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Al-Ahram Weekly 18 - 24 May 2000 Issue No. 482 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 18 - 24 May 2000 Issue No. 482
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Focus Features Heritage Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Private capital
By Robert Wagner*With the appointment of a new prime minister and cabinet in late 1999, there was fresh energy for privatisation in Egypt. However, the country today finds itself at an important but difficult crossroads in its privatisation process. Although it made progress in recent years, many of the transactions involved ownership stakes in companies that have been relatively easy to sell. Egypt now faces the more formidable challenge of privatising generally less attractive companies, as well as those in sectors considered by some to be highly strategic.
In order to accomplish its near-term, privatisation goals -- the government has stated that some 90 plus companies are to be listed for sale in 2000 -- there is no choice but to look into new sales methods. Although a few of the remaining government-owned companies (Telecom-Egypt, the electricity companies, and a small number of Law 203 companies) can be sold on the stock market or to large anchor investors, the majority are unlikely to be sold as IPOs or via international tender offers managed by investment bankers. Most will have to be sold via an electronic bidding process, or via other regional or local sealed bid offers.
Critical issues that still require resolution include valuation, excess labour and debt, regulatory matters, and the selection of proper sales agents. Along with new selling methods, these issues must also be addressed.
Valuation, for example, has been a privatisation hurdle in a number of instances. Although there is no right answer, many people believe that the seller can and should determine a proper minimum price or value for a company prior to sale. If the goal is to sell a company, however, then the seller's pre-determined value can only serve as a reference point for negotiations with buyers. In the end, the only accurate value is what a willing buyer actually offers to pay for what is being sold. Valuation needs to be market-driven, based only on what buyers are likely to offer for a company in a competitive bidding process.
Dealing with excess labour and debt involves both financial and political issues. While 50 per cent of privatisation proceeds are supposedly available to assist with reducing excess labour and debt, there remains a fear of political unrest over excess downsizing, and the negative impact on banks should they be asked to match debt repayment with additional debt forgiveness.
The government of Egypt has the opportunity to privatise well over 700 wholly -- or partially-owned -- government entities, not counting such assets as health facilities and training centres which may eventually be considered for sale.
Privatisation activity is moving forward on a number of fronts in Egypt. Preliminary figures indicate that the government completed three privatisations during the first quarter of 2000. Approximately 40 other potential sales are in the bid evaluation for sales or lease contract execution stage. Announced plans are to offer 94 companies for sale in the year 2000. Another approximately 80 companies are to be restructured prior to privatisation, an approach that some feel is receiving somewhat too much attention across too many industries.
However, although privatisation activity appears to have slowed, particularly after the recent cement company sales, the Public Enterprise Office is building a dynamic database of company information which will be available in the third quarter of 2000 on the MPE Web page which is also under construction. This should provide the ministry with portfolio analysis and management tools that will be necessary for selling companies via alternative methods. The ministry should also benefit from the direct technical assistance of USAID's implementation services contractor which should begin work in May or June 2000.
The government also expects to sign contracts in the first quarter of 2000 with two international investment banks to prepare valuations of the four state-owned insurance companies, as a preliminary step to their privatisation. The ministry also has begun to privatise joint-venture insurance companies, and technical assistance for insurance sector regulatory reform is being provided by USAID. Commercial bank privatisation continues to be unlikely for the near future, however.
The Ministry of Economy and Foreign Trade recently formed an internal joint venture privatisation unit to collect, verify and update data on the portfolio of over 300 joint venture companies. This unit also will be responsible for coordinating the joint venture privatisation effort which is likely to focus on sales of shares to existing private sector owners and/or to local buyers.
The Ministry of Energy and Electricity continues its efforts to restructure and partially privatise the seven power generation and distribution companies. The current plan is to sell from 10 per cent to 20 per cent of the seven companies, beginning with the Greater Cairo Electricity Company in 2000, followed by the Canal Zone Electricity Company, and the Middle Egypt Electricity Company. However, issues regarding proper valuation, proper regulation and level of excess debt all must be addressed before sales can be successful.
The newly organised Ministry of Telecommunications is in the process of strengthening the capability of Telecom Egypt to operate in a commercially oriented manner, while strengthening regulatory capability in this field. It has hired experts to value Telecom Egypt's assets to determine a fair price for an IPO of 10 per cent of its shares sometime in the second or third quarter of 2000.
In addition, the Ministry of Energy and Electricity, the Ministry of Housing, Utilities and Urban Development, and the Ministry of Transportation are actively using BOOT contracts to involve the private sector in the management and financing of infrastructure projects.
Egypt's commitment to on-going privatisation and the introduction of the private sector into many companies is clear. As their capacity to manage their privatisation process improves, international, regional and local investors should have greater opportunity to invest directly in Egypt. Along with other reforms, this will further improve Egypt's economy, making it an increasingly attractive, business-oriented environment.
However, the government must be very careful to avoid any appearance of arbitrary decisions regarding specific privatisations. It must appear transparent, open and fair to the investor community in order to build and maintain a reputation for Egypt as an attractive location to do business.
* The writer is Managing Director of US-based Carana Corporation's Privatisation Coordination Support Unit (PCSU) which currently is extending support to Egypt's privatisation programme, funded by USAID.
