Tuesday,24 October, 2017
Current issue | Issue 1232, (5 - 11 February 2015)
Tuesday,24 October, 2017
Issue 1232, (5 - 11 February 2015)

Ahram Weekly

Wider reform needed

Boosting growth and attracting investment will take more than one new law, writes Niveen Wahish

eco1
eco1
Al-Ahram Weekly

For several months now the buzz has been about the making of a new investment law to facilitate doing business in Egypt. The new law would allow investors to deal with just one office, rather than the current situation, where investors must interact with dozens of government bodies. The target is to have the new law finalised ahead of the Egypt Economic Development Conference, scheduled for next month in Sharm El-Sheikh.

The law is important to pave the way for the March conference to attract much-needed financing and investment to help the recovery of the economy, says political economist Amr Adly. He says priority should now go to encouraging investment and boosting growth.

The past year and a half have seen several modifications to economic laws, foremost among which was one issued during the tenure of former interim president Adly Mansour. The investment law was amended to prohibit third parties from challenging contracts between the government and investors. The amendment was said to be important to allow for more certainty for investors, particularly foreigners.

“While the amendment was not good as far as the transparency of government actions was concerned, it is good for investment,” says Adly.

He added that it will also be very important in the near future, as a good part of the projects to be put up for investment will be public-private ventures where investors will not want to worry about future governments annulling their contracts.

Following the 25 January Revolution, several claims were filed against government contracts with investors, and some of the contracts were annulled by courts, including several privatisation and land deals.

Gamal Abou Ali, an attorney at the Hassouna and Abou Ali Law Firm, argues that the new investment law needs to offer more than what is in the drafts now in circulation. The drafts show the establishment of a one-stop shop and creation of a promotional authority for projects, he says. But what the law lacks is a vision of where the government wants investments to go in terms of geographical locations or sectors.

There is also little by way of incentives to attract investors to these areas, especially since, as Abou Ali says, Egypt is competing with neighbours such as Jordan which offer generous tax incentives in certain sectors.

Not having a vision “gives the impression the government does not know what it wants,” he says, noting that the focus has been on huge investments, while small investments are just as needed.

Abou Ali is against rushing to issue the law before the conference. “If it is not well studied it might backfire, in which case we would be better off without it,” he says, stressing that the government should not issue the law quickly and then regret it later, particularly as “investors need to plan and therefore need legal stability.”

While the government takes the time to issue a more considered law, Abou Ali says, it can make some quick fixes to the existing law to show its good intentions towards investors.

In the meantime, attracting investment is not only about the law. Both Abou Ali and Adly agree that antiquated legislation governing economic activity needs amendment or the introduction of new laws in parliament once there is one in place.

Legislation in need of updating includes the companies law, for example, which, according to Abou Ali, does not allow for the establishment of limited liability companies whose owners are legally responsible only for the amount of capital they have invested. Instead, if a company is owned by a single owner, even his or her personal belongings are liable to cover any company debt. “This discourages investment,” Abou Ali says.

Bankruptcy is another issue that must be tackled, Adly says, pointing out that the current articles about bankruptcy in the civil law go back to the 1940s and that the speed and cost of litigation is often costlier than the value of the company itself.

In fact, he believes that the restrictions on investment are not a matter of policies or legislation alone. The bigger obstacle is institutional and presents itself in the form of bureaucracy and a slow dispute-resolution process. “A good part of the problem is the lack of efficiency in the government apparatus,” he says.

Abou Ali agrees, saying there is a need for a new law on civil servants. “Investors need trained government employees,” he says, added that because many civil servants have a government job for life they lack the incentive to excel. He believes new appointments should be frozen to allow the government workforce, currently standing at around six million, to shrink.

Cutting the number of employees will allow for greater capacity building, he says, thus improving services.

He also says that Egypt needs to work on its labour laws, which he says are biased against the employer and discourage job creation. He says a special law should be issued for investments in the Suez Canal area to facilitate the new investments that will be made in the area.

Another area that needs to be looked into is land allocation. The country’s investment vision should include a map showing all available land and allow investors to go to a single authority to be able to make use of it, Abou Ali says, regardless of which government authority owns the land.

