VII. INVESTMENT CLIMATE A-1 OPENNESS TO FOREIGN INVESTMENT The Government of Egypt is open to foreign direct investment and generally encourages private sector activity in most sectors of the economy. In 1992, the United States and Egypt implemented a Bilateral Investment Treaty reflecting the basic principle that U.S. direct investment abroad and foreign investment in the United States should receive fair, equitable, and non-discriminatory treatment. In general, the Egyptian law under which most foreign investors establish projects, Investment Law 230, is no less favorable to U.S. investors than provisions of the Bilateral Investment Treaty. The Treaty, an agreement between two nations, acts as an additional safety net for U.S. investors. As part of its 1991 Structural Adjustment Loan (SAL) Agreement with the World Bank, the Egyptian government embarked on a program to expand the private sector's role in the economy, primarily through increased investment. In mid-1991, the government replaced its investment licensing system with a screening process under which, in principle, investments are approved automatically if the sector is not on a "negative list" of projects. In July 1993, assembly industries, which had been approved on the basis of local content, were removed from the list and in December 1993, energy intensive activities, including raw aluminum and ferro- alloy production were eliminated from the Negative List. Customs regulations retain, however, a local content feature in which duties on imported components are reduced according to the local content of the finished product. The Negative List now includes: (A) All military products and related industries; (B) Tobacco and tobacco products; and (C) Investments in the Sinai (except oil, gas, and mineral exploration). Rules and Regulations Covering Foreign Investments: Enterprises with private sector ownership of 50% or more (domestic and/or foreign capital) have the option of establishment under either Investment Investment Law 230 or Companies Companies Law 159. Investment Law 230- Investment Law 230 of 1989 is the primary law governing foreign investments, allowing 100% foreign ownership of ventures. It provides a secure basis for a foreign investor to operate in Egypt by guaranteeing the right to remit income earned in Egypt and to repatriate capital. Companies formed under Investment Law 230 are subject to regulation by the General Authority for Investment and Free Zones (GAFI). Key provisions of Investment Law 230 include: the guarantee against confiscation and nationalization without compensation; the right to own land and real estate; the right to maintain foreign currency bank accounts; freedom from administrative attachment; the right to repatriate capital and profits; freedom from administrative attachments; and equal treatment regardless of nationality. Perhaps one of the most important advantages of organizing an enterprise under Law 230 is that such enterprises may own land necessary for their objectives without obtaining the specific approval of the Prime Minister, regardless of the foreign ownership percentage. Investment Law 230 limits inland investments to certain broad fields which may be expanded by the Council of Ministers. Sectors currently covered are: land reclamation; industry; tourism; housing; real estate development; services for oil production; medical services; car repair; water pumping stations; transportation services for all sectors open to foreign investment under Investment Law 230; and consultancy firms. Following passage of the new Capital Markets Law 95 in 1992, GAFI's Board of Directors recommended that security traders be added to the list of activities subject to Investment Law 230, but as yet no decree to that effect has been issued. Free Zones- Investment Law 230 distinguishes between "inland" investments and free zone investments. Designated free zones are in Cairo (Nasr City), Alexandria, Port Said, Suez, Ismailia, Damietta, Safaga, and Sohag. In effect, free zones, also subject to Investment Law 230, are open to any type of sectoral investment. Although exempt from taxes and fees stipulated by Egyptian laws, free zone investment companies are subject to an annual fee of 1% of the value of goods entering or leaving the free zone, or on the gross revenues realized by the project if the activity of the project does not require the entry or exit of goods. Companies producing largely for export (normally 80% or more of total production) may be established in the free zones and operate in foreign currency. Concession agreements such as petroleum, natural gas and mineral exploration and exploitation, although not explicitly covered by Investment Law 230, are in effect treated as free zone areas, but each agreement is finalized separately and is subject to legislative approval. Companies Law 159- Foreigners may choose to invest under provisions of the Companies Law 159. Law 159 joint stock companies may have foreign majority ownership with a maximum of 51%. Provided that at least 49% of the shares are offered to Egyptians upon formation, Law 159 companies ultimately may have 100% foreign ownership. Companies Law 159 does not guarantee the right of access to hard currency for remittances or provide special incentives as in Investment Law 230. Since the establishment of a free foreign exchange market in February 1991, however, access to hard currency is no longer a problem. Foreign companies established under Companies Law 159 can benefit from incentives (such as tax holidays) offered for investments in designated areas set forth in the New Communities Law. In addition, companies registered in the Industrial Register which employ more than 50 employees are eligible for a 5 year tax holiday under the Company Tax Law pursuant to Law 157/1981. Companies established under Companies Law 159 are not subject to GAFI regulation. Investment Screening Procedures Investment Law 230: GAFI decides on a request to establish a project within two days. If the request is rejected, an appeal may be lodged within 15 days. After approval of the investment request, the potential investor must submit a four-page application for incentives giving detailed information on the project's objective, location, capital, investment costs, sources of finance, labor, and wages. The GAFI Board then makes a final decision on the project. The Board, chaired in practice by the President, meets irregularly and sometimes may not meet for several months, thereby delaying approval even though in theory all projects not on the "negative list" are approved automatically. There is a one-year deadline for establishment of a project following GAFI Board approval, but, upon the approval of GAFI's Executive Director, it may be extended without resubmission of an application to the Board. Repatriation of profits cannot be carried out without the approval of the Executive Director, which is to be granted within three days of application. Companies Law 159: A request to establish a Companies Law 159 company should be directed to the Companies