Under the government of Prime Minister Nazif, installed in July 2004, increased foreign investment is a major part of the economic strategy for attaining and sustaining the high economic growth rates needed to improve living standards and employment opportunities for Egypt's growing population. A new Ministry of Investment was created in July 2004 to oversee investment policy, coordinating among the various ministries with investment-related areas of responsibility. The new Ministry supervises the Capital Market Authority, the Egyptian Insurance Supervisory Authority, the General Authority for Real Estate Mortgage Affairs, General Authority for Free Zones and Investment (GAFI), and the privatization program. GAFI had been the main government agency responsible for promoting and regulating foreign investment under previous administrations. has now been converted into a "one-stop shop" for investors, with the responsibility of interfacing with other government ministries on behalf of investors.
Law 8 of 1997 (the investment incentives law) and Law 3 of 1998 (the companies law) are the two key laws governing investment in Egypt. Foreign investors may own up to 100 percent of a business within the scope of the legislation, but some projects still require prior approval from relevant ministries. These projects include: investments in the Sinai; all military products and related industries; and tobacco and tobacco products. Law 15 of 1963 prohibits foreign ownership of areas designated as agricultural lands (in the Nile Valley, Delta, and Oases), except for desert reclamation projects.
Investment Incentives and Guarantees:
Law 8 was designed to encourage domestic and foreign investment in targeted economic sectors and to promote decentralization of industry from the crowded geographical area of the Nile Valley. The law and its executive regulations and amendments group together over 20 incentives. It allows 100-percent foreign ownership and guarantees the right to remit income earned in Egypt and to repatriate capital. Other key provisions include: guarantees against confiscation, sequestration, and nationalization; the right to own land; the right to maintain foreign-currency bank accounts; freedom from administrative attachment; the right to repatriate capital and profits; and equal treatment regardless of nationality.
Under Law 8, qualifying investments in various fields are assured approval, effectively creating a “positive list.” These areas include land reclamation; fish, poultry, and animal production; industry and mining; tourism (covering hotels, motels, tourist villages, and transportation); maritime transportation; refrigerated transportation for agricultural products and processed food; air transportation and related services; housing; real estate development; oil production and related services; hospitals and medical centers that offer 10 percent of their services free of charge; water pumping stations; venture capital; computer software production; projects financed by the Social Fund for Development; and leasing. Companies Law 3 of 1998:
This measure applies to domestic and foreign investment in sectors not covered by Law 8 of 1997, whether shareholder, joint stock, limited liability companies, representative offices, or branch offices. Law 3 in theory permits automatic company registration upon presentation of an application to the Companies Department (which became part of GAFI in 2002), with some exceptions. These exceptions include denials based upon noncompliance with procedures and laws, as well as insufficient qualifications to operate a business. Founders of joint stock and limited liability companies must submit a bank certificate to the Companies Authority showing that 10 percent of the company's issued capital has been paid in. The law also provides for the right to petition a denial of incorporation; removes the requirement that at least 49 percent of shareholders be Egyptian; allows 100 percent foreign representation on the board of directors; and strengthens accounting standards.
Oil & gas exploration and development:
are subject to different procedures, with an individual law required for each investment. Companies are initially granted exclusive rights for exploration in a concession area. If commercial discoveries are found, a joint venture with the state-owned Egyptian General Petroleum Company (EGPC) is formed, based on a standard production-sharing agreement that is specified in the law for the concession.
Privatization: Egypt has an ongoing privatization program under Public Enterprise Law 203 of 1991 for the sale of several hundred wholly or partially state-owned enterprises and all public shares of at least 660 joint venture companies (joint venture defined as mixed state and private ownership, whether foreign or domestic). The law permits sales to foreign entities in Egypt.
Responsibility for the privatization program as of July 2004 lies with the newly founded Ministry of Investment. Since July 2004, 19 deals have been concluded, generating LE 2.8 billion in revenue for the GOE. The Minister of Investment has set a goal of generating LE 6 billion in revenue through sale of public assets in 2005. Upon taking office in 2004, the Minister stated that the new Ministry would accelerate the sale of loss-making enterprises and improve and modernize the financial and operational status of profitable enterprises, while protecting workers rights and invested capital, to increase their competitiveness and productivity. He also stated that enterprises in all sectors would be subject to privatization. This was not the case under previous administrations, which had considered certain sectors strategic and therefore off limits for privatization.
At the beginning of the Egyptian privatization program public companies were categorized by type of economic activity and grouped as affiliate companies under the supervision of holding companies established to manage the privatization of their portfolios of affiliate companies. From 1993 till 2000 a total of 171 public companies were privatized, generating a total of LE 15.45 billion in proceeds, with an average of 20-25 transactions worth LE 2-3 billion annually. The pace of privatization slowed sharply after 2000, with only 13 Law 203 privatization transactions (for a total value of LE 1.1 billion) carried out in 2001 followed by 6 and 9 public companies generating LE 51.2 million and LE 114 million in 2002 and 2003 respectively.
A variety of privatization methods are currently being used, including asset unbundling and leasing with option to buy. Incentives, including five-year tax exemptions and the removal of real estate value from company valuations, have been announced for the sale of 66 companies that have been identified as distressed or loss makers. In 2003, the former Ministry of Public Enterprises (MPE) began offering shares of some state-owned companies to private investors through capital increases. The concept introduced private sector management and ownership into these companies. The sector buy-ins provided capital for restructuring and gradually privatized management, with the expectation that the private share would grow over time as the companies reformed. In early 2004 the Cabinet approved additional incentives, including allowing the transfer of excess and idle assets, some working capital items, and liabilities to the holding companies in order to make public companies more attractive for investors.
Investors have traditionally identified valuation and commitment, as reflected in the pace of execution of deals, as the two primary obstacles to effective privatization in Egypt. Law 203 was amended in 1998 to allow the general assemblies of holding companies to accept bids below the initial reserve price, but only around 10 companies have been sold under that provision since that time. The former MPE retained a number of local and international investment banking firms to assist in the valuation and promotion of public companies offered in the privatization program. The more flexible exchange rate adopted
by Egypt in January 2003 and the subsequent depreciation of the pound, in conjunction with the new Ministry of Investment's efforts to accelerate privatizations, should make public companies more attractive to foreign buyers.
The new Ministry of Investment has opened the privatization program to include services and some public utilities. The Government also has opened some infrastructure areas, including ports and airports, power generation, and cellular phone networks, to private investors on a build-own-operate-transfer (BOOT) basis. Foreign companies have won major BOOT tenders in power generation and airport and maritime port construction. Since 2002, however, the Government has suggested that BOOT projects that require payment for their services in foreign exchange will also be required to generate foreign-exchange revenues.
The Government originally planned to offer 20 percent of Telecom Egypt (TE), the state-owned monopoly fixed-line service provider, for sale in 2000, but the offering was postponed pending more favorable market conditions. Telecom Egypt did announce in May 2004 its plan to issue LE 2 billion in bonds in order to finance its continued expansion and development. In early 2005, the Ministry of Investment indicated that TE shares would be offered on the New York Stock Exchange. In June 2002, Egypt became a party to the World Trade Organization (WTO) Basic Telecommunication Agreement (BTA), which requires the liberalization of telecommunication services. Law 10 of 2003, the telecommunications law, stipulates that TE will relinquish its monopoly status as Egypt's domestic operator and sole international operator by January 2006 and provides for greater price flexibility for shares of TE in a future public offering. |
