Amendment to the Law on Giving Pref

On 11 June 2018, amendments[1] to the Law on Giving Preference to Egyptian Products in Government Contracts (the “Law”)[2] – enacted in January 2015 – were published in the Official Gazette. The amendments expand the scope of application of the Law in more than one way. It extends the application of its provisions to additional sectors, subjects additional governmental bodies to the Law, as well as adds to the obligations that stem from its application. Indeed, the amendments add the programming and electronic application sectors under information technology to the sectors where preference will be given to Egyptian products in government contracts. It also expands the definition of governmental authorities that will be subject to the Law and adds a requirement that these bodies notify the Committee for Giving Preference to Egyptian Products of contracts with a value that ranges between one million and 10 million Egyptian Pounds (instead of the past obligation to notify only in the case of contracts with a value exceeding 10 million Egyptian Pounds).

Entities Subject to the Law

The new amendments extend the application of the Law – which we had covered in our ELU Issue of February 2015 – the main objective of which is to obligate public entities to give priority to Egyptian products over imported products when entering into agreements. In fact, the Law requires the concerned entities to respect a percentage of at least 40% Egyptian industrial component when assessing the estimated value of any projects that they enter into. The Law distinguishes between the obligations of the various parties that are subject to it. On the one hand, administrative authorities or units of the State, including ministries, authorities and units with independent budgets or local administrative bodies, have to give preference to Egyptian product and apply the provisions of the Law to two types of contracts: 1) procurement contracts for the purchase of industrial products, 2) and project contracts (e.g., construction contracts). On the other hand, the Law obligates state-affiliated companies to apply the Law to project contracts only without extending this obligation to procurement contracts. The recent amendments expanded the second category (which the Law only applies to project contracts), stipulating that "companies, in which the State, any public legal persons, any of the companies referred to in this Article or State-owned private persons, jointly or severally, have a controlling interest." The original text enacted in 2015 did not take into account "public legal persons" or "state-owned private persons" and did not calculate their contribution " jointly or severally". While the Law requires preference to be given to Egyptian products in general - in relevant contracts -, it did not do so in absolute terms. The Law provides for several exemptions, including where the Egyptian product does not meet the approved standards, if the quantities are not available, if the price of the foreign product is 15% lower than the Egyptian one, or if the Prime Minister provides a specific exemption in other cases, “for public interest”. On the other hand, the amendments did not introduce any changes to the list of entities and contracts that are exempted from the application of the Law in its entirety. The list therefore remains as such:

1. Contracts concluded by the Ministries of Defence, Military Production, Interior or by the Egyptian General Intelligence.
2. Contracts related to the national security of the country, as concluded by any administrative entity in the State.
3. Contracts regulating private public partnerships, in accordance with Law No. 67 of 2010.

Expansion of the Definition of “Industrial Product” and Amending the Definition of “Egyptian Product”

While the original definition of an industrial product was limited to classical industrial products, such as those resulting from "the physical or chemical conversion of raw material," the amendments introduced an additional sector to the definition, namely "the creation of IT-related software or applications." The definition of a "product complying with the necessary percentage of Egyptian industrial component" (more commonly known as the “Egyptian Product”) has been amended so that it will now be calculated on the basis of the cost of the product rather than its price, which means that the Egyptian Product is now a product where "the Egyptian component exceeds 40% of the cost of the product". This is calculated by "deducting the value of imported components from the cost of the product". It should be noted that the Law had previously stipulated that the Egyptian Federation of Industries will issue certificates verifying that a product fulfils the requirements of an “Egyptian Product” in the meaning of the Law. The Law also provides that the Prime Minister may provide an exemption from the 40% requirement.

Obligation to Notify

Before the amendment, the Law required the parties subject to the Law to notify a committee established by the Council of Ministers (the Committee for Preference of Egyptian industrial Products) with the terms and specifications of contracts that exceed 10 million Egyptian pounds. The Law authorizes the Committee to inform the relevant party if it has comments on the contract and may require the relevant entity to refrain from continuing the contracting process. What has been recently added through the latest amendments is a requirement for relevant entities subject to the Law to provide a similar notice to the Committee for contracts with a value ranging from one million pounds to 10 million pounds. For these contracts, however, the Committee does not have a right to demand the contracting process to be stopped, although it may still provide comments.

Penalties

The amendments added a very important penalty, that is more in line with the nature of contracts concluded by the relevant parties. A fine of between 50,000 pounds and 500,000 pounds is now imposed on those who deliberately "split" the contracts in order to avoid compliance with the Law. If the “splitting” occurs as a result of negligence, a lower penalty would apply. Such penalty would apply, for instance, if a contract of a value of more than 10 million pounds is divided into several lower value contracts in order to avoid informing the Committee and to avoid giving it the authority to stop the contract.

WTO Rules and Exceptions for Government Procurement

As mentioned in our previous analysis, the Law confirms its compliance with the principles of the World Trade Organization. One of the WTO’s fundamental principles is the principle of non-discrimination, which includes a commitment to the principle of national treatment. The latter principle obliges governments not to treat domestic products and imported products differently. Although the Law appears to be contrary to that principle, there is, in fact, no contradiction, since government procurement is expressly exempted in both the GATT Convention ((Article III: 8a), as well as the General Agreement on Trade In services (GATS) (Article XIII:1).

Conclusion

The recent amendments to the Law on the Preference of Egyptian Products expanded the application of the Law in several ways. They expanded the scope of the entities subject to the Law, they amended the definition of the industrial product to take into account some technological industries, and they expanded the nature of the obligations imposed by the Law. In general, the recent amendments seem to be more sensitive and aware of the nature of contracts, which is evident in the imposition of a new penalty on the fragmentation of contracts to avoid application of the Law.   [1] Law No. 90/2018 amending certain provisions of Law No. 5/2015 on Giving Preference to Egyptian Products in Government Contracts, Official Gazette, Issue No. 23 (bis) (a), 11 June 2018. [2] Presidential Decree-Law No. 5/2015 on Giving Preference to Egyptian Products in Government Contracts, Official Gazette, Issue No. 3 (bis), 17 January 2015.