Businessmen upset at investment law

Although it was fiercely attacked by businessmen for not easing customs duties, the new investment law was approved in the People's Assembly this week. Gamal Essam El-Din reports

---

Amid heated controversy, on Monday the People's Assembly approved a newly-amended Investment Guarantees and Incentives Law. The law is the centerpiece of a set of laws which the government hopes will boost the flow of foreign direct investment (FDI) into Egypt.

The law was approved by an overwhelming majority in less than two days. This was a surprise to many due to the barrage of criticism from entrepreneurs directed against the law since its details were publicised in January. The Egyptian Businessmen's Association (EBA) went so far as to call the law unconstitutional, patchy and restrictive.

According to Prime Minister Atef Ebeid, the new law is the third reworking of the Guarantees and Incentives Law (Law 8/1997) in seven years. Addressing the Shura Council (the consultative upper house), Ebeid said that "after seven years of implementation, it has been discovered that this law fell short of a major requirement, which is phasing out some major bureaucratic obstacles standing in the way of foreign investments." The modified law, added Ebeid, will greatly facilitate investment measures in terms of rendering the General Agency for Free Zones and Investment (GAFI) the sole body to which investors will have to turn in order to have their proposed projects approved.

As the law currently stands, investors need to gain approval from as many as 36 authorities before they can start implementing their projects. GAFI, according to the new law, will also be entrusted with issuing licences on certain tax and custom exemptions granted to investors and preparing essential investment maps and statistics. The law also states that the cabinet be authorised to grant "companies of great international fame" certain privileges and incentives.

No sooner had the government referred the legislative amendment to the Shura Council in February than investors and businessmen showered it with vociferous criticism. The Egyptian Businessmen's Association (EBA) said the government's philosophy behind the new legislative amendment is by no means appealing to businessmen. Explaining the reason for this, a report prepared by EBA's investment and legislative affairs committees said that "EBA believes that bureaucracy is not the only obstacle standing in the way of attracting greater investments to Egypt." The report added: "If the investment law is to be amended, this is not to be done through patching it up. There must be a new law aiming at both phasing out obstacles and introducing new incentives."

EBA stepped up its public criticism of the government after the law had been submitted by Shura Council to the People's Assembly. Another EBA report, issued on 16 March, said the newly-modified law includes at least five articles in violation of the constitution. According to the report, GAFI must not be authorised with giving tax or custom exemptions. "The constitution gives this task to the People's Assembly," the report said. Besides, it added, the law makes a distinction between local and foreign investors when it states in Article 63 that the cabinet be empowered with providing internationally-renowned companies with certain privileges. "This violates Article 40 of the constitution which states that all citizens are equal before the law," said EBA's report.

During the preliminary debates at the People's Assembly's Economic Committee, businessmen -- both EBA members and MPs -- said their major reason for attacking the law is that it does not grant investors further tax and custom exemptions on imports of capital goods. "Taxes and custom duties imposed on capital goods leave investment businesses saddled with a 17 per cent increase in costs," said EBA Chairman Gamal El-Nazer. Unless this major obstacle is tackled, El-Nazer said debate on the new law would be "a waste of time".

Talaat El-Qawwas, a businessman and deputy chairman of parliament's economic committee, said "the law is one step forward and two steps back." In its report about the new law, the economic committee stated that the government's grounds for amending the law were by no means adequate. "We agree that there is a need for eliminating bureaucratic obstacles, but there is also a greater need for relieving investors of burdensome custom fees and taxes," the report said.

According to the economic committee's report, the poor performance of the Egyptian economy requires the total elimination of unnecessary bureaucratic obstacles to attract foreign investment. "While the local savings rate accounts for just 11.4 per cent of GDP, the rate of domestic investments also made up a mere 16.1 per cent of GDP in 2001/2002," said the report. The report argued that the rate of domestic investments needs to grow to 25 per cent for Egypt to achieve a growth rate of seven per cent. "This means that attracting greater direct foreign investments have become a major inevitability in light of the fact that there is a gap of seven per cent in domestic investments and that a government ceiling on external borrowing is currently in force," said the report.

The report estimated that around LE100 billion (around $16 billion) in FDI is needed to raise the annual growth rate to six per cent from its current 3.2 per cent. Reports of the Central Bank of Egypt (CBE), however, say that the flow of FDI to Egypt is steadily decreasing. "The volume of FDI in Egypt dramatically plummeted from $1.6 billion in 1999/2000 to a mere $700 million in 2002/2003," the report said.

Nonetheless, Ebeid adamantly rejected suggestions that the investment law be modified to relieve investors of further custom fees and taxes on imports of capital goods, which generate LE2 billion in government revenue. Addressing parliament's economic committee at the end of February, Ebeid said the government is by no means ready at the present time to strip the treasury of any more tax or custom revenues. "Any more tax exemptions will surely exacerbate the budget deficit," said Ebeid. Because the budget deficit is expected to grow to 7.5 per cent of GDP (LE37 billion) in the next fiscal year (2004/ 2005), the government also objects to giving any further tax incentives to small-scale enterprises and decided that a new legislative amendment granting further income tax reductions be postponed to the next and last parliamentary session.

Before the law was finally put up for debate before the People's Assembly on 29 March, Ebeid decided to hold a special meeting with deputies of the ruling National Democratic Party (NDP) to muster their support for the law. Ebeid told NDPs that the government would never be cowed by EBA's pressure for scrapping the law altogether.

"MPs must consider the new law a good step on the way to creating a more favourable investment climate. We cannot accept that granting greater tax incentives is a prerequisite for improving this climate. This is an old philosophy which the countries of the world abandoned a long time ago," said Ebeid.

During the Assembly's debates, Ebeid also argued that the law by no means violate the constitution. Minister of Foreign Trade Youssef Boutros-Ghali said the privileges that Article 62 authorises the government to give to some international corporations do not include special tax or custom exemptions. He explained that in some cases in which some international corporations (such as US-based Microsoft or Japan-based Toshiba) aim to use Egypt's ideal location as a base for exporting its products to the neighbouring region, they ask the government to shoulder the costs of training its Egyptian employees. "Training is an example of these privileges which Article 62 said the government will give to investors. I do not think that this features a breach of the constitution," said Boutros-Ghali.

Boutros-Ghali elaborated that GAFI will seek the help of experts in various fields in order to be highly qualified for dealing with all investors and processing their corporate requests in the shortest possible time. NDP MPs rallied behind the law. Zakaria Azmi, a prominent MP and chief of president Hosni Mubarak's staff, derided EBA for its attacks on the law. "It is not a sufficient step, but it's surely a good step," Azmi said.