Foreign investment and economic development

Gamal Wagdy
Tuesday 20 Feb 2024

As Egypt looks for ways to increase foreign investment in the country, what makes a project a worthy investment, asks Gamal Wagdy

 

The potential sale or long-term lease of Ras Al-Hekma to UAE investors for $22 billion has sparked debate in Egypt. Although there is still little information about the deal, the announcement has deepened the divide between supporters and opponents of generating foreign currency through asset sales.

Supporters have rushed to sell the idea as a way of solving the current foreign-exchange shortage. Some have gone even further, anticipating that it could represent a turning point that puts the economy on the path of recovery. On the other hand, opponents of the deal have been attacking it, driven by value judgments. What is needed is not only the disclosure of complete information to evaluate the deal, but also, and perhaps more importantly, an understanding of how the associated project can be evaluated.

A close examination of the project reveals that many of its expectations are wishful thinking rather than the result of scientific analysis. The reason is that although the prime goal of the proposed project is to inject much-needed foreign currency into the Egyptian economy, the eye-catching amount of the deal represents the total value of the project, not the cash amount that will be received.

The latter will be around $7 billion, and it is not certain that this amount will be paid in one lump sum. In such deals, it is not unusual to see the payment of the land value span several years, which may equal the entire lifetime of the project. Moreover, the expected receipts from the project must be related to its foreign-currency expenses, as the project itself is likely to result in foreign-exchange outflows that could exceed the initial inflow of foreign currency.

By their very nature, luxury tourism and entertainment ventures, like the one being discussed, encompass high-end travel and cater to affluent individuals seeking exclusive and lavish experiences. Luxury tourists want a tradition of high standards and exceptional quality. This means that associated projects will go for exceptional design in order to be up to the expectations of the targeted customers.

But this in turn translates into imports that fulfil those requirements. Importing goods, raw materials, and equipment represents foreign-exchange outflows. Furthermore, foreign investors’ tendency to repatriate profits to their home countries also creates a continuous foreign-exchange outflow. The exact benefits and drawbacks can only be identified by analysing the detailed projected cash flow of the project concerned.

Service industries, especially those related to travel and tourism, are influenced by consumer behaviour and discretionary spending. Economic downturns or global crises usually lead to a significant impact on their income stream. Such services are vulnerable to external factors such as geopolitical events, natural disasters, or health crises, which can significantly impact demand and earnings. The stability of their foreign-currency earnings is influenced by market perceptions of the destination’s safety, attractiveness, and overall reputation. Negative events or changes in perception can lead to abrupt declines in earnings.

While the generation of foreign currency is essential, the goal of investment from a societal perspective extends beyond this. Broader goals include economic development, employment generation, poverty alleviation, and the development of a knowledge-based economy. The ultimate goal is to create a society that is economically prosperous, socially equitable, environmentally sustainable, and culturally rich. This entails looking at the Ras Al-Hekma and other projects from a wider perspective, always keeping in mind that the country needs to achieve comprehensive and sustainable development, not just economic growth.

Economic growth is a narrow concept that focuses on the expansion of the economy’s output measured in terms of GDP. Economic development, on the other hand, is a more comprehensive concept that considers improvements in the overall well-being and standard of living of the population. A country can experience economic growth without necessarily achieving significant economic development if the benefits of the former are not distributed widely or if social and infrastructure aspects are neglected.

The government and private sector often have different aims and objectives for investment due to their distinct roles and responsibilities. The government’s aims from investment include economic growth and development, employment generation, social welfare, and stability and security. On the other hand, private-sector investment decisions are guided by risk and return considerations. The private sector’s aims from investment are focused on profit maximisation, expanding market share, and enhancing competitiveness while effectively managing risks.

It is therefore natural for governments to allocate funds to infrastructure projects, education, healthcare, and research and development in order to enhance productivity and overall economic performance. It is also natural for the private sector to be guided by profits. In some cases, there may be collaboration between the government and the private sector in order to achieve mutual objectives, such as public-private partnerships in infrastructure development. But it is illogical to expect, let alone request, the private sector to invest in these areas.

The private sector sometimes participates in economic growth and the achievement of government goals. However, this is not always the case, as the investment objectives of the government and the private sector can sometimes collide due to differing priorities, motivations, and approaches. Conflicts can arise when private-sector projects with high-profit potential do not align with government goals, which presumably reflect those of society.

When evaluating potential foreign investment, it is crucial to do so based on a country’s objectives for investment. The fast-growing Asian economies provide a good example of investment types that strongly participated in their growth and transformed them into highly developed countries.

The major sectors receiving investment in these economies included technology and innovation, manufacturing and export-oriented industries, renewable energy and infrastructure, pharmaceuticals, and telecommunications. Asian economies, particularly China, South Korea, and India, have seen substantial investment in the technology sector. This includes areas such as artificial intelligence (AI), e-commerce, fintech, and semiconductor manufacturing.

With a focus on sustainable development, there has also been significant investment in renewable energy projects, such as solar and wind energy. The telecommunications sector, including the expansion of 5G networks, has been a focal point for investment, and China and South Korea have been leaders in 5G technology deployment.

It is also crucial to consider the possibility and the degree of technology transfer or knowledge-sharing involved in investment decisions. Their absence could mean that a country receiving investment will miss opportunities for skills development and the growth of domestic industries, hindering its long-term economic development. Capacity building is considered to be an investment objective, particularly in the context of economic development.

Capacity building in services such as tourism and entertainment and capacity building in the production of goods have key differences, however, due to the nature of the industries involved. Capacity building in goods production emphasises technical skills related to manufacturing processes, quality control, and supply chain management. Capacity building in services emphasises soft skills such as customer service, networking, and emotional intelligence.

Despite the latter’s importance in the tourism and entertainment fields, it cannot be relied upon for economic development.

We need to evaluate the proposed Ras Al-Hekma project’s genuine potential to generate foreign currency, its real contribution to economic development and growth, and its alignment with the country’s development objectives. We also need to go beyond this immediate project to identify and address the reasons why the Egyptian economy does not attract investment in crucial sectors like production and export-oriented industries, pharmaceuticals, telecommunications, and technology, which are vital for sustained development and for securing reliable sources of foreign currency.

These are the sectors that can elevate the Egyptian economy from being a less-developed economy to becoming a developed and rapidly advancing one.

 

The writer is a banking consultant.


* A version of this article appears in print in the 22 February, 2024 edition of Al-Ahram Weekly

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