During the past two years, the fleet market in Egypt has been buffeted by a devalued currency, spiraling new-vehicle price increases, higher interest rates, and three hikes in fuel prices as the government rolls back fuel subsidies to control budgetary expenditures.
What triggered these economic travails was when the Central Bank of Egypt embarked on a major economic reform program in November 2016 that included lifting restrictions on foreign exchange transfers, which floated the Egyptian pound (LE). By letting the foreign exchange rate for the Egyptian pound to float, its value decreased by 32% resulting in substantial price increases throughout the economy.
One consequence is that vehicle prices in Egypt witnessed huge, spiraling price increases. This caused a corresponding 40% drop in new-vehicle sales due to the decline of purchasing power by both businesses and consumers, who were simultaneously battered by record high inflation rates, also resulting from the pound’s flotation. Inflation hit a record of 21.9% in 2017, but has since moderated to 13.5%, as of July 2018.
In an attempt to keep a lid on soaring prices occurring throughout the economy, the Central Bank of Egypt significantly increased interest rates across the board. This too had a direct impact on new-vehicle sales, creating a drag on the Egyptian automotive market that is heavily dependent on bank loans, which finance between 60-70% of all new-vehicle sales. With interest rates revolving around the 20% mark, there has been a sharp decrease in the issuance of bank loans to finance automotive purchases.
These economic pressures were made even worse when the value-added tax (VAT) was increased to 14% to assist the Egyptian government decrease its large budget deficit. The VAT was first introduced in Egypt at 13% on Oct. 1, 2016 to replace the 10% sales tax. The purpose for introducing a VAT was to improve the efficiency of tax collections and broaden the tax base.
Higher Fuel Prices
In June 2018, Egypt’s Ministry of Petroleum and Mineral Resources raised fuel prices: 95 octane gasoline increased to 7.75 Egyptian pounds a liter from 6.60 pounds; 92 octane raised to 6.75 pounds a liter from 5 pounds, and 80 octane increased to 5.50 pounds a liter from 3.65 pounds.
The price hike, the third since Egypt floated the pound currency in November 2016, created even more pressure on Egyptian businesses and consumers.
In terms of the impact on fleets, at present, fleet fuel cards are not used in Egypt. Often, volume fuel discounts are negotiated with one or several fueling stations in heavily trafficked strategic locations and offer incentives to employees to go there for refueling
As a collateral impact to the higher fuel and power prices, the Egyptian Automobile Manufacturers Association (EAMA) anticipates that new-vehicle prices will increase, since power costs to build locally assembled vehicles will likewise increase.
Glimmer of Economic Hope
During the first half of 2018, there appears to be some economic recovery as new-vehicle sales increased 12.1% year-on-year in Egypt, according to the Automobile Marketing Information Council (AMIC). Commercial truck sales during the first half of 2018 jumped 91% year-on-year during the same period recording 7,440 units.
But this sales increase is compared to calendar-year 2017, which was the worst sales year for the Egyptian automotive market in over a decade. Historically, the Egyptian automotive market grows on par with the national economy. If the economic forecasts are accurate and the gross domestic product (GDP) achieves 5% growth, it won’t translate into a significant increase in car sales. The forecast for calendar-year 2018 is for total sales of 190,000 units. This is far below the previous sales volumes of 332,100 in 2015, and 349,100 in 2014, the all-time record.
One glimmer of hope is that Egypt’s economy strengthened in FY-2018, which ended in June 2018 due to higher tourism revenues, remittance inflows from Egyptians working outside the country, and record Suez Canal income primarily resulting from the $US8 billion expansion of the waterway has doubled its capacity from 49 to 97 ships a day.
One positive outcome of the Egyptian pound devaluation is that tourism has steadily recovered because of the weaker currency, which is stimulating vehicle acquisitions from the local car rental industry to meet the increased demand.
Tariff on European Vehicles
The Egyptian Customs Authority has been gradually decreasing customs on European cars since 2011, at a rate of 10% per year, as per the EU-Egypt Association Agreement signed in 2004. The tariff reduction is likely to reach 80% in 2018.
However, customs on European 1600 cc engine cars stood at 40% of the car’s value in 2017, which means the 10% annual reduction will only amount to a 4% drop in the tariff in 2018.
