23 - 29 August 2001
Issue No.548
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Al-Ahram Weekly Online 23 - 29 August 2001 Issue No.548 |
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Biting the bullet
The recession and the dismal financial performance of the remaining state-owned companies has forced the government to improvise on its privatisation plans. Mona El Fiqi reports
Although Egypt's decade-old privatisation programme has been praised by international financial institutions, it is entering a difficult phase. Under this programme, which has been implemented within the context of the Economic Reform and Structural Adjustment Programme (ERSAP), 180 companies have been privatised -- many of which were quickly snapped up by investors.
The tally reveals that these entities were divested using a variety of methods. Twenty-six of these were sold to anchor investors, at a sale value of LE6.7 billion, while majority stakes were floated on the bourse for 38 companies, bringing in LE5.6 billion. Employees are now owners of 30 companies under transactions with a total sale value of LE0.87 billion. For 16 companies, a stake of less than 50 per cent was floated on the stock market at a sale value of LE1.7 billion. Thirty-two companies were liquidated and 18 companies were sold as production assets, with both means of divestment bringing in a total of LE0.8 billion. Twenty other companies have been leased to private investors.
However, the entities currently slated for privatisation are loss-making companies which have, thus far, failed to entice investors.
Although the Ministry of Public Enterprise (MPE) offered 49 state-owned companies at the beginning of 2001, no sales have been concluded so far, although negotiations are currently underway regarding the bids offered for a number of those companies. And what is on offer is worth more than LE2 billion, according to the MPE's initial valuation.
Sources at the MPE note that the failure to conclude the sale of a single company over the past eight months is due not only to the poor financial performance of these companies, but also to the market recession and liquidity problems.
In a bid to accelerate the process, the MPE recently announced that it is accepting bids from potential investors for any state-owned companies -- regardless of whether they are slated to go on the block.
Then, last week the MPE issued a statement that it is offering for sale all of the stakes that it has continued to hold in partially privatised entities, adding that the holding companies currently administering the companies are ready to accept bids from local and international investors.
Financial facilities are also being extended for those companies which are badly in need of them, in addition to undertaking modifications in marketing the entities. Last month, for instance, in an effort to enhance the attractiveness of loss-making companies weighed down by considerable debts, the Ministerial Privatisation Committee approved an incentives package to try to attract investors to buy 66 companies classified by the government as "the most distressed," according to the Public Enterprise Office's (PEO) Acting Specialist and Unit Head of the Valuation and Financial Analysis Unit Mohamed Hassouna.
The first of these incentives is that the state, represented by the holding companies, will assume responsibility for the debts owed to banks and as well as surplus labour in those companies, while still preserving the rights of workers according to rules agreed upon among the MPE and the Ministry of Manpower and Immigration and the Federation of Labour Syndicates.
Moreover, the government has decided to conduct valuations for the land of the "distressed" companies, using the market value for land in the nearest industrial city as a benchmark. The investor has the option of purchasing rights to land occupied by buildings or factories under a usufruct arrangement against annual payments. Allowing investors to purchase an enterprise with or without inventory is another option, in addition to granting any buyer of one of the 66 distressed companies a five-year tax holiday. The latter would be immediately effective, on condition that buyers form a venture capital company to acquire the business.
However, there is no indication so far that these incentives have induced investors to consider buying any of the remaining companies. A prominent textiles manufacturer who prefers to remain anonymous said: "It is too late and too difficult for the government to sell these loss- making companies. A better idea is to sell the land to new investors for the purpose of using it to establish new factories."
The source added that "despite the incentives provided investors, no businessman will buy any of the [textile] companies which incur LE2 billion in losses every year." He added that the situation has become increasingly dire due to the domestic recession and fierce competition in international markets.
According to Hassouna the PEO began to apply the "assets unbundling strategy" to try to sell the loss-making companies. "The strategy is appropriate for both loss-making companies and assets," adding that it entails breaking a company into two entities. Applying the unbundling strategy, according to Hassouna, has the potential to bring in "higher returns since the potential investor would tend to undervalue the asset which he does not want and accordingly, offer an unsatisfactory price to the seller."
Moreover, when parts of an entity, the state obtains funds that can be used to restructure other non-viable assets. Hassouna said that through the adoption of this "cash proceeds policy" the government had in 1993 succeeded in restructuring 61 loss-making companies which became profitable in 2000.
Leasing assets or lands is another method applied by the government in selling the remaining companies, especially those engaged in heavy industry. If investors consider the price of the land too high, the holding company may decide to lease it. According to Hassouna, long term leases encourage the investor to invest to upgrade performance and productivity "which is the main objective of the reform programme."
A study conducted by Carana Corporation, a USAID-funded project offering privatisation support to the MPE, had cited overvaluation as one of the main problems which the government needs to tackle so as to be able to sell the remaining loss-making companies.
Analysing 15 cases of failed transactions, the study also attributed these to factors such as bad timing, lengthy procedures, too many unresolved details, lack of transparency and unfavourable market conditions. Hassouna said that a ministerial decree issued in late 1998 to modify article 26 of Public Enterprise Law 203 allows a holding company's general assembly to accept the best bid -- even if this is less than the MPE's valuation price.
Since the decree was issued, five companies plus other assets were sold for 25 per cent less than the original valuation price. Hassouna emphasised that this amendment does not mean these companies are sold cheaply, citing the proceeds from privatisations so far at LE15.8 billion -- a figure equivalent to three to five times of the net book value of the companies.
The government has also decided to sell the public stake in 512 joint-venture banks and companies. As part of the preparation for the selling process, the Ministry of Economy and Foreign Trade has assembled a portfolio of public holdings in these joint ventures, which are estimated to comprise assets worth over LE60 billion. Privatisation will start with 30 companies and banks in which state holdings are equal to or exceed 50 per cent.
According to Carana, the general structure of these joint ventures -- none of which are listed on the stock exchange -- indicates that they are profit-making.
According to the figures of the Ministry of Economy and Foreign Trade the number of companies in which the public sector owns 51 per cent or more is 167, while the companies in which the public owns 50 per cent or less is 338.
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