OECD Investment Policy Reviews: Egypt 2020

Assessment and recommendations

Introduction

Egypt is implementing ambitious reforms to stabilise its economy, attract investors, and spur durable economic growth. These efforts are having a positive effect. Since 2013, GDP growth has doubled, reaching 5.5% in 2019, its highest level in almost a decade, according to the Central bank of Egypt (CBE). Foreign investment inflows have been steadily increasing since 2011, and despite more modest inflows over the past two years, in 2018 Egypt was the largest recipient of FDI in Africa and the second highest in the MENA region. Both the budget and current account deficit have narrowed, and unemployment is decreasing, from 13% to 7.5% by the second quarter of 2019. These positive gains will be tested in the near- to medium-term. Initial projections on the economic effects of the coronavirus pandemic portend declines in FDI in all economies for the coming year at least, along with disruptions to global value chains. A global recession appears likely. The steps the Egyptian government has taken to address its economic challenges, in recent years and in response to the pandemic, may help it weather some of the negative impacts of the current crisis. The new outlook makes continuing to advance Egypt’s reform agenda all the more imperative.

The Egyptian government has taken substantial measures in the past few years to address its macroeconomic challenges. These form part of an ambitious agenda supported by a USD 12 billion Extended Fund Facility, agreed with the IMF in 2016. This agenda demonstrates the government’s commitment to implementing meaningful, and at times difficult, reforms. Notably, the Egyptian Central Bank allowed the exchange rate to freely float to increase competiveness of the long-overvalued Egyptian pound and stop the depletion of foreign exchange reserves. To address its budget deficit, the government has reduced spending on energy subsidies, introduced a value-added tax (VAT), and curbed its public wage bill. Other fiscal-prudential plans include improving the tax administration and management of state-owned enterprises (IMF, 2018[1]).

The government has also implemented structural reforms to improve the business and investment climate and is moving forward with other reforms. The new Investment Law, adopted in 2017, is an important signal that promoting and facilitating private investment is a government priority and key to Egypt’s economic growth. The legislation introduces an incentives regime to encourage local development in the poorer regions of the country and new one-stop-shops to support business processes. A revised bankruptcy act and companies law, passed in 2018, are positive developments towards fostering entrepreneurship and the growth of small and medium-sized enterprises (SMEs). The government has also established a Micro, Small and Medium Enterprise Development Agency (MSMEDA) to promote MSME growth and coordinate with all relevant stakeholders to this end. It also made progress in improving transparency and accountability of State-owned enterprises while advancing reforms to strengthen the independence of the Egyptian Competition Authority and standardise public procurement. The government has also taken steps to improve access to land for investors.

The government has ambitious aims, outlined in its Vision 2030, to nearly triple GDP growth to 12%, reduce unemployment to 5%, and advance within the top 30 countries in terms of doing business. Despite positive reforms, clear challenges remain to these aims. Egypt only briefly reached GDP growth rates of above 9%, between 1976-1982, largely due to petroleum exports and an increase in foreign aid and capital following the country’s shift towards an open market economy (Ikram, 2018[2]). Recent rebounds in investment and exports remain far below peaks reached in 2008, and both will be negatively affected by the coronavirus pandemic. Investment to emerging and developing economies is likely to be particularly affected, as disruptions to trade may prompt firms to reconsider their global supply chains. The Egyptian government has taken a series of measures in an effort to limit the human and economic impact of the pandemic. These include a fiscal stimulus package that will give grants to irregular workers and support to firms that continue to pay employees. Current tax holidays schemes have been extended and industrial sectors are eligible for gas and electricity subsidies. Firms in free zones may temporarily export to the local market at higher rates. The government is also working to further streamline procedures for investors through digitalised one-stop-shops. The rapid implementation of these measures may help the Egyptian economy to weather some of the negative effects of the current crisis. But in the long-term, advancing more durable economic growth will require higher and more sustained levels of investment and savings, as well as substantial improvements in productivity growth and export performance.

The government will also have to contend with ongoing socio-economic challenges, which are likely to be further exacerbated by the coronavirus pandemic and its economic aftermath. Positively, inflation, which spiked at more than 30% after the currency devaluation in 2017, has decreased substantially, reaching 5% in March 2020. The overall unemployment rate prior to the coronavirus pandemic had also been improving, dropping from 13% in 2013 to 10% in 2019, but remained at 20% for women and those with advanced degrees. Youth unemployment is 30%.1 The current health crisis is putting further strain on the workforce. The government recognises that creating more and higher quality jobs is imperative for both economic growth and stability. Reforms could go further to support investment into activities with higher productivity potential, encourage SME growth and promote non-energy exports. Additional short-term and deeper structural reforms would help improve the investment climate and, in turn, advance more sustainable private sector growth.

The Egyptian government has an opportunity to further strengthen its reform efforts, in order to build a more sustainable and transparent investment environment. Based on an updated version of the Policy Framework for Investment (Box 1), this second OECD Investment Policy Review of Egypt identifies several potential areas for reform and provides policy recommendations for the government to consider. Implementing these reforms would help the government advance inclusive growth and reduce political and economic uncertainty. After an overview of trends in foreign investment and their socio-economic benefits (Chapter 1), the Review examines the country’s wider regulatory framework on investors’ entry and expansion (Chapter 2), legal framework for investment (Chapter 3), investment promotion and facilitation (Chapter 4), zone-based policies (Chapter 5), tax policy and investment incentives (Chapter 6), policies to promote responsible business conduct (Chapter 7) and infrastructure connectivity (Chapter 8).

