Since 1991, Egypt has consistently pursued the transition from a state-controlled economy to free market principles, and achieved financial stability and high recent GDP growth. It increasingly relies on its private enterprise sector to generate growth and employment, improve low-income levels and diversify limited foreign exchange earnings. The Association Agreement currently under negotiation will provide for free trade with the European Union (EU) by the year 2010 and Egyptian enterprise is increasingly aware of the need to achieve international standards of competitiveness. It is essential for private enterprise to increase its productivity and adapt to market liberalization and lower tariff protection. However, the required business skills needed and related support services are often lacking, particularly in the small – medium enterprises (SME) private sector, while many policy constraints remain.

The industrial modernization programme (IMP) was originated by the government of Egypt (GOE) in 1997, and developed by an ad hoc task force representing the private enterprise sector, various Ministries, and academic economists. They produced a concept paper, which proposed a three –fold strategy based on:

1. Reform of business environment
2. Strengthening of business service institutions
3. Modernisation of individual enterprises

Consulting provided by the EU assisted the GOE in developing the programme. They consulted major business associations and a large sample of enterprises, and submitted a detailed programme design to the task force. Commission staff reviewed the Egyptian programme and presented to the Government, in April 1998 the outline of a possible EU support programme, together with the draft technical and administrative conditions.

The main form of support provided under the programme will be technical assistance (TA) to satisfy the critical needs of private enterprises during the transition. TA will be European, regional and Egyptian, with Egyptian TA increasing in importance during the course of the programme as local capacity is strengthened.

Significant financing by the way of tranches for budgetary support has been introduced to reflect the institutional and policy reform content of the programme, as well as to ensure its ownership by the Government and to ensure regular budgeting of Egyptian contributions.

After consideration of several institutional models, an autonomous structure outside government was selected in order to preserve the programme’s private sector character and operational independence which will be essential to its success.

The programme is consistent with the high priority placed on economic transition and business upgrading in the EU country programme. According to its objectives, this programme should contribute significantly to the Euro-MED goals of international economic integration, social stability and poverty alleviation. Prospects for generating growth and employment in industry and services are recognized to be much higher than in the agricultural sector.

The programme draws upon the relevant experience of the EU and other donors in Egypt (e.g. world bank , USAID). It is complementary to three ongoing EU-funded projects: the Public Enterprise Reform and Privatization Programme, the Banking Sector Support Programme and the Social Fund for Development (which covers micro-enterprise credits and support to workers displaced by privatization). Moreover, the programme will integrate several features of the EU-funded Private Sector Development Project (PSDP), which has been successful in allocating management consulting services to individual enterprises on a smaller scale. It is envisaged that PSDP activities will become incorporated into the Industrial Modernisation Programme around 2001-2.

The programme will be the first phase of the GOE’s long-term industrial development strategy. The programme overall objectives is to promote GDP growth and the competitiveness of the private enterprise sector, with special emphasis on small and medium enterprises (SMEs) in the context of economic liberalization and internationalization. The programme will also foster employment and entrepreneurship.

The specific objectives of IMP are:

1. to assist private enterprises in their development;
2. to strengthen business associations, support institutions and services;
3. to strengthen the Ministry of Industry (MOI);
4. to improve the sector policy framework.

Expected IMP results include:

1. Improved competitiveness for about 5000 enterprises, by means of the provision of technical assistance;
2. An improvement in the ability of business associations to represent and serve their members’ interests, by means of the provision of technical assistance;
3. An increase in the effectiveness of about 300 Egyptian business consultants and trainers, by means of training and technical assistance;
4. An improved business environment, by means of the institutional development of the Ministry of Industry and about 20 support institutions, including training and research institutions;
5. An improved legislative / regulatory / administrative environment by means of draft texts, and timetables for their adoption, for at least four legislative / regulatory and institutional reforms affecting the business environment.
6. Improved access to capital for private enterprises, although the programme will not provide capital directly to enterprises.

The programme budget is divided into two parts; Part – I of the budget shall principally finance the following activities:

- Establishment of the Industrial Modernisation Centre (IMC):

0. Policy support activities aiming at redefining the role of MOI including:

restructuring, preparation of reform policies and undertaking policy studies

of priority sectors.

- Program audit, monitoring and evaluation activities

Part-II of the programme budget shall make variable and fixed tranche release payments directly to the GOE. The fixed tranches shall be an incentive for policy adjustment. The variable tranches shall depend upon funding for industrial support activities mobilized by the GOE in the previous period.

A special feature of IMP is cost recovery; a share of the direct expenses of providing technical assistance will be charged to enterprises and other non-state recipients. This share will be on average 25 % in the first and second years of IMP duration, rising to 30 % and 40 % in the third and fifth year respectively. The maximum direct expenses of TA granted to a single enterprise shall not exceed the sum of ECU 100,000 over the duration of the programme.

