As part of its plan to attract further international support, the Egyptian government is aiming to facilitate the road for foreign investors, whether through legislation or by improving the country’s security situation.
During President Abdel Fattah Al-Sisi’s visit to Berlin and his meetings with Chancellor Angela Merkel in June, both countries reaffirmed strong ties in the political and economic fields. This came in spite of heavy human rights criticisms directed to the Egyptian side. For the Egyptian state, Germany stands as powerful ally, both politically and economically.
Speaking to Daily News Egypt on Egypt’s investment environment and the latest legislative changes, Hans Christian Mangelsdorf, Head of the German Embassy in Cairo’s Economic Department, discussed the concerns of businessmen when it comes to security and bureaucracy.
Mangelsdorf also addressed the main “challenges and opportunities” that he is looking into when it comes to business in Egypt, such as difficulties German companies are facing with the Customs Authority. He also touched upon positive projects, such as the Suez Canal and the New Cairo Capital.
The German diplomat similarly provided different visions to solve Egypt’s struggles with bureaucracy and competition.
First let’s start with the Al Jazeera journalist’s verdict. As part of Germany’s diplomatic mission in Egypt, how do you evaluate this? How did the German business community receive this verdict?
What I can say is that we are following the case, and we are pretty much aware of what is going on. We are following very closely what is happening regarding press freedom, and the trial and verdict are really grabbing our attention. Typically, German companies, at least the bigger ones, would carry out quite a lot of business intelligence on a market where they are either present in or that they would like to be present in. Of course, they would try to assess their degrees of freedom in the market. So whenever journalism is encountering problems with the judiciary, such issues are quite naturally on the German companies’ radar.
Moving to a more general topic, how do you evaluate the current status of relations between Egypt and Germany?
The current state of affairs that we have always had over the last few years was that we maintained channels to talk to each other. We have always, over the last few years, made sure that those activities that are directly targeting the Egyptian population are maintained. Here I am talking about our cultural relationps and our development cooperation. And I would even say that, since 2011, these things have grown tremendously, especially if we are talking about interacting more closely with civil society. The visit of President Abdel Fattah Al-Sisi to Berlin last June was certainly a clear signal that we are willing to enter into a more formalised dialogue once again with our Egyptian partners, obviously not sparing topics that to us remain of a concern. During these talks that were held in Berlin, those topics were discussed.
With this being said, both sides are trying to be constructive, with the understanding that some issues have to be resolved, especially regarding the Konrad Adenauer Foundation which is a topic that is dear to the heart of Chancellor Merkel. But there are other fields as well in which cooperation is going on for the simple fact that Egypt needs quite a bit of foreign investment, and quite bit of modernisation, and wants to look abroad for these types of investments and technologies.
Ahead of the mega investors’ convention at the Euromoney conference, what would you say about the investment environment in Egypt and its appeal to German/European investors?
Egypt is definitely back on the international map, which was the objective of the Sharm El-Sheikh conference early this year, which was quite a successful one. So people in Germany, such as business leaders and business associations, are eyeing projects and eyeing business with their Egyptian peers and the government. From an economic point of view, Egypt has regained part of its reputation.
Talking on the business climate, what do you think of the ongoing legislative investment environment in Egypt?
This was certainly a good sign. It shows that there is some readiness for reform, which is certainly appreciated. We are looking quite favourably to the reforms of the investment laws. From purely a company’s point-of-view, you can say that the reduction of income tax is certainly something that can be welcomed. Some companies are typically struggling with red tape and administrative work when they want to come here. And that is something that basically needs time. I think a careful, but considerate, reform of the Civil Service Law is one of the main and most important aspects in the next period.
We have seen the legislation being enacted. We have seen the response in the street from those people who are concerned. But I personally believe that there is no way around reforming the administration. I will give you an example: Germany started with around 6.5 million public employees, including teachers and military staff, in the 1990s. Nowadays we are standing at 4.2 million employees. So that shows you two things: yes, it is possible to reform and also to reduce the number of staff you have on payroll, and at the same time obviously keep the system working. It also shows you that this takes time. It is a process that needs to be accompanied by a new labour law, something that will enable companies to have a readiness to employee more people. However, this cannot be done as a sudden and dramatic change, but rather a gradual process.
What about fair competition? Do these laws provide a fair environment for investors and their peers?
Depending on what ideology you are using, you can answer this question in different ways. Personally, as an economist, I would say it allows the market forces to work within a certain framework. We have this concept in Germany that we call the ‘social market economy’. It is very clear on paper, but complicated in reality. Let market forces to do their job, but provide the necessary boundaries, including a labour law, a decent civil service that is performing well, and a financial market that is ready and willing to support companies.
As a matter of fact, this is something that still needs to be done. Market forces are still not able to fully work in Egypt. At the same time, the necessary boundaries haven’t been fully created. You don’t want to end up in a situation where you have high capitalism. I personally don’t believe in this system, and I think many Egyptian decision makers don’t either. Both freeing market forces and setting the necessary boundaries are important.
I will give you another example. Why don’t you have different geographical units in Egypt compete with each other? In Germany there are 16 counties (federal states) in one country. Every federal state is a separate state, with a separate constitution, with a separate government, with a certain freedom to decide upon its own policy. In order to do so, it has to have its own funds from taxes. Then we will have constant competition from different territorial entities, which in the end will give you a system of structures that, if a group is not performing well, they will be overwhelmed by their peers, and this might be something that works for Egypt as well. Egypt is a country of 90 million people, so the question is: can you still, from an economic point of view, control them, guide them, and develop them in a central way? That is an open question.
