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Egypt implements unprecedented reforms, yet policy instability, inflation, corruption, government bureaucracy remain challenging: Country Senior Partner at PwC Egypt - Daily News Egypt

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Egypt implements unprecedented reforms, yet policy instability, inflation, corruption, government bureaucracy remain challenging: Country Senior Partner at PwC Egypt

Strategic location, diversified economy, multilateral trade agreements place country favourably, says Ezzeldeen


Throughout the past three years, Egypt has been through tough but necessary economic reforms undertaken by state authorities, and supported by the IMF. Aiming to resolve economy’s structural issues, curb the budget deficit, eliminate currency shortages, all while achieving sustainable growth, the Egyptian government has adopted a diversified set of economic measures, including currency flotation, subsidy cuts, imposing value-added tax (VAT), and introducing social protection programmes.

Egypt’s unprecedented reform measures of macroeconomic and business legislation are bearing positively on the country’s competitiveness standing for the first time in eight years, Maged Ezzeldeen Country Senior Partner at PricewaterhouseCoopers Egypt (PwC) told Daily News Egypt.

He said that various opportunities exist in the energy sector ranging from exploration and processing of crude oil, liquefying gas, and exportation of such products.

Ezzeldeen elaborated that the PwC support investors to place FDI by developing their portfolios through building or buying. The PwC is a network of firms with more than 236,000 people operating from 158 countries globally, making them the largest professional services provider in the world.

Daily News Egypt interviewed Ezzeldeen, and the transcript for which is below, lightly edited for clarity:

Which are the main challenges Egypt faces to increase its competitiveness in the region?

Egypt’s unprecedented reform measures of macroeconomic and business legislation are bearing positively on the country’s competitiveness standing for the first time in eight years. Egypt’s ranking on the global competitiveness report witnessed a significant jump of 15 places in 2017. Underpinning this was a remarkable improvement in the public institutions and infrastructure indices, signalling the payoff of significant public investments in recent years. Despite such improvement, Egypt still lags on other important competitiveness drivers. The most problematic factors for doing business in Egypt are policy instability, inflation, corruption, government bureaucracy, and the inadequately educated workforce. In comparison to other countries, Egypt ranked 134th out of 137 countries in 2017 on the Labour Market Efficiency Index, followed by macroeconomic environment (132nd) and Innovation (109th).

One of the greatest challenges Egypt faces is its rapid youth population growth, by 2023 the country is expected to have 3.5 million entrants into the labour force which, if properly supported, could present a great opportunity to build a strong private sector that has been lagging over the past several decades compared to its peer MENA region countries. Similarly, Egypt attempts to fully benefit from its skilled workforce by tapping into start-ups and the technology sector, which has made other parts of MENA, such as Dubai, competitive. Also, the floatation of the Egyptian Pound, although a necessary step, led to a further loss in the economy’s competitiveness, making trade balance issues more pronounced. Another major challenge is the structural imbalances in Egypt’s economy which leads to weak productivity and slow growth of industries thereby decreasing its competitiveness. This is exemplified by the country’s increase in public debt, both internally and externally, which accounts for 106% of GDP. To combat such structural imbalances, it is necessary to put in place and implement policies that support productivity bases.

Corruption and red tape have proven to be continuous challenges in Egypt and have thus limited its competitiveness in the region. However, legal reforms have taken place to create a business environment that is more conducive to transparency and to crack down corruption. These efforts have been made through anti-corruption campaigns which incentivise bureaucrats to make decisions and to eliminate the fear of decision making. Also, Egypt is a member of the Global Forum on Transparency and Exchange of Information and must adhere to certain standards by the third quarter (Q3) of 2019 which further reflects the country’s shift to become increasingly transparent. With regards to red tape, the government is working on establishing a new era of technical and strategic bureaucracy which is expected to reduce red tape.

Another challenge faced by Egypt is the region’s no corporate tax environment making it difficult for Egypt to be as competitive as its regional neighbours.

What are the main three competitive advantages when investing in Egypt compared to the MENA region?

One of the most important competitive advantages is the country’s strategic location. Egypt is on the crossroads between the Middle East and the Far East from one side and Europe and the East Coast of the Americas on the other side. More importantly, the Suez Canal offers the shortest link between East and West for international trade. Another competitive advantage is the availability of human resources on all employment levels, particularly its strong manual labour force making it independent from migrant workers unlike, its neighbouring Gulf States.

Among other competitive advantages, Egypt has a diversified economy compared to its energy dependant neighbouring rentier states of the Gulf. Moreover, Egypt’s population accounts for one-third of the Middle East’s population comprising more than 100 million with a large, young, and growing consumer market and a competitively priced labour force make it attractive to investors.

