The term “Sovereign Funds” appeared recently on a large scale in the Arab countries. However, the significance, mandates and targets of these funds remain unclear to the public. Among the most recent of these funds is the Sovereign Fund of Egypt (TSFE), which has moved rapidly since 2018. During 2020, especially in Q3 & Q4, TSFE accelerated its implementation steps to more than just preparatory or legal steps. Up to the current month of April 2021, news of the fund has become more frequent. The Egyptian Fund joined the list of the Institute of Global Sovereign Wealth Funds in early 2020 for the first time, the institute ranked 43 out of 90 global funds and based on this classification the fund’s assets were estimated at USD 11.959 billion.
Sovereign Wealth Funds
Sovereign wealth funds, also known as sovereign portfolios, are investment portfolios entrusted with managing some of the state’s wealth and the financial reserves of its government. The capital of these funds may consist of a variety of sources, such as land, stocks, direct ratios in companies, commercial real estate and other investment tools. Countries always strive to increase their returns, so sovereign wealth funds have become important investment arms for countries. Unlike traditional investment vehicles which favors quick profits, sovereign wealth funds usually eye long term investments ranging from 5 to 15-year investments or strategic investments related to economic diplomacy and national security. Therefore, it is often managed with exceptional precision. This type of portfolio / fund contains some of the foreign exchange reserves (especially the US dollar) owned by the government, the excess returns in foreign currency from certain assets such as oil exports. Then the money is invested by the fund to achieve the highest possible return. Despite the importance of sovereign funds for countries, it is associated with some risks that might threaten financial markets, that we won’t discuss in this article.
This fund, therefore, could take different forms such as: (1) an account with the central bank, (2) a government agency, or (3) an independent public entity. Countries may combine more than one type of fund together. The State of Kuwait took the lead in establishing a clearly defined entity; the “Kuwait Investment Council” established in 1953. The first and the world’s most prominent fund is the Government Pension Fund in Norway.
In Egypt, the sovereign fund was established according to Law No. 177 of 2018, and its articles of association were issued in February by Prime Ministerial Decree No. 500 of 2019. The main objective of establishing this fund based on the Prime Ministerial Decree was: “Contributing to sustainable economic development by managing its money and assets and achieving optimal utilization of them according to the best international standards and rules, to maximize their value for the sake of future generations, and for the sake of that, the Egypt’s sovereign wealth fund has the right to cooperate and participate with Arab and foreign counterpart funds and various financial institutions.” It is important to note that TSFE is an entity that enjoys different practices and rights in some respects as opposed to traditional commercial companies. The assets of the fund transferred to it in accordance with the provisions of this law include unused lands and architectural assets (buildings), especially those that have not been optimally utilized over the past decades, which represents one of the main sources of the fund. The fund’s resources also include (1) the fund’s capital, which represents 5 billion Egyptian pounds (2) returns from investing its money and exploiting its assets, (3) loans and facilities it obtains, and proceeds from issuing bonds and other financial instruments, and (4) other resources that the Board of Directors approves case by case, and a decision is issued by the Prime Minister on its acceptance.
TSFE in 2020: Suggested Amendments
In June 2020, the Egyptian Parliament officially announced the initial approval to amend some provisions of Law No. 177 of 2018. These amendments seek to raise the efficiency and effectiveness of the fund’s performance, to support the national economy. However, these amendments have not yet been ratified. The proposed amendment to the law contains expanding the tax exemption umbrella to include exempting the funds in which TSFE contributes more than 50% of their capital from paying value-added tax. This decision, taken also by India, aims to attract and target a select group of investors such as the Abu Dhabi Investment Authority through its wholly owned subsidiary companies and stimulate sovereign wealth funds and pension funds in order to increase their commitment or allocations[1]. The draft law also added a jurisdiction for the fund’s board of directors to allow international expertise houses to evaluate assets, within the framework of Egypt’s 2030 vision for development.
Hence, the Minister of Planning and Chairman of the Board of Directors of Egypt’s Sovereign Fund, Dr. Hale Al-Saeed, announced in the Parliament session on discussing the law that among the proposed amendments is the addition of an article replacing the name of the fund from “Egypt Fund” to “Egypt’s Sovereign Fund for Investment and Development.”, So that the name of the fund expresses the purpose of its establishment and the nature of its work. In addition to legalizing recourse to the declared coordination between the competent authorities, and in particular the parties that own the assets in the event the fund wishes to include them. These suggested amendments means that Egypt became more specific in achieving the mission of the fund, as clearly announced in September 2020 that the fund aims to invest without putting pressure on the state budget.
