FDI inflows into Egypt were impressive between 2005 and 2008, peaking at nearly $12bn in 2007, with the GDP growth rate peaking at 7% in 2008. Yet despite this growth, unemployment remained high, at an average rate of 9.5% between 1991 and 2010. 

What can be described as jobless economic growth continued, as the gap between rich and poor widened drastically, creating limited enclaves of wealth concentrated in the hands of a small minority of businessmen, industrialists and tycoons in control of vast sectors of the economy. Rapid deregulation, liberalisation and privatisation efforts increased FDI inflows, but also paved the way for rampant corruption, significantly reducing the potential contribution of these inflows to economic development.

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Before the January 25, 2011 revolution, FDI was perceived as an important engine for growth that required minimum interference and few regulations by the government. The legal framework for investment in Egypt was conducive to FDI, providing legal stability and protection to foreign investors and ensuring that bureaucratic obstacles and government interference were kept to a minimum. However, these policies focused on the quantity, rather than on the quality and impact of these inflows on economic development.  

In the way of change

Egypt's FDI policies and regulations will have to be reconsidered in line with the economic objectives of the January revolution, allowing for a more equal distribution of wealth, a greater focus on job creation and a more inclusive development agenda. However, any changes will have to be made with the bilateral treaties for the protection of foreign investment in mind.

Foreign investors and their investments are protected by bilateral investment treaties (BITs), measures obliging the host country to provide equitable treatment, most favoured nation status, protection against expropriation, the freedom to enable the transferal of funds and returns promptly and without government interference, the prohibition of  imposing requirements on investors, and a dispute settlement mechanism allowing foreign investors and companies to file claims against the host country in international tribunals and foras without first having to go through the domestic judicial system.

Egypt has agreed to more than 100 of these treaties, 72 of which they accepted between 1997 and 2010. Egypt signed more BITs than any other Arab or African country in this time. The conclusion of these treaties comes with substantial regulatory and potential financial costs.

Bound by red tape

One of the biggest challenges facing Egypt will be incorporating these treaties into a new national development strategy. Particular difficulty will arise in maintaining the 'legitimate expectations' of foreign investors, when many terms of investment were decided upon by the previous government, in the pre-revolution era. These expectations have been repeatedly identified by arbitral tribunals as a key element of the fair and equitable treatment (FET) standard found in BITs. The obligation to respect the 'legitimate expectations' of foreign investors increases the risk that new FDI regulations may be in violation of BITs, even when the measures are implemented to serve legitimate public purposes.

It should be highlighted that the legitimate expectations of foreign investors have limits. They should be reasonable by taking into account the changing political, economic and social circumstances of host countries. New FDI-related regulations geared towards legitimate public objectives, and implemented in good faith and without discrimination, should not be held in breach of the FET standard in the Egyptian BITs, even where such new measures may not be favourable to foreign investments.

BITs can also have implications the government's ability to regulate capital flows in cases of balance of payment difficulties or other economic problems.The free transfer of funds provision found in the BITs concluded by Egypt gives foreign investors the right to transfer back to their home countries, without delay, funds, profits and returns related to an investment. This could potentially lead to sudden, large capital outflows from the country.

Sudden repatriation of capital would limit Egypt's regulatory right to ensure investors' compliance with specific laws (for example, laws on bankruptcy and payment of taxes prior to transfers) or their ability to safeguard flexibility to properly administer financial and monetary policies. This issue has become especially relevant since the 2008 global financial crisis.

The challenge is therefore to ensure enough regulatory flexibility for Egypt to devise coherent investment policies that serve a broader development strategy, without violating existing international investment commitments made through the conclusion of BITs.

Financial cost

Aside from the regulatory restraints, substantial financial implications might also arise from the investor-state dispute settlement mechanism found in BITs. The conclusion of more than 100 BITs means that the vast majority of foreign investors in Egypt have direct access to international arbitration.

Egypt is therefore more exposed to the risk of facing investment disputes in international tribunals such as the International Centre for the Settlement of Investment Disputes (ICSID). These claims could have serious financial implications, both in terms of the costs of the arbitration proceedings and the awards rendered.

Egypt has already faced at least eight treaty-based cases, and five additional cases are still pending before ICSID. Past investment disputes in Egypt related mainly to hotels and resort development projects, but also to cement distribution projects, cotton and textile enterprises, mining and dredging projects and airport construction.

Between March and June 2011, ICSID registered three cases involving Egypt; a chemical products enterprise; a gas pipelines construction and operation agreement; and a property development project. At least one of these cases has arisen as a result of post-revolution government measures, which are aimed at combating corruption. Between 1998 and 2009, foreign investors sought a total of more than $1bn in compensation from Egypt as a result of treaty-based investor-state disputes in international tribunals.  

Mutual decisions

Foreign investment policies and regulations have to reflect and adapt to the changing political, economic and social realities in Egypt. At the same time, these policies will have to be integrated into an overall development strategy, with the aim of achieving strategic employment objectives and generating more equitable income distribution.

When deciding upon these policies, it is important to involve all stakeholders who will later play a role in, or are concerned by, the implementation of new foreign investment policies.

Three factors seem particularly important. First, investment policies should continue to encourage and facilitate FDI, but this will have to be accompanied by measures and regulations that respond to the legitimate aspirations of the Egyptian masses; second, inter-agency and inter-ministry co-operation within the government when implementing new regulations is crucial to ensure that FDI policies are coherent and consistent with a wider national development strategy; and third, an inclusive and transparent elaboration process of a new vision on how best to use FDI for an inclusive and socially equitable economic development with non-governmental stakeholders, including the civil society, to help build a broad domestic support base for new policies. 

Hamed El-Kady specializes in  international investment policies and their implications on national development  strategies and works for the UN Conference on Trade and Development*. Email: hamed.el.kady@unctad.org. 

*The views are those of the author and do not necessarily represent those of UNCTAD.