In addition, the tariff decreases may be negated as the inflation rate of 1-1.5% in European countries, which could increase the manufacturer’s suggested retail price of European vehicles. Also, the devalued pound relative to the Euro will make European vehicles more expensive, making the tariff decrease less significant. Plus, European automotive manufacturers have the freedom to raise prices even higher, as they have the advantage of tariff cuts unavailable to their competitors outside the agreement. Therefore, they can sell cars at higher prices, effectively erasing any potential price easing for businesses and consumers from the tariff decrease.
Allowance vs. Company Vehicle
Many multinational companies that operate vehicles in Egypt do so by paying cash allowances to their employees. The payment is designed to pay the funding, either lease or bank loan, of a new vehicle over a specified period of time, typically four years for a full payout. The finance contract does not obligate the company and it is directly between the funder and the employee, who becomes owner of the vehicle after the four-year period.
In addition, many multinationals pay the employee a monthly allowance or stipend to cover the operating costs of the vehicle, such as maintenance, tires, and fuel. Many fleet operators in Egypt try not to get involved in vehicle maintenance management or assume residual value risk and instead transfer these responsibilities to the driver, who will eventually own the vehicle.
A general rule is that Egyptian companies, fleet lease companies and fleet operators alike, try to avoid taking responsibility for vehicle maintenance and residual value. Therefore, there is strong tendency to transfer this responsibility to the driver. Independent from the method of financing, most fleet operators do so by paying a certain amount of money to the driver to compensate him for the operating cost of the vehicle. Often the driver has the option to buy the used vehicle after a certain period at an attractive price, an option which most Egyptians use. The employer has a double benefit from this system. First, it gets rid of any responsibility regarding the vehicle’s condition. The driver, who is aware that the car will ultimately become his own, will put effort in maintaining the vehicle’s condition. Second, the employer is able to be assured of the employee’s loyalty for the next several years knowing that the employee will lose the opportunity to get a used vehicle at a very attractive price, if he leaves the company before the transaction.
Non-monetary benefits are generally not subject to taxes in Egypt, a fact that is supposed to make a company car more beneficial to the employee than monetary compensation, such as a car allowance. But Egyptian tax system leaves several gaps to avoid taxation. One of these is the fact that any fixed salary is taxed, while variable incentives and similar provisions are not subject to income tax. This tax provision gives wide flexibility to compensate the employee monetarily without notably increasing the employee’s tax burden.
The reason for the wide flexibility is that the taxation system in Egypt is not very strict and transgressions of tax laws often go unaddressed.
Funding of Company Vehicles
One of the common ways of financing corporate fleets in Egypt is the outright purchase of vehicles using a bank loan. Alternative ways of financing vehicle acquisitions is using a financial lease.
In Egypt, as is the case of many other countries, banks themselves are prohibited from offering vehicle leasing products.
On the other hand, leasing companies operating in Egypt are allowed to offer financial leasing, but they do not have the regulatory permission to offer additional services, such as maintenance or similar services. Because of this, financial leasing institutions are not able to offer operational leases.
In the case of financial leasing, a “classic” lease structure is a lease contract for 3-5 years with the final rate of 1 Egyptian pound. After the end of the leasing period, the company offers the car to the employer at book value or less, but in any case below market price. Sometimes the acquisition price of the vehicle by the driver is contractually agreed upon beforehand.
Bank Loan vs. Lease
Lease companies are relatively fast in approving lease contracts (one to two weeks) and less securities are required compared to a bank loan as the lease loan is directly linked to the financed asset.
Requirements to get a bank loan are usually high and banks are considered to work extremely slowly when it comes to getting a loan approved (up to 6 months).
Interest rates for a finance lease are higher than in a bank loan: usually 2-6% above bank rate.
There are tax rules that favor leasing, such as the leasing installments, which can be completely offset from the taxable income. This advantage, usually more or less, compensates for the higher interest rate. In a bank loan, only the paid interest can be offset from taxable income.
The financed asset is destined to become the property of the lessee at the end of the lease period. The leasing period is usually between 36-60 months with the final rate between 20% of the acquisition price of the leased asset to 1 Egyptian pound. With an approved loan from a bank, the customer buys the car and is immediate owner of the asset.