- TFSE’s Expansion: Rearrangement of Priorities
The fund began working to expand its areas of focus to move in a different way recently, as two investment cooperation agreements were signed in November 2019 with the Ministry of the Public Business Sector and the National Investment Bank to maximize the benefit of some of the assets owned by them. Despite the COVID-19 pandemic, 2020 was considered a watershed year for the Egyptian Investment Fund. Firstly, in November 2019, Egypt had expected that the fund’s capital will reach EGP one trillion (63 billion dollars) within three years, currently at EGP 200 billion now. Therefore, the fund will be used to the maximum extent in the current period in an effort to reach such target. In May 2020, TFSE signed a Memorandum of Understanding with the American Concord International Group to establish a joint company to manage a fund specializing in healthcare in the Middle East and North Africa region. The first phase of the specialized fund valued at USD 300 million aims to maximize long-term assets by taking advantage of foreign direct investment opportunities in addition to attracting foreign direct investment flows and creating joint investment opportunities in other mega projects.
In June 2020, The Egyptian sovereign wealth fund announced a rearrangement of its priorities to include vital sectors and the healthcare sector, due to the COVID-19 pandemic crisis. The fund would redefine its priorities to include food and drug manufacturing, healthcare services, financial services and financial inclusion sectors, in addition to completing the establishment of 4 sub-funds covering priority sectors in the fields of healthcare, food manufacturing and agriculture, infrastructure, services and financial technology. They are:
- Misr Sub-Fund for Utilities and Infrastructure,
- Egypt Sub-Fund for Tourism, Real Estate Investment and Antiquities Development,
- Egypt Sub-Fund for Health Services and Pharmaceutical Industries,
- Misr Sub-Fund for Financial Services and Digital Transformation.
Three more sub-funds are to be established soon. In August 2020, Dr. Hala Al-Saeed also signed a protocol for joint cooperation, with the Minister of Electricity and Renewable Energy Muhammad Shaker, to maximize the benefit from the projects and assets owned by the Ministry and develop them, whether in the field of traditional or renewable energy or linking projects with neighboring countries at the regional and international levels, in an effort to increase the volume Investments and diversification of the fund’s financing sources. The fund started to study the transfer of some projects and assets of the Ministry of Electricity and Renewable Energy to the fund’s “assets available for investment” portfolio. It is also expected that Zarou[2] will invest one billion dollars in Egypt, through Egypt’s sovereign fund, in several developmental areas, foremost among which is the field of infrastructure. This company works in the field of developing, owning, constructing and operating renewable energy stations, transporting oil and gas, and the field of water desalination and sanitation in the Middle East region.
In September 2020, Ayman Soliman, Executive Director of Egypt’s Sovereign Fund, announced the beginning of a plan to transform the downtown area (the heart of Khedivial Cairo) into a destination for tourism, business, cultural and civilizational activity, with the need to better utilize the Tahrir complex, as well as the land of the National Party.
TSFE Moves Towards Maximizing the Economic Benefits
TSFE wants to maximize the benefit of the old capital, and the desire to efficiently make use of all its assets (real estate and land) in the coming period, which is in line with the state’s plan to leave all old government buildings of heritage weight and great historical importance and move to the new administrative capital. The government returns to revive some projects that attracted great government interest before the 2011’s revolution, on top of them converting the downtown area to a non-residential area, to become not only a tourist arena similar to an open museum, but also to be an attractive space for various investments, especially with the expression of interest from many real estate developers and investors, i.e., Al-Ismailia for Real Estate Investment, specialized in restoration of heritage buildings. Arab and foreign investors over the years desire to invest in this region in the event that the state organizes this step appropriately for them.
The Egyptian government works on an integrated plan to take advantage of all its resources in a way that is worthy of follow-up, as the official gazette also published last September, President Abdel Fattah al-Sisi’s decision, No. 459 of 2020, to remove the public benefit from the state’s public property contained in Article Two of this decision. The second article of the decision included the transfer of ownership of real estate, which is later explained according to the attached maps and coordinates for the benefit of the Egypt Fund, namely:
- the land and building of Tahrir complex (Mogamaa el-Tahrir),
- the land and buildings of the administrative headquarters of the Ministry of Interior (the old building),
- the land of the National Party next to the Egyptian Museum,
- the land and buildings of the exploratory educational village, the 6th of October city,
- the land and buildings of the cosmic city of the 6th of October,
- the land and buildings of the annex of the Nasser Institute in the Corniche of Shubra Egypt,
- the land of Andalus Park “Tanta Zoo” in the Gharbia governorate.
