AFRICAN DEVELOPMENT BANK

ARAB REPUBLIC OF EGYPT

ECONOMIC GOVERNANCE AND ENERGY SUPPORT PROGRAM

(EGESP)

OSGE/ORNA DEPARTMENTS

November 2015

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TABLE OF CONTENTS

Currency Equivalents, Fiscal Year, Weights and Measurement

Acronyms and Abbreviations

Program and Loan Information

Program Timeframe-Main Milestones

Program Executive Summary

Results-based Logical Framework

I – INTRODUCTION: THE PROPOSAL

II – COUNTRY AND PROGRAM CONTEXT

2.1 Political Development and Governance Context

2.2 Recent Economic Developments, Macroeconomic and Fiscal Analysis

2.3 Competitiveness of the Economy

2.4 Public Financial Management

2.5 Inclusive Growth, Poverty and Social Context

III – GOVERNMENT DEVELOPMENT PROGRAM

3.1 Government Overall Development Strategy and Medium-Term Reform Priorities

3.2 Challenges to National/Sector Development Program

3.3 Consultation and Participation Processes

IV – BANK SUPPORT TO GOVERNMENT STRATEGY

4.1 Link with the Bank Strategy

4.2 Meeting the Eligibility Criteria

4.3 Collaboration and Coordination with Other Partners

4.4 Relationship with Other Bank Operations

4.5 Analytical Work Underpinning

V – THE PROPOSED PROGRAM

5.1 Program Goal and Purpose

5.2 Program Components

5.3 Policy Dialogue

5.4 Loan Conditions

5.5 Application of good practice principles on conditionality

5.6 Financing Needs and Arrangements

5.7 Application of Bank Group non-concessional borrowing policy

VI – OPERATION IMPLEMENTATION

6.1 Beneficiaries of the Program

6.2 Impact on Gender, Poor and Vulnerable Groups

6.3 Impact on Environment and Climate

6.4 Impact on Private Sector Development

6.5 Implementation, Monitoring and Evaluation

6.6 Financial Management, Disbursement and Procurement

VII – LEGAL DOCUMENTATION AND AUTHORITY

7.1 Legal Documentation

7.2 Conditions Associated with Bank’s Intervention

7.3 Compliance with Bank’s Policies

VIII – RISKS MANAGEMENT

IX – RECOMMENDATION

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List of Tables

Table 1: Key Macroeconomic Indicators

Table 2: Link between the SDS/MFS/CCRP, the CSP and the EGESP

Table 3: Key lessons learnt from the Financial Sector Reform Program (FSRP)

Table 4: Prior Actions and Triggers

Table 5: Projected financing requirements and sources, date

Table 6: EGESP Risk and Mitigation Measures

Appendixes

Appendix I: Letter of Development Policy

Appendix II: IMF Letter of Comfort

Appendix III: Egypt: Meeting the Eligibility Criteria for the PBO

Appendix IV: Egypt: Prior Actions and Triggers

Appendix V: Social Sector Challenges and Development

Appendix VI: Map of Arab Republic of Egypt

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i

CURRENCY EQUIVALENTS (As of November 2015)

1 UA = EGP 11.2012

1 UA = USD 1.39687

1 UA = EUR 1.26793

FISCAL YEAR July 1 – June 30

WEIGHTS AND MEASURES

1metric tonne = 2204 pounds (lbs)

1 kilogramme (kg) = 2.200 lbs

1 metre (m) = 3.28 feet (ft)

1 millimetre (mm) = 0.03937 inch (“)

1 kilometre (km) = 0.62 mile

1 hectare (ha) = 2.471 acres

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ACRONYMS AND ABBREVIATION

ADF African Development Fund

AfDB African Development Bank

AG Auditor General

ASA Accountability State Authority

AU Accounting Unit

BOP Balance of Payments

BSO Budget Support Operation

CAR Commitment at Risk

CBE Central Bank of Egypt

CFRA Country Fiduciary Risk Assessment

CPPR Country Portfolio Performance Review

CSO Civil Society Organization

CSP Country Strategy Paper

CPIA Country Policy and Institutional Assessment

DFID Department for International Development

DO Development Objective

DPs Development partners

DSA Debt Sustainability Analysis

ECA Egyptian Competition Authority

EE Energy Efficiency

EEA Exposure Exchange Agreement

EEDC Egypt Economic Development Conference

EEICSP Economic, Energy and Investment Climate Support Program

EGPC Egyptian General Petroleum Corporation

ESW Economic and Sector Work

EU European Union

FDI Foreign Direct Investment

FM Financial Management

FY Fiscal Year

GBS General Budget Support

GCC Gulf Cooperation Council

GCI Global Competiveness Index

GDP Gross Domestic Product

GIFMIS Government Integrated Financial Management Information Systems

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit

GoE Government of Egypt

HDI Human Development Index

HRH Human resources for Health

IADB Inter-American Development Bank

IMF International Monetary Fund

IOP Indicative Operational Program

IPPs Independent Power Producers

KPI Key Performance Indicator

MDGs Millennium Development Goals

MENA TF Middle East and North Africa Transition Fund

MENA Middle East and North Africa

MFS Macroeconomic Framework and Strategy

MIC TAF Middle Income Country Technical Assistance

MOIC Ministry of International Cooperation

MoF Ministry of Finance

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MTEF Medium Term Expenditure Framework

MTFF Medium Term Fiscal Framework

MTR Mid-Term Review

MW Mega Watt

O&M Operation and Maintenance

OECD Organization for Economic Cooperation and Development

OFID OPEC Fund for International Development

P2P Procure to Pay

PBO Program Based Operation

PCR Project Completion Report

PCG Partial Credit Guarantee

PEFA Public Expenditure and Financial Accountability

PFM Public Financial Management

PPPs Public Private Partnerships

PRG Partial Risk Guarantee

PSD Private Sector Development

PSDS Private Sector Development Strategy

RBM Results-Based Management

RE Renewable Energy

SDS Sustainable Development Strategy

SME Small and Medium Enterprises

SoE State-Owned Enterprise

SSN Social Safety Nets

T&D Transmission and Distribution

TA Technical Assistance

TYS Ten Year Strategy

UA Bank Group Unit of Account

UAE United Arab Emirates

UCS Using Country Systems

UNODC United Nations Office on Drugs and Crimes

USD United States Dollar

VAT Value-added Tax

WB World Bank

WBGI World Bank Governance Indicators

WDI World Development Indicators

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PROGRAM INFORMATION

INSTRUMENT GENERAL BUDGET SUPPORT – PROGRAM BASED LOAN

PBO DESIGN TYPE PROGRAMMATIC OPERATION

LOAN INFORMATION Client’s information

BORROWER: ARAB REPUBLIC OF EGYPT

EXECUTING AGENCY: MINISTRY OF INTERNATIONAL COOPERATION

Financing plan for 2015, 2016, and 2017

Source Amount (2015) Amount (2016) Amount (2017)

ADB Loan USD500.0 million TBD TBD

WORLD BANK USD 1,000.0 million TBD TBD

TOTAL FINANCING USD 1,500.00 million TBD TBD

ADB key financing information

ADB Loan currency United States Dollars (USD)

Loan Type Enhanced Variable Spread Loan

Lending Rate Base Rate + Funding Cost Margin + Lending Spread

Base Rate Floating Base Rate based on 6 month USD Libor with free option to

fix the Base Rate.

Funding Cost Margin1 Refer to footnote

Leading spread 60 basis points (0.60%)

Commitment fees Progressive (A graduated commitment fee ranging from 25 to 75 basis

points on delayed disbursements - Applicable to undisbursed amounts

within the timeframe negotiation per the loan disbursement schedule)

Tenor 20 years maximum inclusive of Grace Period

Grace period 5 years maximum

1

The six months adjusted average of the difference between: (i) the refinancing rate of the Bank as to the

borrowings linked to 6- month LIBOR and allocated to all its floating interest loans denominated in USD and (ii)

6-month LIBOR ending on 30 June and on 31 December. This spread shall apply to the 6-month Libor which

resets on 1 February and on 1 August. The Funding Cost Margin shall be determined twice per year on 1 January

for the semester ending on 31 December and on 1 July for the semester ending on 30 June.

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Timeframe - Main Milestones

Program Appraisal October 2015

Program Approval December 2015

Loan Effectiveness March 2016

Disbursement Closing Date 06 June 2016

Completion 31 December, 2016

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PROGRAM EXECUTIVE SUMMARY

Paragraph Topics to cover

Program overview

Program name: Egypt – Economic Governance and Energy Support Program (EGESP).

Expected outputs: The key outputs of the Program are (i) Enhanced fiscal consolidation (expanded and efficient tax base and

improved revenue collection, improved efficiency of public expenditure, and enhanced fiscal transparency; (ii) Enhanced

energy sector security (enhanced efficiency and viability of the power and gas sector, and improved efficiency in energy

consumption); and (iii) Enhanced business environment (Streamlined and transparent industrial licensing regime, 2 Enhanced

and open competition, and 3 Improve access to credit for MSMEs and women entrepreneurs).

Overall timeframe: 2015-2017, three-year programmatic operation

Program Cost: The program cost for the first year of the three-year programmatic operation is USD500 million. The cost for

the second and third years of the operation will be determined each year.

Program outcomes The Expected outcomes of the program are: (a) Enhanced, transparent and effective fiscal consolidation; (b) Enhanced energy

security, and (c) Improved efficiency and competitiveness of the private sector.

Alignment with

Bank priorities

The operation is closely aligned to three of the operational priorities of the Bank’s Ten-Year Strategy, 2013-2022, namely

infrastructure, private sector development, and governance and accountability, and reinforced by two of the High-5 which is

an emphasis within the TYS framework intended to scale up investments in some key areas of the TYS (Light Up and Power

Africa and Industrialize Africa)2. The program is also linked to the three strategic pillars of the Governance Framework and

Action Plan, 2014-2018 (GAP II) of public sector and economic management, sector governance, and investment and

business climate; as well as the Bank’s Private Sector Development Strategy, 2013-2017. Furthermore, the program is closely

linked to the two pillars of the Egypt Country Strategy Paper - Infrastructure (for sustainable and inclusive growth) and

Governance (for enhanced transparency, efficiency and fairness).

Needs Assessment

and Justification

Despite the recent discovery of the largest ever offshore natural gas field in Mediterranean in Egypt's territorial waters, which

will create additional fiscal space in the medium term, the GoE has indicated its strong commitment to sustain and deepen

on-going reforms efforts. The GoE intends to do what is needed, in the short-term, to address its financing needs and cash

flow constraints, in addition to the need to bolster reserves, which are currently under pressure to support the exchange rate.

The justification for Budget Support Operation (BSO) is premised on the need to create fiscal space to facilitate a smooth

implementation of the government’s budget, implement fiscal consolidation, and improve the targeting of public action to

the most vulnerable segments of the population (using part of the fiscal space created).

Harmonisation The Bank actively coordinates its interventions with all the major bilateral and multilateral Development Partners (DPs)

including the UN system and its organizations operating in Egypt. This is done bilaterally as well as formally through the DP

group, which works closely with 13 thematic groups: Agriculture and Rural Development, Education and Human Resource

Development; Environment and Energy; Democratic Governance; Gender and Development; Health; Macroeconomics and

Public Finance Management; Micro, Small and Medium Enterprises; Migration and Protection; Transport; Social Protection;

and Urban Development; Water. The Bank is not currently chairing or co-chairing any of these groups as it had no new

lending over the past four years. However, in relation to other DPs, the Bank has retained its comparative advantage in key

sectors such as energy, RE, water and irrigation, SME development where it has maintained strong high-level dialogue.

Bank’s Added

Value

The Bank has considerable experience and expertise in PBOs gained from designing and implementing similar programs

focusing on fiscal consolidation, energy sector and investment climate reforms including in Angola, Ghana and Tanzania.

Through the Egypt Field Office (EGFO), the Bank has been dialoguing with the Government on the design of its reform

programs, including measures targeting the energy sector, fiscal consolidation, and transparency and accountability enabling

it to gain considerable knowledge and experience in these areas. These, coupled with leverage its unique position as a reliable

and trusted partner of choice are important assets which the Bank can leverage to sustain its policy dialogue and help

implement difficult reforms.

Contributions to

Gender Equality

and women’s

empowerment.

The policy focus of the EGESP on fiscal consolidation will create savings, part of which are to be used to fund social programs

in health and education, amongst others, targeting the most vulnerable and poor, including women and youth. The increased

electricity supply, and its reliable and efficient delivery, will benefit women and youth, especially those involved in SMEs

and living in rural areas where poverty is widespread and basic services are limited. It would also ensure security enabling

longer working hours and safety for women. As the cost of doing business reduces with reliable supply of electricity, an

improved competitive environment for business will be created, more viable SMEs would emerge, and jobs would be created

particularly for women and youth.

Policy dialogue

and linked

technical

assistance

The proposed operation will focus on supporting fiscal consolidation policy actions, energy sector and investment climate

reforms. Through its operation and on-going Institutional Support Projects, the Bank will continue to encourage and support

best practices in PFM, energy and private sector reforms in Egypt. The program will create a strong platform for policy

dialogue and advisory services, with EGFO playing a pivotal role.

2 The High-5, an emphasis within the TYS framework intended to scale up investments in some key areas of the TYS are: Light Up and Power

Africa, Integrate Africa, Industrialize Africa, Feed Africa, and Improve the Quality of life for Africans.

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RESULTS-BASED LOGICAL FRAMEWORK

Country and project name: Egypt: Economic Governance and Energy Support Program (EGESP)

Purpose of the project: To promote inclusive and resilient growth through fiscal consolidation; improved governance, efficiency and private sector

engagement in the energy sector; and improved business environment.

RESULTS CHAIN PERFORMANCE INDICATORS

MOV RISKS/MITIGATION MEASURES Indicator (including CSI*) Baseline Target

IMP

AC

T

Inclusive and

resilient

economic growth

Real GDP growth 4.2% (2014/15) 4.7% (2017/18)

IMF, MoF,

Risk #1: Economic risks due to

vulnerability to external and domestic

shocks. With the economy still in the early stages of recovery and its external

reserves position, Egypt remains

particularly vulnerable to adverse shocks. For example global financial market

volatility and slowdown in global trade

would affect expected inflows, including official support, foreign direct investment,

as well as tourism.

Mitigation: Government reform program

contains bold revenue enhancement and

expenditure efficiency measures to mitigate this risk and strengthen fiscal

consolidation. Continuous dialogue with

GoE on macroeconomic management under the proposed program will further

mitigate the risk.

