The Sahar Nasr-sponsored investment bill was finally passed by Parliament on May 7 after a long period of infighting among the Cabinet’s economic ministers over the division of power and resources. But Parliament’s approval was only possible with a series of concessions, one of which was that the authority to approve the legislation’s executive regulations was transferred from Nasr to Prime Minister Sherif Ismail, leaving the window open for continued conflict as Cabinet members will be able to review the regulations before they are given final approval.
When Nasr took over the Investment and International Cooperation Ministry, the bill was drastically changed, before being passed by Parliament’s Economic Committee, a move which prompted more internal discord in the Cabinet over private free zones, land allocation and the distribution of authority.
The drama of the past five months since the Cabinet approved the first draft is only the most recent episode in a three-year-old saga that began in the 2014 Cabinet headed by former Prime Minister Ibrahim Mehleb, which resulted in a contentious amendment to the 1997 investment law. The amendment was drafted by former Investment Minister Ashraf Salman who presented the legislation to investors at the March 2015 Economic Development Conference in hopes of luring international money into the country. Since then, Egypt has seen the materialization of a few deals focused primarily on the energy sector. Within a year after Salman’s legislation was taken up, Dalia Khorshid won the Investment Ministry seat on the promise of introducing a new comprehensive investment law. Khorshid’s bill was approved by the Cabinet at the end of December right before she left the ministry. But the State Council returned it with 11 comments, some of which warned of potential conflict among Egypt’s ministries.
Mada Masr reached out to economist and former Deputy Prime Minister Ziad Bahaa Eddin (ZB), political economist Amr Adly (AA), and CI Capital Asset Management economist Noaman Khalid (NK) in an effort to decipher the law’s impact on economic development and investment governance, in addition to its ability to resolve the Cabinet’s internal conflicts.
How do you expect the widely reported internal disputes within the Egyptian government over the recently approved investment law to affect investor confidence going forward? Do you imagine the resolution that emerged from the Cabinet to secure passage of the bill earlier this week will mitigate conflicts in investment governance going forward?
ZB: “Disagreement in the issuance of any law is not in itself a bizarre or even weird thing. It makes sense to have different viewpoints within the government. But what was worrying, first, is that this issue has been disputed since March 2015, when an amendment to the law was at the center of business talks, and, although that amendment was finally issued ahead of the economic conference, it came out unrealistic, making promises it can not fulfill. This ultimately disturbed the mechanisms of investment in Egypt. The other worrying aspect is that, although it is natural that a Cabinet discussion over the law would depict disagreement, and that the Finance Ministry would want to limit tax exemptions, whereas the Investment Ministry would seek to encourage investors, and different ministries would be concerned with protecting their authorities, it is problematic that these differences persisted beyond a Cabinet discussion, even after the law was approved and sent to Parliament. In fact, these differences among ministers persisted even after the Economic Committee approved a draft of the law. This ultimately raises concerns about the extent to which the vision of the law is clear.”
NK: “For an investor, local or foreign, it totally defies the idea of a ‘Unified Economic Vision.’ Any investor would assume that at such a critical time in the history of the Egyptian economy, the Cabinet and especially key ministers (such as Finance, Investment and International Cooperation, Trade) would actually be on the same page regarding what they demand from such an investment law. Investors would assume that all ministers’ interests should be aligned as the Cabinet reshapes the Egyptian economic model into a more sustainable and credible one. It definitely affects investor confidence regarding which type of investors the Egyptian government really wants.”
