralized Collection of Agricultural Residues [LE 205 million]; and

Policy 13 – Catalytic Converters for New Gaso-line Vehicles [LE 125 million].

Table 3.3: Package of PoliciesNumber Full Name Sector Cost-Effect.

1 Mainstreaming of the Environment All A

2 Demand Side Management Energy Efficiency A

3 Standards and Labelling Energy Efficiency A

4 Promotion of Industrial Energy Efficiency (Fund) Energy Efficiency A

5 Promotion of Industrial Energy Efficiency (ESCOs) Energy Efficiency A

6 Fuel Substition: Fund for Conversion of Industrial Facilities Fuel Substitution A

7 Reduction of Transmission and Distribution Losses Power Generation A

8 Promotion of Generation from Wind Power Generation C

9 Exhausted Emission Standards for Existing Vehicles Transport B

10 Inspection and Maintenance of Vehicles Transport A

11 Incentives for Conversion of Vehicles to CNG Transport A

12 CNG Microbuses Transport B

13 Catalysts for New Gasoline Vehicles Transport B

14 Rationalised Burning of Agricultural Residues in the Field Agricultural Residues B

15 Centralised Collection of Agricultural Residues Agricultural Residues B

16 Market Enabling of Agricultral Products from Residues Agricultural Residues B

17 Briquetting of Maize Agricultural Residues B

18 Support for Building Materials using Agricultural Residues Agricultural Residues B

19 Promotion of Refinery Energy Efficiency Refineries A

Source: The World Bank (2003). Egypt: Energy- Environment Review

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If a combination of price readjustment and sector po-lices is implemented, it is expected that local damage costs in 2010/2011 will be at a lower level than in 2001, as shown in (Figure 3.4) below. A great reduc-tion in environmental cost, coupled with a substantial improvement in health will occur if the combination of price readjustments and sector policies exists.

FIGURE 3.4: : ENVIRONMENTAL DAMAGE COSTS IN 2010/11 WITHPRICE REFORM AND SECTORAL MEASURES COMPAREDWITH BUSINESS AS USUAL

mn LE

010

0020

0030

0040

0050

0060

0070

0080

00

Combined

Sectormeasures

Price reform

BAU

Actual(1999/2000)

Source: The World Bank (2003). Egypt: Energy- Environment Review.

The Egyptian government has begun to work on a green information and communication technology (ICT) strategy. The goal is to reduce the sector’s energy use and find a proper way to re-cycle the tons of hardware thrown away every year. The use of ICT and its raw materials account for 2 – 2.5% of global GHG emissions. Recently, Nile Uni-versity joined a Research Center cooperating with private firms to find solutions for power-efficient servers and eco-friendly innovations in the ICT field. Green IT does not only play an important role for its own sector, it can also significantly help other in-dustries with green initiatives and innovations. For example, Italy has a leading position when it comes to the implementation of smart-grids. Smart-grids deliver electricity from suppliers to consumers using two-way digital technology to control appliances in consumers' homes, which would save energy, reduce cost, increase reliability and foster transparency. The electricity distribution grid is thus overlaid with an information system.

To satisfy the requirement for a Green Transforma-tion in a particular sector, the technologies proposed should lead to economic, social and environmental benefits. This can only be done if a cost-benefit analy-sis is carried out in which environmental and social costs are included. In the case of energy efficiency, the cost-benefit analysis showed that a Green Trans-formation could lead to economic growth. It would also reduce the environmental impacts of pollution through an adoption of clean technology, even with a limited price readjustment program.

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Adopting policies to enhance the performance of sustainable markets

Promoting business action

Enhancing labor competitiveness

Properly enforcing the labor laws.

Integrating the above elements into the national sus-tainable development strategy will take time and will require substantial background studies. Egypt should make the strategic move of developing its own green policy that would feed into the overall sustainable de-velopment strategy and be based on the green strat-egy framework proposed below. This chapter has in-dicated the need for an ambitious, multi-faceted and high-priority approach to achieving this Green Trans-formation.

3.4.1 Vision and Goals

The vision for Egypt’s Green Transformation is to have a modern, efficient, competitive, low-carbon, economy with economic, social and environmental benefits for the Egyptian people. Egyptians will be healthier be-cause they will be ingesting less pollution. Egyptians will be in the forefront of an exciting new industry based on renewable energy. Economic and social life will be more productive and more pleasant.

In order to contribute to the achievement of the vi-sion, the goals of the strategy framework will be to:

Develop and disseminate technologies that en-courage the efficient and sustainable use of Egypt’s natural resources in water and energy

Promote a transition to low-carbon development in specific sectors through policy and institutional reforms, with improved choice of fuel, equipment and production technology

Provide a business platform and forge alliances with international and local investors and banking institutions for the development and deployment of low carbon technologies

Raise awareness about natural resource conser-vation, efficiency and climate change vulnerability through informational and educational campaigns among the general public.

24 Rovere, 2009

3.4.2 Making the Case for Change

Egypt’s leaders must articulate the compel-ling case for moving quickly to position Egypt as a leader in the Green Transformation. Just as those who were in the vanguard of the Industrial Revolution and the Information Revolution benefited greatly, so too will Egypt benefit if it can position itself early in the coming Energy Revolution. There will be new job opportunities and new economic growth op-portunities in industries affiliated with this transition. By taking effective measures today, Egypt can ensure that it has the right technological partners and that early development of renewable energy takes place within Egypt.

The Green Transformation is a “win-win” situation that provides economic, social and environmental benefits. The Green Transformation will encourage innovation and modernization in industry, foster in-vestment and attract FDI. The benefits of a compre-hensive approach to the Green Transformation will be felt in health, transportation and housing, which will lead to an improved standard of living for Egyptians. The changes outlined below will also lead to greater productivity through less time lost and less waste of materials. Reduced input costs will strengthen impor-tant sectors of the Egyptian economy, especially the industry that can become one of the leading forces of Egypt’s competitiveness.

Government policy can support new and renewable energy development in a variety of ways beyond the initiatives currently underway to commission wind and solar power for the electricity grid. First, the govern-ment can support R&D targeted at these renewable technologies. Second, it can develop a new financial and regulatory framework that can enable wind tech-nology to reach the break-even point when compared to conventional electricity sources over the short term, while also mobilizing local manufacturers. Third, improvement of regulations and incentive systems will help to increase the demand for solar water heating, supported by local manufacturers. Fourth, a focus on biomass technology would include both financial and technical assistance.

3.4 PROPOSED STRATEGIC FRAMEWORK FOR GREEN TRANS-FORMATION IN EGYPT

As mentioned earlier, the National Committee for Sustainable Development has established a framework for a National Sustainable Development Strategy, which is currently under preparation. Through the Egyptian National Com-petitive Council (ENCC), the business community in Egypt has voiced its recommendations that Egypt should develop its sustainable development strategy since it has no alternative other than to adopt a low-carbon pathway alongside “green, clean and sustainable business.” The elements of the sustainable development strategy(24) were proposed in the ENCC report of 2009:

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3.4.3 Major Strategic Elements

The major elements of the strategic frame-work involve energy, transportation, build-ings, agriculture, industry and environmental conservation. This holistic framework takes a broad view of Green Transformation as something beyond just the transition from non-renewable to renewable energy. It involves all sectors of society and has many far-reaching benefits.

Industry – Industrial co-generation, innovation and modernization will play a role in the Green Transfor-mation. Some firms will have new business opportu-nities thanks to these new technologies and to the design, production and maintenance of renewable energy facilities. Other industries will gain based on capturing energy more efficiently. The transporta-tion, housing, energy and other industries mentioned above will provide opportunities for entrepreneurs and companies. A stronger role of an industry, mea-sured in its share of GDP, is often seen as a key factor for growth in Egypt, and much employment potential lies in these productive sectors. By enhancing produc-tivity and efficiency, GT will contribute to fulfilling this objective.

Industrial pollution has been reduced dra-matically thanks to a variety of initiatives. First, as energy costs have been made to reflect mar-ket realities, the overall portfolio of industrial and manufacturing output has naturally shifted to less energy-intensive industries and modes of produc-tion. Egyptian industrial output has shifted to a higher proportion of employment-generating, light manufac-turing industries and a lesser proportion of heavy in-dustry. This has also helped to create more jobs per unit of investment. Egypt’s industries and exports are known to comply fully with international standards on environment, worker safety, health and overall quality, and this image helps it to compete in global markets. New standards of industrial pollution control are be-ing prepared. Highly polluting heavy industries are be-ing rehabilitated to more environmentally-friendly and less energy-intensive technology by the Egypt Pollu-tion Abatement Project (EPAP II), which is being co-financed internationally by the European Investment Bank, the Japanese International Cooperation Agency, the World Bank,(25) the European Commission, the Agence Francaise de Développement (AfD) and the National Bank of Egypt for a total amount of USD 190 million. This is in addition to the Private Public Sector Industry grant of EURO 7.3 million from the Construction Bank KfW.(26)

25 Industry.eeaa.gov.eg26 Industry.eeaa.gov.eg

Energy – The energy strategy involves a proactive transition to renewable energy, looking to both na-tional and international financing that anticipates the future increased costs of hydrocarbons and allows for investment today in the renewable energy needed for tomorrow. The energy strategy also involves appro-priate incentives for efficiency by pricing scarce non-renewable energy appropriately at rates that are more reflective of international market realities and Egypt’s opportunity costs. The use of various forms of energy for different purposes should be made intelligently on the basis of both efficiency and environmental impact. The energy strategy has both a fuel dimension and an electricity dimension. The Government’s commitment to achieve production of 20% of the country’s elec-tricity from renewable sources by 2020 is important.

Renewable energy source markets should be sup-ported through time-limited subsidies, incentives and preferential grid access schemes, in anticipa-tion of future market prices for renewable and non-renewable energy. Compounded with envi-ronmental regulations, the sector faces good mar-ket prospects in the mid- and long- term.

The Red Sea Coast of Egypt will become even more alive with high-tech and highly efficient wind-mills, which are supplying renewable wind energy to a number of new housing, tourism and industri-al projects up and down the coast. These systems, which are becoming ever more efficient, are also important, and the region is known all over the world as one of the leading areas for wind energy generation along with the North Sea and some other high-wind areas.

General consumption of non-renewable energy should no longer be subsidized in the long-term (except for the poor segment of the population) leading to better stewardship of depleting hydro-carbon resources and rational use of energy. This will free up government budgets to be able to pro-vide more targeted assistance to the poor. Instead of subsidizing the more intense use of electricity and fuel by high-income people, the Government of Egypt should provide effective income support to those who need assistance. Public transport, however, as in most countries, will continue to be subsidized, making the commute of the average worker affordable.

Transportation – Egypt’s transportation strategy is an important element of its Green Transformation. Improvements in conventional internal combustion engines, hybrid engines and electric-powered cars will be a key part of the transition in transportation. Use of compressed natural gas (CNG) and biodiesel as fuels, along with transportation planning are impor-tant elements of this strategy. Efficient, cost-effective

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and environmentally friendly mass transit systems will similarly be important components. If implemented correctly, this can also reduce commuting times as well as reducing wasted fuel due to over-congestion on the roads.

Green transportation initiatives will enable Cairo to become a much more livable city. There will be no-tably less pollution. People will spend far less time commuting than they did in 2010. Timely investments in a mass transit system will provide for a quicker, more efficient and more pleasant commute. Cairo’s mass transit system will include both below-ground and above-ground systems. These include north-south and east-west corridors as well as a diagonal and ring-road mass transit design. High numbers of pas-sengers will move quickly and in relative comfort. The taxi fleet in Cairo, much of which has already made the transition to natural gas, could adopt hybrid en-gine systems. Buses and trucks could also convert to clean energy. The introduction of hybrid and efficient electric-powered cars for personal use, supported by financial incentives, can also contribute to a noticeable improvement in air quality. A series of fast river taxis will provide alternative transportation up and down Cairo.

Buildings – Energy efficient design of buildings, greater use of insulation materials, solar water heat-ers, retrofitting of energy systems, low-energy lighting systems and energy-efficient appliances can combine to create sustainable increases in living standards consistent with low-energy and carbon-intensive ap-proaches. City and urban planning, including zoning laws, should stress high-density and low-carbon living.

Housing – Middle income housing in Cairo and throughout Egypt needs to undergo a major transfor-mation through major policy changes. New long-term mortgage instruments are needed to enable people to both purchase and renovate their houses and flats. A gradual phasing out of rent-control (while protecting the rights of pensioners and the poor) could result in incentives for refurbishment, improved maintenance of existing properties and construction of new prop-erties. This in turn will create an expansion in the con-struction industry and create more jobs, while simul-taneously improving the living space of people. Trash collection, recycling and disposal systems should be improved to become more efficient. Energy-smart construction materials and architectural designs will lower the need for seasonal heating and cooling. So-lar water heating, supplemented by some natural gas water heating, can replace inefficient electrical water heaters in most homes and apartments.

Agriculture – Reduction in the burning of agricul-tural waste, use of agricultural waste for composting and the production of renewable energy, biofuels and biodiesel will be important policy initiatives. Reduc-ing agricultural waste burning will also have positive health consequences. Its impacts will even extend to improving the competitiveness of Egypt’s tourism in-dustry by improving the air quality during different seasons.

In agriculture, measures will be taken to prevent the salinization of water and to improve the stewardship and conservation of water resources. Water should be priced to promote the conservation and efficient use of water in ways that most stimulate economic growth and improve the quality of life. Processing and reuse of wastewater can be used to grow non-con-sumable crops. Agriculture can also provide important sources of biodiesel, including biomass and Jatropha, a highly efficient source of biodiesel.

Conservation – Conservation of coastal and river resources will also play a role in the Green Transfor-mation as well as the intelligent conservation of all of Egypt’s cultural, historic and natural resource assets.

The tourism industry should make a serious com-mitment to develop a reputation for sustainable and green tourism, and serious conservation and educa-tion efforts will protect valuable coastal reefs as well as historical and cultural assets.

As mentioned above, information and commu-nications technology industry (ICT) can do much more to reduce its own carbon emissions and to re-cycle tons of computer equipment. In addition, the ICT industry will contribute much to Green Transfor-mation in every field. From household energy moni-toring controls to onboard vehicle navigation systems that alert people to traffic jams and recommend al-ternate routes, to smart technologies of every kind, the ICT industry will help drive the Green Transfor-mation and will grow and benefit as a result. Green ICT not only helps other industries to come up with green innovations, it also aims to reduce emissions by lowering the energy consumption of servers and PCs, improving recycling methods and finding appropriate ways to store old hardware material.

Other – The strategies mentioned above are not an exhaustive list. There will certainly be other areas not yet mentioned. There may well be a Green Trans-formation element to the strategies of each service industry, including hotels, retailing, finance, personal services and business services.

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3.4.4 Roles and Responsibilities for Im-plementing the Green Strategy Frame-work

3.4.4.1 National Government

It is important for the Egyptian government to take advantage of the benefits of the Green Transforma-tion. The findings of the recently published Climate Competitiveness Index 2010 suggest that there has been a global trend towards climate accountabil-ity, since the Copenhagen Conference of December 2009.(27) Climate accountability is defined as the de-gree to which a country has the leadership, institu-tions, systems and practices in place to deliver climate competitiveness. The growing awareness of the pro-tection of the world’s climate is a strong indicator that countries showing a poor climate performance will neither be recognized, nor be competitive in the globalized world of the future. Regrettably, the MENA region today takes up the last position on the index, so a quicker and more forceful reaction is necessary.

Egyptian leaders have a major role to play in building public awareness regarding Egypt’s responsibility to play a leadership role in confronting climate change. The Climate Com-petitive Index 2010 already predicts that climate poli-tics will become a vote-winner for governments and parliaments. These politics will soon be imperative for political survival. According to estimations from the report, proactive adaption policies are especially es-sential for those countries most vulnerable to climate change.

Egypt can learn from and adapt policy in-struments and incentives that are being used effectively in other countries. To catalyze the market and to support their energy policies, many countries have established a diverse set of tools. Some provide capital subsidies. Others provide feed-in tar-iffs. Investment tax credits may be made available that provide for tax deductions or accelerated deprecia-tion. Production tax credits, based on the amount of electricity generated by renewable energy have also been made available. In some countries, public invest-ment loans or financing from the state budget are used. No single country has established all of these renewable energy promotion policies, as they require substantial financial, economic and technical studies. Many of these instruments such as feed-in tariffs are however, being successfully applied in many develop-ing countries, as shown in (Table 3.4).

27 Accountability, 2010, p.8

Table 3.4: Feed in Tariff Rates (USD $) for Various Types of Energy in SelectedCountries

Wind Photovoltacis Hydro Biomass

Austria 0.101 0.615 0.227

Brazil 0.074 0.052 0.065

California 0.500

Cezch Re-public

0.115 0.620

France 0.110 0.736 0.073 0.120

Germany 0.105 0.658 0.100 0.147

Italy 0.595

Minnesota CBED

0.048

Ontario 0.096 0.365 0.096 0.096

Portugal 0.106 0.381 0.110

South Korea 0.776

Spain <50 MW

0.078 0.451 0.078 0.078

Turkey 0.067

Source: The World Bank, October 2007

Policy Framework: The following policy tools should be considered to move from the stage of strategy to implementation:

a. Make a policy statement and back it with concrete financial commitments. A good start to trigger the transformation into a Green Economy would be to finance high-profile demon-strations of green technologies specifically relevant to Egypt. This would show that Egypt is a favorable location for installation of new manufacturing plants for key technologies and would attract more na-tional and international investors.

b. Realign the existing regulatory framework. A working group from the Ministry of Investment and Ministry of State for Environmental Affairs should be established to realign the existing invest-ment and environmental legal framework. The pur-pose would be to provide incentives for the adop-tion and production of green technology; to revise business and environment practices; and to facilitate the disclosure and dissemination of environmental and business information to attract markets. The retrofitting of existing sector policies and strategies with Green Transformation measures must be (1) realistically achievable in the Egyptian context, (2) affordable, (3) able to create jobs and (d) able to generate direct and indirect revenues. One example would be to revise standards and guidelines for air and water pollution based on pollution loads and on economic and environmental impacts.

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c. Establish a task force on Green Transfor-mation and a “one-stop” office for green investment promotion. The Prime Minister’s office should establish a high-level task force on Green Transformation, composed of business and banking community leaders, with sector ministers acting as facilitators. This think tank could be part of an existing non-government business council, such as the Egyptian National Competitive Council. The mandate of this task force would be to pursue the development of the green strategy, promote inter-national partnerships with selected developed and developing institutions and catalyze action on the green transformation initiatives to be identified. A “one stop office” can provide comprehensive in-formation and guidance on market opportunities, investment opportunities and applications for each industry.

d. Design and implement an incentive system for green investments. The main goal is to cre-ate favorable financial conditions for the banking and private sectors to finance green investments. The Ministry of Finance, in collaboration with the Federation of Egyptian Industries, should design and implement an incentive system for the deployment and manufacturing of green technologies, products and processes. Such an incentive system should be based on performance, such as achieving specific targets and on time-bound compensation for the incremental costs incurred for adopting and scal-ing up the green transformation measures. One example would be to implement a system for is-suing environmental permits that incorporates an estimate of GHG emissions and alternatives for green technologies based the environmental impact assessment/environment audit studies.

Priority should lie on a few “champion” sectors that are ready to move concurrently on catalyz-ing policy reform and leveraging private and public capital. The main criteria for the selection of sec-tors are: (1) where the results would be easiest

to achieve; (2) where there are financially feasible projects already available for attracting private capital; and (3) where there can be partnerships and cost-sharing mechanisms between private and public capital, with the possible support of interna-tional financing institutions and donors.

Another option would be to establish a transpar-ent system of subsidies/financial support for capital costs for green technologies, as well as for capital depreciations and amortization on a life-cycle ba-sis.

e. Promote education on green opportunities, technologies and sustainable growth through knowledge sharing partnerships and joint research programs with leading international engineering schools and research and development institutes. The Ministry of Higher Education and Scientific Re-search should pool funds from existing national and international grant resources to support technol-ogy development and innovation in green technolo-gies and investments. Furthermore, the Ministry should create a national public education/awareness program in support of the policy/program objec-tives of Green Transformation.

f. Raise public awareness of green technolo-gies through media communication and education-al materials. Already, a successful TV media campaign about energy and water conservation is going on. This should be continued and supplemented by specific themes on the use of new and renewable energy and the initiatives mentioned above.

g. Establish a benefit tracking system whereby key performance indicators on investment oppor-tunities and environmental benefits can be mea-sured and reported to the public by an independent third party. The indicators to track the progress of Green Transformation or Climate Competitiveness in Egypt are presented in the Climate Competitive-ness Index:

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FIGURE 3.5: ARCHITECTURE OF THE CLIMATE COMPETITIVENESS INDEX

CLIMATE COMPETITIVENESS INDEX

Climate Accountability Index(4 areas, 13 indicators)

National Leadership� Statement by Head of State� Commitments to Green Jobs agenda� Engagement with UNFCCC

Strategy & Coordination � Materiality of Climate Strategy� Policies at Ministry of Finance� Policies at Ministry of Energy

Investment Promotion & Business Support � Activities of Competitiveness Council� Activities of Investment Promotion Agency� Activities of Chamber of Commerce� Activities of Stock Exchange

Citizen Engament � Activities of Consumer Body� Activities of Civil Society� Uptake of Green Standards

Incentives & Price Signals� Gasoline Price (GTZ)� Electricity Price to Industry (IEA)� Water Price (GWI/OECD)

Awareness & Risk Management � Knowledge of Climate Change (Gallup)� Concern about Climate Change (Gallup)� Insurance Penetartion, non-life as % of GDP (Swiss Re)

Access to Clean Electricity � Access to Electricity (IEA)� Renewable % of Electricity Generation (EIA)� Efficiency of Distribution (IEA)� Quality of Supply (WEF)

Intensity Emission Trends� Emission Intensity Trend (IEA)� Emission Intensity Trend in Manufacturing Sector

(IEA/UNSTAT)� Emission Trend in the five largest companies

(AccountAbiltiy)

Climate Performance Index(4 areas, 13 indicators)

Source: Accountability, 2010, p. 7.

3.4.4.2 Private Sector and Banking Sector

Private Sector – The Climate Competitive Index has found evidence for the importance of the private sector within the Green Transformation process and emphasizes the need to enhance private investment. This directive is supported by empirical findings show-ing that many northern European countries owe their strong performance on the CCI to the role of firms in reducing emissions and in producing products and services with lower carbon emissions. The following strategic elements are proposed for catalyzing the market for green investments by the private sector:

1. Identify green investments that would gen-erate profits and benefit the environment, such as sustainable raw materials, eco-friendly pack-aging, clean energies, and products less dependent on water supply. Investments should take advan-tage of private sector innovation and efficiency, and should generally rely on market mechanisms and price instruments, rather than command and con-trol by the Government.

2. Partner with leading manufacturers that already have the technology and want to expand in the local and regional market and/or become a supplier of equipment and services for candidate technologies.

3. Take advantage of existing financial mech-anisms for shifting to low-carbon growth opportunities, such as the Global Environment Facility (GEF), the Clean Development Mechanism and the newly established Climate Investment Funds (CIF).(28) The CIF, for which over USD 6 billion was pledged, was established by the World Bank in July 2008 and is implemented jointly by the African De-velopment Bank, Asian Development Bank, Euro-pean Bank for Reconstruction and Development, Inter-American Development Bank, International Finance Corporation and the World Bank. It con-sists of the Clean Technology Fund and the Strategic Climate Fund and is considered an interim instru-ment. The Clean Technology Fund would contrib-ute to demonstration, deployment and transfer of low-carbon technologies with a significant potential for long-term GHG emissions savings. In December 2009,(29) the CTF approved the allocation of USD 750 million, which will mobilize an additional USD 4.85 billion from other sources to accelerate the deployment of Concentrated Solar Power (CSP) in five countries: Algeria, Egypt, Jordan, Morocco and Tunisia.

28 World Bank Group29 The World Bank Press Release No:2010/MNA/183

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Banking Sector – Being the provider of capital, the banking sector is an important engine of green invest-ment and innovation. It can do the following:

1. Examine the economic and business opportunities to supply alternative energy technologies and ser-vices in Egypt and in other countries in the region

2. Make recommendations for establishing an incen-tive system that provides a sufficient rate of return on costly green investments

3. Seek a basket of funds from donors and interna-tional financing institutions on the lower end of the market rate

4. Design new financial architecture through leverag-ing with carbon investment finds, CDM and GEF to lower the cost of funds to sub-national entities and especially to small and medium enterprises (SMEs)

5. Provide financing for green investment projects and arrange for guarantees and credit risks to be born partially by the Government

6. Partner with leading manufacturers in green tech-nologies.

3.4.4.3 Education and Research Institutions, Civil Society and NGOs

Education & Research Institutions - The Green Transformation is not only about government initia-tives, but it is also about the private sector, civil so-

ciety and the Egyptian people playing a key role in the transition. There is a role for Egypt’s universities, think-tanks, research institutes, business associations, chambers of commerce, media and other civil society organizations in helping achieve the Green Transfor-mation.

Universities are needed to train the engineers and technical experts who will be in demand as soon as investment begins to grow in green technology. These institutions will need to conduct research to help bring technologies up to date. People will need to be educated to conserve conventional energy, to use green technologies instead of wasteful ones and to deal with waste rationally. This is a task for the media, schools, universities and employers such as companies and firms that will need to train their workforce ac-cordingly.

NGOs - Business associations, chambers of com-merce and organizations like the ENCC can help to raise awareness, facilitate public-private dialogue and monitor progress. NGOs have a role to play gener-ating new ideas, monitoring progress and helping to change mindsets. Because non-profit organizations are seen as operating for the public good, NGOs will play a critical role in communicating to the nation the importance of this transformation.

3.5 CONCLUSION This chapter has defined “Green Transformation” and has justified its importance in the context of sus-tainable economic growth and development. It has demonstrated that other countries, including developing

countries like China and India, are moving faster than Egypt to take advantage of the coming opportunities. The chapter then presented the major strategic elements of Egypt’s Green Transformation, including those related to electricity, fuels, transportation, building, agriculture, industry and conservation for historic, cultural and natural assets. It then proceeded to delineate responsibilities for the government, private sector, civil society and education sector. After identifying some of the parties responsible for implementation, the chapter suggested some immediate next steps, including incorporating the Green Transformation explicitly in Egypt’s national competitiveness strategy and fostering a public-private dialogue, leading to the design and implementation of a comprehensive Green Transformation program that builds on many of the recommendations mentioned here. If Egypt implements the Green Transformation strategy, it will benefit with new jobs, investment capital and technology. As with the Industrial and Information Revolutions, those who can adapt more quickly will prosper.

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REFERENCES

Accountability (2010): “The Climate Competitiveness Index 2010: National progress in the low carbon economy. Summary for Decision-Makers”.

Buchner, Barbara, MichelaCatenacci, Alessandra Goria (FEEM), On-noKuik, and Richard Tol (IVM) (2006). “Climate Change: The Cost of Inaction. A review of assessment studies with a focus on the methodologies used”, OECD Working paper, http://www.oecd.org/data-oecd/60/45/40501169.pdf.

Chhabara, Rajesh (2009): “The future of green building in China”, http://www.climatechangecorp.com/content.asp?ContentID=6023.

Environment Performance Index (2010): http://epi.yale.edu/.

Esty Daniel C. and Michael Porter (2000). Global Competitiveness Report 2000. New York: Oxford University Press.

FAO (2007),Ziesemer, Jodi – „Energy use in Organic Food Sys-tems“.

FAO (2007), Nadia El-HageScialabba – „Organic Agriculture and Food Security“.

German Aerospace Center (DLR), Institute of Technical Ther-modynamics, Section Systems Analysis and Technology Assessment (2005): “Concentrating Solar Power for the Mediterranean Region”, Final Report; http://www.dlr.de/tt/Portaldata/41/Resources/dokumente/institut/system-/proj-ects/MED-CSP_Full_report_final.pdf.

Government of Egypt (2007). “Energy and Development”.

McKinsey (2009): Egypt GHG emissions, reduction strategy, study by order from IMC.

METAP (2006): “Assessing the Cost of Environment Degradation in Coastal Areas”, METAP Policy Notes.

METAP (2009): “Wastewater Policy Investment Optimization for Egypt’s Urban Mediterranean Coastal Zones”, METAP Policy Note.

Network of Heads of European Environment Protection Agencies (November 2005), “The Contribution of Good Environ-mental Regulation to Competitiveness”. http://www.eea.europa.eu/about-us/documents/prague_statement/prague_statement-en.pdf.

NREA (2005): Annual Report 2003/2004. www.nrea.gov.eg.

Renewable Energy Policy Network for the 21st Century (2007): “Renewables 2007 Global Status Report”.

Rivlin, Paul (2009). Arab Economies in the Twenty-First Century. New York: Cambridge Uni-versity Press.

Rovere, Darin, Nadine El-Hakim, and Alex MacGillivray (2009). 6th Egyptian Competitiveness Report, Chapter 4.

Sokhna, Ain. (2008). Egypt Energy Outlook. Egyptian Gazette. May 5 and 6.

UNIDO (2009): “Industrial Development Report 2009. Breaking in and Moving Up: New Industrial Challenges for the Bottom Billion and the Middle Income Countries”.

World Bank (2003): Egypt-Energy Environment review.

World Bank (2005): Arab republic of Egypt, Coun-try Environment Analysis (1992-2002), http://s i t e resources .wor ldbank .org / INTRANETENVI -RONMENT/36358421175696087492/20467129/CEAE-gyptFullDoc2005.pdf.

World Bank (2009): “Over $5.5 Billion in new investment for clean energy technology in the Middle East and North Africa Re-gion”, Press Release No: 2010/MNA/183,

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22412791~menuPK:247603~pagePK:2865106~piPK:2865128~theSitePK:256299,00.html.

World Economic Forum (2009). Global Competitiveness Report 2009-2010. Geneva.

World Happiness Index. http://www.pnhworldheadquarters.ca/Ar-ticle_International_Happiness%20Index.htm.

http://www.eeaa.gov.eg/english/reports/NSDSF.pdf.

Competitiveness of Egypt’s Energy Sector

4.1 ENERGY COMPETITIVENESS IN EGYPT Energy is the pillar of modern civilization, as it is the driver of all modern economic activities. In Egypt, the energy sector contributed to 15.9% of total Gross Domestic Product (GDP) in 2008/2009 (Ministry of Finance; Ministry of Economic Develop-ment; 2010). It also plays a very significant role in attracting Foreign Direct Invest-ment (FDI), representing 65% of total FDI in 2004/2005, and about one-third in 2007/2008. Energy affects the competitiveness of all other industries. It affects how people work, move and live. Understanding Egypt’s energy industry is relevant to all.

1 Respectively General Manager, Environics and Professor of Electrical Engineering/Director Energy Research Center, Cairo University and Consultant to Environics. The Authors wish to thank Eng Amr El Abyad and Eng Ahmad Mostafa for their valuable inputs in production of this chapter.

Yasser Sherif &Mohamed Salah Elsobki (Jr.)*

4

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4.1.1 The State of Energy in Egypt

Although Egypt produces energy from diverse sourc-es, fossil fuels represented 96% of its primary energy production in the year 2007/08 (BP, 2009 and EEHC, 2008). The Egyptian energy sector depends on diverse resources for the primary energy supply. These re-sources vary from fossil fuels (oil and natural gas) to renewable sources (hydro, wind, solar and biomass). However the dominant sources are the fossil fuels. The most useable sources of the renewable energies are hydro energy and wind energy, which combined represent about 4% of the primary energy produc-tion (BP, 2009). Solar energy possesses a wide range of potential uses. A plan for using nuclear energy to pro-duce electricity has already been implemented, and it is expected that Egypt will realize around 4000 MW power generation by the early 2020’s (National Dem-ocratic Party, 2007). Other sources, such as biomass, has good potential for development. However, not-withstanding some pilot and demonstration projects and some limited commercialization, this potential is left untapped. Finally, other sources such as hydrogen, tidal and geothermal have been addressed, but mostly for research purposes. Therefore, this report will fo-cus on the commercially-dominating primary resourc-es, mainly oil, natural gas and hydro power. This report also addresses solar and wind energies, and it includes

a short description of the biomass potentials in Ap-pendix A.

The Egyptian energy chain consists of three main phases: primary energy exploration and development, conversion, and secondary energy transmission and distribution. (Figure 4.1) represents Egypt’s overall en-ergy chain. The primary energy exploration and de-velopment phase is concerned with the production of primary energy from its natural resources. These energies are put into useable forms (secondary en-ergy) during the conversion phase, either by refining crude oil, processing Natural Gas (NG), or generating electricity. Transmission networks then transmit the secondary energy to the main distribution points or the exporting ports. The first part of the energy chain represents Egypt’s primary energy phase, with the percentage share of fossil-based fuels reaching 96%, or about 3,573 trillion BTU in the year 2009 (BP, 2009). Egypt acquires almost all of its fossil-fuel based pri-mary energy from its national resources. Both hydro and wind energies are primarily used to produce elec-tricity, contributing 12.4% and about 1% respectively, of the overall electricity generated in the country (BP, 2009 and EEHC, 2008). The fact that hydropower cov-ered around 60% of electricity consumption in Egypt until the late 1970’s is indicative of the shifting energy landscape.