Department at the Ministry of Economy and Foreign Trade. The original and ten copies of the articles of incorporation and other pertinent information, including biographical data on the foreign partner, must be submitted with the request. After obtaining approval from the Companies Department, the company must obtain a permit from the Local Chamber of Commerce before being registered in the Commercial Register at which point it comes into existence as a legal entity. Approval to carry out activities must be obtained from the relevant authorities such as the General Organization for Industrialization (GOFI) for industrial projects, the Central Bank for banking, etc. The Company's Department also obtains necessary security approvals from the Ministry of Interior (screening of foreign partner). Privatization Public Business Law 203 of 1991 and its executive regulations establish the framework for privatization of Egypt's massive public sector. The law allows the unrestricted sale of shares and assets of the 314 public enterprises currently held by 17 diversified holding companies, to private sector investors. Privatization guidelines clearly state that no discrimination against foreign investors shall be exercised when selecting potential offers, but the sale of public-sector assets to foreigners remains controversial. Government officials have announced that priority would be given to Egyptians, Arabs, and finally foreign buyers. Nonetheless, officials state that foreign investors are favored if they introduce new technology, create jobs, and promote exports. The government is emphasizing employee ownership of public-sector shares. In early 1994, President Mubarak ordered the allocation of 10% of the shares of public- sector companies to be sold to workers through Employee Shareholder Associations (ESAs). Also in early 1994, the Government concluded the sale of two public-sector bottling plants. In both cases, the buyers are consortia of Arab and/or Egyptian investors and a multinational U.S.-based company (Coca-Cola International and Pepsi Cola International). Although initially the government aimed to sell public-sector companies to the bidder with the best financial and technical bid package, the Government is now more inclined to offer shares on Egypt's stock exchange. By law, foreigners are allowed to purchase stock and there are no restrictions or limits on the amount of shares acquired. Under Law 203/1991, if more than 50% of a public sector company's shares are sold to a private investor, the company is no longer considered "public" and becomes subject to Company Companies Law 159. Although unlikely, the possibility exists that a private sector investment involving a major restructuring and expansion program for a public enterprise could benefit from incentives offered under Investment Law 230. Other Laws and Regulations In 1992, new securities and banking laws were passed in conjunction with Egypt's quest to deepen financial markets and stimulate interest in new investment instruments. The executive regulations of both laws were issued in 1993. The Government hopes the new Capital Markets Law 95 of 1992 will revitalize the moribund Cairo Stock Exchange, facilitating public offerings of shares in state enterprises. Law 95 permits the establishment of securities companies, mutual funds and private stock exchanges, and it allows trading of foreign securities in Egypt. Implementing regulations of Law 95 do not address procedures for mergers and takeovers which are covered by Companies Law 159. The new Bank Law 37 of 1992, as amended by Law 101 of 1993, allows foreign bank branches to deal in Egyptian currency. Treatment of Foreign Investors In general, investment procedures have become less onerous as a result of Egypt's economic reform program, but foreign (as well as domestic) investors still note problems. Although provisional approval for non-negative list investments is automatic, all new projects must be approved by GAFI's Board in order to be guaranteed incentives under Investment Law 230. The Board's schedule tends to be irregular and meetings are often separated by several months. Although investment procedures have been streamlined since 1991, there are still impediments to foreign investment in Egypt. Requests for increases in capital, expansion of existing projects, changes in the product-mix, or start-up of a new production line still require an approval from GAFI's Executive Director. According to GAFI officials, this is undertaken for taxation purposes only. Existing projects also need prior GAFI approval to import inputs. Every shipment must be approved by GAFI's Executive Director to obtain Customs release. GAFI officials claim this ensures that the goods are actually imported and utilized by Investment Law 230 companies, and that approval is usually granted within a maximum of 48 hours. R & D projects: Foreign firms are permitted to participate in government-sponsored research and development programs without any apparent restrictions. A German firm currently is engaging in a project to harness energy from burning waste. Investment Incentives Taxes: All inland Investment Law 230 companies receive a five- year exemption from tax payments on profits and dividends, commencing from the first fiscal year following the start of production or of business activity, as the case may be. The Cabinet may grant an additional five-year exemption if deemed in the public interest. Project expansions also are granted a five- year tax holiday. Projects established inside new urban communities, industrial zones, and remote areas are exempted for a ten-year period, as are land reclamation, real estate development, and new city/industrial zone projects. Projects to develop medium and low-income housing receive a fifteen-year tax holiday. Other Exemptions: All inland investment projects under Investment Law 230 are granted exemptions from: - proportional stamp tax - stamp duty on capital (Investment Law 230 exempts the original capital from the stamp tax, but capital increases are subject to a 1.2% annual stamp duty) - notarization and notification fees - payment of inheritance tax on 25% of heir's share in invested capital, and - income tax on a proportion of dividends after expiration of the exemption fees. Free Pricing: The government may not intervene in pricing or setting profit margins for products produced by ventures subject to Investment Law 230, except for "essential" goods specified by decree. Customs Preferences: Per Ministry of Finance decree, machinery and equipment imported for Investment Law 230 investment projects are assessed a low, flat tariff rate of 5%. Discriminatory Policies Under the U.S.