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OBSTACLES TO BUSINESS

Abstracts from “Doing Business 2007: How to Reform”
Published by the World Bank Group
Analysis by Réhab El-Bakry

The World Bank Group has just released the Doing Business 2007: How to Reform report. Issued annually, the report ranks the economic performance of 175 countries based on the ease of doing business. The ranking of countries (one being highest) on the different topics is intended to help identify areas in need of reform.

“A high ranking on the ease of doing business index means the regulatory environment is conducive to the operation of business. The index averages the country’s percentile ranking on 10 topics, made up of a variety of indicators, giving equal weight to each topic.”

The rankings are developed based on 10 factors according to the number of procedures it takes an entrepreneur to complete any given step and the duration and the cost of each step. The 10 topics are: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

The rankings of countries didn’t necessarily remain consistent on all topics. Some economies ranked very well on certain indicators and less favorably on others. The countries with the highest overall ranking were Singapore, New Zealand and the US. Rounding the bottom of the list were Guinea-Bissau, Timor-Leste and Democratic Republic of Congo in last place. Egypt ranked a disappointing 165 overall.

On starting a business, Egypt came in 125th. “Entrepreneurs can expect to go through 10 steps to launch a business over 19 days on average, at a cost equal to 68.8 percent of gross national income (GNI) per capita. They must deposit at least 694.7 percent of GNI per capita in a bank to obtain a business registration number.”

Since 2004, the Ministry of Investment has set out to make starting up a business a simpler process by establishing one-stop shops to streamline the process of registering a business. This cut the number of days to register a business from about 90 to 19, compared to the regional average of 40.9, but has had no impact on the licensing process. “It takes 30 steps and 263 days to complete the process [to acquire a license] and costs 1,002.2 percent of income per capita.”

In fact, Egypt ranks 169th when it comes to dealing with licenses – its worst rating to date. It is also well below the regional average, with licenses granted following 19.9 procedures over 206.9 days. The cost of licenses is almost double the regional average of 499.9 percent of income per capita.

When it comes to employing workers, Egypt ranked 144. On a separate rigidity index, scored 1 to 100 with higher scores being most inflexible, Egypt scored 53, much higher than the regional average of 35.8 – indicating that working conditions are more rigid in Egypt than the rest of the MENA region. On a similar scale, Egypt scored a solid 100 when it comes to difficulty firing staff, while the regional average is 44.7. This reflects the legacy of socialism, which made it very difficult – and expensive – to fire staff, even if they were poor performers or redundant.

Egypt’s performance was far below the regional average when it came to registering property, in which it ranked 141. “It takes 7 steps and 193 days to register property. The cost to register property there is 5.9 percent of the overall property value.” By contrast, the regional average is 49.4 days to register property.

According to the report, Egypt ranked 159th of 175 when it came to measuring the ease with which entrepreneurs can get credit. Egypt scored a 1 out of 10 on the legal rights index, a separate index that rates whether laws are drafted with sufficient flexibility to expand entrepreneurs’ access to credit, 10 being the best score. Its rating indicates that the laws are not designed to facilitate credit easily. Egypt falls just below the regional average of 3.9 despite the fact it ranks poorly, 118, on the international level.

Egypt also faired poorly on the tax payment level. “Entrepreneurs [in Egypt] must make 41 payments, spend 536 hours and pay 50.35 percent of profit in taxes.” According to the study, even after last year’s tax reforms, Egypt still has almost 30 percent more tax payments than the rest of the region. It takes business owners almost twice as long to file their paperwork and it accounts for a higher percentage of their income than the rest of the region.
By far the best performance for Egypt was in cross-border trading. It takes eight documents for an entrepreneur to import to or export from the country and takes 25 days and 20 days, respectively, to import and export. It costs around $1,014 to export a container and $1,049 to import one.

Cross-border trade earned Egypt its highest worldwide ranking of 83, and improved 11 ranks compared to the previous report. For two years, the government has been working on improving the efficiency of trade in Egypt in order to make the economy more export oriented. According to the report, these measures are paying off.

While the situation may have improved when it comes to trade, enforcing contracts can still be slow. “It takes 55 steps and 1,010 days to enforce contracts. The cost of enforcing contracts is 18.40 percent of debt.” The cost and number of steps it takes to enforce contracts are on par with the regional average. However, it takes almost twice the number of days to enforce contracts in the country when compared to the region. Internationally, Egypt ranks 157.

Finally, the last topic based on which the economy’s performance was assessed is closing a business. “In Egypt, the process takes 4.17 years and costs 22 percent of the estate value. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is 16.57.”

A full copy of this report can be obtained online at
www.doingbusiness.org

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