Thursday, 16 March 2017

Beyond the Rubicon: Deja Vu All Over Again

By Aly El Shalakany

In Egypt, we like to keep things simple – the second we have an economic slump, we know we need to attract investment and that, ladies and gentlemen, means we need a new investment law. Who doesn’t like a new investment law? It just makes sense.

In the 1970s, Sadat wanted to liberalize the economy and to kick-start a shift from a more socialist command economy to a hybrid capitalist system where the private sector would grow rapidly and eventually take the lead in economic development. The problem was that Egypt’s legal framework was not very conducive to investment. A complete overhaul of the Egyptian legal system and the creation of new administrative and regulatory bodies that could accommodate the private sector overnight was simply not possible. We needed a quick fix.

As a result, the first investment law was born.

The philosophy behind the first investment law was pretty straightforward. Until we can create the legislative framework for a modern private sector led economy that is conducive to investment, we need to have a “VIP” track in order to get the ball rolling in the right direction. The structure of the investment law was also quite simple. Egypt wanted to incentivize investment in certain sectors and activities and, in return for investment in those areas, the investment law provided certain incentives and guarantees.

The philosophy and structure of every version of the investment law issued or considered ever since has been almost exactly the same.

In terms of sectors that we want to incentivize, the current draft of the new investment law has outlined sectors that are very similar to the ones in the very first investment laws, with the highlights being: agriculture, manufacturing, infrastructure, healthcare and education. We can all get on board with incentivizing these sectors, but the point is that despite a series of investment laws over four decades, we still haven’t managed to do so to a satisfactory level.

As for the guarantees, they are also pretty much the same as we had in the very first investment laws: guarantees against nationalization, expropriation, asset seizure and interference in pricing or profits.

What is quite startling for me is that, after so many years between the first investment law and the current investment law under discussion in parliament, the legislative framework has made very little progress on these fronts and we still need to provide these types of guarantees. One would hope that the powers that be would finally understand that there is a direct correlation between threatening to control pricing and scaring off investors, yet we still see policy statements from the government and regulators to the contrary.

Finally, as for the incentives, these can be split into two categories. Firstly, there are a number of incentives that try to circumvent or exempt the company from bureaucracy and red tape. The benefits and exemptions have evolved over time in order to address old and new bureaucratic nightmares, but it still puzzles me why some of the basic issues that were identified almost 40 years ago still haven’t been solved today?

As an example, let’s take importation. The investment laws have consistently exempted companies under the investment law from having to comply with the importation regulations, and for good reason – there are stringent Egyptian nationality shareholder and management requirements linked to importing finished goods, which would be unworkable for foreign investors. Despite a very recent amendment to relax these regulations, the nationality requirement still remains. Why, as a matter of policy, are we doing this? The messaging to investors is simply contradictory – are we open for business or are we promoting protectionism?

The second category of incentives are tax incentives. In the last investment law, tax holidays of between 5 to 10 years were offered, but these were abolished in 2005 with the new Tax Code in return for a significantly reduced flat tax rate. That was a smart move back then, as the removal of these tax benefits were done as part of a holistic approach to a radical change in taxation policy that resulted in actually expanding tax revenues.

Today is an entirely different story and the rationale of re-introducing tax breaks to incentivize investment in certain areas makes a lot of sense, especially when you look at other competing emerging markets who are already offering this. The tax purists will say that it is “unfair” to give corporate tax breaks at a time when everyone has to pay more tax. My response to this is that I would much rather have a boom in manufacturing, agriculture, infrastructure, healthcare and education that creates thousands of new jobs (and tax payers!).

Despite some grand standing by loud dissenting voices, it seems like those in favor of offering tax incentives will win this battle, which will be reflected in the new investment law. That is good. But the real question is: is this even an investment issue or a tax policy issue?

This really brings us full circle to first principles. Do we want another “quick fix” that will bandage some of the problems for another few years or do we want to have a real go at fixing the root causes? Our civil code was issued in 1948, the companies’ law was issued in 1981 and our commercial code was issued in 1999. These are the pillars of our business law, yet they are in need of a serious upgrade, if not a complete overhaul. Ancillary laws that deal with labor, licensing, construction, financing, etc are in a similar state of disrepair.

Fixing all of these problems will require years of preparation and consultation, there is no doubt about that. It may even seem like an insurmountable challenge. But nobody said the road to success was easy.

I, for one, believe that Egypt has more than enough talent in both the private sector and the upper echelons of the public sector to do what is necessary. When that is not enough, we can always bring in top class experts from around the world to assist, as we have done successfully in the past. There is no shame in this. The real tragedy would be to pass a clean bill of health after applying a band-aid, when in fact major surgery is required to save the patient.

 

Beyond the Rubicon is a column written exclusively for Enterprise every other weekend by Aly El Shalakany, senior partner at Shalakany Law Office, which he joined from Linklaters in London. Aly is a noted specialist in finance, projects and mergers and acquisitions; his column appears exclusively in our Weekend Edition, offering an “inside baseball” look the intersection of business, economy and finance from the point of view of a practitioner at the top of his game.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594). Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2016 Enterprise Ventures LLC.