Investment between 2 IMF loans: An unchanged philosophy and challenges to governance

Immediately after Egypt’s current investment law was ratified in March 2015, the government began drafting a new piece of legislation, with former Investment Minister Dalia Khorshid leading the charge. While Khorshid left the Investment Ministry in the recent Cabinet reshuffle, the new legislation appears to be on the cusp of approval.

The Khorshid bill does update the investment liberalization policies that have been a common tenet of Egypt’s political economy since the 1990s, bringing them into accord with the economic liberalization program the government and the International Monetary Fund (IMF) agreed to in November. Yet, it is difficult to note the salient philosophical differences between the pieces of legislation the government has hung its hat on, as they share several articles and each presents foreign direct investment as a key driver for growth.

Given this continuity, what has driven the political will to introduce new legislation, and how have Egypt’s liberalization policies changed amid the new conditions introduced by the IMF loan?

What has driven the political will to introduce new legislation, and how have Egypt’s liberalization policies changed amid the new conditions introduced by the IMF loan?

At the heart of this question are ongoing and future challenges to investment governance that began after the January 2011 revolution, when the private-public partnership model was questioned by a series of legal contests to the contracts that defined the 1990s and 2000s. Subsequent years have seen the executive branch try to position itself as the sole managerial authority in mitigating conflicts between various investment actors. The calculus involved in the brokering of power is complex, as is evidenced by the fact that, when the State Council returned the new investment bill to the Cabinet earlier this month, its main comments focused on the necessity of presenting the drafted legislation to seven government and judicial entities.

Investment between two loans and another law

Egypt resorted to the IMF in the 1990s for credit facilitations more than once, leading to the 1996 loan agreement, which was approved before the Egyptian government backed away from it. Despite a decision not to receive the funds, the government opted to go ahead with economic liberalization measures. According to an IMF statement released at the time, a new investment law was one of the structural reforms expected that were part of the program and part of a plan to drive growth through investments. A year later, the 1997 law was ratified, and it remained in place until former Investment Minister Ashraf Salman introduced new legislation in March 2015 to address the investment landscape following the 2011 revolution.

But it took around a decade for these measures, along with several “investor friendly” policies, to achieve a significant impact on Egypt’s net foreign direct investments, which peaked at US$13.24 billion in fiscal year 2007/08, when growth hit 7.2 percent.

Notably, these investments were mostly concentrated in the extraction sector, with the exception of FY 2006/07, when a greater amount was directed at the non-petroleum sectors, which acquired 47 percent of FDI that year — a share higher than that for the petroleum sector, which acquired 28 percent. The share of FDI allocated toward privatization of public assets was recorded at 25 percent. This surge in investments, however, had a minimal impact on unemployment levels, which fell slightly to 8.4 percent in 2008, compared to 10.6 percent in 2006.

The high growth levels and surge in investments were short lived and began slowing as soon as the global financial crisis hit in 2008. Egypt’s growth hit 5.1 percent in FY 2009/10 and FDI fell close to the current level, reaching $6.67 billion that fiscal year, before plunging to $2.2 billion in FY 2010/11 during the revolution.

Following the ratification of the Salman investment law in FY 2015/16, FDI was recorded at US$6.9 billion. Despite being a slight increase from the $6.4 billion recorded in the previous fiscal year, it remained less than the targeted $8-10 billion. The rise in net FDI in FY 2015/2016 was prompted by an increase in net investments of $4.5 billion for starting new companies and raising capital, and $1.6 billion in investments in the petroleum sector, according to the Planning Ministry’s report for that year.

The Khorshid bill comes amid a state-led economic liberalization program outlined in a loan agreement with the IMF through which Egypt will receive US$12 billion over three years, conditional on its adherence to the agreed upon terms. The program aims to stimulate growth by introducing fiscal, monetary and structural measures that are “investor friendly,” as well as to draft legislation that will “improve the investment environment.”

“Wider objectives pertinent to technological transfer, job creation, how to capitalize on capital inflows and long term ways of benefiting from the investment, are all absent from the bill.”

“The bill aims to offer incentives and guarantees to attract capital into the Egyptian economy, in the hope of healing the deficit in the balance of payments,” political economist Amr Adly tells Mada Masr. “Wider objectives pertinent to technological transfer, job creation, how to capitalize on capital inflows and long term ways of benefiting from the investment, are all absent from the bill.”

The Khorshid bill carries over many of the 2015 law’s articles – the 2015 law was described to Mada Masr by investment and stock market lawyer Hany Sarie Eddin as “a mess” – and thus the government’s response to the problems in investment governance at the time, including the articles that created a range of regulatory bodies, such as ministerial committees to manage dispute settlements and the Supreme Investment Council. The bill also maintains language that outlines the state’s obligation to train a labor supply and provide public utilities for investment projects, as well as provisions that allow investors to repatriate both the full extent of profits and, upon the dissolution of a corporation, the invested capital, notably without mentioning regulations or incentives to reinvest in Egypt.

However, the new investment bill introduces new economic zones in articles 64-84, which maintain the public free zones and introduce investment and technological zones. Through these economic zones, the state offers tax and customs incentives to attract investors, including exemptions from the value-added tax and special customs channels that aim to encourage production and exports, but that also allow for special treatments for imports.

The bill also replaces the National Authority for Promoting Investment, which was created but never established by the Salman amendments, by granting the existing General Authority For Investment (GAFI), which traditionally manages regulations on investment, the task of investment promotion.