Box 1. The Policy Framework for Investment

The Policy Framework for Investment (PFI) helps governments to mobilise private investment in support of sustainable development, thus contributing to the prosperity of countries and their citizens and to the fight against poverty. It offers a list of key questions to be examined by any government seeking to create a favourable investment climate. The PFI was first developed in 2006 by representatives of 60 OECD and non-OECD governments in association with business, labour, civil society and other international organisations and endorsed by OECD ministers. Designed by governments to support international investment policy dialogue, co-operation, and reform, it has been extensively used by over 25 countries as well as regional bodies to assess and reform the investment climate. The PFI was updated in 2015 to take this experience and changes in the global economic landscape into account.

The PFI is a flexible instrument that allows countries to evaluate their progress and to identify priorities for action in 12 policy areas: investment policy; investment promotion and facilitation; trade; competition; tax; corporate governance; promoting responsible business conduct; human resource development; infrastructure; financing investment; public governance; and investment in support of green growth. Three principles apply throughout the PFI: policy coherence, transparency in policy formulation and implementation, and regular evaluation of the impact of existing and proposed policies.

The value added of the PFI is in bringing together the different policy strands and stressing the overarching issue of governance. The aim is not to break new ground in individual policy areas but to tie them together to ensure policy coherence. It does not provide ready-made reform agendas but rather helps to improve the effectiveness of any reforms that are ultimately undertaken. By encouraging a structured process for formulating and implementing policies at all levels of government, the PFI can be used in various ways and for various purposes by different constituencies, including for self-evaluation and reform design by governments and for peer reviews in regional or multilateral discussions.

The PFI looks at the investment climate from a broad perspective. It is not just about increasing investment but about maximising the economic and social returns. Quality matters as much as the quantity as far as investment in concerned. It also recognises that a good investment climate should be good for all firms – foreign and domestic, large and small. The objective of a good investment climate is also to improve the flexibility of the economy to respond to new opportunities as they arise – allowing productive firms to expand and uncompetitive ones (including state-owned enterprises) to close. The government needs to be nimble: responsive to the needs of firms and other stakeholders through systematic public consultation and able to change course quickly when a given policy fails to meet its objectives. It should also create a champion for reform within the government itself. Most importantly, it needs to ensure that the investment climate supports sustainable and inclusive development.

The PFI was created in response to this complexity, fostering a flexible, whole-of-government approach which recognises that investment climate improvements require not just policy reform but also changes in the way governments go about their business.

For more information on the Policy Framework for Investment, see: www.oecd.org/investment/pfi.htm

Historical context

Economic reforms have improved macroeconomic conditions and opened the country to investment

Egypt’s first episode of liberalisation began with a major reorientation of its economy in the 1970s under a policy of Infitah (open-door policy). The liberalisation reforms sought to attract foreign investment and move toward private sector-driven growth. The new posture contributed to rapid, but volatile GDP growth, with rates peaking at above 14% in 1976 (Figure 1). Positively, the level of labour productivity doubled between 1970 and the late 1980s. External factors aided this growth, including higher oil prices and the resumption of oil exports from the Sinai following a peace deal with Israel, along with higher worker remittances and a growth in tourism (Cammett et al., 2013[3]).

Figure 1. GDP growth (%) in Egypt 1995-2018

Source: World Bank Development Indicators Data

Infitah did not, however, radically change the structure of the economy or advance broad-based private-sector development, in contrast with other emerging countries that undertook similar liberalisation reforms over the same period. State-owned firms remained paramount in both strategic and non-strategic sectors. State spending on subsidies increased to 10% of GDP, following popular opposition to planned cuts. Non-oil exports remained weak, while imports and external debt grew. By the late 1980s, macroeconomic imbalances were once again acute.

The Egyptian government gradually adopted deeper reforms to stabilise and liberalise its economy over the next two decades. With the aid of a structural adjustment agreement with the IMF in 1991, Egypt’s macroeconomic position improved. The government halved state expenditures to 30% of GDP by the early 2000s, and fully or partially privatised around 400 state-owned enterprises (SOEs) in a range of sectors, including banking. Spending on consumer subsidies decreased from 5.2% to 1.6% of GDP (Ikram, 2018[2]). Liberalisation of the financial sector and improvements to the business environment, coupled with record rates of global growth in the 2000s, helped draw a surge in foreign investment. FDI stock grew from 8% of GDP before the reforms to 35% in 2008, and FDI inflows nearly doubled between 2005 and 2008 (Figure 2). GDP growth remained uneven though averaged more than 7% between 2006 and 2008 (Figure 1). This period of growth was brief, however, and only benefited a small segment of the population. The 2007/2008 global financial crisis, followed by social unrest and political instability in 2011, precipitated a new slowdown.

The negative effects of political upheavals on economic growth and investment are well documented (Rodrik, 1989). Between 2011 and 2014, Egypt had six elections and five different governments. Uncertainty over the leadership’s stability and posture prompted capital flight, and GDP growth during this period shrunk to an average of 2.4%. The average Egyptian firm experienced a 6.4% annual reduction in revenues and 1% drop in employment between 2009 and 2012 (EBRD, 2016[4]). Across the MENA region, political instability had a negative spill-over effect on investment, with some investors suspending their operations, downscaling their commitments, or withdrawing investments altogether. When President Abdel Fattah el-Sisi was elected in 2014, exports and foreign reserves were at their lowest levels in a decade, tourism revenue had dissipated, and poverty and unemployment were at ten-year highs (Ikram, 2018[2]).

In light of these challenges, the government quickly passed reforms to stabilise the economy and project a message of economic stability. Macroeconomic conditions are now improving, and FDI appears to be on an upward, albeit moderate, trend.