Risk #2: Security risks: A moderate

likelihood of intensified regional conflict,

especially in countries bordering Egypt, and deterioration in domestic security

conditions due to terrorist activities would

affect confidence, investment and tourism, and consequently attainment of

revenue and investment projections.

Mitigation: The GoE has also intensified

efforts and combating militancy and

terrorism.

Risk #3: Fiduciary risks: The recent

Bank’s CFRA for Egypt rates Egypt fiduciary risk as substantial with positive

outlook, but some sub-systems such as

budget preparation, ex-ante controls over expenditures and external audit present

moderate residual risks (see annex …on

CFRA for details). Fiduciary risk if not mitigated would derail program

implementation, and achievement of

expected program objectives.

Mitigation: As indicated, some sub-

systems of the country fiduciary framework are residually moderate. The

measures being implemented under this program and various ongoing technical

assistance and institutional support

projects aimed to strengthen public

financial management will further

mitigate this risk.

Risk #4: Risks of policy delays or

reversal: Some of the bold revenue

enhancement and expenditure efficiency measures contained in the government

program (e.g VAT, wage reform, subsidy

reform, and electricity tariff reform), if

Poverty rate 26% (2014) 23% (2018)

Global gender gap index (overall score)

0.6064 (2014) 0.7000 (2018)

OU

TC

OM

ES

Outcome 1

Fiscal

consolidation and budget credibility

enhanced.

Increase in non-sovereign corporate

income tax proceeds on goods and

services as % of GDP

5.4% (2015) 6.7% (2018)

IMF/MoF

Reduce central government wages and salaries as a % of GDP

8.1% (2015) 7.4% (2018)

Overall fiscal balance/GDP 13.1% (FY2014) 9.3% (2018)

% of budget allocated for social expenditure

11.4% (2015/6) 13% (2018)

Outcome 2

Improved energy

security and greater role for

the private sector

Operating Reserve3 11% (2014) 30% (2018) EEHC

New private investments in upstream

oil and gas sector

USD 2.4 billion

(2014)

Cumulative

investments of USD

15 billion between 2015-2018

EGPC &

EGAS

Outcome 3

Competitiveness

of the private sector and

financial

inclusion enhanced

Increase in the number of anti-

competitive practices prevented/eliminated

9 (2013 - 2015) 11 (2016 - 2018)

GCI Report

of WEF

(World Economic

Forum)

Average number of days to comply

with industrial licensing requirements 634 days (FY2015 160 days (FY2018)

Government

Reports

Number of licensed microfinance

providers 26 (FY2015) 70 (FY2018)

EFSA

% of loans issued to women by

licensed microfinance providers 26% (FY2015) 50%(FY2018)

EFSA

OU

TP

UT

S

I. Component Advancing Fiscal Consolidation

1.1 Revenue enhancement and

improved revenue

collection.

Unification of the top income tax rate at 22.5% for all economic actors

in Egypt.

Differential income tax rates for different

economic actors in Egypt.

Presidential decree amending the tax law

unifying the top income tax rate at

22.5% for all

economic actors in Egypt issued.

MoF

1.2 Improved expenditure

efficiency and

reduced fiscal risk of the payroll

on the budget.

Freezing of special bonuses and rewards for all employees in 2015/16

Special bonuses and rewards for all

employees existed in

the 2014/15 budget

Presidential decree endorsing the

2015/16 Budget that

has a binding instruction to all

budgetary entities to

freeze special bonuses and rewards

for all their employees in 2015/16

fiscal year.

MoF

1.3 Enhanced

Budget

Transparency.

Institutionalizing the publication of

Citizen Budget

Citizen Budget for

2015/16 published

Decree

Institutionalizing the

publication of Citizen Budget issued by the

Minister of Finance

(2015).

MoF

Component II: Ensuring Sustainable Energy Supply

3 A measure of available operating capacity over and above the capacity needed to meet normal peak demand levels.

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2.1 Gradual liberalization of

the gas sector

Legal framework for the liberalisation and regulation of the

gas sector.

No legal and regulatory

framework in place

A new gas law that provides for open

access to the gas

infrastructure and establishment of an

independent gas

sector regulator endorsed by Cabinet

(2015).

Ministry of Petroleum

and Mineral

Resources

delayed or reversed due to possible negative social impact and citizen

response, could derail fiscal

consolidation, widen imbalances, and set back progress already made.

Mitigation: The reform program is home grown and its implementation is on track.

Ownership by, and commitment of, the

GoE to reforms will mitigate this risk. Moreover, the fiscal consolidation

measures were designed in such a way

that its impact will be neutral on the low income bracket, the poorest of the poor

and the vulnerable.

Risk #5: Energy shortage risk: The

supply-demand gap in the gas and

electricity sector has been widening and huge investment is required to bridge this

gap. Required investment to restore

energy production capabilities in the upstream hydrocarbon and downstream

electricity sectors, was put at USD60-70

billion and USD60 billion respectively. Non realization of this required huge

investment could derail the energy sector

program, worsen the business environment and result in welfare loss for

the population.

Mitigation: GoE planned investment in

both the upstream hydrocarbon sector and

the downstream electricity sector; as well as the measures for improving sector

governance will mitigate this risk.

Risk #6: Social Risk: The freezing of

special bonuses and rewards for all employees in 2015/2016 can be faced

with resistance during implementation.

Mitigation: The new public

administrative reform will review public

sector salaries, and ensure that bonuses

are merit-based.

2.2 Improved

sustainability of the energy sector

through subsidy

reform

Gradual increase in electricity tariff First year increase in

electricity tariff for 2014/15 effected

(2014).

Cabinet decree

mandating the second annual increase in

electricity tariff for

2015/16 issued (2015)

Ministry of

Electricity

III. Enhancing the Business Environment

3.1 Streamlined

and transparent

industrial licensing regime

New industrial licensing regime put

in place

Old industrial

licensing regime in place (2015)

Industrial licensing

reform action plan

endorsed by Cabinet. (June 2016)

Government

Reports

package of

amendments to implement the

industrial licensing

reform action plan submitted to

Parliament (2017)

Government

reports

3.2 Enhanced

and open competition

New competition framework put in

place

Old Competition Law

in place (2014)

Draft Executive

regulations to implement the

Presidential decree

introducing amendments to the

Competition Law

submitted to the Prime Minister (2015)

Government

Reports

Executive regulations

on anti-cartel policy

implementation and ECA institutional

independence

approved by Cabinet (2016)

Government

Reports

3.3 Improve

access to credit

for MSMEs and women

entrepreneurs.

Framework for micro finance

product put in place.

Microfinance Law to

license companies

and non-governmental

organizations issued

by the President (2014)

Framework for at

least one new microfinance product,

such as micro-leasing

or Sharia-compliant micro-loans

introduced by EFSA

(2016)

EFSA

Reports

Establishment of an independent unit to monitor microfinance activities

No independent unit monitoring

microfinance

activities in

specialized

companies and

established associations.

Independent unit to monitor microfinance

activities in

specialized

companies and

established

associations established by EFSA

(2017)

EFSA Reports

Funding: ADB Loan = USD500 million (Funding for 2016 and 2017 would be determined each year); World Bank: USD1,000.0 in 2015.

1

REPORT AND RECOMMENDATIONS OF THE MANAGEMENT TO THE BOARD OF

DIRECTORS ON A PROPOSED LOAN FOR EGYPT’S ECONOMIC GOVERNANCE AND

ENERGY SUPPORT PROGRAM (EGESP)

I INTRODUCTION: THE PROPOSAL

1.1 Management submits the following proposal and recommendation for an ADB loan of five

hundred million US Dollars (USD500 million) to the Arab Republic of Egypt to finance the

Economic Governance and Energy Support Program (EGESP). This is the first of three series of

consecutive programmatic General Budget Support (GBS) operation over the period 2015/16-2017/18),

and the Bank’s second PBO in Egypt4. The operation responds to the request from the Government of

Egypt (GoE) submitted to the Bank in October 2015. The objective of the operation is to promote

inclusive, resilient and sustainable growth by (i) advancing fiscal consolidation through higher revenue

collection, reprioritization and rationalization of expenditure and implementing public finance

management reforms and internal audit mechanism; (ii) ensuring sustainable energy supply through

improved governance, efficiency and private sector engagement in the energy sector; and (iii) improved

business environment through investment laws, industrial license requirements as well as enhancing

competition. The GoE has demonstrated its strong commitment to sustain and deepen on-going reforms

as set out in the Letter of Development Policy (Appendix I). However, for the success of the reform

program, the GoE intends to do what is needed, in the short term, to address its financing needs and cash

flow constraints; and bolster reserves, which are currently under pressure, to an acceptable level to

support the exchange rate. Given the economy-wide impact of these needed reforms and their implication

for macroeconomic stability, a GBS is considered an appropriate support instrument since it will

contribute to creating the fiscal space needed by the Government and facilitate the smooth

implementation of the government’s budget.

1.2 The proposed programmatic operation has been designed taking into account the need for the

Bank to support high, sustainable and inclusive growth in the country through providing a financing

incentive for the required reforms that will allow fiscal consolidation, improved governance and

efficiency in the energy sector and make much needed contribution to meeting Government’s financing

requirements in fiscal years 2015/16 to 2017/18 (see Table 5). It also takes into account the need for

harmonization of the Bank’s support with that of the World Bank, which is also using a three-year

programmatic approach and providing parallel financing for the next three fiscal years. The program was

formulated on the basis of continuous dialogue with the GoE, and discussions with other stakeholders

including the private sector, Civil Society Organizations (CSOs), and development partners and has been

jointly designed with the Government of Egypt (GoE) and the World Bank.

II – COUNTRY CONTEXT

2.1 Political Developments and Governance Context

2.1.1 The initial transition phase (January 2011-July 2013) following Egypt’s 2011 revolution did not live

up to expectations but a new path towards political stability and economic rebound has emerged since mid-

2014. Two crucial milestones of the political roadmap prepared in July 2013, namely the ratification of a new

constitution and presidential elections are already completed. The final milestone is holding of parliamentary

elections in October and November 2015 (currently ongoing), which will lead to the establishment of a new

Parliament by end 2015 or January 2016. Meanwhile, the GoE has been making significant efforts to combat

militancy and radicalism but the security situation remains a source of fragility.

4 The first was a Financial Sector Reform Program for an amount of USD500 million approved by the Board of Directors in July 2006, covering the

period 2006 – 2008.

2

2.1.2 There is a growing culture of accountability and efforts to improve governance in Egypt

but further action is needed. Notable actions already taken include the approval in December 2014 of an

anti-corruption strategy 2014-2018 to be enforced at all levels and the ongoing work on a code of conduct

and a whistle blower mechanism. Likewise, the GoE adopted in November 2014 a Conflict of Interest

law. The implementation of the main Public Financial Management reform namely, Government

Financial Management Information Systems (GFMIS) is underway. There are also ongoing

consultations involving main users to revise the current procurement Law No 89, and organizing Tenders

and Bids. These efforts should lead to a new procurement legal framework that is more modern,

transparent and in line with international best practices. Even though the country’s Country Policy and

Institutional Assessment (CPIA) score declined from 3.34 in 2010 to 2.90 in 2013, it improved to 3.12

in 2014 on account of the renewed drive for reforms. Also, Egypt’s score has improved on the

participation and human rights component of the Ibrahim Index of African Governance. Yet, further

efforts are needed to improve governance of public administration and entities and establish an open and

accountable society that meets the demand of the 2011 revolution. Indeed, Egypt still underperforms

both the African (51.5) and North African (52.8) scores in terms of governance, placing it at the 26th

position (out of 52 African countries). Also, the 2015 Country Fiduciary Risk Assessment (CFRA)

undertaken by the Bank identified weaknesses in some areas of the fiduciary systems such as treasury,

internal audit, financial information, public procurement, and oversight institutions including the

supreme audit institutions (see Technical Annex II for details). However, the government acknowledges

these challenges and is taking measures to tackle them.

2.2 Recent Economic Developments, Macroeconomic and Fiscal Analysis

2.2.1 The social and political unrest in Egypt which began in January 2011, critically weakened

Egypt’s macroeconomic stability. After an average growth of 5% during the decade leading to 2010,

GDP growth slowed to between 1.8 % and 2.2% over the 2010-2014 period. Sluggish economic growth,

the increasing burden of subsidies (energy in particular) and an expansionary fiscal policy caused a

widening of the fiscal deficit from 8.1% of GDP in 2010/2011 to 13.7% in 2012/2013. It has however,

declined to 12.2% and 11.7%5 in 2013/2014 and 2014/156 respectively. It is projected to decline further

in FY2015/16 to 8.9% of GDP. With worsening perception of Egypt’s country risk and consequent

several downgrades by rating agencies, the GoE relied heavily on domestic borrowing to finance the

deficit. Consequently, public domestic debt grew from 69.8% of GDP in 2010/2011 to 80.1% in

2013/2014. This partly crowded out the private sector and led to stagnation in private investment and

job creation with the unemployment rate peaking at 13.4% in 2014 from 9.8% in 2010. Investments

contracted by 8.4% in 2012/2013. Coupled with reduced tourism receipts, and pressure on the local

currency from a strengthening US dollar, the official reserves shrank from 6.8 months of import cover

in 2009/2010 to 2.5 in 2012/2013. As a result, the overall balance of payments as a percentage of GDP

declined from 1.5% in 2010 to -4.4% in 2012.

2.2.2 Faced with a difficult macro environment, the new government since June 2014 has

prioritised macroeconomic and structural reforms as focus areas to jumpstart growth.

Consequently, growth has picked up and is expected to reach 4.2% in 2014/2015 and projected at 4.3%

in 2015/16. As a result of government fiscal consolidation effort encompassing revenue enhancement

and expenditure rationalization measures, the fiscal deficit is projected at 8.9% in 2015/2016. Private

investments grew by 26% y-o-y in real terms during Q1 of 2015, mainly in the gas, manufacturing and

5 IMF Letter of Assessment, November 2015 6 The Ministry of Planning has revised the GDP series dating backwards to FY2011/12 in light of the Economic Consensus

that took place in FY2012/13.

3

real estate sectors. Increase in FDI is also materializing on the backdrop of the recent Egypt Economic

Development Conference held in March 2015 where investment agreements worth USD 38.2 billion

were signed. Confidence in the economy has also improved and the GoE is now able to tap into

international capital markets to fill part of its funding gaps and relieve some of the pressure put on the

domestic markets. GoE issued a USD 1.5 billion Eurobonds in May 2015 which was 3 times

oversubscribed and was priced more favourably compared to Egypt’s credit rating peers, indicating the

level of confidence in the economy. The government expects to issue another Euro-bond of USD1.5

billion in early 2016 as part of its USD 10 billion Eurobond program.