FIGURE 4.1: EGYPT'S ENERGY VALUE CHAIN(1)

Liquid.Fuel40%

Refineries TransportationNetwork

Fuel ProductsDistribution

network

Industry31.8%

ResidentialCommercial(includingTourism)27.3%

Trans &Public Utilities

35.9%

Agriculture &Irrigation

5%

Gas PipesInfrastructure

Natural GasDistribution

network

TransportationFleet

ElectricityDistributionNetworks

Secondary EnergyConversionPrimary Energy

TransportationFleet

ElectricityTransmission

Network

Transmission Distribution End-UserDistribution

Processing

Collection& Handling

Electricity

IndependentSuppliers

0%

N .G56%

Biomass0%

Wind0%

Solar0%

Hydro4%

1 Figures are based EEHC annual reports and Dr. El-Sobki’s Presentation at the World Bank in 2008.

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Egypt’s energy future presents a real chal-lenge as demand is currently growing beyond the supply of nationally generated energy resources. Supply must increase or demand must decrease, or else black-outs will become a common occurrence. A number of alternatives to bridge the energy gap are under serious consideration, among which are: interconnection with other regional re-sources, use of nuclear energy, and tapping into re-newable energies more aggressively. This latter alter-native renewable energy is especially relevant to the “green transformation” theme of this year’s Egyptian Competitiveness Report. In this context, some rec-ommendations to tackle the energy situation had been stipulated in a paper made by the National Democratic Party (NDP) in 2007, (www.ndp.org.eg). They were later on adopted in early 2008 as targets to be achieved by the Egyptian Supreme Council of Energy of Egypt. (Figure 4.2) (National Democratic Party, 2007) illustrates the gap based on an extrap-olation of current demand growth. In practice, the actual demand cannot surpass supply. The NDP pa-per highlighted the importance of wind and solar en-ergy sources as electricity generators, despite their uncompetitive costs when compared to fossil- fuel-based power (In the range of 2 to 4 times higher). Renewable sources would provide a hedge benefit against potential unavailability of fossil fuel.

Furthermore, a nuclear energy law was issued late 2009 to set the rules for the generation of electricity from nuclear fuel.

FIGURE 4.2: EGYPT'S ENERGY FUTURE SITUATION.

135.1

127.5120.3

113.5107

10195.3

89.9

8075.5

71.2

0

15

30

45

60

75

90

105

120

135

150

Nuclear Wind Hydro N.G. Fuel productes

2021

/22

2020

/21

2019

/20

2018

/19

2017

/18

2016

/17

2015

/16

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

Energy Gap Demand with EE Demand

63.471.2

59.856.4

Mil

lio

n t

oe

84.8

Source: Based on National Democratic Party, 2007

Egypt’s primary energy is mainly domi-nated by fossil-fuel based energy (liq-uid fuel and NG).

The renewable energies are dominated by hydro and wind energies, which ac-count for 4% of the primary energies in the country.

Fossil-fuel based primary energies in Egypt are handled in a competitive manner; however, when the state acts as the regulatory body, this concept needs to be revisited to make sure that competitive forces drive efficiency, productivity and innovation.

Renewable energies are handled to date in a non-competitive manner. This is currently changing in the field of wind energy.

With continued growth in demand and constrained supply, Egypt will face a serious energy shortage in the near fu-ture.

Box 4.1: A snap shot

The details of ownership and operation, as well as the competitiveness at different phases of Egypt’s energy chain and its associated regulations, will be addressed in more detail in subsequent sections.

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FIGURE 4.3: OIL RESERVES OF SELECTED COUNTRIESAT THE END OF 2007.

0 50 100 150 200 250 300

TunisiaChadPeru

ColombiaSyria

ArgentinaYemenGabon

UKVietnam

IndonesiaEcuadorEgypt

AustraliaIndia

MalaysiaOmanSudan

AzerbaijanNorwayMexicoAlgeriaBrazil

AngolaChinaQatar

CanadaUS

NigeriaKazakhstan

LibyaRussia

VenezuelaKuwait

IraqIran

Saudi Arabia

Thousand million barrels

Source: Based on BP, 2009

By 2007, the relative positioning of Egypt’s 0.722 mil-lion barrels per day oil production was 0.88% of the total production of the top 37 oil-producing coun-tries, as shown in (Figure 4.4).

FIGURE 4.4: OIL PRODUCTION OF TOP 37 COUNTRIESAT THE END OF 2007.

Thousand million barrels0 2 4 6 8 10 12

Oil Production at end 2007

TunisiaChadPeru

ColombiaSyria

ArgentinaYemenGabon

UKVietnam

IndonesiaEcuadorEgypt

AustraliaIndia

MalaysiaOmanSudan

AzerbaijanNorwayMexicoAlgeriaBrazil

AngolaChinaQatar

CanadaUS

NigeriaKazakhstan

LibyaRussia

VenezuelaKuwait

IraqIran

Saudi Arabia

Source: Based on BP, 2009

When looking at production/reserves ratios, Egypt’s ranking shifts upwards to 14th place with a ratio of 0.06, above Qatar, Kuwait, Iraq, Saudi Arabia and Iran. Egypt has replenished its consumption demand through new oil discoveries and uses more of its re-serves in current production than its neighbors. Other than the discovery of the Sakkara Field in 1989 (EIA 2008), reserves have stood almost still. This indicates that Egypt is consuming at a rate equal to that of new discoveries.

4.2.1.2 Exploration, Development and Produc-tion

The Ministry Of Petroleum (MOP) and its af-filiated corporations regulate all activities (development, exploration and production) concerned with petroleum. The Egyptian General Petroleum Corporation (EGPC) organizes oil explo-ration activities all over Egypt, while Ganoub El-Wadi Petroleum Holding Company (GANOPE) is in charge of areas south of Assyout, since 2003. International companies carry out most exploration activities.

EGPC and GANOPE call for bid rounds, usually an-nounced on an annual basis, where international contractors compete for exploration concessions (blocks). Once oil has been found in commercial quantities, a joint venture company is established be-tween the Egyptian party and the contracted partner, in order to manage development, and production. Lo-cal private companies also joint venture with EGPC and GANOPE. By the end of 2006, the number of cu-mulative agreements that had been reached by EGPC was 392—seven of them were signed by GANOPE (BSAC 2009 and GANOPE 2009).

Egyptian crude has a relatively high sulphur content of 1.6. The American Petroleum Institute (API)(2) number of local crudes falls into the medium crude category. Heavy crudes are harder to pump through pipes. Ob-taining much needed fuel products from heavy crudes like diesel and kerosene is technologically demanding, which in turn reflects on refineries’ capital and opera-tional costs.

2 A main characteristic of crude oil is sulphur content. Another main characteristic of crude oil is the API number, a measure of the density of crude oil, the lower the API the higher the density., value lower than 20 are considered heavy and higher than 40 are considered light.

4.2 PRIMARY ENERGY

4.2.1 Oil Sector

4.2.1.1 Relative positioning and Attractiveness

Egypt ranked 25th among the 37 countries that hold 91% of proven world reserves, as shown in (Figure 4.3); furthermore, Egypt’s oil reserves stood at 4.3 billion barrels by the end of 2008 (BP, 2009). This makes its share of total world reserves about 0.31%. This is quite a modest share compared to the 20.9% of Saudi Arabia, 10.9% of Iran, 9.1% of Iraq, 8% of Kuwait and 2% of Qatar.

121

Figures from the U.S Energy Information Administra-tion (EIA) show that local consumption exceeded production in 2005 for the first time in decades, and again in 2008, as shown in (Figure 4.5). On the other hand, figures from the British Petroleum (BP) World Energy Review Statistical Report show that up until the end of 2007, consumption had never exceeded production, as shown in (Figure 4.6).

FIGURE 4.5: EGYPT'S OIL PRODUCTION AND CONSUMPTION(1998-2008).

200

400

600

800

1000ConsumptionProduction

y201

0yyyyy2

005

yyyyy200

0yyyyy1

995

yyyyy199

0yyyyy1

985

yyyyy198

0

Exports

Production

ConsumptionTh

ou

san

d B

arre

ls p

er

Day

Source: Based on EIA, 2008.

FIGURE 4.6: EGYPT'S OIL PRODUCTION AND CONSUMPTION(1998-2008).

400

600

800

1000Consumption Production

20082007

20062005

20042003

20022001

20001999

1998

Th

ou

san

d B

arre

ls p

er

Day

Source: Based on BP, 2009.

Despite the discrepancy between the two sources, it is clear from both charts that if consumption has not already overtaken production, it is on the verge of doing so. Beginning in the mid-nineties, the trend has been a decline in production. That is despite the use of enhanced oil recovery techniques in mature fields and new discoveries (EIA, 2008). Available facts make it certain that satisfying the current oil consumption requirements would come at the expense of national reserves.

Experts attribute the current production-consump-tion trends to the fact that most Egyptian production comes from mature fields that are declining rapidly (EIA, 2010).

4.2.1.3 Attractiveness

Egypt’s comparatively high production levels prove that the sector is capable of attract-ing international companies. This is especially true when laid against a background of reserves that seem to have peaked and the generally lower quality of Egyptian crude. The declining share of the mature but lower quality fields in the Gulf of Suez, and the re-cent shift of production to the higher quality Western Desert fields, will in time change this pattern.

Several factors contribute to this attractiveness. The major factor is the “Production Sharing” framework, where the concessionaire bears the risk of explora-tion while revenues are shared between the parties of the Joint Venture.(3) Egypt also has the advantage of a good infrastructure in terms of pipelines, accumulated data and knowledge that decrease exploration risks, and human resource systems.

4.2.1.4 Pricing and oil disposition

The Egyptian government controls the pricing framework of crude oil. Brent crude is the cur-rent marker of Egyptian exports, with the Suez blend being the marker price for local variations in crude blends (Goliath Business news, 2008). Either EGPC, GANOPE, or the joint venturing contractor market the produced crude after satisfying local needs as per the PSA model (MOP, 2009). The contractor is free to sell oil as convenient; however, priority is given to satisfying the needs of the Egyptian local market at the current market price.

3 A question that should be asked, but for which the authors could not answer is whether the PSA is set appropriately. For example, is it too generous for the operating partners? Is Egypt sacrificing too much of its non-renewable resource to attract investors? Recent trends in the industry seem to indicate increasing re-turns to host governments. Alternatively, given resource depletion, are the terms sufficient to attract new investment?

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4.2.2 Natural Gas (NG)

4.2.2.1 Relative positioning

Towards the end of 2008, Egyptian NG reserves reached 2.1 trillion cubic meters, representing 1.16% of the world’s total reserves. By 2007, it came in 13th among the top 37 countries that collectively hold 89% of world reserves, as shown in (Figure 4.7).

FIGURE 4.7: NG RESERVES AT THE END OF 2007 FORTOP 37 COUNTRIES.

Trillion Cubic Meters0 10 20 30 40 50

Natural gas: Proved reserves

GermanySyriaPeruUK

BangladeshArgentinaVietnam

Trinidad & TobagoYemen

MyanmarMexico

RomaniaBolivia

PakistanUkraine

OmanIndia

AzerbaijanNetherlands

LibyaUzbekistan

CanadaKuwait

KazakhstanEgypt

ChinaAustralia

IndonesiaIraq

AlgeriaVenezuela

NigeriaUS

Saudi ArabiaQatar

IranRussia


In the Middle East, Egypt’s 1.157% share of the world’s total reserves comes behind the 15.75% share of Iran, the 14.257% of Qatar, and the 4.085% of Saudi Arabia. Outside the Middle East, Russia and Nigeria also pos-sess large NG reserves with 24.26% and 2.9% shares of total global reserves, respectively. Both of them have by far higher shares than Egypt.(4)

Meanwhile, as shown in (Figure 4.8), Egypt ranks num-ber 13 in the production of the top 37 NG producing countries, accounting for about 90% of global produc-tion.(5)

Egypt’s production/reserves ratio stood at 0.028 by the end of 2007. This ratio is quite high when com-pared to the 0.01 of Saudi Arabia and Russia, Venezu-ela and Nigeria’s 0.006, Iran’s 0.005, or Qatar’s 0.002.

The high production/reserves ratio is indicative of investment attractiveness. On the other hand, the same ratio indicates a higher depletion pace of the resource. Senior officials’ announcements put the lifespan of reserves at 30 years and include signifi-cant room for NG in the 2020 energy portfolio. More conservative estimates put it at 17 years (Al-Ahram

4 Figures for relative shares and Production/reserves ratios have been calculated by the study team from BP data sets.

5 It is important to highlight that no data was found for the production of Iraq, Yemen and Peru, which might otherwise reflect on Egypt’s ranking

All exploration and development con-cessions and agreements, and the as-sociated contractual terms done in Egypt, are structured according to a Production-Sharing Agreement (PSA) model called the ‘Egyptian Produc-tion-Sharing Model’. A concessions agreement for each exploration block is reached between the contractor and either EGPC or GANOPE, with the ap-proval of the Egyptian government. The Egyptian PSA divides the explo-ration period into two phases, with a maximum of 6 years. The exploration period is then followed by a 20-year development lease that comes after commercial discovery. The lease can be extended for another five years.

Recoverable costs and valuation of oil (or gas) are reached collectively be-tween the contractor and the Egyp-tian side. After recovery of the costs of exploration and development of commercialized petroleum, which is restricted to a maximum of 35% of total production, the Egyptian party shares petroleum production with the contractor, financially (EGPC, 2009). The rules of sharing are partly regu-lated, as the shares of the Egyptian side are tailored to different agree-ments. However, maximum and mini-mum shares, depending on production levels, are stipulated in the Egyptian PSA framework.

Egyptian PSAs mandate the contrac-tor with irrecoverable bonuses for sig-nature, converting exploration into a development lease, and the five-year extension of leases, as well as a bonus allocated for training Egyptian cadres. On the other hand, the Egyptian par-ty is obliged to pay income taxes and royalties to the competent Egyptian authority out of its share. ‘Meanwhile, the Egyptian government can amend a PSA to cope with ongoing interna-tional and regional trends.’

Box 4.2: The Production Sharing Agreement

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Weekly, 2008). The two estimates are clearly based on different assumptions concerning the growth in de-mand and additional discoveries. It is safe to assume that the life span of the resource will fall within these two extremes.

FIGURE 4.8: NG PRODUCTION IN TOP 37 COUNTRIES IN 2007.

Tri

llio

n C

ub

ic M

ete

rs

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

GermanySyriaPeruUK

BangladeshArgentinaVietnam

Trinidad & TobagoYemen

MyanmarMexico

RomaniaBolivia

PakistanUkraine

OmanIndia

AzerbaijanNetherlands

LibyaUzbekistan

CanadaKuwait

KazakhstanEgypt

ChinaAustralia

IndonesiaIraq

AlgeriaVenezuela

NigeriaUS

Saudi ArabiaQatar

IranRussia


4.2.2.2 Exploration, Development and Produc-tion

The Egyptian Natural Gas Holding Company (EGAS), GANOPE and EGPC are the organiza-tions responsible for regulating NG explora-tion and development activities. Internation-al companies lead the NG market, similar to the case of oil EGAS has signed 23 agreements with 26 international petroleum companies. Total amount of drilled wells is expected to reach 118 by the year 2018 (EGAS, 2010).

NG production has been steadily increasing since the eighties, with the entire production being absorbed by the local market (Figure 4.9). Starting from 2000, the rate of increase in production has increased sharply, with an average annual rate of increase of 14% (EIA, 2010). The Government’s reli-ance on NG as a generator of hard currency explains the change. Exports account for the observed gap between production and consumption in the current decade (EIA, 2010), which came about with the com-pletion of the first NG export infrastructure in 2003, and later with the completion of the Liquefied Natu-ral Gas (LNG) facilities in Idku and Damietta. This is indicative of a remarkable shift in the Egyptian oil and NG exploration and production landscape.

FIGURE 4.9: EVOLUTION OF NG PRODUCTION ANDCONSUMPTION (1980-2007).

bil

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ic f

ee

t

0

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1500

2000 ConsumptionProduction

2010

2005

2000

1995

1990

1985

1980

ExportsProduction

Consumption


4.2.2.3 Attractiveness

The attractiveness of NG investment in Egypt is based on the production sharing framework, wide coverage of the gas network, and the large human resource base. In addition, NG reserves are still expanding. Egyptian NG quality is characterized by its sweetness (low sulfur content), low contaminant levels, and valu-able hydrocarbon characteristics associated with the main component, methane.

4.2.3 Hydro Power

Hydro power supplied most of Egypt’s elec-tricity needs for a number of years but by 2008, represented only 12.4% of electricity and 4% of overall primary energy produc-tion. In Egypt, the energy generation from hydro resources started in 1960, due to the con-struction of Aswan Dam. In 1967, the 2.1 GW High Dam hydropower plants were commissioned. The second substantive addition to hydropower capac-ity in Egypt was the Aswan Dam 2 power plant (0.27 GW) in 1985. Isna hydropower plant (0.09 GW) was commissioned in 1993 and Naga-Hamadi (0.06 GW) in the year 2008 (EEHC, 2008). Contracts for capacity development have been allocated according to com-petitive bidding, within the framework of local pro-curement policies.

(Figure 4.10) below shows the development of the installed capacity of the hydropower plants over the period of 1960-2006.

124

FIGURE 4.10: DEVELOPMENT OF THE HYDRO POWER PLANTSINSTALLED CAPACITY (1960-2006).

GW

0.0

0.5

1.0

1.5

2.0

2.5

3.0 Hydro Installed Capacity

2006

2004

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2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

1960

Source: Based on EEHC, 2008.

Egypt’s hydroelectric power potential has reached the point of saturation. The Nile waterways have been ful-ly exploited. Irrigation needs and minimum discharge rates all constrain any further major development of hydropower. (Figure 4.10) above shows that since the late sixties and early seventies, there have been no substantive additions to the available hydropower in-stalled capacity.

The share of hydropower contribution to the total national installed capacity has been rapidly declining since the end of the seventies. (Figure 4.11) illustrates the trend of hydropower’s share of energy genera-tion in Egypt.

Little room, however, remains for minor additions to the installed capacity through improved efficiency and availability of the high dam generators, which accounts for 74% of Egypt’s total installed hydroelectric capac-ity in 2008 (EEHC, 2008).

FIGURE 4.11: CONTRIBUTION OF HYDRO POWER IN THE TOTALGENERATED ELECTRICITY (1960-2006).

GW

10

20

30

40

50

60

70

80 Percentage of Hydro Installed Capacity

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

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1964

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1960


4.2.4 Wind Energy

2.4.1 Relative positioning and Attractiveness

Egypt has excellent wind energy potential., There are ambitious plans for the expansion of wind energy, and the costs are attractive compared to solar energy. World-wide wind in-stallations in 2008 reached 121.2 GW, more than dou-bling from a 59 GW total in 2005. The yearly installed capacity is as impressive as the growth rate; 74.2 GW in 2006 and 94 GW in 2007 (Global Wind Energy Agency, 2008) which is an indication of a major shift resulting from maturing technology, high oil prices and an awareness of the risks of reliance on fossil fuels, both on security of supply and global warming.

Egypt has a great economic wind genera-tion potential compared to the countries in the Europe – Middle East and North Africa (EU-MENA) region. It is ranked number 5 among the 48 countries of the EU-MENA region. This gives Egypt a leading position, from the wind resources per-spective. Egypt outpaces Denmark, Italy and Sweden, which have all made strides in developing wind energy.

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TWh / year0 50 100 150 200 250 300 350

Potential

HungaryJordan

CroatiaAustria

Czech RepublicRomania

TunisiaIran

BulgariaSyria

BelgiumPortugalMoroccoFinlandAlgeria

NetherlandsGreeceIreland

DenmarkTurkey

SwedenPoland

NorwayItaly

EgyptSpain

FranceGermany

UK

FIGURE 4.12: WIND ENERGY POTENTIAL IN THE EU – MENAREGION.

5 / 29 countries

5.5%

90 TWh/year

Source: Based on DLR, 2005 a & b.

According to the Egyptian Wind Atlas, the western part of the Gulf of Suez is home to some of Egypt’s best wind resources where an average yearly wind speeds surpass 7 m/s. The region also harnesses a potential for some 20,000 MW of wind capacity. The Gulf of Suez is the region where both short- and medium-term plans for Egypt’s wind-energy develop-ment are focused. The western desert also has great future potential for wind energy.

Egypt’s development of wind energy is low compared to global installed capacity. Al-though the total capacity of wind energy exceeded 400 MW (NREA, 2008), it only represents 0.6% of the total of most countries in the EU and MENA re-gion, as shown in (Figure 4.13), (World Wind Energy Agency, 2008).

MW

0 5000 10000 15000 20000 25000 30000

Total Installed Capacity

MoroccoHungary

FinlandCzech Republic

BulgariaKorea (south)New Zealand

TurkeyBrazil

Chinese TaipehBelgiumEgyptNorwayPolandGreeceAustriaSwedenIreland

AustraliaJapan

The NetherlandsCanadaPortugal

DenmarkUK

FranceItaly

IndiaChinaSpain

GermanyUSA

Installed Capacity

FIGURE 4.13: WIND INSTALLED CAPACITY – WORLD WIDE IN 2007.

17/33 countries

0.6%

390 MW

Source: Based on World Wind Energy Agency, 2008.

4.2.4.2 Energy Generation Capacity Develop-ment

The development of wind energy in Egypt went though many stages: from small stand-alone wind turbines in rural areas, to medium size wind parks connected to the national grid. This development is shown in the following figure.

1050

850

630M

W

FIGURE 4.14: DEVELOPMENT OF WIND ENERGY INSTALLEDCAPACITY IN EGYPT (2000-2011).

0

200

400

600

800

1000

1200

Gabal ElZeytJapanese 2KfW5

Dainda3JapaneseKfW4Spanish

Dainda2: KfW2&3KfW1Dainda1Hurghada

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Total

550

430

230

145145986868

5

Source: El-Swedy for Wind Energy Generation (SWEG, 2009) Local manufacturing: Experiences from the MENA Region” (SWEG - RCREEE, 2009).

The development of wind energy in Egypt started in 1988 with limited experimental projects in Hurghada Wind Park, which had a total installed capacity around 800KW. Developments took off in large-scale grid-connected projects after the allocation of 80 Km2 for the New and Renewable Energy Authority (NREA) at Zafarana on the Gulf of Suez. Several projects were carried out in cooperation with the Danish, German, Spanish and Japanese governments. The current cu-mulative operative capacity exceeds 400MW.

Wind parks in Egypt, to date, have been supported by donors. However, this has begun to change with the 700 km2 that has been earmarked by the government of Egypt to host a 3000 MW wind farm at Gabal El-Zayt.

4.2.4.3 Current Developments

The latest version of renewable energy strategy, ap-proved by the Egyptian Supreme Council stipulates that 12 % of total electricity generation in 2020 will come from wind (MOEE, 2010). Although these plans are currently just aspirations, they clearly show that wind is now on the government’s energy agenda.

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Readiness in the market

The limited demand for wind energy in the past has prevented the development of strong local manufacturing industry; however, this is changing quickly. The Sewedy Group has es-tablished El Sewedy for Wind Energy Generation (SWEG), an industrial conglomerate focused on wind energy, which is acquiring technologies and building capacity via alliances with international (mainly Eu-ropean) suppliers. SWEG has already ventured into wind-turbine and tower manufacturing through its subsidiaries. Turbine-blade manufacturing is also in its short-term plans. Other local investors are expected to follow soon, but none have announced plans yet. Meanwhile, local cable production is well developed in Egypt and capable of supplying the needs of wind-tur-bine manufacturing. Transformers are also well rooted in Egypt through local manufacturing.

Regarding auxiliary services of wind industry, neither Operating & Maintenance (O&M) companies nor per-formance measurement agents exist, as these services are monopolized by NREA. SWEG does, however, have imminent plans for an O&M company. It is ex-pected that privatization could vitalize the market for independent service providers.

4.2.5 Solar Energy

4.2.5.1 Relative Positioning and Attractiveness

Egypt is one of the world’s most attractive sites for solar energy thanks to both ample sunlight and proximity to existing and poten-tial energy grids. Solar power uses direct sunlight and must be located in regions with high direct so-lar radiation. Among the most promising areas of the world are: the South-Western United States, Central and South America, Northern and Southern Africa, the Mediterranean countries of Europe, the Middle East, and Iran (DLR, 2005).

Solar energy could be used to produce electricity directly through photovoltaic (PV) technology,(6) to produce heat through solar collectors, or in a Con-centrated Solar Power (CSP)(7) system; the CSP sys-tem would produce steam that could be used for in-dustrial purposes, for the desalination of water, or in a turbine to produce electricity.

Photovoltaic (PV)

Photovoltaic systems can be installed almost everywhere, but their market expansion is limited by high initial investment cost and

6 A PV cell is basically a semiconductor that absorbs solar energy (sunlight) and converts it directly into electric energy.

7 Mirror systems to reflect and focus incident solar radiation onto a receiver) which is mainly tubing system filled with a heat transfer fluid (HTF) usually ther-mal mineral oil, or water.

uncertain future costs of competing energy sources, such as oil and NG. However, PV tech-nology could become competitive by the middle of this century. Egypt has the highest potential of PV in the Mediterranean region with a potential of 36 TWh/year, representing 16.5% of the total potential of the Mediterranean region, as shown by (Figure 4.15) (DLR, 2005). Nevertheless, the Egyptian PV installed capacity does not reflect this potential.

TWh/year0 5 10 15 20 25 30 35 40

Economic Potential in TWh/year

MaltaCyprus

BahrainQatar

LebanonKuwait

PortugalUAELibyaIsrael

GreeceOmanJordanTunisiaSpain

IraqSyriaItaly

Saudi ArabiaAlgeria

IranMorocco

YemenTurkey

Egypt

FIGURE 4.15: PV ECONOMIC POTENTIAL IN SOME COUNTRIES OFSOUTHERN EUROPE AND THE MENA REGION.

1/27 countries

16.49%

36 TWh/year

Source: Based on DLR, 2005 (a & b).

The NREA estimates the total installed capacity of PV systems to be around 5 MW (Union for the Mediterranean, 2008). The figure is very modest when compared to the solar potential that exists in Egypt. Countries like Spain and Italy, which have somewhat lower solar resources than Egypt, have much higher PV installed capacities (Figure 4.16).

TWh/year0 500 1000 1500 2000 2500 3000

Capacity

MaltaGreece

ItalyLebanon

CyprusBahrainTurkey

PortugalIsraelQatarSpain

KuwaitUAE

YemenJordanTunisia

SyriaOman

IranMorocco

IraqEgypt

Saudi ArabiaLibya

Algeria

FIGURE 4.16: PV INSTALLED CAPACITY IN MOST COUNTRIES OF THESOUTHERN EUROPE AND MENA REGION IN 2008.

Source: Based on EurObserv’ER, 2009.

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No grid-connected applications for photovoltaic sys-tems currently exist in Egypt. PVs are used in applica-tions, where the modules are an integrated part of the application, such as advertisement boards along high-ways, powering mobile telephones towers, powering inaccessible locations such as cathodic protection of metal bridges, farm lighting, and PV-driven pumps. Photovoltaic systems are also used in limited cases, in stand-alone power generation systems. These include powering parts of an industrial load (usually lighting). They are used as the main power supply for some vil-lages or communities, as part of demonstration proj-ects- funded by international donors and agencies. Wind energy appears to be more cost-effective and is also receiving greater attention from the government.

Given the limited size of the market, the lo-cal PV market is dominated by service pro-viders or installers. Only a few producers locally assemble PV modules, and the few attempts to locally produce photocells never materialized. The small size of the market limits human capacity, manufacturing ca-pabilities, related services, as well as Research & De-velopment (R&D).

Solar Heaters

Optical systems called solar collectors focus solar ra-diation for heating purposes. There are several types of solar collectors; the most common of them are flat-plate collectors. In the case of residential and commercial solar heating, a water storage tank is used as well, and the system is optimally placed on roof-tops. It uses direct radiation to produce hot water.

Despite the cost-effectiveness and efficiency of solar water heaters, they are under-uti-lized in Egypt. Just as in photovoltaic systems, indi-vidual initiative for solar heaters drives a limited mar-ket . Some companies work with both solar heaters and photovoltaic systems. Four local companies work in the manufacture and installation of water heaters. Other five companies import the systems, while they perform installation work themselves. And although most components and raw material are readily avail-able in the Egyptian market, about 90% are imported.

Concentrated Solar Power (CSP)

CSP is the utilization of mirror systems to reflect and focus incident solar radiation onto a collector. The thermal energy is then used to produce steam in a solar steam generator. The stream produced can be used either to drive a turbine generator set in an as-sociated power plant, or in industrial processes.

Integration of solar energy in industrial pro-cesses is limited. Although Egypt is home to the one of the world’s first plants that utilize solar ther-mal energy in generating steam, there was no further follow-up activity. The plant construction started in September 2001, with a grant from the African De-velopment Fund, and was in operation by May 2004.

The use of solar collectors in the generation of elec-tricity (CSP) is not addressed in this section, but it will be addressed in the electricity generation section.

Overall Situation

Despite its competitive edge, Egypt has not yet tapped into the huge potential of solar energy production. The modest share of total installed capacity, com-pared to countries with lesser potential, reflects the presence of barriers hindering the growth of this promising energy source. Other than the expected unified electricity law, the main policy promoting re-newable energy technologies is the reduced customs tariff for equipment and components, which is largely ineffective.

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4.3.1 Fossil Fuels

Egypt has a well-developed oil refining indus-try, with nine operational refineries (BASC, 2009). The government has spent $4 billion on upgrading and expanding these refineries (BASC, 2009). All of them are state-owned except for one, Middle East Oil Refinery (MIDOR). It is a pub-lic-private refinery, which has been operational since 2001. Recently, the foreign partner pulled out. Theo-retically, the market has always been open to private sector refineries. However, none before MIDOR had been granted a permit by EGPC. State-owned refiner-ies do not purchase crude oil; instead, they refine for EGPC according to a national refining plan. The pri-vate refinery purchases crude and sells products, but it can also refine under contract for EGPC. Egyptian crude, and the technology of the refineries, result in Egyptian refinery output having a high share of heavy products (e.g. HFO known locally as Mazout), and a smaller share of lighter, more valuable products. The balance of local demand for these products is reached through imports. In 2007, 1.8 million tons of LPG, and 1.856 million tons of the valuable gasoline and die-sel were imported (IEA, 2010). Government has re-cently started to alter the local fuel production mix by increasing the production of light fuel products. Modern technologies are employed in new refining facilities and existing plants are being equipped with hydro-cracking facilities, such as the one in Mostorod (an extension of the Cairo Oil Refining Company).

4.3.2 Natural Gas (NG) Processing(8)

Generally, Egyptian NG is comparatively low in sul-phur, which makes it less costly to process. Processing is usually carried out onsite, or at the point of landing for off-shore facilities. Sometimes, further processing is carried out at points along the grid or near shore (in case of off-shore production) at central processing facilities, in order to extract valuable lighter hydro-carbons, such as ethane, ethylene, propane, butane, butylene, isobutene and their mixes.

About 23 NG processing plants, mostly run by GAS-CO, operate in Egypt (Oil & Gas newspaper, 2010). Investments are pumped into the two or three cen-tral processing facilities, to maximize benefits extract-ed from NG.

8 Processing of natural gas is different than oil refining. Gas coming out of wells is mixed with other hydrocarbons, sulphur water vapor and contaminants. On-site processing separates those to meet the specifications required for the transmis-sion network, and extract some condensate and LPG. This renders natural gas predominantly made up of methane. The richer that natural gas is in methane, the higher the quality.

4.3.3 Electricity generation from fossil fuels

Electricity generation in Egypt is dominat-ed by fossil fuels, which represented about 85.5% of total electricity generation in 2008 (EEHC, 2008). This is mainly NG, which accounted for 66.4% of the total electricity generation in 2008. Heavy fuel oil (HFO) is the dominant oil product used in electrical energy generation. It represents nearly 99% of the oil used in electrical energy generation, with light fuel oil (LFO) being relatively insignificant. (Figure 4.17) shows time trends of electricity genera-tion from different sources.

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ea

FIGURE 4.17: GENERATED ELECTRICITY FROM DIFFERENTRESOURCES (2004-2008).

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Hydro

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20082007200620052004


Future plans for installed capacity increase are mainly focused on steam power produced by natural gas as can be clearly seen in (Figure 4.18). The additional capacity of NG driven power plants to be installed by 2027 is expected to reach 41,300 MW (EEHC chair-man, 2008). Hydropower will most likely have a lower percentage share.

4.3 SECONDARY ENERGY Primary energy is converted into three main types of secondary energies: fuel prod-ucts, processed NG and electricity (Figure 4.1). Conversion of primary energy into secondary

energy is almost entirely carried out by government entities.

129

TW

h/y

ea

FIGURE 4.18: ACCUMULATIVE ADDED INSTALLEDCAPACITY TILL 2027.

0

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Thermal

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Hydro

26/27

25/26

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09/10

08/09

Source: Based on the data from the EEHC chairman presentation at the World Bank, February 22, 2008, Washington DC.

4.3.4 Electricity Generation from Wind

The actual effect of wind generation started to appear when the wind parks in Hurghada were connected to the national grid during the late 1990’s. Throughout this period, electricity generation increased by a very fast rate, resulting in growth from 368 GWh in 2003 to 831 GWh in 2007.

(Figure 4.19) and (Figure 4.20) demonstrate the amount of electricity produced from wind. However, the contribution of wind to the overall national elec-tricity production remains modest, at less than 1% of the total between 2004 and 2008.

Enhancement of wind contribution in the Egyptian electricity mix is foreseen to con-sist of two stages.:

Stage one will use a competitive bids approach, through international tenders requesting bids from the private sector to supply energy from renewables. The financial risk for inves-tors is reduced through guaranteed long-term power purchase agreements. The bidding process consists of two Phases.

Phase1: Pre-qualifications based on experience and financial status. It will also include wind measurements, bird migrations, environmental impact assessments, and soil testing. This phase will last one year.

Phase2: Short-listed bidders submit proposals to construct, own, and operate the wind plant. By the year 2017, the last tender will be solicited for achieving the targeted en-ergy supply by the year 2020.