Figure 2. FDI inflows in Egypt and selected MENA countries

Source: OECD based on the IMF Balance of Payments database.

Further structural reforms would increase investment and labour productivity

Several interlinked economic challenges persist. While the state has gradually reduced its levels of public investment and employment since the Infitah period, the private sector did not fill, and has not filled, this gap. Private investment as a proportion of total fixed capital formation has remained at around 10% of GDP since the late 1990s (Figure 3). Formal private sector employment has also stagnated since the late 1990s at around only 13% of total employment (Assaad and Krafft, 2013[5]) (World Bank, 2014[6]).2 Periods of growth in foreign investment have also not been sustained, and stock levels have remained lower than in other emerging economies, even at their peaks. Since 2012, the prospects for inward FDI have improved. At the end of 2018, FDI stock in Egypt was equal to 47% of GDP, above the MENA region (43%) and the OECD (40%) and below ASEAN (89%).3

Figure 3. Gross fixed capital formation: Public vs. private investment

Source: OECD based on the World Bank Development Indicators Data.

Figure 4. Average contribution to GDP by main economic sector (%)

Note: *Manufacturing industries excludes oil refining (which accounts for 4% GDP). Average percent between 2006-2011 and 2011-2017 shown. Percentages calculated based on GDP at factor cost by economic activity. Data for 2006-2011 given at 2006/2007 prices, data for 2011-2017 at 2011/2012 prices. Only sectors with a high contribution to GDP depicted.

Source: OECD based on the Central Bank of Egypt.

Some of the main sectors contributing to economic growth are those with relatively low labour intensity, and therefore limited job-creating potential, such as natural resources and real estate. Between 2011 and 2017, oil and gas was the largest sector in terms of contribution to GDP (nearly 13%); followed closely by wholesale, retail, manufacturing and agriculture (Figure 4). Manufacturing was the leading sector in 2018, however. More than half of all FDI inflows go to the oil sector, and natural resources and agriculture account for more than 50% of Egypt’s net exports (oil and gas alone account for more than 30%). While Egypt has diversified its production in the last couple of decades to include more manufacturing and services, the country remains specialised in low-value added activities within global value chains. Energy subsidies have also encouraged investment in energy-intensive rather than labour-intensive industries (Youssef et al., 2019). Egypt’s reform program that started in 2016, gradually removed the energy subsidies to eliminate distortions and create right price signals. This should contribute to attracting investments in sectors with a competitive advantage.

Among the greatest challenges Egypt’s leaders face is to support job creation on pace with the country’s growing population. Expanding the number – and crucially, the quality – of jobs will be central to economic growth, as well as to reduce inequality and support political stability. The government is committed to making private investment, both domestic and foreign, the engine of growth and development, but further investment climate reforms are needed to achieve this ambitious goal, as described throughout this Review.

Improving the investment climate in Egypt: Main findings

Advancing more inclusive and sustainable economic growth in Egypt – and supporting the growth of higher-productive sectors with greater job-creating potential – will require further near- and long-term reforms to improve the investment and business climate. The government’s recent macroeconomic, legislative and regulatory reforms are important first steps. The 2017 Investment Law demonstrates the high priority that the government places on promoting and facilitating private investment. FDI developments are positive signs of renewed investor confidence. Several areas of the investment climate could, however, be improved, and recent and planned reforms could be strengthened to enhance their impact.

The Policy Framework for Investment considers ways to improve the investment climate for both domestic and foreign enterprises. It looks not only at the policy framework necessary to stimulate investment but also at broader efficiency considerations and at the impact of investment on sustainability and inclusiveness.

Underpinning a positive investment policy framework is good governance. This includes transparency of government decision-making, inter-government co-ordination, and engagement with stakeholders. Investment climate reforms require an understanding of how different areas interact and hence the need for a whole-of-government approach. Co-ordination between government agencies in Egypt is a major challenge, given the country’s complex institutional framework. Roles and responsibilities of investment-relevant ministries and implementing agencies are not always clear, and the division of labour can at times appear relatively artificial, although there have been some recent improvements in coordination, notably through the Investor Service Centres. Recent measures, such as the direct affiliation of GAFI to the Egyptian Council of Ministers, are expected to enhance effective cooperation with line government bodies.

Inconsistent application of policies and regulations and discords in administrative practices, particularly at the local level, also create confusion for investors. Authorities in Egypt also have wide discretion to determine investment incentives, including land and tax subsidies, and beneficiaries. When rules are applied on a case-by-case basis in a non-uniform and non-transparent manner across taxpayers, unfair competition results. It also creates opportunities for corruption. Levelling the playing field for investors in Egypt will also necessitate an examination of the benefits state-owned enterprises and well-connected firms receive, including inter alia preferential access to government contracts and exemption from certain laws and taxes.

Zone-based policies play an important role in the government’s strategy to attract investment that promotes wider economic development. Zones can help compensate for a difficult business climate by offering special treatment to investors, such as tax or administrative incentives, streamlined business procedures, or better infrastructure than outside zones. Nevertheless, they risk becoming a substitute for addressing wider structural challenges, and investors might exploit incentives without embedding in the local economy, limiting potential spill-over benefits.

More broadly, a clear and transparent regulatory framework, developed through wide public consultations, can help to improve implementation of reforms. Civil society, including labour unions, should be empowered to perform their complementary role in monitoring the enforcement of newly enacted laws and the respect of enterprises for those laws. Civil society can also help ensure that human rights are protected, workers’ rights are respected and that the environment is not degraded.

