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New law to lure investors to Egypt could feed corruption, critics say

by Reuters
Thursday, 24 April 2014 06:05 GMT

Critics of the law, which curbs right to challenge state land and business deals, see increased scope for corruption

By Asma Alsharif

CAIRO, April 23 (Reuters) - A new Egyptian law that prevents third parties from challenging contracts made with the government may encourage foreign investors but critics say it will increase scope for corruption.

President Adly Mansour on Tuesday approved the law that will restrict the right to challenge state business and real estate deals to only the government, the institutions involved and business partners.

The law, long-awaited by businessmen and investors, is meant to revive investment hit by political instability since a 2011 uprising toppled autocratic president Hosni Mubarak.

"Uncertainty over the legality of contracts has been one factor behind the lack of foreign investment into Egypt since the Arab Spring revolution, and so this law could provide the protection that some investors have been craving," said Jason Tuvey, assistant economist at Capital Economics.

Many state-land and business deals were revoked after court challenges by people with no direct links to the transactions, harming business confidence in a country where population growth has long outpaced job creation.

The cabinet approved a draft for the law earlier this month.

Since the 2011 revolt, Egyptian courts have issued at least 11 rulings ordering the state to reverse deals signed by former administrations.

The lawsuits have been brought by activists and lawyers who allege that companies were sold off too cheaply, reflecting corrupt business practices during the Mubarak era.

Egypt is desperate for fresh funds. Direct foreign investment fell to $3 billion in the fiscal year ending June 2013, $1 billion less than the previous year. Foreign reserves fell to a critical low of $13.4 billion last year and the economy grew a meagre 2.1 percent.

Gulf investors have been lobbying for more assurances that their money will be safe in Egypt.

In 2011 a court annulled a deal to sell Egypt's historic Omar Effendi department store chain to a Saudi investor after critics argued it was sold too cheaply. Similar cases have kept wealthy Saudis wary of buying Egyptian assets, said Abdullah Bin Mahfouz, Chairman of the Saudi Egyptian Business Council.

"I'm sure that due to this law we will see an inflow of investment no less than $15 billion in the next three years because there are huge opportunities in steel and mining and factories that are considered the biggest in the Middle East," Mahfouz said.

Although the new law is expected to remove legal hurdles, political stability may still deter investment.

Since general Abdel Fattah al-Sisi toppled the country's first freely elected president, Mohamed Mursi of the Muslim Brotherhood, last July, Islamist militants based in the Sinai Peninsula have stepped up attacks on security forces, killing hundreds.

The insurgency has spread to Cairo and other cities and towns at a pace that may keep foreign businesses jittery.

The new legislation is likely to anger activists and lawyers who say it would foster corruption.

"Although the law prior to this change was abused constantly, and to a large extent by vexatious litigants, this amendment effectively removes part of the judicial and civilian oversight over government deals," Moustafa Bassiouny, an economist at Signet Institute, said.

Another concern is that companies that miss out on a tender process have no legal avenue to challenge government decisions.

"This could lead to a situation where the authorities agree to contracts that ultimately represent poor value for money," said Tuvey at Capital Economics.

Mika Minio-Paluello, researcher at Platform London, an advocacy group focused on social and environmental justice issues, said the new law would undermine democratic oversight.

"There's no mechanism or means for citizens to intervene and prevent corruption, to challenge breaches of the law and unfair contracts," said Minio-Paluello.

"If you are a decent investor, it is not in your interest because you will come up against other investors who are dodgy - breaching environmental standards, not paying workers properly."

For now, the law will probably come as a relief to investors who have to contend with hurdles ranging from poor infrastructure to stifling bureaucracy.

Egypt's government has faced 37 international and domestic arbitration cases worth $14.3 billion in the three years since the 2011 uprising, Ezzat Ouda, head of the state's lawsuits authority, told state newspaper Al Ahram.

Companies that have run into legal obstacles in Egypt include Mexican cement giant CEMEX and London-listed gold miner Centamin. (Additional reporting by Maggie Fick; Editing by Ruth Pitchford)

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