What is required to promote investment?

Ziad Bahaa-Eldin , Tuesday 29 Nov 2022

Ziad Bahaa-Eldin resumes his discussion of investment

The CBE will no longer finance  subsidised real estate loans
The CBE will no longer finance subsidised real estate loans

 

I remain on the subject of investment.

Why? Because it is the most important issue at the present moment, and the only way to overcome our economic crisis without more dependence on foreign aid, international loans, or grants from friendly countries, which may or may not materialise.

I don’t think the importance of investment is debatable. In fact, I think all officials are now convinced of it and expressing their interest not only in increasing it but also improving its climate. Many of the government’s recent decisions target this goal, such as the golden licence system, the re-formation of the Supreme Council for Investment, the submission of a draft law exempting some activities from a percentage of the income tax, or the reduction of the minimum capital for companies.

Nevertheless, I remain unconvinced that such decisions and procedures will lead to the desired boom in investment, because they do not address the core of what investors complain about and what worries them. The result is that we exert efforts, make adjustments, and take decisions that are welcomed by the local media, but do not resonate with investors.

In my opinion, this gap between what the government offers and what investors expect is the root of our problem, because the state still speaks the language of incentives and procedures, while investors are looking for stability, clarity, and fairness in the system that surrounds them. And when this certainty and reassurance is at hand, the rest is nothing more than detail. No matter how much the state offers tax incentives (and I am personally against them), customs cuts, and procedural facilitation, they will not have a real impact if investors continue to believe that they are at the mercy of sudden changes in rules, unexpected increases in fees, or the absence of legal rules applicable to all.

Let us approach the issue from a different perspective. Let us not think about procedures, regulations and incentives until we agree on basic principles that should govern our investment policies.

On top of these principles is the need for the state to be convinced that taxes on the profits of investment projects are better and more valuable than any amounts it collects from imposing fees on such projects.

Why? Because the fee is a cost to the project and a burden that impedes its success, while the tax on profit is due only after the project has succeeded, grown, and achieved a surplus. And if investment projects were left to grow and succeed without the state seeking to seize a portion therefrom while they are still grappling with risks and challenges, the state’s return would be greater, not only financially, but also in employment, production, and export.

Another principle worth noting is related to investment regulation. In every country — including Egypt — there are regulatory bodies whose purpose is to prevent manipulation, fraud or defrauding people. These agencies are of two types: a type with general jurisdiction, meaning that its mandate includes all economic activities such as agencies for anti-corruption, competition protection, consumer protection, anti-money laundering, and combating tax evasion.

As for the second type, its mandate is linked to a specific activity, such as the central bank for banks, the financial regulatory authority for listed companies and non-bank financing, supply inspectors for groceries and restaurants, health inspectors for clinics and hospitals, and so on. This is normal, and there is no society that lives in safety without regulatory agencies, laws, and penalties. But it is not normal for all state agencies to have a regulatory mission; governorates, districts, ministries, and even agencies concerned with promoting and stimulating various investment fields. Each of them considers itself the guardian of public money and the interests of the people.

This has a very impeding effect, and it is necessary that the official regulatory authorities should be solely competent in their supervisory role stipulated by the law, while the rest of the public agencies not concerned with regulation leave investors to carry out their activities freely and safely.

Finally, let us remember that investment cannot grow in the absence of clear, transparent, stable and binding legal rules for all. If the fate of the investor is linked to conflicting or changing interpretations, or if public employees have absolute discretion, or if rights and contracts, whether between private-sector parties or between them and the state, are unstable, then there will be no certainty, assurance, or investment. Unfortunately, while the local media was busy reporting state news about investment promotion, the story that spread internationally was the issuing of a report known as the World Justice Report Rule of Law Index which ranked Egypt one 135th out of 140 countries in the field of rule of law. So what impact is this negative report likely to have on the reputation of investment in Egypt?

Let us, then, not be too preoccupied with procedures, controls, and details that do not affect the local and global investment community’s vision of Egypt. Rather, we should agree first on the basics and general directions, and then consider the regulations, committees, and facilitation procedures.


*A version of this article appears in print in the 1 December, 2022 edition of Al-Ahram Weekly.

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