Into the private sector

15-12-2011 09:06 AM

Fady Labib

WATANI International
28 November 2010


Egypt had always been a free market economy; its modern commercial and industrial base was built by Egyptian individuals in the early 20th century. Come July 1960, however, Egypt’s then president Gamal Abdel-Nasser issued his notorious nationalisation decrees through which all privately-owned industries, banks and financial businesses passed into the hands of the State. A huge public sector was then created, mushrooming throughout the following decade and becoming the country’s main employer.
When Anwar al-Sadat came into office in 1970, he had a different economic agenda. In 1974, he announced his “open door policy” and the Egyptian private sector again assumed an active role in the country’s economy. By that time the public sector was seriously deteriorating for lack of funds, maintenance, and upgrading, and because of poor management; it was in shatters. It took a few more years for the government to embark on an ambitious privatisation programme.

Imperative move
A recent study by the Economic and Financial Research and Studies Centre (EFRSC) affiliated to Cairo University’s Faculty of Economics and Political Science investigated the policy of privatisation in Egypt, a process that started in 1991. The study showed that by the late 1980s, the privatisation of public enterprises seemed imperative given the chronic problems that had long plagued the public sector, which included low productivity, weak financial structures and falling competitiveness.
The starting point was law 203 of 1991 stipulating the formation of holding companies to substitute economic public authorities. The move aimed to provide greater flexibility when it came to managing public enterprises. To give a push to the privatisation process, law 95 of 1992 was promulgated to allow the listing of public enterprises’ shares on the stock market, hence broadening the base of private ownership.
The study was written by Aliya al-Mahdy, professor of economics and dean of the Faculty of Economics and Political Science, and Manal al-Qadi, professor of economics and head of the EFRSC. It suggests that the programme to put public enterprises up for sale had three components: first, privatising companies and assets owned by the public enterprise sector; second, putting the government’s share in joint companies for sale; and third, implementing rules of corporate governance.

Paying the debt
From the fiscal year 2003/2004 on, the study shows, privatisation gained momentum with privatised firms increasing from 13 in 2003/2004 to 66 in the following year. The revenues incurred by privatisation stood at EGP15.1 billion in 2005/2006.
Up to June 2003, the Ministry of Finance received 45 per cent of the proceeds of the sale, or EGP6.6 billion. It used this money to pay back the debts owed by public companies slated for privatisation—some EGP4.5 billion—and improving the management style of unsold companies. The tendency then was not to use the proceeds of the sale to finance new investments. The inclination continued over the following years; the revenues generated by the sale went to the Ministry of Finance rather than being directed to inject new investment in the market. In 2005, the ministry used EGP1.12 billion to restructure public enterprises and EGP1.1 billion to pay back loans owed by some companies. The study argues that when evaluating privatisation processes, the debts owed by public enterprises that have been paid back should be taken into consideration, because these represent a burden to be shouldered by society as a whole.

In future
Another study by Hanaa Khaireddin, professor of economics and former executive director of the EFRSC, and economics professor Amal Rifaat indicates that in 1991 there were 314 public enterprises affiliated to 27 holding companies. In the beginning, the privatisation process was remarkably slow with no more than 11 companies being sold between 1991 and 1994. These sales generated EGP418.4 million. Yet the process advanced by leaps and bounds from 1995 to 2004, with 201 enterprises sold for EGP17.4 billion. It peaked in 2000 when 40 companies were sold for EGP4.6 billion.
The entire privatisation process from 1991 to 2006 covered 289 enterprises and generated EGP 37.76 billion.
Finally, the study suggests the adoption of a group of measures with regard to future privatisation. These include the focus on distressed companies; the avoidance of restructuring processes as much as possible—since it was eventually found that their contribution in terms of raising the value of the enterprise was minor—and the sale of the government’s share of joint companies.
The study advocates delaying the privatisation of public facilities for fear it might lead to the substitution of private monopolies for public monopolies. The law for fair competition, the study said, should go into effect to prevent cartels. For considerations of national security, some areas such as banking, insurance, public services and the agricultural sector, should be sold exclusively to Egyptian investors.




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