The section that follows reviews the assessments from each of the policy chapters, including the special focus on zone-based policies. The numerous policy options mix concrete measures that can be implemented relatively quickly and more aspirational recommendations, which will require more fundamental changes in the way the government goes about its business. Some measures can only be implemented over a long time horizon, while the government is already considering others. The aim is to provide a list of policy options in each area of the PFI for the Egyptian government to consider as it reforms it investment climate.

Regulations on investor entry and operations

A coherent investment policy is embedded in a regulatory framework that facilitates market entry, promotes fair competition and encourages international trade, including in services. Despite liberalisation reforms undertaken in the past decades, structural transformation of the economy has been limited in Egypt, impeding a sustained increase in labour productivity. The wider business climate continues to face several regulatory hurdles that limit private sector firms’ entry and growth. Unnecessary restraints to competition caused by the presence of the state in the economy and by disproportionate regulatory protection of incumbent firms, and complex regulatory procedures are impediments to private sector development.

The creation of a more competition-friendly environment would allow for a better allocation of resources towards higher-productivity firms. It would enable new entrants and incumbents to bring in ideas and innovate and would encourage less productive firms to restructure or exit the market. The current reform project to strengthen the independence of the Egyptian Competition Authority (ECA) and increase its transparency and capacity is a positive development.

The government of Egypt has recently implemented further reforms to pursue investment liberalisation. The investment law does not discriminate between foreign and domestic investors. Restrictions on the entry and operation of foreign-controlled firms are nonetheless present in sector-specific legislations. These restrictions, while not particularly extensive, place an additional toll on the development of a thriving business sector. Not only might they discourage foreign investment inflows in the first place, they may also hold back potential economy-wide productivity gains associated with FDI.

Like most countries, Egypt has largely liberalised manufacturing industries to foreign investors, but a few backbone services activities are still partly off-limits. The implications go beyond forgone investments. By hindering contestability and competition in these sectors, restrictions potentially contribute to raising services input costs, such as logistics, for other economic sectors. Access to world-class services inputs through FDI has been shown to be crucial for moving manufacturing up the value chain and boosting growth and jobs in the services sector (OECD, 2015, 2018). In catching-up countries, lower productivity firms can achieve large productivity gains if they benefit from the expertise of foreign investors, if regulations do not impede these gains.

Egypt has fewer restrictions on foreign investment than other emerging economies, but higher regulatory barriers affecting the flows of goods and services. This has had a negative effect on the economy at large. Trade barriers have hurt export growth. Customs and administrative controls on imports (along with the long-overvalued pound) mean that it has long been more profitable to sell on the domestic market than to export. Import tariffs have meanwhile hampered Egypt’s integration into global value chains (GVC) (Ikram, 2018[2]).

Policy recommendations

• Continue undertaking pro-competition reforms to further level the playing field between new entrants and incumbents, particularly SOEs, to allow for a better allocation of resources towards higher-productivity firms. Reforms could include reassessing regulatory protection of, and antitrust exemptions to, incumbent firms against their policy objectives and, when relevant, remove them.

• Egypt could benefit from adopting more transparent and less discretionary regulations on private firms’ market entry, notably in network sectors. Such policies would reduce the impact of undesirable practices, such as corruption and cronyism, as well as potential de facto restrictions on private investors’ access to certain competitive markets, particularly those where SOEs are operating.

• Consider reassessing existing restrictions to foreign investment, notably in services sectors, against their public policy objectives and, where relevant, streamline or remove them. Where such policies are deemed necessary, ensure that they are not greater than needed to address identified risks and concerns.

Investment policy

The government of Egypt is putting strong emphasis on adopting more modern investment legislation and regulations for investment. The new Investment Law, promptly followed by a modernised Companies Law, marked an important milestone in the country’s efforts to provide a safer and more consistent regulatory environment for foreign and domestic investments. Yet, further reform endeavours are required to endow Egypt with clear and transparent regulatory and institutional frameworks governing business and investment activities. Overall, a more uniform and harmonised implementation of these regulations across the country would greatly enhance the enabling environment for investment.

One of the main avowed purposes of the new Investment Law was to create a more robust infrastructure for preventing and managing investment disputes. Despite the creation of new dispute settlement bodies, the current institutional setting for the resolution of investor-state disputes remains complex, and might therefore not serve its purpose in the most efficient way.

Egypt has a vast network of international investment treaties. Bearing in mind the existing scope for treaty shopping, Egypt should consider reviewing and considering possibilities for renegotiation, clarification and exit of investment treaties. Treaties with vague provisions concluded in the past may lead to undesirable interpretations in ISDS disputes.

GAFI, the Ministry of Justice and the Ministry of Foreign Affairs should continue to develop ISDS dispute prevention and case management tools. Egypt may also wish to consider efforts to raise awareness about Egypt’s investment treaties and the significance of Egypt’s international obligations under these investment treaties for the day-to-day functions of different government agencies and officials that regularly interact with foreign investors.

The complex landscape of public land ownership, and myriad approvals required to allocate land to investors, means that a substantial gap remains between land demand and supply in Egypt. The centralisation of investor requests for land under GAFI is an important improvement that appears to have enabled faster distribution of state-owned land to firms. But the government could consider taking further steps to centralise the allocation of land to investors, such as empowering one agency to allocate all publicly owned land, regardless of its sectoral use. More immediately, coordination between the many different government landowners should be significantly strengthened. GAFI’s success in directing investors to the appropriate government landowner will depend on close intra-agency cooperation.

Short of a complete inventory and mapping of public land ownership, coordination challenges between agencies allocating public land are likely to persist. A complete registry would assist both GAFI in facilitating investment and firms in their location decisions. The Investment Map is a good step in this direction. Agencies could make public more comprehensive maps of land within their control, rather than only a selection of land available in zones, as is shown on the Investment Map.