The target is to have the private sector contribute 2500 MW of the grid through long-term power purchase agreements (PPA). The 2500 MW will be issued in 250 MW blocks. This stage will include 5 bids, each will consist of more than one block, except for the first bid which will be restricted to one block. Egypt will target highly qualified international de-velopers with strong financial status and high capacity for technology transfer. Also, local manufacturing will be promoted by giving an advantage to proposals having higher shares of locally manufactured components. The first tender has been proposed with around ten companies qualified to bid. The proposed farm is expected to be operational in 2014.

In stage two, a feed-in-tariff will be introduced, taking into consideration the prices achieved in stage one. The goal of this stage is to reach a 2500 MW of installed capacity (this next phrase is not clear) targeting the inclusion of medium and small developers with projects of a 50 MW capacity or less. The tariff will be set for 15 years, taking into account the wind speed and capacity. An international consultant has already been hired to design the feed-in-tariff, as well as the PPA contract template.

NREA’s share of the targeted installed capacity is 2200 MW. Projects in the pipelines until 2014 anticipate 900 MW of capacity. By 2014, NREA will reach 1270 MW (the current installed capacity is 400 MW). An additional 200 MW will be added each year between 2015and 2020.

Box 4.3: Wind Energy Outlook

130

GW

hFIGURE 4.19: WIND ENERGY TREND – EGYPT (1997-2008).

0

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600

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1000Energy (GWh)

2007

2006

2005

2004

2003

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2001

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MW

FIGURE 4.20: WIND INSTALLED CAPACITY TREND (1997-2008).

0

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350Capacity (MW)

2007

2006

2005

2004

2003

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2001

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4.3.5 Electricity Generation from Solar Energy

The Concentrated Solar Power (CSP) systems can be used either to generate electricity, or or to pro-duce steam for industrial or water desalination ap-plications.

Egypt has excellent potential for solar energy using CSP technologies. It is ranked 4th for CSP potential in the Mediterranean region (DLR, 2005), as shown by (Figure 4.21).

020

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CyprusBahrainTurkey

PortugalIsraelQatarSpain

KuwaitUAE

YemenJordanTunisia

SyriaOman

IranMorocco

IraqEgypt

Saudi ArabiaLibya

Algeria

FIGURE 4.21: CSP ECONOMIC POTENTIAL IN MOST COUNTRIESOF THE SOUTHERN EUROPE AND MENA REGION.

4/27 countries

11.56%

73656 TWh/year

TWh/year

Source: Based on DLR, 2005 (a &b).

As in the case of PV, this potential has not as yet been realized except for a single project under construc-tion as shown by (Figure 4.22).

0 500 1000 1500 2000 2500 3000 3500


MaltaCyprus

BahrainQatar

LebanonKuwait

PortugalUAELibyaIsrael

GreeceOmanJordanTunisiaSpain

IraqSyriaItaly

Saudi ArabiaAlgeria

IranMorocco

YemenTurkey

Egypt

FIGURE 4.22: SOLAR COLLECTORS INSTALLED CAPACITY IN MOSTCOUNTRIES OF SOUTHERN EUROPE & MENA REGION.

TWh/year

Source: Based on EurObserv’ER, 2009.

Egypt’s solar energy-generation economic potential is the highest in North Africa, with good human resource potential and infra-structure generation potential see (Figure 4.23). This high potential has been untapped so far, despite scattered CSP projects in Egypt. A hybrid solar power plant is currently being erected in Kuraymat, which is partially funded by donors. The contribution of CSP

131

is rather limited, as it integrates CSP as a source of power (20MW) with conventional fossil fuel (140 MW) in a thermal combined cycle electricity genera-tion technology. The solar generation of 34 GWh rep-resents only 3.6% of the total energy generated by the

plant. Nevertheless, it could be a learning experience and a starting point for the take off of CSP electricity generation plants to tap into the huge pool of solar resources in Egypt. There are no clear plans for ex-panding CSP.

FIGURE 4.23: NORTH AFRICA – SOLAR THERMAL ELECTRICITY GENERATION COST RANKING

Source: Dr. Hany El Nokrashy’s Presentation at Cairo University, December 12th 2009.

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Distribution

EGPC regulates the sale of oil fuel products at the storage tanks. Misr Petroleum Company, which is owned by EGPC, is the market leader. Foreign compa-nies, including Shell, Exxon Mobil, Caltex and others, in addition to a public company, El-Taawon, are the market players. As the market leader is 100% owned by EGPC, it is unclear whether there is a level playing field.

End-use Distribution

Companies which have purchased the oil products do not trade them, as they resume the retail and end-use distribution themselves, either directly through truck-ing or through retail outlets spread all over the coun-try owned or franchised by each of them.

Prices of fuel products are set by the state at a uni-form rate. These rates do not reflect market prices and are periodically revisited and raised by decree. A table of the different fuel products prices is found in Appendix B. The prices are far below the international economic market prices for these products, and are thus heavily subsidized. However, the subsidy levels are more accurate for imported products such as diesel and butane. For locally produced products such as gasoline and HFO, different references are used for price determination including world market prices, opportunity cost, and the cost of production.

4.4.1.2 Natural Gas (NG)

Transmission

Processed NG is transmitted to the required destina-tion via a network entirely owned by EGAS and EGPC and operated by GASCO.(9) The NG grid length is 16,800 Km, and the capacity is 160 MMSCM/D.(10) The grid is developed and operated according to state of the art standards. A control hub— NATA— is situ-ated in Cairo. It regulates the flow of gas in the grid according to consumer demand. The control hub has branches in Alexandria, Suez, Central Delta and Mo-kattam (EGAS, 2010).

9 70% of GASCO is owned by EGPC, while EGAS and Petro jet hold 15% each 10 Million metric standard cubic meter per day.

Distribution

Fifteen companies purchase the processed NG. The process is regulated by the MOP, mostly through EGAS. Distribution companies are responsible for end-use distribution to NG users and operation of their concessionary portion of the network . Yet some large industrial and power-generation consumers take NG directly from the GASCO transmission grid. Dif-ferent distribution zones have different conditions, in terms of demand size and the level of operational feasibility of the portion of the grid at hand. Conse-quently, there is a level of competition between the fifteen companies for privileged zones. (Figure 4.24) illustrates the distribution of NG consumption among different sectors.

FIGURE 4.24: DISTRIBUTION OF NG CONSUMPTION AMONGDIFFERENT CONSUMPTION SECTORS (2007-2008).

2%Residential &Commercial

14%Petroleum

63%Electricity

1%Transportation

20%Industry*

Source: Based on Dr. Mohammed Elsobki presentation at the World Bank, February 22, 2008, Washington DC.

4.4.1.3 Regional Perspective

An export pipeline called the Arab Gas Pipe-line began commercial operation in July 2003. It started supplying Jordan and was later extended to Syria. An extension of the pipe-line to Lebanon is expected. In 2008, an agreement,

4.4 TRANSMISSION & DISTRIBUTION

4.4.1 Fossil Fuel Products

4.4.1.1 Oil Fuel Products

Transmission

Thus far, transmission has been under state monopoly, but a second party has been granted access to the market, which may signal improved potential competitiveness. The state-owned oil pipeline companies transfer refined oil to main storage tanks owned by the petroleum sector. Formerly, there was only one single player in the market. However, an Egyptian-Libyan company, partly owned by the state, was established several years ago and is involved in the transmission of refined oil as well. The rules of competition remain unclear, as it is not known how the petroleum sector determines the market share.

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was reached between Egypt, Syria, and Lebanon to transform the Arab Gas Pipeline into the Arab Gas Network and to connect it with the Nabucco pipeline extending from Turkey to Austria, passing through Bul-garia, Romania, and Hungary. Iraq and other eastern countries are expected to be the main suppliers of Nabucco, which is planned for commissioning by 2011 (BASC, 2009). Exporting NG abroad requires a differ-ent infrastructure.

The commissioning of the Arab Gas pipeline in 2003 coincided with increased production. However, liquefied natural gas or L.N.G represents the bulk of Egypt’s NG exports, accounting for 85% of export shares (BASC, 2009). L.N.G is produced for sea transport (through special carriers) in two liquefaction complexes: Damietta and Idku. The Dami-etta complex is owned by the Spanish Union Fenosa, EGPC and EGAS. The Idku complex is a consortium of several corporations: EGPC, BG, Petronas and GAZ de France. The two complexes were completed in 2004 and 2005, respectively.

Less than Optimal Use of Resources

Electricity generation absorbs almost 63% of Egypt’s natural gas consumption with industry accounting for another 20%. This consumption pattern is not optimal for the utilization of national NG resources. Con-version of NG to electricity with normal technol-ogy has a 40% efficiency limit (55% when utilizing the modern combined cycle technologies). This technical constraint represents substantial loss of valuable re-sources Meanwhile, industry experts note that higher value products such as fertilizers, petrochemicals and feedstock could multiply the value of such products. Not all NG could be transformed into higher value products given current demand. Egypt is currently highly dependent on NG for electricity generation, but there could be potential for exploiting high-value products in the future to produce a net gain for the economy.(11)

NG exports have replaced oil exports as a major source of hard currency and as a critical contribu-tor to the reduction of the national trade deficit. It is also an important source of FDI. It could, however, be perceived as representing lost opportunity cost of us-ing NG, a non-renewable resource, as a feedstock to industries in order to generate a higher added value.

Share in national exports

Petroleum products represent a significant portion of total Egyptian exports. As (Figure 4.25) shows, pe-troleum exports (crude and manufactured) have in-

11 Given the large gain in value added, even its use in the distant future will still be a gain even when discounted to its present value. The industry does not usually have a good environmental image; however, in this case, it actually encourages a more extended use of the non-renewable resource.

creased in recent years as part of an export develop-ment strategy that has boosted exports across the board.

L.E

Mil

lio

n

FIGURE 4.25: TIME TREND OF PETROLEUM AND OTHER EXPORTS(2004-2008).

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

All OthersManufactured PetroleumCrude Petroleum

2007/20082006/20072005/20062004/2005

Source: Based on Ministry of Finance data, 2010.

The inauguration of the Arab pipeline in 2003 allowed for NG exports for the first time. Increase in manufac-tured petroleum exports from 2005-2007 correlated with the full commissioning of Damietta and Idku LNG complexes. The slight decrease in the period of 2006-2007 reflects the enactment of a government’s decision to limit NG export projects in order to en-sure the continuity of supply to domestic projects.

Meanwhile, crude petroleum exports, have decreased in physical terms, as illustrated by (Figure 4.26) (EIA, 2010). Nevertheless, they have increased slightly in monetary terms, which can be explained in light of the rapid increase in oil prices during the same period.

134

Th

ou

san

ds

Bar

rels

Pe

r D

ayFIGURE 4.26: TIME TRENDS OF CRUDE OIL EXPORTS IN BARRELS

PER DAY ( 2004-2008).

30

40

50

60

Crude Oil Exports

20082007200620052004


Petroleum FDI

In 2004/2005, the petroleum sector repre-sented about 65% of FDI in Egypt and has remained significant, although declining to about one-third of FDI in 2007/08 as shown by the figure below (Based on Ministry of Investment data, 2009). This is mainly a result of current efforts to increase, and diversify FDI. Energy-related FDI has grown in absolute terms, reflecting government com-mitment to increase resource extraction. This has been evidenced by growing numbers of exploration agreements throughout the period 2004-2009 and higher technological development of oil recovery techniques to check the declining production of ma-ture oil fields. (Figure 4.27) shows the distribution of FDI among different economic sectors in Egypt.

FIGURE 4.27: DISTRIBUTION OF FDI AMONG DIFFERENT SECTORS(2004-2008).

%0

%10

%20

%30

%40

%50

%60

%70

%80

%90

%100

Petroleum share of FDI

Real Estate

Sales of Assets to non-residents

New Establishment and expansions

2007/20082006/20072005/20062004/2005

Source: Based on Ministry of Investment, 2009.

4.4.2 Electricity Grid and Distribution

4.4.2.1 Transmission

The Egyptian unified transmission grid cov-ers all regions in Egypt; it has been owned and operated since 2001 by the govern-ment-owned Egyptian Electricity Transmis-sion Company (EETC) (EEHC, 2007). Although independent commercial transmission networks are not virtually prohibited by any current legislation, the EETC is a government monopoly regulated through its owner, the EEHC, and the electricity regulator.

4.4.2.2 Distribution

The distribution networks are owned and operated by nine companies, all working un-der the umbrella of the Egyptian Electricity Holding Company (EEHC). These companies are distributed according to a geographical base, and their zones do not overlap. The total number of customers served by the network was 23.8 million customers in 2008, which is around 99.5% of the Egyptian popula-tion (EEHC, 2008). The distribution of electrical en-ergy in Egypt takes place at different voltage levels: starting from the EHV level for some of the heavy industries, to the low voltage level for residential and commercial customers.

The distribution networks have been expand-ing at a very fast rate in order to cope with the increasing demand of electrical energy. In 2002, the medium-voltage distribution network length was 113,399 km, and the low-voltage distribution net-work length was 195,281 km; in 2008, the lengths of both networks were 142,983 km and 230,187 km re-spectively (EEHC, 2008). It is clear from (Figure 4.28) that consumption of electrical energy in all economic sectors, other than agriculture is steadily increasing at considerable rates.

TW

h

FIGURE 4.28: THE EVOLUTION OF THE ELECTRICAL ENERGY SALESTO THE DIFFERENT SECTORS (2004-2008).

%0

%10

%20

%30

%40

%50

%60

%70

%80

%90

%100

Others

Governmental & Public Utilities

Industrial

Commercial

Residential

Agricultural

2008200720062005 2004


135

Electricity rates are subject to a less direct subsidy than fossil fuel products, as they are indirectly subsidized through the provision of NG and fuel. The adopted electricity tariff in Egypt depends on block rates (residential and commercial), in which the cost of electricity increases as the con-sumption increases. This results in increased average cost per kWh as total consumption increases. More-over, different users are subjected to different pricing schemes. The currently applicable electricity tariff for the different sectors is found in appendix C; the de-sign/formation of these tariffs does have demand side management aspects inherent in them, yet this is not currently the focus of the chapter.

4.4.2.3 Regional Perspectives

For the past twenty-five years, the Egyptian power sector has been keen to improve its performance through diversification of elec-trical energy resources. Between 1998 and 2000, interconnections with Libya and Jordan were imple-mented followed by a Syria-Jordan interconnection. Thus, Egyptian interconnections were able to extend as far as Morocco and Turkey.

Accordingly, new policies for energy trade have been adopted. This has been achieved through technical and commercial agreements with Arab Mashreq countries (Egypt, Jordan Syria, Lebanon, Libya, Iraq and Turkey) and the Arab Maghreb. These nations are also cooperating with the “Arab Union for Production, Transport and Distribution of Electricity,” made up of nineteen countries. (Figure 4.29) illustrates the current interconnections with Arab Mashreq and Maghreb countries.

Egypt also participates in the “Observatoire Mediter-ranean de l’Energie” (OME) and the Study Committee for the Study of the Electrical Interconnection of the Mediterranean Countries. The aim of this European Trans-Mediterranean collaboration is to extend the previously mentioned connections to Europe through Turkey and Morocco. (Table 4.1) below shows the pro-spective interconnections with Europe. Currently the Libya – Egypt interconnection is the weakest link in the chain, acting as a bottleneck for electricity trad-ing. The expansion plan of the whole interconnection does not meet the needs for an electricity trading market that contributes to the Egyptian energy mix.

Table 4.1: Current and expected intercon-nection capabilities with Europe

From - ToInterconnection Capability(MW)

2008 2010 (expected)

Spain – Morocco 700 1400

Morocco – Algeria 400 900

Algeria – Tunisia 300 450

Tunisia – Libya 470 600

Libya – Egypt 120 600

Egypt – Jordan 300 600

Jordan – Syria 350 600

Syria – Turkey 350 600

Turkey – Greece 750 750

Turkey - Bulgaria 1250 1250

Source: Based on Dr. Mohammed Elsobki presentation at the World Bank, February 22, 2008, Washington DC.

FIGURE 4.29: INTERCONNECTION WITH : (A) ARAB MASHREQ COUNTRIES (B) ARAB MAGHREB COUNTRIES

(B)(A)

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The main reasons behind Egypt’s attractiveness are the PSAs in both oil and gas, which are clearly favor-able to the operators.(12) The upstream oil and gas markets attract a high level of competition. On the other hand, transmission, which requires a large infra-structure, seems to be a natural monopoly for both oil and gas.

Egypt’s refineries are rather antiquated and require large investments for upgrading. Oil refining is mostly undertaken by state-owned refiner-ies, that report to the MOP. These mainly meet local demands for refined products. There is no legislation preventing investments in private refineries. Howev-er, private investments in local refining are only now starting to appear on the scene, primarily through independent investments; moreover, there are indica-tions that upgrading the state-owned refineries could be undertaken in partnership with the private sector (MOP presentation, 2010). Higher oil prices coincid-ing with a government more receptive to private sec-tor involvement could explain this change.

Gas processing facilities are more modern and have to be located at gas reception facilities, as processing takes place before NG is pumped to the local trans-mission network or the liquefaction facilities for ex-port. This has not prevented the private sector from venturing into gas processing(13).

Distribution of oil and gas does not follow the same rules. Oil is mainly distributed by competing distribu-tors on the national level, while NG is distributed by competitors who battle for geographically exclusive concessions. Both oil and gas are, however, subject to heavy subsidies.

The Ministry has announced plans to remove subsidies from energy-intensive industries such as cement, steel and fertilizers. A three-year schedule was announced. However, implementa-tion has been delayed in light of the global financial/economic crisis. Profit margins are negotiated with the MOP and revisited as necessary.

12 Whether the PSA framework is too generous to the operators, and there are marginal gains to be recovered through renegotiation, is a question that de-serves to be studied.

13 Although not in actual terms yet, but the Egyptian Kuwaiti Holding Company has just established a new company whose scope includes gas processing ( Al-Ahram, March 23, 2010).

With the advent of private refineries, the supply side of fossil fuel products would have progressed, in terms of competitiveness, in an already reasonably competi-tive market. However, the demand side of this market is its weakest point, as subsidized prices do not give the right signals to producers or consumers.

The infrastructure for exports of oil and gas can be sustained, and local human and tech-nical capacities have been built during the last few decades. Export markets, especially for NG, are secured with long-term contracts. However, during the period when hydrocarbon price hikes were unprecedented in 2008, export prices were lower than spot world market prices, which led to a renego-tiation of a number of contracts.

4.5.1.2 Renewable Energy Resources

Hydropower has been the dominant renew-able energy resource in Egypt, but its current potential is fully utilized. As a result of the con-tinued growth of the energy supply, its stable absolute size is dwindling as a share of Egypt’s total energy sup-ply. Hydropower has hit a natural constraint, which cannot be addressed through policy interventions or further investments.

Egypt is competitive in other renewable en-ergy resources because of its natural endow-ments; infrastructure, human resources and proximity to potential export markets. For example, Egypt is the best positioned in the Mediter-ranean basin to exploit solar resources (DLR, 2005). However, exploitation of these resources falls behind the full potential and performance of other countries. Egypt enjoys excellent wind energy potential. There are ambitious plans for the expansion of wind energy, and the costs are attractive compared to solar energy.

Energy subsidies are prohibiting the normal development of the industry, which should be expanding its supply, maximizing efficien-cy, improving quality and investing in appro-priate R&D. Despite this, plans are proceeding for

4.5 EGYPTIAN ENERGY POLICIES: IMPACT ON THE COMPETI-TIVENESS OF THE ENERGY SECTOR

4.5.1 Egypt: Doing Things Right?

4.5.1.1 Fossil Fuels

Despite Egypt’s comparatively modest energy reserves, foreign investments are flowing into the market. The size of investment partially reflects the nation’s attractiveness, but it should be viewed in context of rising extraction costs.

137

tenders that will expand wind energy generation in Egypt. Moreover, there are market rumors that CSP might follow suit. Additionally, the “Unified Electricity Law,” currently in draft form, is establishing a frame-work that will be more conducive to the expansion of renewable resources, as will be discussed below.

4.5.1.3 The Electricity Sector

Egypt’s current single-buyer model is a clear monopsony. The state-owned transmission util-ity buys all generated electricity from state-owned plants, BOOT projects, and state owned wind farms. It then sells the electricity to state-owned distribution utilities, thus representing a clear monopoly. Market distortion is associated with bulk sale prices regulated by the state, and subject to subsidies,(14) with cross subsidies endowed to end users further distorting the market.

The current investment and business legal framework clearly does not prohibit com-petition at all levels of the electricity chain (generation, transmission and distribution). However, government-regulated prices discourage a higher involvement of the private sector. There are currently around 11 private sector generation utilities that are limited in size to less than 200 MVA, repre-senting less than 1% of the market. On the distribu-tion side there are around 14 utilities with around 550 MVA in capacity, representing less than 0.25 % of the market (Egypt ERA web site, 2010). Both factors are expected to change with the enactment of the “Unified Electricity Law” currently in the legislative pipeline, as will be seen below.

Regional interconnections of the electricity grid have provided the needed infrastructure for the export of electricity, and they are incrementally reinforced.

4.5.1.4 Expected Impacts of the New Electric-ity Law

The draft law is designed to gradually reduce the investment burden on the state by build-ing up a competitive market and encouraging private investment. Moreover, the law addresses the promotion of renewable energy and energy ef-ficiency. The latter has a scope wider than electric-ity. Rather, it addresses all forms of energy including fossil-based fuels, as per the current text of the law.

14 Of which a substantial part is indirect as a result of the price at which primary energy, i.e. oil and gas, is secured to power plants.

Building a Competitive Market for Electricity

The law gradually eliminates the captive “Single-Buyer” market by allowing third-party access to the infrastructure owned by the Ministry of Electricity and unbundling ownership of the distribution system. While the electricity transmission company will continue to be state-owned, the law provides a legal framework conducive to private sector investment in generation and distribution. Competition is encouraged in the beginning, by allowing a limited number of qualified consumers(15) to contract directly with generators. At the same time, other consumers are allowed to purchase power back-up or higher power quality. This should pave the way to the gradual evolution of a new, more competitive market.

Evolution of the market from its current structure, as shown in (Figure 4.30), to a liberalized electricity market based on bilateral agreements, should prog-ress incrementally to avoid market shocks:

i. Identify either an initial target group of custom-ers (e.g. industry) or subgroup (e.g. extra and high voltage customers or certain type of industrial ac-tivities), which should expand with time, to include both old and new end users.

ii. These selected end users would get part of their electricity from the free market, where electricity is offered according to market prices, based on bi-lateral agreements. The electricity that is traded on the free market would be provided by both state-owned utilities as well as new private sector service providers, based on specific criteria (e.g. peak peri-ods). These criteria will be relaxed with time.

iii. Bilateral agreements, in early stages of implementa-tion, can span to one year, but will eventually oper-ate on a 24-hour basis much like a stock market.

15 A “qualified” consumer, as defined by the law, is one who has the right to choose his or her electricity supplier

138

FIGURE 4.30: CURRENT ELECTRICITY MARKET IN EGYPT

MOEE/EEHC

MV & LVCustomers

PrivateDistributor

MVCustomers

HVCustomers

UHVCustomers

LVcustomers

Exports &Imports

BOOT(s)

ISP

Gov. PP

Generation Co.(s)

Trans Co(s)Dis Co(s)

LV: Low VoltageUHV: Ultra High VoltageISP: Independent Service ProviderBOOT: Build, Own, Operate and Transfer

MV: Medium VoltageHV: High VoltageGO: Government PP: Private Participation

ISP

Source: Presentation of Dr. Mohamed El-Sobky at World Bank in Washington DC, February 28th 2008. High energy session round.

FIGURE 4.31: TARGET ELECTRICITY MARKET IN EGYPT

HVCustomers

MVCustomers

MV & LVCustomers

Exports &Imports

BOOT(s)

ISP(s)

Generation Co.(s) Dis

Co(s)

UHVCustomers

RE: Gov PP& wind IPP

…..

TSO

Independent Merchant Transmission & Distribution

Ministry of Electricity and Energy

EEUCPRA

Target market

Source: Presentation of Dr. Mohamed El-Sobky at World Bank in Washington DC, February 28th 2008. High energy session round.

(Figure 4.31) shows the proposed change in the elec-tricity market towards a liberalized market. In this market, the transmission system would operate as an independent operator, insuring its current and future sustainability. More importantly, it would oversee the compliance of the bilateral agreements between sup-pliers and end users.

The proposed procedure is gradual and flexible in terms of timing of implementation, as market shocks have to be avoided as much as possible. However, a timetable must be set and announced. The same con-cept would be applied to the market of renewable energy resources.

139

Promoting Renewable Energy

According to the draft law, the Electricity Transmission Company and licensed distrib-utors are mandated to connect Renewable Energy (RE) power plants to their networks. The NREA calls for competitive bids(16) to construct RE power plants. The Electricity Transmission Com-pany also calls for competitive bids. As such, they will be constructed, owned and operated by investors. Meanwhile, independent operators will be allowed to build RE plants, as well. After the new system will be established, a second phase will implement Feed-In Tariffs(17) for the purchase of renewable electricity. To help cover the grid’s costs to support RE electricity, an RE fund will be established. Its main source of financing will be the subsidies saved from fossil fuels, which otherwise would have been used for electricity generation.

Energy Efficiency

The law includes several clauses designed to improve energy efficiency. Electricity dis-tributors and transmitters are mandated by law to purchase energy generated by co-generation using Feed-In Tariffs, thus reducing wasted energy. On the consumer side, electricity consumers with an installed capacity above 500KW are mandated to hire an en-ergy management professional and maintain energy records. The law sets the framework for an expansion in the application of energy labels for different appli-ances and equipment.

Nevertheless, information gaps that should be filled by executive regulations remain. Suggested regula-tions should elaborate on the implementation of the new electricity law and the associated new market mechanisms, as well as explicate criteria for assign-ing low- and medium-voltage traders and distributors. Some other gaps should be clarified through action plans, such as the timeframe for the phased approach of implementation of the proposed mechanisms, and the expected timing if the shift to feed-in tariffs.

16 Competitive bids secure investors through long-term contracts and pre-reserv-ing a quota for RE in the grid’s electricity. They aim to overcome the competitive edge possessed by fossil-fuel electricity over RE generators.

17 Feed-In Tariffs are fixed prices (they might also gradually change according to a pre-planned schedule) guaranteed by authorities for RE producers. They are usually above the market prices of electricity.

Conclusion

In general, Egypt is doing things right, and it has clear plans and mechanisms to further im-prove the competitive allocation of resources in order to augment its energy resources. The electricity energy market in Egypt will become more competitive with the issuance and implementation of the Unified Electricity Law. Involvement of the private sector in oil refining and gas processing will increase the competitiveness of that link in the energy sup-ply chain. These measures should induce ripple effects upstream in the sector on refining and production ef-ficiency, in terms of meeting quality targets and opti-mal production levels. However, it remains to be seen whether more serious steps toward a liberalized oil and gas distribution market, will be taken.

(Table 4.2) summarizes the state of competitiveness in the Egyptian energy market. The table does not address competitiveness with other countries, but rather whether the resource valuation is competitive. For example, Egypt is competitive in terms of solar resources, but this is not the same as market com-petitiveness. Moreover, the table does not address competitiveness in terms of the cost of different re-sources.

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Table 4.2: Summary of Competitiveness along the Energy ChainResource Activity Competitiveness Level Comment

Oil

ExplorationAll concessions are based on competitive bidding

Refining

State- owned companies mo-nopoly. Foreign participation in a refining company, which did not last long, indicates an institutional set-up suitable for future competitiveness.

Trans.Network

Government Monopoly, with a single other player involved

Dist.Network

Multiple parties with major state owned player Prices Fixed

N.G

ExplorationAll concessions are based on competitive bidding

ProcessingProcessing activities are mostly carried out on-site as part of production

Trans.Network

Government Monopoly to date.

Dist.Network

Competition for acquiring geo-graphically exclusive conces-sions Prices Fixed

Hydro

Capacity Development

Limited Competitive bidding, sometimes restricted to compa-nies of donor country providing best financing package

GenerationGovernment ownership of hy-dro power generation

Wind

HistoricalDevelopment

Limited Competitive bidding restricted to donor country’s companies.

Generation Current Government monopoly

Current TrendDevelopment & generation

Open Competitive Bidding, local capacity building

SolarDirect Use

(PV or Heating)

Cut throat market, in a highly unfriendly context

Generation

Quasi monopoly of State owned enterprises

However, minor contribution of private sector as allowed by the legislations

Electricity

Trans.Network

Government Monopoly

Dist.Networks

Geographic monopoly of State owned enterprises Prices FixedHowever, minor contribution of private sector as allowed by the legislations

Highly Competitive =

Considerably Competitive =

Competitive =

Partly Competitive =

Uncompetitive =

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4.5.2 Egypt: Doing the Right Things?

Egypt is depleting its oil and NG resources to meet growing internal demand and to bal-ance its trade. As indicated in section 2 above, Egypt’s oil and NG production/reserves ratios is high compared to other countries with much higher re-serves and production levels. It will be difficult to maintain this high rate of oil and NG production from non-renewable national resources. Some investments in energy are likely to be prohibitively expensive. In fact, in a recent presentation by the Minister of Pe-troleum (American chamber of commerce, 2010), the potential for exploiting oil shale (cost of extraction above $ 40/bbl) was addressed, in addition to tapping into deeper reservoirs in the western Desert, and gas exploration in deeper waters. In the same presenta-tion, the Minister expressed the need to revisit the cost recovery schedule of the PSA, given the rising costs of extraction.

Growing energy demand in Egypt is being driven by demographic growth, economic growth and energy intensity of economic ac-tivities. A comparison of energy intensity over the period 2003-2007 with other countries of the MENA Region shows that Egypt’s energy intensity is about average. However, there is something to learn from a structural comparison of Israel, Lebanon, Turkey, Morocco and Algeria, in terms of energy intensity. Major factors may include the respective roles of ag-riculture, manufacturing and services in the economy. Use of electricity may also be influenced by different climates in different countries. However, pricing policy could also be a major factor in determining energy intensity.(18) (Table 4.3)

18 A study of the reasons behind the differences in energy intensity is obviously beyond the scope of this report.

Population growth and economic growth will continue to drive increased energy demand. Although demographic growth has declined over the last few decades, the absolute growth figures are chal-lenging and will continue to be, until the population stabilizes to 1.5 times the size of the current popula-tion. Economic growth needs to remain high for Egypt to achieve its poverty reduction goals and to improve living standards. Population growth and economic growth will continue to boost demand for energy.

Given the growth in population and econom-ic activity, energy intensity will have to be the major focus of policy. World Energy Council statistics (www.enerdata.fr), reveal that the energy in-tensity of the Egyptian GDP(19) has grown from 5,955 BTU/ $ 2005 dollars calculated by Purchasing Power Parity (PPP)(20) in 1980 to a current figure of around 7100. It is remarkable that energy intensity in Egypt has been decreasing since the mid-1980s, with the ex-ception of the 2001-05 period (Figure 4.32). Clear-cut explanations require a detailed study about energy production and utilization patterns in Egypt. One pos-sible explanation is that non- energy-intensive sectors of the economy, such as service industries, are grow-ing faster than energy-intensive sectors. Fewer energy subsidies would encourage energy efficiency.(21)

19 Calculated at USD 2005 Purchasing Power Parity.20 Total Primary Energy Consumption per unit of GDP. The figures on the site are

provided as kg of oil equivalent, converted by the authors for easier comparison.21 With real exceptions, including the electricity sector improvement in genera-

tion and transmission efficiencies.

142

En

erg

y In

ten

sity

[Btu

pe

r Y

ear

20

05

U.S

. Do

llar

s(P

urc

has

ing

Po

we

r P

arit

ies)

]

Year (1980-2007)

FIGURE 4.32: EGYPT ENERGY INTENSITY - TOTAL PRIMARY ENERGYCONSUMPTION PER DOLLAR OF GDP [BTU PER YEAR2005 U.S. DOLLARS (PURCHASING POWER PARITIES)](1980-2007).

6000

6500

7000

7500

8000

8500

9000

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

Source: Based on U.S. Energy Information Administration (EIA, 2010).

Table 4.3: Total Primary Energy Consumption BTU per unit GDP for MENA Countries (2003-2007)

Year2003 2004 2005 2006 2007

Country

Bahrain 27,256.00 26,503.00 26,840.00 27,476.00 26,493.00

Iran 10,712.00 10,548.00 11,379.00 11,413.00 10,930.00

Iraq 20,417.50 18,457.80 19,421.80 13,293.10 14,030.00

Israel 5,830.30 5,565.70 5,509.70 5,072.70 4,872.10

Jordan 13,187.30 13,438.30 13,142.30 12,757.80 12,331.30

Kuwait 9,927.80 9,441.80 9,820.70 9,224.10 8,921.30

Lebanon 6,641.90 5,935.20 5,616.30 4,961.80 4,745.70

Oman 6,702.00 6,796.00 8,233.50 8,813.10 8,490.70

Palestine 4,856.30 6,607.40 7,455.20 8,368.20 8,209.70

Qatar 24,410.00 24,382.20 27,508.30 26,315.00 24,679.70

Saudi Arabia 13,055.00 13,362.80 13,381.80 13,458.80 13,859.20

Syria 12,083.10 11,585.10 10,412.60 10,046.80 9,388.30

United Arab Emirates 17,790.30 17,099.60 16,478.70 16,209.80 17,081.60

Yemen 5,804.80 5,625.30 5,554.50 5,879.90 5,811.40

Egypt 7,861.00 8,014.50 8,087.50 7,132.20 7,043.20

Turkey 5,455.60 5,281.30 5,181.60 5,278.30 5,355.60

Morocco 2,958.20 2,958.10 2,952.50 2,840.10 2,840.10

Algeria 5,975.90 5,554.00 5,985.90 6,261.10 6,308.90

Libya 11,021.20 11,692.70 10,876.40 9,646.20 9,367.00

Source: EIA, 2010

Without major new discoveries, Egyptian fos-sil fuel resources will be depleted. Meanwhile, Egypt’s significant latent potential of renewable energy remains untapped. The short-term focus on attracting FDI for exploitation of fossil fuels, combined with the lack of focus on renewable energy and its technology, threatens the long-term energy competitiveness of the Egyptian economy.