-Egypt Bilateral Investment Treaty, each party to the Treaty "retains the discretion to approve investments according to national plans and priorities on a non-discriminatory basis." Generally, foreign companies established under Investment Law 230 are treated in a non-discriminatory fashion comparable to their Egyptian private sector counterparts. Under the economic reform program, privileges enjoyed by public sector enterprises (subsidized inputs, credit facilities, and preferential custom rates) have, for the most part, been eliminated. Industrial product prices, except for pharmaceuticals, have been decontrolled. A standard cost-plus formula is to be used to determine pharmaceutical prices, but it has been administered inflexibly. Although U.S., other foreign, and (most recently) public sector pharmaceutical companies argue that the system is financially harmful, it is expected to remain in effect for the foreseeable future. The only other goods still subject to price controls are cigarettes, rationed edible oil, and rationed sugar. Export and Import Policies Egypt has made significant progress in reduction of non-tariff barriers since 1990, when the import ban list, which was developed in 1986 to protect domestic industries, covered 210 commodities which represented 37% of Egypt's total manufacturing and agricultural production. In July 1993, the Egyptian Government dropped all but three commodities from the import ban list. Commodities still banned from importation include fabrics, apparel, and poultry, which together represent approximately 4% of total domestic production. The Government has pledged to remove the ban on poultry in 1994 and review the ban on textile products in conjunction with the GATT Uruguay Round agreement. The list of goods requiring prior approval before importation was also eliminated in 1993. Some 126 items are inspected for quality control prior to admittance into Egypt. The Government stresses that standards applied to imports are the same as for domestically produced goods, but in practice, imports are subject to different, and usually tougher, inspection tests. Tariffs range between 5-70%, with exceptions on the upper end for luxury goods (e.g. automobiles, tobacco, and alcoholic beverages). By the end of 1994, the maximum tariff rate is to be lowered to 60%, with a maximum rate of 50% to be implemented by mid-1995. In 1993, the Government abolished preferential customs treatment for public- sector businesses for all but two commodities: baby milk, which requires an approval from the Ministry of Health, and yachts, boats, and vessels, which are imported by tourism companies. Export subsidies as such do not exist and the Government does not impose export performance requirements. Exporting industries, including Investment Law 230 projects, receive rebates on duties paid on imported inputs at the time of export of the finished product. Animal hides, scrap metal (except scrap of stainless steel), and alpaca fibers, are the only items banned from export. The import/export paperwork process has been greatly simplified from past Egyptian practice, but several days are required to obtain necessary signatures for importation and/or exportation. A-2 CONVERSION AND TRANSFER POLICIES REPATRIATION OF PROFITS AND CAPITAL: Investment Law 230 guarantees the right to remit profits, provided the amount remitted does not exceed the balance of the project's foreign currency account. Investment Law 230 also guarantees the right to repatriate invested capital. Upon liquidation, all invested capital may be transferred in one installment if the foreign currency account balance is sufficient to cover the transfer. Otherwise, the transfer may be effected in five equal annual installments. Egypt's February 1991 liberalization of the foreign exchange market eliminated foreign exchange transfer restrictions. Despite this, Investment Law 230 companies still require authorization from GAFI's Executive Director to remit profits. GAFI reports that the pro-forma authorization process takes no longer than 72 hours and is for statistical purposes only. Investment Law 230 retains restrictions on the transfer of proceeds from the sale of assets, and prior GAFI approval is required. GAFI claims that it is able to process paperwork for transfer of funds the same day as submitted, thus, not appreciably delaying the remittance process. Companies established under Companies Law 159 face no similar impediment to the free transfer of earnings. A new foreign exchange law passed by the People's Assembly in May 1994 relaxes restrictions on capital transfers and emphasizes the right of individuals and companies (whatever their legal status) to transfer foreign exchange out of Egypt. Foreign currency is readily available at banks and foreign exchange companies. BILATERAL INVESTMENT TREATY: The U.S.-Egypt Bilateral Investment Treaty provides for free transfer of returns, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payment, and proceeds from sales. Transfers are to be made in a "freely convertible currency at the prevailing market rate of exchange on the date of transfer with respect to spot transactions in the currency to be transferred." REMITTANCES: Investment Law 230 stipulates that non-Egyptian experts and personnel recruited in a Investment Law 230 project are entitled to transfer up to 50% of their total earnings. Remittances are to be processed within a maximum of 48 hours of submission of paperwork to GAFI without other delays. ROYALTY PAYMENTS: Royalty payments are authorized when a patent, trademark, or other licensing agreement has been approved under Investment Law 230. OPIC INCONVERTIBILITY CLAIM: The estimated annual U.S. dollar value of local currency purchased by the U.S. Embassy in Cairo to finance U.S. government operations in Egypt is approximately $58 million. The Embassy purchases local currency at the official dollar selling rate, which in late May 1994 equaled 3.393 Egyptian pounds per U.S. dollar. The Egyptian pound has appreciated in real terms against the U.S. dollar since 1991 - it is unlikely that this rate is sustainable. A-3 EXPROPRIATION AND COMPENSATION There have been no expropriation actions by the Government since the days of Nasser in the 1960's. Given the present environment, in which the Government is committed to creation of a market economy which will require new and sustained private-sector investment, expropriation actions are unlikely. Article (8) of Investment Law 230 guarantees against nationalization or confiscation of investment projects under its domain. It further guarantees against seizure, requisition, blocking, confiscation, and placing under custody or sequestration, except through judicial procedures. Investment Law 230 offers guarantees against full or partial expropriation of real estate and investment project property, except when necessary for the public interest, and fair compensation based on market value is provided. The U.S.