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Tuesday, 25 April 2017

Egypt’s new Investment law misses the mark

Egypt new investment law aims to boost investment. But without tackling the root causes that impeded it, the law will not meet its objectives

Hdeel Abdelhady , Wednesday 4 Jun 2014
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Views: 2557
In the next few days, Egypt will have both a new president and the same old problems. Among them, a sub-optimal level of investment and associated governance deficiencies that have bred and been nurtured by the country’s poor economic performance.
 
Both problems were highlighted by the Egyptian government’s recent approval of a law barring third parties from challenging investor-state contracts in Egyptian courts.
 
Issued amidst an economic crisis, an investment slump, a slew of post-January 25 investor claims against Egypt, and notable court-ordered reversals of Mubarak era investor-state contracts, the new law aims to bolster investor confidence, particularly among Arabian Gulf-based investors whose home governments have since July 2013 pumped billions of dollars into Egypt. 
 
Hardly a cure for Egypt’s investment woes, the measure is symptomatic of official Egypt’s chronic inability to conceive and implement economic and investment policies proactively, rather than from a position of weakness and often as a condition of receiving outside financial or other aid. 
 
The ban on third party legal challenges (Law 32 of 2014), which reportedly applies prospectively and retroactively to previously initiated third party actions, has drawn praise and criticism. Its proponents contend that it will provide investment security needed to lure investors. The law’s detractors argue that it will breed corruption and infringe on the judiciary’s oversight power (its constitutionality is now being tested).
 
Both sides raise valid points. Egypt needs investment. However, the ban on third party legal challenges will not insulate investors from public scrutiny (and potentially official intervention under political pressure). Nor will the law—a meager legal response to what is fundamentally a mixed political, economic, and governance problem—appreciably bolster the quantity or quality of investment in Egypt.
 
No Panacea for Investors
 
In post-uprising Egypt, a ban on third party legal challenges will not, by itself, eliminate or reduce the impact of public scrutiny, particularly where controversial investments involve Egypt’s champion assets (e.g., agricultural land, notable state enterprises) and industries (e.g., textiles, cement, natural gas), or the displacement of public sector employees following privatization.
 
In the Mubarak era, the government could afford to ignore public discontent or offer superficial concessions, even when public backlash was well-publicized. Today, the political calculus is vastly different. The costs to the government (even one headed by a popular president) of official obstinacy may very well exceed the burden of losing an investment opportunity or litigating an investor-state dispute.
 
Investors should understand that few, if any, politicians or governments will sacrifice political survival to uphold a contract. The removal of one category of legal risk—third party challenges—leaves investors exposed to the political and other risks that have fueled both third party legal challenges and investor-initiated claims against the Egyptian government.
 
Strategic Blunder?
 
In addition to being of dubious usefulness, the ban on third party legal challenges to investments may prove to be affirmatively disadvantageous for investors and the government. The very existence of the measure, particularly considering its timing and context, casts a shadow of suspicion on the government’s motives and invites interested third parties to more vigilantly monitor investor-state activity.
 
Moreover, by removing a legal avenue for challenging controversial investments, the government may have closed what could prove to be an important pressure relief valve. Lacking access to legal processes, third party opponents of investments who might have resorted to the courts may take their cases directly to the public (via protests, traditional or social media, etc.) to garner support and force the government’s hand. Such scenarios might not only result in adverse outcomes, but might also disadvantage the government and investors procedurally, by depriving them of notice and opportunities to respond or negotiate with some degree of discreetness. 
 
Diversion from the Government’s Role
 
The ban on third party legal challenges assumes—or attempts to create the assumption—that Egypt’s investment woes are attributable wholly or significantly to meddlesome third parties whose legal challenges have muddied an otherwise pristine investment environment. The assumption is factually flawed and excuses the government from its responsibility to address its culpability for Egypt’s investment troubles.
 
While the number of both investor and third party initiated cases has spiked since 2011, Egypt’s pre-2011 record of investor-initiated claims in domestic and international fora makes clear that third party legal challenges have not been the sole or primary agitators of sub-optimal investment levels and investor-state disputes. In fact, investors’ negative perceptions of government conduct, such as corruption, have diminished Egypt’s attractiveness to investors, notwithstanding its commercially compelling demographics and strategic location.   
 
For example, in response to a May 2011 Economist Intelligence Unit survey of executives commissioned by HSBC, 31 percent of executives cited corruption as “the main operating obstacle” to doing business in Egypt. To put this in perspective, more respondents were concerned with corruption in Egypt than were with corruption in five other Arab countries tested. For instance, only 16 percent of respondents viewed corruption as a main operating obstacle in Saudi Arabia and the UAE. Even conflict-ridden, post-war Iraq fared better than Egypt, with 27 percent of executives citing corruption as the main obstacle to operating in that country.
 