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Table 4.4: Summary sheet Strengths Weaknesses Opportunities Threats

Oil

Commercial policy con-ducive to international technology and invest-ment in upstream activi-ties

Experienced human ca-pacity

Strong infrastructure

Involvement of private sector in refining which infuses modern technol-ogy into the sector.

Geographic location pro-viding access to oil trade lines

Egyptian oil quality

High level of non-renew-able energy subsidy dis-courages transition to renewable sources

Low level of competitive-ness in down stream ac-tivities

Technology of most refin-ing capacity is outdated

The knowledge that main players in global oil circles have of the Egyptian mar-ket provides an opportu-nity for increasing com-petitiveness downstream, once relevant policies and associated regulations have been adjusted

Geographic location pro-vides opportunity for re-fining crude from other sources

Limited and depleting re-serves

Nat

ura

l G

as

Commercial policy at-tracting international technology and invest-ments in upstream activi-ties

A large pool of experi-enced human base

A strong infrastructure, including a natural gas export regional network

Geographic location pro-viding access to NG trade lines

Long life span of local re-serves

Superior quality of local resources

Overuse of available nat-ural gas resources in low value- added activities, namely electricity gen-eration

Investment in more ef-ficient use of gas as feed-stock for petrochemical industries is slower than required

Petrochemical industry potential exists based on available stock of natural gas

Associated increased val-ue added and contribu-tion to the national GDP and budget revenue

Less limited, NG is still a depleting resource.

The need to export NG might undermine value-added opportunities and deplete reserves

The increased local de-mand for electricity in-creases the pace of deple-tion of the resource

Competition from region-al players in the field of petro-chemicals

Win

d

Large development po-tential especially along the Gulf of Suez.

Local manufacturing of equipment is evolving

Practical steps have been taken, towards private sector involvement in the development of the sec-tor

Development of large scale expansion lacks the physical and human in-frastructure of the same scale

Lack of regulations for tapping the pool of avail-able wind resources

An expected new elec-tricity law with clauses specially designed for prompting RE could lead to a boom in electricity generated from wind.

Technology maturation as a result of large scale im-plementation in the last few years

So

lar

CS

P

Tremendous wealth of available resources.

Lack of financial resourc-es and promotional regu-lations

Euro- Mediterranean partnership has the de-velopment of solar ener-gy across the Med shores high- on its agenda

Lack of progress in pricing carbon emissions and NR resources appropriately, resulting in difficult cost dynamics

Lack of progress in bring-ing production costs down

EU reversal of Euro-Med policies and renewable energy policies

So

lar

He

ate

rs

Big pool of available solar resources

Components are more readily available in local market than CSP and PV.

Greater potential for in-creased demand than PV

Lack of enforced quality standards

Lack of a wider public awareness of the benefits of solar heaters

Lack of regulations or policy to promote solar heaters

Considerable socio-eco-nomic and energy sav-ings from replacement of electrical heaters with solar ones

Business opportunities for capitalizing on ex-pected increase in elec-tricity tariffs, and more liberalized electricity market.

New electricity law could generate high demand that local industry is un-able to meet, leading to its displacement by im-ports

PV

Tremendous wealth of available resources

Some experience with commercialization

Value chain restricted to service provision—not manufacturing

High dependency on in-ternational suppliers.

Limited market demand because of the insignifi-cance of solar energy in general on policy agendas

Maturing PV technology in EU and Euro-Mediter-ranean zone provide op-portunities for PV devel-opment in Egypt

Technological constraints on energy storage give a significant edge in bulk power production to the other, relatively less ma-ture, solar technology (CSP)

Lack of progress in bring-ing down costs to accept-able and competitive lev-els

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4.6.1 Motivations for Change

Energy security: The rapid depletion, compared to other countries, of non-renewable resources will deprive the country of its buffer when dealing with the highly volatile energy markets. The poten-tial fiscal pressure on the Egyptian economy had it been importing its energy in 2008 is a case in point, where the buffer prevented undue distress. In addition, since a number of large producers of oil are already beyond their peak production, im-porting might not be a viable option in the future.

Job-rich growth: Price distortions favor en-ergy-intensive industries at the expense of labor-intensive industries.

Opportunities for growth industries: The delayed action in conservation and renewable en-ergy may be retarding Egypt’s participation in new, high-growth-supporting industries and technolo-gies.

Social fairness: Subsidies do not consistently favor the poorest people in Egypt. On the con-trary, a large part of the subsidies are siphoned off by large consumers of electricity, owners of high-energy consumption cars, and energy-intensive industries benefiting from improved profitability.

Public finance constraints: Sustaining energy subsidies limits the government’s ability to act in other areas such as health, education, and public transportation, which are important for the gen-eral population, but specifically for the poor.

4.6.1.1 Urgency

Although Egypt has not yet reached the stage in which it actually suffers from an energy crisis,(22) action should be taken to avoid such a crisis. Egypt is already comparatively late in capital-izing on its renewable energy resources. Further de-lays could increase the costs of inaction.

Better prevent a crisis than react to it: The preparations needed to prevent the crisis cannot be implemented overnight.

The “first mover” advantage: There will be winners and losers in the next energy transition. Pioneering countries will develop industries and technologies, which could open venues for indig-enous developments and exports.

22 Nevertheless, in a personal communication of one of the authors with a power plant operator, an incident when natural gas supply was disrupted in winter 2010, and HFO supplies could only cover 36 hours of operation , was consid-ered critical. Moreover, there are expectations of black-outs during the coming summer of 2010. Only time will show whether this is true. Irrespective, this is still expressive of the general mood in the energy circles.

Increasing volatility of energy markets: Potential future spikes in energy prices will put greater strains on the economic system. Local production of energy substantially protected the Egyptian economy from the unprecedented peak in oil prices witnessed in 2008.

Some of the required actions are politi-cally sensitive: Changes will affect the interests of the general public as well as stronger lobbies. They will require public understanding, political consensus and political maneuvering. Policy mak-ers today are in a better position to choose the timing and the pace of actions and address them in a comprehensive and reasoned manner.

Depletion of non-renewable resources: Egypt is depleting its non-renewable resources more quickly than other nations, and time will only make it more vulnerable.

In addition, cleaner energy will contribute to a more livable environment. A delayed action in this respect can only add to the substantial health costs currently borne by the Egyptian population.

4.6.2 Towards What?

Diversification away from non-renewable resources is needed to protect the Egyptian population, ensure needed economic growth and avoid sudden disruptive shocks. Egypt’s en-ergy sufficiency cannot be sustained in the long-term merely through local fossil fuel resources. Importing energy will become more difficult in the future and will make Egypt’s economy even more vulnerable than it currently is to exogenous shocks. This mandates a planned and determined shift of primary energy sources from non-renewable to renewable energy, where Egypt has a comparative advantage.

This seems to be in line with government as-pirations to have renewables comprise 20% of electricity supply in Egypt by 2020. However, Egypt needs a vision not only for addressing the fore-casted gap in energy supply, but also for an eventual complete transition to renewable energy. The 2020 goal should be a milestone rather than a target. The following guidelines would inform such a strategy:

1. Transition takes time. The current capital stock is an important technological governing factor, but is not the only one. Behavioral, and lifestyle, issues are as important.

4.6 MOVING FORWARD The energy situation in Egypt mandates a substantively different outlook on energy planning with the shortest possible delay. A number of reasons were outlined throughout the previous sections, and are condensed below.

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2. The transition to renewable energy needs to be coupled with a serious energy efficiency program. This will decrease depletion rates, and thus buy time for the transition to take place.

3. A transition needs to be planned, and could very well use market mechanisms for implementation. The transition will not evolve by market signals alone. Markets are subject to price shocks while new technologies and renewable energy develop-ment take time. Markets are too short-sighted to invest in this desired future vision. This intrinsic weakness is magnified by the unpredictability and volatility of energy prices.

4. Some transitions are easier than others. To take an extreme example, electricity is “fungible.” Irrespec-tive of detailed technical issues, it is much easier to integrate other sources of electricity onto the grid than to shift automobiles from liquid fuel to electricity.

5. The primary focus of policy should be to extend the life of Egypt’s non-renewable resources, develop new sources, and invest in sustainable renewable energy in ways that maximize economic value for Egypt. Egypt should capitalize as much as possible on funding and technical cooperation opportunities for renewable energy development.

6. The change described above is not a simple under-taking. A more expressive term is “transformation” rather than “transition.” This is a societal undertak-ing and goes beyond the contribution that can be made by energy specialists alone.

4.6.3 What needs to be done?

It is difficult to list all the things necessary to achieve such a societal transformation. However, informed choices and timely decisions are needed. Actions should be taken on two levels. The first level is pro-cess-oriented, in which this section outlines the main principles. For the second level, this section recom-mends major courses of action.

4.6.3.1 Process Oriented Principles

Transparent public communication, public outreach and public-private dialogue are needed to mobilize support for this transfor-mation. There is major work to be done in public education. The dialogue process needs to be closely planned and monitored.

Transition will be speeded up and facili-tated by intelligent use of market mecha-nisms. Planning does not necessarily exclude market mechanisms. On the contrary, a market responsive to economic signals will represent an invaluable tool to

implement the planned transformation. A more re-sponsive market is not synonymous with a “free” mar-ket. It is “free” to react, but not to constrain. Policy tools such as green government procurement policies and differential pricing/taxation can only function and send the required signals in such a market.

The magnitude of the change in energy poli-cy will require political will and the authority to implement. The body managing it should have the power, popular support and requisite authority. Energy policy requires choices and tradeoffs, as well as changes in attitudes and behavior. It requires a body with authority to bring about the needed changes.

Two possibilities for such an authority exist. The first would be a super-ministerial body in the cabinet reporting to the prime minister. The existing Supreme Energy Council could provide an adequate basis for this approach. However, it is expected that such a body will be faced with hurdles that are typical of periods of change, resulting from inter-ministerial politics and inconsistencies with current mandates. The other option is the establishment of a special task force reporting directly to the President, leav-ing aside all details of day-to-day management of the current configuration to ministries, in order to focus on the planning and implementation of the required transformation.

Greater use of market forces is needed and recent initiatives are positive. The electric-ity market seems to be on a more competitive path, although the pace of progress remains to be seen. Similar actions to those ushered by the draft electric-ity law, need to be considered for the NG market. Foreign partners will have to consider the economics of their options: exporting their shares, thus bearing the costs of liquefication, or selling them in the local market. This will increase the share of NG reaching the local market, and thus may help buy more time for the energy transformation to materialize. The higher prices at which these large consumers will ac-quire their energy should not affect the price of their products. Energy-intensive industries already sell at world market prices, and the electric power subsidy will increase transparency in the electricity genera-tion chain. The mechanism to subsidize the electric-ity prices, when needed, is already taken into account in the draft electricity law.(23) The market in the oil production chain is also at a reasonable level of com-petitiveness.

To insure the responsiveness of the market, subsidies have to be revisited and redesigned to support the transformation. Local energy

23 The current geographically-bounded private distributors might be the only los-ers in the process, and their contracts and their profit margins will need to be revisited to be more consistent with the current distributors who do not have intensive users in their domains.

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markets are mostly constrained by the subsidized prices for products. The social and political dimensions of this basically unavoidable action are substantial. The former could be addressed through a socially sensi-tive design, taking the concerns and vulnerabilities of the poor segments of society as a primary input. On the other hand, in order to address the political dimensions, this design should be coupled with po-litical tools to neutralize the potential mobilization of vested interests and insure popular support. What is being transformed is a well-organized system, infused with strong political interests; therefore, wide-based political support will be difficult to acquire if the costs of the transition are not fairly distributed.

As will be seen below, responsiveness needs to be insured not only in energy markets, but also in oth-er critical ancillary markets. These include industries contributing to this transformation and financial and labor markets.

Policies Must Lead to Specific Action Plans

For anything significant to be achieved, a plan must be developed with targets, timeframes, resources, responsibilities, indicators, and mechanisms for revisions and corrective ac-tions. Delaying significant action until a full-fledged plan is agreed upon and initiated is a recipe for failure. Action should start immediately, on a no-regret ba-sis, in parallel with the development of an indicative long-term plan and a short-term detailed plan. As this transition could take place during the next 10 to 20 years, the continuous review of targets, tools, oppor-tunities and lessons learned should form an integral part of the planning framework. This is not only nec-essary because the global energy industry will be in flux during this period, but also because of the evolv-ing landscape of the local markets and society, and the proliferation of energy in all aspects of modern life.

Transformation Is a Political, Rather Than an Administrative, Process

It is necessary to focus public attention on the urgency and importance of timely action. Like any major policy change, this one will have win-ners and losers. Policies need to be designed so that those who lose in the process are those who can af-ford it. Social safety nets are needed to assist those in need. On the other hand, subsidies should be reduced for those who can well afford it.(24) Potential savings from removing subsidies need to be wisely invested in order to mitigate any negative consequences.

24 e.g. profitable energy intensive enterprises, as opposed to labor intensive SMEs, and upper middle class rather than citizens under the poverty line. Unfortu-nately, and this is not by no means specific to Egypt, those who can afford the costs of change are usually the more powerful segments of society, who have the political influence to modify policies to avoid their undesired impacts, and redistribute them to other parts of society. .

Actual costs and benefits should be strategi-cally utilized to mobilize popular support of the reforms, and counter the standard argu-ment that subsidies protect the poor. The dis-tribution of costs of inaction on the short and the long term will also need to be publicly disclosed. The successful management of this political process is a crucial condition for the required transformation.

A transparent schedule can help investors make appropriate decisions, but it can also give opponents of change time to mobilize against it. A schedule is theoretically able to mo-bilize future investments and avoid shocks by allow-ing enough time for adaptation. However, by the same token, it gives those rejecting change the chance to mobilize against it. In fact, a public statement of imple-mentation schedules is a political move, rather than an administrative procedure. The lack of leverage, or commitment, to implement publicized schedules could threaten the credibility of the program.

The transition needs to address primary and secondary stages, local and export markets, supply and demand, and renewables as well as non-renewables. It will also need to adequately address the multiple constraints facing this transfor-mation, including not only time and resource con-straints, but also political, social and technological constraints and opportunities.

Effective implementation requires the active involvement of different government bodies, private sector stakeholders, universities and researchers. Private sector stakeholders include consuming industries, potential investors, industries dependent on current electricity and fuel prices, and industries potentially benefiting from the transforma-tion. Universities and research centers need to be in-volved, as well as those representing the interests of consumers. Concerned parties could obviously differ by virtue of the sector, the form of energy and the change being considered.

The format for such consultation should take into ac-count the expected short-sighted political pressures, which could stall progress towards an effective tran-sition. Policies, incentives and guidance in resolving potential conflicts typical to transition phases is an integral part of the planning and consultation process.

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4.6.3.2 Specific Action Recommendations

The process-oriented actions are geared towards ex-tending the life of local fossil fuel resources, and ag-gressively increasing the share of renewable resources in the Egyptian energy mix. Major courses of action are identified and discussed below:

1. Improve energy efficiency;

2. Diversify renewable energy resources;

3. Mobilize private investment;

4. Maximize local supply chains;

5. Revisit energy subsidies;

6. Gradually displace non-renewable energy exports;

7. Consider value added uses of hydrocarbons;

These major courses are to be adopted simultane-ously. An outline of each course of action will be elab-orated below. Each of these courses, as well as each component, could obviously be further elaborated. Accordingly, even short-term plans should continu-ously evolve on a rolling basis to capitalize on emerg-ing opportunities, and avoid stalemates.

1. Improve Energy Efficiency – The Easiest First Step

Energy efficiency is the lowest hanging fruit in reducing primary energy consumption of non-renewable fossil fuels. Energy efficiency alone can never provide a long-term solution for an upcoming energy crunch in Egypt or globally; how-ever, time can be bought through energy efficiency so that the transition can be made more smoothly.

However, major efficiency gains on the de-mand side will not be possible in the absence of a major reform of local energy prices. Energy efficiency projects and activities have been undertaken in Egypt since the 1980’s. Substantial im-provements have taken place in electricity generation and transmission, while some can be can be detected in industry as a result of higher awareness and mod-ern equipment. Any future energy efficiency program should be based on the lessons learned from past ex-perience.

Energy efficiency has had a focus on indus-trial activities. A code for more energy efficient design of new buildings has been issued, a plan for its implementation is not clear though. Remodeling of the existing building stock needs to be considered, as this will represent the majority of consumption for years to come. Moreover, it is obviously clear that remodeling will increase employment opportunities in the construction sector. This is an activity that will have a double dividend for the economy. In addition,

residential units, commercial buildings and office spac-es need to have clear constraints regarding energy use per unit of area, beyond which electricity prices should escalate, possibly to prohibitive rates.

Energy efficiency can go a long way in encouraging rational choices of technology. This is true even at the household level. Heat extracted from NG and con-verted in power plants to electricity to be transmitted through the grid, is already subject to substantial un-avoidable technological inefficiencies. These inefficien-cies are magnified when electricity is again converted to heat in electric water heaters at the household level. Compared to direct use of NG by households, the use of NG for conversion and transmission of electricity for the same end purposes, is a tremen-dous and unnecessary waste of an already depleting resource.

2. Diversify Renewable Energy Resources

Tackling Egyptian shortcomings and barriers of the wider challenge of adopting RE must move forward at the fastest applicable rate. The settlement and estab-lishment of this market, in the near future, is a sine-qua-non requirement for the dire need to extend the life of the national non-renewable resources.

The movement away from non-renewables will not rely on any one single renewable re-source. Different non-renewables will be appropri-ate for specific situations. These may even differ by region. Uncertainties in the development of the cost-effectiveness of these technologies indicate that diver-sification would be the safest way to go. For instance, CSP for electricity generation and biomass, especially agricultural and municipal waste for the production of methane,(25) deserve to take their rightful place in the public agenda.

Transportation is one of the highest sectors in terms of energy demand in Egypt and can-not be addressed by wind or solar energy in the short to medium term. A modification of the source of energy will not be possible in the short term for a fleet running on liquid fuel. However, as it is technologically possible to use a mix of ethanol (up to a maximum of 30%) for vehicles using gasoline, using the same distribution network. Given Egypt’s scarce land and water, the on-going R&D concerning ethanol production from cellulosic waste needs to be closely followed up. The execution of a reasonably efficient plant today should be objectively compared to that of a more efficient one in the future, given the time con-straint under which the transformation should take place.

25 The main component of natural gas.

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3. Mobilize Private Sector Resources

Private investments have proven responsive. The private sector is a reliable source of investment. The positive market reaction to the announcement of plans to increase the contribution of wind energy to the electricity grid is a clear indication that the Egyp-tian private sector is willing and able to react to clear signals. A faster pace on this track is needed.

The Unified Electricity Law and the removal of fossil fuel subsidies will help mobilize pri-vate investment. Both will insure a more level play-ing field. The reaction of the market to such changes could be extrapolated from its current reaction to peak demand rates for electricity.(26)

A similar move to that undertaken by the Government concerning wind energy plans is needed on the CSP and biomass fronts. Al-though the feasibility of CSP in current economic and technological conditions is not as encouraging as that of wind energy, it is clear from the current trends that technology advancement on one side, and rising fossil fuel prices on the other, will eventually improve CSP feasibility. In fact, Egypt can afford to assume a higher risk of inefficiency with CSP, due to its greater flex-ibility of locations as compared to wind development sites.

Government demand is required to prime the pump for supply of renewable energy and technologically prepare for tomorrow’s tran-sition. However, distributed generation of heat and electricity (small wind turbines, PVs, solar heaters and biogas), also has its role to play in the national tran-sition plan to renewables. The financial feasibility of these alternatives needs to be streamlined with their economic value to society. It is remarkable that no incentives exist,(27) and even more remarkable that none are planned in this area.

The private sector is normally not prepared to invest in public goods, but here it is necessary for this transi-tion to take place. These investments include support for coordinated R&D, human resource development, industry standards and demonstration projects.(28)

26 The peak-demand share of the electricity tariff structure for high-consuming industrial users (with installed capacity greater than 0.5 MW) - both low and medium voltage -has increased three times, from 0.073 EGP/kW in 1993 to 0.183 EGP/kW in 2006. Consumers reacted in several ways, including shifting peak demand. Moreover, some consumers have begun to switch part of their loads to renewable sources to lower their electricity demand during peak peri-ods.

27 With the exception of the reduced customs rate, only applied to specific com-ponents.

28 And could practically be funded through a minute part of savings resulting from subsidy reform.

4. Maximize Local Supply Chain Involve-ment

This transition could provide a major driver of economic growth and employment in the next few decades. The transition described in this chapter can generate jobs in production, inputs, parts, maintenance, servicing and other related industries. It can also generate export revenues given the growing global demand and support for renewable energy. An adequately designed policy for localization of supply should be geared towards a reduction of investment costs on the long term, thus improving the feasibility of renewable energies.

Without an aggressive program of local supply chain development, expansion in this sector could negative-ly affect the national trade balance. The import incen-tives for components of renewable energy generation need to be revisited and tailored to optimize the pace of transformation and the development of the local supply chain. Local procurement should also be en-couraged within the framework allowed by Egypt’s trade agreements.(29)

Finally, the creation of a local industrial base serving renewable energy will increase the social groups hav-ing a stake in its development. This could represent a crucial political asset, to sustain progress in the initia-tion phase.

5. Revisit Energy Subsidies

Energy subsidies have several serious draw-backs. Apart from encouraging the indiscriminate use of non-renewables, energy subsidies may have skewed Egypt’s industrial development in favor of en-ergy-intensive and capital-intensive, rather than labor-intensive growth. Given the growth in new entrants to the labor force, these policies need to be revis-ited. Hydrocarbon subsidies may also be subsidizing pollution. Finally, people in higher income brackets benefit more from energy subsidies than do the poor because they use fuel and electricity in greater quanti-ties than the poor. The very poor may be getting very little real benefit from these policies, especially the poor in rural areas. Energy subsidy policies need to be seriously revisited.

Furthermore, the growth of energy-intensive industries—while energy is relatively cheap—is likely to become a liability in the medium term. It should be noted that the timeframe for depletion of fossil fuel resources in Egypt, with the current consumption and growth, is shorter that the average life of an industrial facility.

29 For example, through including the environmental/energy cost of transporta-tion as a factor in procurement of goods, will be good for the environment as well as local industry. Such move will be welcomed by neighboring trade part-ners as well as environmental NGOs.

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Transportation could be more energy ef-ficient. More than 85% of total transportation of goods, nationally, is moved by the trucking industry. The transportation strategy needs to be reshaped to encourage higher energy efficiency. This is especially true since Egypt’s high population and commercial centers lay mostly along the Nile River, the Suez Ca-nal, and the Mediterranean Coast, which are condu-cive to rail, river and sea transport. The same applies to intra-city public transportation as opposed to the over-reliance on private vehicles. Cairo’s traffic con-gestion represents a further inefficiency in both time and natural resource loss. The remarkable delay of investments(30) in these more energy efficient alterna-tives should be overcome through a higher political commitment.

Transportation is a function of land use, an area weakly managed in terms of its rela-tion to energy use. Commercial malls are major consumers of energy, not only in terms of large vol-umes of air-conditioning, but also of the higher, mostly private vehicle traffic they induce. Policies related to commercial malls on the cities’ outskirts need to take this into account.

6. Incrementally Displace Non-renewable Energy Exports

The pressing demand for hard currency to meet the import needs of national develop-ment plans has resulted in a substantial in-crease in NG exports. The shift in exported en-ergy has already taken place from oil to NG during the last decade. It has required a major investment in infrastructure, in terms of pipelines, liquefaction and port facilities. At some point, investments will need to facilitate the export of solar power based electricity.

Opportunities to help jump-start Egypt’s so-lar development exist. The Union for the Medi-terranean has adopted a plan that includes reaching a 20 GW total installed capacity of renewable energy around the Mediterranean rim. This plan, on reaching its targets, should be an initial learning experience and a nucleus of an entire new renewable energy regime.

EU countries possess technological know-how and robust financial resources to finance solar projects. The Trans-Mediterranean Renew-able Energy Cooperation (TREC)—an initiative of the Club of Rome—has already set up DESERTEC, a foundation aimed at supporting the development of renewable energy, especially solar energy, with more emphasis placed on the EU-MENA region. The MENA region possesses huge solar energy potential, but it lacks sufficient technological and financial resources.

30 The Greater Cairo Metro has recently become an exception, as studies for line 4 started and its execution is expected to overlap with the execution of line 3.

These plans could be constrained by the current, weak infrastructure of electricity export to Europe. It is, however, possible to consider a virtual market to export solar-based energy. In such a market, the NG displaced by solar-based electricity and currently feeding the national grid, would be exported to Eu-rope, using the existing infrastructure, with the cost shouldered by the national economy. As this option does not largely contribute to the reduction of the rate of depletion of the resource, it should be consid-ered a short-term option to encourage investments in alternative energies.

Export policies and development efforts could be tilt-ed to bolster renewables.(31) Export drives of these industries can be strategically used to improve the contribution of renewable energy to the national mix.

7. Consider Value-Added Uses for Hydrocar-bons

Electricity-generation dominates local de-mand for NG. This results in a waste of large amounts of NG, as a result of the unavoidable losses when turning NG into thermal energy and conse-quently electricity.

Higher value-added could be extracted by redirecting NG to petrochemical industries. Investments in the Egyptian petrochemical industry are under way, in the framework of a national petro-chemical plan, but their progress can be expedited. The slow pace of progress could be related to the large investments required and the competitive re-gional market. Moreover, it is difficult to consider this path while the electricity supply relies on NG, and the trade balance relies on its export.

The complementarity between the develop-ment of renewable resources and that of pet-rochemical industries cannot be overstated. While the former avails NG for higher value use, the latter increases the opportunity cost of the resource and thus improves the economic feasibility of renew-able energy resources.

The energy transition is an opportunity for Egypt. Egypt is currently facing demographic, eco-nomic and security challenges, in addition to dwin-dling non-renewable natural resources. In this respect, the energy transformation should be understood and managed as an opportunity, rather than as a burden to be avoided. Some opportunities that the transition presents were mentioned above, including export markets and employment opportunities.

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4.6.4 Challenges

Naturally, change will be faced with multiple difficul-ties, and conflicts are bound to arise. Some of these are real challenges, and some are obstacles raised by those who have a vested interest in the status-quo. Each of those will require different management tools, but none should be left aside, as these all have the potential to stall the much needed progress of energy transformation.

Some of the relevant, structural, challenges were al-ready addressed in the process-oriented principles above. This section focuses on the major operational challenges faced by this transformation.

6.4.1 The Subsidy Challenge

Subsidies of L.E 62 Billion in 2008/2009 to petroleum products, make the transition challenging. The social impacts of reducing fos-sil fuel subsidies are often stated as reasons to avoid public dialogue or serious consideration of reforms in price policy. However, the high and often adverse social impacts of these same subsidies are not taken into consideration. Large investments have gone to high-energy intensity industries. Promising changes were undertaken by the government, but have not yet reached fruition. These include a schedule for the re-moval of subsidies from energy-intensive industries. Furthermore, energy and electricity subsidies tend to favor those consumers who use more of these re-sources and disfavor the poor who consume smaller amounts of energy resources.

But tools to move out of this subsidy trap ex-ist. Replacing subsidies with monetary payments to needy households has been discussed. The system used for the rationing of subsidized foods could be expanded to cover some petroleum products, such as LPG bottles. The logic behind delaying serious action concerning these bottles, which only reach their end consumers 3-15 times ????, depending on the season. It is unclear as to how the government sets the price. However, this is clearly one of the political challenges that cannot be managed simply as an administrative motion.

4.6.4.2 The Funding Challenge

Private sector investment has proven respon-sive to the funding challenge. Financing an en-deavor of this scale is an obvious challenge. However, the investment needs could be partially mobilized from the local private sector, which has proved to be more than willing to act, based on clear and consistent signals from the state. Moreover, the proposed link between exports of energy intensive products and

the contribution of renewables to energy content (see section 6.3 #4 above) could prove to be a major contributor to the required investments.

Funding could also be mobilized from trade partners to whom the export of solar-based electricity will take place. Finally, the huge yearly subsidies intercept-ed by higher economic classes and encouraging them in wasteful consumption of energy, can be partially redirected to support this much needed transforma-tion.

4.6.4.3 The Technological Challenge

Egypt is not alone in addressing the technological challenge. International partnerships and cooperation with global centers of excellence can complement Egyptian capabilities. However, local contributions should be encouraged, especially in a global environ-ment highly receptive to innovation. Moreover, deci-sion makers need to be aware that this uncertainty will not be resolved soon; in fact, waiting until it is will cost Egypt dearly, in terms of resources. The decision makers required for the next period are those able and willing to take calculated risks.

4.6.5 A National Project

The need for a national project to drive de-velopment is needed. Although the rationale be-hind the energy transformation is the need to avert an impending crisis, the size of this transformation and the nature of its subject are likely to impact on the economic, social, technological, environmental and political aspects of life in Egypt.

Ancient Egyptians faced the change in climate trans-forming their lush territory to barren desert by tech-nological and organizational innovations. If they had insisted on preserving their previous lifestyle, the Egyptian civilization would not have emerged. Simi-larly, the upcoming global energy crisis will have im-portant repercussions. Modern Egyptians should be prepared to face them in the spirit of their own cul-tural heritage.

Change involves risk but the costs of inac-tion are prohibitive. Action is needed to put Egypt on the path of transforming its energy mix into one mostly supported by its substantial, but mainly untapped, renewable resources. The urgency of this action is supported by a number of factors, the most important of which is the continuous depletion of non-renewable energy resources. The call for a na-tional, informed and constructive dialogue is the first right step towards building the needed consensus and public support for a major societal transformation.

151

REFERENCES

Agrawala Shardul, Annette Moehner, Mohamed El Raey, Declan Conway, Maarten van Aalst, Marca Hagenstad and Joel Smith. “Development and Climate Change in Egypt: Focus on Coastal Resources and the Nile”. Paris, France: OECD, 2004.

Al-Ahram Weekly. Egypt’s Coming Energy Crisis, 1–7 May 2008.

American Chamber of Commerce in Egypt: Business Studies & Analysis Center (BSAC, 2009). Petroleum Sector Develop-ments.

Arafa Salah, El-Shemi Samir, ?. BioGas technology transfer to rural com-munities in Egypt. Cairo-Egypt: Science Department, Ameri-can university in Cairo.

British Petroleum (BP, 2009). BP Statistical Review of World Energy.

Egyptian Center for Economic Studies. (ECES, 2007). The Impact of Reducing Energy Subsidies On Energy Intensive Industries In Egypt. Cairo, Egypt.

Egypt Oil and Gas Newspaper. All lies in the infrastructure! Part II. February 2010 Issue.

Egyptian Electricity Holding Company (EEHC, 2005). Annual Re-port: Electricity for 2004/2005.




El-Masha, Hamed M., Van Loon Wilko K.P, Zeeman Grietje, Bot Gerard P.A, Lettinga Gatze (El-Mashad et al, 2003). Reuse potential of agricultural wastes in semi-arid regions: Egypt as a case study. Reviews in Environmental Science and BioTechnology 2(1) 1572-9826.

EurObserv’ER (2009a). Photovoltaic Barometer.

EurObserv’ER (2009b). Solar Thermal Barometer.

Fmaly Hesham, Mageed Eid (Fmaly et al, 2008). Lignocellulosic Bio-mass Conversion Technologies to Biofuels: Potentials in Egypt. Cairo, Egypt: United Nations Industrial Development Or-ganizations (UNIDO).

Global Bio Energy Partnership (GBEP, 2007): A review of the current state of bio energy development in G8 + 5 countries. Rome, Italy: Food and Agriculture Organization of the United Na-tions.

Global Wind Energy Council (2008). Global Wind: 2008 Report.

http://www.egpc.com.eg/ (EGPC, 2010). Accessed [3, 02,2010]

http://www.energy.ca.gov/biomass/msw.html (California Energy Com-mission, 2008). P.S (To the study team, it was referenced in the report as (California energy commission, 2009)

http://www.ganope.com/index2.htm (GANOPE, 2010). Accessed [9,01,2010]

http://www1.eere.energy.gov/biomass/abcs_biofuels.html (U.S depart-ment of Energy, 2009)

<http://earthtrends.wri.org/pdf_library/cp/cli_cou_818.pdf>.(Earth-trends, 2010). Accessed [10, 01, 2010].

<http://www.r-e-a.net/info/energy-info> (REA, 2010).

International Energy Agency (IEA, 2010). Statistics: Oil Data For Egypt

International Poplar Commission (2008). Poplars, Willows and Peo-ple’s wellbeing: Synthesis of country progress reports. Rome, Italy: Food and Agriculture Organization of the United Na-tions: Forestry Department.

Japan Development Institute (JDI, 2007). Possible Bio-Energy Produc-tion from Jatropha in Egypt using Waste-Water and Waste Land and Marginal Land & Hedge of Agricultural Land.

Medstat Program (MedStat, 2009). Rapport final: Statistiques de l’énergie. European Commission

Ministry of Electricity and Energy (MOEE, 2010) P.S the dates of the data in the hydropower section needs to be further checked.

Svetlana Ladanai, Johan Vinterback (Ladanai et al, 2009). Global Poten-tial of sustainable biomass energy. Uppsala, Sweden: Swedish University of agricultural Science: Department of Energy and Technology.

El-Swedy for Wind Energy Generation (SWEG, 2009) Local manufac-turing: Experiences from the MENA Region”(SWEG-RECREE)

U.S Energy Information Administration (EIA, 2008). Country Analysis Briefs: Egypt.

