Photo: Investment and International Cooperation Minister Sahar Nasr talks during an interview with Reuters in Cairo, Egypt June 21, 2017. REUTERS/Mohamed Abd El Ghany
Egypt hopes its new investment law will attract more foreign money to the country, make it easier to do business and help reduce unemployment.
But the law – many years in the making and signed onto the statute books in June by President Abdel Fattah al-Sisi – is still incomplete. Crucial details have yet to be agreed, and it is those finer points on how the law will be implemented, along with the question of whether Egypt can unshackle companies from the state’s labyrinth bureaucracy that will determine whether the law will succeed in its aims.
“The politics and economics of Egypt will be more important than the law itself,” said Noaman Khalid, Macro Economist at CI Capital Asset Management.
An earlier investment law was passed in 2015, but this was widely derided as insufficient, leading the government to create the new law that includes more incentives for foreign investors scared away by the country’s political turmoil this decade.
Extra foreign cash is considered vital to help steady an economy in which inflation is at a three-decade high following November’s flotation of the Egyptian pound. The currency has since lost more than half its value versus the dollar.
Among the key points in the new law are a 50 percent refund on the price investors paid for land for industrial projects should production start within two years. But many of its most touted features were already present in disparate pieces of legislation. For example, the principle of fair and equitable treatment for foreign and local investors is included in bilateral investment deals with several dozen countries.
“It’s a positive step as it improves clarity about these rules, but I don’t think there’s anything that is qualitatively different from what existed before,” said Amr Adly, an Egyptian political economist.
The government has still to publish the executive regulations – or by-laws – that will determine how the law will be implemented. These were slated to be announced within days of the law being signed but are now unlikely to be released until after the summer when parliament returns.
“We’re waiting for the executive regulations to come out to shed some light on the law’s specifics. It’s unclear right now. The essential details haven’t yet been announced,” said Mohamad Talaat, managing partner of Baker McKenzie’s Cairo office.
Egypt is a lowly 122nd in the World Bank’s Ease of Doing Business rankings and 115th in the World Economic Forum’s Global Competitiveness Index. Foreign and local investors have long complained about Egypt’s bureaucracy stifling entrepreneurial activity, and the new law promises a ‘one-stop-shop’ through which investors can channel all paperwork to launch operations.
But such a notion has been explicitly stated as a principle since 2004 through an amendment to the 1997 investment code and little headway has been made, said experts, with investors still hostage to the dozens of administrative units within the government that compete for power and resources.
“The most important parts of the law are the promises to streamline procedures like for getting a license, allocating plots of land or real estate, the tax incentives for certain investment systems,” said Mohamed Hashish, a partner at Cairo’s Soliman, Hashish & Partners.
“Obtaining an industrial license can take up to one year – it’s a miserable process and even more complicated and time-consuming if you have multiple factories or facilities.
“Just before the issuance of the new investment law, parliament issued another new law for facilitating industrial licenses to simplify matters but again the government has to accelerate the process of issuing the executive regulation of this new law as well,” Hashish added.
The government’s drive to reduce bureaucracy also extends to amendments to the Companies Law. These are slated to include simplifying the process of holding board meetings and general assemblies, which currently require laborious approvals from the authorities, plus the introduction of a single shareholder company, said Baker McKenzie’s Talaat. Currently, foreign firms founding a local limited company (LLC) must take on a second shareholder.
“We believe these amendments will give a good impetus for investments in the country as a whole,” said Talaat.
The investment law also promises tax reductions of up to 50 percent for projects and investments in less developed regions and 30 percent if they fulfill certain criteria such as being labour-intensive, or in certain sectors such as tourism, renewable energy, automotive, engineering or food and agricultural production.
How these tax breaks will work will be decided in the by-laws.
“From our discussions with the government, we understand it will be deducted from the income tax,” said Hashish.
Income tax is levied at 22.5 percent of net income, or profit, with the government likely to deduct the investment costs of a project from a company’s tax bill.
“In the case of Egypt, tax incentives should play a positive role because the country’s main selling point to investors is as a cheap production location,” said Adly. “It’s pretty much a race to the bottom versus similar countries like Jordan, Tunisia and Morocco, where you show investors this is a destination where they’ll pay less.”
The law will reinstate privately owned free zones.
“In Egypt, the technology sector is very active and we have a lot of requests from international companies to invest therein,” said Hashish. “Reinstating private free zones is a very important step because most of the leading multinational IT companies used to benefit from this system.”
Framing the investment law involved tense negotiations between multiple ministries, all keen to defend their turf. Steadily though, the Ministry of Investments has assumed ever greater control over the process.
Applying the law will depend on the power dynamics within the state bureaucracy, which was partly why a supreme investment council headed by Sisi was established last year.
“The main problem is this big black box of the government, whether it can actually restructure, re-scope, reform and reduce the level of bureaucracy,” said Adly. “I have no answer and I don't think they have an answer themselves; they are learning by doing.”
FDI, M&A UP
Since 1990, annual foreign direct investment (FDI) into Egypt has rarely topped 1.5 percent of GDP, aside from a period from 2005 to 2008 when inbound investment spiked, World Bank data shows. FDI hit a record high of 9.3 percent of GDP in 2006 as the government sold off state assets.
Foreign investment plummeted following civil unrest from 2011 that ousted two presidents and a deadly insurgency that has killed hundreds, but inward investment is now steadily increasing again. Egypt was Africa’s second biggest recipient of FDI in 2016, attracting $8.1 billion, according to UNCTAD. To put that in context, Africa accounted for just 3.4 percent of global FDI last year.
The pound flotation, which eased a crippling chronic dollar shortage, and the recent removal of restrictions on repatriating profits may prove to be of more significance to foreign investors than the new investment law.
“We’re seeing the same level of M&A activity we used to see pre-revolution in terms of the number of deals, but the ticket size isn’t there yet,” said Omar Bassiouny, Founding Partner and Head of M&A at law firm Matouk Bassiouny in Cairo. “We’re getting to the position where foreign investors are comfortable about investing in Egypt again, hence M&A activity has been on the rise.”
He said foreign investors were most interested in oil and gas, plus defensive sectors such as education, healthcare, pharmaceuticals and fast-moving consumer goods including food manufacturing.
“Despite inflation, people are still going to get sick, send their kids to school, buy food, while oil and gas remains immune to economic and political upheavals,” added Bassiouny. “We’re seeing a lot of interest from investors in these sectors, whether private equity or strategic.”
Overall, economists, analysts and lawyers welcome the new investment law, but remain wary of the government’s poor track record in implementing its plans, even if other initiatives such the long-mooted pound flotation demonstrate a rare resolve among officials to succeed this time.
“These reforms will undoubtedly increase investments,” added Baker McKenzie’s Talaat. “But the question is to what extent.”
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