Additionally, the bill changes tax incentives and incentives tied to the allocation of land. Where the Salman law did not set any time constraints for the incentive by which investors could recuperate half the value of the original cost of land once they commenced industrial production, the Khorshid bill adds a two-year limit for the incentive. The bill also introduces a regime of three-year tax breaks, effective upon issuance of the law’s executive regulations, which can reach up to 40 percent.

Unresolved issues

However, the new investment bill resolves neither investors’ issues, nor those at the core of Egypt’s investment philosophy.

Parliament’s economic committee held its second formal discussion of the draft bill on March 1, with Mohamed Khodeir from the General Authority For Investment (GAFI), and a representative from the Investment Ministry in attendance. The committee postponed discussion on the articles concerning incentives and guarantees due to the absence of representatives from the Finance Ministry.

Medhat al-Sherif, a member of the committee, tells Mada Masr that they had already begun studying the draft law before it was officially submitted for consideration. “There are several amendments we see as necessary to introduce before the bill is put to a vote,” he says.

While Sherif did not provide details of the committee’s objections, he asserted that one of their main concerns is the issue of coordination. “Some decisions within the bill need coordination among different entities,” he explains, expressing skepticism as to “the ability of some administrative entities to implement what the bill obliges them to do.”

“There are limits to the influence of legislation on private investment in Egypt, especially foreign investment. In the end, the influence of certain state entities depends on power dynamics within the state and between the state and society.”

In the comments attached to the bill that it returned to the Cabinet, the State Council enumerated several state bodies that should review the law: the Finance Ministry, the Central Bank of Egypt, the competition authority, the investment authority, the financial regulatory authority, the administrative office at the State Council and the Supreme Judicial Council. In addition, the State Council determined that Article 15, which was approved by the Cabinet at the end of December and would have allowed for preferential treatment to be granted to certain investors in instances where the Cabinet judges there are threats to national security, is unconstitutional.

The State Council argued that the article undermines equity and equal opportunity principles set forth in constitutional articles 4, 9 and 27, suggesting that Article 15 be amended to allow for exceptions to these conditions only in cases where the Egyptian government takes reciprocal action in response to another nation’s investment policies.

The State Council’s concerns come down partly to whether legislation can do enough to govern power dynamics within the government. “There are limits to the influence of legislation on private investment in Egypt, especially foreign investment,” Adly says. “In the end, the influence of certain state entities depends on power dynamics within the state and between the state and society.”

These power dynamics were long managed through privatization and public-private partnerships, considered the main characteristics of the 1990s and 2000s economic liberalization program, which went into crisis when investment contracts were challenged in court. The 1997 investment law did not provide investors with any protection from the growing corruption accusations that coincided with the program, which set the scene for future litigation.

The Khorshid bill allows the government to reconcile with investors during investigations or during court proceedings before a final ruling is delivered.

Following a series of judicial verdicts against investors in the aftermath of the 2011 revolution, the government decided in 2014 to bar third party challenges to its contracts with investors. The Salman law moved to formalize the protection of investors by creating ministerial committees endowed with the authority to settle all investment disputes. According to the May 2015 decree establishing the ministerial committees, the ministries of investment, local development, trade and industry and the Finance Ministry must meet twice a month to settle all disputes.

The Khorshid bill kept in place these committees and went a step further by including in the bill an article that was added to the 2015 Criminal Code, which allows the government to reconcile with investors during investigations or during court proceedings before a final ruling is delivered. The addition to the criminal code ultimately allows the executive authority to bypass the judicial authority in matters pertaining to investors.

This balance of power was also evident in the discussion about private free zones, which Khorshid sought to retrieve in her bill.

The proposed legislation defines free zones as a portion of state territory that adheres to decentralized administrative authorities and are treated according to special customs and tax incentives. The GAFI website differentiates between public free zones and private free zones, with the former being a free zone for investment, industrial and service projects delimited within one zone, and the latter being a free zone for one project only.

However, the Finance Ministry turned down Khorshid’s attempt to salvage private free zones, stating that they harm the state’s bottom line due to the fact that they are used as a smuggling site.

Land and corruption, once more

Investment disputes were not just related to privatization, as the allocation of land was also a significant concern, especially in the real estate and tourism sectors. Much of the conflict centered on disagreement over prices and the allocation mechanisms.

“Access to land is a pivotal matter to investors in Egypt, and, of course, in a manner that is not compatible with the abundance of desert land,” Adly explains.

The new bill allows for the allocation of land for free or for half its value in some cases, but it does not specify in what form or through which mechanism, and comes without settling the issue of the existence of numerous authorities that are in charge of allocating land.

The term “land” was dropped from articles 53 to 67 that the new bill carries over from the 2015 law regulating the use of state assets. As a result, the articles only regulate the use of state-owned real estate, as compared to the Salman law, which regulated the use of both land and real estate. Although the new bill failed to specify the mechanisms for land allocation (direct order or bid, etc) or the form of allocation (ownership, rent, etc), Article 36 allows for the free allocation of land to strategic projects or for half its value for industrial projects that start production within two years from the date the land is acquired.

“The free allocation of land needs to be regulated because the state in this case picks the winner,” Adly says. He doesn’t think there is a problem with the state taking on this role necessarily, but he cautions that it may lead to a repetition of past mistakes when investors used the acquired land for personal gains rather than for development. “Allocation of land requires clear regulations and an institutional framework capable of supervising, [so as not to repeat past mistakes] that have become in themselves a source of land scarcity.”


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