How The Doing Business Report Affec
How The Doing Business Report Affects Your Business
Last month the World Bank released its 2009 Doing Business Report, an annual report that ranks 185 countries using ten key «business friendly» indicators (starting a business, getting a license, trading across borders, getting credit, registering property, enforcing contracts, protecting investors, paying taxes, existing the market, and flexibility of the labor market). The Report relies on a methodology of comparing the time, cost and number of procedures required to undertake each of the above indicators. It has become the most widely used reference worldwide for comparing «investment environments», even through it has been criticized for using a mechanical approach that often misses the reality of investment environments by neglecting the macroeconomic environment, the political stability, the state of the infrastructure, and other key aspects that could be of much more significance to the investment decision than administrative procedures.
Over the last two years, Egypt has done reasonably well. From a miserable ranking of 165 (Doing Business 2007), it ranked 126 last year (Doing Business 2008) and 114 this year (Doing Business 2009). On twice occasions, Egypt came out in the Reformers’ Club, i.e. the ten countries with the widest set of implemented reforms. But undoubtedly the current ranking continues to be too modest and there is an enormous scope for improvement. The debate about the Doing Business reforms has been captured by the Press in Egypt and was widely discussed in seminars and events. The business community, however, does not seem to have taken sufficient notice of the actual impact of the changes. The following is a brief description of what the reforms actually mean in terms of business impact. Four indicators are worth pointing out to:
The Limited Liability Company
One of the key reforms has been the reduction of the minimum capital requirement for the Limited Liability Company to LE 200.p (Two Hundred Egyptian Pounds). This is down from LE 1000.p (One Thousand Egyptian Pounds) last year and LE 50,000.p (Fifty Thousand Egyptian Pounds) two years ago. To big business, this may not sound like a major change. Even the fifty-thousand pounds minimum capital requirement two years ago was not a major barrier to forming a company. However, putting together a number of incremental reforms that have occurred over the last few years gives a different picture. Companies are no longer required to submit a proof of address for the first year after in-corporation. The flexibility in determining the object of the company for the limited liability form. The lack of restriction on trading of subscriptions in the limited liability company. These and other minor reforms mean that the Limited Liability Company is increasingly being used in Egypt as the «SPV» instrument, i.e. as the form capable for being used for initiating a corporate form, whether for submission of license, application for a transaction, opening bank accounts, etc with the flexibility of determining later its final capital, address, specific object and even subscribers.
Registering Property
The most remarkable improvement made by Egypt in this year’s Report was in the Registering Property indicator. This is no surprise, and it comes as a result of significant reforms in the domain of real estate registration. This, however, applies to the registration of transfer of ownership of already registered properties, i.e. properties which have been previously inscribed in the real estate registry. Where registering properties will continue to face delay is with respect to properties that have not yet been so inscribed. In terms of impact, banks, mortgage companies, and other secured debtors will find it easier to register their real estate properties and mortgages thereon. Some ease will also be felt for the households seeking to purchase and register properties from the secondary market, which will have a higher chance of being previously inscribed.
Protecting Investors
This Doing Business indicator refers to minority protection in companies. The improvement of Egypt’s rank is a result of Decree by the Capital Market Authority Number 2 of 2008 (issues in February of this year) which amended the Stock Exchange Listing Rules. The changes introduced earlier this year tightened the disclosure requirements by board members of listed companies over any transactions they may conduct with the companies on whose boards they sit. Moreover, the Board’s annual report is now required to include a description of any related party transactions. Finally, related party transactions were required to be approved by the company’s general assembly prior and not following the conclusion of the transaction.
Obtaining Credit
Egypt’s improvement in this indicator comes as a result not of a change in law but from the entering into operation of the country’s first Credit Bureau Company. The Company was established last year and its shareholders are the leading Egyptian banks. It started operations late last year, but its first credit reports were issued during the first quarter of this year, thus qualifying it as an operational company.
What Next
Where Egypt still lags behind significantly is with respect to Obtaining a License, Enforcing Contracts, Exiting from the Market, and Labor Market Flexibility. Some improvement may be foreseeable by next year’s Doing Business Report. Obtaining a License will be the key improvement during the forthcoming year as a result of the passing of the new Unified Building Law already issued as Law No. 61 of 2008. Its impact will be felt by next year once the Executive Regulations have been issued and applied and it will reduce the time required for obtaining a building license. In addition, with respect to Enforcing Contracts, one should expect the impact of the newly issued Economic Courts Law to improve the record for commercial disputes (for details see the July Egypt Legal Update). However, no significant improvement should be expected soon with respect to the Labor Market Flexibility indicator which requires a comprehensive review of the Labor Law, nor to the Exiting the Market indicator which can not progress until a new Bankruptcy Law is issued.