2.2.3 The latest Debt Sustainability Analysis carried out by the IMF in 2015 indicates, that

Egypt’s debt remains sustainable as its external debt and sovereign spreads remain low (Technical

Annex VII). In this regard the Primary budget Balance, thanks to the reform implemented, is projected

to contract from -1.6 in 2015/2016 to -0.2% by 2018/19 and turn positive (0.3%) by 2019/20. In spite of

higher FDI inflows (USD 6.4 billion over FY2014/15), deposits from GCC countries, and reversal of

portfolio investment in Egypt in the recent past, foreign exchange reserves are still under pressure

reaching USD 15.8 billion in September 20157, corresponding to less than 2.7 months of imports. With

no immediate signs of any new fresh funds from GCC countries, the Government needs to boost foreign

exchange reserves. Between May 2014 and July 2015, inflation stood at 11%. The GoE however expects

inflation to gradually fall to between 7-8% by 2018/2019 as a result of improved fiscal stance, and

enhanced productivity driven by better human and institutional capabilities in the public sector. Table 1

presents the projections of key macroeconomic indicators over the program period (2015/16-2017/18).

Table 1: Key Macroeconomic Indicators (% of GDP, unless otherwise indicated)

FY 2015/2016 FY 2016/2017 FY 2017/2018

Real GDP 4.3 4.5 4.7

Consumer Prices–end of period 10.2 10.4 8.0

Current Account Balance - incl grants -4.7 -4.7 -3,9

Broad Money (M2) 71.0 71.1 71.5

Public External Debt 9.5 10.8 12.5

Central Government Domestic Debt 77.2 73.9 71.2

Gross official reserves (months of imports) 3.0 3.0 3.0

Fiscal Balance. incl. grants -9.6 -9.4 -9.3

Fiscal Balance. excl. grants -9.7 -9.5 -9.4

Source: IMF

2.3 Competitiveness of the Economy

2.3.1 The private sector contributes 62% of Egypt’s GDP, and over 65% and 70% of total investment

and employment respectively. Microenterprises (1 to 4 employees) account for 91% of Egyptian private sector,

and small and medium enterprises (5 to 500 employees) constitute 8%. On the Global Competitiveness Index,

Egypt ranks 116 (out of 140 countries) in 2015/16, while in the 2015 Doing Business report the country ranks 112

out of 189. There is therefore, room for improving private sector competitiveness. According to the 2015 Global

Competitiveness Index report, the most problematic factors are policy instability, weak infrastructure, gaps in the

skills and education of the educated work force, challenging access to finance, foreign currency regulation and

corruption. Egypt’s financial sector is dominated by banks, with limited funding to the real sector, inadequate long

term financing and low level of intermediation. SMEs share of total bank lending is estimated at 6%, which has

ramifications for inclusive growth. The Government is cognisant of these challenges and is taking the necessary

steps to address them. The launching of mega infrastructure projects such as the Suez Canal regional development

and plans to upgrade transport infrastructure (including through PPPs), the passing of a microfinance law,

development of mobile financial services and enhancing the financial infrastructure are good steps in that regard.

7 IMF Letter of Assessment, November 2015

4

2.4 Public Financial Management

2.4.1 In 2015, with the assistance of the World Bank, the government updated its PFM strategy

and issued a report including a comprehensive Action Plan which addresses a number of key PFM

challenges in the country. The Bank undertook a Country Fiduciary Risk Assessment (CFRA) for Egypt

in June 2015 and updated it in the course of the appraisal of this operation. The findings show

shortcomings in the following areas, among others; financial controls, public procurement, and oversight

including the supreme audit institution and parliament. There were however, some recent positive

developments in the area of fiscal transparency, including, the preparation and publication of a pre-

budget statement on the MoF website for the first time in 2015/2016. The enacted budget, in-year budget

reports, and year-end budget reports were also made public. Public enterprises and economic authorities’

budgets and final accounts were published for the first time in 2010/2011. However, a number of areas

requiring improvement remain. (See paragraph 6.6.3 and the CFRA in the Technical Annexes for

details).

2.5 Inclusive Growth, Poverty and Social Context

2.5.1 Egypt has made considerable progress in improving MDG-related human development

indicators but a number of challenges remain including, chronic poverty, unemployment, and regional

and gender inequality. The poverty rate rose from 19.6% in 2010 to 26% in 2014, and unemployment

rate rose from 8.4% to 13.4% over the same period, with youth and women disproportionately affected.

The unemployment rate for young women is estimated to be fivefold that of young men, at 38.1 and

6.8% respectively, and Egypt is one of few African countries where the share of women in wage

employment in the non-agricultural sector is declining. The income disparity between men and women

is also wide. For instance, in the public sector males earn 26% more than their female counterparts, while

in the private sector this rate decreases slightly to 23.2%. The 2013 Global Gender Gap Report ranked

Egypt 125th out of 136 countries, making it 10th of 15 MENA countries. Further analysis demonstrates

an increase in the incidence of poverty with near poor reaching almost 50% of the population, mainly in

Upper Egypt (51.5%) followed by urban Upper-Egypt (29.4%) and the urban Governorates (9.6%).

However, regarding primary education and neo-natal, under five and maternal mortality front, the

country is among the top African performers.

2.5.2 The Government of Egypt is taking firm action to address the issues of social equity, job creation

and improved social service delivery. The newly adopted constitution of 2014 increased the targets for

government spending on education, higher education and health as a percent of GDP to 4%, 2% and 3%

respectively, and institutionalized social pension as a right of the vulnerable population, namely the

handicapped, the old and the unemployed. Government is aware that the proposed program, especially

the fiscal consolidation measures and subsidy reforms may have unintended negative impact on the poor

and the vulnerable. To mitigate this, the GoE is putting in place an array of measures to protect the poor

and the vulnerable including exempting the lowest income quartile from a potential subsidy reform and

implementing well targeted social protection program using part of the fiscal space generated through

the reform program and a World Bank loan of USD400 million for a social protection program. (See

Technical Annex X).

5

III – GOVERNMENT DEVELOPMENT PROGRAM

3.1 Government overall Development Strategy and Medium-Term Reform

Priorities

3.1.1 The GoE’s development strategy is centred on the “Sustainable Development Strategy

(SDS): 2030 Vision”, the 5-year Macroeconomic Framework and Strategy (MFS) announced in March

2015 and the new Cabinet’s comprehensive reform program announced in October 2015. These

documents outline the GoE’s vision for a productive and efficient economy that generates high,

sustainable and inclusive growth. The SDS and MFS set 3 main objectives to achieve this vision, namely:

(i) restoring macro stability and generating higher and sustainable levels of growth that creates jobs and

higher value added, (ii) improving public service delivery and (iii) achieving social justice and inclusion.

Four drivers were identified to achieve these objectives: economic development, market

competitiveness, human development and citizen happiness. The MFS and SDS also highlight

macroeconomic stability as the core of the GoE’s reform program and identify three policy channels:

fiscal consolidation, prudent monetary policy and legislative and structural reforms. Notably, the SDS

gives top priority to the following issues: (i) sustainable and green development, (ii) active involvement

and partnership with the private sector and (iii) food security. In the context of the MFS, the GoE will

continue implementing structural reforms in the energy sector to respond to the growing demand for

energy by the manufacturing and household sectors. The Strategy outlines the government’s objective

to enhance the effectiveness and efficiency of energy sector public enterprises while curbing corruption.

3.1.2 In line with Egypt’s Sustainable Development Strategy and Economic Recovery Plan, which

seeks to restore the country’s macroeconomic stability, the government has published in March 2015 a

White Paper outlining its vision for the energy sector. The vision is anchored on three main pillars

targeting energy security, sustainability and governance. The White Paper lays out the following key

directions for achieving this vision: (i) expansion of energy infrastructure, (ii) diversification of the

energy mix with emphasis on clean energy, (iii) reforming energy subsidies and tariffs, (iv) promoting

private sector participation, and (v) improving sector governance, transparency and competitiveness (see

Technical Annex V for details).

3.2 Challenges to National/Sector Development Program

3.2.1 Egypt is facing major national/sectoral challenges, some of them longstanding. These

challenges include macroeconomic imbalances, microeconomic distortions, low human capital,

infrastructural gap, sizeable energy shortage, and a business environment characterised by poor

competitiveness indicators and low access to finance especially by the micro, small and medium

enterprises (MSMEs).

3.2.2 A core macroeconomic challenge is re-establishing a sound macro-economic framework

which is a prerequisite for growth, job creation and private sector-led competitiveness. Over the four

years of economic instability since 2011, fiscal revenue and foreign exchange earnings deteriorated while

expenditure rose disproportionately, causing inflationary pressure, large budget deficits, sizeable

external imbalances and external reserve loss. To re-establish sound macroeconomic fundamentals, the

GoE has embarked on an ambitious program of fiscal consolidation and structural reforms aimed to

foster sustainable and inclusive growth, a process the GoE will continue over the coming years.

3.2.3 A key challenge facing the energy sector is ensuring energy security by bridging the supply-

demand gap through enhanced energy production, transmission and distribution; reforming the energy

sector to improve governance, enhancing private sector confidence, and limiting its fiscal burden on

government budget; and promoting alternative energy sources to diversify the energy mix and minimise

the impact on the environment. The energy mix in Egypt is highly biased toward fossil fuels, especially

6

petroleum and natural gas. The high level of subsidization of energy is depriving equally important

sectors such as education, health and social protection, that impact more on the poor, of the much needed

budgetary resources.8 The subsidization of fossil fuels also renders the use of Renewable Energy (RE)

and Energy Efficiency (EE) less competitive but recent power shortages have prompted renewed interest

in RE and EE. The GoE has recently embarked on the process of subsidy reform with the objective of

using a market-based approach to energy pricing so as to safeguard budgetary resources for spending on

priority sectors. Also, GoE has announced an ambitious target for RE to contribute 20% to the energy

mix by 2022, as well as published feed in tariffs for solar and wind-based energy.

3.2.4 In the area of business environment, the challenge lies in boosting private sector led growth

to create jobs (especially for the youth and women) and attract investments. Some of the key

challenges to the private sector are related to the business environment (time and number of licenses

required to start a business, weak governance, non-conducive regulation, and infrastructural gaps) as

well as inadequately skilled workforce, particularly among university graduates. A notable constraint to

private sector development, especially MSMEs, is the issue of secured transaction and access to finance,

especially long-term investment finance. The infrastructure challenge relating to inefficient power

supply also constrains private sector productivity and competitiveness. To address these challenges, the

GoE has prioritized reforms of the legislative and regulatory environment, energy sector reforms and

development of microfinance as an integral part of its medium-term reform agenda.

3.3 Consultation and Participation Processes

3.3.1 Policy and strategy development in Egypt is characterized by extensive consultations. In

fact, the 2030 Vision Initiative was originated by the civil society in 2013 and later adopted by the

government in 2015 after a solid consultation process involving all stakeholders, the media, civil society,

government institutions, and the private sector. The vision project coordinated by the Ministry of

Planning, comprised 12 pillars namely, Culture, Education, Energy, Environment, Health, Innovation,

Social Justice, Transparency, Urban, National security, External affairs, and Economy. Each pillar was

developed by a group that included representatives of the civil society, the private sector, and government

institutions and headed by a champion that was a subject matter expert. The groups met 12 times over 3

months to put together the Vision including its objectives as well as inputs, outputs and outcome KPIs.

Outcomes were then translated into action plans to be implemented on the short and long term.

Consultation sessions were carried out for each key stakeholder cluster across the pillars whilst some

were done for specific topics.

IV- BANK SUPPORT TO GOVERNMENT STRATEGY

4.1 Link with the Bank Strategy

4.1.1 The Economic Governance and Energy Support Program (EGESP) is linked to the two

pillars of the Bank Group Country Strategy Paper (CSP), 2015-2019, for Egypt, namely (i)

Infrastructure (for sustainable development), and (ii) Governance (for enhanced transparency, efficiency

and fairness). The Bank’s key objectives under the CSP, are closely aligned with the priorities announced

by the government in the SDS and MFS. The program is also fully aligned with the Bank Group Ten

Year Strategy (2013-2022), namely the Governance and Accountability, Infrastructure, and Private

Sector Development core priorities; the Energy Sector Policy of the Bank Group (2012), namely (i)

ensuring energy security and increasing access for all, (ii) moving towards a cleaner energy path, and

(iii) enhancing governance at the national level; and reinforced by two of the High-5 an emphasis within

the TYS framework intended to scale up investments in some key areas of the TYS are: Light Up and

8 Studies are increasingly showing that the flat subsidy system is benefiting the rich more than the poor.

7

Power Africa, Integrate Africa, Industrialize Africa, Feed Africa, and Improve the Quality of life for

Africans namely, “Light Up and Power Africa” and “Industrialize Africa”. It is also closely linked to the

three strategic pillars of the Bank Group Governance Framework and Action Plan, 2014-2018 (GAP II),

and the Private Sector Development Strategy, 2013-2017 (pillar 1 on investment and business climate).

The linkage of the proposed program with both the CSP and the government development agenda is

summarized in Table 2.

4.2 Meeting the Eligibility Criteria

4.2.1 Egypt meets the Bank Group’s Program Based Operations (PBO) eligibility criteria. The

SDS and MFS, whose key objectives are addressing social inclusion priorities and achieving social

justice demonstrates government commitment to poverty reduction and protection of the poor and the

vulnerable groups. To address the social demands of the revolution, social equity, job creation, improved

social service delivery and social safety nets have become priorities for the Government. With relative

political stability and government commitment to reforms, there are increasing prospects for improved

growth, employment and macroeconomic stability. The Bank’s recent Country Fiduciary Risk

Assessment (CFRA) for Egypt, indicated moderate residual risks in some sub-systems with positive

trajectory (see paragraph 6.6.1.2). In line with the Bank’s commitment to the provision of the Paris

declaration on the use of country systems, the Bank is using the moderate residual risk sub-systems in

implementing its aid initiatives in Egypt, and the entire public fiduciary framework for budget support

operations. There is a strong donor presence (bilateral and multilateral), harmonization and coordination

in Egypt. The details of how Egypt meets the eligibility criteria are provided in Appendix III.