The Rule of Law
 
The ban on third party claims sends a troubling message about Egypt’s judiciary and legal processes. By statutorily banning third parties from challenging investor-state contracts in the courts, the government implies that Egypt’s courts, laws, and rules of evidence and procedure are incapable of weeding out legal actions that lack merit. Alternatively, the measure suggests that, post-January 25, court-ordered renationalizations of state assets or reversals of contracts made in the Mubarak era were politically motivated, rather than legally founded. True or not, these messages undermine, rather than bolster, the case for investment in Egypt.
 
Moreover, in the absence of verifiable data about third party legal challenges, neither investors nor the public can gauge the necessity and potential utility of the new law. To assess the law's value (and hold the government accountable based on facts), interested parties should know, among other things, the number of third party claims filed, the number of filed claims that reached the merits stages of applicable legal processes, and the number of claims that resulted in contract reversals or other court-ordered action. 
 
Because the Egyptian government has presented the elimination of third party legal challenges as a measure that will boost investment, it should publish data that supports its action, to inform investors of its practicality and the public of its legitimacy.
 
New Government, New Approach?
 
By one indication, the markets have favorably received Egypt’s presidential election and its implications for stability—the cost of insuring Egypt’s sovereign debt for five years reportedly fell on the second day of balloting. The market sentiment, while positive for Egypt, is but a snapshot. In real economy terms, Egypt’s true bankability will be measured by a process, rather than by an event.
 
Unless Egypt’s next government takes concrete steps to enhance Egypt’s political, economic, and legal environment (namely by reliably enforcing existing laws), some investments (particularly those lacking transparency and viewed as corruptly procured) will continue to be controversial, with consequences.
 
To truly and effectively serve the public and investors’ long-term interests, Egypt’s next government will address the root causes of Egypt’s investment problems, rather than their offshoots.        
 
The writer is a Washington DC-based lawyer whose practice includes international investment transactions and disputes with a focus on emerging and developing markets. 
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6



Pharaoh
10-06-2014 03:57am
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enumerated laws
I just wrote that title to sound nerdy. Marry me! Don't sell your roots out, marry me!
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Giuseppe
09-06-2014 06:55am
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objective
Foreign investment is not black and white and this article reflects that truth by considering different angles. A cohesive approach from the government will be better for everyone, investors should not celebrate yet.
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ayman
08-06-2014 11:28am
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Disagree
I disagree in several key points. First, before 2011 it was much harder to just criticize a deal publicly let alone sue any company affiliated with the regime. After 2011, it became a free for all, thus the number of cases that were raised against current deals increased dramatically. Second, the courts are indeed swamped from the aforementioned onslaught of cases. Even if they are efficient at weeding out the frivolous cases, it just slows down the court system and consequently panics investors into thinking that even if they didn't do anything wrong they can still be caught in court proceedings for years. Third, I believe that drumming up public support and using it to pressure the government to amend or cancel a deal is a much better system than direct third party law suits for the time being. Hopefully, the law can be amended to allow third party lawsuits but only when strongly supported by evidence and fines imposed on frivolous cases.
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Gamal
13-06-2014 10:32am
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Why?
Why would public pressure be better than a process for investors? Even a bad process is better than chaos. I disagree with your history. If you saw Egyptian tv or news papers you would have heard loud accusations about corruption in investment like Omar Effendi, Madinaty... The difference is that there was no justice. The rule of law point is important.
Sam Enslow
09-06-2014 09:46am
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Question of standing
There needs to be a set of rules defining standing. That is to say those bringing a case must show how they are directly affected by the contract. This same problem affects "insulting" cases. The one, and only one, who should have standing in such a matter is the one "insulted". The question of standing will eliminate many cases brought for political or other reasons.
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Nimir
05-06-2014 02:26am
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Correct
Having worked with GCC and European investors in Egypt for decades, I think this article is on point. No investor wants all sorts of lawsuits allowed but laws that give false comfort will not help in the long run.
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Haley
05-06-2014 01:19am
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Interesting
This is an objective and interesting perspective that looks at different angles. I agree that limiting lawsuits won't protect investors and the Egyptian government should examine the root causes of the problem as the writer suggests at the end. Thought provoking. Thanks.
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Nihal El-Sayed
04-06-2014 05:18pm
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Be more positively realistic!
The article starts out by saying that “in the next few days Egypt will have both a new president and the same old problems.” Is that a generalization if I have ever heard one? There is a reason that Al-Sisi won, because 96 percent of the population in Egypt believed that he would change the way how we, and the rest of the world see Egypt. So it is not fair to be so negatively forward thinking, the guy hasn’t even been inaugurated yet!
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Salwa
06-06-2014 04:35am
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realistic
Hi Nihal. I dont see why you think it is negative generalisation. We do have a new president and the same problems. I hope Sisi will help the economy but it is a fact that he will face old problems. Why are you offended?

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