Land allocation is one of the problems investors most complain about, saying they are often given the runaround before getting the necessary permit to work. “Land should be given for free, if we want to urbanise the desert and take people away from Cairo. Whoever is not serious about what they are doing should have their land withdrawn,” Abou Ali says.

Abou Ali and Adly echo much of what former deputy prime minister Ziad Bahaa Eddin believes are the challenges the government must tackle. Speaking at a seminar at the School of Public Policy at the American University in Cairo, Bahaa Eddin noted that the government has carried out limited reforms of the investment, customs and tax laws, but that “reforms to major laws are often postponed.”

The latter, which include bankruptcy legislation, commercial law and the bids and procurement laws, are the infrastructure for investment.

They are complicated and need more than an amendment or new law to set them right, they need institutional reform Bahaa Eddin says.

Mohamed Fadel, an associate professor of law at the University of Toronto and a member of the Egyptian-American Rule of Law Association (EARLA), says most government efforts have been geared towards attracting foreign investment, but until it makes the domestic economy more efficient Egypt will have difficulty attracting the right kinds of foreign investment, among them industrial projects that could employ large numbers of Egypt’s unemployed youth.

In the absence of such changes, Fadel says, Egypt will only attract investment in extractive enterprises— more akin to one-time gains from the sales of assets than investments that provide sustainable returns and expand the country’s productive base.

Fadel points out that the level of savings and investment as a percentage of GDP is anemic and does not exceed 15 per cent of GDP.

Indonesia, by comparison, reports a savings and investment level approaching 33 per cent of GDP. “This is a reflection of the poor domestic environment for investment, and until this is solved there is really very little prospect of creating sustainable economic growth,” he says.

He wants to see the government adopt policies that discourage investment in non-productive sectors of the economy such as real estate, and direct more resources to investment in basic infrastructure such as roads and public transportation.

“Egypt’s poor transportation infrastructure almost certainly discourages investment, not only in industry, but also in agriculture, as there is no point in expanding output if excess crops will spoil for want of transportation,” he says.

Hoda Atia Moustafa, also a member of EARLA, agrees with Fadel, lamenting that many people invest in real estate and nothing else and then see apartments sitting vacant for years because of unenforceable tenancy laws. At the same time, many middle and working class people are unable to afford housing, and this has severe impacts on the ability of young people to get married and set up households.

For Moustafa, transportation infrastructure is also a huge issue. “Cairo residents are still totally wedded to their cars, even when they cannot reasonably afford to have them, and the commutes are outrageous,” she says. Proper incentives for public transportation are needed, such as investing in an accessible metro and bus system or giving tax incentives to public transport users.

Moustafa believes that due to credit risks, if the government is serious about attracting foreign investment it needs to step up and provide contractual support to backstop the payment obligations of state-owned companies. She points out that the oil and gas sector has been suffering due to the major arrears owed by the Egyptian General Petroleum Corporation (EGPC) and the failure of the government to provide adequate support to cover the debt.

Greater contractual support is crucial, she says. Without it, major investors could reduce their interests and rule out future investments.

 

Conference on track

Preparations for the Egypt Economic Development Conference, to be held in Sharm El-Sheikh from 13 to 15 March, are fully underway, Prime Minister Ibrahim Mehleb said this week. He stressed that the government is determined to make the conference a success and said that nothing will stop the country from building the economy.

Mehleb was speaking after threats this week by jihadists against Egypt’s economic interests and foreign investors. Minister of Investment Ashraf Salman said that some 30 projects will be tendered during the conference and that the prime minister has agreed to set up a special unit to facilitate procedures for projects resulting from it.

The conference has the backing of Kuwait, Saudi Arabia and the United Arab Emirates, all of which have said they will take an active role at the conference as part of their support for Egypt.

It will present the government’s economic vision and midterm reform programme, as well as its plans to revive key economic sectors.

High-profile speakers scheduled to take part include Mohamed Al-Erian, chief economic advisor of Allianz and chair of US president Barack Obama’s Global Development Council; Jeffrey Immelt, chair and CEO of General Electric; and Ahmed Abdulkarim Julfar, CEO of the Etisalat Group.

More information about the conference is available at http://www.egyptthefuture.com.

add comment

  
 
 
  • follow us on