In the next few days, Egypt will have both a new president and the same old problems. Among them, a sub-optimal level of investment and associated governance deficiencies that have bred and been nurtured by the country’s poor economic performance.
Both problems were highlighted by the Egyptian government’s recent approval of a law barring third parties from challenging investor-state contracts in Egyptian courts.
Issued amidst an economic crisis, an investment slump, a slew of post-January 25 investor claims against Egypt, and notable court-ordered reversals of Mubarak era investor-state contracts, the new law aims to bolster investor confidence, particularly among Arabian Gulf-based investors whose home governments have since July 2013 pumped billions of dollars into Egypt.
Hardly a cure for Egypt’s investment woes, the measure is symptomatic of official Egypt’s chronic inability to conceive and implement economic and investment policies proactively, rather than from a position of weakness and often as a condition of receiving outside financial or other aid.
The ban on third party legal challenges (Law 32 of 2014), which reportedly applies prospectively and retroactively to previously initiated third party actions, has drawn praise and criticism. Its proponents contend that it will provide investment security needed to lure investors. The law’s detractors argue that it will breed corruption and infringe on the judiciary’s oversight power (its constitutionality is now being tested).
Both sides raise valid points. Egypt needs investment. However, the ban on third party legal challenges will not insulate investors from public scrutiny (and potentially official intervention under political pressure). Nor will the law—a meager legal response to what is fundamentally a mixed political, economic, and governance problem—appreciably bolster the quantity or quality of investment in Egypt.
No Panacea for Investors
In post-uprising Egypt, a ban on third party legal challenges will not, by itself, eliminate or reduce the impact of public scrutiny, particularly where controversial investments involve Egypt’s champion assets (e.g., agricultural land, notable state enterprises) and industries (e.g., textiles, cement, natural gas), or the displacement of public sector employees following privatization.
In the Mubarak era, the government could afford to ignore public discontent or offer superficial concessions, even when public backlash was well-publicized. Today, the political calculus is vastly different. The costs to the government (even one headed by a popular president) of official obstinacy may very well exceed the burden of losing an investment opportunity or litigating an investor-state dispute.
Investors should understand that few, if any, politicians or governments will sacrifice political survival to uphold a contract. The removal of one category of legal risk—third party challenges—leaves investors exposed to the political and other risks that have fueled both third party legal challenges and investor-initiated claims against the Egyptian government.
In addition to being of dubious usefulness, the ban on third party legal challenges to investments may prove to be affirmatively disadvantageous for investors and the government. The very existence of the measure, particularly considering its timing and context, casts a shadow of suspicion on the government’s motives and invites interested third parties to more vigilantly monitor investor-state activity.
Moreover, by removing a legal avenue for challenging controversial investments, the government may have closed what could prove to be an important pressure relief valve. Lacking access to legal processes, third party opponents of investments who might have resorted to the courts may take their cases directly to the public (via protests, traditional or social media, etc.) to garner support and force the government’s hand. Such scenarios might not only result in adverse outcomes, but might also disadvantage the government and investors procedurally, by depriving them of notice and opportunities to respond or negotiate with some degree of discreetness.
Diversion from the Government’s Role
The ban on third party legal challenges assumes—or attempts to create the assumption—that Egypt’s investment woes are attributable wholly or significantly to meddlesome third parties whose legal challenges have muddied an otherwise pristine investment environment. The assumption is factually flawed and excuses the government from its responsibility to address its culpability for Egypt’s investment troubles.
While the number of both investor and third party initiated cases has spiked since 2011, Egypt’s pre-2011 record of investor-initiated claims in domestic and international fora makes clear that third party legal challenges have not been the sole or primary agitators of sub-optimal investment levels and investor-state disputes. In fact, investors’ negative perceptions of government conduct, such as corruption, have diminished Egypt’s attractiveness to investors, notwithstanding its commercially compelling demographics and strategic location.
For example, in response to a May 2011 Economist Intelligence Unit survey of executives commissioned by HSBC, 31 percent of executives cited corruption as “the main operating obstacle” to doing business in Egypt. To put this in perspective, more respondents were concerned with corruption in Egypt than were with corruption in five other Arab countries tested. For instance, only 16 percent of respondents viewed corruption as a main operating obstacle in Saudi Arabia and the UAE. Even conflict-ridden, post-war Iraq fared better than Egypt, with 27 percent of executives citing corruption as the main obstacle to operating in that country.
The Rule of Law
The ban on third party claims sends a troubling message about Egypt’s judiciary and legal processes. By statutorily banning third parties from challenging investor-state contracts in the courts, the government implies that Egypt’s courts, laws, and rules of evidence and procedure are incapable of weeding out legal actions that lack merit. Alternatively, the measure suggests that, post-January 25, court-ordered renationalizations of state assets or reversals of contracts made in the Mubarak era were politically motivated, rather than legally founded. True or not, these messages undermine, rather than bolster, the case for investment in Egypt.
Moreover, in the absence of verifiable data about third party legal challenges, neither investors nor the public can gauge the necessity and potential utility of the new law. To assess the law's value (and hold the government accountable based on facts), interested parties should know, among other things, the number of third party claims filed, the number of filed claims that reached the merits stages of applicable legal processes, and the number of claims that resulted in contract reversals or other court-ordered action.
Because the Egyptian government has presented the elimination of third party legal challenges as a measure that will boost investment, it should publish data that supports its action, to inform investors of its practicality and the public of its legitimacy.
New Government, New Approach?
By one indication, the markets have favorably received Egypt’s presidential election and its implications for stability—the cost of insuring Egypt’s sovereign debt for five years reportedly fell on the second day of balloting. The market sentiment, while positive for Egypt, is but a snapshot. In real economy terms, Egypt’s true bankability will be measured by a process, rather than by an event.
Unless Egypt’s next government takes concrete steps to enhance Egypt’s political, economic, and legal environment (namely by reliably enforcing existing laws), some investments (particularly those lacking transparency and viewed as corruptly procured) will continue to be controversial, with consequences.
To truly and effectively serve the public and investors’ long-term interests, Egypt’s next government will address the root causes of Egypt’s investment problems, rather than their offshoots.
The writer is a Washington DC-based lawyer whose practice includes international investment transactions and disputes with a focus on emerging and developing markets.