-Egypt Bilateral Investment Treaty also provides protection against expropriation. The Treaty stipulates that no investment shall be expropriated or nationalized by either party, unless the expropriation: - is done for a public purpose; - is accomplished under due process of law; - is not discriminatory; - is accomplished by prompt and adequate compensation; and - does not violate any specific contractual engagement. Compensation is to be based on fair market value and is to be freely transferable at the prevailing rate of exchange. There is no evidence that the Government discriminates against foreign investors in general, or U.S. investors specifically. Nonetheless, foreigners in Egypt find doing business in Egypt extremely difficult, because of non-transparent procedures and regulations and inefficient bureaucratic practices. Also, foreigners are routinely charged higher rates for basic goods and services and "tips" are always required. A-4 DISPUTE SETTLEMENT Egypt acceded to the International Convention for the Settlement of Investment Disputes in 1971 and is a member of the International Center for the Settlement of Investment Disputes (ICSID) which provides a frameworke for arbitration of investment disputes between the government of the host country and a foreign investor from another member state, provided that the parties agree to such arbitration. Without prejudice to Egyptian courts, Investment Law 230 recognizes the right of investors to settle disputes within the framework of: bilateral agreements; the Convention for Settlement of Investment Disputes; or through arbitration before the Regional Center for International Commercial Arbitration in Cairo. The U.S.-Egypt Bilateral Investment Treaty (BIT) provides for non-binding, third-party arbitration in investment disputes. Egypt recently has passed Law 27 of 1994 which provides a comprehensive framework for the arbitration of all commercial disputes whether domestic or international. This new law provides a highly flexible framework for arbitration and limited opportunities to challenge arbitral awards in court. Even if an arbitral award is challenged, a special order must be obtained to continue enforcement which must be based on a likelihood of success in challenging the award. Egypt's new law represents a significant advance over a prior confusing and conflicting set of rules which left the enforceability of both International and Domestic arbitral awards in doubt. In addition, Egypt adheres to the 1958 New York Convention on Enforcement of Arbitral Awards (which means that foreign judgements can be enforced in Egypt), the 1965 Washington Convention on the Settlement of Investment Disputes between States and the Nationals of Other States (i.e. the ICSID agreement), and the 1974 Convention on the Settlement of Investment Disputes between the Arab States and the Nationals of Other States. There have been several investment disputes extending over many years, involving U.S. persons or companies. There is no pattern except that principals have ceased to trust one another, and generally the foreign side consists of a single individual or a small firm. These disputes most often take the form of contract disputes, wherein the U.S. side claims arbitrary, illegal action (typically cancellation of the contract and takeover of the entity) by the Government side. In some instances, Government entities refuse for years to accept contractual requirements to arbitrate even if arbitration is explicitly written into the contract. Local lawyers insist, however, that the recalcitrant party cannot prevent indefinitely the initiation of arbitration. It requires time, sometimes numerous court proceedings which in many cases average five years to reach primary court decision, and sometimes numerous appeals to senior Government officials. Legal appeal procedures can extend court cases to 15 years or longer. The following is a description of some investment disputes over the past few years involving U.S. investors, which the U.S. government is attempting to resolve: -- A U.S. company's contract to operate airport duty-free shops was cancelled in 1988, the government-owned airline was given the management contract, and inventory and equipment were confiscated. The owner has initiated several legal suits in the court system over the past five years, with no visible result. The owner also initiated steps to invoke the BIT. GOE officials have indicated their interest in bringing the case to closure either through mediation or arbitration. -- A U.S. company entered into a contract with a public sector company to operate two hotels in Egypt. Disputes arose over both properties. One dispute was settled in April 1994 following arbitration by the Cairo Regional Center for International Commercial Arbitration. The second dispute, which led to an Egyptian court decision authorizing the public sector company to "sequester" one of the hotels, also will be heard by an arbitration panel at the same Center in the near future. -- U.S. officials have assisted in two other less clear cases (one involving a cancellation of a letter of intent, resulting in a loss of rights to develop a tourism project; the other involving cancellation of a ship off-loading company's contract after non-payment of rental fees which the company claims were higher than those charged Egyptians). The Egyptian Legal System: The Egyptian Constitution of 1971, as amended in 1980, states that Islamic Law is the source of all law. Laws issued prior to 1980 need not comply with this provision, but new regulations are checked for conformity with Islamic Law. The 1948 Civil Code and the 1883 Commercial Code are the basic laws governing commercial contracts and transactions. Secured Interests In Property: Mortgages are limited in scope and highly restricted. Real estate mortgages can be registered with the Land Register, but the registration fee is prohibitive, equal to 1.5% of the amount being secured by the mortgage. "Pledges" of personal property are possible, but they are only effective if the creditor takes actual possession of the property. The only non- possessory security interest in personal property available in Egypt is through a "commercial" mortgage or "mortgage of the fonds de commerce." This type of mortgage covers tangible as well as intangible assets of a business (ranging from equipment to "good will") and is registered at the Commercial Register, but can be done only by banks registered with the Central Bank. Judicial System: The judicial system in Egypt consists of the following components: 1) The Supreme Constitutional Court: an independent judicial body with jurisdiction over questions of constitutionality of laws and regulations and their interpretation. It rules on jurisdictional questions regarding other courts and on conflicting, non- appealable judgments issued by other judicial bodies. 2) The Council of State and Administrative Court: The council of State gives legal advice to different ministries and government departments and adjudicates administrative litigations in which the state is involved. It also reviews draft bills presented by the government to the People's Assembly. The Administrative Court detects, investigates and judges any administrative or financial infraction within the government. These courts judge all disputes between private firms and the government unless contracts explicitly provide for alternative dispute resolution. The Administrative court operates under the authority of the Council of State, both of which under the Ministry of Justice. 