Kick-starting privatisation

The government is pumping new blood into the privatisation programme, reports Niveen Wahish

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Three months into its tenure, the new government is getting down to re-activating the privatisation programme. Earlier this week, President Hosni Mubarak met the cabinet's economic group to look into future plans for the sale of state-owned and joint venture companies, as well as the management of strategic projects. The meeting established the broad lines by which the government would be moving to revive the privatisation programme, following more than three years of sluggish progress. That sluggishness has always been a source of concern to international financial institutions and rating agencies, which consider privatisation an indicator of government willingness to address economic reform.

While the government decided it would not be forfeiting control of what it sees as strategic industries, it may delegate their management to the private sector, or even foreign investors. Although "strategic industries" have not been clearly defined, infrastructure projects were included in the grouping.

The privatisation process has been nearly moribund for some time now, with revenues from the sale of formerly government-owned entities during the first half of 2004 not exceeding LE210 million. In 1997, a peak year for privatisation proceeds, revenues reached LE3.4 billion. According to Ministry of Industry and Foreign Trade figures from 1993 to May 2003, 194 public companies were privatised, generating LE16.6 billion in proceeds.

One hundred-seventy-two companies employing some 401,000 individuals have yet to be sold; government stakes in 695 joint venture entities will also be up for sale.

To kick-start the process, the government announced that it was selling off 10 companies. This first batch includes public enterprise companies and public stakes in joint venture companies. According to a statement issued by the ministry, the sales proceeds will be used to recompense the liabilities of state-owned companies, as well as bolster new investments in companies that need funds.

The government said the sale would take the preservation of these companies' assets, as well as the protection of labourers' rights, into account.

The 10 companies on offer work in a variety of fields ranging from construction to textiles to pharmaceuticals. One financial analyst said they were chosen based on their marketability, since most are doing well financially. That represents a deviation from the previous cabinet's tendency to concentrate on selling off loss making companies by offering generous incentives to lure investors. The incentives included, among other things, the transfer of excess and idle assets. In general, however, the strategy failed to attract buyers.

Of the overall 172 companies that will eventually be sold off, 61 are loss making, squandering some LE3 billion annually. Several of these -- especially the giant textile companies -- are doing particularly poorly.

Financial Consultant Hamdi Rashad of IQ Management Consultancy Group encouraged the sale of both profit and loss making entities. Rashad, a former Public Enterprise Office technical director, said that because the government tended to keep loss-making companies floating, it created an unfair dynamic for the private sector. "The government has to remove itself from many sectors," Rashad said, "if we are going for a market economy."

Sadat Academy economics professor Ihab El-Dessouqi said that loss-making companies could still be sold, as long as they were in a profit-making sector. "The steps being taken by the government to revamp the economy are bound to encourage investors to buy," he said.

A 2002 study by Carana Corporation's Privatisation and Coordination Support unit, a USAID- sponsored privatisation monitoring programme, indicated that companies in the pharmaceutical, housing, cinema and tourism sectors had the highest potential.

Most of the other companies being sold had "declining revenue, high debts, and bank overdrafts, excess labour and [a] highly questionable future." The report called the divestiture of these companies "urgent".