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Egypt: privatisation is the key.

The IMF and Egypt's creditors have become a little sceptical about the country's much-vaunted economic reform programme (The Middle East, October 1992). Josh Martin writes from Cairo that besides cutting subsidies, reducing the deficit and devaluing the pound, privatising public sector companies remains the most crucial issue.

WILL EGYPT ever implement its stated policy of privatising the economy? The government of President Hosni Mubarak has drawn fire from both the IMF and domestic critics for its extremely cautious moves towards the sale of state-owned companies. "The environment fight now seems to be in an 'analysis paralysis' mode," says one banker. "The only true test (of economic reform) is the marketplace."

Although President Mubarak would deny it, the government is in a race against the fundamentalists and other opposition groups to improve living standards through economic reforms of which privatisation is a key element.

There have been some promising developments. The government has realised many of the macroeconomic reforms sought by the IMF, including removal of subsidies and devaluation of the currency. Earlier this year, the government created holding companies which took title to most of the state's industrial assets.

These changes are expected to lead to the sale of a significant share of public companies to the private sector. At present, 85% of Egyptian industry TABULAR DATA OMITTED is government owned. Under the new holding companies, state-owned assets may be sold as the holding companies' boards see fit. Small scale factories and entities (including restaurants, cinemas and small hotels) will be sold off entirely by state governors rather than the federal government.

Pressure to privatise comes from both the domestic business community and Egypt's overseas creditors. However, delays in the process have been frustrating. Company evaluations have only recently begun, and the government has had to achieve a delicate balance between its commitment to privatise and its sensitivity to the pressures brought by subsequent dislocations.

Nevertheless, the promise of sales in the near future has attracted a surprisingly diverse group of interested investors. They include local Egyptian businessmen, union members, Gulf-based Arabs, as well as European and American multinational corporations interested in developing their Middle East presence.

Major Western and Arab financial groups have already expressed a strong interest in buying shares of those companies, or purchasing assets outright. Among the potential bidders are such well-known institutions as Merrill Lynch, Morgan Stanley, Barclays, as well as the National Bank of Kuwait and the Misr Iran Bank.

Several investment funds are being created, both by Egyptian businessmen and foreign banks, anticipating the sales of shares in the public sector companies. A bank consortium whose members include Chase International Bank, Ahli Bank and Misr Bank, is setting up an investment company with capital of $100m to invest in such shares. Citibank is considering creating a mutual fund to hold shares in newly-privatised companies as well as companies already listed on the Cairo stock exchange.

While many foreign observers have been impatient at the cautious pace President Hosni Mubarak has adopted, the Egyptian government points out that earlier attempts at reform have foundered because they threatened rapid and substantial economic dislocation. Above all, the government would like to avoid anything that enhances the already substantial popularity of various fundamentalist groups.

The fundamentalists are actively courting popular as well as professional opinion. The Muslim Brotherhood and independent Islamists have begun to make sophisticated studies of Egypt's economic conditions -- the kinds of studies needed to determine the policies of a shadow cabinet. In a recent series of raids, the government confiscated computer discs from the Muslim Brotherhood's Salsabil Centre, which detailed data on prices, economic standards, the living standards of the middle class, as well as the lifestyles of the flashy millionaires who have profited from corruption in the government.

The economic data in the Salsabil case is so sensitive that the attorney-general's office is treating it as other countries might handle military secrets. "The discs contain commercial studies that should be kept secret," says one high-ranking government official. The attorney-general's office has refused to give out any details of the material.

Egyptian and foreign investors have criticised the government for the slow pace of reforms. It was widely expected that the first batch of companies to be privatised would be prepared for sale earlier this year. But Hisham Hasabou, the chief performance evaluation specialist at the Public Enterprise Office, points out that much of the delay was unavoidable. "Just the process of filling the boards of directors (of the holding companies) took much time," he says. "Then there has been the valuation of the companies. Each company requires six to nine months to evaluate."