4.3 Collaboration and Coordination with Other Partners

4.3.1 The proposed operation has been jointly developed with the World Bank, which provides

to the GoE a loan of USD 1 billion in the first year of the three-year programmatic operation. Both

institutions fielded a joint appraisal mission and are using one joint reform matrix that has been drafted

by the Government with inputs from and support of the two institutions. The main components of the

EGESP, policy actions and triggers have all been fully aligned. Donor coordination is done bilaterally

as well as formally through the DP group, which works closely with 13 thematic groups. The main

components and policy actions of the EGESP were discussed on a bilateral basis with some key bilateral

partners, including, US Treasury, USAID, Canada, Norway, Germany, France, Switzerland, EU, UK by

the EGFO. In addition, the Ministry of International Cooperation in conjunction with the Ministries of

Finance and Petroleum, hosted a briefing session on Monday November 2, 2015 to update the donor

community on the main pillars of the GoE’s Reform Program, the policy matrix, the AfDB and World

Bank supported program, and key areas for development partners’ support, amongst other issues. .

Harmonization with the World Bank will continue during implementation, in terms of monitoring of

performance and the preparation of subsequent phases of the PBO over the next two years.

Table 2: Link between the SDS/MFS/CCRP, the CSP and the EGESP

SDS/MFS CSP: 2015-2019 EGESP: 2015 – 2017

Strategic Objectives:

(i) Achieving high, sustainable and well diversified growth that creates jobs and higher

value added; and (ii) Addressing social

inclusion priorities and achieve social justice.

Strategic Objectives:

(i) Achieving high and well diversified growth that creates jobs and higher value added; (ii)

Achieving social justice and inclusion while

ensuring sound macroeconomic management.

Program Goal: Building a strong foundation

for inclusive and self-reliant economic growth.

Program Objective: Strengthening fiscal

consolidation, energy security and business environment.

Priorities:

(i) Sustainable economic development (ii)

Market competitiveness, (iii) Human

development; and (iv) Citizen happiness.

Strategic Pillars:

(i) Pillar 1: Infrastructure (for sustainable and

inclusive growth; and (ii) Governance (for

enhanced transparency, efficiency and fairness).

Program Components:

(i) Enhancing fiscal consolidation,

effectiveness and transparency; (ii) Enhancing

energy security through improved governance

and private sector engagement; and (iii) Enhancing the Business environment.

8

4.4 Relationship with Other Bank Operations

4.4.1 The Bank Group ongoing portfolio in Egypt as of 3 November 2015 comprises 30 operations

with a total commitment of UA 1.26 billion in the areas of power (78.83%), transport (7.6%), social

(3.77%), water and sanitation (3.7%), agriculture and irrigation (3.36%), multi-sector (2.54%), and

finance and SME (0.2%). (See Technical Annex VI). 87% of the portfolio is composed of public sector

loans (8 operations), 11.5% of private sector loans (1 operation), and 1.5% of technical assistance grants

(21 operations).Portfolio performance is rated satisfactory with an overall score of 2.4 (on a scale of 0-

3) as per the 2015 Country Portfolio Performance Review (CPPR). There are no problem projects (PPs),

no potentially problematic projects (PPPs), no projects at risk (PAR), and no commitment at risk (CAR).

The disbursement rate stands at 58% as at end-October 2015. The main issues causing delays in the

implementation of grant-funded projects are the Bank’s procurement rules and regulations which are not

known to EAs most of whom are dealing with the AfDB for the first time, as well as designing project

implementation plans for infrastructure projects in the wastewater treatment sector with ambitious time

frames, especially in the context of a transition.

4.4.2 The energy pillar of the EGESP which aims at supporting government efforts for ensuring

security and reliability of energy supply, will complement other Bank interventions in the power

sector. The regulatory and legal reforms being supported by the EGESP will potentially attract much

needed private investments to help close the large energy sector financing needs, while electricity tariff

reforms will significantly improve the financial sustainability of the power utility, which is a very

important factor in ensuring the sustainability of the power generation projects that the Bank is currently

co-financing. The EGESP has synergies with the governance project involving procurement and public

financial management, two areas identified with substantial risks by the 2015 CFRA. The key lessons

learnt from the previous PBO, the Financial Sector Reform Program (FSRP), and how they are

incorporated into the design of this operation are presented in Table 3. (See Technical Annex VIII).

Table 3: Key lessons learnt from FSRP

Key lessons learned How lessons are incorporated into the new operation (EGESP)

PR

OJ

EC

T C

OM

PL

ET

ION

RE

PO

RT

Ownership by the Egyptian authorities over the program

and coordination and harmonization amongst participating DPs are essentially due to the fact that the

program was designed and initiated by Government and

supported by DPs. This is very important in view of the experience of the PBO that was prepared in Nov. 2012

but was not presented to the Board due to lapses in

coordination between the Bank and World Bank.

The joint policy matrix used by the Bank and the World Bank is fully agreed with and

owned by the GoE and is aligned with Egypt’s reform program. In addition, existence of a joint coordinated policy reform matrix, eliminated duplication of interventions. To

ensure full harmonization the Bank fielded a post-appraisal mission during the period

13 -19 November, 2015 with the World Bank to ensure that a full picture of all last program items discussed and agreed to, are reflected in the Bank’s program.

The Bank’s Field Office played an important role in facilitating and expediting the entire process.

EGFO is in constant dialogue with the GoE and is fully involved in design of this operation and will be fully involved in the monitoring and supervision of the program.

The Bank should get involved in program at early stage

to contribute to its design and be able to provide both technical assistance and financial support.

The joint appraisal mission with the World Bank for this operation gives the Bank team

the opportunity to contribute to the discussions of the joint policy matrix which forms the basis of this operation with the GoE. Furthermore, the Bank has also prepared a

number of ESW which underpin this operation to enhance quality at entry.

For large programs, some flexibility should be built in

the targets to allow the borrowing country to gain

ownership and control over it.

The operation uses a programmatic approach which introduces flexibility into the

policy matrix for subsequent phases of the program. Moreover, indicators in the joint

policy matrix are fully owned by the GoE and are realistic to be achievable in the time

frame of the program.

The Bank should look to reduce delays in responses, shorten and speed up the disbursement process in

general.

The Bank has fast tracked this operation waiving some of the usual processes. The Bank will also speed up the disbursement process since each phase will have a single

tranche to be disbursed immediately after Board approval following the fulfilment of

the prior actions.

4.5 Analytical Work Underpinning

4.5.1 The design of the EGESP benefitted from a number of analytical works and country reports

prepared by the Bank, other partners and the Government. The Bank conducted a series of in-depth

analysis on: i) the private sector and the constraints to a private sector led growth, and ii) the energy

sector with a focus on clean energy promotion, the reform of energy subsidies and the promotion of a

9

more adequate institutional framework. A number of ESW are also ongoing, including Use of Renewable

Energy in Irrigation; Enhancing Cooperation in the Energy Sector within the Nile Basin Countries;

Social Policy and Social Protection - Analysis in the North Africa (Tunisia, Morocco, Algeria and

Egypt); Analysis of Social Policies in Rural Upper Egypt; and Promoting North African Women’s

Employment through SMEs; which will feed into policy dialogue with the Government and inform the

development of the second phase of the PBO in 2016. Other important documents consulted include the

IMF 2014 Article IV Consultation – Staff Report, and the World Bank report on “Egypt Economic

Monitor – Paving the Way to a Sustained Recovery. The findings and conclusions of these reports

informed the framing of the Bank Group supported program. For example, the energy studies identify

some of the weaknesses of the energy sector in Egypt, key risks associated with the energy subsidy

system and insights into the subsidy reform agenda and also proposed policy and reform measures to

promote the use of clean energy through a better involvement of the private sector. The private sector

reports provide complete review of the sector and identify the challenges in the competitiveness of the

Egyptian economy. Other reports provide insights into the fiscal reform, and how mitigation measures

should be put in place to lower the impact of the various measures proposed. The IMF Article IV report

and the World Bank report provides the basis for the macroeconomic framework and the fiscal impact

of the various measures proposed.

V. THE PROPOSED PROGRAM

5.1 Program Goal and Purpose

The goal of the proposed operation is to support the implementation of the government medium-term

development agenda aimed at building a strong foundation for inclusive and self-reliant economic

growth through fiscal consolidation; improved governance, efficiency and private sector engagement in

the energy sector; and improved business environment. In this regard, the program aims to: (i) advance

fiscal consolidation through higher revenue collection, greater moderation of the wage bill growth, and

improved fiscal transparency and management; (ii) ensure sustainable energy supply through improved

governance in power and gas sectors, reforming of subsidies and rationalization of tariffs, and enabling

private sector investments in cleaner forms of energy to promote green growth; and (iii) improved

business environment by improving environment for investment and industrial growth, and fostering

open competition, transparency, good regulatory governance, and financial inclusion.

5.2 Program Components

5.2.1 The package of reforms under the proposed program is organised around three

complementary components which are also the program Development Objectives (Dos). Component

1 on advancing fiscal consolidation would enhance macroeconomic performance, create fiscal space for

enhancing energy security and improve the environment for private sector development. Measures

proposed under component 2 on sustainable energy supply would reinforce the attainment of the fiscal

consolidation objective and also improve energy efficiency for private sector development. Measures

under component 3 are focused on enhancing business environment to spur growth and job creation. It

is a balanced program combining fiscal reforms with increased spending on the social sector with well-

targeted safety net initiatives to mitigate possible negative social impact of the program on the poor and

the vulnerable. The Bank’s supported program will complement that of the World Bank under a broader

Joint AfDB/World Bank Policy Matrix agreed with the government (Technical Annex III).

Component 1: Advancing Fiscal Consolidation

5.2.2 Challenges and Constraints: Large fiscal imbalances in recent years fuelled by revenue

shortfall, rising wage bill, and high interest payments due to rapidly rising public debt have placed fiscal

10

sustainability and macroeconomic stability at great risk. The level of fiscal deficit, observed since

2012/13 therefore require sustained fiscal consolidation efforts. In recent years, fiscal deficit and debt

rollover needs have risen, pushing up domestic borrowing costs. Delayed reforms, lower revenue, rising

wage, subsidy, and interest payments led to double-digit budget deficits reaching close to 13% of GDP

in 2012/13. Notwithstanding large external grants from the Gulf countries (4.6% of GDP), budget deficit

remained at almost the same level (12.2% of GDP) in 2013/14 as a result of two stimulus packages9 and

revenue shortfalls. Although debt sustainability analysis indicates that Egypt debt remains sustainable

as its external debt and sovereign spreads remain low, public domestic debt increased from 69.8% of

GDP in 2010/2011 to 80.1% in 2013/14, thus partly crowding out private investment and slowing down

job creation. In terms of internal control, while the internal audit capacity is adequate, the absence of

internal audit function constitutes a risk.

5.2.3 Recent Government Actions: Since 2014/15 the authorities have been implementing bold

fiscal reforms to reduce fiscal deficit and enhance debt sustainability. The 2015/16 adopted budget

targets a deficit of 8.9% of GDP (including grants equivalent to 1% of GDP), while the medium-term

fiscal objective is to reduce budget deficit to 8-8.5% of GDP over the next five years. The main measures

already implemented include energy subsidy reforms (through price hikes for fuel products by 40-80%

and electricity by 20%), wage reform, introduction of taxes on dividends and capital gains, a 5%

additional tax on high incomes, increases on excises on tobacco and alcohol, a new mining law, and a

revamped property tax, customs reform, increasing non-tax revenues, and raising other fees and excises.

The fiscal impact of the envisaged revenue enhancement measures is estimated at 3.7% of GDP in

2015/16. On the expenditure side, government is introducing measures to rationalize electricity tariff

and reform petroleum products subsidy. The fiscal impact of these expenditure measures is estimated at

1.19% of GDP during 2015/16 fiscal year of which savings from subsidy removal is estimated at 1.1%

of GDP. The authorities have also embarked on the process of re-prioritizing the structure of public

spending towards social investments particularly in health and education, by 1% of GDP.

5.2.4 Program Activities: The Bank’s operation will support the government fiscal consolidation

program. Activities under this component in this first operation of the programmatic series include: (i)

amendment to the tax law unifying the top income tax rate at 22.5% for all business and economic actors

operating in Egypt (Prior action). This measure complements a former reform that empowers the tax

authority against harmful tax planning practices; (ii) freezing special bonuses for civil servants and

delinking variable payment from basic salary in 2015/16, imposing clear controls over new government

recruits, and abandoning tax exemptions for bonuses (Prior Action). This will improve expenditure

efficiency, limit the fiscal burden of personnel emolument on the budget, and result in savings estimated

at 0.35% of GDP in 2015/16; (iii) institutionalization of the publication of the citizen budget mandating

among others: the timing and period of publication, and the budget data and information to be disclosed

in the citizen budget. This will provide the legal basis for citizen understanding of, and involvement in,

the budget execution process, and empower them to demand greater accountability from the authorities

in the process of budget execution, thereby improving fiscal transparency and management. The Ministry

of Finance has already published the citizen budget for 2014/2015 and 2015/16, but the decree to

institutionalize this process is still pending; (iv) publication of a Medium-Term Public Debt Strategy that

lays down polices to elongate the maturity of debts, diversify sources of financing of the budget deficit,

and issue new instruments to mobilize additional resources. This coupled with adoption of pro-growth

fiscal consolidation path will further reinforce debt sustainability.

9 To support domestic demand, the government raised infrastructure and social spending by 1.8% of GDP, increased the minimum wage for government

workers by 70%, and raised wages of teachers and donors.

11

5.2.5 Subsequent operations under the programmatic series will support further actions to

reinforce fiscal consolidation. These include: introduction of a fully-fledged value-added tax (VAT)

conforming to international standards to replace the sales tax, the ministerial decree establishing an

Internal Audit function in the MoF, publishing of a time bound plan with procedures and measures for

the automation of wage and salary payments, Cabinet approval of a medium term plan/rule that sets a

cap on the number of public sector new recruits relative to the number of retirees, the ministerial decree

institutionalizing the publication of the mid-year review statement, issuing of the pre-Budget Statement,

setting up of a comprehensive system for the management of contingent liabilities, and the ministerial

decree institutionalizing the publication of the medium-term macro-fiscal framework in the Budget

Statement document. Cumulatively, these policy actions will strengthen fiscal consolidation.

