 |
Al-Ahram Weekly 10 - 16 February 2000 Issue No. 468 
|
||
Published in Cairo by AL-AHRAM established in 1875 |
| ||
|
Al-Ahram Weekly 10 - 16 February 2000 Issue No. 468
|
||
| Published in Cairo by AL-AHRAM established in 1875 |
| ||
Egypt Region International Economy Opinion Culture Features Focus Profile Travel Books Sports People Time Out Chronicles Cartoons Letters Undermining investment
By Sherine Abdel RazekMost economists agree that seven per cent annual growth is vital for Egypt in its current post-stabilisation phase. According to the IMF, realising this target of adding 1.5 per cent to an average annual growth rate of 5.5 per cent requires LE75 billion worth of investment each year. Domestic savings and investments can cover only 65 per cent of this figure, though. The remaining LE26.65 billion must be funded through foreign investments.
It is not only as a source for financing the investment gap that makes foreign direct investments crucial for Egypt. Egypt also needs these investments to improve business productivity.
FDIs are sometimes presented as the panacea for Egypt's persistent problems. In addition to providing job opportunities for at least a percentage of the 500,000 new entrants to the job market a year, joint-ventures also give the Egyptian partners access to developed management techniques, state-of-the-art production technology, market expertise and market links, all factors that the Egyptian corporate lacks.
But is Egypt attracting enough investments to fulfill all these needs? The answer, for now at least, is a resounding no. The LE26.65 billion target has proved, predictably, to be far more easily recommended than accomplished. In 1998 Egypt succeeded in attracting only LE6.6 billion of foreign investments, including direct and portfolio investments.
During the same year, Egypt's share of FDIs among 23 emerging countries came in at $0.8 billion (LE2.75 billion) or 0.58 per cent of overall investments directed to these countries. And while this figure is higher than the $770 million directed to Egypt during 1996-1997 it is a setback when one considers that Egypt had maintained its position in the top 12 recipients of FDI to developing countries between 1979 to 1989.
While figures for 1999 are as yet unavailable, a Ministry of Economy report placed FDIs during the first half of 1999 at just $312 million (LE1.06 billion). Foreign participation in the capital of approved projects during the first nine months of the year reached just LE4.198 billion compared to LE5.53 billion for the whole of 1998.
Foreign interest in the Egyptian market, though, appears to be strengthening when acquisition and joint venture deals concluded the second half of 1999 are taken into account.
The cement and banking sectors cornered the lion's share of foreign investors' attention during the second half of the year. Major stakes in three formerly state-owned cement companies, Beni Suef Cement, Assiut Cement and Alexandria Portland, were acquired by Lafarge (France), Cemex (Mexico) and the Blue Circle (UK) in deals with an aggregate value of LE2 billion. The financial sector was among the largest recipients of foreign investment during the same period, with Barclays' full acquisition of Cairo Barclays Bank. Robert Flemings (UK) merged the activities of its local joint venture Fleming Mansour with the brokerage arm of Commercial International Investment Company, capitalised at $100 million, while ABN Amro bought a 26.4 per cent stake in a local portfolio management company. Meanwhile the British retailer Sainsbury deepened its presence in the Egyptian market by injecting LE500 million worth of investment to raise its stake in the Egyptian retailing group EDGE.
New Build-Own-Operate-Transfer (BOOT) and Build-Operate-Transfer (BOT) projects, given the legal green light by Laws 19 and 22 for 1998, now include power generation plants and ports. The World Bank expects these projects to push the overall figure of foreign direct investments during the year 2000 to $2.25 billion (LE7.6 billion), still much lower than the targetted figure.
But what is the reason of the relatively low level of FDI to Egypt? So what are investors looking for when choosing an investment site outside the borders of their own country? The most obvious answer is high returns, higher than can be posted on investments in the country of origin.
Such returns, though, will only be possible in an environment offering low investment costs, an investment-friendly legal framework, encouraging macro economic indicators and a market with high growth potential.
"The yield on investment in Egypt is very satisfactory," said Stephen Helburn, managing director of the American sanitary ware manufacturer Ideal Standard in Egypt. "We have been here for 13 years and by March we will be opening our fifth plant in Egypt which means that we are satisfied with our rate of return," he said.
According to the UNDP the average return on American companies' investments in Egypt is 22 per cent, higher than in other emerging markets and twice the average return in Europe.
Egypt boasts sound macro-economic indicators combined with investment-friendly policies crowned by issuance of the investment guarantees and incentives law of 1997, according to which companies incorporated in Egypt are guaranteed against the expropriation or suspension of licenses. New companies formed under the investment law enjoy tax holidays that range from five to 20 years, according to the location of the project. Egypt has, too, signed a number of treaties for the "encouragement and reciprocal protection of investments" with several countries, and has entered into treaties with its major trading partners to avoid double taxation.
In terms of cost effectiveness UNCTAD's investment policy review of Egypt shows that Egypt's cost competitiveness, compared to other emerging markets, is high in terms of labour, electricity, shipping costs and telephone tariffs.
Egypt's low cost labour -- at $0.55 per hour one third that of Turkey, and one tenth of Israel -- constitutes a major competitive advantage. According to the World Economic Forum 1996 competitiveness report, which surveyed 49 countries on a variety of competitive indicators, Egypt ranks the 10th for qualified engineers, 12th for secondary and technical training and 15th for the supply of skilled labour.
Poor vocational skills in Egypt is cited as a major problem for foreign investors. Training schemes swallow a great deal of money. The situation is worsened by domestic labour laws seen to be weighted in favour of employees.
Other perceived constraints include red tape, a complicated tax system, low levels of skilled labour and high custom and import duties.
"We find our investments in Egypt lucrative, albeit difficult due to bureaucracy," said Helburn. "A lot of day by day paper work -- sometimes for a piece of paper you have to pass to seven people for signatures and stamps, which might take two to three weeks -- is time consuming and runs counter to production schedules that we do not want to be left behind."
The tax system also operates as a disincentive to investors. The standard rate on corporate profits is 40 per cent, while the tax norm in the region is around 30 per cent.
A report issued by the Egyptian Centre for Economic Studies on corporate tax and investment decisions in Egypt described the tax system as "complicated".
"The numerous tax rates applied to different activities, granting tax incentives to certain activities rather than others and tax holidays of different durations according to the location of the project fails to offer a neutral tax treatment to investors," stated the report.
Moreover, tax holiday schemes have not so far proven to be effective as a means of encouraging investments. The tax relief given to American companies in Egypt is, for example, claimed by the US government when income is remitted.
Input procurement procedures, too, remain cumbersome. A World Bank report on Egypt in the global economy points out that tariff and import tariff protection is still high. Tariff differentials exist between different product groups and there are import bans on certain commodities, including poultry, textiles and clothing.
Efforts to give exporters access to imported inputs are undermined by excessive paperwork and low service standards in the four maritime ports, Damietta, Port Said, Dekheila and Alexandria.
The World Bank report points out that overall charges for seaport services are triple those of competitors while the physical condition of ports and the quality of services are both low.
Customs clearance of imported materials is also troublesome. Procedures are complicated -- clearance of food stuffs, for example, requires entry permission from five agencies starting with the atomic energy agency and ending with the government organisation for export and import control.