Egypt is the signatory to an extensive number of multilateral trade agreements, such as GAAT, GATS, PAFTA and QIZ, in addition to bilateral agreements with countries including Tunisia, Morocco, Libya, and Lebanon. These trade agreements present investors with a myriad of opportunities that position Egypt as a strategic trade hub.

Egypt’s policy is positioning it as a global and regional services, production, and re-export hub; creating jobs and economic growth by opening new markets for Egyptian products while simultaneously attracting FDI from corporations looking to harness Egypt’s unique basket of preferential trade agreements, highly competitive labour and utility costs, talented labour force, and proximity to key global markets. Together, these advantages make Egypt an ideal hub from which to export to Europe, the Arab world, the United States, and Africa.

Diversity is a key strength in the Egyptian economy where growth is driven by many sectors, both conventional and unconventional. This enhances the economy’s ability to absorb internal as well as external shocks. It also presents multiple opportunities for investors across many sectors compared to its energy dependant neighbouring GCC countries.

Egypt’s recent significant gas discoveries in the Zohr field in the Mediterranean Sea have further diversified its economy in addition to other discoveries underway such as BP’s Atoll and East Nile Delta projects, as well as Nooros field. Egypt’s hot climate coupled with high wind speeds makes it an ideal hub for renewable energy sources.  By 2022, Egypt aims to shift 20% of energy supply for electricity generation to renewable energy with wind, hydropower, and solar providing 12%, 5.8%, and 2.2%, respectively. Geothermal energy is also playing a key role with the recent agreement between the New and Renewable Energy Authority (NREA) and Ganoub El Wadi Petroleum Company (GANOPE) to utilise geothermal energy to generate power. These recent developments in Egypt’s energy sector are enhancing its position as the potential energy hub, both regionally and globally. In fact, FDI in Egypt’s petroleum sector represented 64.6% of total FDIs during the first half (H1) of fiscal year 2017/18.

Could you please explain to our readers, how can the new Investment Law and Company Law improve the investment climate and offer security for international investors?

The new Investment Law, passed in May 2017, offers foreign investors a plethora of financial, administrative, and tax incentives in addition to safeguards to facilitate the investment process and to protect foreign investors. Some of these incentives include exemption from stamp tax, fees of notarisation, and registration of the Memoranda of Incorporation for five years from a company’s registration day. Investors are also exempted from contract fees for company registration and 2% on overall customs tax on the value of all imported machinery, equipment, and devices required to set up companies. Moreover, in order to facilitate and encourage the development of various industries, foreign investors are able to import casts and moulds to manufacture products with no customs duties that are to be re-exported after being introduced and implemented. In addition, investors are given discounts on investment projects made in Sectors A and B of 50% and 30%, respectively. Sector A comprises of underdeveloped areas with a high level of poverty and unemployment rate in addition to zones, such as the Suez Canal Economic Zone and the Golden Triangle Economic Zones. Sector B entails small and medium-sized enterprises (SMEs), renewable energy projects, tourism projects, and infrastructural projects. The aim of these discounts is to encourage development, reduce income inequality, and create jobs.

Furthermore, safeguards put in place involve ensuring similar treatment of foreign investors equal to that of national investors and granting them immediate residency in Egypt throughout the duration of their project. A particularly progressive safeguard is that investment projects can not face nationalisation, providing investors comfort towards the government. Foreign investors are also allowed to own an investment project, profit and transfer related profits without restrictions.

Most importantly, the unifying notion of the law is to cut bureaucracy, promote fair competition, combat antitrust practices, and ensure transparency to ultimately make Egypt’s investment climate appealing to foreign investors. It is evident that Egypt is reaping the benefits of the new Investment Law through a promising rise in foreign direct investment by 15% in April 2018.

Which are the key sectors in which foreign investors can find unparalleled opportunities in Egypt?

Egypt has many resources that have made it appealing to foreign investors. After the discovery of Egypt’s massive Zohr natural gas field, the country has been placed on the international energy map. The Zohr field is the first mega discovery in the Mediterranean area with proven reserves of 30tn cubic feet making it a real jewel to the Egyptian economy and a very promising step for energy self-sufficiency and for further explorations to the Egyptian territorial waters in the Mediterranean. Various opportunities exist in the energy sector starting from the exploration and processing of crude oil, liquefying gas, and export of such products. There are other various discoveries whether in gas or crude oil underway such as BP’s Atoll and West Delta Nile projects, as well as Nooros field, which are enhancing Egypt’s position as the potential energy hub of the region and a key player on the world energy scene.

