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One step at a time.

Egypt has launched its long-awaited privatisation programme, drawing mixed reviews from the publi and business community. The four-year plan to privatise public sector companies is expected to result in the sal of at least 85 firms and properties. On the positive side, writes Josh Martin, the launch marks a major step forward for the government's economic reform strategy. The sales embrace all areas of commercial activity, and they are expected to contribute significantly to a revival of Egypt's financial and stock markets.

The business community in Egypt has generally welcomed the privatisation programme. "It is a step in the right direction," one company executive told The Middle East. But another businessman echoed widespread frustration at the pace of reform. "The government has delayed far too long," he declared. Meanwhile the influential American Chamber of Commerce in Egypt charitably described the condition as "slow progress".

The privatisations are being carried out in three stages. The first sales, now underway, involve 20 properties, dominated by hotel and tourist facilities. These include four cruise vessels, the long-established Shepheard's Hotel and the Cairo Sheraton. Other properties being sold include Suez Cement, Misr Studio (one of the country's largest film companies) and the Egyptian Bottling Company.

Critics says delays in launching the privatisations - originally scheduled to begin in late 1991 - are due to opposition from vested interests and government fears of unrest as the Nasserite economic system, with its emphasis on state ownership and subsidies, is gradually dismantled.

Government officials point out in response that delays have been due in part to the need to obtain an accurate accounting of properties to be sold. Officials add that in many cases cross-ownerships between and among public companies and banks had to be untangled prior to sale.

The Public Enterprise Office (PEO), which oversees the privatisations, has turned to outside banks and consultants to sort out the mess and supervise the sale of properties included in the second and third tranches of the process. It is an indication of strong foreign investor interest that of the 13 banks and 39 firms on the PEO'S shorthlist to oversee sales, 17 are foreign and another 20 are joint venture firms (such as accountants, brokers and investment companies) linking Egyptian and foreign partners.

The foreign contingent on the short list includes J P Morgan, Citibank, Bank of America, Booz Ahen and Morgan Stanley. Joint venture partners include major accountancy firms such as Arthur Andersen, KPMG/PEAT Marwick, Coopers and Lybrand and Ernst Young. Major Egyptian institutions on the short list are Shawki and Company (accountants), Bank Misr, Bank of Alexandria, Banque du Caire, Commerce International Bank and the Export Development Bank of Egypt.

The 25 properties in the second tranche include more industrial concerns than the first (three chemical companies, two pharmaceutical firms and three engineering groups), as well as consumer-oriented properties such as the giant Sednawi department store). Almost half the 25 properties to be sold represent the sale of government holdings in joint ventures, most of which are already listed on the Cairo Stock Exchange.

The third tranche, representing 40 properties, includes major textile factories, cement works and transport companies. Even with the announced sales schedule, the state is expected to remain the largest single owner of industrial assets in the country.

In 1991, when most of the government's substantial industrial assets (representing 85% of Egypt's manufacturing capacity) were placed under 27 holding companies, it was estimated that those companies controlled 314 subsidiaries with asset exceeding E66bn ($21bn). A half-hearted offer to self 1,800 small-scale holdings, started in 1990, has only brought in E36m so far, while holding company assets are estimated to have grown to E80bn.

The real value of assets may be significantly lower. In the past, government and public company officials seriously overestimated the value of their properties while minimising liabilities. Ahmed Shawki, managing partner of Shawki and Company, says government and public sector officials need to adopt more realistic expectations. Sometimes they seem to think that all they have to do is offer, and investors will flock to buy."

Strict conditions set by the IMF as part of Egypt's $35bn debt forgiveness package, are having their effect. Holding companies and their subsidiaries can no longer rely on government subsidies and other forms of protection. While some of these companies are profitable, many operate at a loss or have incurred a large burden of debt.

Public sector companies which in the past were able to mask their mismanagement by borrowing freely from captive state-owned banks have already experienced a rude awakening. The banks themselves are under intense scrutiny by the Central Bank to meet "prudent" investment standards.

Other firms which were able to import supplies using artificial currency exchange rates (as much as 70% less than the market rate) are now compelled to use the unified exchange rate. Some boards of directors of the new holding companies, who expected unending paternalistic support from the government, have been shocked by the government's refusal to get involved in in the internal affairs of what are now regarded legally as independent legally-held entities.

As the holding companies confront market realities, they will be forced to rationalise - cutting losses where necessary, and selling off assets to cover their red ink. As a result, both government officials and private sector analysts expect the list of companies to be privatised will grow substantially over the next few years.

The government has tried to staunch any potential panic selling. Various provisions of Capital Market Law 95, which governs how the nation's stock markets will operate, make it unlikely that those markets will be swamped - even if all the 27 holding companies seek to self shares.