U.S Energy Information Administration (EIA, 2010). Independent sta-tistics and analysis.

World Wind Energy Agency (2008). World Wind Energy Report 2008.

German Aerospace Center (DLR, 2005a&b). Trans-Mediterranean Interconnection for Concentrating Solar Power.

152

APPENDIX 4.A BIOMASS ENERGY

4.A.1 Biomass, a wide scope

Biomass is biological material derived from living, or recently living organisms (Biomass Energy Centre, 2009). Accounting for 10% of world energy demand in 2006, it is currently the most important renewable energy.

It is of particular significance in rural parts of the developing world (Ladanai et al, 2009). Biomass energy comes from three major sources: energy crops, municipal and industrial wastes, and agricultural residues, as shown in(Figure 4.A.1): Sources of Biomass Energy. It becomes either electricity or heat, generated from biomass incineration, biogas driven boilers, or fuel products derived from biomass sources.

FIGURE 4.A.1: SOURCES OF BIOMASS ENERGY

Energy crops

Waste

Virgin wood

Short Rotation Forestry (SRF)

Agriculture

Grasses and non-woody energy Aquatics (hydroponics)

Agricultural energy crops

Dry residues Wet residues

Straw andhusks Corn stoves

Animal litter

Food waste Industrial wasteandand co-products

Wet foodwaste Waste oils Woody waste Non-woody

waste

Untreated wood Treated wood

Wood compositeand laminate

Paper pulpand waste

Textiles

Sewagesludge

Biomass

Forestry residues Tree surgery residues

Grass silage Animal slurry andfarmyard manure

Short Rotation Coppice (SRC)

Fuel wood

Source: Ladanai et al, 2009.

APPENDICES

153

4.A.1.1 Energy Crops

Energy crops are crops grown intentionally for the production of biomass energy such as bio-fuels, bio-ethanol(1) or bio-diesel.(2) They also include short rota-tion Coppice(3) and Micanthus(4) (REA, 2010).

4.A.1.2 Waste Streams

Energy from waste comes in the form of bio-diesel, biogas or waste-to-energy (WTE) processes. Bio-diesel can be obtained from recycling waste oil and food from municipal and industrial waste-streams. Bio-gas is generated from the anaerobic digestion processes in wastewater treatment plants. By making some modifications to these processes, the produc-tion of biogas can be catalyzed. WTE is the process in which municipal and industrial waste is incinerated to generate heat or electricity, either on site or in WTE plants.

4.A.1.3 Agricultural Residues

Agricultural residues come in the form of wet or dry residues, each with their own uses. Dry residues are parts of crops not intended for the primary purpose of producing food or fiber such as straw, corn sto-ver and poultry litter (Biomass Energy Center, 2009). These residues can be burned to generate electricity to provide energy for farmers, or else they could be used as feed-stock for village-based centralized WTE plants. Also, technologies are being developed for uti-lizing them in the production of bio-ethanol (U.S de-partment of energy, 2009). Wet residues include high water content such as animal slurry and manure or grass silage. These can be fed into simple units, on a household basis, where processes of fermentation and anaerobic digestion produce biogas that can be stored and later used for heating, cooking and other energy applications. Alternatively, they can be used in the production of biogas on a more industrial scale.

4.A.2 Resource Size and development


Bio-ethanol

According to a progress report presented to the Food and Agriculture Organization (FAO) , Egypt has a program to promote the plantation of poplar and willow, where seedlings are distributed free of charge (International Poplar Commission, 2008). Yet, it is not

1 It is produced from sugar cane and beetroot crops or starch crops such as wheat and maize. It is prepared through a process of fermentation, distillation and dehydration. It can be blended at small ratios with petrol in unmodified engines or used directly in modified engines

2 It is produced mainly from plants containing vegetable oils like Jatropha and algae. It is prepared through a process called transesterification in which glycerin is separated leaving bio-diesel.

3 These are trees that grow again after being cut down to a low stump in relatively short intervals (3-5 years). They include varieties of willow or poplar tree, and are a source of cellulosic bio-ethanol.

4 Woody grasses which can be harvested annually for at least 15 years.

part of a bio-ethanol production support program, for other benefits are extracted from poplars and willow. Many developing countries are already producing bio-ethanol mainly from starch crops and sugar cane. (Fig-ure 4.A.2) presents global production of bio-ethanol of several countries and regions:

Mto

e

FIGURE 4.A.2: BIO-ETHANOL PRODUCTION IN INDIA, CHINA, USA& OTHER COUNTRIES (2000-2005)

0

5

10

15

20

OtherIndiaChina

European UnionUnited StatesBarazil

200520042003200220012000

Source: GBEP, 2007.

Alas, reciprocating these experiences in Egypt faces serious limitations. The limited agricultural patch in Egypt cannot keep up with the rapidly growing popu-lation, in terms of securing food crops. Consequently, expansions in bio-ethanol production from starch crops are not currently a viable option.

Bio-diesel

A huge potential for the production of bio-diesel in Egypt exists with Jatropha plantations, as Jatropha is a particularly good source of bio-diesel. A study by the Japan Development Institute (JDI) has shown that if half of Egypt’s wastewater is used to plant Jatropha in reclaimed and marginal agricultural lands, Egypt will be able to produce 4.5 million KL of Bio-Diesel of a global market worth of $ 4.5 billion (JDI, 2007). This is equivalent to 4.14 million KL of biodiesel or 3.5 Mtoe. Despite this huge potential, bio-diesel produc-tion and Jatropha plantation remains very limited in scale. (Figure 4.A.3) illustrates main global producers of bio-diesel.

154

Mto

eFIGURE 4.A.3: GLOBAL DISTRIBUTION OF BIO-DIESEL PRODUCTION

ALL OVER THE WORLD (2000-2005)

0

0.5

1.0

1.5

2.0

2.5

OtherUnited StatesRest of Europe

ItalyFranceGermany

200520042003200220012000

Source: GBEP, 2007.


Energy generation potential from municipal waste streams amounts to around 0.6 Mtoe/year (National Council for economic affairs and Production, 2005). Municipal solid waste sorting and treatment facilities exist throughout Egypt. Therefore, WTE power plants may be constructed close to the treatment facilities to capitalize on this yet unexploited potential.

The potential of biogas generation from wastewater is around 0.48 Mtoe/y (National Council for Econom-ic Affairs and Production, 2005)

4.A.2.3 Agricultural Residues

Agricultural residues, in Egypt, are mostly burned us-ing conventional methods yielding very low efficiency of 10-20%. That is in spite of the fact that agricultural residues represent 50% of biomass energy potential in Egypt (El-Mashad et al, 2003).

A potential for the production of 0.418 (Mtoe) cel-lulosic Bio-Ethanol from agricultural residues, exists (Fmaly et al, 2008). These figures, however, are pre-liminary, and it has to be taken into consideration that the commercialization of cellulosic bio-ethanol technology would take around ten years. The national council for economic affairs and production estimates the overall available energy potential from agricultural residues to be 2.4 Mtoe/y of energy in the form biogas and WTE activities.

4.A.3 Development, Production and Handling


Biofuels

The only form of bio-mass energy, from ‘energy’ crops, with commercial usage in Egypt is the production of bio-diesel. Experimental farms have demonstrated the feasibility of planting Jatropha in Upper Egypt.

An Egyptian-Austrian joint venture company, Amiral, has a Jatropha farm in Beni-Suef, as well as two oil extraction and two bio-diesel production plants in the Sokhna Port totally dedicated to exports. The target-ed capacity of the plants is 90,000 tons of bio-diesel a year, which is equivalent to 0.09 Mtoe

4.A.3.2 Agricultural Residue

Biogas generation exists but on a marginal scale. It has spread in Sharquiyah with small units found in vil-lages there. The trend started with the Basseisa vil-lage and spread to many other villages, but it is still on a relatively modest scale. It has great potential to spread more widely to many other Egyptian villages. Total energy produced from agricultural residues, in 2005, amounted to 1.7 Mtoe/y, mainly in the form of conventional burning (National Council for produc-tion and economic affairs, 2005).


In the El Gabal El- Asfar wastewater treatment plant, 0.09 Mtoe/y of electricity from biogas is co-generat-ed. Also 3.3 Mtoe of energy is co-generated, mainly from sugar and agro-industries. Municipal WTE activi-ties are non-existent, except for some inconsiderable marginal activities.

155

4.A.4 Energy Generation From Biomass

(Table 4.A.1) summarizes the biomass energy potential in Egypt. It includes figures for produced energy vis-à-vis available potential.

Table 4.A.1: Biomass Energy in Egypt in 2008.(5)

SourceEnergy

Produced (Mtoe/y)

Available Energy

(Mtoe/y)

Percentage of Utilized

Energy

Agricultural Residues

1.7 2.4 70%

Municipal Waste

0.08 0.6 13%

Wastewater 0.09(6) 0.48 18%

Industrial waste

3.3 4.2(7) 78%

Energy Crops 0.09 3.5 2.50%

Source: National Council of Economic Affairs and Production; JDI; Fmaly et al, 2005, 2007, 2008

(Table 4.A.1) shows that a huge potential, in both ab-solute and relative terms, remains untapped for bio-diesel production from Jatropha plantations. The available 3.4 Mtoe/y of bio-diesel is much greater than the available 2.5 Mtoe/y of biomass energy extracted from all other sources put together.

The second biggest potential, in absolute terms, stems from industrial waste. Better and more efficient utili-zation of bagasse(8) in sugar industry accounts for the biggest share of this potential. A big chunk of the avail-able potential of energy generation from wastewater and municipal solid waste remains untapped. It is still small in absolute terms, though. However, an upcom-ing energy crunch, looming in the distance for Egypt, renders the efficient utilization of all available energy potentials a matter of absolute common sense.

5 Slight changes in figures may have taken place over the past 2 years.6 This is restricted to an 18 MW installed capacity, in Gabal Al-Asfar Waste treat-

ment facility, used for co-generation7 It has been assumed that energy available from sugar cane molasses is 2.7 Mtoe8 A fibrous residue that is a byproduct of the process of crushing chopped sugar

cane to extract juice

4.A.4.1 Overall situation

Total biomass energy produced in Egypt is around 5.2 Mtoe out of a potential swiveling around a figure of 11. Mtoe/y. Figures show that there is room for the de-velopment of biomass energy. However, the problem is that this energy source involves different secondary energy forms: electricity, bio-gas, bio-fuel and each of these requires specially designed policies. Accordingly, the expected new electricity law with its renewable energy promotion clauses can only help to a limited extent in exploiting the potentials of this sector(9).

9 Only electricity generated from waste as well as industrial co-generated can ben-efit from this.

156

APPENDIX 4.B FUEL PRICES IN EGYPT

Table 4.B.1: The development of the costs of the fuel products, during the period1981/82 – 2006/2007.

NG Butagas MazoutDiesel

(transportation)Diesel Kerosene Gasoline

1981/82 9 52 7.5 30.42 36 37.8 182

1991/92 75 200 80 210.6 240 252 1013

1992/93 99 200 100 315.9 360 378 1301

1993/94 149 200 130 421.2 480 504 1305

1994/95 152 200 130 421.2 480 504 1305

1995/96 156 200 130 480 480 504 1305

1997/98 156 200 130 480 480 504 1305

1997/98 156 200 182 480 480 504 1305

1998/99 156 200 182 480 480 504 1305

99/2000 179 200 182 480 480 504 1305

2000/2001 179 200 182 480 480 504 1305

2001/2002 179 200 182 480 480 504 1305

2002/2003 179 200 182 480 480 504 1305

2003/2004 244 200 300 480 480 504 1305

2004/2005 275 200 300 720 720 504 1305

2005/2006 279 200 300 900 900 964 1768

2006/2007 327 200 500 900 900 964 1768

2007/2008 200 1000 1320 1320 1320

2005/2004 price of diesel= 60 Pt / liter2004/2003: 1 tons of gas = 1312 cubic meters (18.6 Pt / cubic meter) 2005/2004: 1 tons of gas = 1349 cubic meters (22 Pt / cubic meter) 2005/2006: 1 tons of gas = 1360 cubic meters (the price of gas $ 1.25 / million Btu) 1 ton gasoline = 1360 liters 1 ton kerosene = 1285 liters 1 ton diesel = 1200 liters The exchange rate U.S. dollar = 5.71 Egyptian pounds Note: The price of gas for bakeries and homes is still 14.1 Pt / cubic meter

Butagas £ 2.50 cylinder

Gasoline 95 275 Pt / liter




Kerosene 110 Pt / liter

Diesel 110 Pt / liter

Mazout 1000 pounds / ton

Source: The Egyptian General Petroleum Corporation (EGPC)

Box 4.B.1: Prices of Fuel products

157

APPENDIX 4.C ELECTRICITY TARIFFS

Table 4.C.1: Applicable Prices of Electricity, by sector and consumption

Customer classification according to the service volt-age level and nature of usage

Tariffs (mills per kWh/month) (data were compiled by IMC)

Feesrelated to

Powerfactor

Oct2006 up to Sept

2007

Oct2007 up to Sept

2008

% Dif-ference

between 2006/07

&2007/08 tariffs

July2008 &

Oct2008

up to …..

% Difference between

2007/08 & 2008/00 tariffs

1

Extra High Voltage (EHV) -500, 220, 132 kilo Volt (kV)

Energy intensive industries *

Yes 111

133.33 20.12% 202 51.50%

Other industries **

119 7.21%

139 16.81%

None energy intensive activities (indus-try and other users) *** 129 8.40%

2

High Voltage (HV) -66 and 33 kilo Volt (kV)

Energy intensive industries *

Yes 134

161.33 20.40% 245 51.86%

Other industries **144 7.46%

168 16.67%

Other users - none energy intensive ac-tivities (industry and other users) ***

157 9.03%

3 Housing Companies Yes 129 139 7.75% no housing companies

4

Medium Voltage (MV) and Low Voltage (LV)

Over 500 kW demand

Energy intensive industries * Demand charge

Yes

8.60 LE/kW/

month

9.00 LE/kW/

month4.65%

10.40 LE/kW/month

15.56%

Energy charge

183 220.33 20.40% 334 51.59%

Other industries ** Demand charge

8.60 LE/kW/

month

9.00 LE/kW/

month4.65%

9.50 LE/kW/

month5.56%

Energy charge

183 197 7.65% 230 16.75%

Other users - none energy intensive activities (industry and other users ***

Demand charge

8.60 LE/kW/

month

9.00 LE/kW/

month4.65%

9.50 LE/kW/

month5.56%

Energy charge

183 197 7.65% 214 8.63%

Up to 500 kW demand

Agriculture users No 97 104 7.22% 112 7.69%

Others Yes 215 231 7.44% 250 8.23%

5

Residential users (on monthly basis)

0 – 50 kWh

No

50 50 0.00% 50 0.00%

> 50 – 200 kWh 100 107 7.00% 110 2.80%

> 200 – 350 kWh 136 149 9.56% 160 7.38%

> 350 – 650 kWh 196 216 10.20% 240 11.11%

> 650 – 1000 kWh 280 311 11.07% 390 25.40%

> 1000 kWh 342 380 11.11% 480 26.32%

6

Commercial users (on monthly basis)

0 – 100 kWh

No

213 229 7.51% 240 4.80%

> 100 – 250 kWh 309 335 8.41% 360 7.46%

> 250 – 600 kWh 393 425 8.14% 460 8.24%

> 600 – 1000 kWh 487 525 7.80% 580 10.48%

> 1000 kWh 511 550 7.63% 600 9.09%

7Offices and clinics (not hospitals), etc. ( is classified under item # 4 of this table - up to 500kW demand without a power factor consideration)

No 215 231 7.44% 250 8.23%

8 Streets public lighting No 356 383 7.58% 412 7.57%

Note: 1000 mills = 1 Egyptian Pound (LE) & 5.5 LE ≈ 1 $ on October 2008 a 0.9 power factor is assumed Note: in Feb 2009 the Glass, ceramics and chemicals; were reclassified as other industrie* Energy intensive industries (Glass, ceramics, chemicals, steel, cement, fluidizers, Aluminum, copper, petrochemicals) in accordance with PM decree # 1795 year 2008.** Other industries (Food, Textile and weaving, Pharmaceutical, Engineering) in accordance with PM decree # 1795 year 2008.*** Other users - none energy intensive activities (industry and other users)Source: MOEE,2010

Competitiveness ofthe Construction Industry:

A Green Perspective

5.1 EXECUTIVE SUMMARY The Egyptian construction industry is extremely important to the Egyptian econo-my, contributing between 4-6% of GDP and 7-8% of total employment. It provides many jobs for Egypt’s unskilled and low-skilled workers. An efficient and competi-tive construction industry is very critical to cost-effective provision of residential, commercial and industrial buildings and to the provision of infrastructure related to transportation, energy, water, sanitation and other areas. Construction is also crucial to the energy efficiency of the economy, not only as an industry itself but because the design and choice of materials support energy utilization rather than the useful life of buildings. The construction sector has been a driver of growth in recent years in Egypt.Using an economic tool called Revealed Competitiveness Analysis (RCA), this chap-ter shows that the construction sector is competitive as demonstrated by a mildly positive net export position for both engineering-related services and construction materials. Egyptians are also in demand in the construction sector throughout the region, indicating a good base of trained and talented human resources. However, there is likely to be increasing competition from global firms in the context of the trend towards liberalization in services, and the Egyptian construction industry must now begin to prepare for international competition while developing its own plans to potentially expand abroad.

* Lobna Abdel-Latif is the Head of the Economics Department of the Faculty of Economics and Political Science, at Cairo University and Senior Advisor to the Minister of Local Development. Nihal El-Megharbel is the Head of the Economic Affairs Component of the Decentralization Support Unit, of the Ministry of Local Development.

Lobna Abdel-Latif &Nihal El-Megharbel*

5

160

The analysis of Strengths, Weaknesses, Opportunities and Threats (SWOT Analysis), reveals that the size of the Egyptian construction industry and its human re-source base are significant strengths along with gov-ernment commitment to expand housing and infra-structure funding, including the development of new cities. Weaknesses include difficulties with access to land, difficult access to finance, high cost of finance for those with access, the informal (non-registered) na-ture of firms in the industry, complicated regulations and time-consuming permit processes. Opportunities in regional markets exist in which Egyptian firms could expand their operations. However, the more liberal-ized environment under the General Agreement on Trade in Services (GATS) also means that the Egyptian industry could face the threat of stiffer competition.

This chapter provides recommendations for improv-ing the competitiveness of the construction industry. More transparent and competitive tenders could im-prove industry competitiveness. The construction industry plays a smaller role in the overall economy than in other similar economies, and the antiquated rent-control policies impede further competitiveness of the industry. Among these policies are rent con-trol and the lack of long-term mortgage instruments that dampen demand for residential construction and renovation. Improved training, vocational and special-ized educational programs can help further boost the skills at all levels of the construction workforce.

Green construction is particularly important for the future competitiveness of the Egyptian construction industry and for the Green Transformation of the Egyptian economy, which is the subject of the 2010 Egyptian Competitiveness Report. First, the materi-

als chosen and processes used in construction can be less energy intensive and less polluting. Second, the design features in buildings can make them far more energy efficient. Third, the choice of technologies and inputs, such as solar water heaters, can make build-ings more efficient over their future lifetimes. Fourth, by taking a holistic approach to urban planning, trans-portation infrastructure, zoning and residential, com-mercial and industrial construction, one can reduce commuting time, reduce wasted fuel, improve quality of life and realize a new vision for urban living that is both more pleasant and more socially responsible from the point of view of energy, carbon emission and environmental stewardship.

Mastering green construction will also increase the competitiveness of the Egyptian construction indus-try as this trend is becoming more and more impor-tant for Gulf States and other countries of the region. Egypt needs to adopt a green construction strategy, involving the government and the private sector, to catalyze the sector to be ready for the new, global competition. This chapter recommends convening public and private sector leaders in the construction industry to forge a consensus leading to specific stra-tegic initiatives that will improve the competitiveness of the construction industry while putting into place standards and incentives for green construction that will be of long-term benefit to the economy and to all Egyptians.

161

Construction also contributes to Egypt’s for-eign exchange earnings. Exports of construction materials and engineering services are not insignifi-cant. Egyptian expertise in construction is widely used in the region and contributes importantly to the flow of remittances from engineers and construction workers employed in other countries. Therefore, the competitiveness of Egypt’s construction industry and its workforce is important.

Construction directly affects the quality of life of every person. Apart from providing for the livelihoods of many, it provides shelter for all.(1) It provides the infrastructure required for providing a prosperous future and satisfying investment needs and corporate objectives. The construction sector has helped to upgrade highways, roads, airports and sea-ports. It has helped to house millions of Egyptians and contributes to renovation activities. The construction industry provides the physical structures for manu-facturing and service industries. It has been heavily involved in the development of Egypt’s new cities and industrial parks. It has also supported the upgrading of utilities in Egypt, including the provision of clean water to almost all villages, towns and cities.

The construction industry will play a key role in Egypt’s Green Transformation. The Green Transformation of the construction sector is not a luxury, but rather will provide economies of scale for the sector, reduce cost and waste for consumers, and reduce CO2 emissions. The greening of the construc-tion industry will include energy-efficient, low-carbon emitting materials, building reuse, recycled content, regional materials, reduced site disturbance and inno-vation in the design process. To date, concern for the environment has been a relatively small part of most construction development. Developers, architects, de-signers and consumers are all increasingly aware of the need to reduce energy costs, lower carbon emis-sions and minimize the ecological impact of construc-tion activities.

1 The construction sector includes residential and non-residential buildings; in-frastructure and utility projects; and specialized construction activities, such as site preparation, installation activities, building and finishing (http://unstats.un.org/unsd/cr/).

The majority share of CO2 abatement opportunities in construction is cost-negative. Residential emissions in 2005 accounted for 68% of total buildings emis-sions. With the rise in population, the adoption of green technologies in the construction sector will have a long-term positive impact. On the commer-cial buildings side, the reduction in emissions(2) will be mostly driven by a reduction in electricity demand, if abatement measures are implemented. This reduction in demand will translate to lower costs for companies and for families, allowing companies to invest more in their businesses and allowing families to save more.

The objective of this chapter is to provide a perspective on the future competitiveness of the construction sector and to highlight its role in Egypt’s Green Transformation. This chapter analyzes the contribution of the sector to GDP, employment, investment and exports. It then an-alyzes constraints to the growth of the housing mar-ket and the impact of this on the construction sector. The strengths, weaknesses, opportunities and threats to the industry are then examined. The chapter then presents a review of international experience and best practices related to “green construction” before presenting policy recommendations for Egypt.

2 McKinsey, 2009.

5.2 BENEFITS OF THE CONSTRUCTION INDUSTRY The construction industry is an important driver of growth for Egypt’s economy and will play a major role in the Green Transformation of the Egyptian economy. Construc-

tion contributes significantly to the Egyptian GDP. Its large multiplier effects ripple through other sectors of the economy. The industry is a job generator. As a labor-intensive industry, it provides jobs to millions of unskilled and semi-skilled employees, providing livelihoods for many. Government uses investment in construction as an important public policy tool to create employment during periods of slow economic growth. The construction sector is an important market for construction materials produced by the manufacturing sector.

162

5.3.1 Impact of construction on the economy

This section reviews the contribution of the con-struction sector to GDP, employment and investment.

5.3.1.1 Contribution to GDP

The average share of the construction sector in real GDP at factor cost during the period 2000/01 through 2008/09 amounted to 4.3%, compared to a worldwide average of between 5 and 7% , and on the low end of the average of 4 to 6% in developing countries. As shown in (Figure 5.1), the sector’s impact is smaller than that of agriculture and manufacturing but larger than the electricity and wa-ter sectors.

Although potentially volatile, lately the con-struction industry’s growth rates have been robust. The growth rate of the domestic product of the construction sector increased from 4.3% in 2003/04 to 16% in 2007/08, before declining to 11.4% in 2008/09 as a result of the global economic crisis. However, the construction industry is one of the sec-tors that recovered quickly during the first six months of 2009/10 and achieved a growth rate of 13.1% . The share of the private sector in the domestic product of the construction sector increased from 58.4% in 2000/01 to 88.3% in 2008/09, signifying the greater role of the private sector in the Egyptian economy and especially in construction.

5.3 IMPORTANCE OF THE CONSTRUCTION INDUSTRY TO EGYPT’S ECONOMY

The construction industry makes important contributions to Egypt’s GDP and employment. However, the sector is currently underrepresented in the overall GDP when compared to other countries, including developing countries. The positive balance of trade in exports of construction-related goods and services may be a sign of the relative competitive-ness of the industry in the region

0

5

10

15

20

Construction Water Electricity

Industry Agriculture

2008

/09

2007

/08

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01

FIGURE 5.1: CONTRIBUTION OF THE CONSTRUCTION INDUSTRY TO GDP (2000/01 – 2008/09) & CONTRIBUTION OF PUBLIC & PRIVATE SECTORSTO CONSTRUCTION INDUSTRY GDP3

0 20 40 60 80 100

Private SectorPublic Sector

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

2001/02

2000/0141.6

12.0

12.3

13.0

13.0

12.8

11.6

11.8

11.7

58.4

88.0

87.7

87.0

87.0

87.2

88.4

88.2

88.3

%

Source: Authors’ calculations using data obtained from www.mop.gov.eg

3 Author’s calculations based on Government of Egypt data at www.mop.gov.eg.

163

5.3.1.2 Contribution to employment

The sector contributed 7.8% to Egyptian employment on average, between 2000/01 to 2007/08. The contribution to employment is even more important than the contribution to GDP.(Figure 5.2) indicates that the total average share of the construction sector in total employment amount-ed to 7.8% during the period 2000/01 to 2007/08. However, this is still on the low side compared to a worldwide average of between 7 to 11%, indicating that there is considerable upside potential for em-ployment generation. It contributed 10.5% of private sector employment and 2.2% of public sector em-ployment during the same period.

FIGURE 5.2: SHARE OF CONSTRUCTION EMPLOYMENT INTOTAL EMPLOYMENT

%

0

5

10

15

20

25

30

Construction Water Electricity

Industry Agriculture

2007

/08

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01


Economic stimulus in the construction sector can have a relatively important short-term impact on employment. The employment elastic-ity of the construction sector is high. This means that a relatively small increase or decrease in economic activity will have a more significant impact on employ-ment. In contrast, agriculture has a relatively low elas-ticity of employment.(4)

4 The elasticity of employment in construction is 0.51 whereas the elasticity of employment in agriculture is 0.22. However, agriculture generated 26.7 percent of employment while construction generated 7.8 percent in 2007/08.

FIGURE 5.3: EMPLOYMENT ELASTICITY AND INVESTMENTIN ECONOMIC SECTORS

(0.20

)

(0.16

)

(0.18

)

(0.61

)

(0.55

)

(0.22

)

(0.22

)

(0.32

)

(0.51

)

%0 5 10 15 20 25

Construction

Hotels &Restaurants

Agriculture &Land Reclamation

Utilitues

Trade, Finance& Insurance

Manufacturing

Social Services

Mining

Transport,Communication

& Suez Canal

Employment elasticity


Growth in construction employment in re-cent years has been relatively strong. As in-dicated in (Table 5.1), the average annual growth rate of construction employment between 1998 and 2006 was 5.9% , exceeding the overall employment growth rate of 4.6%. It was about equal to the employment growth rate in the service sector of 6%.

Table 5.1 Growth in Employment bySector.

Sector

1998 2006 Average annual growth rate (%)

(000) % (000) %

Agriculture and fishing

3,088 20.3 5,388 25.2 7.4

Mining, man-ufacturing and utilities

2,611 17.2 3,117 14.6 2.4

Construction 1,081 7.1 1,686 7.9 5.9

Trade, hotels and restau-rants

2,305 15.2 3,712 17.4 6.4

Transporta-tion, storage and commu-nication

931 6.1 1,546 7.2 6.8

Financial and business services

304 2 589 2.8 8.8

Public ser-vices

4,054 26.7 4,656 21.8 1.8

Other 806 5.3 677 3.2 -2.3

Total em-ployed

15,180 100 21,371 100 4.6

Source: Tohamy and Madbouly, 2006.

164

Furthermore, the construction sector has been generating jobs for unskilled and semi-skilled workers. As shown in (Table 5.2), more than one-third of construction workers are illiterate (34%), while another 27% of workers received only a primary education. Only 6% had university degrees.

Table 5.2. Distribution of Construction Employment by Education Attainment in 2006

Type of EducationTotal Construction

Workers

Number Share (%)

Illiterate 637,212 34

Technical/vocational education

631,686 33

Literate 233,579 12

Primary education 124,319 7

Preparatory education 115,812 6

University education 112,007 6

Pre-university education 38,860 2

High diplomas 531 0.03

Master degree 367 0.02

PhD 175 0.01

Other 113 0.01

Total 1,894,661 100

Source: Central Agency for Public Mobilization and Statistics, 2008.

Most jobs generated in construction are clas-sified as crafts and related trades workers. (Figure 5.4) indicates that such jobs constituted 84.8% of total employment in the sector in 2007. This share was 78.2% in 2003. In general, the distribution of con-struction workers by type of job is heavily biased to-wards crafts and related jobs, whereas managers and professionals taken together constituted less than 10% of employment in construction.

FIGURE 5.4: CONSTRUCTION SECTOR EMPLOYMENT BY TYPEOF JOB IN 2007.

Skilled agricultural and fishery workers

Elementary occupations

Clerks

Service workers and market sales workers

Plant and machine operators and assemblers

Technicians and associate professionals

Professionals

Legislators, senior officials and managers

Craft and related trade workers

4.8%

3.7%2.8%

1.5%0.2%0.7%0.7%0.8%

84.8%

Source: www.laborsta.ilo.org (3 February 2010).

Yet, despite generating jobs for large num-bers of relatively unskilled and semi-skilled workers, the construction sector has relative-ly high wages. The average wage in the construc-tion sector exceeds the average wage at the national level. Average weekly wages in the private sector construction industry averaged LE 183 compared to an average of LE 165 overall among private sector firms nationally (CAPMAS 2009). Among public sec-tor firms, construction wages were slightly lower than average. Average weekly wages in the public con-struction sector for the period 2001-2007 reached LE 224, compared to LE 235 in public sector firms at the national level. However, the productivity of workers in construction is relatively low compared to other non-agricultural sectors of the economy. The average real labor productivity for the period 2002/03 through 2006/07 reached LE 2,097, compared to LE 3,247 economy-wide; LE 50,982 in the oil sector; LE 10,553 in the real estate sector; LE 8,518 in the transportation, storage, and communication sectors, as well as the Suez Canal; and LE 4,756 in the manu-facturing sector (El Ehwany 2009).

5.3.1.3 Contribution to investment

Investment in construction seems relative-ly low, at only 2.2% between 2000/01 and 2008/09. Of this, some 79% was private investment and 21% was public investment. As (Figure 5.5) shows, the share of private sector investment in total private investment allocated to construction amounted to 3.2%, while public sector construction attracted only 1% of total public investment during the same period. This may indicate untapped opportunities that could attract a high level of foreign and domestic invest-ments.

FIGURE 5.5: SHARE OF CONSTRUCTION INVESTMENT IN TOTALINVESTMENT.

%

0

3

6

9

12

15

Construction Water

Electricity Agriculture

2008

/09

2007

/08

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01


165

As (Figure 5.6) shows, the share of private investment in construction was significantly higher than public in-vestment in all years. This could be partly explained by the privatization of a number of publicly-owned construction firms that has taken place since the mid-1990s.

FIGURE 5.6: DISTRIBUTION OF PUBLIC AND PRIVATE INVESTMENTSIN THE CONSTRUCTION INDUSTRY.

0

20

40

60

80

100

Private Sector Public Sector

2008

/09

2007

/08

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01

71.9 80.4 74.5 73.4 70.2 89.8 80.7 80.1 75.5

28.1 19.6 25.5 26.6 29.8

10.2

19.3 19.9 24.5

%


Foreign investment became particularly no-table in the real estate sector. (Table 5.3) shows the distribution of the stock of private investment al-located to the construction sector during the period 1970-2008 and allocated to different construction subsectors. Real-estate and contracting firms attract-ed almost 80% of total investment in the construction sector. National investment accounted for 77% of the total investment allocated to the construction sector, while foreign investment accounted for the remaining balance. Foreign investment accounted for a major-ity of the investment in real estate during the same period.

Table 5.3 Distribution of Investment in the Construction Sector (1970-2008) bySubsector

Subsector

Firms InvestmentNational

investmentsForeign in-vestments

# %LE

million%

LEmillion

%LE

million%

Real-estate develop-ment

1706 36 20 46 14.6 44 5.2 53

Contracting 2440 52 14.3 33 12 36 2.3 23

Infrastruc-ture

302 6 6.2 14 4.3 13 2 20

Housing 271 6 2.6 6 2.2 7 0.4 4

Total 4719 100 43.1 100 33.1 100 9.9 100

Source: Authors’ calculations based on unpublished data from the Ministry of Investment, 2008.

The private sector dominates the residen-tial building sector, while the public sector is prominent in construction related to edu-cation, health, water and electricity. The two sectors are involved equally in road construction and maintenance. (Figure 5.7) shows the distribution of construction projects by type and sector. The private sector accounts for about 80.7% of residential build-ing construction and 75.7% of industrial building con-struction. Projects for educational buildings (68.8%), buildings for the health sector (68.5%) and water and electricity networks (70.6% and 80.8%, respectively) are carried out mainly by the government.

FIGURE 5.7: DISTRIBUTION OF PUBLIC AND PRIVATE INVESTMENTSIN THE CONSTRUCTION INDUSTRY.

