Slow Pace Of Egypt Privatization Attracts Continued Criticism

VOL. XLV

No 11

18 March 2002

EGYPT

Slow Pace Of Egypt Privatization Attracts Continued Criticism

The slow pace of the Egyptian Government’s privatization program continues to attract criticism from local and international economists, with many suggesting that fresh momentum on privatization would help turn around the country’s beleaguered economy. Already suffering from an economic downturn, the 11 September attacks left Egypt suffering from a foreign currency shortage resulting from the decline in tourism, which compounded the negative effects of falling Suez Canal receipts and lower oil prices. Cairo-based HC Brokerage said in a report entitled Egypt 2002: Global Collapse, Local Pains that acceleration of the privatization program is crucial to prospects for foreign direct investment (FDI) in fiscal year 2001-02. While FDI has been a major source of foreign income over the past five years, it fell by nearly 70% to $509mn in fiscal year 2000-01 compared to $1,656mn in fiscal year 1999-2000 largely as a result of a drastic decline in the government’s efforts to achieve its privatization targets, said the report. “We believe structural reforms that place an emphasis on attracting foreign strategic investors are critical now that Egypt’s natural recurring foreign currency earners are expected to plummet in fiscal year 2001-2002,” the report said. International donors who met in Sharm al-Sheikh early in February also emphasized the importance of private sector development, with the World Bank Group calling in particular for banking sector reform which would lead to privatization of public sector banks and stronger regulation.

In its quarterly review (October-December 2001) the Privatization Coordination Support Unit (PCSU), formed by the Carana Corp to implement USAID’s three year (1999-2002) monitoring and coordination services project, said that Egyptian privatization was continuing to struggle with a difficult economic environment, with the stock market’s downturn causing additional indirect problems. However, the report noted that there have been some successes in the privatization program, pointing out that the first power sector build-operate-transfer (BOT) project, Sidi Krir, became operational at the end of the year. Nevertheless, the total privatization sales value for the Ministry of Public Enterprise in 2001, at E£1.1bn – $237mn (despite the sale of a minority sale in Helwan Cement for E£670mn –$144mn) was the lowest reported and compares poorly to the E£2.48bn ($534mn) seen in 2000 and E£2.79bn ($601mn) in 1999.

“The privatization process has been very slow. There have been a lot of promises but the government doesn’t seem to want to let go, but they have to let go at lower prices because under these economic conditions, who wants to pay higher prices?” questioned one local economist. She said that reform on the macroeconomic front would probably encourage more investors and if the government became more “flexible and credible,” the privatization process would be more likely to move along. Even with the currently poor economic climate, if potential investors had more confidence in the government, they would be more likely to take the risk and invest, in the hope that the economy will turn around, she said. However, another analyst noted that the problem is not simply tied to the economy but the reality that some of the best assets that come under the auspices of the Ministry of Public Enterprise (MPE) have already been sold. However, PCSU observed that the MPE is becoming more selective in offering companies for sale, reducing the number of companies awaiting approvals or in negotiations, which will ensure that there are fewer failed transactions in the future. Also, in an effort to enhance the attractiveness of the 66 “distressed” companies that are being offered for sale, the Ministerial Privatization Committee has approved a set of incentives to attract investors, and now holding companies will assume all bank debt, settle excess labor, and assume or revalue assets that tend to deter investors. MPE sources told MEES that currently six transactions are being finalized which include the sale of companies and/or their assets, either to an anchor investor or the Employee Shareholders Association (ESA). The sales will include trading companies, glass producing companies and companies from the chemical sector. Separately negotiations to sell Misr Hotels and department store group Omar Efendi are also underway after much stalling.

While some have complained that only 13 of the MPE’s list of 49 companies offered in 2001 (see table below) have been sold (and are now up for sale in 2002), a local analyst notes that the government had not expected to sell all of them – this was simply a list of the possibilities or a “wish list.” He noted that the privatization process also needed to be targeted at areas that will help the economy, such as at the banking sector, telecoms, electricity and airports. “The government could sell 100 small companies and it would be a nice public relations move, but for the economy it would mean nothing,” he explained. During 2001 the MPE concluded four sales to anchor investors, two ESA sales, two liquidations, three asset sales and two leases. Sales to anchor investors included Egyptian Gypsum, Arab for Carpets, Alex for Cooling and Abou Zaabal Fertilizer; sales to ESA included Gharbeya Mills and Misr for Import Export; liquidations included Egyptian Electrical Equipment and Egyptian Company for Metal Trade and leases were made of Misr Aluminum’s Darphala Factory and a GYMCO Gypsum factory. Assets sold included Alex Metal Products’ Nozha Factory and Minya Iron Sheets Factory and Alex Confectionary’s Nadler Factory.

PCSU noted that privatization of electricity and distribution companies continued to be postponed in the fourth quarter and no future schedule had been announced for privatization. However, the Ministry of Electricity and Energy has successfully settled a large percentage of the outstanding debt of electricity distribution companies, which is estimated at around E£4.1bn ($883mn). An international tender for the next two electricity sector build-own-operate-transfer (BOOT) projects is expected to be announced soon. In cooperation with other government agencies, the MEE plans to issue several new regulations aimed at conserving foreign exchange and in particular has developed new guidelines for BOOT projects that include new contract terms which will limit the percentage of revenue from electricity sales that can be transferred out of the country.

