Boosting and incentivising investments
Dr Abou Shoka, founder of Cairo-based legal firm, Abou Shoka Law, sheds light on Egypt’s recently passed Investment Law.
Egypt’s long-awaited investment laws were passed in May, marking an important step in Egypt’s aim to attract international investment back into the region, which promptly fell away following the 2011 Arab Spring. This article will look at what this new law entails, and whether it has gone far enough in its aim to attract foreign investment, in particular from the Middle East.
Egypt occupies an important position in the MENA region. Connecting North Africa to the Middle East, the country has previously been considered a key hub for international investment. Unfortunately this new legislation only skims the surface of what Egypt has to offer businesses in the Middle East.
The main elements of the new law include offering tax incentives for foreign investors, and also cutting red tape. While this latter aim is easily promised, it is rather more difficult to accomplish. Previously, up to 70 government agencies would get involved to grant a company a permit, the new law creates a so-called ‘one-stop shop’, in which one single body (General Authority for Investment and Free Zones) manages all the paper work. Also, importantly, authorities will have a 60-day deadline in which they will need to provide investors with the necessary authorisation; non-reply within this period will be considered an approval and the requested license will be issued accordingly.
This will help ensure investors aren’t put off with the country’s awfully lengthy administrative processes, however there are still many other delays that can crop up. Egypt has a lot to offer in terms of a large customer base and cheap labour, but clogged-up bureaucracy has been a major block in attracting investors back to the region, and this isn’t going to get better overnight.
In terms of tax incentives, companies setting up in certain specialist sectors (such as electricity and renewable energy), or in under-developed areas, can get between 30 to 70 per cent off their tax bills for the first seven years. In addition, the new law includes provisions returning to investors the price they pay for land for industrial projects, as long as production is started within two years. While this sounds good in theory, in reality the administrative process of ironing out the details of this law will likely take many months.
It is crucial that Egypt does not keep missing the opportunity to do more, as it has so far, because potential investors will go elsewhere. At times, Egypt is competing with the likes of Dubai, and its independent international jurisdiction, the Dubai International Financial Centre (DIFC). This set-up has been hugely successful in providing an independent legal and regulatory framework for foreigners to use for civil and commercial matters. It is understandable that many businesses in the MENA region would opt for Dubai over Egypt, because they can then operate independently of most local laws. Ideally, Egypt would follow a similar model to Dubai’s DIFC if it is serious about competing for business in the region.
While Egypt still has a way to go to be the most attractive option for businesses in the area, things have certainly been looking up in the last few months. Not only did the cabinet approve the country’s first-ever bankruptcy law in January this year, but adding to this, at the end of last year key reforms needed to attract investors from the Middle East were made, when the Egyptian government finally floated the pound, following a $12 billion deal with the International Monetary Fund.
Since then, foreign cash has been returning, as exchange rates were no longer being artificially inflated. So far foreign investment in Egypt has improved by 39 per cent to $6.8 billion in a six-month period. This is also thanks to the new Corporate Governance Code which was introduced last August as part of Egypt’s Anti-Corruption Strategy to help restore faith in the region.
In addition, political unrest has been showing signs of ceasing, and investors are feeling less spooked about doing business in the area. Nevertheless, there is still a lot of work to be done to reduce white collar crime in Egypt.
Egypt has a unique opportunity right now to make the most of a currently bad situation in Europe. Where investors from the MENA region would usually be looking to invest in Europe, the political and economic uncertainty pervading the continent (notably Brexit and the debt crisis), opens up a space for Egypt to woo investors by showing that it is a less risky alternative.
Despite the steps in the right direction, and the vague signs of hope, there is still much work that needs to be done. Egypt’s president first spoke of these new investment reforms in early 2015, and the fact that it has taken over two years for the bills to become law reflect poorly on foreign investors’ perception that Egypt is worth the trouble.
While the new law is undoubtedly a step in the right direction, this is simply not enough for businesses to choose Egypt as their investment destination. Going forward, Egypt’s focus needs to be on creating a system that will compete with the likes of Dubai; tightening up on its anti-corruption strategy to regain foreigners’ trust; and work at improving the government’s administrative process further.