Component 2: Ensuring Sustainable Energy Supply

5.2.6 Challenges and Constraints: Inadequate governance, legal, regulatory and institutional

frameworks as well as inadequate supply and price regime are key constraints to energy security

and private sector engagement in the energy sector in Egypt. Demand-supply gap in oil sub-sector

was 9.1 million tons/year in 2013/14. Also, Egypt is already a net importer of gas ahead of 2018 which

was initially projected. The gap between electricity supply and demand peaked during the summer of

2014 when the system was 5,540 MW short, representing about 15% of the installed capacity. According

to the GoE’s White Paper (2015), substantial investments of the order of USD60-70bn for the oil and

gas sector and USD60bn for the power sector will be required by 2022 to expand the energy

infrastructure capabilities of Egypt in the upstream hydrocarbon sector and downstream electricity

sector. The required resources far exceed public investment capabilities; therefore, a sizeable share has

to come from the private sector. Fuel subsidies have encouraged inefficiencies in energy usage with

adverse effect on the environment and job creation. Energy subsidies represented a third of government

revenues, a fifth of government expenditure, 6.6% of GDP, and seven times of the health budget in 2014.

Government payment arrears to international oil companies reaching around USD 6 billion in July 2014

resulted in a decline in additional investment needed to sustain and expand domestic oil and gas

production. Also, the power and gas markets are still dominated by government entities, with very

limited role for the private sector, leading to operational, technical and financial inefficiencies.

5.2.7 Recent Government Actions: The GoE reform program in the energy sector focuses on

improving the governance of the power and gas sectors; subsidy reform and rationalization of

electricity tariffs; and creation of enabling environment for private sector investments in clean

energy. In this respect, GoE has embarked on an ambitious energy sector reform program focused on

energy diversification (from gas to renewables and other sources of power) and increased private sector

participation in upstream petroleum and power generation; financial sustainability; improved

governance; and transition to a liberalized market structure with independent transmission companies

and sector regulators. In pursuance of these reform efforts, the President issued in July 2015, a new

Electricity Law. The new Law was designed to reflect the planned market reform as well as strengthen

the regulatory framework. The law also provides for the separation of Egyptian Electricity Transmission

Company as an entity independent of the generation and distribution entities; enhanced transparency and

consumer protection; and clearly pushes for the adoption of energy efficiency and demand side

management measures. To implement the law, the Ministry of Electricity and Renewable Energy is in

the process of issuing the Executive Regulations.

5.2.8 Program Activities: The EGESP will support government program aimed at achieving

energy security at reasonable prices, while safeguarding financial and social sustainability of the

sector and ensuring effective and transparent sector governance. Activities under this first operation

in the programmatic series include: (i) issuance of Electricity Law No. 87/2015, with the objectives of

a) the creation of a wholesale electricity market providing direct access between generation companies

12

and eligible large consumers; b) the separation of the Egyptian Electricity Transmission Company as an

entity independent of the generation and distribution sectors; c) increased transparency and consumer

protection; and d) measures to enhance energy efficiency; (ii) the creation of a competitive gas market

through the endorsement of a new gas law, which will include provisions for open access to the gas

transportation infrastructure and the establishment of an independent gas regulator (Prior action); (iii)

issuance of a Renewable Energy Law regarding the stimulation of production of electricity from

renewable energy sources with a view to increasing the share of renewable electricity in the power grid

to 20% by 2022; and (iv) issuance of a decree mandating the second annual electricity tariff increase as

part of a five year tariff increase plan to reform the gas and electricity subsidy (Prior Action). This will

help reduce the regressive energy subsidy amount from 6.6% of GDP in 2014 to 3.3% in 2016 (target

for 2018 to be confirmed during subsequent operations of the program). The enforcement of the

electricity tariff increase and the announcement of the price trajectory will give market players and the

private sector a more stable business planning framework.

5.2.9 Subsequent operations under the programmatic series will support policy actions to further

strengthen energy security. These include parliamentary approval of the new gas law along with its

Executive Regulations, establishment of a new independent gas regulator, establishment of a dedicated

portal by the gas regulator with online access to all regulations and approval procedures, publishing of

the distribution tariff and the underlying methodology by the gas regulator, and identification of

consumers eligible for the open gas market. Other policy actions include the conclusion of competitive

bids for private development of renewable energy projects, and the creation of new energy efficiency

units at the two energy ministries. Efforts for continuing fiscal consolidation in the sector will include

implementation of the last three annual electricity tariff increases as part of a five-year subsidy reform

and continued reduction of payment arrears to international oil and gas companies to stimulate fresh FDI

in the sector.

Component 3: Enhancing the Business Environment

5.2.10 Challenges and Constraints: Among the most problematic factors for doing business in

Egypt are regulatory bottlenecks, including complicated licensing procedures. The industrial

licencing regime is particularly complex as several government agencies require evidence of registration

with the industrial registry as a requirement for various administrative formalities. This is in addition to operational licensing procedures in specific sectors for both foreign and domestic investors. In practice, additional

or different requirements than those provided in the laws are requested. Delays and non-renewal of licences, as

well as the lack of transparency in the issuance of licenses have been flagged by the business community. The

amended Law is now in place but no Executive Regulations to enforce its provisions. Moreover, lack of

appropriate legal and institutional framework to facilitate the use of movable property (such as bank

accounts, accounts receivable, inventory and raw goods, durable consumer goods, agricultural products,

vehicles and intellectual property) as collateral for both business and consumer credit, including the lack

of an efficient registration system for non-possessory charges over movables, together with lack of

access to finance, constitute a major challenge for MSMEs and limit financial inclusion in Egypt. Other

challenges and constraints include lack of appropriate foreign currency regulation, lack of transparency

and a large growing informal sector.

5.2.11 Recent Government Actions: Egypt is pursuing a policy of investment-led growth, and

improvements to the legislative and regulatory environment are an integral part of this effort. Since 2014,

the Government has been putting in place a series of regulatory and legislative amendments to create a business-

friendly environment for investors. The Government introduced amendments to the investment law in

March 2015, and issued related implementing regulations in July 2015, on the basis of which, among

others, investment procedures have been simplified, conditions and procedures for non-approval of

licenses have been defined, and dispute resolution and liquidation mechanisms have been streamlined.

13

The General Authority for Investments and Free Zones (GAFI) is playing a key role in simplifying and

facilitating the process of approvals, registration, licensing and certification for new investment projects.

Steps have also been taken to stimulate private investments through a reform of the tax system. Cabinet

approved an amendment to the tax code to unify the highest income tax rate on individuals and corporates

at a single rate of 22.5%, down from 25% for individuals and 30% for corporates, and a reduction in

sales tax on capital goods and machinery from 10% to 5%. These changes will be effective starting

2016/17. The development of mobile financial services and enhancing the financial infrastructure will

impact positively on the business environment. The launching of mega infrastructure projects such as

the Suez Canal regional development and plans to upgrade transport infrastructure (including through

PPPs) are also aimed at improving the business environment. These new developments will go a long

way in reducing the cost of doing business in Egypt.

5.2.12 Program Activities: The Bank’s operation will support the government program

in streamlining the industrial licensing regime; enhancing the legal and institutional framework for

microfinance services. The first phase of the operation in this programmatic series will support (i)

establishing an inter-ministerial committee in 2015, mandated to prepare and submit to the Cabinet a

detailed and comprehensive reform plan of the industrial licensing regime (Prior action); the reform

plan aims to (a) limit the scope of industrial licensing to enforcement of health, safety, security,

environment, and land use requirements by the responsible agencies; (b) separate policy making,

regulation and facilitation functions, and (c) further decentralize the provision of licensing services; (ii)

issuance of a Presidential Decree and Executive Regulations introducing amendments to the Investment

Law, to among others, define conditions and procedures for non-approval of licensing and streamline

dispute resolution and liquidation mechanisms (Prior action); and (iii) issuance of a Law on

Microfinance to license companies and non-governmental organizations to engage in microfinance

activities (Prior action). This policy action would improve legal and regulatory framework for improved

business enabling environment to enhance private sector investment and improve access to credit for the

underserved MSMEs and women entrepreneurs.

5.2.13 Subsequent operations under the programmatic series will support, among others,

endorsement by Cabinet of an Industrial licensing reform action plan; implementation of the industrial

licensing reform by simplifying at least one regulatory area in a manner that significantly reduces

compliance requirements; introduction of framework for at least one new microfinance product;

implementation of mandatory credit checks from the credit bureau for financing above a certain

threshold; and establishment by EFSA of an independent unit to monitor microfinance activities in

specialized companies and established associations. These policy actions will further enhance business

environment and financial inclusion.

5.3 Policy Dialogue

5.3.1 The program log-frame and the government policy matrix will form the basis of policy

dialogue around the achievement of the expected outcomes of the three main components of the

program. Policy dialogue will focus on the following issues, among others: (i) Fiscal consolidation

focusing on revenue enhancement measures and improved expenditure efficiency to contain the fiscal

deficit; (ii) Social protection focusing on the need to protect the poor through well-targeted safety net

measures and careful design of the subsidy reform. The program therefore has in-built enhancement of

social expenditure, with an indicator to gauge the anticipated increase in social expenditure. Consistent

implementation of the social protection measures will inform policy dialogue during program

implementation. Well managed fiscal consolidation measures need not hurt the poor and the vulnerable

groups but actually benefits them by creating fiscal space to allow for the reprioritization of spending

toward social program. The Government intend to continue to allocate an adequate portion of the fiscal

14

savings annually to finance well-targeted safety net programs, whilst developing a single consolidated

and comprehensive social protection strategy with an action plan that puts into motion different programs

targeting the different categories of poor and vulnerable, including youth, women and the populations in

rural and remote areas. Dialogue with the Government will continue with the objective of supporting

social protection initiatives, improving gender equality, and improving safety nets to enable the active

poor of taking business risks without jeopardizing their livelihoods; (iii) Promotion of renewable

energy: In addition to the proposed measures in the program, the Bank’s ongoing study on the use of

renewable energy for irrigation, will further enhance policy dialogue in this area; and (iv) Improving

business enabling environment focusing on amendments to the investment law, licensing reform, and

micro finance will enhance policy dialogue on improving business environment and financial inclusion.

5.4 Loan Conditions

5.4.1 Prior Actions for 2015/16 and indicative triggers for subsequent operations: Before the

proposed operation is presented to the Board for approval, the prior actions presented in Table 4 would

have been met by the authorities and the required documentary evidences submitted to the Bank.

Appendix IV which also shows indicative policy actions that will serve as triggers for the second and

third phases of the operation, subject to modification during the preparation of the streamlined program

appraisal reports in 2016 and 2017. All the prior actions and triggers are drawn from the government

matrix jointly agreed with the AfDB and the World Bank during the program appraisal mission.

5.5 Application of Good Practice Principles on Conditionality

The design of the EGESP is in line with the principles on conditionality. The reform policy matrix

is fully owned by the GoE. This is reflected in its policy reform program (Letter of Development Policy,

Appendix I). EGESP was designed in line with GoE’s reform program and in harmonization with the

World Bank’s supported program. The EGESP contains a number of prior actions in critical areas of

different elements of the government program.

5.6 Financing Needs and Arrangements

The financing gap is estimated at 147.9 LE billion (18.9 billion USD) for fiscal year 2015/2016. The

measures (tax measures, fuel and food reforms), supported by this support operations will help reduce

the overall financing gap by 62.9 LE billion (8 billion USD) to 85 LE billion (10.9 billion USD).The

government will finance this gap through domestic borrowing and international borrowing. The IFIs are

Table 4: Prior Actions and Required Evidence for FY 2015/16 :EGESP Measure Evidence Required

Amendment to the tax law unifying the top income tax rate at 22.5% for all business and economic actors

operating in Egypt.

Copy of the Law

Freezing special bonuses for civil servants and delinking variable payment from basic salary in 2015/16,

imposing clear controls over new government recruits, and abandoning tax exemptions for bonuses.

Copy of the Law

The creation of a competitive gas market through the endorsement of a new gas bill, which will include

provisions for open access to the gas transportation infrastructure and the establishment of an

independent gas regulator.

Copy of letter from the Secretary General

of the Cabinet informing the Ministry of

Petroleum that the bill has been endorsed by Cabinet

Issuance of a decree mandating the second annual electricity tariff increase as part of a five year tariff

increase plan to reform the gas and electricity subsidy.

Copy of the decree

Issuance of a Law on Microfinance to license companies and non-governmental organizations to engage in microfinance activities.

Copy of the Law.

Establishing an inter-ministerial committee in 2015, mandated to prepare and submit to the Cabinet a

detailed and comprehensive reform plan of the industrial licensing regime.

Copy of Prime Minister’s Decree.

Issuance of a Law and Executive Regulations introducing amendments to the Investment Law, to among others, define conditions and procedures for non-approval of licensing and streamline dispute resolution

and liquidation mechanisms.

Copy of the Law and Executive Regulations

15

expected to contribute 10.9 LE million (7.8 WB, 3.1AfDB) and the Government plans to float another

Euro Bond of USD1.5 billion in 2015/16 as part of the country program involving issuance of Eurobonds

up to USD 10 billion. AfDB’s Budget support accounts for 1.0 % of the budget deficit and covers 2.4%

of the current account deficit. The approach seems sustainable. First on external resources mobilization,

the 1.5 billion Eurobond issued in May 2015 was 3 times oversubscribed which augur well for future

emission as it demonstrates market confidence in the economy and the reform agenda. Second, the

government mobilizes the IFIs to lower future debt service obligations through a loan with a grace period

giving the authority the necessary space to bear the fruits of the reforms program. Third, the

diversification away from domestic borrowing will ease pressure on the private sector through less

crowding out and reduced exposure. Finally, the debt sustainability analysis (See Technical Annex IX)

shows that the external debt is still sustainable.

Table 5: Projected financing requirements and sources, date

FY 2015/2016 FY 2016/2017 FY 2017/2018

LE Billion US Billion LE Billion US Billion LE Billion US Billion

A Total revenue and grants 504,7 64,6 571,8 73,1 654,3 83,7

Of which: grants (excl, budget support) 2,0 0,3 2,2 0,3 1,9 0,2

B Total expenditure and net lending 824,2 105,4 939,2 120,1 1 068,1 136,6

Of which: interest payments 222,3 28,4 264,2 33,8 311,0 39,8

Of which: capital expenditure 75,0 9,6 59,8 7,6 68,1 8,7

C Overall balance (cash basis) (A - B) -319,5 -40,9 -367,4 -47,0 -413,8 -52,9

D Accumulation of arrears 8,8 1,1 1,9 0,2 2,5 0,3

E Overall balance (commitment basis) (C - D) -328,3 -42,0 -369,3 -47,2 -416,3 -53,2

F External financing (net – minus Bank and WB) -22,0 -2,8 -35,0 -4,5 -18,2 -2,3

G Domestic financing (net) 191,5 24,5 227,4 29,1 243,5 31,1

H Bank contribution 3,1 0,4 0 0 0 0

I World Bank 7,8 1,0 0 0 0 0

J Financing (F + G+H+I) 180,4 23,1 200,2 25,6 233,1 29,8

K Financing gap (-E -J), financed by: 147.9 18.9 169.1 21.6 138.2 23.4

L Identified measures (cumulative deficit reducing) 62,9 8,0 70,0 9,0 77,8 10,0

M Others

N Residual financing gap (K– L – M) 85,0 10,9 99,1 12,7 105,4 13,5

5.7 Application of Bank Group non-concessional borrowing policy

Egypt is classified as an ADB country and is eligible for only ADB financing. As such, Egypt is not

affected by the Bank Group non-concessional borrowing policy adopted in 2008 and the 2010

amendments to the Bank Group Policy on Non-Concessional Debt Accumulation.

