The Egyptian Economic Development Conference: Is it A step Forward Or Pursuit of Policies of the P

Press Release

12 March 2015

The Egypt Economic Development Conference (EEDC) arrives this month amidst an official government and media discourse reflecting the government's high hopes for the EEDC to attract investments needed by the economy to emerge from its current financial crisis. This happens at a time when the key set of strategies—which acts as a foundation on which the state views the issue of investment—needs to be revised to aim at managing the state's financial crisis, and addressing structural problems inherited from the past.

Despite its utmost importance to the Egyptian economy, the EEDC takes place without taking into consideration the fundamental principles of democracy, participation, transparency, and accountability – which are key components for any rigorous social contract between the state and society. Despite the focus by the conference on promoting investment opportunities for investors in general and foreign investors in particular, the government neglected strengthening relationships with other key actors on the national level, such as trade unions, workers, and the civil society. Moreover, a set of laws – supposedly setting the economic vision of the state – are underway in the absence of an elected parliament, and with barely any societal engagement. The Investment Law and its various drafts, for example, has not been subject to any form serious societal review, save for a few investors close to the circles of power. Moreover, it is unexpected that even the investors would be capable of reviewing the law and its full executive regulations before convening the conference.

The philosophy of relying on growth as the sole measure for the performance of the national economy has been for long the key driving force behind the management of the economy. Subsequently, attracting investments has been driven by incentives related to taxation, and the (under)pricing and allocation of local assets and energy, and the protection of investors even from the national judiciary. This was the very same philosophy reflected in the different drafts of the proposed investment law as cited in some newspapers, and the accompanying taxation policy, which relies on lowering the tax ceiling while maintaining the support given to export activities; however, all such support is undertaken in the absence of transparency concerning the true beneficiary industries and the effectiveness of this support, and the need for reviewing it with respect to its structure and beneficiaries.

This is the very same policy that was adopted before January 25, which resulted in an investment boom in terms of quantity, but without diversity or an impact on development, justice, and employment. Thus, many questions are raised concerning the type of investments that could be attracted by the EEDC, and their ability to lead to any true development, given the reliance of state on promoting cheap local assets, with no rigorous governance framework for project concessions, particularly public-private partnerships (PPP) projects. Within such environment, it is feared that the conference would only attract investments with the sole objective of short-term and quick profit.

On its official website, the Ministry of Finance has recently announced the standardization of income tax in Egypt, at a maximum of 22.5% down from a total of 30%. According to the Minister of Finance, Hani Qadri Demian, such procedures are part of an overall plan to improve the investment environment. This is indeed an expression of the typical assumption that there is a simple and direct relationship between reducing the tax rate (particularly on higher segments) and attracting investments. However, standardizing and lowering the tax for all deprives the state from a key instrument to encourage specific types of investment serving even and sustainable development plans through granting them tax privileges, while discouraging other areas that could be harmful to development plans such as industries that are polluting, not labor-intensive, and energy-intensive through levying higher taxes from them. Since the EEDC seeks to foster some investments with a positive impact on the economy and the society as a whole, it is important that the government employs the taxation policy as a tool for serving sustainable development plans and social justice.

The allocation of free-of-charge land through direct-order (non-tender procedures) transactions, as stipulated by the draft investment law which is expected to be issued before the conference, follows the same lines of granting privileges to investors without necessarily serving any agreed-upon development goals. Furthermore, such direct-order transactions have cost the treasury billions of pounds in the past, according to estimates from the Central Auditing Agency, with no developmental strategies such as allocating this land to execute housing projects for low income groups, or other sustainable development projects. Most of this national property was used for the construction of luxury housing owned and utilized by individuals close to the circles of power. This fear is grounded on the nature of the projects as announced in the media, when the government publicized 37 projects to be launched during the EEDC; nine of which are housing and construction projects and four of which are grand tourism projects – both sets of projects are likely to benefit from such granting of land through non-tender allocation either for free or at below-market prices, as indicated in the investment law draft.

Projects related to oil industries and the generation of electricity from coal are at the forefront of the energy projects publicized by the conference. One of the concerns is that the state could be seeking to secure energy hastily at the lowest prices possible, overlooking some of the key long-term impacts related to energy, such as national sovereignty over sources of energy as well as social and environmental sustainability.

This concern is based on the announcement made on the official website of the conference concerning the intention of generating six gigawatt of energy from coal, in addition to the cement companies that are currently adapting their plants to operate on coal. On the other hand, plans regarding the use of renewable sources of energy such as solar or wind remain ambiguous. Moreover, the promises made by the conference to privatize large portions of the electricity sector in the fields of generation and distribution are unclear. Needless to say, this could have many negative repercussions on social justice. This alerts again to the fact that the agenda of the EEDC was not presented for public discussion, and was imposed without starting a wider societal dialogue about the goals and the promises of the conferences particularly in the absence of a legislative body. This indeed poses many reasonable concerns that the conference would turn to a venue for selling state assets to investors searching for investment opportunities and cheap production inputs without a achieving any desired developmental goals.

In this feverish pursuit by the government to attract investment, it is feared that this would be at the expense of establishing and respecting a sound governance framework. One of the key problems of the lack of good governance adopted by the new set of investment legislations issued on the occasion of the conference is the impunity granted to investor against prosecution. The government undertakes this approach through three components to reassure the investors that justice will not operate to the detriment of their business:

-Procedures immunizing contracts concluded between the government and the investor by only permitting parties to the contract to challenge it, as stipulated by Law 32/2014 which regulates the procedures for challenging state contracts;

-The provision in Article 15 of the draft investment law prohibiting filing a lawsuit or taking any measure of investigating offenses (provided for in Book II, Part 4) committed by the investor in person or in their capacity as an investor, without the approval of General Authority for Investment's board. As governance and separation of powers is concerned, this is a flagrant transgression by the executive branch (represented by GAI) of the mandates of the judiciary; and

-The protection of investors from prosecution through intensive reliance on independent dispute settlement mechanisms away from Egyptian courts, which vests an extra degree of immunity and protection from prosecution for violations committed. Such immunizing policies compromise the independence of the judiciary and rule of law.

Finally, boosting investment in the state needs to stem from a philosophy that safeguards the creation of high quality job opportunities, increasing the tax revenues, and increasing foreign currency resources while reducing pressure on foreign currency domestically. However, the EEDC and the accompanying policies suggest a focus on only attracting sources of foreign currency to fix the balance of payments deficit.

The conference is held during difficult financial conditions, arising from current regional political risks and from a domestic administration that failed to date to resolve core structural problems in the economy, governance, and anti-corruption – while counting on the conference to resolving economic problems as a possible way forward for achieving better political stability. This vision missed, though, that the very same economic problems is the result of deficient political administration and a security-oriented approach to addressing issues, while adhering to a set of incentives that failed to lead to development-oriented investments in the past. Therefore, the concerns of being caught in the very same vicious circle remain valid – i.e. giving priority to overcome the financial crisis without due examination of the costs at stake related to justice, development, transparency, and the rule of law, let alone financial sustainability itself.

While recognizing the importance of promoting investment, the Egyptian Initiative for Personal Rights (EIPR) believes that establishing an integrated national coherent strategy for managing the national economy should have rather been the foundation for any plan to promote investment in Egypt.