3) The Judiciary: is comprised of (a) the various national courts and (b) the public prosecution. There are two general types of national courts: (1) regular courts, including summary, primary, appeals, and cassation courts; and (2) special courts, including the court of ethics and state security courts. U.S. firms typically would use the regular courts for disputes with private parties. (a) National Court System: (1) Regular Courts: Summary courts - cover civil litigation, cases of contraventions and misdemeanors, and minor criminal offenses punishable by imprisonment not exceeding three years. Primary courts - hear civil and criminal appeals from summary courts. They also function as first instance courts in matters that involve civil litigation exceeding LE 5000 and crimes of a more serious type. Courts of Appeal - adjudicate appeals in both civil and criminal sentences passed by lower courts. Court of Cassation - is the highest court of law in Egypt. Its jurisdiction lies in interpretation of the law and its application. Court of appeals judgments are referred to the court of cassation only when a matter of legal interpretation is in question. (2) Special Courts: The Court of Ethics (Law of Shame) - is divided into a lower and upper court. The two courts have jurisdiction over litigation brought by the Socialist prosecutor against persons or groups alleged to be endangering society's "safety." It also acts as a brake on bureaucrats who might wish to deviate from regulations, minimizes compromises in negotiations, and exacerbates the fear of taking decisions which might be challenged by the Socialist Public Prosecutor. State Security Courts - are also divided into lower and upper courts which have jurisdiction over crimes against the external and internal safety and security of the state, bribery, tariff offenses, and "national unity." (b) Public Prosecution: The Public Prosecutor is responsible for investigating crime as well as formulating cases against accused criminals. His office enforces court judgments. (4) The Socialist Prosecutor is responsible for taking measures to secure people's rights and the safety of society and its political system. He is subject to the control of the People's Assembly and is appointed by the President. Only the Socialist Prosecutor can refer cases to the Court of Ethics. The government does not interfere in the court system. The acceptance of judgments of foreign courts and their enforcement is determined by bilateral agreements between Egypt and other countries or on the provisions of the contract. Foreign and Egyptian parties can specify methods of settling commercial disputes in contracts including choice of law and, under Egypt's new Arbitration Law 27/1994, can select for arbitration under virtually any set of rules including those of UNCITRAL, the International Chamber of Commerce (which follows the UNCITRAL rules), or any other organization. A-5 PERFORMANCE REQUIREMENTS/INCENTIVES Performance requirements are not specified in Investment Law 230. The ability to fulfill local content requirements is no longer required to obtain an approval to set up an assembly project. However, assembly industries must meet a minimum local content requirement of 40% in order to benefit from customs tariff reductions on imported industrial inputs. Employment Requirements: Under Investment Law 230 and Companies Law 159, Egyptians must normally comprise 90% of the company's workforce, and wages for the Egyptians employed must constitute 80% of the total wage bill. Egyptian technical and administrative staff must make up no less than 75% of the labor force and their wage bill must be at least 70% of the total wage bill. In cases where qualified Egyptian workers do not exist, however, companies may seek permission from the appropriate Ministry to hire foreign workers, advisors or specialists. In certain sectors, additional restraints on the number of foreign employees exist. For example, in case of maritime services, only 5% of the total crew may be foreign, and foreign insurance companies (only allowed in the free trade zones) must have an Egyptian national as managing director. Geographical Areas: There are no formal geographic restrictions on investment, but GAFI will approve investments in congested areas such as Cairo only when there is an economic rationale for the location. As noted above, both Investment Law 230 and Companies Law 159 investments may benefit from incentives for establishments in new communities. Upon request, GAFI will assist investors in locating a site for the project, assuring the availability of necessary infrastructure. Governorates have authority to issue decrees involving prior establishment and operation licensing, investment approval, and location changes for investments under their geographical jurisdiction. Although the government pledged to the World Bank that these decrees will be abolished, it appears that the process will take some time. Therefore, the government plans to work on streamlining the process first, with the eventual goal of elimination of the governorate's involvement in the investment process. A-6 RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Under Investment Law 230 and Capital Markets Law 95, foreign investors may own up to 100% of establishments engaged in various activities within the scope of those laws. Investment Law 230 covers the following activities: land reclamation, industry, tourism, housing, real estate development, services for oil production; medical services, car repair, water pumping stations; transportation service; and consultancy firms. Law 95 allows the establishment of Egyptian and foreign security companies conducting one or more of these activities: underwriting of subscriptions; participation in the establishment of companies issuing securities; venture capital; clearing and settling of securities dealings; forming and managing securities portfolios and mutual funds; and acting as brokerage firms. Furthermore, under Banking Law 37/1992 as amended by Law 101/93, existing foreign bank branches are allowed to provide all banking services in both local and foreign currencies. Central Bank of Egypt policy with regard to new entrants is very restrictive. In theory, under Companies Law 159, foreign shareholders may own 100% of a limited liability company and ultimately own 100% of a joint stock company provided that 49% of the shares have been offered to Egyptians upon the formation. The activities in which such companies with foreign ownership may engage, however, may be restricted by specific laws or institutions. Foreign investors may not engage in export/import activities, accounting services, and the local insurance market. The domestic insurance market is closed to foreign companies, but they may operate in free trade zones as minority partners. A draft insurance law prepared by the government allows insurance companies with no more than 49% ownership access to the Egyptian market after a five-year transition period. Law 15 of 1963 prohibits foreign ownership of agricultural