VI OPERATION IMPLEMENTATION

6.1 Beneficiaries of the Program

6.1.1 The EGESP will directly benefit MOF and ministries and public entities in charge of the energy

sector (e.g. EEHC, EGAS, sector regulators, etc.) The 89 million Egyptian people will be the ultimate

beneficiaries from fiscal consolidation, as the resultant freed fiscal space will be directed to fund pro-

poor expenditures and basic social services delivery. The private sector too will benefit from reliable and

affordable electricity, improved access to finance, especially by SMEs including women-owned

enterprises, as well as from more transparent and efficient PFM system, especially relating to

procurement practices. The entire population of Egypt will also benefit from the improved operational

efficiency and competitiveness in the energy sector that will result in positive impacts on the security,

reliability and pricing of energy supply. On the other hand, reforming the energy subsidies is very likely

to trigger a change in the structure of the industrial sector by discouraging energy intensive industries

that tend to be capital rather than labour intensive, and open the door for more labour intensive industries

and therefore helping create more jobs.

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6.2 Impact on Gender, Poor and Vulnerable Groups

6.2.1 Impact on gender: The proposed operation will impact positively all citizens, both men and

women. Improved public financial management and fiscal consolidation will allow savings, part of

which will be used to finance specifically targeted programs for women’s empowerment particularly in

rural areas, including expansion of the cash transfer program where payments are made to mothers of

school-age children. The increased electricity supply, and its reliable and efficient delivery, will benefit

all, including women and youth, living in rural areas where poverty is widespread and basic services are

limited. Specifically it will impact positively on the health system, educational attainment, and

agriculture sector with particular benefits to rural folks. It would also ensure security enabling longer

working hours and safety for women. The improved business environment including the simplification

of licensing process and the law on microfinance will decrease the cost of doing business and increase

access to credit and encourage both men and women, particularly the youth and women entrepreneurs,

in engaging in lucrative income-earning activities and in creating viable start-ups and SMEs.

6.2.2. Impact on Poor and Vulnerable Groups: The policy reforms under the proposed operation have

been designed and implemented in such a manner as to shield the poorest and vulnerable from any

additional financial burden emanating from increase in price of utilities and/or increased taxation. More

specifically, the risk to the vulnerable group arising from adjustments of electricity tariff is being

mitigated by categorizing the residential tariff reforms and applying minimum or no increase on the

lowest segments. The increase in taxes is not expected to impact the poor as taxes on dividends, capital

gains, and property address mainly the higher-income segments of society. In fact, the government has

designed the forthcoming VAT reform package in a way that is progressive and exempts the goods and

services consumed primarily by the lowest income groups. Nonetheless, to mitigate some of the risks

associated with the price hikes that could potentially impact the poor and the middle class, the

government announced the decision to increase expenditures on social benefits. With regards to energy

sector reforms, they were designed and launched in a way that minimizes the potential negative impact

on the poor and vulnerable communities. Indeed, the government uses prudent measures to regulate the

hike in prices while simultaneously ensuring the adoption of social reforms with tangible, sustainable

benefits. An example of the Government approach is seen in the fuel price hikes adopted in 2014, the

increase adopted for the high-octane fuel used by the richer segments of society than for fuel used for

public transport. (See Appendix V for details) Through its support for improved business environment

for SMEs, where youth and women are increasingly involved, the proposed program will also contribute

to better gender equality and women’s empowerment in Egypt by improving access to finance and

tailoring savings and loan products for the active poor, including women. In addition, government has

already piloted several social protection programs, including a cash transfer program with the assistance

of the World Bank loan (USD400 million), as part of the measures to mitigate the possible negative

social impact of the proposed program on the poor and the vulnerable.

6.3 Impact on Environment and Climate Change

The EGESP is classified as Category 3, in accordance with the Bank’s environmental and social impact

assessments procedures. The EGESP focuses solely on policy and institutional reform measures, with

no direct or indirect adverse environmental, climate change and social impacts. Beyond the

categorisation, no further action is required. The EGESP includes several features that will make it

contribute very positively to improvements in the overall physical environment and to combating climate

change. This will be achieved through the emphasis that the EGESP is putting on promoting clean energy

in Egypt, including both renewable energy and energy efficiency. In this respect, the EGESP will

strategically and effectively support Egypt fulfil its target of increasing the share of renewable energy in

the energy mix to 20% by 2022 through support to policy and regulatory reforms in the sector that will

17

ultimately lead to more private investment in clean energy. This strategic shift from conventional to

renewable energy will impact positively on the environment and help reduce the energy intensity which

will ultimately contribute to improving the overall carbon emission performance of the grid in Egypt.

Reforming the energy tariffs is also expected to give the much needed boost to energy efficiency, both

at the supply and demand sides. Finally, activities under component 3 aim inter alia to limit the scope

of industrial licensing and to enforcement of health, safety, security, environment, and land use

requirements by the responsible agencies.

6.4 Impact on Private Sector Development

The EGESP will have a positive impact on Egypt’s economic competitiveness and private sector

development. The program’s focus on fiscal consolidation will help in creating fiscal space for increased

investments in critical areas such as infrastructure which will benefit the private sector. This is critical

to reducing the cost of doing business. A reduction in the deficit will also reduce the risk of crowding

out of the private sector. One of the objectives of the energy sector reforms is to use a market based

approach to energy pricing and safeguard budgetary resources for spending on priority sectors. This will

also play a role in creating the conditions that will attract private sector interest in the energy sector. The

resultant efficiency gains emanating from competition will lower energy prices in the medium to long

term. This will not only boost Egypt’s competitiveness, but will also reduce the cost of production and

enhance profitability of businesses, including SMEs. Finally, measures geared towards enhancing

competition and reducing regulatory bottlenecks, including through streamlining of the licensing regime,

will go a long way in fostering a favourable business climate and hence positively impact private sector

development. Specifically, reforming the industrial licensing regime and strengthening the regulatory

framework through the investment law, will provide the private sector with the incentive to invest, which

will in turn stimulate economic growth with impact on poverty reduction. Moreover, the new gas law

and recent discovery of large gas reserves will lead to a diversification of the source of power generation

with a resultant reduction in the cost of generation. This is expected to lower the cost of energy in the

medium to long term and boost competitiveness the private sector in Egypt, as well as reduce the cost of

production and enhance profitability. The lower cost of production will benefit SMEs, which generally

struggle to survive the high cost of production and low margins.

6.5 Implementation, Monitoring and Evaluation

6.5.1 Implementation Institutional Framework: The Ministry of International Cooperation (MOIC)

will be responsible for the overall coordination of the program while the Ministry of Finance (MOF), in

collaboration with the Ministry of Energy and other relevant agencies, will be the implementing agency.

The MOF and the other sector ministries have the means and the competent human resources to

implement the program. The Bank plans to complement the technical assistance provided by other DPs

including the World Bank, to MOIC to further enhance its capacity to coordinate the program. A MENA

TF grant of UA3.2 million is being finalized by the Bank for the MOIC. The project will support the

transformational Capacity Building and institutional strengthening to better equip MOIC to carry out its

aid coordination/management and resource mobilization mission efficiently and effectively.

6.5.2 Monitoring and Evaluation Arrangements: The Operations Policy Matrix (see Technical Annex

III), agreed between the Egyptian authorities on one hand, and the World Bank and Africa Development

Bank on the other, as well as the quantitative and qualitative indicators defined in the Results-Based

logical Framework, will constitute the framework for monitoring and evaluation of the EGESP. The

MOIC will be responsible for collecting data and coordinating monitoring and evaluation, and will make

information available to the Bank and the World Bank. The Bank will monitor the implementation of

the Program through regular supervision in coordination with the World Bank, and close follow-up to

assess progress achieved based on the indicators and triggers for years two and three of the Policy Matrix.

18

EGFO will play a critical role in follow-up of implementation and monitoring of program results and

impact and, in particular, constant policy dialogue with Government and regular consultations with the

World Bank and other DPs. This operation will be followed by the second and third operations in 2016

and 2017, to complete the programmatic series. Following completion of the third operation, a Program

Completion Report (PCR) will be prepared to evaluate progress against the Results-Based Logical

Framework and to draw lessons for follow-up operations.

6.6 Financial Management, Disbursement and Procurement

6.6.1. Country Fiduciary Risk Assessment (CFRA)

6.6.1.1 In June 2015, the Bank undertook a Country Fiduciary Risk Assessment (CFRA) as part of its

CSP preparation process. The CFRA covers the main components of the PFM systems of the GoE,

namely Budget Planning and Execution, Treasury Management, Accounting Recording and Reporting,

Internal Control, External Audit, Procurement and Governance. The CFRA shows that operational

capacities for the PFM systems are in place, the citizen budgets for 2014-2015 and 2015/16 have been

published, internal control arrangements in the Accounting Units (AUs) for execution and accounting of

the public expenditures and an e-payment system is functioning in a substantial number of AUs. This

notwithstanding, there is room for improvement, especially with regard to the acceleration, update,

establishment, adoption and standardization of some FM arrangements within the main PFM systems

components. Although the procurement law and its executive regulation (ER) provide sound and good

procurement principles, the ER is too broad. This coupled with the absence of key implementation

documents reduces predictability and constitute a potential source for inconsistent decisions and reduced

transparency. Efforts to improve the current procurement law and its regulation through an in-depth

revision are on-going, but there is a need to accelerate the process. In the area of Governance and Anti-

Corruption (GAC), there are at least twelve anti-corruption authorities in Egypt and the GoE has in place

an anti-corruption strategy serving as a roadmap for the authorities on anti-corruption issues. A draft

code of conduct and a whistle blower mechanism are in place, but these are yet to be adopted. A conflict

of interest law was adopted in November 2014, but it falls short of international standards and the GoE

is currently working with the UNODC to improve it.

6.6.1.2 Given the positive trajectory of the GoE’s PFM reforms, the Bank will be using the country’s

PFM sub-systems in the implementation of its aid initiatives. In doing this, the Bank will continue to

support related reforms and design measures to mitigate residual risks for its projects and programs.

However, this approach will be adapted to the specificities of each operation while ensuring compliance

with each strategy process set-up by FM, Procurement and Governance Departments in the Bank. The

Bank’s support to PFM and Procurement reforms will focus on the enhancement of corporate governance

of public enterprises, the setting up of an Internal Audit Function based on international standards,

structural reforms and capacity building of the Accountability State Authority (ASA), and the scaling up

of ongoing e-procurement agenda aimed at moving toward electronic bid submission. The Bank

fiduciary support will continue to ensure performance management of the country portfolio and

individual operations in Egypt.

6.6.2 Financial Management, Audit and Reporting Requirements

6.6.2.1 Given that the proposed operation is a PBO, the use of funds will be compliant with the

institutional, legal and regulatory frameworks of the Egyptian PFM for which reforms are being

implemented. The operation will contribute to covering the financing gap estimated at 8.9% of GDP for

the fiscal year 2015/2016. Since the proposed operation is a fast-disbursing operation involving

disbursement into government’s treasury account, funds disbursed by the Bank are co-mingled with

government funds. Given the inherent fungibility of funds, Bank funds cannot be easily tracked to

19

specific transactions after disbursement. To that end, the Ministry of Finance will ensure the financial

management responsibility of the proposed operation.

6.6.2.2 With regard to the external audit duties and activities, the ASA as the Supreme Audit Institution

of Egypt conducts financial, compliance and performance audits of all the entities using public resource.

The ASA audit reports are not published, as the legal framework has not yet been updated. The

confidentiality of the audit reports and therefore their limited impact combined with the current absence

of parliament constitute a significant limitation to the external oversight of budget execution. The Bank

reviewed the flow of funds arrangement between the Central Bank of Egypt (CBE) and the Treasury and

concluded that current arrangements are adequate with fiduciary risks within acceptable risk tolerance

levels. Nevertheless, an audit of the transfer of funds of the program from the foreign currency account

to the Central Treasury Account by the independent auditor Accountability State Authority is required.

The transaction audit report should be submitted to the Bank, by the Executing Agency, not later than

six months after the financial year to which it relates.

6.6.2.3 Disbursement Arrangements: The operation will follow the Bank’s disbursement procedures

for PBOs. The funds will be disbursed by the Bank, in a single tranche, into a foreign currency account

to be opened in the CBE by the Ministry of Finance, as a transit into the Central Treasury Account of

the Government that is used to finance budget expenditures. The Ministry of Finance will report to the

Bank on the amounts deposited in the foreign currency account and credited in local currency to the

budget management system. If after deposit in this account the proceeds of the Loan are used for

ineligible purposes, the Bank will require the Ministry of Finance to refund the amount directly to the

Bank.

6.6.2.4 Procurement: The procurement arrangements for the budget support operation will be

undertaken in accordance with country systems set by the Law N. 89/1998 (‘’The Law’’) (as amended

or replaced), promulgating the law on the Organization of tenders and Bids10, and the Decree 1367/1998

issued by the MOF promulgating the Executive Regulation11 (“ER’’)12 (as amended or replaced).

VII – LEGAL DOCUMENTATION AND AUTHORITY

7.1 Legal Documentation:

The Loan Agreement between the African Development Bank and the Arab Republic of Egypt.

7.2 Conditions Associated with the Bank’s Intervention

7.2.1 Conditions Precedent to Entry into Force of the Loan Agreement: The entry into force of the

Loan Agreement shall be subject to the fulfilment by the Borrower of the provisions of Section 12.01 of

the General Conditions Applicable to Loan and Guarantee Agreements of the Bank.

7.2.2 Prior Actions: Before the proposed operation is presented to the Board, GoE shall have provided

evidence, satisfactory in form and substance to the Bank, that the prior actions for the EGESP outlined

in Table 4 have been fully fulfilled.