Real estate in Egypt, unlike the region, has been continuously expanding and we have been witnessing an unparalleled real estate appreciation in the last two decades. In 2017, the real estate sector has contributed to 10% of GDP and 15% of total investments in the economy, positioning Egypt as second in the region with regards to real estate investment returns. Despite the decreased purchasing power resulting from the devaluation of the Egyptian Pound, an influx of foreign investment in the sector was evidenced exemplified by an increase of 90% of Egyptians living in the GCC countries after floatation. Various Arab investors who are concerned about the unstable political climate in their countries, such as Libya, Yemen, Iraq, and Syria are investing. Also, the New Administrative Capital and Alamein City are vivid examples of how a new city is coming to life with all its infrastructural requirements.

Although still lower than pre-2011 levels, Egypt’s tourism sector is strongly rebounding (37.7% real growth in FY 2017/18) and tourism receipts posting 123.9% increase compared to the previous year. With continued political stability, Egypt has the potential to captivate its fair share of tourism regionally as well as globally.

Moreover, Egypt has the largest education system in the MENA region at both the school and higher education levels. Egypt has observed a significant increase of 32% in enrolment rates over the last decade. Foreign investors can benefit from the education opportunities as demand exceeds the current level of supply in the country’s education sector.

Also, the country’s recently passed universal healthcare covers all citizens with world-class quality service offerings. The bill aims to cut high medical costs of the private sector and increases efficiency. It will first be implemented in five governorates and then further spread across the country in the coming years.

The information and communications technology (ICT) industry has remained remarkably resilient post the 2011 revolution, recording 10.4% annual real growth in FY 2017/18. Beyond the basics of national internet infrastructure, Egypt offers a number of benefits for potential ICT investors, among which its proximity to the lucrative European markets.

In 2016, Egypt was shortlisted for the Outsourcing Destination of the Year globally by the European Outsourcing Association (EOA). The relatively high computational efficiency and multilingual skills of Egyptians sheds light on the 50,000 employed in offshore BPO and the 40,000 in regional outsourcing in 2015 alone in addition to the ICT sector contributing to 4.1% of GDP. This has positioned Egypt strategically to further attract BPO contracts making it a hub for outsourcing activities.

The food and beverages sector has also appeared promising through an increase in local restaurant and café services. These include chains, such as Mori Sushi, Nola’s Cupcakes, and Bocca which have decreased the need for franchises to set up in Egypt.

How are you planning to benefit from a cheaper Egyptian Pound as the main driver to attract foreign private investment?

Despite the competitiveness gains brought about by the cheaper currency following the Central Bank of Egypt’s (CBE) decision to shift to a managed-float exchange rate regime and country’s unprecedented macroeconomic and legislative reform measures implemented over the past two years, foreign direct investment in Egypt remain lacklustre, contracting by 2.7% on annual basis in FY 2017/18. A material boost to the FDI is awaiting further consolidation of the fiscal accounts and deeper reforms to the business environment.

Nevertheless, a cheaper Egyptian Pound has made Egypt very competitive in several areas. Many efforts are underway to implement import substitution by encouraging local manufacturing and thus export. Egypt has already seen improvements in export activities demonstrated by an increase of 14% in H1 2018 which has made it more competitive. Also, a cheaper currency gives foreign investors more equity for the investment compared to Egypt’s Gulf Mena-peers. Egypt, also plans to take advantage of the Egyptian pound by marketing itself as a cheap tourist destination exemplified by low ticket and hotel rates for inbound tourists allowing them to gain more for their money. In addition, a cheaper Egyptian Pound allows foreign investors to benefit from the country’s low-cost human resources on a broad spectrum of employment giving it a competitive quality.

What do you think are the main concerns of foreign investors to come and do business in Egypt (beyond safety)?

We can proudly say that safety has been restored in Egypt evidenced by the increase in the number of tourists arrivals by 30% in Q1 2018 compared to that in 2017 and 730,000 tourists in February 2018 alone, making it no longer a main concern. A major concern to foreign investors could be the instability in Egypt’s policies which are often amended. This is exemplified through Egypt’s tax system which remains a source of discomfort to investors as numerous changes have been made to its tax code as a result of the country’s past political instability. The tax code’s complexity and difficulties with tax administration mean that companies often face uncertainty about how tax collectors will interpret the law. Many investors are therefore unable to make long-term decisions as they can not plan effectively for their tax treatment. However, the increased level of stability in the Egyptian cabinet and its leaning towards reform, point to the possibility that tax administration might be clarified. Similarly, the safeguards put in place through the new Investment Law offer protection for foreign investors, for example, investment projects can not be nationalised by the government. Moreover, as part of economic reform, Egypt passed its first Bankruptcy Law in January 2018, which further protects foreign investors in the event of bankruptcy by eradicating imprisonment and simplifying post-bankruptcy procedures.

