Legislation to create Egypt’s first sovereign wealth fund, which will bear the name the Egypt Fund, was passed by Parliament on July 16. Pooling together a maximum of LE200 billion in state assets, the fund has already secured a pledged LE5 billion to be paid within the first three years, LE1 billion of which is to be paid from the state treasury at the fund’s inception.
While the law has seen its share of controversy inside Parliament, its proponents have touted that the creation of a sovereign wealth fund is the best approach to administering state assets, especially ones that are idle or unused.
However, once deposited in the Egypt Fund, state assets will be considered private property and will be not be subject to the parliamentary oversight that comes with management of the state budget. The fund will also have the right of disposal of state assets. Additionally, while there were attempts to make the fund completely tax-exempt, the final language of the law has laid taxes on the fund’s subsidiary funds and companies it has shares in, while exempting transactions related to the main fund, and any entities it owns, of any taxes or fees.
What is a sovereign wealth fund and what does it do?
A sovereign wealth fund is a state-owned investment fund that allows states to invest in real and financial assets, ranging from stocks, bonds and foreign currency reserves to property and returns from natural resources, like oil and natural gas.
Many sovereign wealth funds have a larger value than other types of funds, as they draw on immense returns from oil and gas. For example, Norway’s sovereign wealth fund, which is called the Government Pension Fund of Norway and is the largest sovereign wealth fund, is worth slightly more than US$1 trillion, according to figures calculated in June, while the most valuable Emirati sovereign wealth fund, the Abu Dhabi Investment Authority, is worth $683 billion.
The raison d’être for sovereign wealth funds is to increase the returns on investment on assets held by the government, especially in countries that rely on a single source of income, such as oil, as is the case in Norway. In these cases, the idea is to diversify the sources of national income to avoid a crisis when a single source of income is exhausted — when a natural resource runs out, for example.
Why has Egypt set up a sovereign wealth fund?
According to comments made by Planning Minister Hala al-Saeed in April, the Egypt Fund will be established “to achieve sustainable economic development through the best allocation of state-owned assets.”
This phrasing is echoed in the official language of the legislation, which now awaits ratification from President Abdel Fattah al-Sisi to pass into law. According to the law, the fund aims to “aid sustainable economic development through the administration of its funds and assets in order to realize the best use of them in accordance with the highest international standards and regulations to increase their value for future generations.”
Saeed stressed in her remarks to the press that the fund will manage a number of state assets that are currently idle or unused.
The idea to set up a fund first began to materialize in 2015 with the government’s announcement that it would pool together LE5 million in assets to create the Amlak sovereign wealth fund. However, the plans fell through after Saeed withdrew the law in 2017, citing the need for further studies.
Talk of a sovereign fund had subdued until former Public Enterprise Minister Khaled Badawy said in March that a fund would be created to own and manage a large number of Egyptian state assets. This was followed by Saeed’s April announcement of plans to establish the Egypt Fund.
How will the Egypt Fund work?
The law establishes a sovereign wealth fund, the Egypt Fund, with an authorized shared capital of LE200 billion (US$11 billion), which represents the maximum amount of state capital the fund can pool. Pledges in the fund, as represented by subscribed capital, amount to LE5 billion, LE1 billion of which is to be paid from the state treasury at the fund’s inception, with the rest to be paid within three years of the date of establishment of the fund, in accordance with investment opportunities plans offered by the fund. According to the law, the state funds in the Egypt Fund are considered private property.
Article 14 reads, “The fund and the secondary funds and the companies it founds or co-founds are deemed persons of private law, whatever the shares belonging to the state or the public sector or public enterprises are, and none of these are bound to governmental rules and regulations.”
Article 5 allows the president to transfer the ownership of assets from the state to the Egypt Fund if they are unused. It also allows for the transfer of assets used by the state in coordination with the ministry that owns the assets in question.
The fund also retains the right to dispose of its assets, either by sale or rent ending in ownership, or licensing for use or for in-kind shares, according to Article 8 of the law.
Further, the law makes provision for the creation of a board of directors and a general assembly. The former appoints its chair and draws up the fund’s investments plans and supervises their implementation, while the latter shares some of these responsibilities, and issues final approvals of the fund’s financial actions and plans.
A presidential decree appoints individuals to the board of directors, which includes the minister of planning as a non-executive chairperson, in addition to representatives from the planning, finance and investment ministries, as well as five independent board members with relevant experience. The law sets the duration of membership on the board to four years.
The board of directors is responsible for putting forth the fund’s general vision and strategy, following up on its performance and approving its annual budget.
Like the board of directors, the general assembly is established through a presidential decree, and includes the finance and investment ministers and two other ministers engaged with economic affairs to be determined by the prime minister, along with seven independent members with relevant experience. The law sets the membership period for the general assembly at three years.
The law gives the general assembly the responsibility of approving the fund’s financial statements, monitoring performance and ratifying the board of directors’ decisions from the previous year.
The fund has an independent budget, and its revenues are principally derived from capital and assets owned by it, as well as returns on investments, loans and facilities.
The law also allows the fund to create subsidiary funds unilaterally or in partnership with other Egyptian or foreign funds, banks and financial institutions.
Oversight of the fund’s finances is relegated to auditors from the Central Auditing Agency (CAA) and another auditor registered at the Central Bank of Egypt or the Financial Regulatory Authority.
Parliament’s Planning and Budget Committee proposed an amendment to the law to oblige the fund to present its financial statements, the CAA report and the fund’s annual report on its performance and plan to the legislative body. The government agreed to the amendment, but Parliament removed it from the law during its final vote.
Hussein Eissa, the head of the committee, described the amendment as important during a session discussing the legislation, only to be rebuffed by Parliament Speaker Ali Abdel Aal.
Abdel Aal argued that the withdrawal of the amendment was due to the Egypt Fund’s activity being an “executive” matter, stating that “the House of Representatives does not interfere in executive activities.” He insisted that there was no reason to present its financial records to Parliament.
The law also exempts the Egypt Fund’s transactions, along with those of the entities it fully owns, from any taxes and fees. Dividend payments, subsidiary funds, as well as companies the sovereign fund does not fully own, are not granted the same exemption, however.
While Eissa clarified that the committee had been against the exemption, he says that a long discussion unfolded between members of Parliament and the government, which was represented by Parliamentary Affairs Minister Omar Marwan and Finance Minister Mohamed Mait. The conversation resulted in the compromise to exempt transactions between its entities from taxes while taxing its transactions with other entities.
During the July 16 voting session, MP Diaa Eddin Dawoud, a member of leftist parliamentary bloc 25-30 Alliance, said that the law was “rushed” and “lacks a clear philosophy,” adding that sovereign funds are usually created when there is surplus wealth. Egypt, however, has debt obligations and a government unable to deal with it, he pointed out.
Dawoud warned that some sovereign funds have “collapsed and led to the collapse of the countries owning them,” saying the creation of the Egypt Fund is a “losing bet.”
MP Gamal al-Sherif, a member of the same parliamentary bloc, argued in the session that approval of the law should have been contingent on the newly formed Cabinet, which is headed by Prime Minister Mostafa Madbuly, receiving a vote of confidence, so as to avoid any constitutional challenges in the future, a recommendation that was rejected by Abdel Aal.