7.2.3 Conditions precedent to disbursement of the funds of the EGESP: Disbursement of the loan

amount of USD500 million shall be conditional upon the entry into force of the Loan Agreement, the

transmission to the Bank of the details of a foreign currency account with the Central Bank of Egypt for

purposes of receiving the proceeds of the Loan.

10 As amended until 2013 11 As amended until 2010 12 Others Additional legal texts such as decrees and legal opinions from the state council are regularly issued to complement this framework

20

7.2.4 A Streamline Appraisal Report (SAR) for the second year of the programmatic series (EGESP

II) will be prepared at the end of phase I of the operation in 2016 and presented to the Board for approval.

Similarly a SAR for the third year will be prepared at the end of phase II in 2017 and presented to the

Board for approval. Each of the subsequent SARs will indicate, inter alia, any applicable prior actions

adopted before Board presentation and/or any conditions precedent to disbursement, in addition to any

indicative triggers for the third operation in the case of the second operation. A separate loan Agreement

shall be prepared for each phase of the programmatic operation.

7.3 Compliance with Bank Group Policies

The EGESP complies with all applicable Bank Group policies and guidelines, and no waiver of the

applicable Guidelines has been requested with respect to this proposal. The key Bank Group Guidelines

and other guidelines applied to this Program are the following: (i) Bank Policy on Program-Based

Operations (2012, 2013, and 2014), (ii) the Bank Group Ten-Year Strategy (2013-2022); (iii) the

Governance Strategic Framework and Action Plan 2014-18, (iv) the Revised Staff Guidance on Quality-

at-Entry Criteria and Standards for Public Sector Operations, (v) the Energy Sector Policy of the Bank

Group (2012), the Private Sector Development Strategy, 2013-2017, and (vi) Guidelines on Product and

Pricing for MICs (2009).

VIII RISKS MANAGEMENT

8.1 The risks and mitigation measures of the program are presented in table 6 below and are also

summarized in the logical framework:

Table 6: EGESP Risk and Mitigation Measures

Risk Mitigation measures

Economic risks due to vulnerability to external and domestic shocks. With the economy

still in the early stages of recovery and its fragile external reserves position, Egypt remains particularly vulnerable to adverse shocks. For example global financial market volatility

and slowdown in global trade would affect expected inflows, including official support,

foreign direct investment, as well as tourism and Suez Canal revenues.

Government reform program contains bold revenue enhancement

and expenditure efficiency measures to mitigate this risk and strengthen fiscal consolidation. Continuous dialogue with GoE on

macroeconomic management under the proposed program will

further mitigate the risk. Security risks: A moderate likelihood of intensified regional conflict, especially in countries bordering Egypt, and deterioration in domestic security conditions due to

terrorist activities would affect confidence, investment and tourism, and consequently

attainment of revenue and investment projections

The GoE has also intensified efforts and combating militancy and terrorism

Fiduciary risks: The recent Bank’s CFRA for Egypt indicates a positive trajectory of

GoE’s PFM reform, and that some sub-systems such as budget preparation, ex-ante

controls over expenditures and external audit present moderate residual risks (See Technical Annex II for details). However, Fiduciary risk if not mitigated would derail

program implementation, and achievement of expected program objectives.

As indicated, some sub-systems of the country fiduciary framework

are residually moderate. The measures being implemented under this

program and various ongoing technical assistance and institutional support projects aimed to strengthen public financial management

will further mitigate this risk.

Risks of policy delays or reversal: Some of the bold revenue enhancement and expenditure

efficiency measures contained in the government program (e.g VAT, wage reform, subsidy reform, and electricity tariff rationalization), if delayed or reversed due to possible

negative social impact and citizen response, could derail fiscal consolidation, widen imbalances, and set back progress already made

The reform program is home grown and its implantation is on track.

Ownership by, and commitment of, the GoE to reforms will mitigate this risk. Moreover, the fiscal consolidation measures were designed

in such a way that its impact will be neutral on the low income bracket, the poorest of the poor and the vulnerable. The government

is also implementing a social protection program with the assistance

of World Bank loan (USD400 million). Energy shortage risk: The supply-demand gap in the gas and electricity sector has been widening and huge investment is required to bridge this gap. Required investment to

restore energy production capabilities in the upstream hydrocarbon and downstream

electricity sectors, was put at USD60-70 billion and USD60 billion respectively. Non realization of this required huge investment could derail the energy sector program,

worsen the business environment and result in welfare loss for the population.

GoE planned investment in both the upstream hydrocarbon sector and the downstream electricity sector; as well as the measures for

improving sector governance will mitigate this risk

Social Risk: The freezing of special bonuses and rewards for all employees in 2015/2016 can be faced with resistance during implementation.

The new public administrative reform will review public sector salaries, and ensure that bonuses are merit-based.

IX RECOMMENDATION 9.1 Management recommends that the Board of Directors approve an ADB loan not exceeding

USD500.0 million to the Arab Republic of Egypt for the fiscal year 2015/16 for the purposes, and subject

to the conditions, stipulated in this report. Management invites the Board to note that this operation is

part of a 3-year programmatic series, covering the fiscal years 2015/2016-2017/18.

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APPENDIX I: LETTER OF DEVELOPMENT POLICY

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APPENDIX II:

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APPENDIX III: EGYPT: MEETING THE ELIGIBILITY CRITERIA FOR THE PBO

Prerequisites Country Eligibility

Government

Commitment

The government has developed a home grown and credible reform agenda articulated in the SDS and the

MFS prepared through wide-ranging participatory process involving various stake holders. Both the SDS

and MFS address the root causes of poverty and social exclusion in Egypt. A well targeted social protection

program is an integral part of the medium-term reform program, which also addresses the issue of transition

to green growth through the development of renewable energy (RE) sources. The GoE has recently put an

ambitious target that RE contributes 20% of the energy mix by 2022. Government is committed to the

successful implementation of the policy reforms articulated the program documents, which are well aligned

with the medium-term budget framework. There is also allocative efficiency of the budget against the

national development plan. Capacities for formulating, executing and controlling annual budgets are in place.

Macroeconomic

framework

The IMF Article IV Consultation for Egypt was concluded in February 2015. According to the report, the

past four years of political instability in the country has taken a toll on confidence, economic activity,

investment and tourism. Starting from a difficult position, the authorities seek to achieve higher and more

inclusive growth and job creation while reducing inflation and budget deficit. By 2018/19, they target 6

percent growth rate and 7 percent inflation, and a budget deficit reduced to 8-8.5 percent of GDP. There are

a number of factors that could minimize the downside risks and help the authorities achieve higher than

expected growth, faster fiscal consolidation and an improvement in the external balances. For instance, the

growth path could be outperformed if an accelerated structural reforms agenda were implemented along with

a higher –than-expected materialization rate for EEDC projects. Public investments by the government in

infrastructure and human capital, including health and education, are likely to result in quick productivity

gains and crowding in of the private sector, positively supporting growth. Also, resolving exchange rate

concerns would help reduce the external financing gap on the back of increased portfolio investment flows

as well as a pick-up in non-oil exports growth. An accelerated recovery of the tourism sector, which has been

affected recently by security incidents, would also have a positive impact on growth and the external position.

Accessing other sources of external financing also has the potential to cover the external financing gap; these

sources include issuing new instruments such as sukuk, tapping the Asian financial markets, and utilizing

the euro clearance system. Implementing the right policies will enhance Egypt’s opportunities as a suitable

and safe haven for foreign investments. On the fiscal side, a faster pace of reforms would result in more rapid

fiscal consolidation. Additionally, the acceleration of some public financial management reforms could lead

to efficiency gains and optimize the utilization of public resources.

According to the latest debt sustainability analysis undertaken by the IMF, public debt sustainability risks

remain significant although mitigated by an ambitious fiscal adjustment plan and a friendly domestic investor

base. The GoE targets a debt-to-GDP level ratio of 80/85% by 2018/19, down from 95.5% in 2013/14.

Foreign exchange depletion has stabilized but foreign exchange levels remain fragile. The official exchange

rate has remained broadly unchanged since June 2013, but this has generated a parallel market premium

fluctuating between 2-7 percent and a backlog of demand for foreign exchange. Inflation (currently 9.5

percent) pressure continues to persist on the back of fiscal consolidation and a weaker pound. Monetary

policy seeks to balance concerns over inflation and the need to support growth and finance the fiscal deficit.

Overall, the monetary stance has remained broadly accommodative. The banking sector has been resilient in

the face of economic turmoil in recent years, but it has been exposed to shifts in political fortunes leading to

downgrades to “significant risk” by rating agencies since 2013. Given the relative political stability, Moody

in July 2015 changed Egypt’s banking system outlook from negative to stable. There are no risks of policy

instability since government is committed to the implementation of its home-grown reform program

Political

stability

The initial transition phase (January 2011-July 2013) following Egypt’s 2011 revolution resulted in political

instability, but a new path towards political stability and economic rebound emerged since mid-2014. Two

crucial milestones of the political roadmap prepared in July 2013, namely the ratification of a new

constitution and presidential elections are already completed. The final milestone relating to holding

parliamentary elections in October and November 2015, which will lead to the establishment of a new

Parliament by end 2015 or January 2016 is currently ongoing. Meanwhile, the GoE has been making

significant efforts to combat militancy and radicalism but the security situation remains a source of fragility

in view of terrorist attacks, initially localized in North Sinai and targeting security forces, but now slowly

expanding to Cairo. Consequently, Egypt’s political outlook remains cautiously positive.

Satisfactory

fiduciary risk

assessment

The Bank’s 2015 Country Fiduciary Risk Assessment (CFRA) for Egypt covers the main public financial

management (PFM) systems components of the GoE, namely budget planning and execution, treasury

management, accounting, recording and reporting, internal control, external audit, procurement and

governance (see paragraph 6.6.1 and Technical Annex2 for details). The CFRA indicated positive trajectory

of GoE’s PFM reforms; and indicated that the Bank uses some sub-systems such as budget preparation, ex-

ante controls over expenditures and external audit that present residual moderate risks, in implementing its

initiatives in Egypt.

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Harmonization A harmonized donor framework for budget support operation is not in place in Egypt given that only the

World Bank and the AfDB are currently engaged in this area of support to Egypt. There is also no plan there

is no on-going process to establish a budget support group under the proposed operation. However, this

operation is fully harmonized in its approach with the World Bank through the fielding of a joint program

appraisal mission and the use of a joint matrix agreed with the GoE. This process will also continue during

implementation, in terms of evaluation of performance and the preparation of the subsequent phases of the

PBO in 2016 and 2017. The main components and policy measures were also discussed with the key bilateral

partners both informally (through various mechanisms) and formally through the DP briefing organized by

MOIC at the end of the appraisal mission. In general, the Bank is actively discussing its interventions with

all the major bilateral and multilateral development partners in Egypt. This is done bilaterally as well as

formally through the Development Partners Group (DPG) coordinated by the UNDP, which works closely

with 13 thematic groups.

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APPENDIX IV: EGYPT: PRIOR ACTIONS AND TRIGGERS Prior Actions for Phase 1 Triggers for Phase 2 Triggers for Phase 3

Component 1: Enhancing fiscal consolidation

Objective 1.1 Enhancing Government Revenue

Measure:

The President has issued a decree promulgating Law No. 96/2015 which amends the [Income Tax Law] by

unifying the top income tax rate at twenty-two and one

half percent (22.5%) for all economic actors operating in the Borrower’s territory, including those operating in

special economic zones formerly subject to a lower rate

of ten percent (10%)

.

Status: Issued and effective for all budgetary units since

June 2015 Evidence Required: Copy of the decree

Measure:

The Government has done an initial assessment of the implementation of the [Value Added Tax

law] which introduces the following features to

the value added tax regime: (i) a single unified tax rate for all goods and services; (ii) a clearly stated

table detailing excise taxes; (iii) a well-identified

list of exempted goods and services; (iv) a full-fledged tax credit system for direct and indirect

inputs; and (v) a tax refund system for expenses

related to the purchase of equipment and machinery. The assessment includes the initial

revenue effect of the VAT as well as the

adequacy of the institutional capacity to implement the VAT, along with

recommendations for institutional capacity

strengthening.

Measure:

The Ministry of Finance issues a decree that introduces a harmonized and simplified tax

regime for micro and small businesses based

on turnover.

Objective 1.2 Containing the wage bill

Measure:

The President has endorsed the national budget for FY16

by issuing Presidential Decree No. 32/2015 which includes administrative instructions to all government

budgetary entities to: (a) freeze bonuses and rewards of

their respective employees in FY16; and (b) delink the variable portion of employees’ salaries from the basic

salary component.

Status: Issued and effective for all budgetary units since

June 2015

Evidence Required: Copy of the decree

Measure:

The Ministry of Finance publishes a time-bound

plan with procedures and measures that facilitate and enforce the automation of wages and salaries

payments for all government employees to: (i)

enable the government to have a reliable data base to guide a more informed decision-making

process, (ii) enhance financial inclusion by

requiring all employees to have bank accounts, and (iii) reduce cost of managing the government

payroll system.

Measure:

The Cabinet approves a medium-term

plan/rule that sets a cap on the number of new recruits in the public sector relative to the

number of retirees.

Component 2: Ensuring Sustainable Energy Supply

Objective 2.1 Improving Energy Governance

Measure: The Cabinet has endorsed a new gas law that

provides for: (i) open access to the gas infrastructure; and (ii) the establishment of an independent gas sector

regulator

Status: Cabinet endorsed the new law on 28 October 2015

Evidence Required: Copy of letter from the Secretary

General of the Cabinet informing the Ministry of Petroleum that the law has been endorsed by

Cabinet

Measure:

(i) The President/ Parliament enacts the new gas law, and the Ministry of Petroleum and Mineral

Resources issues the executive regulations

implementing the new gas law.

(ii) The Ministry of Petroleum and Mineral

Resources establishes a new independent gas

sector regulator pursuant to the new gas law.

Measure:

(i) The Ministry of Petroleum and Mineral Resources nominates the independent

transmission system operator in compliance

with the requirements set by the gas sector regulator, and the gas sector regulator issues a

license to the independent transmission

system operator.

(ii) The Cabinet, based on advice from the gas

sector regulator, identifies consumers eligible

to choose a gas supplier in the open market, pursuant to the new gas law.

Objective 2.2 Reforming Energy Subsidies

Measure:

The Cabinet has issued a decree for implementing the

second annual electricity tariff increase as part of a five year tariff increase plan outlined in the Prime Minister’s

Decree No. 1257/2014 to reform the gas and electricity

subsidy.

