UK's former investment director in Egypt, John Franck, reveals what scares British investors the most about Egypt
The UK is the largest European investor in Egypt, and British companies investing here have continued to invest and expand their operations over all this period.
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With John Franck leaving his position as UK Trade and Investment Director in Egypt and Jason Ivory taking office in May, the Daily News Egypt interviewed Franck to review the bilateral trade and investment relationship between Egypt and the UK over the period he had been in post. Franck listed the challenges British investors face in the country, reaffirming his positive outlook regarding the economy.
How do you evaluate the commercial relationship between Egypt and the UK in the period you have spent in your position?
The time I spent in this job was two years; I arrived just as president Morsi was being elected. During this period, the volume of trade and investments between Egypt and the UK went down (compared to 2009 and 2010) and both exports from Egypt to the UK and imports from the UK to Egypt have been affected. Over the last year we have begun to see an improvement again. UK exports to Egypt are more or less the same in 2013 as they were in 2012, but Egypt’s exports to the UK went up by 21% in 2013. But I think we need to distinguish between trade and investments. The UK is the largest European investor in Egypt, and British companies investing here have continued to invest and expand their operations over all this period. But what has been difficult is attracting new people either to invest or do business.
How many British companies are currently operating in Egypt?
If you ask GAFI [the General Authority for Investments and Free Zones], they will tell you there are 900 companies with British capital in Egypt, but we think that this must be an exaggeration, as we haven’t found anything like that number of companies actually operating here. We know that there are at least between 200 and 250 British companies operating in Egypt and they are probably more, because we keep finding more; there is no obligation on companies to tell the British Embassy that they are doing business in Egypt, or to come through the embassy to do business.
What is the value of those companies’ investments?
If you look at the initial investments or the continued value of investments, I haven’t got that figure. The initial investment of for example BP (British Petroleum) and BG (British Gas) is something around EGP 30bn, but you know that they continue to invest. We haven’t got a figure of the total value of investments, but we know that we are the largest in Europe, and either the largest or second largest investor in Egypt globally. Amongst the main UK companies with a significant presence in Egypt are BP, BG, Vodafone, Barclays, HSBC, Carillion, Unilever, Shell, BAT, GSK, G4S, Kompass, Rexam, Actis, IHG, Astrazeneca and Standard Chartered.
What are the kind of products Egypt export to UK, and UK export to Egypt?
First, I have to make clear that our job here in the embassy is not to promote Egyptian exports to the UK; our job is to promote UK exports to Egypt, and to promote Egyptian investments in the UK. So it’s not our job to attract British investments here, but of course if a company wants to invest in Egypt and asks for help, we’d help. But it’s surely UK’s responsibility to attract investments to UK, and its Egypt’s responsibility to attract investments to Egypt. Responding to the question, exports from Egypt to the UK are vegetables and cotton (Marks and Spencer for example has products that are made of Egyptian cotton). And from UK to Egypt, I think it is mainly metal exports, automotive products, industrial machinery, medicinal and pharmaceutical products, and chemical materials and products.
What are the problems that face British investors in Egypt?
Stability – business likes stability, and there has been a lot of political, economic and social instability in Egypt in recent times. I mean that companies can’t be sure of how the future will look like, how things are going to change, what taxes are going to be paid for example; they don’t want several changes of political leadership because that leads to a change in the economic leadership. Once the economy is back on track, once the security situation has calmed down, and once a stable government is in place foreign business activity in Egypt will start to increase again. Also, lack of legal certainty of contracts would be another problem, because some business contracts that were signed several years ago have been challenged in court.
The cabinet has recently approved a draft law preventing third parties from challenging contracts between the government and investors, would that improve the business climate?
Yes, it has done. But this law can be challenged in courts as well. It is a step in the right direction but it does not provide a full solution to the issue.
What is the full solution that needs to be done in that regard?
If a contract is signed, then it is signed. But of course, if you can prove that there is some sort of injustice, dishonesty or fraud, that is different. Any legal system should allow challenges, but for random people who have a grudge against the company for whatever reason to be able to challenge contract validity, that should not be allowed. Foreign investors need to be sure that the money they pump in Egypt will be safe.
So the only thing the government can do to attract investment is to maintain legal certainty?
There is also another problem in the ability of companies to repatriate their profits; that is an issue with the exchange controls. Companies aren’t always able to send their money back to the UK, or to even get hold of money to pay their suppliers. So access to foreign currency is a major issue as well.
