Egypt is among the top 10 signatories of Bilateral Investment Treaties (“BITs”) worldwide, with a total number of over 100 BITs. It is also ranked second, after Angola, in the list of top African countries with foreign direct investment (“FDI”) growth with an increase of 49.3% of FDI inflow going from $4.6 billion in 2014 to $6.9 in 2015 (UNCTAD World Investment Report (2016)). This growth of FDI has been driven mainly by the expansion of foreign affiliates in, inter alia, the financial, pharmaceutical, energy, construction and transport industry. But despite this positive development, Egypt lost 19 places in the 2016 Doing Business report published by the World Bank ranking it 131th out of 189 countries and FDI inflows in Egypt remain well below the $11.4 billion reached in 2009.
That Egypt went through recent tough political and economic times is an understatement. Following the 25 January Revolution in 2011, civil unrest and threats to national security have substantially affected the country’s economy, and in particular its attractiveness index for foreign investors. Egypt’s plan to attract $10 billion in FDI in the fiscal year 2016-2017 is therefore not an easy objective to attend.
It comes as no surprise, therefore, that the government recently made significant efforts to make Egypt’s legal framework more attractive for foreign investment. As a result, it enacted the Investment Guarantees and Incentives Law No. 17 in 2015 (the “2015 Investment Law”), thereby making key amendments to the Egyptian Investment Law No. 8 of 1997. The 2015 Investment Law significantly modified the Egyptian legal framework, instituting several incentives for investment in specific sectors or regions, in particular by way of tax exemptions. In fact, further to discussions with the International Monetary Fund, Egypt created a value-added tax regime for that purpose, which was approved by Egypt’s parliament in August 2016 at an initial rate of 13% for the fiscal year 2016-2017, rising to 14% the following year (El Shahid, Ternieden and Abdelaziz “Egypt”, Getting the Deal Through, Investment Treaty Arbitration (2017), pp. 40-45.)
Interestingly, the 2015 Investment Law also created a new mechanism of settlement of investment disputes in the form of an alternative out-of-court forum, but eliminating any previous reference to the possibility of dispute resolution under the Washington Convention. In particular, the law established three separate ministerial committees, a Ministerial Committee on Investment Contract Disputes (responsible for the settlement of disputes arising from investment contracts to which the state, or a public or private body affiliated therewith, is a party), a Complaint Committee (considering challenges connected to the implementation of Egypt’s amended Investment Law), and a Committee for Resolution of Investment Disputes (reviewing complaints or disputes between investors and the government related to the implementation of the Investment Law).
While this new investment law was a positive development for foreign investors critics called for further much needed amendments in 2016.
Responding to the call for distress, it has been reported that hundreds of investors were recently consulted and a poll was posed by the General Authority for Investment and Free Zones (an agency under the Ministry of Investment), about the amendment of the 2015 Investment Law.
Early December 2016, a draft of a new investment law (“the 2016 Investment Law”) was submitted to the Cabinet for approval including 139 new articles altering those approved in 2015.
Major changes grant additional incentives for investment in specific sectors or regions including the institution of private free zones, reduced time for carrying out licensing processes for foreign investors, the lifting of taxes as well as the offer of free or discounted land. More specifically, in accordance to recent drafts of the 2016 Investment Law, investors in specific sectors will be granted exemption from income tax for a period between five to ten years. Furthermore, investors will have the right, for the first time in Egypt, to create mortgage over the plots of land that are subject of any usufruct contract with the Government.
At the date of publication of this post, it is still unclear whether any further changes were made to the investor dispute resolution mechanism established by the 2015 Investment Law.
At this stage, it is difficult to assess what the impact of the 2016 Investment Law will have on foreign investors in Egypt. The original text submitted to investors for consultation was reported to be lacking substantial provisions in many respect causing the Federation of Egyptian Industry to initially reject it. In particular, investors criticized the bureaucratic over-regulation with respect to land allocation licenses – which could still take years to be accepted. This is in part due to the existence of a lengthy approval mechanism before a number of overlapping authorities, and the lack of differentiation between the roles of, in particular, the Ministry of Investment, the General Authority for Investment and Free Zones, and the Supreme Council for Investment.
While tax cuts and lower land prices are a welcome incentive for investors, as long as these significant administrative hurdles will exist, they will be seen as major obstacles and costs of doing business in Egypt by foreign investors.
It is also noteworthy that important restrictions continue to exist in Egypt with regards to specific FDI sectors namely with regards to regulation of specific sectors for national security and related reasons. By way of example, the purchase of real estate by foreigners in border areas or near other sensitive sites, air and maritime cabotage services and air traffic control is strictly regulated. Significant restrictions also exist with regards to electricity power grids and exchanges, seaport or airport management and oil and gas extracting activities, and other sectors where the government has full control (UNCTAD World Investment Report, (2016)).
In an effort to remove a number of foreign ownership restrictions, parallel to the amendment to the 2015 Investment Law, various other efforts are currently made by the Egyptian government to attract foreign investors, all important steps towards the liberalization of the Egyptian market.
In particular, it has been recently reported that the Egyptian Council of State and the Parliament committees (the Industrial and Economic committee) have approved the draft amendments proposed by the Government to the Importation Registrar Law No. 121 of 1982, whereby non-Egyptian companies will be allowed, for the first time in Egypt, to directly hold up to 100% of the share capital in any company carrying out the importation and exportation activities in Egypt. The Government is also in the process of, amending the Capital Law Market No. 95 of 1992, the Special Economic Zones Law No. 83 of 2002, adopting several recommendations made by the World Bank and the IFC, and of creating the new Gas Regulatory Law.
Not insignificantly, early November 2016 Egypt also floated its currency, devaluating it 48%, with the hope of eradicating a growing parallel foreign currency market.
Another interesting development signaling Egypt’s ongoing efforts to attract foreign investment is its recent project of revising its model BIT which is awaiting release after a thorough review that involved all concerned stakeholders. It is reported that the update aims to balance investment protection and the State’s right to regulate. It also includes provisions on combatting corruption, consideration of sustainable development goals and a refined international state dispute mechanism.
As soon as further details become available on the exact provisions of the 2016 Investment Law as well as the new Model BIT, we will update this post, providing a more thorough picture of how the new changes may impact existing and new foreign investors in Egypt.
In the meantime, it is reasonable to conclude that 2017 looks like a promising year in terms of key legal reforms in Egypt directly affecting foreign direct investment.
*Associate (New York Qualified), Clyde & Co., London, UK.