Egypt’s public sector stronghold: Will it hold?

01-08-2014 11:54 AM

Fady Labib

So a significant portion—EGP85 billion—of the State subsidy that made the daily life of Egyptians tolerable and their State budget intolerable has been lifted. Prices spiralled almost out of control, and the pain of swallowing the bitter pill of serious economic reform is biting.
That much is all-too-obvious in Egypt, but what is not so obvious is what the funds freed into the budget will be used for. It would be agonising for Egyptians should they find out that their sacrifice has been poured down the drain.
The government says the funds saved will go into health and education spending, but the experts warn that lifting the subsidy will work for the benefit of the people only if other reform moves are taken. And such reforms will probably again cause much pain.
A case in point is Egypt’s public sector factories and firms that have for decades now been regularly bleeding Egypt’s economy with unsustainable losses. The columnist Suleiman Gouda wrote in his column Khatt Ahmar (Red Line) in the independent Cairo daily al-Masry al-Youm on Friday 25 July urging for a bold decision to end the haemorrhaging of funds the public sector is causing to the State budget. With daily losses that amount to hundreds of millions of Egyptian Pounds, he wrote, “Have we Egyptians accepted the pain of lifting the subsidy only for the government to spend, no to waste, our hard-sacrificed money by pouring it down a drain called the public sector?”

Rise and fall of the public sector
The ‘public sector’ is a term that in Egypt designates companies and factories established by the government during the 1960s, or much earlier by Egyptian or non-Egyptian industry men or traders in the 1940s and 50s then nationalised by President Gamal Abdel-Nasser in 1960 and moved into State hands. These venerable establishments were for decades seen as strongholds of the country’s industry, and were run directly by State-owned public institutions or holding companies. The public sector included backbone industries such as iron and steel, cement, spinning and weaving, paper, chemicals, fertilisers, food and manufacturing industries.
During the time of President Anwar al-Sadat (1970 – 1981), the State adopted new open-door economic policies that fostered a free economy. The door for importing goods was opened after a long ban by the Nasser regime. Egyptian businessmen went into the industrial field which had reopened to private ownership, and began setting up factories and businesses many of which were international franchises and most of which met international standards. The public sector, which had been used as a vehicle for the socialist economy of the 1960s, began to suffer. The basic structural changes that had plagued it, most serious of which were the overburden of a labour force much too excessive for its needs and a pricing policy that included embedded State subsidy, increasingly drove it out of competition with the new Egyptian-made or imported goods, and sent it into a dramatic downward spiral. The emerging private sector, by contrast, flourished and gained ground, rapidly expanding to cover some 80 per cent of production in Egypt. Adopting the latest advances in technology and administration it boomed, whereas the public sector accumulated huge debt and ended up a massive burden on the State budget.

Innovative ideas
Today, with the severe decline in the economy in the aftermath of the 2011 Arab Spring revolution, the Egyptian public sector has become almost unaffordable. Yet its huge labour force with its equally huge demands poses an epic problem for which some bold, innovative decision is needed.
Renowned businessman and head of the Egyptian Businessmen Association Louis Bishara sees that the apparently insolvable problems of the public sector in Egypt are due to government fears of worker protests should any proposal touch on their benefits. “But we really need innovative ideas to resolve the dilemma,” he says. “The Indian city of Mumbai suffered from the same problem as our public sector, some fifty years ago. The Indians solved the problem by selling the land on which the factories were built and relocating the factories in other less expensive areas. The price of the original land had skyrocketed over the decades and amply paid for the relocation and modernisation the factories needed. If we look at the public sector in Egypt we’ll see a clear parallel. Factories in towns such as Mehalla al-Kubra, Tanta, Shebin al-Koum or Helwan now sit on land worth billions, whereas the factories themselves suffer obsolescence and high debt and have therefore very few chances of survival, let alone competitiveness.” Mr Bishara says that the businessmen association recommends implementing the Indian model and relocating these factories to new sites in Egypt’s vast deserts. The selling price of the land, he says, would adequately cover the relocation of factory and workers, as well as the facilities needed for resettlement of their families.
The government, however, is reluctant to take such a step because it fears the angry reaction of the factory workers who would oppose the change.