Also, for UK exports to Egypt, the customs and testing environment is very difficult and very challenging, because even if you have products that comply with international standards, they will still have to be tested before entering Egypt. This forms a problem for some companies, especially fashion companies, because some of their products are being held for several weeks and sometimes months for testing matters.
Before leaving your office, were there any new companies or investors planning to enter Egypt?
Actually, the companies that are here have continued to invest their money, HSBC Egypt had raised its capital in the last year for example, Vodafone continued to invest and expand its network and bring new products to the market. So the major British companies here have continued to invest in the market. The difficulty is for new companies because the business community is reluctant to commit lots of money to Egypt until there is more certainty. Some people are saying that there are no investments in Egypt as before, but that is not true, there are only fewer investments than before.
In our case we have had in the past few months two new British investors in Egypt. I cannot give the name of one of them, but it is in the oil and gas sector, and the other one is a private equity company called “Actis”. Until recently Actis was a major shareholder in CIB, it has a 30% stake in Edita, the food company, and is investing in other sectors too in Egypt, for example pharmaceuticals and ICT. And there are many other companies who, I know, would love to come and take advantage of Egypt´s many fundamental advantages as a place to invest and do business. They just need to see stability returning.
Are there any partnership projects between British companies and the Egyptian government?
I think the closet thing will be oil and gas companies, because according to the law you have to be partner with the government (oil and gas holding companies owned by the government) in order to enter the Egyptian market. But that’s not a very happy story at the moment because the International Oil Companies (IOCs) aren’t getting paid for the oil and gas they are providing to Egypt. Around 20% of the debt owed by the government to petroleum companies was been paid in December and it is expected that another repayment will happen soon. But billions of dollars are still owed, which is reducing the amount the IOCs willing to invest in Egypt in the future.
But in early May, BG pledged to pump $1.5bn in Egypt in the second half of 2014, is that true?
No, that’s a mistake. BP has made a commitment to continue some investments in Egypt not BG. It’s possibly a misunderstanding by those that reported this announcement. But from my knowledge BG is continuing its operations here without planning any future investments at the moment, because it needs to be paid its dues.
What are the factors that attract UK investors to the Egyptian market?
There are many advantages of Egypt as a place to do business. The geographical location is good, it’s very close to Europe, Africa and the Middle East. It also has the Suez Canal, through which I think 8% of global trade travels every year. Egypt has free trade agreements with number of its neighbours in Africa and the Middle East which is really useful for companies wishing to export to countries in these regions. There is also a reasonably-priced work force and lots of raw materials, not just oil and gas but also others including phosphates and gold. The demographics of the country are very favourable as around 50% of the population is 25 year-old or under, which tells a lot about the potential productive capability of the country as well as increasing consumer demand. The increasing population needs to be fed, watered, housed, clothed, educated, entertained etc. There are many opportunities in Egypt for international businesses.
Is there a figure for the market share of British companies compared to other foreign companies?
There’s no figure and we are not really interested in knowing the market share, what we care about is making sure that a climate exists for the appropriate British companies to come and do business here, support the development of Egypt, and make profits for themselves. Egypt´s needs are great, and there is plenty of opportunity here for everyone.
After 30 June 2013, Egypt’s interim government has taken several measures in order to revitalise the economy, what do you think of those measures?
Egypt’s economy is in a bit of a mess, we have to look at where the country is getting money from and where it is spending its money. For example, Egypt is spending around 25% or 30% of its budget on subsidies and that has to change. Even the government knows that this has to change. Regarding where Egypt gets its money from, it’s largely from taxes, but there is very large informal economy that doesn’t pay taxes at all, and even people who should pay taxes do not always. Remittances from Egyptians working overseas are a major and growing source of income. In addition, Egypt also gets money from the Suez Canal and also from tourism and foreign direct investment (FDI). In recent years the last two sources went down due to instability. Once you get security and stability back, tourists and investments will come back because the reason they came at the first place haven’t changed. In the meanwhile the country is relying on support from wealthy friendly neighbours. I suspect that this cannot go on forever.
Answering your question, yes there are many things that have been done in order to boost the economy, yet there is still a lot more to be done.
What is the first economic move the new president should consider?
There’s no doubt that Egypt needs a proper economic programme to find its way out of the problems it is currently facing. It also needs to have a programme to make sure that the people do actually feel secure whether they are investors, tourists or Egyptians. Until those two things happen, it is way difficult to see the situation changing here.
What are the most needed reforms to activate the economy?
The subsidies as I mentioned is the main reform I think. He also should tackle the tax collection issue.
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