0

20

40

60

80

100

Private Government Public sector

Elec

trici

tyne

twor

ks

Wat

erne

twor

ks

Road

s

Oth

erbu

ildin

gs

Educ

atio

nal

Build

ings

Build

ing

for

the

heal

thse

ctor

Indu

stria

lbu

ildin

gs

Resid

entia

lbu

ildin

gs

%

80.7 75.7 18.6

68.5 68.8

39.8

5.1

15.3

4.0 4.819.2 12.8 10.7 37.6 20.5

1.8

30.5

70.6 80.8

20.5 55.4 31.9

9.0

17.4

Source: www.capmas.gov.eg.

5.3.2 Contribution of the construction sector to external trade(5)

The construction sector, while primarily domestic, contributed 2.6% of service exports and 1.4% of to-tal exports during 2002-2006. However, imports of construction services were 1.9% of total services im-ports but only 0.5% of total imports. International foreign trade in construction services is not restricted in Egypt. This modest but favorable balance of trade in construction-related goods and services may be in-terpreted as a positive sign of the competitiveness of Egypt’s construction sector. However, as noted ear-lier, it may be underfunded as it represents a lower share of Egypt’s GDP than is usually the case in other countries.

5 Purchase of a good by a resident (of the compiling economy) from a non-resident and the subsequent resale of the good to another non-resident (without the good entering or leaving the merchant’s economy). The difference between the value of goods when acquired and the value when sold is recorded as the value of merchanting services provided.

166

Table 5.4 Percentage of Exports and Imports of Services (2002-2006)

Code ProductShare of services exports in Share of services imports in

Total services exports

Totalexports

Total services imports

Totalimports

205 Transportation 30.9 17.2 34 9.7

236 Travel 43.7 24.3 17.2 4.9

245 Communications services 2.7 1.5 2.7 0.8

249 Construction services 2.6 1.4 1.9 0.5

253 Insurance services 0.3 0.2 7.2 2

260 Financial services 0.8 0.4 0.7 0.2

262 Computer and information services 0.2 0.1 0.3 0.1

266 Royalties and license fees 0.8 0.4 1.1 0.5

268 Other business services 15.7 8.8 25.2 7.2

269Merchanting and other trade-related Services

0.8 0.5 2.9 0.8

270 Merchanting 0.4 0.3 0.8 0.2

271 Other trade related services 0.4 0.2 2.1 0.6

272 Operational leasing services 0.02 0.01 0.1 0

273Miscellaneous business, professional and technical services

0 0 0 0

287Personal, cultural and recreational ser-vices

0.6 0.3 0.2 0.1

291 Government services, n.i.e. 1.7 0.9 9.7 2.5

Total 100 55.5 100 28.4

Source: Authors’ calculations using data obtained from www.trademap.net

5.3.3 The profile of the construction sector

Construction includes three major segments: residential construction, industrial and com-mercial construction and infrastructure de-velopment. The latter includes roads, railroads, energy, ports, airports and water and sanitation sys-tems. A wide variety of firms are involved in diverse activities. The industry includes firms that construct, repair or renovate buildings. Other firms may focus primarily on the initial development and subdividing of land. These establishments may operate on their own account or under contract to other establishments or property owners. They may produce complete projects or just parts of projects. Extensive subcon-tracting is a hallmark of the industry. There are sub-stantial differences in the types of equipment, work force skills and other inputs required by firms in this sector. Economic actors in the sector vary by size, from self-employed individuals providing services, to private house owners, to multinational firms operat-ing on a global scale.

Small and medium enterprises are a major feature of the construction sector. Globally, the sector is dominated by small and medium enter-prises (SMEs), and Egypt is no exception. According to the 2006 Census, the number of construction firms was 13,324, representing 0.54% of total firms. This

relatively small share of construction firms is mainly due to the high level of informality that dominates the sector. The number of firms employing less than five workers represented 76% of total construction firms (Table 5.5). The dominance of public sector firms in low-income housing, roads, bridges and industrial cit-ies is also evident.

Table 5.5 Distribution of Construction Firms by Size in 2006

Size(number of employees)

Numberof Firms

Share in total firms (%)

> 5 10,144 76.1

> 50 2,999 22.5

50 – 99 79 0.6

100 – 499 87 0.7

500 – 1000 11 0.1

< 1000 4 0.03

Total 13,324 100

Source: www.capmas.gov.eg

(Table 5.6) indicates that, according to the Establish-ments Census in 2006, 44.8% of the construction firms are contractors, and they are employing 69.6% of the construction workers. In addition, the special-ized construction activities employ 21.5% of construc-tion workers, while only 8.9% of them are working in civil activities.

167

Table 5.6 Distribution of Construction Firms by Subsectors and Size in 2006 (%)

SubsectorNumber of Employees

4-Jan 9-May Oct-49 50-99 100-499 500-999 <1000 Total

Contractors Firms 34.5 76.3 80.6 77.2 78.2 72.7 75 44.8

Employees 41.6 77.1 79.6 78 80.8 77.8 73.1 69.6

Civil activities Firms 1.1 4.3 9.7 10.1 14.9 18.2 25 2.4

Employees 1.5 4.5 10.9 9.7 10.3 15.3 26.9 8.9

Specialized construction activities

Firms 64.4 19.4 9.7 12.7 6.9 9.1 0 52.8

Employees 56.9 18.4 9.5 12.4 8.9 6.8 0 21.5

TotalFirms 100 100 100 100 100 100 100 100

Employees 100 100 100 100 100 100 100 100


The Egyptian Engineers Syndicate (EES) and the Egyptian Federation for Construction and Building Contractors (EFCBC) are promi-nent organizations in the sector. The Syndicate is an independent entity established in 1946 with the purpose of streamlining engineering activities and co-ordinating between contractors and government, in a common bid for sustained and efficient social and economic development. The Syndicate suffers from fi-nancial and administrative problems and has been put under sequestration. As for the Federation, it aims at promoting the common interests of its members and representing them with different authorities. The EF-CBC organizes the conditions of occupation and de-velops the main framework, rules and regulations for the construction practice and profession. The Federa-tion also defends member interests before the courts and other parties, while resolving the disputes that arise between members. The EFCBC also strengthens the relations with Arabic and foreign organizations and institutions. The Federation classifies its members of local and foreign contractors into seven different grades of work, using eight criteria.(6) The majority of the members of the EFCBC are classified within the sixth and the seventh grades, while a small portion of them belongs to the first three grades, as shown in the following table. This classification confirms the fact that the majority of construction firms are SMEs and that a small fraction of the construction firms meets the requirements of large firms with large paid-in capital, many years of experience and large con-tracts and operations.

6 These criteria include paid-in capital, years of experience of the contractor, num-ber of technical staff, financial structure, administrative and legal structure, the highest value of the work carried out during the last five years, the value of the largest operation successfully completed during the five years prior to the sub-mission of the application and the upper limit of the allowable value of the tender (El Ehwany 2009 and Serag El-Din 2009).

Table 5.7 Distribution of EFCBC Members according to Grade Classification 2008

GradeRegistered Contractors

Number %

First 364 1.1

Second 251 0.8

Third 403 1.2

Fourth 1,689 5.1

Fifth 1,855 5.6

Sixth 5,523 16.7

Seventh 23,036 69.6

Total 33,121 100

Source: El Ehwany 2009 based on EFCBC unpublished data.

The dominance of SMEs and the high level of infor-mality are major obstacles that are hindering the competitiveness of the sector, both domestically and internationally. Although in other sectors, SMEs could be able to establish a special niche for themselves while producing or offering different and innovative goods and services, construction activities require large investments, use more advanced techniques and require modern management and marketing tools and strategies, which are often not available with SMEs and informal contractors.

168

5.3.4 The Housing Sector in Egypt

Most Egyptians live in apartments and in slightly overcrowded conditions. According to the 2006 Population Census, the majority of families (69.6%) and individuals (67%) are living in apartments. The average family size at the national level is 4.18 while the overcrowding rate(7) is 1.13%. However, this rate is much lower than in many developed coun-tries. In 2007, 17% of the European Union population lived in overcrowded households. Among EU mem-ber states, the highest percentages of overcrowded households were registered in Latvia (59%), Romania (54%), Lithuania and Poland (both 52%). Cyprus and the Netherlands each recorded the lowest at 2% (ec.europa.eu).

Table 5.8 Distribution of EgyptianFamilies and Individuals According to the Type of Housing

Type of housingFamilies Individuals

Number % Number %

Apartments 12,026,508 69.6 48,478,486 67

More than one apartment

188,017 1.1 877,367 1.2

Villa 927,648 5.4 4,387,182 6.1

Country house 2,735,593 15.8 13,170,541 18.2

A room or more in a housing unit

1,007,583 5.8 3,965,416 5.5

An independent room or more

357,263 2.1 1,279,558 1.8

A straw or a tent 32,251 0.2 133,882 0.2

Others 14,436 0.1 56,687 0.1

Total 17,289,299 100 72,349,119 100


According to the 2006 census, the total hous-ing stock in Egypt reached just over 27 mil-lion units, of which 52.8% were in urban ar-eas and 47.2% were in rural areas.(8)

Public agencies and programs responsible for the direct supply of affordable housing(9) have delivered 1.26 million public housing units during the period 1982-2005, which represented 36% of formal houses in urban areas with a total cost of LE 26 billion (USD 4.7B). The remaining 64% of the housing units in ur-ban areas were provided by the private sector, with a total cost of LE 60 billion (USD 10.9B). Public agen-cies provided 82% of low-cost and economic hous-ing units during the same period. In recent years, the share of the private sector in providing housing units

7 The overcrowding rate is defined as the percentage of the population living in a household considered to be overcrowded.

8 See www.campas.gov.eg.9 They include governorates, housing and development companies, the Joint Proj-

ects Agency, the General Organization for housing and Building Cooperatives, the Housing Finance Fund, the Housing and Development Bank, development agencies and the New Urban Communities Authority.

increased to nearly 90%, indicating a notable shift from the public to the private sector (World Bank 2007).

Despite the existence of a significant share of vacant housing units, there is a mismatch between the supply and demand of housing in Egypt. According to the 2006 population census, almost 3.7 million urban housing units are unused, be-ing either vacant or closed. This could be explained by the fact that for the last 25 years, housing and real estate have consistently served as an inflation-proof savings and investment mechanism. In addition, while there is an oversupply of formal housing for middle- and high-income groups, there is a shortage of supply for low- and moderate-income groups (World Bank 2007a and b).

Unmet demand for low- and moderate-in-come households is left to the informal sec-tor. During the period 1986-1996, the informal sec-tor was responsible for the delivery of 45% of the new housing units. The increase in participation of the informal sector in the provision of housing units could also be explained by compliance difficulties with building and zoning standards, as well as a bureau-cratic and costly permit process. Informal housing of-fered by small developers provides a low-cost housing solution, but these may suffer from quality problems and they do not allow households to use mortgage finance. The lack of integrated services in new cities or towns, where subsidized units are often located, has further aggravated the problem.

Around 42% of the housing stock is frozen under rent control and grandfathering ar-rangements, which is not necessarily or pri-marily benefiting the poor. The housing sector in Egypt also suffers from an antiquated and increas-ingly dysfunctional rent control system. The market for rental housing has almost disappeared due to this system. Even after partial rent decontrol schemes, the perception of uncertainty about the enforceability of the new rental law (No. 4 for 1996) does not en-courage owners to put their unoccupied units on the rental market.

The government subsidizes low-income hous-ing but construction costs have been rising markedly, putting a strain on government budgets. The government has implemented low-cost housing programs since the 1940s. Subsidies al-located to the housing sector represent a large bur-den on the government’s budget, especially with the recent increase in construction costs. The average construction cost for low-cost housing for an average

169

unit measuring 52-79 m2 increased from LE 353 in 2003 to LE 500-600 in 2006, and “economic” hous-ing units of 65-97 m2 increased from LE 362 to LE 500-600. In 2005, the government adopted a National Housing Program (NHP) aimed at providing 500,000 housing units by 2011, and it allocated around LE 1 billion (USD 181M) per year to finance this program (World Bank 2007a and b).

A number of new initiatives, including a new mortgage system, seek to address some of the current constraints affecting Egypt’s residen-tial housing industry. Increases in construction costs will have a dampening effect on the affordability of housing, the growth of the industry and the suc-cess of the newly initiated mortgage system. A study carried out by the World Bank and USAID in 2007, aimed at analyzing the reform of the housing policy, recommended a roadmap to a well-functioning hous-ing system in Egypt. The reform policies determined by this study include:

Unlocking the stock of vacant housing through in-centives to the owners of vacant units in order to mobilize them and develop a liquid rental market

Strengthening rental market regulations and accel-erating rent decontrol

Enhancing affordability by increasing access to housing finance and reducing the supply cost of housing

Improving the targeting of public subsidies to en-sure that they are provided to the lowest income households and to specific market segments to as-sist in clearing well-defined market blockages

Promoting the role of the government as a regula-tor of the housing market and formulating neces-sary policies that encourage the private sector’s engagement in the delivery of housing services.

5.3.5 Non-Residential Construction in Egypt

The non-residential construction sector, whether in the industrial, agricultural or tourism segments, faces similar constraints regarding access to land and com-plicated regulations. These negatively affect the com-petitiveness of the construction sector.

5.3.5.1 Industrial projects

There are several options for investors wishing to acquire public land for industrial projects, including public free zones operated by the General Authority for Free Zones and Investment (GAFI), the industrial zone in new cities and urban communities controlled by the Industrial Development Authority (IDA), the planned industrial zones in different governorates and the special economic zones. The main problem that investors are facing in acquiring public land for indus-

trial development is that the market is not demand-driven. Moreover, the land parcels for industrial proj-ects are limited in certain areas where high demand is available. The cost of land is also very high, especially for small and medium enterprises (SMEs). Each of the entities responsible for public land has different procedures, regulations and conditions related to land pricing and allocation and to development conditions (World Bank 2006). The processes of obtaining a building permit for a factory and securing utility con-nections in these areas are also complicated, cumber-some and time-consuming.

5.3.5.2 Tourism projects

The government entities responsible for the develop-ment of tourism projects in Egypt are diverse and the processes of land allocation and project start-up are overlapping and uncoordinated. In general, allocation of public land for tourism development suffers from problems similar to those that face the establishment of industrial projects. However, it is claimed that the process of allocating public land to tourism projects is more efficient and the least burdensome. The Tour-ism Development Authority (TDA) is the sole gov-ernment authority responsible for promoting tourism development and land allocation along the Red Sea, the Mediterranean Sea and Aqaba Gulf. Obtaining se-curity clearance from the Ministry of Defense creates bureaucratic hurdles for investors. There is also a ten-sion between TDA and the governorates, which are deprived from any control over coastal lands, which represent a major source of income for them. How-ever, tourism development suffers from lack of bal-ance with environmental conservation needs (World Bank 2006).

5.3.5.3 Agriculture projects

Laws governing the allocation of land for agricultural projects are complex, unclear, differentiated and in many cases, contradictory. This results in time-con-suming and costly procedures, which have negative impacts on agriculture investors (World Bank 2006). Investors must also secure multiple approvals and clearances from different government entities to es-tablish agricultural projects. In some cases, the land allocated for agricultural projects is not suitable for agriculture and investors often convert the use of the land into urban uses, making windfall profits. Inves-tors also complain about the balance between land availability, the availability of irrigation water and avail-ability of the local workforce.

Issues of access to land and cumbersome procedures are common to industrial, tourism and agricultural projects. These are costly, time-consuming and af-fect the underlying competitiveness of non-residential projects.

170

5.3.6 Infrastructure and Utility Con-struction

Between 2005 and 2009, a number of infra-structure projects have been designed and implemented. Paved roads increased from 45.5 thousand kilometers to 47.7 thousand. Some 227 ki-lometers of railway were renewed. Some 14 bridges have been built. The Alexandria Port has been reno-vated at a total cost of LE 850 million. Other renova-tions included Dekheila Port with a total cost of LE 350 and Damietta Port with a total cost of LE 190 million. The third terminal of Cairo International Airport (at a total cost of LE 3 billion) was launched with an annual capacity of 11 million passengers, and the new terminal of Sharm El-Sheikh airport was also established, raising the capacity of Egyptian airports to 52.6 million passengers per year, a major increase over the previous capacity of 34.5 million passengers in 2005/06. These developments have had a positive influence on Egypt’s tourism capacity and were re-flected in the competitiveness rankings, as presented in Chapter 1 of this report.

However, Egypt suffers from major problems related to road quality, traffic, air pollution and noise. For instance, the Greater Cairo Region (GCR) does not have adequate road infrastructure

for its 2.2 million vehicles, resulting in major traffic bottlenecks. These bottlenecks not only create frus-tration for commuters but lead to economic losses for businesses, lower productivity for people, negative health consequences and waste of energy resources by vehicles stuck in traffic. Average vehicle speed in 2001 was only 19 km per hour, and if left unchecked, it is estimated that by 2022, the average vehicle speed will slow to 11.6 km per hour.

The government has adopted an ambitious plan aimed at completing the third phase of the underground sub-way, increasing the number and length of paved roads, building several bridges and establishing a number of airports in different governorates. This ambitious plan will provide opportunities for the construction sec-tor.

There have been some notable investments in the utility sector. For example, the capacity of potable water increased from 19.2 million m3/day in 2004/05 to 27.4 million m3/day in 2008/09. Some 99% of Egyptians are now reported to have a secure source of potable water, and 92% of families receive this water directly in their houses. Sanitation net-works require much more extensive development, but they increased by 30% during the same time pe-riod.

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5.4.1 Measuring the competitiveness of the construction sector

In order to assess the competitiveness of the con-struction sector, the revealed comparative advantage (RCA) is used. Although RCA does not take into consideration the effect of government distortions, such as quotas and subsidies, it offers a useful tool to detect comparative advantages in specific sectors. Three RCA indices are used to indicate comparative advantages or disadvantages in the Egyptian construc-tion sector during the period 2002-2006. The three RCA indices cover relative demand and supply dimen-sions of trade in different services, in order to reflect Egypt’s position relative to its size in the world market of different services. Taking both exports and imports into consideration indicates Egypt’s sectoral special-ization (Wörz 2008).

(Table 5.9) shows the average of the three RCA indi-ces during the period 2002-2006. According to RCA 1, travel; transportation; construction; communica-tions; government; other business; and personal, cul-tural and recreational services revealed strong com-parative advantage. Insurance, financial, royalties and license fees, and operational leasing services revealed comparative disadvantage. As for RCA 2, travel, trans-portation, construction, and communications services showed strong revealed comparative advantage, while other business services, including domestic trade ser-vices, and royalties and license fees, exhibited revealed comparative disadvantage. As for RCA 3, Egypt’s ex-ports and imports of services indicates that most of the services exhibited revealed comparative disadvan-tage, except transportation, travel, communications services, construction services and personal, cultural and recreational services. Higher scores on the table below indicate higher revealed competitive advantage.

5.4 COMPETITIVENESS OF THE CONSTRUCTION SECTOR This section measures the competitiveness of the construction sector using revealed competitiveness analysis (RCA) and then analyzes the factors driving this competitiveness by presenting an analysis of its strengths,

weaknesses, opportunities and threats (SWOT Analysis).

Table 5.9 Average Revealed Comparative Advantages of Egyptian Exports (2002-2006)

Code ProductAverage (2002 – 2006)

RCA 1 RCA 2 RCA 3

205 Transportation 3.86 1.35 0.16

236 Travel 4.35 1.52 0.92

245 Communications services 3.57 1.24 0.003

249 Construction services 3.7 1.3 0.2

253 Insurance services 0.35 0.12 -1.48

260 Financial services 0.38 0.13 -0.11

262 Computer and information services 0.18 0.06 -0.08

266 Royalties and license fees 0.45 0.16 -0.16

268 Other business services 1.95 0.68 -0.45

269 Merchanting and other trade-related services 0.37 0.13 -0.43

270 Merchanting 0.56 0.2 -5.58

271 Other trade related services 0.47 0.17 -0.31

272 Operational leasing services 0.04 0.01 -0.04

273Miscellaneous business, professional and technical services

NA NA NA

287 Personal, cultural and recreational services 1.4 0.49 0.3

291 Government services, not identified elsewhere 2.09 0.72 -1.81

Source: Authors’ calculations using data obtained from http://www.trademap.org/ (4 March 2010). NA: not available

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5.4.2 Factors affecting the competitive-ness of the construction sector

The competitiveness of Egypt’s construction sector is affected by many factors, including human resources, physical resources, financing, building codes, govern-ment procurement, technology, investment, taxes and other factors.

Human resources: As mentioned above, many construction workers are illiterate or have had only a very basic education. Improved education can improve the productivity of even low-skilled workers. Highly educated engineers, administra-tive and IT personnel and marketing managers are not enough to meet the growing demand for bet-ter quality services and to apply innovative and de-veloped design and construction techniques. The informal nature of the sector also discourages in-vesting in skills and training of the workforce.

Physical resources

The scarcity of land is a major constraint that is hin-dering the competitiveness of the construction sector in Egypt.

Urban planning and rural planning: Traffic congestion and urban sprawl in and around Cairo are results of historically inadequate attention to urban planning and zoning. Land management has been a constant constraining issue, according to industry leaders. There are two main authorities governing land management in Egypt. The central government authorities control public land outside of the Zimam,(10) distributed along sectoral lines, with localities managing public land outside of the Zimam, spread along geographic lines. Moreover, several overlapping and, in many cases, contradict-ing laws are governing land management, both at the central and local levels (World Bank 2008). In order to solve the problem of land scarcity, in re-cent years the government established the Indus-trial Development Authority (IDA), which is re-sponsible for allocating land to industrial projects. Although the IDA played a major role in solving some of the obstacles related to land allocation and pricing in the manufacturing sector, it did not deal with the problem of availing land for hous-ing and infrastructure projects. Strict measures were also undertaken by the government to face the problem of retaining the land for speculation purposes.

10 Zimam refers to the limits of the perimeter that comprises urban lands within city or village cordons, as well as cultivated and uncultivated agricultural lands that have been surveyed by the Egyptian Survey Authority (ESA) and included in the register of agricultural lands and real estate—kashf al mokalafat—main-tained by the Real Estate Tax Department (RETD). In cities and villages located in “desert” governorates, the cordon (i.e. municipal administrative boundary) and zimam are the same.

Finance and capital resources: The construc-tion sector is dominated by SMEs and informal contractors, which lack capital resources to invest in growth and productivity. They also lack the abil-ity to take on larger, more ambitious and more complex projects. The majority of construction firms are not registered by the EFCBC, which lim-its their ability, according to EFCBC rules and reg-ulations, to implement large construction projects. Large firms represent a very small share of total firms in the construction industry. Bank loans and credits are not easily guaranteed for construction firms, due to unclear banking regulations. Interest rates in 2010 were also quite high.

Demand conditions: The construction market and its growth prospects are considered promis-ing. This is reflected by the increase in construc-tion’s contribution to the GDP and the increased investment in infrastructure development, both by the private and the public sectors. According to the Presidential Program, the government adopted an ambitious social housing program that aims to provide 500,000 units for youth over a period of six years. The process of building these units will be assigned to private sector firms. During the last four years, 235,000 units were delivered to young people. In addition, the Presidential Pro-gram included the implementation of sanitation projects amounting to LE 25 billion (USD 4.5B) during the same period (2005-2011). During the current fiscal year, LE 10 billion (USD 1.8B) was allocated to these projects. Other private sector mega-projects have been implemented during the last few years, including a number of new cities in Greater Cairo and in the North Coast. Consum-er sophistication is weak but improving, as cost is still a strong driving factor behind demand.

Local competition: The Egyptian construction sector is characterized by a mixture of public and private sector firms. The bidding process tends to place focus on cost, with awards going to the low-est among the qualifying bidders (AmCham 2003). While foreign competition is present, these firms do not seem to have developed niche markets, nor do they seem to be basing their competitive advantage on differentiating their products and services.

Size of firms and structure: As previously mentioned, the construction sector in Egypt is dominated by SMEs and by informal contrac-tors. In addition, 4.1% & are public sector firms and 94.8% & are private sector firms, employing32.3% & and 66.3% & of construction workers respectively, and the remaining 1.1% & belongs

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to other sectors where 1.3% & of construction workers are employed. The dominance of the pri-vate sector in the construction sector is related to a large privatization process that has taken place since the mid-1980s. More than 80% & of the construction firms are owned and managed by one person, and only 8.7% & and 6.3% & of these firms are partnership and joint stock companies, respectively. The remaining 4.5% & of the con-struction firms belong to other legal forms, such as limited partnerships and equity shareholding.(11) In general, the size, structure and legal status of the construction firms could be negatively affect-ing the competitiveness of the sector.

Technological development: Egyptian con-struction firms rely mainly on labor-intensive techniques rather than on innovative high tech-nologies. This could be explained by the low cost of labor and the large investments necessary to adopt new technologies. This trend is also sup-ported by the government-driven demand for implementing low-cost housing projects.

Input and raw materials: Building materi-als represent around 40% – 60% & of the cost of construction projects. The main building materi-als that are included in construction projects are glass, paints, construction chemicals, cement, and steel, the most important of which are cement and steel. Since the liberalization of the cement market, the price of cement has declined, espe-cially after the establishment of a number of lo-cal and foreign cement factories. During the last few years, the cement industries witnessed an increase in price, but the government succeeded in breaking monopoly practices through penalties on domestic producers and by imposing restric-tions on cement exports. Contrary to the ce-ment industries, the government failed to face the claims related to monopolistic practices in the steel market. To a certain extent, the government was capable of controlling the overshooting prices of steel, except in times where the price of raw materials were largely increasing in international markets. In general, the high price of steel and cement resulted in a large increase in the cost of construction projects, which had a negative impact on the sector’s competitiveness.

Support services: The efficiency of the sup-port services related to the construction sector is weak and negatively affects its competitiveness. These support services include accreditation labs, training centers, R&D facilities and financial insti-tutions. The labs used to test and accredit the in-puts and raw materials that are used in the sector are old and utilize out-of-date technology. R&D institutions are not linked to the sector and do not meet its requirements. Also, training centers

11 Source of this data is www.capmas.gov.eg (7 March 2010).

capable of raising the capacity of human resources are very limited and also lack new technologies. The construction sector lacks reliable information networks that provide construction firms with comprehensive data and information about poten-tial export markets and their policies. In addition, the EFCBC and the EES can do more to support the construction sector, especially in promoting Egyptian contractors in international markets and in developing the sector to raise its competitive-ness.

Investment in the sector: Public investment in the construction sector has been declining during the last 10 years as a result of privatization. How-ever, the stimulus packages that the government undertook to support the Egyptian economy dur-ing the global economic crisis included LE 8 billion and LE 10 billion in FY 2008/2009 and 2009/2010 respectively, which were allocated for infrastruc-ture projects. In addition, the ambitious housing programs that were adopted over the last four years mainly concentrated on encouraging private sector firms to invest in construction projects.

In addition, the government is adopting a new law to encourage the public-private partnership (PPP) in the development of infrastructure and public utilities projects. The new law is mainly aiming to replace the bidding law #89/1998, which currently does not allow for the private sector to contrib-ute in infrastructure and public utility projects. Even before the law has been ratified, the Minis-try of Finance (MoF) is already inviting the private sector to invest in building roads, ports, schools and hospitals. The new law will increase private in-vestments in such projects and will also introduce new and industrious production and management techniques that will contribute positively to the competitiveness of the construction sector.

Taxes and tariffs: In 2005, the government ad-opted a new tax law that reduced income taxes by 50% & and undertook large measures to reform the tax administration. These reforms resulted in an increase in tax income. Consequently, tax rates and tax compliance are not the barriers to for-malization that they were before. The government has also undertaken measures that have ranked it as one of the top reformers in the Doing Busi-ness Report. However, there are some major im-pediments to the competitiveness of firms in the construction industry. These impediments include high customs duties, which discourage construc-tion firms from transporting their machinery and equipment to and from international sites. Con-sequently, firms purchase or rent used machinery abroad, thus affecting their cost-effectiveness. Construction firms also suffer from limited bank-ing finance, large government arrears and delayed payments.

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Building Codes: Very recently, the government issued the Unified Building Law 119/2008 and its Executive Memorandum in April 2009. Under the new law, the National Council for Urban Planning and Development (NCUPD) will be established. The NCUPD is chaired by the Prime Minister and involves all sector ministries, as well as rep-resentatives from civil society and planning ex-perts. The NCUPD is responsible for reviewing and approving housing and construction policies both at the national and local levels. This law is a step in the right direction and in the long term will have a positive impact on the competitiveness of the construction sector. Nevertheless, these codes are still difficult, binding and costly. They will remain as a constraint facing informal housing (World Bank 2008). Under the new law, the gov-ernor will be granted the right to modify building codes and standards. However, the law does not include codes related to preserving the environ-ment.

Export Strategy: The government established a large network of trade agreements in order to promote exports of goods and services, including construction services, in international markets, especially in Arab and African countries. It is ex-pected that the liberalization of the service sector as part of Egypt’s commitments under GATS will encourage and facilitate technology and expertise transfer and will have a positive impact on the sec-tor’s competitiveness. However, the domestic con-struction exports suffer from lack of institutional and financial support. The Export Development Bank (EDB) and the Export Credit Guarantee Corporation (ECGC) could do more to support the construction exports. Egyptian banks lack a long-term hedging system to protect exporting construction firms against exchange rate fluctua-tions during the lifecycle of the construction proj-ect. In addition, the ECGC does not cover political risks during the period of the construction proj-

ect. They also charge high insurance fees. Egyp-tian construction services face red tape and other obstacles when exporting their services. Lack of experience also leads them to accept unfair con-tract conditions, such as absorbing risks related to price fluctuations in building materials during the construction period or lack of compensation for delayed payment. In order to promote exports of construction services, the government established the Egyptian Construction Council.

5.4.3 Strength, Weakness, Opportunities and Threats (SWOT) Analysis of the Con-struction Sector

This section compares the main competitive strengths that the Egyptian construction sector maintains, with the weaknesses that it suffers. In addition, it highlights the opportunities offered to this sector compared to the threats that it faces, especially in international markets, which hinder its competitiveness.

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5.4.4 The Green Revolution in the Egyp-tian Construction Sector

Building construction has an important ef-fect on energy utilization, and therefore construction materials and techniques have an important influence on Egypt’s energy use. In Egypt, residential and office buildings con-sume 45% & of electricity. (12) The construction sector is also responsible for a large amount of pollutants in the process of construction itself. Pollutants include noise, air, high-energy consumption, solid waste gen-eration, global greenhouse gas emissions, environmen-tal damage and resource depletion (Zimmermann et al., 2005 Melcher 2007; Otriz et al., 2009).(13)

The construction industry is very much in need of improving its environmental perfor-mance. With growing concerns for the environment and climate change, especially in developed countries, there has been a focus on the environmental impact of the performance of the construction sector, partic-ularly in its use of energy and resources. In Egypt, like

12 (www. http://www.idsc.gov.eg/ (9 March 2010)).13 This trend is more or less similar to other countries. In the United States, build-

ings account for 39 percent of total energy use, 12 percent of total water con-sumption, 68 percent of total electricity consumption and 38 percent of carbon dioxide emissions (EPA GB, 2004). In Hong Kong, buildings consume 50 percent of all energy and about 89 percent of electricity, mainly for air-conditioning, which is responsible for around 17 percent of all greenhouse gas emissions (CE, 2008: EB, 2008). In Singapore, the electricity consumption in buildings, excluding the industry sector, is 57 percent. Residential buildings consume 20 percent of the electricity while office buildings’ consumption reached 16 percent of the overall non-manufacturing sector’s consumption (Lee, 2001). In Sweden, the construction sector accounts for about 40 percent of the use of energy. In ad-dition, the construction sector contributes to about 30-50 percent of the waste generated in higher income countries.

many other developing countries, the construction sector, as mentioned before, is dominated by SMEs. These firms lack the awareness of the importance of taking into consideration the environmental impact of their performance. They cannot afford the costs of adopting green technology. In addition, required materials for green buildings are not available, and this represents a constraint not only for SMEs but for large firms as well. As will be discussed later, govern-ment intervention to support green construction is not available.

Private-public partnership can enable the industry to reposition itself with green tech-nologies, green techniques and green materi-als so as to exercise leadership in the region’s future construction industry. There is evidence of increased demand in the region for green buildings. Adopting green construction or green building strate-gies could minimize the impact of construction activity on the environment. Green construction(14) refers to the process that covers planning, design, construction and maintenance of buildings that achieve resource efficiency and energy efficiency, including greenhouse gas emissions reduction, pollution prevention, noise abatement and waste removal (John at al. 2005).

14 Green construction and green buildings are used interchangeably.

Strengths Weaknesses• Large domestic market size • Complicated and sometimes contradicting regula-

tions and laws at the local level

• A strategy to renovate historic buildings • Lack of transparency in government procurement procedures

• Expansion towards developing countries • Direct award versus competitive bidding procedures

• Strong government commitments to provide af-fordable housing

• Difficulty with delivering affordable housing due to high construction and materials costs

• Rent control limits new investment

• Large stock of infrastructure (roads, bridges, air-ports, seaports, etc.)

• Large financial arrears resulting from delays in gov-ernment payments of contract values

• Public credit crowding out private credit

• Large number of experienced engineers, designers and developers

• High volatility of prices of steel and cement• Mismatch between supply and demand for housing

units

• The development of a number of new cities • Lack of knowledge and information networks related to business opportunities abroad

Opportunities Threats• Government infrastructure growth plans• Trend towards Public Private Partnerships for infra-

structure and public utilities projects • Commitments to liberalize the construction and

related engineering services under GATS• Growth markets in region (Iraq, Libya, etc.)• Stimulus package going to water, sewage and other

infrastructure

• Increasingly globalized construction firms will enter international markets

• Material cost fluctuations that put margins at risk• Unfair contracts in foreign countries• GATS liberalization may lead to increased interna-

tional competition in Egyptian market• Difficulties to be licensed in international markets• Lack of information on different building codes in

foreign countries

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Benefits of “Green Construction”

International best practices have shown that green construction can yield a 40% & savings in construction costs and improved lifetime performance (Lockwood 2006). Empirical studies also have shown that enhanced daylight and reduced toxicity in indoor environments can increase employ-ee productivity by up to 16% &. Employees in healthi-er green buildings tend to spend more hours on their jobs (Atsuska, 2003). In addition, green construction provides business opportunities for architects, devel-opers, contractors and almost all stakeholders in the sector. Green construction strengthens the competi-tiveness of the sector, ultimately transforming it to a regional pioneer in this field.

