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Pragmatism is the winning formula: a pragmatic rather than dogmatic approach to economic growth is proving a winning formula for Egypt as the country nudges new growth records. Neil Ford reports on Egypt's new approach to economic health.

While economic growth in Libya and Algeria is largely being fuelled by oil and gas revenues, Egypt is following the Tunisian model far more closely. High oil prices have made its sizeable oil sector more valuable and the growing gas sector has certainly added another string to the country's bow, as well as boosting its industrial muscle through the development of a liquefied natural gas (LNG) sector.

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Despite earlier security problems and terrorism scares, the country was able to announce the highest tourism revenues on record in 2004, adding to the rosy picture.

The government has been determined to adopt a slightly unusual approach to reform and a genuinely broad based economy is beginning to take shape.

In January, the Egyptian finance minister, Youssef Boutros-Ghali revealed that the government expected the economy to grow by 6% this year, up from 5.1% over the previous year, which was already the most impressive figure for five years.

In addition, the currency has stabilised and inflation stood at just 3.1% in 2005, the lowest for 20 years. It is widely recognised that countries in Africa and the Middle East generally need to grow their economies by over 5% in order to make real improvements in living standards, partly because of relatively high population growth.

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Official Egyptian unemployment currently stands at 10% but the real scale of the problem is likely to be much greater, given the impact of underemployment.

If it ain't broke, don't fix it

The higher levels of growth are being achieved without any dogmatic approach to the private-sector versus state-control debate. While Egypt has traditionally favoured state control of key enterprises and vital national infrastructure, the current government has adopted a policy of selective privatisation. Where state owned companies function well, utilities remain in state hands; where they do not they are privatised. The most extreme example of this policy comes from the power sector.

The Egypt Electricity Holding Company (EEHC) was created in 2000 out of a previous power sector parastatal with the aim of acting as an umbrella body for the outright privatisation of power sector assets, particularly at the level of generation.

Yet the EEHC has done such a good job of improving its financial performance and of bringing new capacity on stream in the form of new thermal facilities that consume Egypt's own natural gas, that the government is reconsidering the break up of the company and the sale of state owned power sector assets.

While some subsidiaries are likely to be sold off and private sector operators are certain to play a larger role in power generation, the policy has been 'if it ain't broke, don't fix it'.

More progress is also being made on banking sector privatisation. In February, it was announced that a consortium led by Ripplewood Holdings of the US is to buy an 18.7% stake in Egypt's Commercial International Bank (CIB) for between $227m and $244m from the state owned National Bank of Egypt.

All of the country's main banks were state owned but the process of transferring equity to private sector interests in order to make the sector more competitive is likely to continue. It is also hoped that giving more influence to foreign banking interests will improve the access of Egyptian small and medium sized enterprises (SMEs) to credit.

Port success

Shipping has long been a crucial part of the country's economy and of Egyptian national identity. With coastlines on the Mediterranean and the Red Sea, in addition to the most famous ship canal in the world (Suez), it could hardly be otherwise.

Yet the government has managed to transform its ports sector from a mere means of transporting goods into and out of the country into a much more central part of the economy. In short, it is attempting to use Egypt's position at the crossroads of Asia, Africa and Europe to turn it into one of the world's main entrepots, a transhipment centre par excellence.

Ten years ago the picture was very different, when the state controlled ports had very little spare capacity. New ports had to be built or an expensive expansion programme undertaken at the existing ports of Alexandria, Damietta, Port Said, Safaga and Suez.

The result of a series of consultations was an ambitious and forward looking strategy to build brand new ports at Port Said East and Sokhna within larger industrial development schemes, through a combination of public and private sector funding and management.

Sokhna was built within the Suez Special Economic Zone (SSEZ), to the east of Cairo by the Sokhna Port Development Company (SPDC), which was awarded a 25-year management concession.

A SPDC spokesperson said: "Phase one has been successfully completed, which in turn has attracted a host of investors eager to use the port as their operational hub for Europe, the Middle East and Asia. Development of the port will continue beyond 2020, based on the original master plan."

He added: "Sokhna fits as a nodal centre with a perfect location in one of the busiest trade lanes in the world. In addition to this is its capabilities in handling almost any kind of cargo and offering most of the ancillary services that relate to the shipping industry."

Sokhna aims to promote trade with the Middle East via the Red Sea. SPDC expects the total volume of cargo handled by the port to reach 45m tonnes by 2010 and 90m tonnes by 2020, including 4m 20-foot equivalent units (TEUs), making it a massive undertaking on a global scale.

The chief executive and president of SPDC, A1 Sharif, said: "Ports have developed into logistical trade centres offering all types of cargo services. In the future, the transport of semi-finished and finished goods will increase and ports will become physical, administrative and management centres."

The second new facility, the new Suez Canal Container Terminal (SCCT) at Port Said East, at the northern end of the Suez Canal, has been constructed to handle trade with the Mediterranean and the Atlantic.

It forms part of the 150sq km Gulf of Suez project, which includes petrochemical facilities and other industrial enterprises. The contract to build and manage the port for 30 years was won by a consortium of Danish giant A P Moller, ECT International and Egyptian public and private investors.

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The first port operations came into use in 2004 and when completed, the port will have a container terminal with the capacity to handle 1.7m TEUs a year, plus dedicated bulk liquid cargo facilities. Although some public sector funding has been put into both port facilities in order to provide power, water and transport links, the bulk of investment in the industrial and manufacturing enterprises that are being set up in the shadow of each port is being provided by the private sector.

Both schemes fall into the same Egyptian tradition of jumbo projects as the various attempts to open up some of the country's desert regions to habitation and agriculture.

While large scale development projects are generally out of fashion in Africa, at the expense of smaller scale, targeted development investment, it is difficult not to be impressed by the two port schemes.

Pragmatic, pro-active approach

If sufficient tenants can be attracted to their respective industrial zones--and a great deal of progress has been made in this direction--then they will each provide a massive boost to the Egyptian economy.

Companies investing in the 9,000-hectare Suez Special Economic Zone (SSEZ) at Sokhna have been given a 10-year tax holiday yet they should generate a great deal of employment. Tate & Lyle is setting up a sugar plant and Australian firm Magnesium International is developing a magnesium plant; other projects include a methanol production facility and a synthetic fuel factory that will be fed by vegetable oil.

Fresh impetus was injected into the government's privatisation programme by the appointment of a new cabinet in mid-2004. A team of reformers and economists was put together in order to reduce the role of the state in wealth creation still further and increase the pace of privatisation.

Taxes have also been cut in order to create a far more pro-business investment environment and some headway is being made already, if the increase in economic growth is anything to go by.

By taking a pragmatic pro-active approach, Cairo certainly seems to have found a winning formula. Moreover, the fact that it is adopting this strategy at the time of an oil and gas boom speaks volumes about its determination to create a well balanced, healthy economy in the long term.
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Author:Ford, Neil
Publication:African Business
Geographic Code:7EGYP
Date:Mar 1, 2006
Words:1431
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