TSFE also announced also that Egypt has started talks about plans to sell electricity to Europe and Africa and using its advantage as a producer of cheap renewable energy in an attempt to become a regional export hub, in order to exploit the available surplus of the Egyptian electricity. In this regard, Egypt provides electricity to Europe via a planned submarine cable to Cyprus and Greece, after the fund announced that it had reached an agreement with the Ministry of Electricity to communicate with investors for export plans, and contact has already been made with Libya and Jordan, also Egypt is seeking to supply emerging economies on its side is from the Mediterranean. For now, this strategy might face many challenges during the rise of TSFE, especially if it tries to rely on the Egyptian private sector to support it in some projects related to infrastructure and tourism due to residual fears from crowding-out the private sector. This had begun to emerge after news circulated about the project to develop the historic Bab al-Azab neighborhood in Old Cairo and the breakdown of talks with private investors.
It is unclear the direction of the fund at the present time, especially after the Egyptian financial group Hermes Holding announced that it intends to acquire with the fund a share of not less than 76% of the capital of the Arab Investment Bank, mostly by subscribing to increasing the issued and paid-up capital of the bank, by purchasing Number of shares owned by the National Investment Bank. Moreover, Nigeria’s Africa Finance Corporation (AFC) started in last February to explore different investments in the Egyptian market in 2021 through TSFE.
However, in March 2021, TSFE has begun his steps towards supporting the State’s sustainable development strategy by creating value out of unutilized assets to support the Egyptian education sector. Accordingly, TSFE signed a memorandum of understanding to develop and operate two premium national schools western Cairo with GEMS, which will be built over 30,000 sqm (TSFE owned land) with a capacity of 2,500 students each. So currently, TSFE is seeking realizing multiple objectives in maximizing the utilization of its assets by investing in development, noting that the education sector in Egypt is already considered as an attractive sector for local and global stakeholders.
Conclusion
In the Egyptian case, talking about any serious and real attempts to convert this fund into an investment entity that serves the citizens of the state with full transparency and integrity, requires ensuring the supervision of the competent supervisory bodies over its activities. In addition to not being immunized against judicial oversight and providing space for popular accountability as well. The extent of the government’s vision and goal of this fund will be shown through transparency in what will be issued by the Central Auditing Organization, and the annual reports that, according to the law, are supposed to be submitted to the Fund’s Board and then to the President and to Parliament. Although Egypt is currently considered far from exploiting its fund in economic crises nationally in the short term due to the fact that it is still an emerging fund, but if it works to increase its investment, it may contribute in the future to support the state to bridge the public budget deficit, and then it may strengthen the future per capita share of the state’s wealth by contributing to the national GDP, in addition to the possibility of prioritizing the use of TSFE to create alternative localized financial tools to finance the SDGs. Some believe that the Egyptian Fund needs more oversight and transparency mechanisms, with the aim of achieving the greatest national economic benefit from it and reducing the international obstacles it may face on the way to growth. This point still remains as a fundamental challenge for the Egyptian sovereign fund, especially in the current period where the fund is required to take all necessary measures to obtain confidence from various international bodies, and the possibility that Egypt will obtain it through international loans and facilities. The proposed amendments appear to be targeting to expand the powers of this fund and its staff, and to try to bypass the bureaucracy that already exists between governmental institutions. It is difficult now to conclude the possibility of TSFE to support the national economy, and accordingly establishing a participatory mechanism that allows societal control and contribution to the work of TSFE and creating a tool to continuously follow up their activities.
[1] Amendment of Article (3) to expand the objectives of the Egypt sovereign Fund, in contributing to sustainable economic development through the management of its funds and assets, or state-owned entities and entities or its affiliated entities, or state-owned companies, or contribute to them whenever those entities entrust the Fund to manage these funds and assets to achieve optimal utilization of them in accordance with the best international standards and rules, and the controls stipulated in the fund’s articles of association, and the fund may, for the sake of that, cooperate and participate with Arab and foreign counterpart funds and various financial institutions. Article (6) of the law permits the president of the republic to transfer the ownership of state-owned assets, exploited or untapped, to the fund and also defines the methods and mechanisms for evaluating the fund’s assets. Article 6 bis also regulates the President’s decision to transfer ownership of the assets stipulated in Article (6) of Law No. 177 of 2018 by establishing the Misr Fund by way of deposit without fees, and this deposit has the legal effects of the month. And amending Article (19) to decide to exempt the inter-agency transactions of the fund and the entities fully owned by it only from all taxes, fees and the like, to include those exemptions and interactions between the Egypt Fund and the subsidiary funds and the companies in which the Fund contributes.
[2] Zarou is an owned by private equity giant Blackstone, Zarou is a MENA-focused energy development company that finances, constructs and operates renewable energy, oil and gas, and water projects in the region.
