When oil majors responded to the ending of tax breaks in May by threatening to cut investment in Egypt, it was a rare setback for an economy that has been attracting ever more international capital in recent years.
The companies are complaining about the introduction of tax and higher prices for gas feedstock in the country’s free zones. But even if they go through with their threat, it is unlikely to significantly alter the wider trend. Last year, Egypt attracted $11.1bn worth of foreign direct investment (FDI), and this year Cairo estimates it will rise to $15bn.
The task of attracting investors to the country falls largely to Assem Ragab, chairman of the General Authority for Investment & Free Zones (Gafi). He has led the organisation since September 2007 when he took over from Zeyad Bahaa el-Din.
The free zones have certainly been a success, but it is clear when Ragab lays out his vision for the future of investment in Egypt that his ambitions go far beyond his organisation’s existing network of sites. Gafi manages 10 general free zones and close to 300 smaller private zones across the country, based around individual companies.
The authority assists investors with registering their companies, locating sites for their businesses, identifying local partners, agreeing contracts and acquiring licences.
The free zones have proved popular and most of the space in them has now been filled. “Most of the existing general free zones are more or less occupied,” says Ragab, speaking on the sidelines of the recent World Economic Forum on the Middle East in Sharm el-Sheikh.
“More than 90 per cent is occupied. The remaining 10 per cent are scattered plots. We are going to continue with them, but we will focus on industries and sectors that add value to our economy, and that develop downstream industries such as textiles, auto components and petrochemicals.”
Legislation introduced by the government in May has altered the status of some businesses operating in a free zone. Companies in the petrochemicals, steel, oil refining and gas processing industries will now be subject to a 20 per cent tax on profits, and will have to pay almost twice as much as before for their gas supplies. It is this that has led some companies to threaten to cut their investment in the country.
However, Ragab defends the move, estimating the change will affect only about 40 out of more than 1,140 free zone companies. “It is a corrective action to apply this regime to energy-intensive companies that have been enjoying a very generous tax cut coupled with a severely subsidised energy feedstock,” he says.
“There has been a heavy subsidy and there is a budget deficit, and countries need to take corrective action at one point in time to cater to this without rocking the boat too much.”
The same companies will also be affected by a rise in the price they pay for gas from $1.70 to $3 a million BTUs. “Let me give you a fact here,” says Ragab. “When we started to liberalise our energy pricing, we discovered that 80 per cent of the energy consumed in Egypt was by four sectors. The sectors covered by the [new] law were the core of these.
“It is not fair if we want to develop our industrial initiatives to dedicate 80 per cent of our energy to four industries and leave off the rest of the industrial development plan, especially when these industries are for export, so it is as if we are exporting our subsidised energy.”
The new charges for businesses in the free zones are a clear sign of how Gafi is changing its approach and prioritising other initiatives. The authority is focusing on developing a series of new investment zones across the country, following parliament’s approval in May 2007 of a law that allows the private sector to develop them.
“Investment zones are the evolution of free zones in Egypt,” says Ragab. “They are clusters primarily targeted to be managed by the private sector. By managed I mean owned, managed, operated and marketed.”
Under the new regime, a private developer will benefit from some of the same advantages associated with free zones, including an environment with far less bureaucracy than the wider economy, although the tax breaks will be missing. A single regulator will be established for each investment zone. With members of the regulator’s board being drawn from the developer, Gafi and other government bodies, it will be able to license industries and projects within the zone. However, it will be up to the private developer to put the necessary infrastructure in place.
“It is the same as the free zones,” says Ragab. “The only difference is it does not have the fiscal incentives. But at the same time, it does not have the same restrictions – for instance, that you have to export 70 per cent of your production. It is a very liberal environment where the private sector is the developer, not the government.”
As with the existing free zones, the new system is not only applicable to government-owned land. If a developer has property he wishes to convert to an investment zone, the government will help him do so.
The scheme is focused on the development of downstream industries, such as food processing, textiles, petrochemicals and automotive components, as well as mixed-used or tourism developments. Gafi is finalising an investment map of various regions across the country that it is promoting to interested parties, with different zones designed to fit in with the strengths of the local economy.
“For food processing, for example, we would like to develop these clusters close to where agricultural production is,” says Ragab. “I would like to develop it in Upper Egypt where at least 40 per cent of our agricultural production is found. We would like to develop mining-related industries in areas that are generous in mineral resources such as Aswan, Asyut and Wadi el-Gedid.
“What we are doing in parallel is promoting these zones internationally, so we are basically reaching out and actively knocking on the doors of local or international developers.”
It is too soon to say how much investment Gafi hopes the new zones regime will bring in. “I cannot put it into numbers yet because we are still articulating our long-term strategy, but what I can say is that I believe it will be the future of Egypt because it is a planned way of developing the real resources of the country,” he says.
The strategy will target less developed parts of the country, particularly the south. The aim is to draw developers to areas that have until now lagged behind in terms of foreign investment. It is hoped that new investment will create employment opportunities for locals as well as harnessing previously untapped talents and natural resources. At the same time, it is a way for the government to get the private sector to help in developing the country’s infrastructure.
In the past, Upper Egypt has not appealed to many investors. “The environment was not suitable, meaning the infrastructure was not complete and the investment services were remote,” acknowledges Ragab. “We are now adamant about trying to develop the local infrastructure, such as roads and ports.”
Natural gas will reach Aswan in 2009 and Egypt is also embarking on an extensive programme to build river ports on the Nile, allowing it to capitalise on the waterway’s potential for inland transport.
But it is not just about providing infrastructure. Ragab is aware that if Gafi is to succeed in attracting business to Upper Egypt, it will have to change widespread perceptions about the region. “There is a stereotype that Upper Egypt is a very conservative area, there are limited resources and no talent and no human resources, which is a myth,” he says.
In May, Gafi hosted an event that brought together nine governors from areas south of Cairo with more than 100 potential investors from 10 countries. “They showcased their opportunities and we basically created the matchmaking between supply and demand,” says Ragab.
Access to finance will also be critical to the process of drawing investment to the south of the country. “We are trying to communicate with the business communities in the south, again through matchmaking between debt and equity suppliers and the demand side, through our satellite offices,” says Ragab.
“Our mandate is to create awareness of the financial products that are available to small and medium-sized enterprises, including non-conventional debt such as financial leasing and mortgages.”
To back up this effort, Gafi has established the Upper Egypt Company for Investment. Its mandate is to develop ideas and projects in the area. It can take a maximum stake of 20 per cent in a project and will invite private investors to join in on the rest.
Just eight months into the job, Ragab appears confident that the measures Gafi is now putting in place will ensure that international investment in Egypt will continue to grow in the future. He reiterates one overarching idea as the conversation nears its end.
“I am betting this will be the future of Egypt,” he says. “I believe in the near future a big portion of our FDI will come through investment zones.”
1988: Receives degree in chemical engineering from Alexandria University
1997: Receives business administration degree from American University in Cairo
2003: Co-founds Fortune Consulting, an Egyptian investment banking advisory firm
June 2007: Assistant to chairman of Gafi
September 2007: Chairman of Gafi
Also currently a board member of the National Investment Bank and the Industrial Development Authority, and a member of the board of trustees of the Egyptian Institute of Directors.