FDI in Egypt during 5 years

Presented by Dr. Amany Asfour President Egyptian Business Women Association(EBWA) Business & Professional Women Egypt (BPW-Egypt) African Association for Women Empowerment (AFRAWE). Mediterranean Congress of Business & Professional Women Representative of Civil Society for North Africa in the African Union.

Introduction:
The Africa and Middle East region historically has attracted low levels of FDI. Africas share of global inflows fell from 2.3% in 2001 to 1.7% in 2002 and, although the countries of the Middle East may attract substantial investment into the oil and gas sector, FDI flows into the most diversified economy in the region. The Middle East and North African (MENA) region as whole (excluding Israel) is only responsible for 0.9% of global flows of FDI. Egypt has a well-diversified economy, with no single sector contributing more than 21% of GDP. Its well-

integrated structure ensures sustained growth in a diversified environment where sectors such as manufacturing, energy, agriculture, tourism and services interact to create economies of scale. This generates a balanced distribution of the nations income, employment and export revenues, and multiplies the opportunities for investment and growth. Such a solid economic base reduces vulnerability to external shocks and enables Egypt to attract foreign investments in a variety of fields (Fig ).

Figure ( ): Composition of GDP 2002/2003

An Era of Reform:
In the early 1990s, the government launched an Economic Reform and Structural Adjustment Program (ERSAP) supported by a Standby Arrangement with the International Monetary Fund and a Structural Adjustment Loan from the World Bank, in addition to bilateral debt forgiveness/debt service relief from the Paris Club. This comprehensive program, designed to achieve macroeconomic stability in the wake of partial reforms implemented in the early 1980s and debt rescheduling in 1987, included: financial sector reforms, interest rate liberalization, reduction in subsidies and price controls, exchange rate standardization, foreign trade liberalization, and public sector reform. The overarching goal was to

create an open, market-oriented, decentralized economy receptive to foreign direct investment and private-sector participation. Egypt is an increasingly attractive choice as a location for transnational corporations, with its natural resources, skilled and competitively priced workforce, geographical location, advanced infrastructure and opportunities for combining trade and investment strategies. Opportunities also abound in manufacturing, high technology sectors, food processing, textiles, mining and services. A number of sectors and industries benefit from the governments generous incentives and guarantees, such as zero tax over the lifetime of a project. Egypt offers many advantages to investors. These include: well-established and accessible ports on both the Mediterranean and Red Sea; the availability of highly trained and skilled labour at competitive wage rates; an efficient banking system and a dynamic and growing stock market; political and social stability; a favourable business environment with strong support from the government for the private sector; and a well-developed infrastructure.

Main Policies and Actions:

The government continued to enhance the investment climate in Egypt, through extending the exemptions stipulated in the law of Investment Guarantees and 4

Incentives, to cover the expansions in investment projects as well as the activities exercised under the BOT system. Egypt's record in attracting FDI has been very positive over the past decades. FDI is the major source of capital flows to developing countries. Egypt is well placed to attract additional foreign investment given the success of its stabilization program and the strength of its economic recovery. In 1999, UNCTAD reports that Egypt was one of the two recipient countries for FDI in Africa. Its share was 29%. The choice of Egypt as a location for TNC activity is increasingly attractive, given the country's major advantages in availability of natural resources skilled and competitively priced work force, geographical location, advanced infrastructure and in the opportunities for combining trade and investment strategies in Egypt. As a result of the new philosophy adopted by the government to respond to the private sector and achieve economic growth needs new activities have been added to benefit from the incentives and guarantees granted by Investment Law 8 of 1997 such as: Transportation to and from the new communities and remote areas. Services in the new communities and remote areas

 Integrated tourism development. Development of industrial parks.

Volume of FDI to Egypt:

Direct Investment in Egypt (net)
In Millions of US Dollars 1997/98 Direct Investment in Egypt (net) 1998/99 1999/00 2000/01 2001/2002 2002/2003

1104

711

1656
-

509

428

701

Source (table 21) p. 30

Monthly Economic Digest

Total GDP:
In Millions of Egyptian Pounds 1997/98 Total GDP 266,758 1998/99 282,578 1999/00 315,667 2000/01 332,544 2001/2002 354,564 2002/2003 388,060

Source (table 3 a) p. 5

Monthly Economic Digest

Gross Investments:
Value 1997/98 1998/99 1999/00 2000/01 2001/2002 2002/2003 Total Investments 61.8 66.5 66.5 65.5 69.2 71.0

Environment for attracting FDI: 1. Legal Environment:

Recent Economic Legislation:
During the past decade, Egypt has implemented an economic and structural reform adjustment program. An important goal of the reform program was to shift the 10

economy towards a market-oriented economy policy. This required dramatic legislative changes to enable the economy to meet the challenges of the new global economy in which Egypt has become an active participant. The needed legislative changes were implemented gradually in order to preserve the stability of the market and the economy as a whole.