While the government is firmly committed to the policy, privatisation is too important -- and too complicated -- to be rushed, says Faika el Refaie, deputy governor and chief of research at Egypt's Central Bank. "We have to undertake a fair and realistic asset evaluation," she says. "And we have to find a fair and realistic way to sell these assets."

Yet efforts by private businessmen or the press to evaluate companies are frustrated by the government's insistence on secrecy. Inquiries about the holding companies or the first candidates for privatisation are brushed aside with expressions of concern that such information "may upset the stock market".

Even the US government has met with little success in this area. "There are several different sets of figures going around," says one American diplomat in Egypt. "Things published by the Egyptians are out of date and contain numerous contradictions."

Hussein Taha, general manager of the Gulf Arab Investment Company, a $40m fund chiefly invested in Egypt, suggests that the government should move faster and be more open in its selection and evaluation process. "The government needs to be more courageous," he says. "They need to take a more dynamic approach."

Taha's views reflect those of many in the business community who point out that goodwill and the desire to invest could evaporate. Prospects of privatisation could be killed, not by fundamentalists but by government procrastination.

A question of accounting

AT THE HEART of Egypt's economic reform programme is an as yet incomplete plan to privatise much of the state's vast industrial holdings. To streamline management of those companies -- and in part to adopt more professional standards -- the long-awaited privatisation of Egypt's public sector companies took a major step forward earlier this year with the creation of new holding companies empowered to sell assets.

Those holdings include everything from steel mills to film studios, and employ almost a million workers. But potential investors and government accountants have been unable to agree on just how big those holdings are. No two ministers provide identical figures, which has raised serious questions about the veracity of any government accounting.

If measured by numbers of employees, according to government figures, the companies range from giants such as the holding companies for food industries, chemical industries and engineering industries -- each employing over 60,000 workers -- to smaller entities such as the cinema (1,800 employees), tourism (6,700 employees) or construction and electronic industries (10,000 employees).

It is estimated that the 27 holding companies have assets exceeding $21bn, distributed among some 314 subsidiary public sector companies. But this figure could change dramatically. Values set by paternalistic bureaucrats could be diminished by more sober-minded outside accountants now being commissioned to survey the holdings.

Moreover, assets alone might be a poor measure of value. Many of the public sector companies are heavily indebted, or are owed vast sums by client government agencies, or depend on imported raw materials once purchased at the now-scrapped, much overvalued official Egyptian Pound exchange rates.

Many of the publicly-held companies have suffered from poor management. Most are over-staffed, some are heavily indebted to both public and private agencies, and others need major infusions of capital to upgrade plant and equipment.

The creation of holding companies is seen as a key step towards restructuring the state's vast industrial assets, facilitating their eventual sale to the private sector. As holding companies sell their subsidiaries, the proceeds are expected to be used to make necessary internal investments to prepare other subsidiaries for sale.

The holding companies have titles to most of the government's substantial industrial assets. At present, 85% of Egyptian industry is government-owned. Although the government is pledged to sell off most of those holdings, there are exclusions, including banks, insurance companies, the petroleum sector, the Suez Canal and EgyptAir, the national airline.

Under new laws, the holding companies will have the right to sell all or part of their assets, in several different ways. Shares in the holding companies may be sold on the Egyptian stock exchanges or through private placements. Individual properties (factories, hotels, buildings and so forth) may be directly sold to investors.

Government officials say the first sales of major entities could be undertaken in early 1993. Fuad Abdel Wahab, head of the Public Enterprise Office (PEO) overseeing the creation of holding companies and the subsequent sale of assets, believes 25 companies or major assets can be sold next year, and another 25 companies can be restructured. Abdel Wahab believes the same number of companies can be sold or restructured in succeeding years.
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Title Annotation:Business & Finance; includes related article
Author:Martin, Josh
Publication:The Middle East
Date:Dec 1, 1992
Previous Article:Investing, not borrowing.
Next Article:Iran: the uncertain path to reform.

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