Given that micro, small and medium-sized enterprises (MSMEs) are currently facing serious challenges in the domestic market, particularly with the repercussions of the COVID-19 crisis, President Abdel-Fattah El-Sisi ratified in July Law 152/2020 to give MSMEs a boost and fix the flaws of the previous law.
Egypt’s Minister of Trade and Industry Nevine Gamea speaks with Ahram Online about the new law and how it will benefit the economy, and MSMEs in particular, and how it will help the sector’s enterprises to recover from the ongoing crisis.
Ahram Online: What are the focal points of the new MSMEs law?
Nevine Gamea: The law encompasses six major pillars. It gives a consolidated definition for MSMEs. A serious problem the MSMEs sector was facing in Egypt is having more than one definition for these enterprises. This has resulted in widescale confusion that negatively affected the sector.
The law also facilitates fund provision for engaged agencies and financial providers. The law has developed new mechanisms to give easier fund access to MSMEs via financial institutions and granted these institutions, in turn, more privileges to guarantee their fund recovery. For instance, under the law, the enterprise premises shall be temporarily allocated to the funding institution, thereby securing its fund recovery rights according to the risks it shoulders. The law has, in addition, reorganised usufruct on buildings allocated for MSMEs and likewise regulated the clearance procedures.
The law gives as well more financial and non-financial incentives, which targets the companies and institutions that support these enterprises. In addition, it adopts simplified bases for taxes imposed on these enterprises and develops mechanisms to put these incentives in action.
The law has put into effect a stimulating mechanism that will enable enterprises operating in the informal sector to engage in the formal economy. Such a mechanism will allow them to obtain a temporary licence for a period up to five years until their conditions have been reconciled. They will similarly be entitled to a package of financial and non-financial incentives in the same period.
Meanwhile, the law has developed facilitated procedures with specified terms and discounted fees to secure the approvals necessary for starting operations through one-stop-shops (OSS) and service units of the Micro, Small and Medium Enterprises Development Agency (MSMEDA) and its branches, be they in the governorates or at the General Authority for Investment and Free Zones (GAFI). These also include the allocation of lands in industrial, touristic areas and urban communities coupled with another allocation of 40 percent for MSMEs in public procurements.
AO: What are the challenges facing MSMEs, particularly amid the ongoing COVID-19 crisis?
NG: These challenges are complex and interrelated, including the lack of sufficient financial resources, which is a stumbling block for MSMEs. Even when start-ups apply for loans, they often encounter many hurdles… These are subsumed into the high financial risks these enterprises entail, plus the insufficient or unsatisfactory credit collateral aggravated by modest credit competence. In addition, MSMEs usually fall short of presenting regular financial registers and official documents. It is important to take into account that this kind of enterprises is often run by one person or one family, which could enfeeble the enterprise's financial position.
The majority of MSME initiators are indeed laypersons who demonstrate inadequate know-how and poor regulatory, administrative, technical and marketing skills. Consequently, banks and financial institutions hesitate to extend finances for the sector’s enterprises.
AO: What are the additions introduced in the new law?
NG: MSMEs totally depend on money. We often see numerous MSMEs that feel the pinch. We used to have many ambitious actionable ideas unable to be translated into enterprises for the lack of cash, time-consuming loan, licensing procedures or tiresome tax burdens... The new Law 152/2020 has come to complement the former Law 141/2004. It has initiated flexible mechanisms, expanded the financial and non-financial incentives and applied a smoother tax system to make funds more accessible for MSMEs. Under the new law, financial institutions are endowed with more privileges that help them guarantee their rights and support their positions in claiming their funds back. They have been granted a temporary allocation of the enterprise premises. That is to say, the financial institution shall be temporarily entitled to possess the enterprise premises on a temporary basis. This way, financial institutions are motivated to embrace MSMEs much more than in the case of the former law and are now increasingly poised for finance. The law has also reorganised the right to usufruct on buildings allocated for MSMEs and clearance procedures out of Public Treasury dues.
AO: What are the incentives the law provides to MSMEs?
NG: The law expands on granting financial and non-financial incentives for MSMEs and financial institutions together with a streamlined tax system. It has offered numerous non-tax incentives to enterprises operating in certain domains and conforming to regulations set forth by the executive regulations. One of the main incentives is to recover part of or all the total cost of utility installation in the allocated land following operation. The law also grants the enterprise periods for disbursing utility installation cost. One more incentive is to participate in the technical training of workers in the enterprise. The law also provides many other incentives to encourage entrepreneurship, including free land allocation, total or partial bearing of the cost of participation in exhibitions, grants of no more than 0.3 percent of gross domestic product with a minimum of EGP 1.5 billion annually and the exemption of entrepreneurial enterprises from patent registration fees.
Moreover, the law sets that informal enterprises applying to formalise will be exempt from the stamp duty and registration fees for five years. It also states a unified custom duty of two percent of imported machines and equipment and that capital gains resulting from assets and production equipment will be exempt from taxes with conditions.
The law also identifies tax dues on registered enterprises with a turnover amounting to EGP 1 million and less than EGP 3 million annually, by 0.5 percent of the turnover of enterprises (EGP 1 million and less than EGP 2 million), 0.75 percent of the turnover of enterprises ( EGP 2 million and less than EGP 3 million), and one percent for five years of the turnover of enterprises (more than EGP 3 million and not more than EGP 10 million annually).
The law also identifies tax dues on micro-enterprises with a turnover of no more than EGP 1 million annually, worth EGP 1,000 for enterprises with a turnover less than EGP 250,000, EGP 2,500 for enterprises with an annual turnover of EGP 250,000 and less than EGP 500,000, and EGP 5,000 for enterprises with an annual turnover of EGP 500,000 and less than EGP 1 million.
AO: The coronavirus crisis has impacted the economy and subsequently MSMEs. How does MSMEDA intervene to mitigate the effects of the crisis on enterprises?
NG: Since the onset of the COVID-19 crisis, MSMEDA has provided support for all its sponsored enterprises, particularly those that are negatively affected. The authority launched many initiatives to mitigate the effects of the crisis on MSMEs, including suspending or extending instalment repayment of the aggrieved enterprises. MSMEDA has also smoothed out application and establishment procedures for manufacturing detergents and medical activities amid the crisis.
Moreover, MSMEDA has initiated an exceptional loan of up to EGP 1 million within a period not exceeding a year to help MSMEs secure the cash necessary for operation and production expenses until the crisis is over.
In a complementary step, MSMEDA has developed a guide that aims to shield workers engaged in MSMEs against the crisis. The guide presents diversified prophylactic programmes applicable to all enterprise sectors whether agricultural, industrial, or commercial and those engaged in community infrastructure. The guide is available on MSMEDA site: www.msmeda.org.eg
AO: Converting vehicles to natural gas is an ambitious initiative. How is MSMEDA participating in the campaign?
NG: The initiative started in 1999 by MSMEDA and the Ministry of Petroleum (Car Gas Company) cooperating on 22 phases which were implemented. MSMEDA has also cooperated with the Ministry of Petroleum (Gas Tech company) in 2011 to implement six phases.
MSMEDA has allocated EGP 210 million for this initiative. Through cooperation with Car Gas and Gas Tech, around 40,000 vehicles were converted. Since 1999 the initiative has managed to create 40,000 job opportunities.
Currently, MSMEDA has allocated a total of EGP 1.2 billion for the implementation of this national initiative to be disbursed over three years. EGP 80 million of these sums will be presented as the first tranche to Car Gas and Gas Tech.