Status: Decree for the second annual electricity tariff

increase has been issued in July 2015. Evidence Required: Copy of the decree

Measure: (i) The Egyptian Electric Utility and

Consumer Protection Regulatory Agency issues

an order for implementing the third annual electricity tariff increase as part of a five year

tariff increase plan outlined in the Prime Minister

Decree 1257/2014 to reform the gas and electricity subsidy.

(ii) The Cabinet formulates and implements the

policy for financing variations in actual fuel costs, compared to budgeted estimates.

Measure: (i) The Egyptian Electric Utility

and Consumer Protection Regulatory Agency

issues an order for implementing the fourth annual electricity tariff increase as part of a

five year tariff increase plan outlined in the

Prime Minister Decree 1257/2014 to reform the gas and electricity subsidy.

(ii) The Cabinet implements the policy for

allocating fuel costs financing variations in actual fuel costs, compared to budgeted

estimates.

Component 3: Enhancing the business environment

Objective 3.1 Enhancing Financial Inclusion

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Measure: Law No. 141 of 2014 regulating Microfinance

activities issued by virtue of Presidential Decree. The law

allows specialized companies and non-governmental

organizations to practice microfinance activities after

being licensed by EFSA.

Status: President has issued Law No. 141 for 2014 on Microfinance.

Evidence Required: Copy of the Law.

Measure: i) EFSA has issued permanent licenses

for at least 150 NGOs and two companies.

(ii) compilation of microfinance statistics and

producing the first set of annual microfinance

activity reports.

Measure: EFSA has introduced the

framework for at least one new microfinance

product, such as micro-leasing or Sharia-

compliant micro-loans and has implemented

mandatory credit checks from the credit

bureau for financing above USD 190.

Objective 3.2 Reforming Industrial Licensing

Measure:

The Prime Minister issued decree No. 2807 of 2015

launching the reform of the industrial licensing regime

along the principles of (i) limiting the scope of industrial licensing to risk-based enforcement of health, safety,

security, environment, and land use requirements by the

responsible agencies; (ii) separating policy making,

regulation and facilitation functions; and (iii) further

decentralizing the provision of licensing services.

Beginning with the establishment of an inter-ministerial committee mandated to prepare and submit to the Cabinet

a comprehensive plan.

Status: (a) Draft law on amendments submitted to cabinet, (b) Framework for industrial licensing under

review by Minister

Evidence Required: (a) Letter from the Prime Minister’s office confirming that the Decree has been issued

Measure: (i) Industrial licensing reform action plan, consistent with the reform principles laid-

down in the Prime Minister Decree has been

endorsed by the Cabinet.

(ii) The government has started implementation

of the industrial licensing reform by simplifying

at least one regulatory area in a manner that

significantly reduces compliance requirements.

Measure: Cabinet has submitted to Parliament the package of amendments to

implement the industrial licensing reform

action plan.

Objective 3.3Improving Investment Regime and Facilitation

Measure:

The President has issued Presidential Decree No. 17 of

2015 and the Prime Minister has issued Decree No. 1820

of 2015 introducing implemented amendments to the Investment Law (Investment Guarantees and Incentives

Law No. 8 of 1997 of Egypt) defining investor rights and

improving investment facilitation services. This includes : (i) define conditions and procedures for non-approval of

licensing; and, (ii) designate GAFI as the sole interface

for the investor for certain investment activities; (iii) explicitly grant investor rights to establish and expand

investment projects and to gain and transfer profits; and

(iv) streamline dispute resolution and liquidation mechanisms.

Status: Amendments decreed in March 2015 and

Implementing Regulations issued in July 2015

Evidence: Copies of the Decree and Executive

Regulations

Measure:

(i) Extend GAFI’s Cairo one-stop shop

capabilities beyond registration to licensing and

other investment services in at least one sector.

(ii) In order to enhance transparency and access

to information for investors and the general

public: (a) the Ministry of Investment/General Authority for Investment and Free Zones

publishes a complete inventory of available

investment incentives and eligibility criteria; (b) the Ministry of Investment/General Authority for

Investment and Free Zones publishes all licensing

and permits procedures and requirements for all activities and sectors.

Measure:

The General Authority for Investment and

Free Zones extends its one-stop-shop

capabilities beyond registration to include post-registration licensing facilitation and

other investment services to other sectors.

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APPENDIX V: SOCIAL SECTOR CHALLENGES AND DEVELOPMENT

ANNEX X: SOCIAL SECTOR CHALLENGES AND DEVELOPMENT

1. Context

For six consecutive years, between 2004 -2010, the Egyptian economy grew at unprecedented rates;

yet growth was not inclusive, among others, leading to the Arab Spring Uprising of January

2011.Poverty rates had been on the rise, unemployment had become chronic, and the wealth gap was

widening with stark regional disparities. Aggravated by the economic standstill of the transitional

phase the poverty rate rose to 26.3% in 2012/13 while almost half of the population was vulnerable

to poverty. Poverty is concentrated in Upper Egypt (51.5%), and is multidimensional with serious

implications on nutrition, health, and education, and is leading to a deepening of the intergenerational

cycle of poverty. In 2011, the UNDP's Gender Inequality Index (GII) rated Egypt 126th out of 148

countries suggesting marked disparities in socio-economic outcomes and empowerment. Meanwhile,

with 850,000 new entrants to the labor market annually, coupled with a large mismatch between the

skills of the graduates and the needs of the labor market and limited entrepreneurship, unemployment

reached 13.6% in 2012/3, while dropping down to 12.7% in 2014/2015. More specifically, the youth

are the hardest hit by unemployment, with highest levels recorded for university graduates (44%)

followed by skilled technicians (38.2%) versus low unemployment for unskilled labor at 2.3%.

Female youth unemployment exceeds by four-fold that of the male youth unemployment rate. As a

consequence, the informal sector has increasingly become positioned as the main option for job

creation despite the quality of jobs offered and unpredictability of income has increased.

The Social Safety Net (SSN) structure in Egypt is complex with fragmented programs that have

historically resulted in leakages and enhanced inequalities largely due to weak targeting. For

example, according to a joint AfDB/IDRC study13 the social insurance system is stratified in a manner

that higher paid workers receive 80% of the social protection benefits, while the social solidarity

pension - the largest cash transfer program- is estimated to reach less than 10% of the poorest quintile.

Against this backdrop a new Constitution was drafted in 2013 and adopted in 2014, which positioned

social protection benefits as rights, and included unprecedented measures clearly focused on the poor

and marginalized communities with clear expenditure targets for the sectors of education, health and

scientific research14. For example: it has become a constitutional right for small holder farmers,

workers in agriculture, fisheries and the informal sector to obtain some form of pension (article 17).

With almost 30% of the workforce employed in agriculture, and an even larger percentage in the

informal sector, this newly introduced right is critical and is anticipated to make significant

improvements to livelihoods once adopted, particularly in the rural and poor urban areas. Currently

studies are on-going for the introduction of pensions for small-holder farmers and informal workers.

2. Government Reforms Undertaken

The priorities of the successive governments during the post-2011 period have included social equity,

job creation, improved social service delivery and human capital development, and economic reforms

have been advanced with varying degrees of boldness. There has also been a partial reversal of the

non-borrowing policy for social sector projects to kick-start social protection initiatives until savings

from home-grown reforms can be used to sustain them.

Some of the most salient reforms initiated include the following:

Budget reforms, with a focus on expenditure reforms to re-prioritize public spending in

favor of protecting the poor and vulnerable. In FY 2014/15 many of the reforms

implemented and financed through public funds addressed the social demands of public sector

employees and pensionaries. These included increase in wages to accommodate the

13 Social Protection and Social Policies in North Africa: Taking Stock and Moving Forward, under processing. 14 Expenditure targets in the constitution are set as follows: 4 percent, 2 percent, 3 percent and 1 percent of GDP in

basic education, higher education, health, and scientific research respectively.

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application of minimum wage salary increase, improvement in salaries of the teachers, and

the increase in contributions to the pension funds and social insurance pensioners by 13.7%

and 41.4% respectively. In FY 2015/16, the state budget allocations to the social sector

increased by over 11% and are expected to finance on-going and new social programs such

as the cash transfers15 which were kick-started through WB financing.

Figure: Comparison of Budget Allocations for the Social Sector for 2014/15 and 2015/16

Million EGP

Item 2014/15 2015/16

Change

(%)

Total expenditure in social fields 383,459 428,691 11.8%

Expenditures on Health, Education and scientific researches 141,840 159,944 12.8%

Expenditures Programs on Health 42,402 48,759 15.0%

Expenditure Programs on Education 94,355 98,187 4.1%

Expenditure programs on scientific researches 5,083 7,098 39.6%

Other programs on health, education ans scientific researches

0 5,900

Cash Transfer programs 6,629 11,351 71.2%

Social pension 6,500 6,500 0.0%

Takaful and Karama 0 4,700

Children pension 53 70 32.1%

Monthly assistance 76 81 6.6%

Expenditures on Housing 21,911 25,330 15.6%

Expenditures on goods subsidies 134,626 136,003 1.0%

Supporting Insurance funds and pensions 33,213 52,485 58.0%

Youth, Culture and religious programs 28,356 31,018 9.4%

Other social programs 16,884 12,560 -25.6%

Major subsidy reforms: Fuel subsidy reform was introduced in July 2014 with an increase

in prices by 40-80% and the introduction of a fuel smart card system to regulate the amount

of subsidized fuel per car and limit leakages. Translated into road transport tariff increases,

these reforms impacted all Egyptians, particularly the poor. Prudent government maneuvers

in regulating the hike in prices16 coupled with prior adoption of social reforms with tangible

benefits off-set risks of discontentment. Amongst these social reforms were reforms in food

subsidy with the transfer from in kind transfer, (subsidized commodities) to an allowance-

based system facilitated by the introduction of a smart card system. Also, the baladi bread

reforms implemented have resulted in quality outputs and a well-regulated system, where

subsidized bread is provided with a ceiling of 5 loaves per person per day, and a maximum

of 50 loaves per family per day.

Housing programs were launched, with a dedicated social housing component targeting the

young active poor whereby 1 million small flats will be availed over 5 years, to the tune of

200,000 flats annually, in the newly established cities nationwide with newly introduced

financing facilities such as long-term mortgage financing coupled with a one-time subsidy of

varying percentage of unit cost price. Other terms and conditions were also developed for

15 Financial bulletin, Ministry of Finance, August 2015. 16 Some of the maneuvers used included the regulation of transport prices with diligent on-site control mechanisms, the

availability of fuel after long fuel shortage periods, and the introduction of army-owned buses as temporary alternative

transport options. The adoption of a weighted tariff increase across all consumption categories was perceived as equitable.

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middle classes and upper classes to ensure that the newly established cities are integrated with

a diversified population.

Cash transfers: two important social cash transfers for the poor and disabled, Karama and

Takaful, were launched in January 2015 to kick-start the social protection reforms. Karama

is a non-conditional cash transfer program targeting the old and disabled, while Takaful is a

conditional cash transfer program for the poor and vulnerable families. The first phase of the

conditional cash transfer program targets those living above the 60% poverty line and was

piloted in six of the poorest governorates in Upper Egypt before being rolled out nationwide.

This program is being supported by a loan from the WB for USD 400 Million, and targets 1.5

million poor families.

Labor intensive employment program is under implementation and focuses on the rural

and remote areas, whereby NGOs have been mobilized to select youth and unemployed and

identify small works required, such as rehabilitation of schools or de-weeding of the rivers

and canals, against a daily remuneration. This program is being supported by the WB and the

EU.

Training for employment programs were developed and implemented by the Industrial

Training Center to address unemployment and skills mismatch resulting in 58,240 training

opportunities in 16 sectors by April 2015 and 70,000 matchmaking opportunities.

3. Impact on the poor and vulnerable groups of the policy reforms supported under this

operation

The reforms envisaged under this proposed Policy Based operation focus on three different areas:

fiscal consolidation, energy security and business climate. The beneficiaries are the Egyptian citizens

at large, with a particular focus on investors and the business community. The anticipated overall

outcomes include increased transparency and efficiency in public financial management, improved

energy security through larger participation of the private sector, and an improved enabling

environment for businesses.

Some of the specific reform measures supported, such as the continued decrease of energy subsidies,

would have negatively impacted the poor had they been implemented rigidly and in vacuum.

However, positioned as a balanced, home grown reform package, with the necessary flexibility to

fine-tune and adapt the implementation with the on-going context, and complemented by over-

arching support programs for the poor, the reforms are anticipated to be passed without risks of

discontents. For example, in the specific case of the electricity subsidy reform, the bulk of the

consumption (51%) is taken up by residential users and evidence suggests that the poorest

households pay a larger portion of their income on housing and utilities17: the poorest 2% of the

population pay between 25%-46% of their incomes on housing and utilities annually, versus 87.8%

of the population (with earnings equal to or above the minimum wage) who spend 16%-20% of their

annual income on the same items. Fully cognizant of this situation, the residential electricity tariffs

have been divided into 6 categories so that each category can be increased at varying progressive

levels, thereby allowing the government some flexibility in the adoption of the reform measure.

Indeed, given the current economic context, under the second phase of electricity tariff increase

program implemented in July/August 2015, a decision was taken to apply zero increase on the lowest

three categories of consumption and instead have the three highest categories shoulder the full tariff

increase. Different scenarios can be adopted in the coming years, depending on the overall economic

context.

Not only have mitigation measures been taken against risks of discontentment, but also some

additionality is anticipated from the economic reform program under consideration. The

programme’s focus on fiscal consolidation will widen the tax base and reduce large inefficient

17 Analysis of the household expenditures on housing and utilities, as published in the Statistical Year Book for 2015,

by CAPMAS.

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expenditures thereby creating fiscal space for increased investments in critical areas, such as social

sector programs and infrastructure development, including social housing and the extension of water

and sanitation in rural and remote areas largely populated by vulnerable and poor communities. In

addition, some of the reforms under the business environment pillar are anticipated to encourage

further the development of micro, small and medium enterprises and entrepreneurship development,

thereby availing job creation opportunities particularly for youth and women. The increase in fuel

costs for the industry is expected to encourage a transfer from energy intensive to labor-intensive

industries thereby increasing job opportunities further. This coupled with on-going initiatives such

as “training for employment” for men and women will improve the technical skills of the workforce

and contribute to decreasing the skills mismatch that currently haunts the labor market.

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APPENDIX VI: MAP OF ARAB REPUBLIC OF EGYPT