Opportunities and Challenges in Egypt’s New Industrial Zones
In the Roundtable organised by the British Egyptian Business Association (BEBA), under the name “Opportunities in the New Industrial Zones”, our Partner Dr. Fatma Salah discussed the regulatory challenges facing the manufacturing sector in Egypt. Dr. Fatma gave her thoughts on the draft law for Facilitating Industrial Licensing Procedures currently debated at House of Representatives, as well as the prospective incentives for industrial projects under the draft Investment Law.
The guest speakers included Eng. Ahmed Abdelrazek, Chairman of Industrial Development Authority IDA, Dr. Ahmed Fikry, Board Member of the Federation of Egyptian Industry, and Eng. Yasser El Maghraby, Advisor to Minister of Industry.
The manufacturing sector is facing increasing regulation and compliance measures. While some regulations are essential, other can be a massive burden to manufacturing companies – particularly for SMEs. Egypt’s legislative and regulatory structure has long been recognized as one of the major challenges to achieving economic development in general and industrial growth in specific. The Egyptian government in the recently announced Egypt 2030 Report designed a roadmap with measurable objectives to make the legislative structure less complicated, more transparent, and more effective.
For the manufacturing sector, the government during the 10 years has taken some major steps towards streamlining the industrial licensing process and reforming the industrial legislative structure in general. Some of these legislation has provided a good starting point, and other have their critics.
In November 2016, a law was issued to amend Law no. 7/1991 Regulating State Owned Land. The Law solved the conflict among the various entities on state-owned land, and granted the Industrial Development Authority (IDA) the absolute authority over industrial land. The IDA is now the exclusive authority which can decide on the planning, developing, installing utilities and infrastructure and maintenance, or putting the land up for bids. The law is broad enough to allow IDA to determine the pricing mechanism for industrial land in accordance with its development strategy.
Addressing the Utilities and Infrastructure Bottlenecks
One of problem facing the government in boosting the investment in the manufacturing sector is attaching utilities and infrastructure to industrial land, giving the tight public budget.
The government needs to reconsider relying on the private sector or the ‘industrial developer’ model in developing and attaching the infrastructure and utilities work to the industrial zones, especially after their success in doing this in the Sixth of October City and Tenth of Ramadan. This option alleviates the pressure on the public budget, especially for the mega projects the government is currently planning to implement.
Using the ‘industrial developers’ model was always criticized for resulting in increasing land prices and the high maintenance and services fees. Industrial developers justify such increased prices by the fact that the government share with them part of the profits realized from selling the land, the high quality of the services and maintenance they provide to investors, and the general price increases in the electricity and water utilities.
Using the Usufruct Model
There was also suggestion to allocate industrial land to investors through ‘usufruct’ rather than transfer of title (or ownership). Usufruct means giving the investor the right to use the land for a period of time while retaining the title of the land with the government. This suggestion was opposed by the industrial developers on the basis that:
- The right of ‘usufruct’ is temporary by its nature, according to the investment law, it has a maximum of 30 years.
- Usufruct may not be pledged, and accordingly it causes difficulties in security loans from banks since land is one of the major assets which banks take as a security for giving loans.
- In addition, usufruct terminates automatically on certain circumstances like the passing away of the beneficial, and it may not be inherited, which would discourage individual investors, especially for SMEs, from expanding their projects or injecting more money on the risk that the land would be taken from them at the end.
The Prime Minister has recently formed work force composed of representative of several ministries, including the Trade and Industry, Investment, Housing and the head of the Investment Association Federation to put new regulation to resume the use of the ‘industrial developers’ model in developing industrial clusters and avoid the previous pitfalls. The work force discussed a number of regulations including:
- Setting a cap profit of 30%.
- Another suggestion is to set a fixed annual increase rate that may not exceeded.
- Using a public lottery system, instead of a bidding process, to allocate land for qualified investors.
- Executing a tripartite agreement among the developer, the investor and the IDA in order for the IDA to supervise and monitor land pricing and prevent land trading.
- Requiring the investor to finalize construction and operation of the project within 3 years otherwise land will be withdrawn.
Free and Discounted Allocation of Industrial Land
The government began to offer free industrial land to serious qualified investors. This option was added by the 2015 amendments to the Investment Law no. 8 of 1997 for a period of 5 years to end on April 2020. The investor in this case will be required to provide a monetary security to be refunded after 5 years from the start of the operation/production of the project.
In implementation of this new amendment, President Abdelfattah Al Sisi issued a decision in 2016, allowing the free allocation of certain industrial areas in Upper Egypt for financially and technically qualified investors.
- The determined land plots are distributed among eight Governorates in Upper Egypt: Aswan, Luxor, New Valley, Asyut, Sohag, Qena, Bani Sweif and Al-Minya. They shall be allocated only for industrial development purposes.
- Investor must be working in one of the industrial sectors listed under the Investment Law no. 8 of 1997.
