The breath of fresh air blowing through the offices of the General Authority for Investment and Free Zones (GAFI) hits you in the face. GAFI, which is the Egyptian government agency charged with attracting investment to the country, has a new private sector-like efficiency about it that is easy to notice.
This has a lot to do with the fact that prime minister Ahmed Nazef turned to the private sector to recruit senior technocrats to reform the Egyptian economy, and the attitude is filtering down through government.
Khaled El-Mahady Hamza, head of promotion at GAFI, is one such recruit, giving up a job as a portfolio manager in Dubai to come back to Egypt. His reason: a new cabinet that was saying – and more importantly doing – the right things to overhaul the economy and attract investment.
Front and centre has been the challenge to tackle Egypt’s notorious red tape. Mr Hamza believes there is no better signal of the government’s firm intention to transform the economy than its success in streamlining regulatory procedures. Whereas it used to take three months to register a business, it now takes only 72 hours.
To do this, GAFI has created a one-stop shop where investors can fulfil procedural and bureaucratic requirements for numerous government departments under one roof. “This is an unbelievable effort,” says Mr Hamza. “You have no idea how complex and diverse the requirements of each government entity were.”
The government has in fact undertaken a series of reforms aimed at improving the business and investment climate in Egypt. The strategy is built around streamlining investment procedures, dismantling bureaucratic obstacles, and liberalising business. The end goal is to promote export-led industries, stimulate foreign and domestic investment and create jobs.
Significant developments include the introduction of new tax and customs laws and ongoing trade negotiations to set up preferential access to new markets.
The new tax law slashes the highest personal tax rate from 32% to 20% and cuts the corporate tax rate in half – from 42% to 20%. New regulations in the customs law reduce tariffs from an average of 14.6% to 9%, simplify and reduce the number of tariff bands from 29 to six, and see the adoption of streamlined and automated customs procedures.
In December 2004 Egypt signed the Qualifying Industrial Zones (QIZ) Protocol Agreement with the US, which grants all Egyptian products manufactured in QIZs free access to the US market without tariffs or non-tariff barriers, as long as the products comply with rules-of-origin requirements and consist of 11.75% Israeli content. QIZs are geographically designated areas in Egypt, determined by the Egyptian government and approved by the US government where industrial products originating in Egypt and satisfying agreed-upon Israeli content requirements are granted free entry into the US customs territories.
The new vigour to transform the country’s investment climate is clearly evident; what is less certain is the stamina of Egypt’s policy-makers to persist with reforms. At Egypt Invest 2005, an international investment and trade forum held in late November in Cairo, Amr Abdel Azim, vice-chairman of GAFI, warned delegates that the transformation would not happen overnight.
Success, he said, would require a combination of urgency on one hand and patience on the other. He reiterated the government’s sense of urgency but tempered expectations, adding: “We know that nothing of real value comes quickly or easily.”
Such sentiments should not dash hopes that the government is serious about reform; if anything they reveal a maturity and honesty about the scale of the task and a reluctance to raise public expectations to dangerous levels.
“We are all impatient for results but if we are not realistic about the time required to transform an economy, we risk abandoning the effort before it has a chance to succeed. Businesses do not invest hundreds of millions without studying the prospects for earning a return in a reasonable period of time. This often takes a year or more,” Mr Azim said. “Once a company decides to invest in a foreign market, another year or more is required before a plant is built and goes into operation. Only a year has passed since we began our reforms. We are still early in the process of transforming our economy and promoting Egypt to business investors.”
Untangling the knot of unfriendly business regulations, red tape and out-of-date laws is only part of the problem. The government also has to tackle deep-seated international perceptions about the country’s obstacle-ridden business environment – both at home and abroad – that often lag behind reality.
Sensing the scepticism of delegates, Mr Azim made the point that clearly the situation was improving. In response to a mood of “We’ve heard this before”, he pointed out that total foreign investment increased to $4.7bn in 2004 from $1.8bn the previous year. Significantly, non-petroleum investments have jumped four-fold in the past 12 months, from $407m to $1.3bn.
Egypt’s value proposition to investors is built on three pillars: people, location and value.
The country’s population is young – almost six out of every 10 Egyptians are under 25. Not only does this imply a sizeable and growing pool of young workers, it is also represents an expanding consumer market.
Importantly, an historic culture of education is rooted in Egyptian society, and a large majority of Egyptians go on to seek higher education. There are 16 local and foreign universities, graduating 232,000 students annually, and a large number of specialised technical institutions building up a workforce to match the needs of investors.
With respect to location, Egypt sits at an important strategic node, a gateway to Asia, Africa and Europe. As a result of international trade agreements, the country enjoys a wide range of market access to North America, China, Europe, north Africa and the Middle East. From Egypt, a market of 800 million consumers is within easy reach; from its commercial ports on the Mediterranean and Red Seas a far wider market is available.
The third pillar of Egypt’s proposition to investor is value, and it is here where reforms are starting to bear fruit, particularly with respect to increasing the efficiency of the domestic economy and lowering operating costs.
The reduction of customs duties has opened Egypt’s markets to more foreign trade and stimulated domestic producers. The streamlining of business procedures not only lowers compliance costs for investors, it is also triggering a flurry of private sector activity which in turn is improving the productive capacity of the economy. This too has been helped by the reduction in corporate and personal taxes as well as ongoing privatisation.
This is steadily lowering the cost of doing business in Egypt, where labour and land costs are already competitively priced. Infrastructure is also gradually being improved: electricity and gas prices are competitive and the government is putting deeds behind its words of willingness to extend energy infrastructure to new investment projects. Plans are also afoot to improve the transport system.
Egypt has also set in law a number of investment-friendly regulations. Full foreign ownership of projects and companies is permitted as is full repatriation of profits and capital. For what it is worth, the investment law expressly protects investors from nationalisation and expropriation.
Other aspects relevant to Egypt include exemption from state-administered price controls on outputs; income tax exemption on foreign project consultants in the country for less than a year; and a unified 5% import dute rate on imported capital assets and construction materials required to establish an approved project.