EXCLUSIVE- Gov’t plans to scrap automotive directive, looks to replace it with special economic zones: The Madbouly Cabinet has decided to scrap the automotive directive — the long awaited government strategy to grow the domestic auto industry by granting local assemblers incentives to move further up the value chain to manufacturing.

Background: The Automotive Directive had been in the works for over three years now thanks to wrangling in the House of Representatives and opposition by auto importers. The package of incentives was designed to allow local assemblers, who industry backers argue support tens of thousands of skilled direct and indirect jobs, to better compete with European Union, Moroccan and Turkish imports that receive customs breaks here in Egypt. That strategy has been sharply opposed by our EU trade partners — particularly Germany, whose chancellor, Angela Merkel, is said to have addressed the issue directly with President Abdel Fattah El Sisi.

The alternative? The government is looking to replace the automotive directive with a policy of setting up special auto industry freezones that would offer a range of as-yet unspecified tax and customs breaks to assemblers, a senior government source with direct knowledge of the move told Enterprise. Among the incentives would tax and customs exemptions for capital goods imported for local assembly, the source said. Our source noted that the ministries of trade and industry, finance, and investment are currently working on studies that would back the new policy, but did not say when the proposal might be officially unveiled. The policy will likely emulate others adopted by regional players including Morocco and South Africa.

Higher local content requirements part of the proposal? Manufacturers looking to join the proposed program would be required to source 60% of their components here at home, the source said. That’s a significantly higher rate than the 46% domestic component requirement mandated by former Trade and Industry Minister Tarek Kabil in April to push forward the transition towards the automotive directive.

The source noted that the government plans to pitch the new policy to foreign auto companies that sell cars here in the hope of spurring foreign direct investment in the sector. A number of auto companies are on record as saying they were awaiting the automotive directive before committing to new assembly lines. These include Toyota and China’s GAC Motor. Others including Fiat and Volkswagen were said to be exploring manufacturing opportunities in Egypt but were awaiting clarity from the government on its auto industry policy.

This significant change in direction by the government comes as Egypt has 154 days before 1 January — that’s when customs on EU manufactured cars fall to zero, a prospect that could see top assemblers close down assembly lines.