The GOE shall mobilize funds, including EU advances, fixed and variable tranche payments for the following programmes of industrial support:

1. Financial assistance to enterprises
2. Technical Assistance to Enterprises in the form of: Foreign

Investment, Exports, Competitiveness, Business Management,

and Industrial Training

3. Business Resource Centres
4. Institutional Development

The GOE will mobilize funds for private sector investment while the Industrial Modernisation Centre (IMC) will provide technical support for this strategy. EU contributions will not fund capital investment itself.

Technical assistance shall be addressed to: individual enterprises or groups of enterprises with common needs and Egyptian consultants and trainers catering for private enterprises. Enterprises eligible for technical assistance should fulfill the following conditions:

1. be fully privately-owned or with a majority private share
2. show potential for growth and profit
3. operate in the industry or service sector
4. have a number of full time employees exceeding 10

(or any higher number subsequently defined)

5. be legally established in Egypt

Details of technical assistance programmes are given below:

- Consultants will deliver a study on restructuring the agency in charge, the General Authority for Investment and free Zones (GAFI), developing the promotion function and lifting policy constraints to foreign investment.

- Eligible enterprises will be assisted by consultants to find foreign partners.

- Commissioned consultants will draw short-lists of interested and capable partners, and assist in feasibility studies or raising finance as needed.

- Investment campaigns in Egypt and target countries and media advertising.

- The prospection by consultants of foreign investors and the provision of assistance in their visits and studies.

- Promotion of the European Community Investment Partners programme (ECIP) in association with GAFI.

- Enterprises will be assisted in upgrading their overall management efficiency through consulting and training services. According to needs, this assistance may focus on marketing, financial management, organisation, and information systems and human resources development.

- Consultants will organize joint purchasing programmes for groups of interested enterprises.

Creation of a network of about 20 Business Resource Centres to offer a first-stop service to eligible enterprises. The staff of these centres will provide general management counseling and will make referrals to specialized sources of information and assistance.

- Specialized consultants will be commissioned to assist business associations to meet the needs of private enterprises. The consultants will evaluate the organisation, design a strategic business plan and assist through its implementation as needed. Similar consulting assistance will be extended to selected research institutes with a view to making them commercial and accessible to businesses.

- The identification and promotion of local or sectoral clusters of enterprises sharing the same needs, including new SME business associations.

0. (Egynet); A national business information service with a toll-free

Telephone number with be set up, and will direct inquiries to suitable

providers of information and advice

1. Quality Campaign and Institutions: A national campaign for promoting

quality standards according to international trends will be organized by

the experts of this programme and public relations consultants

contracted for this purpose.

The Government will establish an Industrial Modernisation Centre (IMC), a Council for Industrial Modernisation, an Interim Committee and an Advisory Board

The IMC will be a public institution, outside and operationally autonomous of government, constituted by a presidential Decree, and charged with implementing the programme and coordinating donor inputs. The IMC’s management and staff shall receive remuneration at current market rates for employees of internationally-financed programmes.

The Director of the IMC shall be recruited through an international recruitment procedure. He/she will manage the IMC’s day to day activities and report to the council. Other management staff will include a Financial Controller responsible for supervising all expenditures, a senior Monitoring Officer responsible for measuring the programme’s progress, a Project Coordinator planning and coordinating the activities of the Components, Component Managers responsible for planning and coordinating the Management Units, and Unit managers.

The experts of the IMC Management Units will not and normally provide direct assistance themselves but will manage each type of assistance, verify enterprise eligibility and needs, develop rosters of consultants and trainers, and oversee their selection and performance. The support staff of the IMC will assist the experts and undertake financial and contractual administration.

Before the end of programme, the IMC will submit plans either to transfer the different programme components and Management Units to qualified private and public organisations, or to establish them as autonomous entities with their own sources of long-term funding, or to discontinue their activities.

The Council will report to the prime Minister and will consist of the Minister of Industry (as chairman), representatives of other enabling public industry support agencies, a majority representation from the private business and finance sectors, a representation form the private business and finance sector, and a representative form academia. The IM Council, collectively or through its members, shall approve the operations / procedures manual and the annual budget and work plan of the IMC. The IM Council, collectively or through its members, will have the right to evaluate the IMC at any time and require improvement.

The Advisory Board will consist of the chairman of the Council, the IMC Director, up to four experts appointed by the Chairman of the Council, and as observers: a representative of EU delegation in Cairo, a representative of each of the other donors having committed more than ECU 10 million to the programme. Member states of the European Union may be represented as observers on an ad hoc basis. It will advise upon drafts of the operations/procedures manual, annual budget and work plan of the IMC.

The Interim Committee is a temporary body comprising members of the Council, the Ministry of Foreign Affairs and a representative of the European Union delegation in Cairo (observer status). It will co-ordinate activities under part I of the budget and the recruitment of the IMC Director. It will be dissolved once the Director of the IMC is in place and the IMC has assumed responsibility for managing part I of the budget.