Financed assets can be insured by the lessee or the lessor, which charges the insurance premiums to the lessee. In the latter scenario, the lessor may manage any subsequent claims with the insurance company. With a bank loan, since the customer is owner of the car it is his responsibility to acquire appropriate insurance coverage.
Compared to a bank loan, leasing is considered to be in accordance with Islamic rules, which forbids taking interest on lending money. Leasing installments are considered renting payments related to the asset, not interest on loan. With bank loans is that taking interest on money loans is not considered in accordance with Islamic rules, therefore devout Muslims try to avoid lending and borrowing money involving interest.
Leasing Companies in Egypt
Orix Lease Egypt SAE is a business unit of the multinational Orix Group headquartered in Tokyo, Japan. Approximately 30% of all leased assets for Orix Lease Egypt are passenger and commercial vehicles. Nearly all of Orix Lease Egypt customers are Egyptian companies. Many international companies tend to buy cars or give their employees a cash allowance. The two reasons international companies get much cheaper money from international banks or have enough of their own capital allowing them to provide low internal interest rate.
International Company for Leasing SAE, also known as Incolease, was the first all-Egyptian leasing company and currently has the largest portfolio, more than 4.7 billion Egyptian pounds in assets. Founded in 1997, Incolease is a pioneer in the financial leasing services industry in Egypt and has established itself as a market leader with an estimated 20% market share. Incolease offers only financial leasing, plus insurance as an option.
Another local lessor in Egypt is A.T. Lease, which is the first Islamic Sharia Compliant Leasing Company in Egypt. A.T. Lease is among the top five leasing companies in Egypt with approximately 2.5 billion Egyptian pounds in assets. It is an affiliate of Dallah Al-Baraka Group (DBG), which is headquartered in Saudi Arabia. DBG is one of the pioneers in international Islamic banking. The company founded in 1969 as a courier service in Saudi Arabia.
Prevalence of Operating Leases
Operating leases in Egypt are practically non-existent. Financial lease companies are by law not allowed to offer services, except insurance, to go with the lease agreement.
There are only two lease companies in the market that offer a scheme, which includes services typical for operating lease – these are Corporate Leasing Company Egypt, S.A.E. (known as Corplease) and GB Lease.
Founded in 2004, Corplease provides leasing products and services. Headquartered in Giza, Egypt, with operations in the United Arab Emirates, its lease products include corporate finance, fleet leasing, vendor finance, and technology leasing.
GB Lease is business unit of GB Auto, which is part of a large Egyptian conglomerate known as Ghabbour Group. Established in 2008, GB Lease is GB Auto’s first financing venture to provide financing for its commercial vehicles and corporate fleet clients.
Besides various other activities, the conglomerate Ghabbour Group is the exclusive importer of Hyundai products in Egypt and owns a larger number of dealerships. This allows GB Lease, in cooperation with other Ghabbour Group companies, to offer a maintenance program to the lease customers. Since then, GB Lease has grown into a multinational organization with a diversified lease asset base that covers all asset classes, including real estate, construction equipment, production lines, automotive, and other assets.
GB Lease provides business-to-business financial leasing solutions that are non-exclusive to GB Auto, catering to a diversified client base ranging from top-tier multinationals to local corporations of various scales, as well as small and medium enterprises. GB Lease is regulated by and operates under the auspices of the Egyptian Financial Services Authority (EFSA).
Short- & Long-Term Renting
A large number of smaller Egyptian rental companies offer car renting for both short-term and long-term arrangements for business operating in Egypt. In nearly most cases, the rented agreement includes a driver. The labor cost of a driver is relatively low, making this additional service relatively inexpensive. By having a dedicated driver who in many cases depends on the job as his main livelihood, there is an individual, who is personally responsible for any damage to the car. This allows better control of the car’s condition for both the rental company and the business renting the vehicle.
Vehicle Maintenance in Egypt
Egypt presents a very difficult and often challenging environment for fleet operators. As a general rule, the more rugged, durable, and easy to maintain the vehicle, the better it will survive Egypt’s demanding conditions.