The Egyptian army is heavily involved in many economic sectors in the country, such as infrastructure, industry, and services. Do you think investors see this as a type of competition that they cannot keep up with?
Competition per se is not something bad. Competition needs to be fair in a way. So, if you are starting from a completely different set of parameters, surely that is a challenge, and this is true for any economic actor that is present in the country. So yes, this is something that companies and investors will certainly monitor closely. Investors will be very sensitive to circumstances where they would feel that in a way or the other, they are not meeting their peers on the same level.
In the last press conference, the former German ambassador to Egypt mentioned the relationship between political stability and German investment in Egypt. What do you have to say about that?
Companies are taking precautionary measures to simply protect their assets and staff in the country. But with these notable and mysterious exceptions recently, we have hardly ever seen Western and foreign investments directly targeted in Egypt. Companies are very sensitive to these things, and that is why they have their security experts on board, but on the other hand this is a clear message that the Egyptian market is an interesting market, not for all industries. but for quite a number of industries.
It is a market that reached quite a significant level of industrialisation, and there is an industrial base to start from that can be developed. There is also a system of higher education that is producing potential staff that can be taken in, retrained, upgraded, then used for the business process, and on top of all of that it is a huge domestic market. Any company that is producing consumer products certainly wants to have a strong foothold in Egypt.
Again, yes, security and stability are important, so that is why we are actually happy, from a political point of view, that the parliamentary elections have been announced. We are excited to see what is going to come out of it. We are also seeing security measures being taken, some successfully, sometimes not so successfully. All these things are feeding into the larger picture. The larger picture does not only include political and security stability, but also includes an efficient administration. For instance, a few German companies are currently facing problems at the customs authority. There has been false information spread across these cases, but we are not seeing, for instance, any initiative from the government to find a constructive solution for that. As long as you don’t see this, it will have a negative impact on Egypt’s image abroad, especially if it is concerning many companies. There are definitely a few of these things that need to be worked on
As Head of the German Embassy’s Economic Department, what are the main challenges and opportunities you are currently looking into?
For challenges, there is the issue of foreign currency, the everlasting subject, which might entail a slightly modified monetary policy. Second, there are some cases that exist between German companies and the customs authority where we would like to see a WTO-compliant solution as quickly as possible, in order to prevent more unnecessary harm.
On the opportunities side, the new Cairo Capital is definitely something that we are following closely, because I personally believe this is going to offer good potential for Egyptian and German companies to team up together. We are also excited about the land reclamation project that was announced. Obviously, this calls for not only agricultural hardware, but also for a lot of technology that could be made available. The whole transfer sector remains high on the agenda, and we are seeing upgrades to the rail network, which is highly necessary and in which German companies are participating. Obviously, the Suez Canal Zone is another area. For me, this is something that is closely associated with transport and similar activities. I am actually excited that the necessary legislation in order to further develop this zone was passed through the last weeks.
Otherwise, you might have noticed that bilateral trade is doing well. That is a very encouraging sign. If you are looking at the numbers made available by the Central Agency for Public Mobilization and Statistics (CAPMAS), Egyptian exports are down something like 20%-25% in the first half (H1) of 2015. That is certainly not true according to Egyptian exports to Germany, which are up by 12.5%. German exports to Egypt are up by 18.5 % in H1 of this year, which is a very encouraging sign. We are seeing a constant flow of German FDI to Egypt. Nearly 70 German companies are working in the country, employing something like 20,000 to 23,000 people, which is quite a substantial amount, and which can increase.
As you mentioned at the beginning, the electricity and energy production mega projects are something that is thrilling and has never done before in Egypt on this scale. This is going to be the precondition for economic development in Egypt. Without electricity, an economy cannot survive. So that is a very encouraging sign
And that is basically the direction in which the economy is heading, although I would call this a framework parameter. At the same time, you need to make sure that those risks that always exist don’t negatively affect economic development. Those risks are basically a balance of payment that is in some parts very weak. That is something that needs to be monitored very closely. Another aspect is the stock of foreign currency. This is something that is related to the monitoring of policy. Another potential threat that needs to be monitored is tourism, which is obviously one of the main service industry sectors which always needs to be on the radar, every single day
If you keep these things under control, then you have a good opportunity to manage through an improved economic situation and the challenges ahead, like increasing population, high demand for employment, and the ever-growing need to spread in areas that haven’t been used so far. The economy, as such, is an instrument to allow the government or decision makers to improve the livelihood of the people. And there are a lot of improvements that need to be done and can only be done if the economy is providing the baseline
There are reports that claim Germany is the fifth largest supplier of arms to the Middle East. What can you tell us regarding German-Egyptian cooperation in that department?
For German arms exports, there are individual companies that export arms all over the world, obviously only in those cases that they have received the necessary export licences. It is a very transparent procedure these days. We publish our arms export information and figures every six months, including the legal bases for taking these decisions. Now, with Egypt, we have certain contracts and deliveries going on, which include individual companies. These arms exports are accessed based on set of very simple criteria, not the least of which is criteria agreed on in the framework of the United Nations. There is an arms deal treaty that exists and is enforced. Egypt is also participating in negotiations.