The Egypt Sovereign Fund Law is Iss

On 18 August 2018, the Official Gazette published Law No. 177 of 2018 which establishes the Egypt Sovereign Wealth Fund (“ESWF”) with an authorized capital of EGP 200 billion, after the House of Parliament approved it last July. According to the law’s provisions, the fund aims to contribute to sustainable economic development through management of state funds and assets, and is eligible to participate in all economic and investment activities, including private equity, investing in listed and unlisted securities, debt instruments, and other financial instruments inside and outside of Egypt, and making use of movable and fixed assets. Transactions between ESWF and its wholly-owned subsidiaries are exempt from taxation, save for taxes on dividend distribution.

Background

A sovereign wealth fund (“SWF”) is a pool of money that is owned by the state and set for global investment in different classes of financial assets. Historically, SWFs were established in order to invest state surpluses from certain commodities such as oil in the Gulf. One of the first SWFs to be established was therefore the Kuwaiti Investment Authority in the 50s, which was followed by other SWFs including the Abu Dhabi Investment Authority in the 70s, and the largest SWF to date, the Government Pension Fund of Norway established in 1990. Together with the China Investment Corporation, and the Saudi SWF: SAMA Foreign Holdings, the aforementioned SWFs represent the largest in the world. Today, several countries have SWFs and their collective impact on the global economy is significant. SWFs are typically financed by budgetary surpluses as a way to diversify investment for countries that mainly rely on a single commodity for much of their wealth. They invest in varying types of assets including government bonds, equity, real estate, hedge funds, and foreign direct investment. SWFs are different than national pension funds in that the invested money belongs to the state and is not eventually paid out for the benefit of a certain group, such as pensioners. Because of their sizeable impact on the economy which comes with their sheer volume and sometimes the companies or countries they invest in, and because of the higher degree of risk that comes with holding large stakes in volatile markets, SWFs have been criticized – especially following the 2008 global economic crisis – because of their lack of transparency and the fact that they do not typically reveal their portfolios. In Egypt, there has been talk of a government desire to establish a SWF for a while. This has intensified following recent natural gas discoveries, and the official re-launch of a program to divest state-owned assets through the issuing of Cabinet Decree 926 of 2018, which we have covered in our Egypt Legal Update Issue of May 2018, Week 4. At the time that the Sovereign Wealth Fund Law was discussed in Parliament last July, the House’s Budget and Planning Committee suggested an amendment that would mandate that the Fund’s financial statements, auditor and annual reports be presented before Parliament. However, this amendment did not eventually pass.

The Egypt Sovereign Wealth Fund Law[1]

The Law establishes a sovereign wealth fund with independent legal personality and allows its board of directors to establish branches and offices in Egypt and abroad. The stated goal of ESWF is to contribute to sustainable economic development through managing the fund’s money and assets in the best possible manner in accordance with international standards in order to capitalize value for future generations. For that purpose, ESWF may collaborate and participate with other Arab and International funds, and other financial institutions. ESWF’s authorized capital is EGP 200 billion, and its issued capital is EGP 5 billion of which 1 billion is to be paid from State Treasury at incorporation, and the rest (of the issued capital) over three years. It has the right to manage its money itself or delegate management of all or part thereof to external managers. ESFW may also delegate the management of subsidiary funds to specialized companies or institutions without having to comply with government rules and systems. Furthermore, ESFW and its subsidiary funds are considered by virtue of the ESWF Law private persons that are subject to private law. Some of the consequences of that are that disputes arising in relation to the fund and its subsidiaries will fall under the jurisdiction of the general court system rather than administrative courts, that its employees might be considered private employees, and that the fund and its subsidiaries are not subject to public sector rules (which the Law explicitly stipulates). On the other hand, the fund’s assets are considered privately owned state assets, and the Law grants the president the right to transfer privately owned state assets to ESWF or any wholly-owned funds it establishes. ESWF’s board of directors is to be chaired by the Minister of Planning, and include five independent experts, and a representative from the ministries of Planning, Finance, and Investment. The board sits for four years that may be renewed for a similar period, and the fund is represented by an Executive Manager. As for the fund’s general assembly, that is to be formed by a presidential decree, headed by the Prime Minister, and include the ministers of Planning, Finance, and Investment, one of the CBE deputies, and seven experts in the fields of finance, economy, law, and fund management that are recommended by the Prime Minister. ESWF’s financial resources are comprised of its capital, assets that are transferred to it, returns on the fund’s investments and issued debt instruments, loans and facilities it obtains, and other resources that its board approves and the Prime Minister ratifies. Assets are listed in ESFW’s records based on their market value, and the Law specifies that disposing of wholly-owned ESWF assets is undertaken through sale, hire purchase, usufruct, or in-kind contribution, based on a market valuation that is calculated by taking the median between three financial appraisals by FRA and CBE certified appraisers. The fund has an independent budget that follows Egyptian Accounting Standards. It is audited by the Central Auditing Agency and a second CBE-certified auditor. ESWF’s financial statements are presented to its general assembly ahead of being submitted to the president within three months from the end of the fund’s fiscal year, which is to be determined in the fund’s bylaws that the Law states are to be issued by the Prime Minister within six months of the Law’s passing.   [1] Law No. 177/2018 establishing the Egypt Sovereign Fund, Official Gazette, Issue No. 33 (bis) (a), 18 August 2018.