Privatisation glitches
Sherine Nasr attended a seminar weighing the pros and cons of Egypt's privatisation programme
Sixteen years after the implementation of an ambitious privatisation programme, economists and experts still have mixed opinions about the process and its contribution to the economy. At a seminar entitled 'Privatisation in Egypt: Problems and Returns', hosted by the Higher Council for Culture on Sunday, participants were able to expound on the success and blunders of the privatisation process.
Although resorting to privatisation seemed inevitable in the early 1990s, the process has yielded mixed results. It was inititated at a time when the former Soviet Union was being dismantled, and the whole world was moving towards open market mechanisms. In Egypt, however, special requirements made the process all the more necessary. Notable amongst these is the fact that the performance of public enterprises (PEs) before 1990 was very poor. The PE portfolio consisted of a jumble of so-called profit- making entities and loss-making enterprises.
"PEs were operating with soft budgets and their deficits were financed by the government," noted former Minister of the Public Business Sector Mokhtar Khattab. Although this portfolio demonstrated LE1.2 billion in profits, the accumulated losses were LE2.37 billion. "PE debts stood at about LE47 billion, a huge burden on government funds and state-owned commercial banks which were the main financiers."
The shift towards the private sector started as early as 1974, "when the government began to realise the importance of giving private capital a better chance to grow," related Khattab. According to him, the pillars of successful privatisation are transparency, disclosure and the absence of corruption or profit-making. "I guarantee that the privatisation process was proceeding as efficiently and professionally as possible," assured Khattab, who held his post for six years.
The proof, he continued, is the fact that every single privatisation transaction since the programme began in 1991 has been thoroughly documented. This includes an introduction to each company, its assets, profits, losses, the means by which it was assessed and by whom, the number of stakes sold, how it was sold and at what price, the name of the buyer, in addition to the decision taken by the company's general assembly and a copy of the final agreement by the Central Agency for Auditing (CAA) on all procedures. Vouching further for the integrity of the sales, Khattab said that all decisions were taken by consensus at general assemblies or company board meetings. "I am sure that not one single decision was taken unilaterally," he asserted.
The privatisation process has resulted in some 225 volumes of full documentation, copies of which are kept at the People's Assembly, the Shura Council and university libraries. "But what's the use of volumes of information to the majority of people who know little about these highly sophisticated procedures?" asked Shura Council member Sabri El-Shabrawi, who pointed out that privatisation and its proceedings were never the people's choice to begin with. "It was not the people who decided to privatise," he argued. "I wonder if the people have any say in how this country is run."
Another opposing opinion suggested that the biggest defect of the privatisation process remains that most, if not all, privatisation proceeds are used to cover up budget deficits, rather than pump fresh capital into new projects and encourage investment. "This trend fundamentally contradicts the principles of how privatisation should be implemented," stressed Hisham Hasabou, professor of accounting at Ain Shams University. Hasabou explained that selling fixed assets to spend on current costs, losses and subsidies comes at the expense of the next generations.
Ismail Osman, the chairman of the Egyptian Company for Railway and Transportation Projects, shared another perspective. Why is privatisation the only means of turning around the fortunes of loss-making PEs? As former chairman of the state-owned construction company the Arab Contractors, Osman suggested that the enterprise remain in the hands of the state, but run as a private sector company. "This can be achieved by changing leadership and improving management," he proposed.
He was drawing on his own experience at the head of the Arab Contractors beginning in 1993. "At the time, the volume of work was worth about LE1 billion, and it increased at the rate of LE1 billion per year for the next nine years," he said, which brought the company out of the red and provided 60,000 jobs in 26 countries. Moreover, it was the first state-owned company to create a human resources department. "Effective leadership and management is the key to turn a losing public sector company into a profit- making one," Osman concluded.
For others, going private -- whether in reality or essence -- is not necessarily the best solution. Some participants felt that although the private sector is given many incentives by the government, it is unable to become the main engine for promoting investment, creating new jobs or leading the process for modernisation. "The private sector has failed to achieve the goals of the political leadership," according to Hasabou. "It cannot be solely relied on to steer economic development in the country."
Technically, Egypt should maintain a growth rate of nine to ten per cent over the next 20 years if it wants to catch up with the Asian tigers. "In other words, the private sector should invest at least 35 per cent of the country's total GDP, some LE200 billion, in order to maintain that growth rate and absorb workers entering the labour market annually," stressed Khattab, although this is very unlikely to happen at present.
In conclusion, the question remained of how to best manage public assets. The alternatives comprise changing the leadership, or managing public entities as private enterprises. Other options include selling to either major investors or a consortium, and assessing whether to sell to Egyptians, Arabs or Arabs. The jury seems to be still out on all of the above.
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