The Egyptian government has taken substantial measures to improve standards of corporate governance for state-owned enterprises. Yet, the current dual regulatory system, under which only a subset of firms adhere to good corporate governance practices, falls short of levelling the playing field between SOEs and their private sector competitors. The government could do more to apply standards to all state-owned enterprises and take steps to minimise the market distortions of publicly-owned firms.

Policy recommendations

• For clarity and predictability purposes, and to avoid legal loopholes, adopt implementing regulations more promptly after the enactment of new legislation.

• Apply administrative procedures more consistently across all governorates and relevant public authorities. Strong, regular and transparent institutional cooperation mechanisms, including between central authorities and special economic zones, are needed on a more regular basis to provide for a more efficient administration of investment activities.

• Consider concrete reform options to streamline the current institutional infrastructure for investment dispute settlement. Clarify the respective mandate of each dispute settlement and prevention body, and avoid creating new bodies with similar mandates.

• Take steps to update Egypt’s network on international investment treaties to bring them in line with government intent, Egypt’s current priorities and more recent practices in investment treaty policy. Consider options to harmonise the content of overlapping bilateral and regional treaties.

• Centralise the allocation of land to investors, and improve day-to-day inter-agency coordination and exchange of information. The ongoing modernisation of the land cadastre is also encouraged.

• Further apply standards of Corporate Governance to State-Owned-Enterprises.

Investment promotion and facilitation policies

Investment promotion and facilitation policies can support the competitiveness of a country by branding it as a profitable investment destination, attracting quality investors and making it easy for businesses to establish or expand their operations. The General Authority for Investment and Free Zones (GAFI) is Egypt’s investment promotion agency in charge of investment policy, promotion and facilitation. The government of Egypt, mostly through GAFI, has placed high priority on promoting and facilitating private investment, as demonstrated by the recent creation of flagship tools, such as the Investment Map and the Investors Services Centres. While the former is an innovative tool providing an array of information on existing investment opportunities by sectors and locations, the latter are fully-fledged one-stop shops aiming to facilitate the establishment of new businesses by providing required approvals, certifications and licences under the same roof.

Investment promotion activities in Egypt are sometimes hampered by a lack of common vision and of co-ordination across key public agencies and ministries. GAFI’s recent affiliation to the Egyptian Council of Ministers can nevertheless enhance effective co-operation with other government bodies involved in investment promotion and facilitation. GAFI’s investment facilitation and regulating mandates are well developed but the agency could benefit from a clearer investment promotion strategy to better structure and monitor its activities, and to attract increased levels of FDI in priority sectors.

GAFI has the reputation of being a responsive and problem-solving organisation in the business community. Public-private consultations and aftercare services have recently improved but efforts need to be reinforced to make public-private dialogue more systematic and comprehensive. Involving all parts of government and representatives of different segments of the private sector is key to ensure an environment of trust and find ways to solve investors’ challenges. Private sector representatives also report that administrative procedures and requirements tend to be burdensome after establishment – and fulfilling these requirements can be an impediment to their expansions and, at times, an incentive to divest. Improving these procedures, and the implementation of regulations, necessitates better co-ordination across government agencies.

Policy recommendations

• Prepare and disseminate a high-level investment policy statement to present the investment landscape in Egypt and its vision for FDI and supplement it with a well-articulated investment promotion strategy providing targets, tools and indicators to guide GAFI’s activities and ensure that FDI attraction is well-aligned with national development objectives.

• Building on these strategic efforts, improve institutional co-ordination mechanisms on investment promotion and facilitation and clarify the roles and responsibilities of relevant ministries and implementing agencies;

• Build on the notable efforts to brand the country and guide potential investors to existing opportunities through the Investment Map to gradually conduct more systematic investor outreach and targeting activities to attract quality investments that can support sustainable and inclusive development.

• Continue and strengthen the monitoring and evaluation of the functioning and the performance of the Investors Services Centres to ensure, on the one hand, that investors are satisfied and, on the other hand, that the centres provide value for money;

• Pursue efforts to systematically revise existing administrative procedures and requirements to start and operate a business with a view to eliminating those which are deemed redundant or unnecessary; and

• Building on the recent efforts to systematise public-private sector consultations, establish a whole-of-government public-private dialogue platform to instigate an environment of trust between the government and the business community. Use it systematically to consult with the private sector, to seek business representatives’ views on the main challenges to address, and to discuss government priorities and reforms.

Zone-based policies

Egypt has a longstanding history of relying on zone-based policies for development aims. Zones have become central growth locomotives of the Egyptian economy and, as in other emerging economies, they are home to large manufacturing activities. They have succeeded in attracting foreign investment, boosting participation in global value chains and creating jobs. By one estimate, they are home to at least one-tenth of the FDI stock, generate more than half of non-oil exports and employ nearly 2% of the national workforce.

Currently, seven types of zones co-exist in Egypt: public or private free zones, investment zones, technological zones, special economic zones, qualified economic zones, and industrial zones. Most are governed by specific laws, overseen by different ministries, operate under distinct regulatory and institutional frameworks, provide different types of incentives to investors, and often have overlapping goals.

Egypt Vision 2030 calls for “achieving coherence and integration among industrial and free zones, and domestic, regional, and global value chains”. The complex and overlapping landscape of zones in Egypt has generated co-ordination challenges between government institutions over zones management. According to the Egyptian government, the regulatory framework for land management is clearly organising and defining the competency of the governmental ministries or authorities responsible for public land administration in zones. The patchwork of policies and regulations governing zones also makes it difficult to assess the benefits and costs of each zone type for investment and wider economic development. Further clarity on each zone’s development aims, governance structure and legal and regulatory framework would help policymakers in better aligning zones’ strategic objectives with Egypt’s long-term development goals. This clarity is more than ever needed in a context where different institutions are rapidly increasing the number of their respective zones.