Goals of Law No. 83/2002 for Special Economic Zones:

In its efforts to attract national and foreign direct investments to Egypt, the government has drafted and passed the special economic zones law in 2002. The law provides for the establishment of special economic zones that have the ability to compete with their analogs all over the world.

2. Administrative Environment:
In the new economic areas, the license could be approved in 15 days because of the one stop shop.

GAFI:
GAFI is Egypt's "One Stop Shop" for investment, easing the way for investors worldwide to take advantage of the opportunities of this promising emerging market... Investment opportunities exist in various sectors throughout the Egyptian economy, with emphasis on export oriented ones among many others. 11

GAFI is the primary governmental authority concerned with regulating and facilitating investment, and stands ready to assist investors. Services GAFI can provide range from company registration to site location to partner identification to contracts and licenses acquisition. GAFI's services are provided at no cost to the investor.

3. Services Environment:
The importance of the presence of service companies on an international standards and the presence of well developed infrastructure.

Business Environment:
Streamlining investment procedures, dismantling bureaucratic obstacles and literalizing the business environment: these are priorities for the Egyptian government in is bid to foster an attractive climate for local and foreign investors alike. Since the inauguration of the economic reform program in 1991, the government has taken measures in the economic, legal, monetary, financial and institutional spheres to encourage private-sector participation and boost investment levels. As a result, the economic policy and business environment now offer investors a plethora of attractive incentives and opportunities: duty-free zones and industrial cities benefiting from the most advanced infrastructure, a stable economy, liberal conditions for trade, a freely convertible currency with full rights to 12

affect all transfers abroad... These developments, as any observer of the current Egyptian scene can confirm, have attracted an increasingly number of multinational corporations. Legal and economic reforms have eased or removed price restrictions to accommodate the business environment further. To boost investment in all sectors of the economy, offices have been established across the country, streamlining bureaucratic procedures considerably. In April 2002, a presidential decree made the General Authority for Investment (GAFI) responsible for establishing an Investment Service Pool (ISP) adopting the "One-Stop Shop" approach. Representations of relevant authorities and agencies at ISP are to minimize the cost, effort and time required of investors who seek to establish new businesses in Egypt. Three branches of the One-StopShop are to be established in Alexandria, Ismailia and Assuit Governorates, followed by other additional outlets. ISP provides IT facilities to cater for investors needs either in the form of data collection, comparative studies, and analytical reports regarding investment fields in Egypt. Drawing on Egypt's skilled, inexpensive human resource pool, investors today have a unique opportunity to capture a domestic market of 70 million, not to mention a sizable portion of the lucrative regional market. Egypt's 13

geographic location provides investors with a strategic platform for virtually effortless entry to the Middle Eastern, African, European, American, and Asian markets. In addition, Egypt has signed a number of bilateral and multilateral agreements to protect investments. It is a party to the International Convention for the Settlement of Investment Disputes, and has also entered an investment guarantee agreement that insures against political risk for US private investments in Egypt (Overseas Private Investment Corporation). Egypt has also signed several treaties for the Encouragement and Reciprocal Protection of Investment. Agreements with Egypt's major-trading partners also protect against double taxation. The Egyptian business environment, which offers investors so many incentives, has fostered the creation of several companies under the Investment Law (8/1997). The table below illustrates capital growth and the proliferation of registered companies according to economic sector, and demonstrates that industrial activities attract most investment in-land or in free zones. Total capital additions/expansions hit LE9.9 billion in 1999 and LE6.6 billion in 2001. At the end of June 2003, the total cumulative number of companies registered at GAFI amounted to 13,788, of which 11,682 registered in-land and 772 in free zones; total issued capital was recorded at LE154 billion, creating 1,152 million job opportunities.

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As for companies registered in accordance to the Companies Law (159/1981), the cumulative number at the end of June 2003 amounted to 16,354, with a total capital of LE33.6 billion. Below, the reader will found a detailed discussion of the business environment, including the benefits of investing in Egypt, corporate guidelines, foreign investments, an overview of the privatization program, and finally mega projects, free zones and industrial cities.

INVESTMENT ADVANTAGES
Merely creating a business-friendly environment is too passive a stance to promote the growth objectives of Egypt's citizens, however, and so further steps have been taken to attract investment and support business. These consist of specific incentives ranging from tax holidays to exemptions from certain laws. Bureaucratic obstacles to market entry/exit and business operations have been eliminated over the past few years. Licensing for local and international investment is automatic and open to private business, and no minimum local content conditions obtain.