lands, except for desert reclamation projects. Egyptians or foreign investors wanting to establish companies in the military, tobacco, or aluminum sectors must seek approval from GAFI, but approval of such projects is unlikely. GAFI also must approve non-petroleum exploration projects in the Sinai. The private sector (both domestic and foreign) is prohibited from investing in shipping agencies, stevedore services, and airport services. The new Public Business Law 203/1991 and its executive regulations allow the sale of shares (with no upper limit) and assets of public enterprises to private sector investors without restrictions. The law does not preclude purchase of assets by foreigners. Credit: Established foreign and domestic private investors have good access to credit. In connection with its commitments to IMF and World Bank programs, the government is committed to restrict credit to the public sector, while expanding credit opportunities for private (foreign and domestic) investors. Despite abolition of credit ceilings and the relative decline of interest rates on lending, private sector demand for credit is still relatively low because the economy has been in a state of recession. A-7 PROTECTION OF PROPERTY RIGHTS Egypt, as a party to the Berne Copyright and Paris Patent Conventions, bears a commitment to protect U.S. inventive and artistic works. While Egypt's legal system provides protection for acquisition and disposition of all property, protection for all forms of intellectual property is inadequate and enforcement of current laws, although improving, is still ineffective. Although significant progress has been achieved in improving legal protection for copyrighted works and enforcement of the copyright law, Egypt has not yet passed a modern patent law. Because copyright progress was achieved, the U.S. Trade Representative decided to lower Egypt from the Special 301 "Priority Watch List" to the "Watch List" in April 1994. Progress will be reviewed again in the fall of 1994. On October 4, 1993, the U.S. Trade Representative (USTR) announced that his office had accepted for determination a petition filed by U.S. industry which requests that Egypt's tariff benefits under the U.S. Generalized System of Preferences be rescinded due to inadequate protection of intellectual property rights. Acceptance of the petition requires USTR, by October 1994, to decide if benefits should be rescinded. Patents: Egypt's 1949 patent law excludes certain categories of products and contains overly-broad compulsory licensing provisions. Product patent protection for pharmaceuticals and food products is excluded. The patent term is only 15 years from the application filing date. A five-year renewal may be obtained only if the invention is of special importance and has not been worked adequately to compensate patent holders for their efforts and expenses. Compulsory licenses, which limit the effectiveness of patent protection, are granted if a patent is not worked in Egypt within three years or is worked inadequately. In August 1993, U.S. officials conferred with Egyptian officials and proposed revisions to the draft patent law text. The draft law represents a significant improvement, and if implemented, could be considered a model patent law for the developing world. Egypt has made a commitment to the United States to submit a suitable new patent law to the People's Assembly by September 1994. Industrial designs receive protection (under the Patent Law) through registration with the Bureau of Industrial Designs in the Ministry of Supply. Copyrights: In response to U.S. and domestic industry calls for improved legal protection for copyrighted works, the government passed Law 38 of 1992, amending the 1954 Copyright Law. Penalties against piracy were increased substantially, and computer software was afforded specific protection. The amendments did not resolve all areas of U.S. concern, however. As a result of U.S. lobbying, in March 1994, the government passed Law 29 which amended Law 38 and ensured that computer software was afforded protection as a literary work (allowing it a 50-year term of protection). In addition, in April 1994, the GOE issued a ministerial decree which clarifies rental and public performance rights, protection for sound recordings, and the definition of personal use. Although the legal framework for protection of copyrights has improved significantly, and enforcement has been stepped-up, copyright piracy is still widespread and affects all categories of works. Holders of copyrights on motion pictures (in video cassette format), sound recordings, printed matter (notably medical textbooks), and computer software suffer the greatest harm, although video piracy has fallen off over the past year. Trademarks: Trademark protection is provided by Law 57 of 1939. Egypt is a member of the Paris Convention for Protection of Industrial Property of 1883, the Madrid Convention of 1954, and the Nice Convention for the Classification of Goods and Services. Instances of alleged trademark infringement have been cited frequently by U.S. and other foreign firms operating in Egypt. The trademark law is not enforced strenuously and the courts have only limited experience in adjudicating infringement cases. Fines amount to less than $100 per seizure, not per infringement. Judgments and enforcement thereof must be made separately in each of the 26 governorates. Trade Secrets: Egypt has no specific trade secrets legislation. Protection of commercially valuable information is possible through contractual agreement between parties. Breach of contractual terms of protection can be remedied in legislative proceedings under either the civil or criminal code, depending on the severity of the damage caused. Semiconductor Chip Layout Design: There is no separate legislation protecting semiconductor chip layout design, although Egypt signed the Washington Semiconductor Convention. A-8 REGULATORY SYSTEM: LAWS AND PROCEDURES The streamlining of investment procedures over the past three years represents a positive step toward facilitating new investment, but there is room for much improvement in the general business climate in Egypt. Egypt's accounting system is not consistent with international norms. The often arbitrary imposition of bureaucratic impediments and the length of time which must be spent resolving them remain significant obstacles to increased private sector investment in Egypt. For example, Egypt's Capital Markets Law 95/1992 stipulates that any company wishing to make a public offering must obtain the approval of the Capital Markets Authority, however, it does not bind the Authority to a time frame to grant the approval. The decision-making process is complex, non-transparent, and often inconsistent. If the government meets its pledge to implement a comprehensive domestic commercial law, combining Public Business Law 203, Companies Law 159, and Investment Law 230, this could improve the situation, but bureaucratic efficiencies in any number of Egyptian agencies will continue to plague investors for