Zones have a mixed record in generating value-added, fostering innovation, and supporting diversification and sustainable development countrywide. In some zone types with generous fiscal incentives, they may be impeding fair competition between firms inside and outside of zones, at the risk of creating economic enclaves. They also impose a cost on government revenues, as the incentives granted to firms reduce the fiscal base. While foreign-owned businesses take advantage of such tax incentives, they often limit the deployment of local production sites in order to maintain some degree of locational mobility. Ties between zones and the local economy may be even narrower in the lower value-added segments of sectors such as textiles and clothing. Linkages between multinationals in Egyptian zones and local suppliers do sometimes exist, but policymakers could support their extension to further rely on higher-skilled labour or on R&D agreements.

Policy recommendations

• Better align the development objectives of zones in Egypt with national and local strategies as well as investment and trade goals, as stated in Egypt Vision 2030. The policy dialogue around the objectives should involve several ministries, the investment and export promotion agencies, the Industrial Development Agency, the SME agency, the SEZs authorities, governorates, and civil society.

• Assess the longer-term benefits and costs of creating new zones, notably free zones, or expanding existing ones, for sustainable development and economic welfare. For existing zones, balance the objective of expanding their activities with a transparent and sequenced plan to level the playing field between the special and the inland investment regimes, particularly with regard to corporate income tax incentives.

• Promote private investment in higher value-added segments of the manufacturing sector to unlock zones’ export competitiveness potential. This includes promoting investment in capital-intensive, upstream stages of the manufacturing supply chains to modernise production capabilities. The government could support investments aimed at replacing ageing technology in SOEs, from which downstream firms in zones source their inputs.

• Better use zones as a tool to bridge investment and regional development policies. Cost-based incentives should be favoured over compulsory linkage requirements to strengthen linkages between MNEs in zones and suppliers located in the inland regime. Authorities at the national and zone level could better co-ordinate their efforts to promote the different tools incentivising linkages.

• Clarify zones’ institutional and regulatory framework to ensure a level playing field between public and private investors. More systematically involve the private sector, local governorates and other relevant stakeholders in the decision-making process of zone authorities.

• Ensure that investors in zones comply with health, safety, labour and environmental norms and that these are in line with national and international standards. Monitor the impact of more flexible labour regulations, particularly in SEZs as they enjoy more flexible labour and social rules. Zone authorities should put in place independent mechanisms to monitor labour and environmental rights.

Investment incentives

The Egyptian government has made substantial improvements in its tax policy in recent years. The rationale behind the wide investment incentives offered by 2017 Investment Law is to boost domestic and foreign investments to spur economic growth, achieve inclusive development especially in lagging regions, generate employment, support SMEs development, increase exports and contribute to the formalization of the informal sector.

The 2017 Investment Law includes many positive changes, including limiting the scope of corporate income tax holidays to free zone companies only. Similarly, the 2015 amendment of the Law on Economic Zones of Special Nature no longer includes reduced corporate and income taxes for projects inside special economic zones. The government also has an extensive array of measures to protect the domestic tax base from cross-border tax minimisation techniques used by multinational enterprises (MNEs).

At the same time, the tax regime in Egypt remains highly complex, reflecting the multifaceted institutional framework surrounding overlapping zone-based strategies. A major concern is that officials have excessive discretion in deciding amounts of tax subsidy and beneficiaries, determined on a case-by-case basis. This hands-on approach runs counter to best practice that limits discretion by providing detailed legislation and regulations. Minimising discretion also improves outcomes by reducing uncertainty for investors, limiting scope for corruption of tax officials and revenue loss, and encouraging investment.

The new Investment Law No. 72 of 2017 has clarified the provision of special cost- and profit-based incentives. Article 11 provides a 50% discount off the investment costs for sector (A) and 30% for sector (B). Sector (A) covers investments in geographic locations most urgently in need of development according to the Investment Map and based on the data and statistics issued by the Central Agency for Public Mobilisation and Statistics. Sector (B) covers remaining areas in the country, in accordance with the distribution of the investment activities and for a number of identified projects. In addition, Article addresses taxes and duties of projects operating in public and private free zones. The government expects the new law to improve the institutional framework and tax regime in Egypt, which in return would facilitate investors’ confidence and reduce uncertainty in the tax system.

Egypt’s generous tax incentives to projects in free zones, including a corporate income tax holiday, also raises several concerns. Profit-based tax incentives, such as corporate tax holidays, are generally less efficient than cost-based tax incentives. Tax holidays to projects in free zone come with an export share requirement. The stated objectives are to enhance exports and increase foreign currency reserves. Although free zones in Egypt certainly stimulated exports, the extent to which their performance has met the objectives set by the government is an open question. Productivity growth may be hindered where tax relief encourages free zone firms to supply the domestic market where they enjoy a competitive advantage, rather than export markets where greater efficiency of business operations may be required to be competitive and profitable. Such concerns may arise even if free zone projects are subject to custom duties when they access the local market. Indirect tax relief in free zones also offers opportunities to evade taxes.

Policy recommendations

• To ensure consistency with overall tax policy and to strengthen accountability, the government is encouraged to consolidate tax incentive legislation and tax legislation and assign to the Ministry of Finance as primary responsibility to introduce tax incentive legislation.

