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Tuesday, 31 July 2018

Trade Minister denies Automotive Directive is being scrapped

Is the automotive directive still alive? The Ministry of Trade and Industry issued yesterday a statement denying our report of Monday morning that the government plans to scrap the long-delayed automotive directive, which was designed to transform Egypt’s automotive assembly industry into a manufacturing and export power. A senior government official with direct knowledge of plans drawn up by the Ministry of Trade and Industry was our source on the original story. The official spoke on condition of anonymity.

What’s the ministry saying? The statement says our report was untrue, but notes that officials are reviewing the current policy with an eye towards a vision for the industry and a strategy for its development. It added that the development of the local auto industry is a top a priority for the ministry — “as is the case with any other industry.”

What our source claims the Trade Ministry is proposing: 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 could be 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.

So, where do things stand? Two well-sources with whom we spoke yesterday confirmed the proposal to scrap the directive in favour of Moroccan-style incentives and special economic zones is very much alive and has been presented to the cabinet.

How does this compare with the automotive directive? Both policy directions ostensibly aim to give local assemblers protection against less-expensive imports by giving them incentives to move up the value chain into manufacturing. The automotive directive was a blanket policy for the industry, not based on specific zones or geographies. And it would not have required direct payouts to manufacturers: The original draft of the automotive directive set a minimum production and export requirement to benefit from incentives, which include tax and customs breaks of 23.1%-57.5% of the sales price of the car, varying by engine size and proportional to the percentage of domestic components used to assemble the vehicle.

Why incentives may not be the way forward: Similar programs in Morocco and Turkey to which our source says the government has referred provide cash rebates or subsidies of 20-30% on a manufacturer’s investment cost. Industry players with whom we’ve spoken in the past day put that at a cost to the taxpayer of some USD 500 mn per plant. Moving up the component value chain to require 60% of content be domestic would required further bn’s of USD worth of investment — this at time when the industry is simply too small to support something of that size.

In any case, the clock is ticking: We have five months and one day before cars assembled in the EU enjoy customs-free access to the Egyptian market, a fact that would imperil thousands of skilled manufacturing jobs (both direct and indirect). Our take is that this is the industry’s last chance to get on a footing that could one day see our exports be regionally competitive. To lose jobs and future economic opportunity for lack of a clear policy would be a shame. Whatever cabinet plans to do with the industry, now is the time to make it clear — foreign investors won’t come pouring in until the regulatory framework and the fate of existing domestic players is clear.

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