the foreseeable future. Labor redundancy is a problem, particularly in the public sector. The current Labor Law does not allow lay-offs of workers without the approval of a specific government committee. Dismissal of individual workers is restricted to specific cases and involves a lengthy and tiring process. Fear of a social backlash is cited as a primary reason for the government's hesitation to proceed expeditiously with its privatization program. The private sector is urging the government to enact a new labor law allowing employers to have more control over hiring and firing, but a draft labor law has yet to emerge from interagency review. Adherence to health and safety regulations is uneven and enforcement is complicated by a multiplicity of laws, agencies, and opinions. For example, at least four ministries regulate the operation of restaurants. A-9 EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT Private foreign investors have access to credit in the local market. The market offers only a very limited range of financial instruments: treasury bills, a few stocks traded on the Cairo exchange, and CD's. There is no active securities or bond market. In January 1991, the Government began issuing Treasury bills with tax-free interest rates determined at auction. The Central Bank uses the three-month treasury bill average interest rate as an indicator for the Central Bank's discount rate. Treasury bill sales have been very successful, but experts believe they may be crowding out private sector investments. In order to activate the stock exchanges, the Government issued the new Capital Market Law 95/1992, allowing establishment of mutual funds and companies operating in the securities market. The Law exempts returns on securities of public subscription companies from taxes and stamp fees. It also allows issuance of bearer shares. Moreover, it removes the ceiling on bond return (formerly, returns on bonds could not exceed 7%). The Law's executive regulations were issued in April 1993. A few securities companies have received preliminary and/or final approval to operate, however, they are still in the establishment phase, making it difficult to assess the impact of the law on capital market formation. Two mutual funds have been licensed. Revival of the Egyptian stock market is closely tied to the progress of the privatization program as it makes shares available for trading. A-10 POLITICAL VIOLENCE There exist terrorist groups which profess violence in order to de-stabilize or attempt to overthrow the current government. A spate of extremist violence included gunfire and bombs striking tourist buses and some tourist sites, as well as some public facilities in a period of late 1992 to early 1994. Most extremist targets, however, seem to be police or other symbols of the Government's security apparatus. The last recorded political violence involving the collective targeting of foreigners occurred in 1977 when rioting police cadets trashed several foreign-managed and Egyptian owned or Egyptian-managed hotels, restaurants, and tourist facilities near the Pyramids complex. Generalized civil disturbances are unlikely. Nonetheless, the possibility of scattered terrorist incidents anywhere in Egypt is possible at any time. U.S. citizens travelling to Egypt should avail themselves of the State Department's regularly up-dated travel information on security conditions within Egypt and contact the Consular Section of the American Embassy in Cairo for current assessment on travel conditions. B. BILATERAL INVESTMENT AGREEMENTS On June 27, 1992, the U.S.- Egypt Bilateral Investment Treaty (BIT) went into effect. As mentioned previously, the treaty provides for fair, equitable and non-discriminatory treatment for investors of both nations and includes the following provisions: international legal standards for expropriation and compensation; free financial transfers; and procedures, including international arbitration, for the settlement of investment disputes. Egypt has signed investment agreements with the following countries: the United States, Germany, the United Kingdom, Sweden, Switzerland, Japan, the Netherlands, Belgium, Luxembourg, France, Italy, Greece, Finland, Romania, Sudan, Morocco, and Thailand. C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS Egypt and OPIC have an investment guarantee agreement providing political risk insurance for U.S. private investment, as well as for bid, performance, advance payment, and customs bonds and guarantees issued on behalf of U.S. suppliers and contractors in Egypt. To date, 25 U.S. investment projects in Egypt have been covered by OPIC insurance. Egypt is a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA). D. LABOR The civilian labor force was estimated at 16.4 million in 1993, with 14.3 million estimated as employed. Over 5 million workers are employed by government agencies or in the public sector. Many more millions probably hold part-time or seasonal jobs in the large informal sector of the economy where employment statistics cannot be accurately estimated. Excess labor and underemployment characterize the staffing patterns in public-sector companies. Egypt has a surplus of both unskilled and skilled labor. Consequently, many workers in both categories have sought employment abroad. While the official unemployment rate is 10%, unofficially unemployment is estimated at 14% or higher. The Government is expected to submit a new draft labor law to the People's Assembly in 1994. The proposed law provides statutory authorization for the rights to strike and to collective bargaining. Under current labor law such rights are not adequately guaranteed. Under the current law, unions may negotiate work contracts with public sector enterprises if the latter agrees to such negotiations, but unions otherwise lack collective bargaining power in the state sector. Under current circumstances, collective bargaining does not exist in any meaningful sense because the government sets wages, benefits, and job classifications by law. Larger firms in the private sector generally adhere to such government-mandated standards. Even though the right to strike is not currently guaranteed, strikes do occur. The government considers strikes a form of public disturbance and hence illegal. Most job actions are organized by the workers themselves. Union leadership keeps its distance from such actions because the law empowers the government to remove from office any union executive who provokes a strike. A frequent reason for such job actions is company failure to pay workers' bonuses. As a result of the economic reform program, Egyptian Trade Union Federation (ETUF) leaders are training union leaders in collective bargaining techniques and in new approaches to labor-management relations. With the passage of the new labor law, ETUF is expected to gain more authority to negotiate wages, hours, and conditions of employment with individual companies. Employers expect the new law to grant them greater legal authority to dismiss workers. Under the current law, the dismissal