It’s the management
Finance and Investment consultant Enayat al-Naggar says that the public sector now resembles an ‘asylum’ for workers and employees who nonetheless usually work at a second job in the private sector. “Inefficient management is the main reason behind the current lamentable fate of the public sector,” she insists. “Management is the cornerstone of businesses, regardless of whether they are public or private owned. Some public sector firms are successful and other private sector companies are a failure; success or failure depends not on the type of ownership but on efficient management.”
Ms Naggar criticises the call to privatise public sector companies. She believes that only the management should be privatised. “It is possible to keep those companies in the public sector and run them through private companies,” she suggests. “This would guarantee that the management attains the highest level of efficacy. The sector’s current and potential assets should in the meantime be assessed, with a view to obtaining the financing needed for restructuring and modernisation. Once the assets are assessed, many sources of finance may be found including bank advances or the issuing of stocks or bonds.” Ms Naggar, however, did not address the high probability that the first thing a new management would probably have to do in order to succeed would be to rid the company of the excess labour; otherwise there is a next to nil chance of becoming competitive.

From bad to worse
“The public sector has been going from bad to worse, especially throughout the past 25 years,” says Bassant Fahmy, Professor of Banking and Finance at the Université Française d’Egypte. “Discussions on how to deal with the dilemma have also been ongoing since the 1990s. The only solution to bring the public sector back to its feet is to activate the Public-Private Partnership (PPP) law. In this system, the State remains the owner and participates in their management alongside a private sector company. This must be done in accordance with a clear legal expression that would guarantee the rights of the workers.”
Dr Fahmy sees that this solution is probably the closest to the President’s programme to tackle the problems of the public sector. “According to the PPP law,” she says, “the State can act as a partner and contribute by providing certain assets such as the land, whereas the private partner can handle the actual management and technical development. All this would come under the financial and administrative supervision of the State. The private sector may include shareholders.”
Yet companies and factories that produce strategic commodities such as electricity, gas, and water must remain under full control of the State, Dr Fahmy warns. These firms may, however, issue stocks that can be sold on the stock market.

PPP: Public-Private Partnership
Dr Fahmy sees Egypt’s experience with privatisation as one of the worst because it was exploited for the benefit of special interest groups or persons. “We now need appraisals for all public sector companies to be conducted by local banks or specialised firms. But more important, we need legislative procedures to establish bases for international investment, such as laws of incorporation and bankruptcy. Egypt does not currently have a clear bankruptcy law, so we must set the ground for an investment environment based on mutual trust between investors and the State.”
Such procedures are pivotal for PPP and for determining the best methods for implementing them. Introducing shares on the market might be the best solution for a specific company for instance; finding major investors may work better for another, whereas a third company may seek the expertise of a specialised company to operate it. All these steps and procedures are usually implemented either in steps or in parallel.
Dr Fahmy says that a committee has been formed by the Central Bank of Egypt (CBE) to manage the assets of the public sector, including land, buildings, warehouses, tools and machinery, as well as inventory. These assets are now being grouped under one umbrella organisation to be managed according to new unconventional rules.

Staggering losses
For his part, former governor of the CBE and President of Misr Iran Development Bank Ismail Hassan says that only a major development leap in management and production can work for the public sector, which implies the need for financing. “Banks are usually the key players in such situations; however, banks look for feasibility and competence, characteristics which are frequently lacking in the public sector,” Hassan says. “For any effective financing, these characteristics need to be restored.”
There are currently 151 public sector companies in Egypt, managed through nine holding companies which follow the Ministry of Investment. One sector alone, the spinning and weaving sector, includes 31 companies that employ some 60,000 workers whose basic monthly pay amounts to some EGP70 million. According to the 2012/2013 financial performance statement of the spinning and weaving sector, published by the liberal Cairo daily al-Wafd, the net loss incurred by the sector amounts to 1 billion and 832 million Egyptian Pounds. But the really shocking figure was that of the accumulated losses which reached a staggering EGP27 billion. The sector’s debt is upwards of EGP35 billion.

WATANI International
3 August 2014

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