Challenges facing “Green Construction”

The green transformation in construction will not happen on its own. Despite growing concern about the environment and its implications on the competitiveness of the construction sector, neither developers and contractors, nor consumers in Egypt are currently committed to green buildings. The constraints are many.

Capital cost: There is a widespread percep-tion that green construction implies higher initial design and construction costs. This will be true in the short-term . Market forces alone are not promoting more environmentally sound behavior among construction firms, especially SMEs. How-ever, it is expected that the extra cost of green construction will gradually be reduced in the long run when new practices and technologies are de-veloped and accepted by the market.

Insufficient fiscal incentives: It is not only market forces that are not encouraging the adop-tion of green construction, but also the govern-ment is not helping in providing fiscal incentives, such as eco-taxes or landfill taxes, to compensate for the high cost of adopting green construction technologies and to increase the attractiveness of green buildings.

Lack of finance: Financial institutions are re-luctant to finance green construction projects, due to lack of knowledge and information about their aspects, yields, risks and values. In addition, financial markets do not offer incentives such as discounts, loans and technical assistance (Hayles and Kooloos 2008).

Lack of information and knowledge: There is a lack of information about green construction in terms of its economic cost-benefit. This could be explained by the complexity of this concept and lack of empirical studies in this area. In devel-oping countries like Egypt, neither customers nor developers are pushing to improve their environ-mental performance. Customers are not aware of the environmental implications of construction; rather, they are only interested in the price that they pay and the speed of delivery. Since energy is subsidized in Egypt, there is little incentive to save energy in the construction sector.

Unavailability of materials and technolo-gy: Even if consumers and firms wanted to adopt green construction techniques, the materials and technologies to do so are often difficult to obtain in Egypt.

The dominance of SMEs: The small and infor-mal firms in the construction industry will not be in a position to easily adopt such new technologies and materials, even if they were prevalent. While green construction techniques reduce costs in the long run, SMEs cannot bear the cost of adopting green buildings techniques and their clients are of-ten price sensitive.

Examples of some initiatives of “Green Con-struction” in Egypt

Although few “Green Construction” initiatives cur-rently exist, some notable ones include:

The Egyptian Green Building Council (EGBC): Established in January 2009, EGBC in-cludes government officials, representatives of NGOs, prominent businessmen, labor leaders, and major contractors. The main objective of EGBC is to promote green construction in Egypt and to encourage contractors, engineers and developers to use energy efficiency and environmental con-servation codes. EGBC also plays a major role in raising awareness about the benefits of green con-struction among engineers, builders, contractors, owners and consumers. EGBC took the initiative of developing a national Green Building Rating System called the Green Pyramid Rating System (GPRS). The rating system will define the require-ments of an “Egyptian Green Building,” taking into consideration well-established and widely used methodologies and techniques from other coun-tries.(15)

15 (http://egypt-gbc.org/ 26 April 2010)

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Smart Village:(16) Almost all buildings in the Smart Village are applying green building ap-proaches including high performance glazing, high performance façade and recycling of water used for irrigation. The Smart Village is characterized by spacious green areas, waterfalls, artificial lakes and business community leisure areas. It caters to the needs of sophisticated national and international IT and telecommunication companies.(17)

HSBC building in Smart Village: HSBC Bank Egypt built the first green building in Africa com-plying with LEED 230,000sf requirements. It is a four story building with two levels of underground parking located in the Smart Village, serving as the regional and global hub for HSBC’s Middle East re-gion, providing offices, check processing centers, call centers, and a bank branch.(18)

16 It is Egypt’s first technology park and e-community. It hosts state-of-the-art infrastructure geared towards hi-tech companies.

17 (ORASCOM 2010)18 (ORASCOM 2010)

The Low Income Housing Communities in 6th of October: In 2006, Orascom Hotels and Development,(19) in partnership with other inter-national real estate investment firms, launched Orascom Housing Communities (OHC) focus-ing only on low-income housing projects. The project will include 50,000 housing units, schools, one hospital, commercial areas, a cinema complex, sporting clubs, garment embroidery businesses, daycare centers, retail and commercial outlets (ORASCOM 2010).

19 A national large contractor with extensive experience in developing large-scale housing communities.

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5.5.1 Residential and Commercial Proj-ects

5.5.1.1 Implement gradual rent decontrol.

The issue of rent control should be discussed in a more serious way and a clear vision should be ad-opted. Egypt should adopt bolder measures regarding liberalizing rents and discontinuing grandfathering ar-rangements. One possible option is to liberalize rents over a course of five to seven years, while making ex-ceptions for households or individuals who are over a certain age or under a certain income threshold. This could also be complemented by allowing landlords to buy out the contracts of existing tenants on a mutu-ally voluntary basis.

5.5.1.2 Expand coverage of long-term mort-gage finance and Islamic finance.

Improving the availability of culturally and religiously appropriate financing mechanisms would increase de-mand and enable more Egyptians to afford to build or modernize their houses. Introducing Islamic financing could be a suitable strategy for activating the housing market and making the stock of housing units afford-able to the many people who find it very difficult to bear the cost of buying a suitable house from the for-mal market. Islamic banks will have to better under-stand the needs, preferences, behaviors and demand requirements of the customers who wish to secure a house without paying interest rates. Egypt could benefit from the experience of several countries that succeeded in promoting Islamic finance in the mort-gage market, such as Pakistan.

5.5.1.3 Formalize arrangements regarding ap-propriate access to land.

The issue of lack of access to public land for indus-trial, tourism, agriculture and other projects must be urgently addressed. The government should shift to a demand-driven strategy for land allocation instead of the current supply-oriented system. In addition, government entities responsible for allocating public land must be aligned. A clear strategy and vision for developing public lands must be formulated to secure an efficient use of existing land and to consider ad-equate pricing policies that would contribute to the competitiveness of different sectors.

5.5.1.4 Implement new zoning legislation.

Although new zoning legislation has taken affect, there is an urgent need to address construction, transpor-tation and energy use in a holistic manner so as to improve quality of life, manage commuting time and promote the GGreen Transformation, which is the theme of this report. For industrial development proj-ects, the use of commercially viable models for special economic zones and industrial parks can help further expand Egypt’s industrial base and create jobs.

5.5.2 Civil Engineering and Infrastruc-ture

5.5.2.1 Implement a transparent institutional and legislative framework for procurement.

More transparency in government procurement pro-cedures will definitely ease the operation of con-struction firms, especially SMEs, which suffer from bureaucratic procedures that hinder their competi-tiveness. Minimizing the use of direct award contracts and reducing the time and the cost of contracting procedures will have a positive impact on the per-formance of construction firms. The use of the Fé-dération Internationale des Ingénieurs Civils (FIDIC) will give consulting engineers a more important role in implementing construction projects, which will be positively reflected in the performance and efficiency of construction firms.

5.5.2.2 Implement Public-Private Partnership (PPP) mechanisms.

The Government issued a new law governing PPPs for developing infrastructure and public utilities. This law, which will complement Law No. 89 of 1998, will deal with obstacles that are currently preventing the active participation of private sector firms in these projects. Although the government is allocating on average LE 30-35 billion (USD 6B) annually for infrastructure, there is a clear need for doubling these investments. PPPs allow the government to overcome fiscal con-straints by utilizing the efficiency of private sector firms and their access to finance and skilled labor.

5.5 STRATEGIC FRAMEWORK FOR IMPROVING COMPETITIVE-NESS OF THE CONSTRUCTION INDUSTRY

This part of the chapter provides a strategic framework for improving the competitiveness of the residential, non-residential and civil engineering projects.

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5.5.3 Common strategies

5.5.3.1 Prepare for a liberalized environment under GATS.

Liberalizing the construction sector will be challeng-ing for many companies, but it will increase the contri-bution of the sector to economic growth and employ-ment. It will also have a positive effect on efficiency and productivity. Opening the Egyptian market to for-eign firms will raise competition in the construction market, which will drive productivity improvement in ways that should benefit the Egyptian household. There will be knowledge spillovers, leading to greater innovation and the upgrading of labor skills. However, SMEs will be vulnerable. Establishing a “Construction Modernization Centre,” in the spirit of the Industrial Modernization Centre that was created to support industrial firms facing competition from liberalizing trade in industrial products, will have a positive impact on the competitiveness of construction firms.

5.5.3.2 Improve skills with a focus on produc-tivity.

Raising the skills of construction workers will contrib-ute to improving the competitiveness of the construc-tion industry. There is a pressing need for developing the institutional framework for vocational training. In addition, training for informal workers must be pro-moted. Coordinating between the different entities involved in providing training and promoting initia-tives, such as the Mubarak-Kohl initiative, would be very useful.

5.5.3.3 Ease access to credit at reasonable cost with enforceability of payments.

Although bank credit has been increasing lately, there is still a crowding-out effect from high government debt. The interest rate, currently averaging 13&, is prohibitively high. Access to credit is also problem-atic for many small firms. Improved macro-economic policy can help to bring down real interest rates over time to more reasonable levels.

5.5.3.4 Reduce informality of sector.

Dealing with issues of zoning, reducing the cost of building materials, increasing access to land and re-ducing the barriers to formalization will help to re-duce informality in the construction sector.

5.5.3.5 Launch visible green building initia-tives.

Egypt should adopt voluntary programs to promote green construction. These programs include labeling programs, such as Energy Star or Leadership in En-ergy and Environmental Design (LEED). They provide comprehensive information and guidance on green construction. Construction firms should seek ISO 14000 certification, which aims at adopting better environmental management practices into their busi-nesses. It fosters self-organization and self-regulation and promotes effective environmental practices in the construction firms. The ISO 14001 certification is the world’s most recognized framework for environmen-tal management systems (EMS) that helps organiza-tions both manage the impact of their activities on the environment and demonstrate sound environ-mental management. However, very few construction firms in Egypt have applied to get this certification.

In addition, there have been a number of attempts to initiate eco-labeling schemes around the world. The first eco-labeling scheme for buildings was introduced by the Building Research Establishment (BRE) in the UK. This scheme tried to assess the overall impact of the building on the environment. The US Envi-ronmental Protection Agency (EPA) building energy scheme, called “Energy Star,” is another more recent scheme to assess the impact of construction on the environment.

Three initiatives that should be implemented to re-duce greenhouse gas emissions in construction are: changes to production processes or technologies, cross-cutting energy efficiency initiatives, and manu-facturing for a low-carbon world. Together, these three actions will reduce greenhouse gas emissions in construction, impact competitiveness, increase em-ployment and improve energy efficiency in other sec-tors such as transportation, building and power.

The majority share of building emissions is attribut-able to electricity consumption, which can be reduced through the implementation of improved materials and design of new buildings, renovation packages for existing buildings, replacement of current air-condi-tioning units, replacement of standard gas water heat-ers with solar ones, and lighting levers. However, for these abatement methods to work, education efforts must be implemented to mobilize people and compa-nies to make these initial investments, in order to get the long-term returns.

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In cement, which is the largest contributor of GHGs in industry,(20) most emissions are driven by process and fuel combustion. Substituting clinker by other minerals is one of the most efficient ways to reduce GHG emissions from processing. Implementing clin-ker substitution and alternative fuel-waste levers re-sult in incremental cost savings.

Other recommendations for promoting green con-struction in Egypt include revising the Unified Build-ing Law to take into consideration thermal insulation of roofs and walls, especially in new cities, creating performance ratings for air-conditioning and ventila-tion in houses and in public and commercial buildings, and using high-efficiency lighting, which is currently expanding in Egypt with the support of government policies.

20 McKinsey, 2009.

5.5.3.6 Support efforts of Egyptian engineer-ing firms in boosting service exports.

The banking sector is not supporting the promotion exports of Egyptian engineering firms. Most of the credit offered to these companies is completely cov-ered through the firms’ own resources. In addition, these banks and other entities do not offer any guar-antee for contracts being implemented in other coun-tries. The government delay in paying the contractor’s fees very much affects the ability of domestic firms to compete abroad and to secure the required liquidity.

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The construction sector is relatively competi-tive; however, lack of finance, access to land, skilled workers and transparency in govern-ment contracting procedures remain as ob-stacles. The construction industry runs a positive balance in both goods and services. However, lack of finance, unavailability of land, high informality, lack of skilled and trained workers and a lack of transparency in government contracting procedures all remain as important challenges. Many of the problems related to residential activities mainly relate to the lack of long-term mortgage finance and outdated rent con-trol systems.

A comprehensive strategy for is needed for the construction sector’s competiveness. This would serve as a valuable reference for policymakers, experts and practitioners to promote construction and increase its contribution to development, growth, employment and exports.

This chapter has highlighted the benefits of “green construction” but has identified se-rious obstacles blocking its implementation. Two major tracks for promoting green construction should be pursued. The first is to encourage mar-ket conditions that will provide natural commercial incentives for firms to adopt green construction tech-niques.(21) The second track consists of government-led initiatives to support green construction.

21 However, leaving things to the market alone will be inefficient (Qian et al., 2006; Dennis, 2006).

Building regulations and fiscal incentives can encour-age green construction. Legislative sanctions are an-other way to promote green construction. Govern-ment needs to play the lead role in advocating and raising the awareness of contractors and customers of green construction (Ofori and Ho, 2004; and Qian et al., 2006). A mix of government incentives and mar-ket forces would have a better impact on fostering green buildings. Currently, neither the government, nor the market pushes for green construction.

There is a need to adopt a strategy for reducing con-struction waste as part of the sector’s sustainable development strategy. The strategy would encourage recycling of materials; continue the efforts to reno-vate historic buildings; reduce noise and dust emis-sions; and raise awareness on green construction, including the pass-through benefits of saving energy costs and reducing dust, noise and vibration. A con-struction sector focused on green technologies and building methods will have the tools it needs to com-pete globally.

5.6 CONCLUSION AND POLICY IMPLICATIONS The construction industry contributes to GDP growth, employment generation, even exports and foreign exchange generation. The sector contributes to the well-being of citizens

through residential construction and to the economy through infrastructure construction. However, construction plays a somewhat lower role in the economy of Egypt than in other economies, and more can be done to improve efficiency, encourage innovation and position the industry as a regional leader in the green construction movement.

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REFERENCES

American Chamber of Commerce (AmCham). 2003. The Construc-tion Sector in Egypt: Development and Competitiveness. Sep-tember.

Central Agency for Public Mobilization and Statistics (CAPMAS). 2009. Statistical Yearbook 2008.

--------------------. 2008. Population Census 2006.

El Ehwany, Naglaa. 2009. “The Construction and Related Engineer-ing Services in Egypt: Challenges and Policies,” Working Paper no. 146. The Egyptian Centre for Economic Studies, April.

J.B. Storey “Overcoming the barriers to improving the sustainability of existing commercial office buildings”

John, G., Clements- Croome, D. and Jeronimidis, G,. 2005. “Sustain-able Building Solutions: A Review of Lessons from the Natu-ral World,” Building and Environment, Vol. 40, pp. 319-328.

Lockwood, C. 2006. Building the Green Way, Harvard Business Re-view, June, pp. 129-137.

McKinsey, Egypt GHG Emissions, Reduction Strategy. December 4, 2009.

Revell. Andrea. 2007. “The ecological modernization of SMEs in the UK’s construction industry” Geoforum, 38, 1.

Shuman. Mussa. 2004. Competitiveness Advantages of the Egyptian Contractors Sector, PhD Thesis presented to the Civil En-gineering Department, Faculty of Engineering, Zagazig Uni-versity (in Arabic).

Serag-Eldin, Shaimaa. 2009. The Role of the Institutional Framework of the Egyptian Construction Sector in Activating the Gen-eral Agreement of Trade in Services (GATS), Master Degree Thesis, Presented to the Economics Department, Faculty of Economics and Political Science, Cairo University.

T.E. EL Diraby, J. Costa, and S. Singh “How do contractors evaluate company competitiveness and market attractiveness? He case of Toronto contractors”

Tohamy Sahar and Mustafa Madbouly. 2006. “Employment in the Construction Sector in Egypt: Growth, Informality and Hu-man Capital Development,” paper presented during the ECES Conference entitled “The Egyptian Economy: Cur-rent Challenges and Future Prospects,” held on November 21 and 22.

World Bank. 2008. “Arab Republic of Egypt: Urban Sector Update” June.

World Bank. 2007 a. “Analysis of Housing Supply Mechanisms.” Feb-ruary.

-----------------. 2007b. “A Roadmap for housing Policy reform in Egypt: Developing a Well Functioning Housing System and Strengthening the National housing Program.”

-----------------. 2006. “Egypt Public Land Management Strategy,” June.

www.capmas.gov.eg

www.laborsta.ilo.org

www.mop.gov.eg

www.trademap.org/

www.unstats.un.org/unsd/cr/

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APPENDIX 5.A FORMULAS USED IN CALCULATING REVEALED COMPARATIVE ADVANTAGE

The first RCA index (RCA 1) uses the original index formulated by Balassa (1965):

Where represent Egypt’s exports of the jth service; are Egypt’s total exports; represent the world’s

exports of the jth service; and are the world’s total exports. The service reveals a comparative advantages if

RCA 1 > 1. An alternative measure of revealed comparative advantage, RCA 2, is used to determine the RCA

of a particular service. RCA 2 provides insights about the structure of service exports.

Where represent Egypt’s exports of the service; are Egypt’s total services exports; n represents

the world’s exports of the jth service; and are the world’s total services exports. The service reveals a

comparative advantages if RCA 2 > 1. Both RCA1 and RCA 2 indices do not take imports into consideration.

The third index, RCA 3, which considers both services’ exports and imports, is derived by subtracting Egypt’s

import advantage (RMA) from its relative export advantage (RXA = RCA 2).

Where represent Egypt’s imports of the jth service; and are Egypt’s total services exports;

represent the world’s imports of the service; and are the world’s total services imports.

The service reveals a comparative advantages if RCA 3 > 0 (Seyoum 2007).

APPENDICES

ENCC Proceedings2009-2010

In February 2004, a group of Egyptian private sector, government and aca-demic leaders representing many different industries came together, moti-vated by the common concern of boosting Egypt’s economic competitive-ness and thereby contributing to the sustainable improvement in Egyptian incomes and living standards.

Since February 2004, the ENCC has worked to identify strategic priori-ties, areas of weakness and new drivers of competitiveness for Egypt. The ENCC’s mission is to improve the quality of life for Egyptians by being an ef-ficient and effective platform to bring together stakeholders from business, government, academia, media and civil society and through raising awareness and advocating policies that enhance competitiveness. The ENCC, in broad consultation with Egyptian stakeholders, attempts to forge consensus re-garding key potential drivers of competitiveness.

During its first few years, the ENCC focused on the production and dissemi-nation of the annual Egyptian Competitiveness Report. It has now expanded its scope of activities and outreach dramatically at the national, regional and international levels. Most notably, after the successful launch of the 6th

Egyptian Competitiveness Report in 2009, His Excellency Prime Minister Dr. Ahmed Nazif requested a meeting with the ENCC where he expressed his interest in the findings and recommendations of the report and commis-sioned the ENCC to develop Egypt’s Competitiveness Strategy (ECS).

The strategy will be formed with broad societal dialogue and will be con-ducted in a manner to create consensus around a set of short- and long-term priorities. It is designed to foster comments, feedback and involvement by many thinkers, opinion shapers and leadership groups. The ECS will fo-cus on three key overarching topics or ‘thematic areas’: Investing in People, Green Transformation and Innovation and Research & Development (R&D).

A comprehensive human resource strategy will address labor market poli-cies that encourage rather than discourage hiring in the formal economy. On Green Transformation, the strategy will advocate the use of renewable en-ergy sources, more efficient usage of water, energy and other input materials and the utilization of green and low-carbon technologies in all industries. This Green Transformation will eventually create a competitive advantage and improve quality of life. On Innovation, the ECS will aim to align incen-tives for commercializing the research of Egypt’s universities and research institutes fostering linkages among the “quadruple helix” of industry, aca-demia, finance and government.

ENCC STAFF

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The council is instrumental in promoting greater “connectivity” and more cohesive and coordinated action toward the goals of prosperity and competi-tiveness. Furthermore, the council represents a wide array of actors and interests allowing for more multi-dimensional solutions for the nation’s problems.

Incremental improvements in performance are no longer sufficient nowadays. It is becoming harder and harder to compete globally as international competi-tiveness rises exponentially. To keep up with other na-tions and attain higher living standards for its people, Egypt must move immediately to foster productivity, connectivity and a clear vision for the future.

*1.1 Publications

*1.1.1 The Egyptian Competitiveness Report (ECR): Summary of 2009 ECR

The Egyptian Competitiveness Report (ECR) is the ENCC’s annual flagship publication that was first pub-lished in 2004. The report provides a critical analysis of Egypt’s competitiveness that is based mainly on the World Economic Forum’s Global Competitiveness Re-port (GCR) as well as other international reports and studies. Authored by prominent scholars, the ECR is a key source of data and information for policymakers, researchers and civil society organizations.

The 6th ECR, published last year entitled, "Beyond the Financial Crisis: Competitiveness and Sus-tainable Development," included four chapters. The major messages are summarized below:

Chapter 1: Egypt’s Competitiveness Indica-tors – Egypt’s competitiveness rank continued to de-cline; to improve its performance, it needed to focus on macroeconomic stability and human resources, paying special attention to education and labor mar-ket reform.

Chapter 2: The Egyptian Economy in the Face of Global Financial Turbulence: Steady through the Storm – Annual real GDP growth, increasing for the previous five years, slowed down with the onset of the global financial crisis and was set to slow further in 2009. Achieving a balance between short-term public spending (aimed at stimulating eco-nomic growth) and avoiding a long-term fiscal deficit problem was one of the greater challenges facing the government along with boosting the competitiveness of the economy.

Chapter 3: Egyptian Agriculture Competi-tiveness: New Opportunities and Future Prospects – The positive impacts of the agriculture sector were identified including its contribution to sustainable economic growth, employment, poverty reduction, local economic development and food se-

curity. However, many constraints were identified to the competitiveness of the sector and specific policies and initiatives were identified that could boost pro-ductivity and bring about the transformation of the sector.

Chapter 4: Enhancing Egypt’s Performance through Responsible Competitiveness – Re-sponsible Competitiveness, or taking environmental and social dynamics into consideration, was an inte-gral component of Egypt’s overall competitiveness. A National Sustainable Development Strategy (NSDS) could be a mechanism to achieve more responsible and sustained competitiveness.

*1.1.2 Policy Brief Series

The ENCC launched a new policy brief series entitled "Towards Competitiveness." Each policy brief tackles a different issue related to national competitiveness and is based on ENCC workshops discussing differ-ent key issues influencing the competitiveness of the Egyptian economy. The ENCC issued three policy briefs to date, entitled,

1. “Higher Education Competitiveness: Achieving Bet-ter Quality and Better Equity” authored by Mr. Andrew Lewis, Education Team Leader at the Unit-ed States Agency for International Development (USAID) Technical Assistance for Policy Reform II Program

2. “The Productivity and Competitiveness of the Egyp-tian Economy” authored by Dr. Ashraf El-Araby, Economic Expert at the Center of Comprehensive Policy Studies

3. “Legislative Policy in Competitiveness” authored by H.E. Mufid Shehab, Minister of legal Affairs and Par-liamentary Councils

*1.2 Stakeholder Awareness Campaigns

Through stakeholder awareness campaigns, the ENCC seeks to persuade government, private sector and civic leaders as well as the public at large of the importance and urgency of implementing measures to improve Egypt’s competitiveness. Past campaigns have included:

Awareness campaign for media profes-sionals in cooperation with the Economic Jour-nalists Division, Egyptian Press Syndicate (March, 2009)

Awareness campaign for parliamentarians in cooperation with the Parliamentary Program, Cairo University (April, 2009)

In March 2010 the ENCC held its 3rd Stakehold-er Awareness Campaign for both parliamentar-ians and media professionals in collaboration with the Entrepreneurs Business Forum (EBF) and The

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Parliamentary Program at the Faculty of Economics and Political Science- Cairo University. It sought to promote competitiveness through entrepre-neurship and Small and Medium Enterprises (SMEs) which together can be powerful engines of economic growth, productivity and innovation in ad-dition to improving the quality, number and variety of employment opportunities in Egypt. In the opening session, Professor Mona El Baradei, Executive Direc-tor of the ENCC, Mr. Amr El Abd, Chairman of the Entrepreneurs Business Forum and Mr. Safaa Eldin Ka-mel, Deputy Governor of Alexandria introduced the importance of entrepreneurship and competitiveness, the linkages between the two and their role in foster-ing sustainable development.

The first session was moderated by Professor Mo-stafa Elsaied, President of the Economic Committee in the People’s Assembly. The session was entitled “Entrepreneurship and Economic Growth”. Speakers included Mr. Amr El Abd, Chairman of the Entrepreneurs Business Forum, Mr. Amr Gohar, Mid-dle East Council for Small Business and Entrepreneur-ship (MCSBE), Professor Maged Ossman, President of Information and Decision Support Center (IDSC), Mr. Abdel Moneim El Alfy, Vice-Chairman of General Au-thority for Investment and Free Zones, and Mr. Saad Hagras, Managing Editor of Al Al’am Alyoum Newspa-per. The session focused on the concept and theoreti-cal framework of entrepreneurship, its current status in Egypt and its impact on developing SMEs.

The second session concentrated on the financial services necessary for entrepreneurship and SMEs development. Professor Youmn El Hamaky, Deputy of the Economic and Financial Committee in the Shu-ra Council was the session moderator. Speakers in-cluded Mr. Yehia El Agamy, General Manager of Retail Banking and Small Businesses at the Bank of Egypt, Eng. Azmy Mostafa, Chairman of the Technical Of-fice at the Social Fund for Development and Dr. Mo-hamed Omran, Vice-President of the Egyptian Stock Exchange and Chairman of the Advisory Committee for the Nile Stock Exchange. The session focused on the responsibility of the banking sector to support en-trepreneurs and the challenges preventing greater ac-cess to finance as well as the role played by the Social Fund for Development and the Nile Stock Exchange in providing SMEs with financial services.

The third session discussed the non-financing ser-vices. It was moderated by Mr. Magdy Afify, Member of the Shura Council, and presentations were given by Dr. Mohamed Zakaria, Advisor to the Unit of Small and Medium Enterprises at the Egyptian Banking In-stitute, Eng. Hisham Wagdy Abdel Dayem, Director of the National Programme for Technical Support at the Industrial Modernization Center (IMC), Dr. Nagwa El Shenawy, Director of Information Center at the Min-

istry of Communications and Information Technology and Mr. Walid Eid, Board Member of the Entrepre-neurs Business Forum. This session highlighted the role of the Industrial Modernization Center, Ministry of Communication and Information Technology and other institutions in offering training programs to en-trepreneurs to improve SMEs competitiveness.

The fourth session focused on the ways to de-velop a more supportive environment that encour-age entrepreneurship and business start-ups. Profes-sor Samir Radwan, Economic Advisor at the Egyptian Financial Supervisory Authority (EFSA), Eng. Hisham Ragab- Assistant Minister at the Ministry of Trade and Industry and Eng. Sherif Delawer-Professor of Man-agement Strategies at the Arab Academy for Science and Technology were the key speakers.

Professor Ismail SeragEldin, Director of the Li-brary of Alexandria, was the keynote speaker in the final session. He presented success stories of en-trepreneurs in Egypt. The session revealed that SMEs face some major challenges that diminish their ability to contribute effectively to sustainable development. The most crucial obstacles are the mismatch between educational outcomes and labor market needs, lack of training, weak administrative capacity, limited access to local and international markets, lack of access to finance, inadequate data and information about small enterprises in Egypt, high complexity of some regula-tions and procedures, inability to meet international standards and poor information on financial services offered by banks.

Key recommendations for the future included in-creasing participation of the business community in social responsibility programs, encouraging SMEs to train their employees by offering some form of sup-port and incentives; providing financial assistance for the development of SMEs by improving lending and funding mechanisms; removing legal and regulatory constraints imposed on new institutions; increasing government support for entrepreneurship; improv-ing information systems reporting on economic and social variables at the macro and sectoral levels; pro-viding support and incentives for effective technol-ogy transfer; studying international experiences and documenting best practices in SMEs policies; support-ing innovation policies and engaging SMEs and other stakeholders in a national dialogue to explore the challenges faced by new businesses.

*1.3 ENCC Sub-Councils

In 2008/2009 the ENCC established three sub-coun-cils: the Travel and Tourism Competitiveness Council, the Human Resources Council and the Agriculture Competitiveness Council.

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*1.3.1 The Travel and Tourism Competitiveness Council (T&TCC):

Tourism is one of the strategic economic sectors in Egypt growing rapidly both in terms of volume and economic importance. It contributes approximately 3.5% to Gross Domestic Product (GDP). Each Egyp-tian Pound (LE) invested in the sector achieves 1.8 LE of value added and increases foreign currency by 3.4 EGP. The tourism sector provides jobs for approxi-mately 12% of the total workforce. According to the Ministry of Tourism’s presentation in preparation for the National Sustainable Tourism Strategy, each Egyp-tian Pound invested in the sector creates 2.5 direct jobs, 1.6 indirect jobs in addition to 1.0 job in other sectors. This sector is still capable of creating new job opportunities over the coming years. In fact, the tar-get for the Ministry of Tourism is to attract 25 million tourists by the year 2020. Most importantly, tourism overlaps with other productive feeding sectors in the economy such as agriculture, construction, manufac-turing, food industry and aviation. Therefore, the well-being of the economy as a whole depends in part on the quality of the tourism sector.

As part of the ENCC’s task to foster the compe-tiveness and sustainability of the Egyptian economy, the Travel and Tourism Competitiveness Council (T&TCC) has been focusing this year on containing the adverse impacts of one of the most dangerous threats to the industry’s sustainability: environmental degradation.

The sustainability of tourism as an economic activ-ity and the environmental well-being are highly inter-linked and mutually-reinforcing. Global warming poses great dangers to the tourism sector in Egypt, endan-gering ancient monuments, causing shore-erosion and loss of beach areas and threatening to destroy the natural resources on which the sector relies such as coral reefs that face the threat of becoming whitened. On the other hand, uncontrolled conventional tour-ism practices pose potential threats to the environ-ment as well. These practices place enormous stress on natural areas causing natural habitat loss, soil ero-sion, increased pollution, discharges into the sea and pressure on endangered species. They also put tre-mendous pressures on critical natural resources, es-pecially water, energy and raw materials.

Collaborative work will be required to try to mini-mize threats to the environment and hence to the tourism sector. The T&TCC therefore has been focus-ing its activities on trying to raise public awareness on the different types of tourism that leave minimal impact on the natural environment.

The most important activity of the T&TCC in this re-gard was organizing a workshop entitled "Eco-Tour-ism: The Future of Tourism Competitiveness

in Egypt" on April 12, 2010, bringing together differ-ent stakeholders from the private sector, government, academia and media professionals to discuss the chal-lenges Egypt is facing to developing ecotourism. The workshop identified the potential benefits of investing in this type of tourism activity and drew attention to the need to enhance the sector’s competitiveness.

The workshop was inaugurated by His Excellency Minister Zuhair Garrana, Minister of Tourism who declared the “Green Sharm” initiative transform-ing Sharm El-Sheikh to an environmentally friendly city by 2020 by reducing carbon emissions and water consumption while implementing an effective sewage and solid waste management system, preserving coral reefs and establishing natural protectorates.

Prof. Mona El Baradei, the Executive Director of the ENCC, Mr. Helmy Abouleish, the Chair of the ENCC and Mr. Ashraf Ibrahim, the President of the T&TCC chaired the workshop.

The workshop discussed the concept of ecotourism, the negative effects of climate change (one of the most important challenges facing humanity) and the potential for ecotourism to flourish in Egypt. Even though Egypt is not one of the countries contributing the most to global warming, it is one of the countries most vulnerable to its adverse effects. Therefore, seri-ous collaborative actions to lessen such impacts are indispensible, especially since Egypt has the potential to develop such an industry. This potential was the focus of the second session.

Speakers in the second session included Dr. Mostafa Fouda, Director of Nature Conser-vation for the Ministry of State for Environmen-tal Affairs (MSEA), Mr. Sherif El Ghamrawy, a T&TCC member and an owner of an eco-lodge andMr. Mounir Nakhla, Managing Director at Envi-ronmental Quality International (EQI). This session presented an overview of world class ecotourism destinations, natural protectorates in Egypt and nat-ural resource conservation fundamentals. Further-more, speakers brought attention to the expected threats particularly on marine, coastal and terres-trial ecosystems as well as potable water resources. They also highlighted the importance of ecotourism as a type of tourism activity that is rapidly growing globally as well as the economic returns on adopting environmentally-friendly practices in tourism. Egypt has more than 24 natural protectorates that could be used as splendid tourist sites. It has the potential to develop prosperous desert, geological and culture tourism all over Egypt especially in Sinai, along the Red Sea and Mediterranean coasts, in Upper Egypt and in the vast deserts and oases. Participants also discussed the challenges facing ecotourism in Egypt the most important of which is the complexity of establishing

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eco-lodges due to the high presence of state bodies involved in the process. Other challenges include the poor social awareness of environmental affairs, low cooperation and networking among stakeholders, weak presence and reliable means of transportation, government bureaucracy, increasing taxes, increasing administrative expenses, limited number of interested investors and the absence of an official body working to support this type of activity.