For one thing there is a a vast surplus of latent demand in the market. Some analysts believe it could allow for as much as 10-fold increase in volume. More important, however, holding companies have to traverse a lengthy approval process - including an outside audit - before they can sell any shares of their subsidiaries. Under Law 95, listed and traded companies must provide full and reliable financial data using international accounting standards.

Ironically, there have been complaints from potential investors about the quality and quantity of basic data being released by the government on the companies to be sold. "We get information which is satisfactory to make a decision, but it is not enough," says Taha Hussein, general manager of the Gulf Arab Investment Company. "We need accurate information on a timely basis."

That may come about as reforms take hold. The privatisation programme is taking place after the enactment of a series of laws and structural changes, reforming the nation's economic infrastructure. In addition to the capital market law, new legislation has liberalised labour relations (Law 137), revamped management hierarchies in public companies (Laws 203 and 230), eased foreign investment procedures and presaged long-awaited reforms of Egypt's banking sector.

With these and other new laws in place, Egypt's Capital Markets Authority (CMA) now has the legal means to create the facilities and venues in which a significant portion of former state holdings will be sold and traded. Investors are clearly looking for opportunities among the holding companies. Recent public offerings by two subsidiaries - Misr Chemicals and United Housing - were oversubscribed.

Two groups of investors were attracted. One was foreign companies needing access and facilities in what is the Middle East biggest market. The other was Egyptian investors seeking better returns on their valuable savings.

The CMA is now overhauling Egypt's sleepy stock exchanges which are expected to play a major role in the privatisation process. The CMA is also expected to approve issuance of a variety of derivative financial products, designed to encourage both domestic and overseas investors.

"We are working to build up a proper mix of institutions and tools, to create a good, functioning capital market in Egypt," says Mohammed Hassan Fagannour, the chairman of the CMA. Among the institutions being considered are mutual funds "and all sorts of collective investment vehicles", and introduction of derivatives (futures and options) trading. Mutual funds are seen by the CMA as a means to attract significant amounts of domestic and foreign capital without destabilising Egypt's re-awakening stock exchanges.

At present, Egypt's two stock exchanges in Alexandria and Cairo are quiet institutions with one or two hours of trading each day. Although total capitalisation exceeds $2.5bn, the markets rarely see daily trading volumes exceeding 100,000 shares. Less than 200 shares were traded last year in about 7,500 individual transactions, with a total value of less than $300m.

Capital Market Law 95 is expected to encourage new players in the markets. Fagannour points out that "it will pave the way for private corporate institutions to operate in the capital markets, rather than individual brokers as is now the case."

The law allows mutual funds to be set up with shares priced as low as E10 ($3), putting them well within the reach of middle- class Egyptians. The CMA is likely to supervise such funds very closely, determined to prevent the upheavals caused when several Islamic finance houses went bankrupt in the late 1980s and early 1990s.

Institutional trading will be necessary to generate the funds needed to purchase shares which holding companies are expected to put on the market in coming years. Moderately priced mutual funds are particularly welcome by the government because they not only bring in capital but also create a middle-class base of support for the government's privatisation policy.

There have already been proposals to create five mutual funds. The CLU recently granted its first licence to an investment fund being established by Bank Misr. According to Ashraf Shamseddin, the CMA undersecretary for international relations, foreign investment banks are also seeking approval. Merill Lynch, Kidder Peabody and Solomon Brothers have all launched bids to open to shop.

As Shamseddin would have it, the outlook should be rosy. "All barriers which had arrested development in past have now been eroded." But more sombre potential investors remain critical of the slow pace of reform. Even if all the announced privatisations are carried out, they represent a small proportion of state holdings. They suggest that holding companies may over-price properties, and point out that the over-subscriptions of Misr Chemical's and United Housing's offerings were lukewarm compared with investor response to similar offerings in Morocco and Turkey.

Finally, potential investors remain concerned about the government's seeming inability to curb fundamentalist violence or restore growth in the Egyptian economy. With President Hosni Mubarak and his fundamentalist opposition engaged in virtual civil war with one another, and a severe recession underway, questions are being raised about the privatisation programme's chances for real success.

Where, for example, will money come from to buy these properties? Many potential foreign investors have been frightened off by the fundamentalist bombings. And while Egyptians have a lot of loose cash, much remains secreted abroad. There is an estimated $35bn on deposit in various American and European institutions.

"I don't think the government realises the seriousness or magnitude of the problem," says one investment banker. "I admire the determination and patience of the Egyptians. But investors are nervous. They want to wait until things settle down."
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Title Annotation:privatization program in Egypt
Author:Martin, Josh
Publication:The Middle East
Date:Sep 1, 1993
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