Thursday,20 September, 2018
Current issue | Issue 1349, (15 - 21 June 2017)
Thursday,20 September, 2018
Issue 1349, (15 - 21 June 2017)

Ahram Weekly

Leading IPOs

Ashraf Ghazaly, CEO and managing director of NI Capital, explains to Niveen Wahish the wisdom behind Egypt’s IPO programme

Ashraf Ghazali
Ashraf Ghazali

Earlier this year the government announced its intention to launch an Initial Public Offering (IPO) of several government-owned entities. The move is part of the government’s economic reform programme. The five-year IPO programme aims to attract investments worth $5 billion over three years. It includes stakes in financial services and banking, oil and gas, and petrochemicals companies. The last time any company was offered through an IPO in Egypt was back in 2005. Al-Ahram Weekly talks to Ashraf Ghazaly, CEO and managing director of NI Capital, the sole financial advisor to the Egyptian government for the IPO programme.

What is the concept behind the establishment of NI Capital?
It is the investment arm of the National Investment Bank. Regulated by the Egyptian Financial Supervisory Authority, the company works in asset management and investment banking.

The company has also acted as financial advisor to the government on several large-scale national projects such as Al-Reef Al-Masry, Damietta City for Furniture and the National Company for Investment and the Development of Sinai. These are privately managed, publicly-owned companies that were created upon the advice of NI Capital to manage large-scale projects.

What is the purpose of the government’s IPO programme?
For starters, the government wants to increase the depth of the market and increase market capitalisation to 50 per cent of GDP in three to five years. Market capitalisation right now is roughly 16-18 per cent of GDP.

The stock market capitalisation in 2008 was roughly 105 per cent of GDP. We had a very active, diversified and liquid stock market. We want to regain that back because it has been proven that there is a high correlation between an active stock market and overall GDP growth.

We need to increase exposure to new sectors such as oil and gas, utilities, logistics, transportation. These are all under-represented in the stock market of a diversified economy like Egypt.

This diversification of sectors will derive interest from local and international investors and it will bring in fresh capital to the stock market.

So, for the moment the government is only intending to go for IPOs and not strategic investors?
Yes, that is our mandate.

What are the companies in your portfolio?
When we started the programme, we were handed over a list of 50 companies from the Ministry of Investment which we screened and shortlisted nine.

What is the first company to be offered?
Twenty-four per cent of the Engineering for the Petroleum and Process Industries (ENPPI) will be floated. The listing process takes between six and 18 months . We hope we can finish it soon but it depends on the company itself and the concerened entities.

In May, the Request for Proposal process was launched to invite qualified local and international investment banks to bid for the role of global lead arrangers.

We received 16 expressions of interest. Proposals were submitted by six consortia last week. Right now, we are in the process of evaluating these proposals to make sure they meet our key objectives and the winning consortium will be announced in July.

Are you involved in the proposed privatisation of some banks?
The CBE will take the lead on banks because it is a specialised area.

What other companies are in the pipeline?
We have screened 580 public sector companies over the last few months and that showed us that Egypt is about to launch a massive IPO programme that could be very successful but we need to move faster. They are state-owned assets from various sectors. They have a combined contribution of 17 per cent to the GDP.

We have enough assets to fuel the IPO programme for the next five years depending on how much the market can absorb.

What’s keeping us from moving faster?
Getting the companies approved for floatation is a tedious process. We have undertaken sweeping reforms of subsidies, the currency and taxes. The IPO programme is what needs to get going and this has the greatest potential for returns on the Egyptian economy. We need to move a lot faster.

Of the 580 we have shortlisted 10 per cent to be offered over three to five years. Some of the companies that top our list are already listed.

Economists often warn of the negative effect of high interest rates on investment in the stock market. What is the outlook for IPOs given the current high interest rates?
The current hike in interest rate is temporary to counter-attack inflation. By the time we get these companies ready things will look a lot different. Nonetheless, before the most recent interest rate hike in late May you had an active stock market. Even after hiking interest rates, the stock market is at an all-time high right now because assets are underpriced and there is lack of good quality stocks in the market. I am not really concerned because it is a short-term hike. Interest rates will eventually come down.

How do you expect the depreciation in the value of the pound to affect demand for your offerings?
The liberalisation of the currency exchange has made the stock much more attractive because they are now cheaper.

How will you overcome the shortcomings of the previous privatisation programme?
Before embarking we studied why the privatisation programme in the 1990s had a bad reputation. I am not in a position to judge policy-makers at the time, however, some of the companies that were privatised in the late 1990s were not the profitable companies. When you are selling a losing company, you sell cheap, even though it might have a lot of undervalued assets.

Do you believe the government has chosen the IPO path to avoid the problems faced in the former privatisation programme?
Egypt has tried selling to strategic investors before and it did not work out. When you have a vibrant, well-positioned stock market with strong fundamentals in a country that needs to be developed, this is a market that has huge potential that must be taken advantage of.

The decision-maker has decided to take the IPO route to pump blood in the stock market. It will create economic exposure for the country through good blue-chip companies. We are only selling a minority stake of between 20 to 30 per cent; the government will remain majority owner. When successful, we can consider a bigger stake.

Do you believe public sector companies should remain in government hands?
Yes, some public assets must remain owned by the state, however, they need to be managed differently. For example, in Poland most public sector assets are still owned by the government, however, they have in place legislation that enables it to attract management talents from all over the globe and pays them the highest salaries. They turned around the state-owned companies from non-performing public assets to companies that are very profitable. Egypt needs massive legislative change to enable efficient management.

Are there plans to establish a sovereign wealth fund?
We were mandated by the economy sector of the council of ministers to study the possibility of establishing a sovereign wealth fund. It was an initiative by former minister of planning Ashraf Al-Arabi. Hopefully such a fund will be coming out to the market by the end of 2017. We have drafted a new law for the fund to be established. We looked at best practices across the globe, how they are operated and the laws governing them. All sovereign funds are established under a separate law.

Where will it get its funding from?
Globally the funding comes from resources of the country. Egypt for example can use part of the revenues of the Zohr natural gas field when it comes online. Some of the proceeds of the IPOs can also be placed in the fund. It will be like setting aside money for future generations. It remains for the government to decide.

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