Egypt expands law granting domestic products preference

Egypt’s parliament has approved amendments to a law that gives preference to domestic products instead of imported ones in government contracts, drawing mixed reactions from local experts.

al-monitor Egyptians are seen in front of the headquarters of Telecom Egypt, one of the companies that could benefit from amendments to the product preference law, Cairo, Egypt, Sept. 21, 2017.  Photo by REUTERS/Amr Abdallah Dalsh.

Jun 11, 2018

CAIRO — Egyptian-made products just got a boost from parliament, which has approved amendments broadening a law that gives preference to domestic products over imported ones in government contracts.

On May 29, legislators passed changes to a 2015 law known as the Egyptian Industrial Product Preference Law in Government Contracts. The amendments expand the definition of industrial products to include information technology products and services. Also, the original law applied to government contracts only, but now preference also will be given to all contracts involving companies totally owned by the state and companies partly owned by the state in partnership with the private sector. Such companies include the Holding Company for Water and Wastewater, Telecom Egypt and Egypt Air.

With the amendments, a committee is to be formed to oversee granting preferences. The committee will include representatives of the ministries of Trade and Industry, Public Business, Supply and Trade, and Investment. The committee will also include representatives of all the Federation of Egyptian Industries (FEI) chambers.

The FEI or the Information Technology Industry Development Agency will issue forms indicating that at least 40% of a product or service is purely Egyptian. The prime minister can raise this to 50% if it doesn't affect the final product's quality. He may also exclude from the law certain contracts concluded by the police, the armed forces, intelligence agencies and other institutions that require confidentiality for national security reasons.

President Abdel Fattah al-Sisi must approve the amendments before they take effect, which could take several weeks, as he was just sworn in for his second term and is reviewing the new Cabinet and attending to details of the new government.

Rashad Abdo, the head of the Egyptian Forum for Economic and Strategic Studies, told Al-Monitor, “The amendments to the law are a great advantage to the state and local investors, as they encourage local producers to improve the quality of their products and lower their prices to remain competitive with international or foreign producers. When the Egyptian products are of better quality and are sold at the same price as foreign products, preference shall be given to the Egyptian products under the new law, and this encourages local producers to scale the quality of their products up to global levels.”

As for the gains the amended law can achieve for Egypt, Abdo explained, “The law will prompt providers of imported or foreign products to reduce their profit margin to be able to compete with local products. It will also prompt foreign investors to invest in Egypt so that their products are deemed local, because local products are any that are locally produced, regardless of the origin of their company’s capital.”

Ehab el-Dessouki, the head of the Economics Department at Sadat Academy for Management Sciences, disagrees with Abdo. He told Al-Monitor the law fails to take into account many international stipulations under the General Agreement on Tariffs and Trade (GATT). This agreement requires local products to compete fairly with imported products. He pointed out that Egypt could face major fines if another country sues or files a complaint with the World Trade Organization. Also, he said, the law could backfire on Egyptian producers, who might be tempted to lower both their prices and their quality, knowing they will receive preference.

Mostafa Badra, a Cairo University professor of funding and investment, told Al-Monitor that in cases when there are local products of the same quality that can replace imported products, the law leads Egypt to economize on the hard currency it usually spends on imported products.

Badra said the law doesn't ignore that many local Egyptian products rely on imported raw materials, and this is why it gives preference to local producers who use local raw materials in their micro, small and medium enterprises (MSMEs).

Also, the amendments stipulate that local MSMEs are exempted from half the amount of a bid bond and half the amount of a performance bond in any tender organized by the parties mentioned by the law in the event the industrial products of these MSMEs contain at least 40% Egyptian industrial components. This aims to stimulate MSMEs to sell their products to government companies and institutions.

Wael al-Nahas, an adviser to economic and investment institutions, told Al-Monitor the law is an opportunity to develop and improve Egyptian products, attract investments to Egypt and economize on the use of hard currency, which contributed to an economic crisis in 2015 and 2016 from which Egypt is still trying to recover.

As for the law's potential defects, Nahas agreed with Dessouki that it jeopardizes Egypt’s status in GATT.

"In addition," he said, "government corruption may allow some Egyptian investors to acquire tenders and supply orders issued by the government without any regard for quality and based on the sole fact that they offer the same price as foreign investors.” While the law calls for quality-control committees, there are concerns that these committees also will be marred by corruption.

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