6 - 12 April 2000
Issue No. 476
|Published in Cairo by AL-AHRAM established in 1875|
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Government faces suit over duty freeBy Mona El-Fiqi
When Egypt Free Shops Company was privatised in 1997, 97 per cent of the equity was sold at LE40 per share -- a quarter being purchased by foreign investors, the rest by locals, all of whom were encouraged to invest by the company's high sales record.
Two years later, in June 1999, the government issued two decrees regulating the activities of duty free shops. The first of the decrees issued by the Ministry of Finance curtailed the period allowed for duty free purchases from one month after arrival in Egypt, to 24 hours. A second decree banned the sale of durable goods in duty free shops outside ports of entry. The duty-free shops affected were given a two-month grace period to sell their inventories of durable goods.
The decrees, the government claimed, were intended to combat smuggling, reduce the demand for dollars -- which are used to purchase duty-free goods -- and increase government revenues. After the new regulations were announced, Egypt Free Shops shares slumped from LE40 to LE9.
"Durable goods' sales accounted for more than 80 per cent of total sales, and were lost overnight," Abdel-Salam El-Zeidy, the company's chairman, told Al-Ahram Weekly. "The company's revenues have deteriorated sharply, because it has been deprived from its major source of revenue" he added.
The company had been established in 1975 as a 100 per cent Egyptian joint-stock company. When the law for public enterprise companies was issued in 1991 it became a part of the Holding Company for Housing, Tourism and Cinema. In 1997, under the privatisation programme, 97 per cent of the company's shares were sold at LE 40 per share. Foreign investors held 25 per cent of the shares, with the rest sold to local investors.
Now, these shareholders who were harmed by the government's decision say they are fed up with its procrastination in redressing the harm which has befallen them as a result of its sudden decrees. Given the impact of the new regulations on the company's business, shareholders had authorised the board of directors to negotiate with the government for the repurchase of shares at the LE40 offer price. Subsequently, the board requested that the Capital Market Authority halt trading in the company's shares until 27 July, 1999, when negotiations with the government were scheduled to be completed.
On 25 July, 1999, an agreement was signed between the Holding Company for Housing, Tourism and Cinema, and Egypt Free Shops Company, stipulating that on 20 September shareholders who had bought shares before the decrees restricting duty free transactions would be eligible for the purchase price of the shares, plus LE3 per share compensation. That was six months ago.
Then, in January, Mukhtar Khattab, minister of public enterprises, issued a decree forming a legal committee to study the situation and reach a final resolution. Two weeks ago, the press reported that this governmental committee would recommend that shares be repurchased at their annual average price estimated at LE31 rather than the previously agreed LE40. Not surprisingly, shareholders are incensed, and foreign investors are threatening to file a suit against the government. "And they will undoubtedly win," says El-Zeidy.
The issue is exacerbated by the fact that share holders say that they were encouraged to buy the company's shares based on the fact that for years the government had facilitated and encouraged the duty free business.
"The government was wrong to sell to the shareholders initially, and must now stick to its first agreement rather than start this unseemly bargaining," says El-Zeidy.
This week El-Zeidy sent a memo to the minister of public enterprise, on behalf of the company's board of directors, asking him to submit alternative solutions for discussion to the board meeting, scheduled for 26 April.
On more than one front, the issue will hold negative repercussions. Some 1000 employees at the company now stand in danger of losing their jobs.
It would be easy for shareholders to get their money back by selling the company's assets, said El-Zeidy, but it is unfair that nearly 1,000 workers will lose their jobs.
The negative impact as well stems from the fact that the whole question of the Free Shops Company gives the impression that the government at times, whatever the reasons cited, appears to be actually going back on its privatisation policies. The fallout from all of this cannot be underestimated.
"If this problem is not settled soon, it is likely to have a negative impact on foreign investors' confidence in the government's privatisation polices," he concluded.