Study criticises privatisation programme

A new study argues that the government should have gone about the privatisation programme differently. Niveen Wahish reports

---

Click to view caption

More than 10 years have passed since Egypt committed itself to large-scale privatisation, yet to date no overall evaluation of the process has been made. Accordingly, Minister of Public Enterprise Mukhtar Khattab announced two months ago that an encyclopedia on the Egyptian privatisation programme will soon be issued in 173 volumes. It will feature all the details on some 203 companies and factories that have been sold.

But to fill the gap until that happens, a large section of the third Report on Integrated Development (RID) in Egypt has been dedicated to presenting an overall evaluation of the privatisation programme since its inception. The RID is issued every two years by the Centre for the Study of Developing Countries at Cairo University.

A team of researchers, headed by Laila El- Khawaga, professor of economics at Cairo University, looked at the economic aspect of the privatisation process and presented their findings last week.

In their study, the team questioned the rationale behind privatising the public sector's profitable entities first while keeping the losing companies for last on the pretext that the profitable units are capable of attracting investors. The study pointed out that the revenues of those profitable companies helped balance the public budget while the losing entities represent a burden on the public budget.

The report also noted that the legislative authorities were not involved throughout the privatisation process; instead, only one minister was in charge. It compared the Egyptian experience to that of the French, where the procedure of transferring ownership from the public sector to the private sector was closely scrutinised by society at large. "Involving the people in the privatisation process results in consensus" over the decision to be taken, pointed out El-Khawaga. She added that had this taken place in Egypt, many of the interpellations that are still being raised in parliament would have been avoided.

The report also lamented the lack of transparency, whether regarding the valuation process, the choice of the mode of privatisation or the buyers. The study team showed that the Ministry of Public Enterprises insisted from the beginning of the privatisation programme until 1999 that the Central Auditing Agency (CAC) not take part in reviewing the valuations of the companies on sale. By the time the CAC was finally allowed to participate, 166 companies had already been sold. The report said that this resulted in companies being sold at bargain prices to investors who later sold them at 300 per cent of the original price.

The study also investigated the method in which the proceeds of privatisation were utilised.

The report noted that those revenues were not pumped back into the economy in the form of new investments, but were largely used to finance early retirement schemes and debt settlement. Some LE6.6 billion went to the Ministry of Finance while LE0.9 billion went into the administrative and technical reform of unsold companies. As of June 2003, privatisation proceeds had reached LE16.9 billion, of which LE14.7 billion has been paid while the rest had yet to be collected as installments from the Employee Shareholders' Associations (ESA).

The report also examined the success of each mode of privatisation, whether sale to the private sector, selling to both the private sector and the ESA, or selling jointly to the private sector and the ESA while the holding company continued to hold a share. It looked at their profitability, competitiveness, new investments and expansions, and their productivity and ability to create new jobs.

It concluded that the most profitable and best performing companies were those wholly owned by the private sector.

In the meantime, the return on investment of companies sold on the stock market, dropped from 8.5 per cent before privatisation to 1.9 per cent after privatisation which signals a drop in the performance of the companies after privatisation. And their competitiveness did not do any better. The performance of companies sold to the ESA deteriorated, and they did not receive any new investments or renovations.

While examining the privatisation programme, the team also looked at the new plan for 2004. It criticised the fact that additional privileges are promised to prospective investors. Not only will the companies on sale be sold at book value, and the value of the land where they are located be measured against the price per metre of the nearest urban area, but the debts of these companies to banks will be borne by the concerned holding company. The report also highlighted that Khattab had announced that the excess labour will be dealt with flexibly, but without specifying how.

Reda El-Edel, secretary-general of the Arab Association for Economic Research, called the current privatisation plan a bargain. However, he said that if these companies are still not sold, they will have to be restructured. Samiha Fawzy, professor of economics at Cairo University, observed that this restructuring process would represent a burden on the government and aggravate budget deficit problems. "It was the government in the first place which was the cause of the state they are in and is therefore unable to turn them around," said Fawzy.

To tackle the loss-making companies, El-Khawaga suggested the establishment of a venture fund by the banking system to buy out these failing companies, restructure them, then sell them again.

During the period 1990-2002, 190 companies were partially or totally privatised out of 314 companies subject to Law 203/1991.