Last month the World Bank released its 2009 Doing Business Report, an annual report that ranks 185 countries using ten key «business friendly» indicators (starting a business, getting a license, trading across borders, getting credit, registering property, enforcing contracts, protecting investors, paying taxes, existing the market, and flexibility of the labor market). The Report relies on a methodology of comparing the time, cost and number of procedures required to undertake each of the above indicators. It has become the most widely used reference worldwide for comparing «investment environments», even through it has been criticized for using a mechanical approach that often misses the reality of investment environments by neglecting the macroeconomic environment, the political stability, the state of the infrastructure, and other key aspects that could be of much more significance to the investment decision than administrative procedures.
Over the last two years, Egypt has done reasonably well. From a miserable ranking of 165 (Doing Business 2007), it ranked 126 last year (Doing Business 2008) and 114 this year (Doing Business 2009). On twice occasions, Egypt came out in the Reformers’ Club, i.e. the ten countries with the widest set of implemented reforms. But undoubtedly the current ranking continues to be too modest and there is an enormous scope for improvement. The debate about the Doing Business reforms has been captured by the Press in Egypt and was widely discussed in seminars and events. The business community, however, does not seem to have taken sufficient notice of the actual impact of the changes. The following is a brief description of what the reforms actually mean in terms of business impact. Four indicators are worth pointing out to:
The Limited Liability Company
One of the key reforms has been the reduction of the minimum capital requirement for the Limited Liability Company to LE 200.p (Two Hundred Egyptian Pounds). This is down from LE 1000.p (One Thousand Egyptian Pounds) last year and LE 50,000.p (Fifty Thousand Egyptian Pounds) two years ago. To big business, this may not sound like a major change. Even the fifty-thousand pounds minimum capital requirement two years ago was not a major barrier to forming a company. However, putting together a number of incremental reforms that have occurred over the last few years gives a different picture. Companies are no longer required to submit a proof of address for the first year after in-corporation. The flexibility in determining the object of the company for the limited liability form. The lack of restriction on trading of subscriptions in the limited liability company. These and other minor reforms mean that the Limited Liability Company is increasingly being used in Egypt as the «SPV» instrument, i.e. as the form capable for being used for initiating a corporate form, whether for submission of license, application for a transaction, opening bank accounts, etc with the flexibility of determining later its final capital, address, specific object and even subscribers.
Registering Property
The most remarkable improvement made by Egypt in this year’s Report was in the Registering Property indicator. This is no surprise, and it comes as a result of significant reforms in the domain of real estate registration. This, however, applies to the registration of transfer of ownership of already registered properties, i.e. properties which have been previously inscribed in the real estate registry. Where registering properties will continue to face delay is with respect to properties that have not yet been so inscribed. In terms of impact, banks, mortgage companies, and other secured debtors will find it easier to register their real estate properties and mortgages thereon. Some ease will also be felt for the households seeking to purchase and register properties from the secondary market, which will have a higher chance of being previously inscribed.
Protecting Investors
This Doing Business indicator refers to minority protection in companies. The improvement of Egypt’s rank is a result of Decree by the Capital Market Authority Number 2 of 2008 (issues in February of this year) which amended the Stock Exchange Listing Rules. The changes introduced earlier this year tightened the disclosure requirements by board members of listed companies over any transactions they may conduct with the companies on whose boards they sit. Moreover, the Board’s annual report is now required to include a description of any related party transactions. Finally, related party transactions were required to be approved by the company’s general assembly prior and not following the conclusion of the transaction.
Obtaining Credit
Egypt’s improvement in this indicator comes as a result not of a change in law but from the entering into operation of the country’s first Credit Bureau Company. The Company was established last year and its shareholders are the leading Egyptian banks. It started operations late last year, but its first credit reports were issued during the first quarter of this year, thus qualifying it as an operational company.
What Next
Where Egypt still lags behind significantly is with respect to Obtaining a License, Enforcing Contracts, Exiting from the Market, and Labor Market Flexibility. Some improvement may be foreseeable by next year’s Doing Business Report. Obtaining a License will be the key improvement during the forthcoming year as a result of the passing of the new Unified Building Law already issued as Law No. 61 of 2008. Its impact will be felt by next year once the Executive Regulations have been issued and applied and it will reduce the time required for obtaining a building license. In addition, with respect to Enforcing Contracts, one should expect the impact of the newly issued Economic Courts Law to improve the record for commercial disputes (for details see the July Egypt Legal Update). However, no significant improvement should be expected soon with respect to the Labor Market Flexibility indicator which requires a comprehensive review of the Labor Law, nor to the Exiting the Market indicator which can not progress until a new Bankruptcy Law is issued.