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Al-Ahram Weekly On-line 16 - 22 November 2000 Issue No.508 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly On-line 16 - 22 November 2000 Issue No.508
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Focus Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Reviving dead capital
By Sherine Abdel-Razek
Ahmed Abdel-Latif, a 24-year-old university graduate who lives in Heliopolis decided to put his savings in a private business and he chose to operate a garage.
Abdel-Latif, who opted for private business rather than standing in long queues waiting for a vacancy in a state body, was even more frustrated by the long procedures to obtain the legal authorisation to operate the garage. The long process involves obtaining permits and going through red tape in eight government departments. The lengthy procedures took him 223 days during which he made 77 visits to government offices and received government officers from the Environmental Affairs Agency, health ministry, civil defense department and other government offices.
Abdel-Latif points out that with a mathematical calculation of the time red tape costs, he has lost around LE9,000, a very high figure if compared to the total capital of LE5,500 he has put up as a capital in the project.
Abdel-Latif's case is just one of thousands that take place every day in Egypt and that ultimately lead people searching to make new business to prefer to go illegal and join the informal sector rather than go through all the lengthy procedures and costly steps of formalising their businesses or their property holdings.
The volume of this sector in Egypt is extremely big. A workshop organised by the Egyptian Centre for Economic Studies (ECES) has shed light on the expansion of this sector in Egypt. Sahar Tohami Associate principal economist at the ECES pointed out that the informally held real estate is estimated at the terrifying figure of $240billion. This includes the buildings on agricultural lands, buildings on public or even private lands without permission or adding extra floors in residential units without a license.
The figure is 116 times greater than the value of the privatised companies between 1992-1996 and 55 times greater than the value of foreign direct investments in Egypt during the same period.
The workshop was held to shed light on the progress of a project called "Formalisation of Egypt's urban informal sector" organised under the auspices of ECES and the Peruvian Institute for Liberty and Democracy (ILD). The project, funded by the US Agency for International Development (USAID), started in 1997.
The first stage involved assessing the magnitude of informal real estate property in Egypt and planning institutional reforms that might help this sector to go formal. Ten months ago a parallel plan to assess and define the impediments hindering the informal business sector from being included in the economy has been launched in cooperation with the ministry of finance.
The informal business sector includes millions of small-scale low capitalised economic activities established without following any legal procedures or acquiring required licenses. Most such activities exist in underdeveloped districts like Al-Muski, Magra Al-Uyun, Bulaq, and Al-Herafiyin. Shoe workshops, car and vehicles repair workshops, fruit shops, ironing shop, hairdressers, coffee shops are only a few examples of this kind of activity.
The economic resources invested in such businesses or real estate are described by Hernando de Sotto, head of ILD, as "dead capital." Addressing the workshop, he said that the poor in the developing countries possess most of the informal land and the businesses and lack the kind of formal property rights that could raise the value of these assets and convert them into capital. He explained that their assets cannot be used in efficient and legally secure market transactions since obtaining a bank loan or guaranteeing the payment of water, electricity or other infrastructure services, cannot be legally transferred after the death of the owner. This ownership cannot be traced and validated.
The advantages that this sector might be missing and the penalties and even imprisonment threats the owners of informal land or businesses might be subjected to have not so far succeeded in tightening its expansion. Why? According to the findings of a pilot project carried out by the ECES and ILD team, it is the same problem that Abdel-Latif faced: the high cost of going formal. The project cited the case of a man who wanted to formally acquire a state-owned piece of land to build a dwelling unit and then register the property following legally established procedures.
This required going through 77 bureaucratic procedures in 31 different public and private offices all of which could take some 6 to 14 years.
Is it an insoluble problem then? The team of the ILD believes not, as they have successfully helped in formalising sectors of the economies of Peru and Haiti. In cooperation with the ECES they have advanced a number of proposed solutions that they will help in implementing. The proposed solutions start with adopting a legal reform package under which the laws, regulations and administrative procedures are consolidated to remove bottlenecks. Adopting a less complicated registry system and streamlining access to credit, investment and insurance as part of a taxpayer-friendly plan are among the steps proposed to encourage entrepreneurs to go formal. The recommendations also propose the creation of a formalisation entity to replace the numerous public bodies in charge of the assignment, recognition and protection of real estate property.
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