of workers is difficult, except for documented cases of incitement to strike, extremely poor work performance, chronic absenteeism, or willful damaging of property. Wage rates are low, even with social insurance payments and other fringe benefits. Egyptian workers may, but are not required to, join trade unions. There are 23 industrial unions. All must belong to ETUF, the sole legal labor federation. ETUF officers are freely elected and formulate policy independently of the government. However, the International Labor Organization (ILO) has long noted that a law requiring all unions to belong to a single federation infringes on a worker's freedom of association. The ILO has also criticized provisions of the law which provide for compulsory arbitration if requested by only one party to a dispute. Labor and Investment Law 230: Inland investors - including those under Investment Law 230 - are required by the Companies Law to employ 9 Egyptians for every foreigner, unless an exemption is obtained from the appropriate authorities under Investment Law 230 must employ nine Egyptians for every foreigner. In the free zones, Egyptian personnel must comprise no less than 75% of the project's work force. Certain restrictive sections of the Labor Law are not applicable in the free zones. The Investment Law 230 provision requiring companies to distribute 10% of profits to employees was amended in January 1992 to require distribution of 10 percent of distributed profits (instead of 10% of total net profits) up to a ceiling of not more than 100% of salaries. This amendment placed Investments Law 230 companies on an equal footing with companies organized under Companies Law 159 and public sector companies regulated by Public Business Law 203/1991. E. FOREIGN TRADE ZONES/FREE PORTS Investment Law 230 distinguishes between "inland" investments and investments in free zones, which are designated areas in Cairo, Alexandria, Port Said, Suez, Ismailia, Damietta, Safaga, and Sohag. Foreigners have the same investment opportunities in the free zones as their domestic counterparts. Companies producing largely (normally 80% or more) for export can be established in the free zones and operate free of customs duties and taxes. An annual fee of 1% of the value of the commodities traded by a project or proceeds of the enterprise, whichever the case may be, is collected from free zone investment companies. Goods produced in the zones are treated as imports if sold in Egypt and are subject to customs duties and import regulations. In general, free zone companies face minimal regulations compared to inland investments. See Section B1A above for more information on Investment Law 230 and exemptions for free zones. F. CAPITAL OUTFLOW POLICY Egypt's foreign exchange policy resulted in the October 1991 creation of a single, free foreign exchange market with no restrictions on foreign exchange current transfers outside the country. High interest rates, stable exchange rates, and remaining uncertainty in other countries of the region stimulated large capital inflows and dedollarization of the economy. New inflows are concentrated in short-term deposits and treasury bills, not in long-term investment. Egypt's leaders envision foreign investment as a net inflow of resources to assist economic growth and development. A new foreign currency law was passed in April 1994, eliminating all restrictions on repatriation of tourism and export proceeds. While the government promotes the creation of closer economic ties with its neighbors, trading partners, and aid donors, it does not push for increased Egyptian investment abroad. G. FOREIGN DIRECT INVESTMENT STATISTICS Statistics were provided by GAFI and include only approved investment projects established under Investment Law 230 as of June 30, 1993. Neither more recent nor more extensive data on foreign investment is available from the Egyptian government. Information below does not include foreign investment in petroleum and minerals exploration projects, nor does it include information on investment projects formed under Companies Law 159. CUMULATIVE Investment Law 230 FOREIGN INVESTMENT IN EGYPT BY COUNTRY AS OF JUNE 30, 1993 (IN MILLIONS OF EGYPTIAN POUNDS) COUNTRY NUMBER OF COUNTRY TOTAL INVESTMENT PROJECTS PARTICIPATION CAPITAL COST --------------------------------------------------------------- U.S.A. 158 1198 3353 5499 U.K. 104 405 1133 1778 FRANCE 63 220 941 1408 GERMANY 77 197 756 1194 LUXEMBOURG 38 180 710 1032 ITALY 54 137 623 1458 NETHERLANDS 30 99 482 813 DENMARK 15 83 122 300 IRELAND 3 34.1 671 1341 SPAIN 9 29 79 101 BELGIUM 11 21 55 149 GREECE 11 16 24 90 PANAMA 31 673 1047 1932 CANADA 13 12 40 49 SWITZERLAND 80 475 1029 1974 ROMANIA 3 77 191 191 SWEDEN 9 28 95 169 NORWAY 6 21.2 44.5 160.5 POLAND 2 19 65 82 CZECHOSLOVAKIA 2 9 10 13 FINLAND 4 4 9 14 RUSSIA 5 4 7.5 8.5 AUSTRIA 4 2 5 5 AUSTRALIA 3 2 6 12 JAPAN 14 76 373 878 HONG KONG 7 31 65 122 MALAYSIA 2 20 46 119 KOREA 5 11 59 90 SINGAPORE 4 10 42 95 CHINA 4 1.7 6 8 OTHERS 44 530 1515 3167 -------------------------------------------------------------- TOTAL 815 4625 13604 24252 H. MAJOR U.S. INVESTORS IN EGYPT U.S. firms have been active investors in Egypt for decades, although most firms currently in operation entered the market in the mid-eighties. The majority of U.S. investment capital is in the hydrocarbon sector, with Amoco the largest foreign investor in Egypt. Other U.S. oil and exploration and production companies include Mobil, Caltex, Arco, Esso, Texaco, Marathon, and Phoenix. Foreign investors (AGIP, Shell, Repsol and British Gas) are also significant in this sector. U.S. firms are active in banking and in a wide range of manufacturing industries, producing goods for the domestic and export markets. Examples of U.S. investors include: American Express, Citibank, Chemical Bank, Coca Cola, Ralston Purina/Eveready, General Motors, Johnson & Johnson, Proctor & Gamble, Squibb, Pfizer, H.J. Heinz, Chrysler/Jeep, Gillette, American Standard, R.P. Scherer, Bristol-Myers Squibb, Pepsico, Pioneer, and Xerox. Reliable current data on U.S. investments in Egypt is unavailable. The July 1993 "Survey of Current Business" reports that U.S. investment stock in Egypt fell from $1.24 billion in 1991 to $922 million in 1992, primarily due to a decline in petroleum investment. Conoco's departure from Egypt and reduced investment by other oil companies such as Amoco contributed to a drop in petroleum investments from $1.046 billion in 1991 to $735 million as of 1992. Egyptian authorities state that as of 1993, cumulative total U.S. investments (including petroleum) equal $1.2 billion. According to GAFI information, cumulative U.S. investments under Investment Law 230 (both inland and free zones) equaled LE 1.198 billion in 1993, approximately 5% of cumulative foreign investments from all sources (4.8% of inland investments and 11% of total free zone investments). GAFI figures do not include Companies Law 159 companies or petroleum sector investments. (Note: The June 1994 exchange rate was 3.39 Egyptian pounds per U.S. Dollar).