- Priority is given to specific sectors, such as new and renewable energy projects, labor intensive projects, medium and small enterprises, projects using new technology, promoting the use of local component, or projects intended for exportation.
To guarantee the seriousness of the investor, the law provided that:
- Start in the construction of the project within 1 year from having the land, otherwise, the land allocation will be cancelled.
- Finalizing the construction process sand the production within 3 years.
- Not to sell the land unless after 5 years from the actual production and after approval of the IDA.
Streaming and Facilitating Industrial Licensing Procedures
One of the chronical challenges facing the industrial sector in Egypt is the licensing process. It is as early as 2008 when a special central unit was established (affiliated to ERRAD initiative) to be responsible for identifying all business-related regulations and simplifying licensing procedures. Again, and in 2015, the Prime Minister Sherif Ismail, established a special committee to prepare a detailed plan for reforming and simplifying the industrial licensing process (2807/2015). Such plan aimed at:
- Promoting the decentralization of the licensing process.
- Separating between the industrial licensing and the industrial regulatory authorities.
- Minimize the licenses requirement to only health, security, safety, environment and land allocation.
Industrial Clusters for SMEs
In developing countries the private sector mainly consists of micro, small and medium enterprises that generate a large share of employment and income opportunities. Often, however, their development potential remains untapped, as projects operate in isolation, are locked into uncompetitive production patterns and unable to approach dynamic business partners that could bring in new expertise and know how. Developing industrial zones on the cluster model brings together projects from the same sector (or complementary sectors) to benefit from enhanced supply chains, economies of scale and shared infrastructure.
Egypt has a special SME law since 2004 (Law n. 141/2004). The law provides that 10% of the state-owned industrial land must be allocated for SMEs. Authorities owning these lands are mandated to provide the Social Fund for Development (SFD) with maps of available land and template contracts. Special units at the SFD and GAFI (the General Authority for Free Zones and Investment) will work as one-stop-shop to facilitate the registration and licensing procedures for SMS. Public officers at these unites have the authority to give approvals on the establishment and operation of the projects as well as execution of contracts directly with the investors.
The ‘Movable Collateral Law’ no. 115/2015 was issued to introduce an overarching regulation for taking non-possessory security over diversified movable assets. The law upon implementation will facilitate SMEs access to credit through a well-defined legal regime that is in line with international standards. Also the Central bank announced that credit to SMEs must account for at least 20% of any commercial bank’s loan book by 2020. Under these CBE lending guidelines, SMEs can access loans at highly attractive rates of less than 5%.
Draft New Law for Simplification of Industrial Licensing Procedures
Anew law for Simplification of Industrial Licensing Procedures has been approved by the Cabinet and it is underway for approval by the House of Representative soon. Generally speaking, the law categorizes the industrial projects into low risk and high risk.
Low risk projects can be established by a simple notification to the IDA subject to subsequent inspection and a grace period of 1 year for compliance. SMEs are given longer grace periods to comply which reaches 2 years. These projects are exempted from submitting an environmental assessment study before establishing the project.
High risk projects require prior approvals from the IDA. The draft law provides that the IDA should issue its approval within only (14 days) during which it should inform the applicant that is application is complete and no missing documents. The IDA will take another 30 days to approve or reject the issuance license. The law provides that the non-reply of the IDA during this period shall be considered as rejection. This provision comes in contradiction with the norm which usually considers the non-reply of the government as an approval in order to force the governmental entity to reply and give reasons to its rejection. For high risk projects, the law allow the issuance of a ‘temporary license’ of 1 year to be renewed for 3 years in case of the requirements which are not met are unsubstantial.
The law provides for the establishment of a special committee for ‘Licensing Requirement’. The committee will be responsible for identifying all the requirements for obtaining the industrial license, including the environment, the safety and civil defense requirements. It will further categorize these requirements according to their importance and impact from the safety and environmental perspective. All governmental entities are required by the law to inform the committee and cooperate with it in identifying its requirements for the establishment and operation of an industrial entity.
Special Incentives for Industry under the Draft Investment Law
The draft new Investment Law provides for a special incentive for investors in industrial categories, investment in remote areas. The special incentive consists of a tax rebate system upon which up to 30% to 40% of the project investment cost will be deducted from the taxable profits. This tax rebate system applies to specific projects and subject to a number of conditions. First, the project must be implemented through a newly established company rather than an already existing. Second, the deducted profit will be capped of 85% of the company’s paid up capital. These conditions are criticized and rejected by several stakeholders.
The government has already made several legislative improvements and countless changes over the past 10 years, what the country needs now is dramatic administrative reform and a deep-rooted cultural change to defeat the outdated bureaucracy which is the real problem obstructing Egypt’s development. The government needs to work seriously on controlling the bureaucracy and improving the capabilities of the public servants is becoming a must. Decentralization of the decision making process, and enhance administrative accountability is another challenge.
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