• The tasks of monitoring compliance with tax incentives should be assigned to the Egyptian Tax Authority and strict penalty regimes should be exercised.

• The current project to switch to a fully electronic data management platform in the tax system is strongly supported.

• Redesign targeting criteria and clarify terms to minimise discretion in determining eligibility, and reduce discretion of officials in providing tax incentive relief.

• No longer provide free zone projects with a corporate income tax holiday (profit-based incentives), in line with the IMF recommendations to Egypt, and grandfather existing projects. Instead, extend investment tax allowances (cost-based tax incentives) of the Investment law to free zones projects.

• Apply strict penalty regimes for non-compliance with tax incentive laws and regulations.

Responsible business conduct

Promoting and enabling responsible business conduct (RBC) is of central interest to policymakers wishing to attract quality investment and ensure that business activity in their countries contributes to broader value creation and sustainable development. At global level, expectations and demands on RBC are rising, as reflected by a proliferation of high-level statements, national legislations, economic instruments and industry initiatives on RBC. Any company that wishes to integrate in the global economy and participate in trade and investment must be aware of the fact that their buyers, clients, and partners may have various obligations when it comes to RBC.

The notion that businesses should contribute to society is part of Egyptian business culture and rooted in Egyptian traditions. A number of programmes and initiatives that aim to address societal challenges from a business perspective exist in Egypt. These programmes have predominantly been based on philanthropy or social investments, but, in line with global trends, understanding of RBC in Egypt is evolving to align with the understanding that impacts on society and the environment are also a matter of core business operations.

The Egyptian government has taken steps to support various initiatives and promote RBC. Egypt is an adherent to the OECD RBC instruments since 2007 and the establishment of a National Contact Point (NCP) on RBC is an important milestone in this endeavour. Although the functioning of Egypt’s NCP has not been consistent over the years, new developments, including the appointment of a contact person in 2019 demonstrate renewed efforts to promote RBC in Egypt. Continued co-operation with the OECD including participation in the Working Party on RBC offers an opportunity to renew various commitments on RBC, engage in dialogue with peers, and benefit from international good practices on RBC.

The Egyptian government has every interest in using the recent momentum on RBC in the country to promote a wide dissemination and implementation of internationally recognised RBC standards. This is especially true as a way to ensure that businesses conduct due diligence to identify, prevent, avoid and mitigate environmental and social risks which can have a significant impact on key economic sectors. For example, in the garment industry which is a strategic industry in Egypt, RBC can be instrumental in building a reputation for quality and sustainability that is increasingly essential. In infrastructure projects, risk-based due diligence can contribute to minimising potential environmental and social impacts.

Implementing RBC standards requires broad engagement with businesses but also with all stakeholders, including relevant government ministries and agencies, NGOs and trade unions. The government can take strategic actions to create an enabling environment for all relevant stakeholders to contribute to the design and implementation of RBC standards. A particular opportunity exists to promote collaborative initiatives.

Policy recommendations

• Engage with other NCPs in order to build the capacities of the Egyptian NCP. The NCP is an instrumental tool in the government policy toolbox that has so far been under-utilised. A well-functioning NCP can be instrumental for engagement with business and other stakeholders due to its unique non-judicial mandate and it can support the sound design and implementation of RBC-related policies.

• Undertake a voluntary NCP peer review by 2023. In line with calls from the international community and commitments made in June 2017 at the OECD Ministerial Council Meeting, Egypt is encouraged to undergo a voluntary peer review of its NCP. Peer reviews provide an important means to assess the practical aspects of NCP functioning and have been used by various government to assess opportunities for further improvements.

• Develop a National Action Plan on RBC, in line with international best practice and in wide consultation with stakeholders. A NAP process would be an opportunity to build multi-stakeholder support in key areas for Egypt’s development trajectory and in complex areas where action by one stakeholder would not be enough. A consultative and inclusive NAP process is an opportunity to strengthen knowledge about the linkages of various policy areas that address business practices in the country and help build the capacity of Egyptian industry to participate in global supply chains.

• Facilitate meaningful stakeholder engagement in the design and implementation of RBC policies and processes. Particular attention should be paid to ensuring meaningful engagement in the early stages of policy development. In the planning and implementation of state-led projects, such as infrastructure projects, it is particularly important to meaningfully engage affected stakeholders.

• Support, enable and promote RBC due diligence among businesses. Egypt should explicitly support multi-stakeholder initiatives and promote broad dissemination and implementation of the OECD due diligence instruments. In particular, facilitating dialogue between various stakeholders in the garment sector and supporting application of the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector in Egyptian factories would help improve industrial relations and enhance competitiveness of the garment sector.

• Require the integration of RBC due diligence standards at all stages of infrastructure project life cycle, including in tendering and contracting processes. Potential contractors and suppliers should be explicitly asked to follow international standards on RBC such as the OECD Guidelines and UN Guiding Principles and to demonstrate that they do so.

Infrastructure connectivity

Egypt has significantly improved the quality of its trade and transport infrastructure in recent years. However, the economy still faces important infrastructure challenges, coupled with considerable investment needs. According to the Ministry of Investment and International Cooperation, Egypt has directed around USD 61.4 billion to the infrastructure sector in the past five years to connect governorates, enhance accessibility and mobility of goods. The current levels of investment in infrastructure have raised questions whether Egypt may be able to sustain the current stock of infrastructure given its natural depreciation and aging, let alone expand it to meet growing demand. Bridging the financing gap requires a more cross-cutting approach to mobilise investment.

