January 26, 2011 / 2:38 PM / 6 years ago

FEATURE-Jams, red tape and graft obstruct business in Egypt

7 Min Read

* Slack infrastructure investment leads to gridlock

* State education fails to provide the right skills

* Bribes necessary for success, say some managers

By Shaimaa Fayed

CAIRO, Jan 26 (Reuters) - A project manager shipping furnaces to his new pipe plant near Cairo received a surprise taste of the challenges to doing business in Egypt when he went to inspect the massive structures. "Somewhere along the way, the truck rolled over and nobody told us. They simply put the furnaces back on the trailer and brought them to the site with tree branches stuck in the frames," said William McKee of Greater Cairo Foundries.

The furnaces survived the fall but had to be refurbished, pushing back the company's schedule by several weeks.

"It was astonishing," said McKee.

Lucrative business opportunities abound in the Arab world's most populous country, but not for the faint-hearted.

Entrepreneurs willing to put up with Egypt's snarled and dangerous roads say they struggle to find the talent they need in a creaking education system, face mounds of paperwork and must bribe bureaucrats to keep businesses afloat.

Egypt's economy is seen expanding by 5.4 percent in the 2010-2011 fiscal year ending in June, according to economists polled by Reuters last month. The government says it can push growth to 7 percent in 2011-2012 and at least 8 percent the following year.

That outstrips an International Monetary Fund growth forecast for the Middle East and North Africa of 4.8 percent in calendar 2011. The IMF sees 6.5 percent growth this year across all emerging markets.

Economists say the government has had a helping hand from a recovery in global risk appetite after the economic downturn and some momentum in pushing through business-friendly reforms.

"There's enormous liquidity here," said Angus Blair, head of research at investment bank Beltone Financial in Cairo. "Egypt could be a major powerhouse of growth. But many other issues need to be addressed."

The World Bank ranked Egypt the top global business reformer for 2006-2007 after the government halved business start times and slashed the minimum required capital, cut fees to register property and eased port and construction permit bureaucracy.

This helped the country weather the worst of the global downturn. The government aims for $10 billion of foreign direct investment in this fiscal year. It drew $7 billion in 2009.

Crisis Point

The reforms also helped Egypt jump 5 places this year in a World Bank table comparing the ease of doing business in different countries (www.doingbusiness.org), placing it 94th out of 183 economies.

But smog-ridden Cairo's gridlock shows investment in roads, railways and ports is failing to keep pace with economic growth, menacing public health and threatening economic asphyxiation.

Around 12,000 deaths occur every year in Egypt because of road accidents, the highest rate in the world per head of population bar Eritrea and the Cook Islands, according to the World Health Organization's most recent report in 2009.

The capital's congested roads come to a standstill daily as infrastructure fails to support population growth of 2 percent a year and as thousands of new cars hit the streets every year.

Poor transport has inflated prices as goods take longer to reach market, making it harder to maintain the low interest rates that have spurred private lending and consumer demand.

"It is becoming a crisis," said Blair. "If Egypt ... had a very efficient mass public transport in place within the major cities and in intra-city movements ... you could increase growth by several percentage points per year."

An even thornier problem lies in Egypt's state schools, where a lot of teaching is still done by rote and teachers are failing to develop the critical thinking and practical skills demanded by the job market.

Entrepreneurs say Egypt has also failed to reverse a welfare mentality inherited from the socialist era of the 1950s and 1960s, leading to a lax work ethic among much of the population.

"We came from decades ... in which the government was responsible for giving you free education, giving you a job. Whether you perform in your job or not, it still (gave) you food," says Ashraf El Gazayerli, Chairman of the Egyptian Junior Business Association. "We are still in this mindset."

Greasing Palms

The shortening of port turnaround times did not sweep aside all the bureaucratic headaches for importers, who complain that labelling and testing requirements are still cumbersome.

"What we would hope for is to do is a risk assessment approach that would not necessarily test every single shipment," said Jalal Abu Gazaleh, founder of Gourmet Egypt, a food importer. "If you're in a business that does regular small shipments, the cost is very high."

Gazayerli said state agencies that test products should be merged to quicken the process and reduce the bribery that some company managers say is essential for business to run smoothly.

He said there are 17 state bodies that monitor and control the food industry, but a recent law is supposed to merge them into one authority.

"These types of legislative reforms will cut the bureaucracy and accordingly the corruption," he said.

Egypt's government set up a Transparency and Integrity Committee in 2007 to monitor corruption, find ways to tackle it and publicize the harm it does the economy and society.

Corruption has grown around the world in the past three years, but corruption watchdog Transparency International ranked Egypt 98th out of 178 countries last year in its global index of perceived levels of corruption, in which number one is the least corrupt, up from 115th out of 180 countries in 2008.

The 2011 ranking puts it level with Burkina Faso and Mexico and trailing regional peers Saudi Arabia, Morocco and Tunisia.

Some say Egypt's efforts to tackle graft still fall short.

The head of an event planning company, who declined to be named for fear of official reprisals, said bribery had become synonymous with success in his industry.

"You'd be hard-pressed to find an events company that doesn't bribe tax officials," he said. "They turn up at the door of your event on the day even though they're well-aware that you already have the correct paperwork ... and paid the necessary dues."

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