The workshop proposed a number of rec-ommendations, the most important of which was the need to establish the Egyptian Chamber of Ecotourism under the umbrella of the Egyptian Tourism Federation (ETF). This body would serve to enhance an environmentally-friendly tourism sector, ensure the engagement of the native communities in the planning and decision-making process when es-tablishing eco-lodges, improve the management of natural resources, identify the appropriate means of transportation (especially to remote areas), acquire licensing, provide and update information, assist in the marketing of eco-tourism in Egypt and work to in-crease their growth rates.

This body should also be in charge of facilitating co-operation with different state and non-state bodies, study the most environmentally-friendly use of the available resources and work in collaboration with the Ministry of Tourism to develop principles and cri-teria for ecotourism projects to ensure conformity to environmental standards. Among the key recommen-dations of the workshop is for Egypt to join interna-tional organizations working to develop ecotourism worldwide such as The Adventure Tourism De-velopment Index (ATDI).

This workshop on tourism comes out of the ENCC’s continued interest in promoting tourism, begin-ning with the fifth Egyptian Competitiveness Report (2008), which allocated a chapter to discuss the status of the tourism sector in Egypt and the main require-ments of sustainable development. The sixth Egyptian Competitiveness Report (2009) also included a chap-ter on how to develop Egypt's performance through Responsible Competitiveness, which continued to re-inforce these themes.

*1.3.2 The Agriculture Competitiveness Council (ACC):

Since its establishment in November 2008, the Agri-culture Competitiveness Council has been concerned with issues relating to the development of Egypt's ag-riculture sector and supporting its competitiveness. The objective has been to identify the appropriate policies, initiatives and solutions to improve the per-formance of Egypt’s agriculture sector. The Council’s vision is to support efforts to create an agriculture sector that is competitive, balanced and sustainable.

Agriculture is strategically important to Egypt. It contributes approximately 16% to GDP and makes up 22% of the total non-oil exports, accounting for LE 22 billion. Moreover, the sector provides employ-ment and livelihoods for more than 26% of the total workforce. New and better job opportunities can be created in the coming years in the process of further modernizing the sector. It is also the cornerstone for achieving food security.

Therefore, the Council has set an agenda to study the most important issues affecting the agriculture sec-tor's competitiveness, to review the existing strate-gies and to propose recommendations to the ap-propriate experts and organizations. In this context, the Council held several meetings to discuss all the related vital issues.

Key Issues Discussed by the Agriculture Com-petitiveness Council

1. Water and Irrigation:

Rationalizing the use of irrigation water in the Delta is considered one of the most important challenges that face the agriculture sector in Egypt. As a result, on January 30th 2010, the Agriculture Competitive-ness Council with the Food and Agriculture Commit-tee jointly organized a sub-committee of the Egyptian Junior Business Association (EJB), the first workshop to discuss the topic. A number of key decision mak-ers, academics, representatives of the private sector, parliamentarians, specialists and a number of media professionals and journalists participated in the work-shop.

The workshop was inaugurated by H.E. Amin Aba-za, Minister of Agriculture and Land Recla-mation, and H.E. Dr. Mohamed Nasr El-Din Allam, Minister of Water Resources and Ir-rigation in addition to other prominent speakers. The workshop was chaired by Dr. Hossam Badrawi, the Honorary Chairman of the Council and Dr. Mona El Baradei, the Executive Director of the ENCC, who declared that the agriculture sector needs to be de-veloped in order to achieve food security, reduce the consumption of fertilizers and pesticides, prevent pol-lution and rationalize water consumption, especially in agriculture which consumes about 85% of the water in Egypt as well as Dr. Abdel Hamid El Demerdash, the head of the ACC. Dr. Hossam Badrawi also high-lighted the necessity of developing human resources in the agriculture sector and has reviewed a set of proposals for reform. Eng. Hassan El Khatib, the CEO of the Egyptian Junior Business Association (EJB), has emphasized the importance of water for all economic sectors, whether for agriculture or for citizens’ daily consumption.

The workshop speakers were Dr. Hussein Hegazy, Chairman of the Shura Council's Agricultural Pro-duction and Land Reclamation Committee, Dr. Adel El-Beltagy, the Chairman of the Agricultural Research and Development Council in the Ministry of Agricul-ture, Dr. Abdel Ghani El-Gendy, the Secretary of the Agriculture Sector of the Supreme Council of Uni-versities and Dr. Tarek Kotb, the Director of Moni-toring and Evaluation Unit in the Ministry of Water Resources and Irrigation.

Dr. Hegazy emphasized the importance of develop-ing Research and Development (R&D) in the agricul-ture sector. Dr. El Beltagy emphasized the need for a sustainable agricultural strategy. Dr. Abdel Ghani El-Gendy spoke about "the development of irrigators and the proposed irrigation systems", and Dr. Tarek Qotb stressed the importance of developing the ir-rigation and the integrated management for water resources in Egypt.

In his comment, Eng. Tarek Tawfik, the Chairman of Chamber of Food Industries, called attention to the need for a unified database on the status of agricul-ture in Egypt and stressed the importance of rational-izing the use of irrigation water in order to reduce the losses in transporting crops. Mr. Ahmed Samir, Mem-ber of the Food and Agriculture Committee of the Egyptian Junior Business Association, also commented on the workshop and spoke about the problems ex-perienced by the Egyptian farmer with respect to the fragmentation of land tenure and the unfair distribu-tion of irrigation water. Moreover, Mr. Ahmed Mansy, Farmers’ Secretary and Member of the People’s As-sembly, has referred to the need for reconsidering the agricultural cycle to maximize the benefits of the planted area.

His Excellency Minister Amin Abaza has strong-ly emphasized the importance of rationalizing water usage pointing out that there is a dire need for maxi-mizing the return on production and per unit of water in order to guarantee the continuity of the agriculture sector. He added that the rationalization of water use does not mean reducing the level of productivity but helps to increase it. Moreover, he stressed the need to provide incentives to farmers to save water. His Excellency also assured the necessity of avoiding any delay in implementing the development plans that aim at raising the efficiency of water use delay, especially with the future needs resulting from overpopulation. In addition, there is a need for agricultural expansion through rationalizing water use and maximizing the farmer's return. It is estimated that by 2050, water consumption per capita will decrease to 350 cubic meters due to a tremendous increase in population – expected to reach 160 million people. Furthermore, modern techniques in the use of seeds and pesticides will be used.

His Excellency Mohamed Nasr El-Din Al-lam has pointed out that Egypt will suffer from a lack of water resources in the future at a time when water will become one of the most expensive re-sources. Since 1959, Egypt's share of Nile water has not changed, which means that Egypt will suffer from acute shortages of water, as alternate water resources are nonrenewable and cannot sustain the increase in population. H.E. also declared that there is an urgent need to reduce the amount of crops that consume large amounts of water such as rice and sugar cane. He noted that farmers should commit to using mod-ern irrigation systems and measures should be taken to sanction the indiscriminate or wasteful use of wa-ter resources. Moreover, the irrigation infrastructure should be modernized to reduce water waste, in-crease equity in distribution and develop horizontal irrigation.

Mr. Abd El-Hamid Demirdash has added that theproblem is aggravated by the population boom and the low water-use efficiency in the Delta, reducing the share of water to 815 liters per capita compared to the international standard of around 1000 liters. Water is increasingly being lost. The efficiency of wa-ter transfer does not exceed 70% and the efficiency of field irrigation is as low as 45%. Mr. Demirdash discussed an irrigation development project in the Delta, a project that if successful, would definitely in-crease the competitiveness of the agriculture sector and therefore reclaim about 1.5 – 2 million ‘fiddans’ (acres). This project would increase crop productiv-ity, improve soil fertility, reduce water leaching, reduce weeds and cut down on irrigation costs borne by farmers in the Delta.

One of the existing programs to confront the prob-lem of water misuse is an experimental project funded by the World Bank Group to develop about 500,000 acres in the governorates of Kafr El Sheikh, El Beheira, Asyut, Suhag and Qena. The project aims to achieve gradual improvements in the efficiency of field irriga-tion systems to reach 70% instead of 45%. In addition, it aims to save around 10 – 12 billion cubic meters of water annually through using subsurface buried pipes for water-wheels and irrigators and using land-laser leveling, regaining the tile drainage systems in some areas of the Delta.

The following are some of the recommendations pro-posed by the Agriculture Competitiveness Council (ACC) in the workshop:

1. Planting some crops outside Egypt such as in Nile Basin countries where land and water resources could be used for this purpose;

2. Fostering cooperation with the Nile Basin coun-tries and speeding up the establishment of various projects (i.e. Gongli Canal, Bahr El-Ghazal project, Mashar Canal project) to save water;

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3. Making use of the groundwater in the Western and Eastern Deserts;

4. Making use of the groundwater in some governor-ates in the Delta and Upper Egypt;

5. Measuring the amount of groundwater withdrawal in Sinai, Western and Eastern Deserts by means of water meters placed on the wells;

6. Studying the possibility of making use of the salty groundwater – ranging from 3000 to 20,000 ppm – in planting olive and developing marine fish farms;

7. Desalinating well-water to be used for drinking and irrigation in some areas;

8. Setting rules for water well drilling, eliminating en-croachments and legalizing the current situation;

9. Fighting encroachments over land and water wells;

10. Developing a system for water guidance and cre-ating a waterway guide;

11. Reducing the planted areas that are highly water consuming (e.g. if the rice-planted area is reduced by 500,000 acres, the amount of water saved would be about 3 billion cubic meters) such as sugar cane and bananas;

12. Reducing the water losses of the Drinking Water Network affiliated with the Ministry of Housing, Utilities and Urban Development; and

13. Introducing a law to enforce using advanced irriga-tion systems.

2. Agriculture Companies:

The Agriculture Competitiveness Council is also con-cerned with laws and regulations related to compa-nies involved in agricultural manufacturing as well as setting new standards that focus on technical efficien-cy, expertise and the acquisition of International Qual-ity Assurance Accreditation in agro-industries such as the Global Partnership for Good Agricultural Practice (GAP), ISO 900, Hazard Analysis and Critical Control Point, or ISO 22000.

Companies involved in exporting agricultural goods should enjoy financial and technical efficiency and acquire certificates of compliance with international standards on quality and other certificates like the British Retail Consortium (BRC)'s certificate.

3. Land:

There is a dire need for the reclamation of desert land in the future, which accounts for 97% of Egypt's area, to reduce the pressure on the fertile land in the Delta which is unable to meet the domestic demand. While fertile land only accounts for 6 million acres, the des-ert reclaimed land accounts for 2.5 million acres. The Council believes that one of the obstacles to reclaim-ing desert land is the economic and legislative policies that regulate the ownership, buying and selling of state

land to be used for desert reclamation projects. For this reason, the Agriculture Competitiveness Coun-cil recommends amending various laws to create an environment that is more conducive to successful reclamation processes. These amendments shall aim at unifying and harmonizing the policies related to selling the State land to make it easier for investors to transform desert to green land. There are more than nine laws and Ministerial Decrees that regulate the usage of desert lands; however, there should only be one unified law. There is also a need to introduce a usufruct system in agriculture as well as to pay atten-tion to Contract Agriculture under the supervision of Principal Bank for Development and Agricultural Credit (PBDAC).

4. Issues and Recommendations:

Recommendations that were made included the fol-lowing:

1. To improve human resources in the agriculture sec-tor through education, training, and changing cur-ricula in schools and faculties of agriculture;

2. To support small-scale farmers especially those cul-tivating strategic crops such as wheat, corn and rice as well as reconsidering the policies related to their wages for them to enjoy a good standard of living;

3. To join international organizations of strategic im-portance to Egyptian agriculture such as the Inter-national Union for the Protection of New Varieties of Plants (UPOV) to enable Egypt to have access to new varieties of plants from different countries all over the world;

4. To pay more attention to agricultural cooperatives since they provide an important mechanism to en-able and help farmers face production and market-ing problems;

5. To fight diseases and pests that are considered a significant burden on crops such as fruit fly, peach fruit fly and other pests by use of environmentally-friendly means that emerged recently through es-tablishing laboratories specialized in sterile insect release to limit the reproduction of harmful pests and create natural enemies for them;

6. To undertake studies to increase the number of fish farms on the Mediterranean and the Red Sea shores in addition to purifying, deepening and increasing the productivity of the northern lakes from two to five tons, lowering the losses to reach 40% and dis-cussing the laws related to fish farms;

7. To transform the agricultural wastes that pollute the environment to a feedstock or a source of natu-ral energy; and

8. To provide refrigerators in airports and ports to promote agricultural exports and facilitate mari-time transportation.

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*1.3.3 The Human Resources Competitiveness Council (HRCC):

The HRCC, established in 2008, continues to achieve its mission of raising awareness, stimulating efforts and taking initiatives to enhance the competitive-ness of Egyptian human resources. According to the 2009/2010 Global Competitiveness Report (GCR), Egypt has made a slight achievement in its ranking in the "Higher Education and Training" and now ranks 88 out of 133 countries compared 91 out of 134 coun-tries the previous year. In light of this limited improve-ment, the HRCC still looks to the enhancement of higher education as a key mechanism for boosting the human resources sector in Egypt. Consistent with this focus, the HRCC dedicated most of its efforts this year to undertake a survey on "Ranking IT Facul-ties in the Egyptian Universities". The survey will be conducted in collaboration with the Infor-mation Decision Support Center (IDSC).

The project seeks to identify a number of variables that can be used to rank Egyptian IT faculties accord-ing to their ability to produce competitive graduates in the labor market. This will be achieved by examining the satisfaction of graduates with their training in ad-dition to the satisfaction of employers with employees graduating from the IT faculties (Supply Perspective).

The HRCC has settled on 8 indicators for the ques-tionnaires targeting graduates and those for compa-nies. These indicators include:

Employer satisfaction or the degree of employer satisfaction in terms of skills and knowledge of employees hired from selected faculties;

Graduates hired in top companies including the number of graduates hired in the top 150 corpo-rations in Egypt or abroad;

Entrepreneurship, which encompasses the number of graduates who established their own enterpris-es that continued successfully in the market for more than two years;

International partnerships, their number and their impact on the educational process;

Prizes or awards won by graduates, students and staff during the past year;

Number of publications in recognized internation-al journals within the past five years;

Patents awarded to graduates within the past 10 years; and

Number of students enrolled in post graduate studies abroad at one of the top 500 universities in the world.

According to the IDSC methodology, the survey sam-ple is divided into two categories ـــ companies and graduates. The "Companies" category is subdivided into "Companies directly working in the IT field" (Di-

rect Companies) and "Companies indirectly working in the IT field" (Indirect Companies). The "Graduates" category is subdivided into "IT specialized graduates" (Specialized Graduates) and "Not specialized Gradu-ates in IT" (Not Specialized Graduates).

This year, the HRCC also held a workshop entitled, “Education, Training and Competitiveness: International Experience and the Egyptian Case" on February 23, 2010. The workshop was conducted in cooperation with the European Training Foundation (ETF) and sought to bring together vari-ous stakeholders and the international expertise of the ETF to explore the relationship between educa-tion (and training) and economic development in pro-moting Egypt’s competitiveness. Education is a critical issue for Egypt as human capital continues to be an area of competitive disadvantage for the nation, de-spite Egypt’s large capital base, high enrollment rates and extensive and subsidized education system.

The workshop had a number of distinguished inter-national and Egyptian speakers and participants. The program of the workshop included three sessions in addition to the opening session whose speakers were Prof. Mona El Baradei, the Executive Director of the ENCC; Mr. Peter Greenwood, the Head of Operations at the ETF; Prof. Hossam Badrawi, the Honorary Chair of the ENCC who addressed the problems of lack of financial resources and lack of linkages of skills to the labor market and Mr. Antonino Crea, First Counselor, Delegation of the European Union to Egypt.

The first session was on “Human Development and Competitiveness: International Experi-ences & The Egyptian Perspective" with pre-sentations from Professor Heba Nassar, Vice Presi-dent of Cairo University; Mr. Jens Johansen, Senior Specialist at the ETF; Ms. Ghada Amin, ETF expert and Dr. Amr Ezzat Salama, Former Minister of Higher Edu-cation and Scientific Research and Consultant to the American University in Cairo. This session focused on the role of the human capital in the GCI and how it applies to the national education policy reform. Also discussed were the results of a survey conducted by the ETF on the perceptions on the relationship between education, training and competitiveness in Egypt. The survey highlighted the low level of aware-ness of both the private sector and policy makers on the issue of competitiveness in addition to the lack of a unified reform vision that can encourage coherence and collaboration among various institutions.

The second session was on "Education and Competitiveness in Egypt." This session was moderated by Professor Sherif Omar, the Chair of the Education and Scientific Research Committee at the People's Assembly and included two presenta-tions on "Education and Competitiveness in Egypt"

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by Professor Mona El Baradei, ENCC Executive Di-rector and "Technical Education and Competitiveness in Egypt" by Professor Mohamed Naguib Abou Zeid, the Member of the Shura Council. HE Professor Hany Helal, the Egyptian Minister of Higher Education was the keynote speaker. In his speech, Professor Helal shed light on some of the features of the education and labor markets in Egypt and pointed out the mismatch between the labor market, which is growing at a faster rate, and the education market, which is growing at a slower rate than the labor mar-ket. He clarified the main obstacles that stand before higher education competitiveness in Egypt and called for greater national dialogue regarding subsidization of the education system, especially since the current system still promotes inequality and access to higher education is largely skewed towards those who can afford it.

The third session was on "Training and Compet-itiveness in Egypt" and moderated by Mr. Adham Nadim, Executive Director of the Industrial Modern-ization Center who stressed the utmost importance of training for labor in industrial enterprises operating in the private sector. Presenters included Mr. Medhat El Madany, Executive Board Member of the Industrial Training Council, General Mohamed Helal, PMU Di-rector of the Technical and Vocational Education and Training (TVET) reform Program, Mr. Hisham Zaazou, First assistant to the Egyptian Minister of Tourism and Mr. Mohamed Ayman Korra, member of the ENCC’s Agriculture Competitiveness Council. At the final session, Ms. Elena Carrero Perez, ETF Country Man-ager announced that the ETF, in partnership with the ENCC, will conduct a study to identify specific means of improving Egypt’s competitiveness through educa-tion and training. Mr. Helmy Abouleish, Chair of the ENCC concluded the workshop by noting that there should be a consensus around the fact that human resources are a crucial element for competition and that there are many excellent initiatives in human re-sources in Egypt that need to be unified.

Key recommendations put forth for educa-tion reform in Egypt include:

Unlocking creativity at all levels of education;

Increasing collaboration and communication in teaching and learning;

Revising national priorities to make education, quality and equity a main concern and ensuring greater spending on education and R&D;

Allocating educational resources in a better way;

Diversifying sources of education finance;

Improving both quality and equality in access to education as both have a significant impact on competitiveness;

Cooperating with other international organiza-tions to benefit from country experiences;

Revisiting the labor law with regard to training funds and their usage;

Scaling down university sizes to become more ef-ficient;

Supporting the idea of civil universities; and

Spreading the culture of productivity and competi-tiveness in Egyptian society.

Concerning vocational education, the work-shop recommended the following:

Building a database on the needs of the labor mar-ket in order to match these needs to the output of the training and educational systems;

Enhancing the capacity of each element within the training process in Egypt by paying more attention to the training of trainers and teachers;

Coordinating efforts among institutions respon-sible for vocational training in Egypt ;

Finding a mechanism for follow-up and evaluation of training centers and their output to the labor market; and

Developing a method to measure the impact of TVET reform on competitiveness and decreas-ing the fragmentation within the TVET system by working towards a national strategy and institu-tion responsible for coordinating TVET reform.

*1.4 Business Advisory Council (BAC)

The ENCC, through the Business Advisory Coun-cil (BAC), provides a mechanism to capture private sector views on Egyptian regulations and deliver this input to the Local Regulatory Reform Initiative (ER-RADA).

By the end of 2009, the inventory phase of the ERADDA initiative had been successfully completed by identifying and taking an inventory of more than 30,000 regulations that affected the business environ-ment in Egypt. As for the current Review Phase, the work is focusing on updating the existing stock of reg-ulations through a process of systematic review, which involves examining regulations and proposing recom-mendations to keep, amend, repeal or consolidate them. Accordingly, consultation with stakeholders is imperative for a more efficient regulatory reform and investment friendly environment where all state regu-lations that hamper economic growth are removed.

Therefore, the BAC, in collaboration with the General Review Unit (GRU), had developed a methodology for the consultation process that starts with present-ing the relevant reviewed topics in an integrated man-ner followed by a discussion through parallel sessions attended by representatives of the private sector,

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ERRADA and the General Ministerial Unit (GMU) to take their feedback. Then, the recommendations and views of the business community will be compiled in a written report in the form of a “review checklist.”(1) These forms will be sent afterwards to the GRU and the GMU to review and put their final recommenda-tions before raising them to the ministers.

The ENCC has already held three workshops to date ranging from small to major ones depending on the nature of the topic discussed and the number of stakeholders involved. The first workshop was held on June 24, 2009 in collaboration with the Egyp-tian Tourism Federation (ETF) to review the progress of the ministerial unit of the Min-istry of Tourism in the context of ERRADA initiative, examine tourism regulations and recognize the business sector feedback on the topic reviewed.

Representatives from the Egyptian Hotels Asso-ciation (EHA), Egyptian Travel Agents Association (ETAA), Egyptian Chamber of Tourist Establishments (ECTE), Egyptian Chamber of Tourist Commodities (ECTC) and the Egyptian Chamber of Diving and Wa-ter Sports (CDWS) participated in the workshop to present their feedback on the regulations that impede their development and their suggestions to overcome them. Turnout was very high and the feedback given on the regulations was constructive and insightful.

Based on the workshop recommendations, a total of 10 regulations were repealed and replaced by the Ministerial Decree No. 730 of 2009, dated Decem-ber 21, 2009 that identifies and classifies the activi-ties, rules and procedures of licensing for diving and marine activities centers. Moreover, some provisions of the of Minister of Tourism Decree, No. 181 for the year 1973, regarding the conditions and procedures for licensing facilities of hotel associations and tourist establishments, were amended.

The second workshop was focused on identifying the challenges facing the business sector in the field of outdoor advertising. The workshop was held on February 9th 2010. Representatives from advertising agencies, businesses, civil society and academics, as well as representatives from relevant GMUs, namely Ministries of Housing, Local Development and Trans-port attended the workshop.

Participants discussed the importance of taking into account the cultural dimension of advertising, as it is not only a commercial activity but also a reflection of the cultural perception of cities. In addition, there is a need to consider the psychological impact of adver-tisement on different social groups, especially on the poor. Other problems were raised in the workshop

1 Review checklists are forms where participants fill in their inputs and feedback on the regulations affecting their sector.

such as the lack of specific and well-known criteria for granting licenses to advertising agencies and the sudden fee increase without giving enough time for advertising agencies to adjust in order to maintain good relations with their clients.

Currently ERRADA is working in cooperation with the BAC to take the views raised by the business community in the consultation workshop into ac-count when making the final recommendations on the subject.

On March 30, 2010, the third workshop was held to examine the licensing and regulations re-lated to maritime professions and safety of naval vessels. The workshop discussion recognized a number of problems facing the maritime trans-port sector and included several recommendations. Among the recommendations is a complete separa-tion between the arbitration committee and the li-censes committee within the maritime transport sec-tor to ensure impartiality. Schedules of professions should be adjusted to allow some new professions to be added, some cancelled and others merged. The introduction of amendments to some legislative tools for the safety of ships such as the Minister of Transport Decree No. 143 for 1990 and Law 8 for 1990 should be accelerated. The procedures relating to the safety of ships should be simplified especially in respect to registration of ships through a branch or unit of the Notary Office at the Egyptian Author-ity for Maritime Safety (EAFMS). Finally, international bodies should be granted full authority on vessels car-rying the Egyptian flag while reserving the right of the EAFMS to intervene at any point.

His Excellency Alaa Fahmy, Minister of Transport attended the workshop and praised the ERADDA initiative and its efforts towards improving the business climate among other state reforms to achieve the same end. The future plans for the BAC aim at tackling the following topics: customs, con-struction union and building contractors, food safety, companies' start-up and investment in the governor-ates.

BAC member institutions include:

Alexandria Businessmen Association

Alexandria Chamber of Commerce

American Chamber of Commerce

Egyptian Businessmen Association

Egyptian International Economic Forum

Egyptian Junior Business Association

Egyptian Tourism Federation

Federation of Egyptian Chambers of Commerce

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Federation of Egyptian Industries

German Arab Chamber of Industry and Com-merce

*1.5 WORKSHOPSThe ENCC held four workshops in 2008/2009 and is expecting to increase this number substantially in upcoming years. The growing number of events will not only increase visibility of the council and increase awareness of competitiveness related issues but also will ensure that the ENCC remains an open forum for dialogue and participation for stakeholders and mem-bers of the community.

Workshops tackle important topics covered by ENCC or individual Sub-Councils. These include the Travel and Tourism Competitiveness Council, the Ag-riculture Competitiveness Council and the Human Resource Competitiveness Council.

Past workshops included:

1. Financing Higher Education and Competitiveness (November, 2008)

2. Productivity and Competitiveness of the Egyptian Economy (December, 2008)

3. Logistics and Competitiveness of the Egyptian Economy (January, 2009)

4. The Global Financial Crisis and the Egyptian Labor Market (March, 2009)

This year, the ENCC started to select topics of work-shops according to each sub-council’s agenda and list of priorities: The workshops organized in 2010 were all mentioned along with the description of each and every council. These workshops aim at creating a pub-lic dialogue that involves all stakeholders, policymak-ers, academia, media, professional and public and pri-vate sectors and putting forward recommendations and initiatives.

*1.6 National and International Coop-eration

*1.6.1 Local Partnerships

The ENCC is committed to expanding its role in Egyptian society and collaborating with other local institutions to promote the principles of competitive-ness and ensure broad stakeholder involvement.

In 2009, the ENCC signed a Memorandum of Un-derstanding with the Egyptian Junior Business As-sociation (EJB). The ENCC and EJB co-organized the workshop, “Rationalizing Water Use in Egypt’s Agriculture Sector” in January 2010 and the BAC Maritime Seminar in March 2010.

The ENCC participated in the United Nations De-velopment Program (UNDP) initiative to create

an “Action Agenda for Cairo.” The first task is the preparation of situation analysis that would assess recent development trends, taking into account the Millennium Development Goals (MDGs) and other international development goals, as well hu-man rights, standards and principles and environ-mental conventions and agreements. It would also identify key challenges that Egypt needs to over-come.

*1.6.2 International Partnerships

The ENCC is extending its activities worldwide to benefit from international cooperation in advancing the principles of competitiveness.

The Competitiveness Institute (TCI Net-work)

ENCC joined the TCI Network as an orga-nizational Member on February 27, 2009. TCI Network is the leading global network for prac-titioners, policy makers, researchers and business leaders in the field of clusters and competitive-ness. It is a non-profit, non-governmental orga-nization, with a global scope, open to members from all countries throughout the private, public and voluntary sector. Its member base consists of 1,700 leading practitioners from more than 98 countries.

National competitiveness depends on macroeco-nomic stability as well as microeconomic pro-ductivity as a major engine of economic growth because wealth is created at the business and in-dustry level. Cluster initiatives are an important way to foster industrial productivity by increasing the networks: within the industry, along its supply chain and with supporting organizations such as research institutions or universities. Clusters are an efficient tool to increase not only productivity, but innovation and positive economic spillovers. Successful clusters usually combine what is known as the “triple helix” of government, private sector and academia. While public-private partnership has well known benefits, the inclusion of academia is becoming increasingly important as a source of innovation, research and development and ulti-mately competitiveness. This is especially true in today’s global economy where low-cost labor and natural resource advantages are no longer suffi-cient sources of competitive advantage. Instead, knowledge, skills and expertise have become the cornerstones of more innovative and successful industry.

Accordingly, the ENCC participated in the 12th

TCI Annual Conference, “Learning Clusters – Adapting to the New Competitiveness Scenario” in Jyvaskyla, Finland from 12-16 October 2009. In the Middle East regional session, the ENCC pre-

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sented “Cluster Development in Egypt: Progress and Future Potential” and discussed the present state of cluster development in Egypt as well as the need for stronger national initiative. The ses-sion included presenters from the Dubai Econom-ic Council that paved the way for greater regional cooperation.

Global Federation of Competitiveness Council (GFCC)

On December 6, 2009 a decision was made by the ENCC Board of Directors to make the ENCC a founding member of the Global Federation of Competitiveness Council (GFCC) along with counterparts from the United States, Saudi Arabia, the United Arab Emirates, Brazil, Chile and South Korea.

The GFCC is an exciting new initiative which seeks to bring together competitiveness councils from around the world to create a global network of institutions that exchange knowledge and work to-ward the common goals of productivity and pros-perity. The new council will establish important cross-county channels of cooperation and commu-nication in the area of competitiveness.

Whether it is for marketing the nation’s products, enhancing technology transfer, increasing exports, attracting tourists and investors, training the work-force or benchmarking against regional and global competitors, Egypt stands to gain from improved linkages to other countries. The opportunity to participate in the creation of the GFCC also co-incides with the country’s recent shift away from a factor-driven economy to one that is transitioning to become an efficiency-driven and productivity-driven economy.

As a founding member, the ENCC will be on the GFCC’s Board of Trustees for the first four years which will allow the ENCC to shape and influence GFCC activities and future development. Upcom-ing initiatives include the creation of a new com-petitiveness index which builds upon and improves the World Economic Forum’s Global Competitive-ness Index, creating a joint statement of global ‘Competitiveness Principles,’ and a number of joint projects on topics of mutual interest such as hu-man resource development and intellectual prop-erty protection.

Funding the GFCC was made possible by the per-sonal contributions of the ENCC Board of Di-rectors. These exceptional individuals agreed to personally pay the associated costs, a sign of their commitment to this initiative and belief in its ability to benefit the council and the country as a whole.

Egypt’s participation in founding the Global Coun-cil on Competitiveness is a significant first step in regaining leadership in regional and global econo-mies.

U.S. Council on Competitiveness

The Ministry of Trade and Industry of the Republic of Egypt signed a Memorandum of Understanding (MOU) with the U.S. Council on Competitiveness on May 27th, 2009. The MOU was intended to help foster sustainable economic growth and develop effective competitiveness policies through a mutu-ally beneficial partnership. The ENCC was selected to be the implementing party on behalf of the Min-istry.

Pursuant to this agreement, the ENCC was invited to partake in the “National Energy Summit” and inaugural meeting of the Global Council on Com-petitiveness (GFCC) hosted by the U.S. Council on Competitiveness in Washington DC from 23-25 September 2009. Additional collaborative ini-tiatives with the U.S. Council are currently being developed.

The Brazilian Agency for Industrial Devel-opment (ABDI)

The ENCC, in April 2010, signed a Memorandum of Understanding with the Brazilian Agency for Indus-trial Development (ABDI), an industrial and technol-ogy development promotion organization that aims at promoting the implementation of Industrial Policy in Brazil.

Both parties agreed to establish a strategic partner-ship to promote sustainable growth and to promote scientific and technological collaboration on innova-tion-based growth. They agreed to create a platform for mutual exchange and innovative activities that can fuel productivity, growth and economic prosperity and build strategic innovation partnerships with pub-lic and private sector leaders abroad to provide op-portunities to gain insight and leverage in the arena of global competitiveness. Both the ENCC and ABDI will also cooperate to promote further alliances in organizing dialogues, workshops and activities focused on a range of competitiveness issues and competitive-ness related activities.

*1.7 ENCC Study Missions

The ENCC conducted a study mission to Turkey to learn more about the initiatives and organizations working to advance competiveness and productivity in Turkey. In light of current efforts to enhance nation-al competitiveness and streamline Egyptian regulation,

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the main objective of the mission was to learn from the experience of the Republic of Turkey in govern-ment regulatory reform and promoting national com-petitiveness. The delegation met with counterparts from 11 different organizations including:

The General Directorate of Laws and Decrees

General Directorate for legislative Development and Publication

Ministry of Industry and Trade

United Nations Development Program (UNDP)

Istanbul Textile & Apparel Exporters' Association (ITKIB)

National Productivity Center (MPM)

International Competitiveness Research Institute (URAK)

Prime Ministry Investment Support and Promo-tion Agency (ISPAT)

TUSIAD-SABANCI University Competitiveness Forum

The success of the study mission led the ENCC to consider a second mission to other successful coun-tries in 2010, such as the Republic of Ireland.

The Egyptian delegation included representatives of the ENCC, the Egyptian Regulatory Reform and De-velopment Activity (ERRADA) and USAID’s Technical Assistance for Policy Reform (TAPR II). Important les-

sons and recommendations include:

The urgent need for ERRADA institutionalization based on the example of regulatory reform in Tur-key;

The need for an agreed and integrated strategy for Regulatory Impact Assessment (RIA) to study the socioeconomic impacts of a proposed regulation and to assess whether the regulation is likely to bring about the desired objectives;

The importance of having an Egyptian Competi-tiveness Strategy that focuses on competitiveness from a national point of view, in addition to having a regional and sectoral focus;

The need for Regional Competitiveness Index with more focus on certain areas such as agri-culture, tourism, entrepreneurship, R&D, innova-tion, Information and Communication Technology (ICT) infrastructure and clustering;

The need to further develop administrative capac-ity of the public sector in Egypt;

The importance of consistency, sustainability and institutionalization for long term development;

The vital role of universities in improving com-petitiveness by conducting research and linking it to the private sector; innovation and technology management; and benchmarking; and

The need to focus on sectors where Egypt has a competitive advantage and boost these sectors by helping them improve their export performance, increase their market share, provide educational programs and market their production.

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