Climate in the Nile Valley and Nile Delta, where 99.9% of the population resides, has high humidity impacting vehicle performance. For instance, cold air holds less water than warm air, and is more oxygen dense. What this means is that warm air requires your engine to pull more air to get the oxygen your engine needs to perform at its best. While this doesn’t have a big effect on fuel economy, it does put stress on the engine. Stressing an engine can result in a shorter lifespan and more frequent repairs. Also, humidity can impact vehicle sensors triggering false alerts increasing vehicle and driver downtime. For instance, the traction control light or check engine light may come on during the more humid time of year and turning off once the air dries out.
Due to the desert terrain surrounding the Nile Valley region, the metropolitan areas are subject to a continuously high degree of sand, dust, and other particulate matter in the air that impact filters and engine performance. The quality of fuel is reportedly uneven, with in some cases a very high level of contaminates.
Many roads, both in the cities and especially in rural areas are very rough and poorly maintained. Accordingly, vehicle maintenance must be a constant, daily process, with the climatic conditions and neglected road repair exacting above-and-beyond wear and tear on tires, suspension, air conditioning systems, fuel systems, electrical systems, and engine components. Temperatures in the desert in the summer can easily exceed 50 degrees Centigrade (122 degrees F), with temperatures inside closed vehicles exceeding the outside temperature by a wide margin. Extreme temperatures will accelerate motor oil consumption and stress the engine’s cooling system. One benefit to the dry, desert climate is that oxidation of exposed metal is a minor problem.
Nevertheless, there is not a conscientious effort or appreciation by many Egyptian drivers for regular vehicle maintenance, such as adhering to scheduled service intervals suggested by the manufacturer. According to those managing fleets in Egypt, vehicle maintenance is defined, in most cases, as a reactive intervention, not preventive. Lessors offering operating leases struggle with keeping vehicles in a condition that allows them to accurately predict residual values at the end of the lease, an essential factor when assuming residual value risk.
An additional challenge is maintenance cost control. The cost of maintenance services varies between garage to garage, even within a network of an official dealer garage network. There is lack of reliable maintenance-related data, which makes it extremely difficult to calculate and maintain a closed-end-rate for maintenance. In addition, given the fact that an operating lease is not prevalent, garages typically will not be inclined to perform work on credit with later payment, especially outside of urban areas.
Most Egyptians view their vehicles as a means of transport, not as a status symbol. Traffic, especially in the large metropolitan areas, is extremely dense, with aggressive driving behavior by many drivers. As a consequence, scratches, dents, even major ones, are widely accepted as a matter-of-fact reality of life, not as accidents. The acceptance of having scratched or dents repaired is not widespread in Egypt, as long as functionality of the car is not endangered.
Accidents represent a major problem to car owners, even when not in fault. Especially when no one is hurt in the accident, police do not pay much attention and accidents are most often not properly documented. Therefore, police documentation does not help a lot in securing a driver’s position as the one suffering damage. In case of larger damages like a total loss, some large local insurance groups try their best to avoid pay-out of the compensation and the legal institutions do not help a lot in claiming a driver’s or company’s rights. The entire process of getting compensation for suffered damage can take a very long time. According to fleet managers at multinational companies, they say insurance companies seem to be notably more reliable and flexible with larger customers like leasing companies.
Road Safety in Egypt
The likelihood of a fleet driver being involved in an accident in Egypt is high. There are four main reasons for the high number of traffic accidents in Egypt: aggressive driving, poor driving skills, hazardous road conditions caused by neglected repair; and poorly maintained vehicles.
The main cause of accidents was the human factor, with 78.9% of the total causes, followed by defects in the vehicle with 14%, and then weather-related causes and the road condition with 2% of the total accidents.
In Egypt, 12,000 people die in traffic crashes every year. The country has a road traffic fatality rate of 42 deaths per 100,000 population. Even though there are laws on speed, blood alcohol concentration for the general population, seat-belt wearing and helmet wearing, they are poorly enforced.
A report published by the World Health Organization (WHO) puts Egypt in the top 10 countries globally for the number of fatal road accidents.
Traffic experts say that most road accidents in Egypt are caused by trucks driven by aggressive drivers and the poor condition of roads. Another major contributor is truck overloading and the widespread disregard for traffic rules and regulations.
Accidents caused by trucks make up about 5% of all road accidents in Egypt, yet they are responsible for 80% of the deaths.
Egypt is also the only country in the world that grants driving licenses without requiring applicants to first pass a driving-school program.