Al-Ahram Weekly Online   13 - 19 October 2005
Issue No. 764
Economy
 
Published in Cairo by AL-AHRAM established in 1875

Privatisation back on track

The government insists selling publicly-owned companies is its only option, reports Mona El-Fiqi

In an attempt to boost foreign direct investment flows the government is revamping its privatisation programme after a three-year hiatus in which an underperforming local economy, an unstable currency and a portfolio of overvalued public sector companies had derailed the process.

Mahmoud Mohieddin, minister of investment, announced last week that 170 state-owned companies will be offered for sale regardless of whether or not they are profitable. The sell-off, said Mohieddin, is the only option given that the government cannot afford the huge costs involved in restructuring the companies. Nor is inaction an option: according to a study commissioned by the Economic Council of the People's Assembly the price tag for doing nothing will reach LE100 billion in five years time

Mohieddin revealed that stakes in 92 public companies, including 45 joint ventures, are scheduled to be sold before the fiscal year ends in June 2006. The government, he said, intends to open the door wide to Egyptian and foreign buyers who can provide better management and develop the companies. Delta Sugar and Misr Shebeen Al-Kom for Spinning and Weaving are among the public sector companies under the hammer.

Since privatisation began in 1991, 210 companies -- 70 per cent of the original portfolio -- have been sold, generating LE17.4 billion in income. This year alone 12 companies have been sold, including Alexandria Mineral Oils Company (AMOC) and Sidi Krir Petrochemicals

Companies are being put up for sale across a variety of sectors, including agriculture, real estate and construction, food and beverages, milling, pharmaceuticals, cement, chemicals and fertilisers, engineering, retail and tourism though -- so far at least -- it is the cement sector that has generated the most proceeds. Sales of cement producers have accounted for a third -- or LE6.3 billion -- of privatisation proceeds since 1991.

The scheduled sale of the Bank of Alexandria early 2006 signals that the four state-owned banks are no longer immune to privatisation. More recently they have been joined by the four public insurance companies one of which, says Mohieddin, will be sold by the end of 2005.

While a majority of experts now agree there is no alternative to privatising state owned companies they differ on the levels of precautionary measures that need to be incorporated in the sales.

Salah Zeineddin, head of Tanta University's department of economics, has no objection to state-owned companies being sold to those able to restructure and provide better management. But, he argues in a recent report, "some strategic sectors such as the steel industry, transportation and health should not be completely privatised".

Nor, points out the report, are the results of privatisation invariably positive. Offering shares in publicly owned enterprises effectively directs private investment to these companies when it might otherwise go towards establishing new projects better able to boost Egypt's growth.

The study also analyses the negative social impact of privatisation, pointing out that redundancies in the wake of the sale of public entities has increased unemployment, leaving some 35 per cent of the population living in poverty, and exacerbated inequalities in the distribution of income.

The study did, however, acknowledge that the privatisation programme had helped reduce the budget deficit from 15 per cent of GDP in 1990/ 91 to less than one per cent by 1996/97.

In recent statements Prime Minister Ahmed Nazif also credits privatisation with helping reduce inflation from 21 per cent in 1989/1990 to 4.5 per cent in 2004/2005.

Karima Korayem, professor of economics at Al-Azhar University, believes that the government had not fully considered its strategy when it embarked on privatisations in the early 1990s. Instead of identifying its own priorities, according to Egypt's specific needs, the government accepted wholesale the recommendations of international monetary institutions. As a result, argues Korayem, profitable entities were sold off ahead of loss making enterprises, regardless of their strategic importance. Nor was the privatisation process tempered by the need to improve Egypt's export performance though it would have been relatively easy to stipulate such conditions in the sale documents.

"What in fact happened was that the new owners of privatised companies that used to export to Arab countries decided to divert their products to cover the local market," says Korayem, who also favours tougher legislation to protect both consumers and workers who might otherwise suffer when publicly owned enterprises are sold.

"Yet even when it came to issuing an anti trust law the government came up with penalties that can hardly be thought of as a deterrent," says Korayem.

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