AA: “It is very hard to tell what the dispute really was. The infighting came out clearly when the parliamentary committee overseeing the draft introduced many and reportedly major amendments that were said to empower the minister of investment over the prime minister and other involved ministries, namely those of the treasury. There has been tension around tax incentives. The treasury, as expected, does not want to compromise its already limited capacity to collect taxes by extending more holidays and tax rebates. The Investment and International Cooperation Ministry, once again as expected, is keen on attracting FDIs at whatever cost. Eventually, some force intervened and passed the original draft presented by the government to Parliament over two months ago ignoring the amended and controversial draft altogether. The tension remains apparently over the bylaw that will have to be passed translating the legal clauses into the various decrees and decisions by the executive authority and hence impacting investors. The struggle to get the issuance of the bylaw by the Investment and International Cooperation Ministry rather than the prime minister might have had to do with ensuring that the most investment-friendly agency is placed in charge of this. This however did not last in the draft passed by Parliament, which implies that tensions will remain. As for the impact of this on investors, of course it looks bad indicating chaos and a lack of coordination even within the tiny economic team that is supposedly all like-minded and business friendly.”
Does the law emphasize one type of FDI (resource-seeking FDI, efficiency-seeking FDI, market-seeking FDI, or strategic asset-seeking FDI) over the others in the incentives it grants to certain geographical locations? How will the type(s) of FDI that the law aims to attract impact unemployment and growth?
AA: “The law covers a great many sectors. The aim of course is to get more FDIs and to redirect them into new sectors that could generate employment and growth. The main challenge has been structural, rather than legal or institutional. Historically, FDIs in Egypt have been concentrated (by a ratio of two thirds) since the 1970s in the extractive industry sector. Few FDIs have ever ventured into agriculture, manufacturing or services with the exception of banking and telecommunications, which are skill-intensive and not labor intensive anyway. The problem here is much more structural, as it has to do with Egypt’s position in the global division of labor and the sectors which have the highest competitiveness to attract foreign capital. This has to do with the cost and skill of labor and the use of Egypt as a hub for exporting to Europe, the Persian Gulf countries and possibly to Africa, which in turn depends on infrastructure. Simply put, attracting FDIs into new sectors requires a comprehensive strategy of development for the building of a competitive advantage for the Egyptian economy, not just addressing FDIs with incentives and holidays.”
Do the provisions on land allocation and incentives address investor concerns with regard to the access and availability of usable land? How does the existence of overlapping land allocation mechanisms affect the ability of the government to ensure any of the following: market competitiveness, a state-controlled economy and international or domestic business interests?
ZB: “The issue of land is significant but also very complex in Egypt, which is unfortunate given that there is no scarcity of land in the country. We might have scarcity in agricultural land, for example, but it is not the case for industrial land or touristic land or even for construction, given the amount of unused land. The problem is then that of ongoing conflicts among different government entities. The investment law attempts to solve this issue by limiting the authority to allocate land to the General Authority for Investment. While that in itself is a very good idea, the law that was passed in 2015 already attempted to do the same thing but completely failed, because the different government entities were divided over ceding authority over land allocation. Hence, it is not a legal issue. It is a problem in implementation. If the government managed to bring together all ministries to work on one objective, coordinate together and force them to follow one policy, then, in this case, it would not matter whether land is allocated through GAFI or other government entities.”
NK: “The access and availability of usable land has always been conditioned by the numerous public entities that own the land and whether such a piece of land is actually available for allocation to new investments. The proposed idea was that different entities report all the land available for allocation, thus creating a new map of all the land across Egypt so investors can choose to rent/buy for a specified period. But such an idea is not applicable under the new investment law. So what will happen is that investors will still choose a specific land and GAFI will then be responsible for checking with all different authorities to get approval for the allocation of the land, a procedure that is very inefficient and will take a lot of time. Thus provisions and incentives are not enough to address investor concerns, since ownership of land will still be threatened. The existence of such overlapping land allocation mechanisms definitely ensures a state oriented economy rather than market competitiveness.”
AA: “Access to land for economic uses has been marked as a major constraint for decades. The current law facilitates access to land in theory. It remains to be seen, however, whether the complex bureaucratic structure and vague legal framework where mandates overlap and authority is not very clear to the detriment of secured property rights for investors will be restructured by the law. It is never an easy task as it requires overcoming vested interest with access to power and to rent in Egypt’s complex and extremely big bureaucratic apparatus.”