The privatization of the four public sector banks (Bank of Alexandria, Banque du Caire, Banque Misr, National Bank of Egypt) has been discussed and planned for several years, but those plans appear to be, for the last year, indefinitely on hold. However, late last year the government neared completion of a plan for the preparation of five joint venture banks for sale (Cairo Far East Bank, International Islamic Bank, Misr Iran Development Bank, Misr America International Bank and Togareyoun Bank) and international companies have been delegated to review them. However, some have rejected privatization of Togareyoun and suggested it should be liquidated because they say actions to reduce its paid-in capital by the amount of losses realized by the bank and then increasing the capitalization to E£200mn are illegal, noted PCSU.

Like electricity and banking the privatization of Telecom Egypt remains on hold, noted PCSU, although Minister of Telecommunications and Information Technology Ahmad al-Nazif has said that steps are being taken to select an anchor investor to purchase an interest in the company which would then participate in the modernization of its operational and management systems. Published reports have suggested that Telecom Egypt will offer up to 34% of its shares to an anchor investor without ruling out the sale of additional shares as an IPO or GDR, although by law private ownership cannot exceed 49%.

Planning continues for the privatization of two state-owned companies, Misr Petroleum Company and Cooperative Company for Petroleum, under the control of the Ministry of Petroleum. The Ministry is reviewing the methods to be used and Shamil Hamdy, Undersecretary for Distribution and Marketing recently told PCSU that it is now considering the option of offering those two companies for joint ventures with international petroleum companies. Investors from several Arab countries are also expressing an interest to the National Bank of Egypt about buying a portion of its shares in the Midor refinery.

The Ministry of Supply and Internal Trade is overseeing a project to increase the capacity and quality of grain silos in Egypt, notes PCSU. It plans to build 50 silos across Egypt and had previously announced that they would be offered to private investors under a BOO (build-own-operate) framework although it appears to have rethought the plan over the past quarter and is now contemplating a project under the BOOT (build-own-operate-transfer) system through formation of a company that would include the ministries of Supply, Industrial Production, the Arab Manufacturing Authority and the banking sector as shareholders, and while the private sector will be allowed to participate, its role is yet to be fully clarified.

Discussion of private participation in the airport sector appears to be opening and while the government is unlikely to sell a whole airport, it is studying the possibility of private involvement in shops and concessions, which would bring benefits to the tourist industry, said one analyst. In a paper presented in December 2001 on private participation in Egypt’s airport sector, Sahar Tohamy and Nihal al-Migharbil, research staff at the Egyptian Center for Economic Studies, noted that the government appears to be concentrating on two areas: attracting investment through individual BOT agreements as well as establishing the internal financial structure that enhances the independence of the Egyptian Civil Aviation Authority from government finances. The study recommends, however, that more attention be given to establishing comprehensive economic regulation of the sector, noting that countries that have failed to establish sector reforms have not ensured efficient operation of their airport industry.

Ministry of Public Enterprise Companies for Sale (Since 2001)

Company Name	Company Name
Moharam Press+	Delta Contracting+
General Paper – RAKTA+	Al Nasr Steel Pipes+
National Paper+	Delta Steel Mills+
General Trading & Chemicals+	Egyptian Ferroalloys+
Delta Fertilisers+	SEMAF for Railway Coaches & Wagons+
Eastern Tobacco (15% to sell)+	General Metals+
Red Sea Contracting+	Sornaga Ceramics+
Mokhtar Ibrahim Contracting+	Al Nasr Glass & Crystal+*
El Abd Contracting+	Alexandria Refractories+
General Electrical Projects – Elygeet+	Chemical Industries Development-CID+++
Al Nasr Contracting – Hassan Allam+	Gomhureya Pharmaceuticals+++
Transport & Engineering+	Nile Pharmaceuticals+++
EDFINA for Preserved Food+	Arab for Textile Wholesale Trade+*
Gharbeya Rice Mills+*	Egyptian Navigation+
Egyptian Starch and Yeast+	Egyptian General Warehouses+
Rice Marketing+	United for Textile wholesale Trade+*
Al Ahram Consumptions Outlets++	Hannaux Department Stores+
Alex Consumption Outlets++	Egyptian Products Sales Dept Stores+
Nile Consumption Outlets++	Omar Effendi Dept Stores+
General For Foodstuffs Wholesale Trading+	Benzayoun Dept Stores+
Egyptian Fish Marketing++	Sednawi Dept Stores+
Egyptian For Foodstuffs Wholesale Trading+	Misr Import and Export+*
Egyptian Meat and Poultry+	Misr Car Trading+
Al Nasr Housing+	Alex Cooling+*
Misr Hotels+

____________

* Companies already sold.

Some companies aside from those marked * have seen partial sales of production lines or factories.

+ For sale to investors.

++ For sale as partnership.

+++ Stock floatation.