Infrastructure connectivity challenges in Egypt include a lack of multi-modal transport, an over-reliance on roads, a rail sector in need of further reform, and a fragmented port system. This leads to high transport costs and poor logistics performance compared to other countries in the region. Logistics costs in Egypt account for around 20% of GDP compared with a global average of 10-12% (IFC, 2013; World Bank, 2015). Overall, such bottlenecks constrain economic growth by around two percentage points per year, hindering the distribution of resources and contributing to a disproportionate concentration of economic activity in metropolitan areas (EBRD, 2017).

The need to improve connectivity is acknowledged in Egypt’s “Vision 2030” and its transport and infrastructure plans, which aim to increase the capacity of the transport sector and boost its share in international and regional transport volumes. The Ministry of Transportation is also taking action to overcome such challenges, with the ongoing preparation of a plan to establish a network of logistical areas and villages. However, the government could strengthen its planning capacity and coordination for infrastructure projects. Currently, numerous infrastructure priorities are outlined in different strategies. The government intends to strengthen its fiscal planning by introducing the medium-term expenditure framework, which will set multi-year expenditure ceilings by major spending categories, including infrastructure (IMF, 2018).

Policy recommendations

• Clarify the regulatory frameworks for infrastructure investments to provide potential investors with clear, predictable and consistent policies. Currently, the public private partnerships (PPP) Law coexists with other channels of procuring infrastructure projects such as the public utilities legislation and a number of sector-specific or project-specific laws. The government should build a clearer and more transparent regulatory framework governing infrastructure activities.

• Provide more opportunities for private participation in infrastructure, including through PPPs. Despite Egypt’s robust PPP regulatory framework, private sector participation in the infrastructure and energy sectors has been limited.

• Engage with stakeholders in local communities to ensure support for PPP projects. Currently, there is low public support for PPP projects, partly due to a lack of adequate community consultation to guide project selection and secure public support for projects. In order to gain more public support for infrastructure projects, the government needs to involve more systematically all the relevant stakeholders from the earliest stages of infrastructure planning to ensure support and that their needs – as well as social, economic, environmental and governance risks – are correctly assessed, addressed and adequately reflected in the contractual structures.

• Strengthen the capacity and co-ordination across the government for planning and assessing infrastructure priorities to ensure that infrastructure strategies are well integrated with other types of planning such as industrial development strategies and land use plans. For example, infrastructure plans in special economic zones such as the SCZone should be well connected with the hinterland. Achieving this also requires better co-ordination between different branches of government.

• Improve coordination of port and multimodal transport planning to facilitate more river-based transport. Currently, ports contribute less than 1% of inland transport, which is mainly due to the poor integration of river transport to the country’s transport networks.

• Strengthen the legal framework for public procurement to increase tender participation and supplier diversity. Currently, the national public procurement legal framework is not considered to be clear, comprehensive, or conducive to a competitive procurement environment. While the 2016 Law on Public Procurement introduces procedures to enhance transparency and reduce discretion in public procurement, the consistent application and enforcement of the law by the involved procurement entities is weak.

• Ensure that infrastructure projects are grounded in efficiency rather than fiscal motivations. Currently, there is no legal requirement in Egypt for public entities to consider the costs of the whole life cycle of an infrastructure project or seek value for money. Building capacity among government entities to assess value for money over the lifecycle of an infrastructure asset is crucial to make sure that investments benefits Egyptian users and society at large.

References

[5] Assaad, R. and C. Krafft (2013), “The Structure and Evolution of Employment in Egypt: 1998-2012”, Working Paper, No. 805, The Economic Research Forum, Giza, http://www.erf.org.eg (accessed on 1 February 2019).

[3] Cammett, M. et al. (2013), A Political Economy of the Middle East, Routledge, https://www.routledge.com/A-Political-Economy-of-the-Middle-East-4th-Edition/Cammett-Diwan-Richards-Waterbury/p/book/9780813349381 (accessed on 13 December 2018).

[4] EBRD, E. (2016), What’s Holding Back the Private Sector in MENA? Lessons from the Enterprise Survey, World Bank, Washington DC, http://www.ebrd.com (accessed on 29 January 2019).

[2] Ikram, K. (2018), The Political Economy of Reforms in Egypt: Issues and Policymaking since 1952, The American University in Cairo Press, Cairo.

[1] IMF (2018), “Arab Republic of Egypt : Third Review Under the Extended Arrangement Under the Extended Fund Facility, and Requests for a Waiver of Nonobservance of a Performance Criterion and for Modification of a Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for the Arab Republic of Egypt”, Country Report, No. 18/213, IMF, Washington, DC, https://www.imf.org/en/Publications/CR/Issues/2018/07/12/Arab-Republic-of-Egypt-Third-Review-Under-the-Extended-Arrangement-Under-the-Extended-Fund-46061 (accessed on 8 January 2019).

[6] World Bank (2014), More Jobs, Better Jobs: A Priority for Egypt, World Bank, Washington, DC, http://siteresources.worldbank.org/INTMENA/Resources/EgyptJobsReportFinalcolor.pdf (accessed on 1 February 2019).

Notes

← 1.  Based on ILO modelled estimates, data for female unemployment from 2019, data for youth and educated unemployment from 2017 (last year available).

← 2.  Based on panel data from the Egypt Labour Market Panel Survey between 1998 and 2012; formal employment is defined as employment that provides either a written work contract or social insurance (World Bank, 2014). According to ILO data, employment in the formal sector in Egypt has decreased since 2012, while share of informal employment has increased from 41% of total employment in 2012 to 53% in 2017.

← 3.  OECD calculations based on the IMF Balance of Payments and International Investment position database, the IMF World Economic Outlook database and OECD Foreign Direct Investment statistics database.