Furthermore, the country’s underground economy, which accounts for 40% of the Egyptian economy, creates an unlevelled playing field and decreases the competitiveness of investors that adhere to the law. This represents a major issue for foreign investors as they do not participate in tax evasion and have different margins to those in the informal sector. The crowding out of Egypt’s private sector, particularly in the construction industry, also limits foreign investor’s chances to compete in the sector.

The lack of a solid legal and regulatory framework in Egypt makes foreign investors apprehensive as they would encounter difficulties to gain justice and would need to resort to the costly solution of arbitration to settle legal disputes. Similarly, while the legal system supports foreign investors to enter Egypt, it presents difficulties in the event of exiting the country reflecting a Hotel California model. Therefore, it is imperative to improve and accelerate the settlement of disputes which is an issue that the new Investment Law tackles. Measures to achieve these goals would have a significant effect on investor confidence. The first step towards this goal would be to call on additional expert witnesses who are well versed in aspects of financial services. This would require judges to become specialised in the financial sector and might even require the formation of a separate court under the auspices of the Egyptian Financial Regulatory Authority (FRA). This would greatly accelerate the judicial process, reducing costs for all parties involved. This would allow foreign investors to enforce their rights in a timely manner and enhance their confidence in the country’s business environment.

Furthermore, the devaluation of the Egyptian pound has not only pose an issue to foreign investors with regards to the value of their investments decreasing by more than half, but also presents an issue regarding high borrowing costs on loans.

Moreover, the World Bank and IMF’s intervention in the economic decisions in Egypt could be a major concern to foreign investors, exemplified by the decrease in subsidies for energy. However, the elimination of energy subsidies may allow for improved resource allocation.

What are your main concerns in regard to reducing the red tape?

It is the government’s role to ensure investors that the new Investment Law will be enforced and red tape will be fought in an effective way. With the current government support to investors and determination to succeed, we believe the red tape will be reduced significantly.

The concept of a one-stop shop for establishing a company, although has helped to expedite the process of starting a firm, has not solved the underlying issue, as firms still need to obtain a majority of the permits, licenses, and approvals from multiple authorities and ministries in order to begin operations. The time spent in obtaining those can often delay projects for months, even if only one or two licenses remain outstanding. In order to reduce the red tape on the firm establishment to have all interactions with businesses take place through this single authority, rather than simply placing multiple authorities in a single location, which is the approach that the ‘one-stop shop’ uses.

Furthermore, redundancy in the deeply entrenched layers of bureaucracy is a major source of red tape, however, the concept of a one-stop shop aims to eliminate such inefficiency.

Could you share with us the story of PWC in Egypt and your main strategy in the country?

PwC was formed in 1998 by the merger of two legacy firms, Price Waterhouse and Coopers and Lybrand. The PwC later acquired Booz and Company in 2014 to make it part of its network. The PwC office in Egypt was established in 1974. Our office in Egypt includes 13 partners and 395 professional staff working in Cairo and Alexandria.

Our ambition is to be the largest and most professional services firm in Egypt that delivers a distinctive experience to our clients and stakeholders. We aim to be the firm of choice for our clients, to offer a nurturing yet challenging environment for our employees and lastly to be an active supporter of our community. Moreover, we support the government with transformational projects and support SMEs initiatives through our strong leadership qualities.

Our strategy is embodied in three core objectives that guide our behaviour and decision making, firstly to enhance the engagement internally amongst our teams, secondly to invest smarter in our clients, talent and infrastructure to ensure sustained leadership in our market, and lastly to excel in our market in order to achieve continuous growth, profitability and quality. Our people have a detailed understanding of the local market, business standards, and culture, and are passionate about working in one of the most exciting and dynamic places in the Middle East.

How can PWC encourage international investors to inject FDI in Egypt?

PwC is proudly a network of firms with more than 236,000 people operating from 158 countries globally, making us the largest professional services provider in the world. We support investors to inject FDI by developing their portfolios through building or buying. Building entails providing clients with market assessment and financial feasibility study. Buying involves offering clients financial tax due diligence of a target firm, valuation of business, internal setup of policies and procedures, audit tax compliance, post-purchase support with a 100-day plan, and exit strategies along with other services.

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https://dailynewsegypt.com/2018/11/29/egypt-implements-unprecedented-reforms-yet-policy-instability-inflation-corruption-government-bureaucracy-remain-challenging-country-senior-partner-at-pwc-egypt/
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