Reforming the public sector

Many of these changes and reforms have been possible, through the use of public private partnerships.

Shalakany Law Office has been working closely with the three main parties involved; the government, the service providers and the lenders, on a variety of different public partnership projects across different sectors, giving them a unique insight into inner workings of the programmes themselves.

World Finance spoke to a representative from The Office about the relationship between the proposed reforms and public private partnerships, how the reforms are affecting the country as a whole and how the government are creating this business friendly environment.

Striking the right balance
Egypt’s high levels of inner city congestion and deterioration of intercity transport routes has led to proposed reforms to its public transport system, with the government utilising public private partnerships to help fund the reforms.

Egypt adopted a new long term policy of pursuing partnership with the private sector back in 2006, to provide new sources of investment capital for required infrastructure projects, to reduce the governments sovereign borrowing and associated risks, to drive the creation of local long term funding markets and to develop new private sector opportunities that would ultimately lead to job creation and improvement of the quality of public services in Egypt.

Our representative from Shalakany Law Office expected the changes, stating: “Egypt has experienced steady population growth and urbanisation since the 1950s. The overall population has almost tripled since then, with major cities such as Cairo almost quadrupling, but comparatively very little investment has been put into city planning and transport infrastructure to go with this population growth.

“Keeping this in mind, it doesn’t surprise me that these sectors, including the transport sector, are high on the government’s agenda in terms of improving all around infrastructure throughout the country.”

Shalakany Law Office is hopeful that the country as a whole can benefit from this type of private investment, as long as the right balance is struck: “There is no doubt that a great deal of investment is required in order to get our infrastructure to the requisite level for achieving strong economic growth and development, as well as improving standards of living for Egyptians.

“The public private partnership program seems to be the best solution for achieving these aims. The question of whether this will be beneficial in the long term depends on whether the right balance can be struck between creating sufficient profit incentive for the private sector and providing high quality public services to society or the government at affordable and sustainable prices.

Essential development
Due to an ever increasing demand for power and electricity, reforming the energy sector is another of the Egyptian Government’s ambitious aims.

Shalakany Law Office is supportive of this reform, believing that it is essential for the development of the country.

“There is no doubt that this reform is much needed to satisfy Egypt’s growing population and targets for economic growth and development.”

Although much of the increased capacity is intended to be fuelled by natural gas, the government has set itself the target of producing 20 per cent of its electricity from renewable sources by the year 2020, with Egypt’s Electricity minister Hassan Younis has recently announcing “plans to diversify energy sources and promote renewable energy projects”.

“Rich in renewable energy”
Although the idea of renewable energy is not a new one in Egypt, with the New and Renewable Energy Agency created more than two decades ago, there is still a great deal of optimism surrounding these new projects. Shalakany explains that: “The idea of renewable energy has gained a lot of momentum of late because with the exception of natural gas, Egypt does not have the fossil fuel natural resource that many of its neighbours can rely of for economic growth and development. We are, however, very rich in renewable energy sources.”

This renewable energy initiative is being supported by the World Bank and is the first project in Northern Africa and the Middle East regions to be supported by the Clean Technology Fund [CTF].

This help is vital, as renewable energy sources are still far less economically efficient than conventional energy sources and without international support, it would be impossible for them to be constructed and developed.

Improved tax reform – increased foreign investment
The current government has implemented a great deal of reform in order to make Egypt a business friendly environment, with a transparent taxation system being top of the list in terms of challenges for the government.

These reforms are a welcome change and from a legal perspective, the government has made the right choice, according to the Shalakany lawyers.

“We have contributed to the World Bank’s ‘Ease of Doing Business’ annual report for Egypt over the past few years and know that taxation reform is one of the main criteria taken into consideration as indicators of a country’s investment climate. The success of these reforms is reflected in its improvement in the rankings.

“The new tax laws have certainly improved transparency and, as a result, tax income for the government has increased and tax related corruption has decreased.”

When it comes to foreign investors, Shalakany certainly believes that these new tax reforms have had a positive effect on the amount of foreign investment.

“Taxation is often a major factor when considering whether to invest in a country, and the economic data for Egypt shows a direct correlation between improved tax reform and increased foreign direct investment over the past decade.

There is still a long way to go, however, and they believe that the government still faces some challenges to ensure the long term success of the recent reforms: “I believe the next challenge for the government will be to keep the simplicity and transparency of the new tax laws and to push for further tax reform, creating tax incentives for strategic areas such as education, health and recycling initiatives.”

‘A business friendly economy’
Changes to the judicial system were the next step for the government, after years of cases flooding the country’s courts.

The Egyptian judicial system has struggled for years to cope with an increasing population and a high level of cases passing through its courts, which has ultimately lead to the introduction of new, specialised economic courts.

Keeping in line with the government’s policy of creating a more business friendly economy, these economic courts were not only a major step in reforming the Egyptian judicial system, but a welcome step in the right direction, according to those at the Shalakany Law Office: “Prior the introduction of the economic courts, major commercial litigation had only one viable option for dispute resolution, namely arbitration, as the regular judicial process was relatively inefficient and time consuming. Today, a client who has a commercial dispute can, in most cases, opt for either arbitration or the economic courts.”

The new economic courts have two main benefits; the judges are more specialised in commercial disputes, thus making the process exponentially faster than regular court proceedings, and they are more cost effective for the parties involved.

Increased transparency
The creation of the Egyptian Financial Supervisory Authority [EFSA] is yet another part of the Egyptian government’s plans to create a business friendly economy.

The EFSA became effective in July 2009, replacing the three other major authorities, with the purpose of further increasing market transparency and improving stability.

“Although it is too early to say definitively what the overall result has been for the non-banking financial sector,” states Shalakany Law Office, “most have welcomed this consolidation and are optimistic about EFSA being able to achieve its objectives.”

With so many reforms and changes within the financial, judicial, taxation and energy sectors, what does the future hold for Egypt’s financial markets? How will these reforms and changes affect the country as a whole and will they turn out to be beneficial in the long term?

Success in the long term?
Shalakany Law Office believe that the government has to take a lot of credit for pushing through the economic reforms that has lead to steady economic growth over the past decade, but the challenge will come in maintaining this success in the long term: “Financial markets have done very well, especially in light of the global crisis. Infrastructure and energy are the next big areas that will witness growth.

“There is a feeling of confidence in the government and their economic policies for the future, which in turn has lead to increased optimism for business opportunities and growth in the future. The challenge is for the government to maintain this confidence by taking decisions based on long term sustainability and prosperity for all Egyptians.

“The steps taken thus far have been very beneficial for the long term, but, as always in emerging markets, there is still room for improvement. Radically improving the quality of human capital through education reform is probably the biggest challenge for the economy over the next decade.”