Incentives Egypt

Available

for

Investing

in

To create a friendly business environment is a paramount objective on the Government's. Many steps have been taken to attract investment and support business. 15

Indirect Incentives:
Investments in Egypt are defined and guaranteed in the following international treaties, agreements, and laws: Encouragement and Reciprocal Protection of Investment Agreements against Double Taxation

Direct Incentives:
The government has passed several laws and decrees that encourage production and foreign direct investment, by affirming all existing incentives, maximizing them and streamlining the means by which they are granted: Guarantees and incentives provided under Law No.8 /1997. Investment Priority Areas under Law No. 8/1997. Additional Investment Priority Areas under Prime, Ministerial Decree No. 740/2000. Additional Investment Priority Areas under Prime Ministerial Decree issued in 2001/2002.

Guarantees and incentives under Law No.8 / 1997

provided

A project may be wholly owned by foreigners. Guarantees against nationalization and expropriation of the project. Any seizure of the asset of a project is to be effected only through a court judgment. 16

 Output of the project is not subject to price control. Projects are allowed to repatriate their capital and profits. The majority of the board of directors may be nonEgyptian. Egyptian staff employees can be hired freely. Foreign experts' salaries are exempt from income tax if their stay in Egypt is less than one year. There is an exemption from rules on workers' participation in management.

Tax Holidays and Other Exemptions:

A project is exempt from corporate tax for five years starting the first financial year following the commencement of the company's activities or production activities. A five-year exemption on income and distributed profits commences from the first financial year following the start of business activity. A twenty-year exemption on income and profits commences on the first fiscal year following the start of business activity in the Kharga, Baris and Farafra oases; and the East Owaynat and Toshka regions.

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Projects established in new urban communities, industrial parks and remote areas enjoy a tax holiday of ten years.

Land reclamation projects enjoy a tax holiday of ten years.

The project is allowed to import equipment and machinery, spare parts and vehicles without the need to be registered on the importation registry. Similarly, it may export its products without being registered on the exportation registry.

Projects are subject to a flat rate of only 5% as custom duties on equipment and machinery imported by the project.

Project contracts are exempt from stamp duties, registration and notarization fees for three years effective from the date of registration in the Commercial Registry.

Fields of Investment: Activities in the areas stated in Article No.1 of the Investment Guarantees and Incentives Law
Reclamation and cultivation of barren and/or desert land. Animal, poultry and fish production. Manufacturing and mining. 18

Hotels, motels, hotel apartments, villages and tourist transportation.

Refrigerated transportation of goods, refrigerators for the purposes of storing crops, manufactured products and food stuffs and container stations.

Air transportation and directly related services. Overseas maritime transport. Petroleum services in support of drilling, exploration as well as gas transport and delivery.

Housing complexes for the purposes of full, unfurnished leasing for non-commercial uses.

Infrastructure operations including potable water, sewage, electricity, roads, communications and under multiple story garages.

Hospitals, medical and therapeutic centers that offer 10% of their capacities free of charge.

Financial leasing. Venture capital. Production of computer programs and systems. Development of new zones.

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Establishment, operation and management of under-ground multiple storey garages on the basis of B.O.T system.

Obstacles Facing FDI: 1. Stability of foreign exchange market:

To follow monetary and fiscal policies leading to stability in the foreign exchange market, so stability in the exchange rate which is a prime concern for any foreign investor.

2. Long procedures:

list

of

Administrative

To have the license, sometimes it might take 1-1.5 years to get approval from different ministries and authorities which is a loss of time and money for the investor.

New Strategies for Promotion of FDI:

1. Convection and partnership of local investment in small and medium industries with FDI to transfer technology and promote export Markets for small and medium projects productive of goods or services. 2. Hi-Tech industrialization under regional specialization and integration. 3. Aggressive privatization to create a competitive market of Hi-Tech and quality.

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4. Availability of market studies, information, training programs, etc..

Unconditioned exemption of corporate taxes:

If profit of organization was not subjected to corporate tax in the host country, it is subjected to income tax of the country of origin of capital leading to loss of income to host country budget while it is an exporting income of budget to country of origin (rich country). So, poor countries supports to achieve development and employments are losing for the sake of state budget of exporting country. There is a need for economic legislation for:

Consumer protection law:

To avoid any commercial fraud and to guarantee the criteria of products according to international standards and measures and in order to attract the foreign investor in a competitive market guaranteeing transparency.

Antitrust and competition law:

This will prevent monopoly and opens the market for competition and gives a chance for the involvement of private sector in all fields.

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