After years of shying away from divesting from publicly owned firms, the government has announced a plan to generate LE6-8 billion annually from selling stakes in the country's major assets. It was back in January that the Egyptian presidency said that shares in “successful” state-owned companies and banks were to be offered on the local bourse. The plan re-emerged two weeks ago in a cabinet statement revealing the start of negotiations with the IMF on a possible loan and underscoring the main features of the government's reform programme aiming to plug the country's foreign currency gap. Only 20-30 per cent stakes of the companies are to be floated through initial public offerings (IPOs), Finance Minister Amr Al-Garhi said in a press conference last week. Companies slated for partial privatisation include firms from the oil sector, power companies as well as banks with majority public ownership. The listings are expected before the end of the current fiscal year. “This does not mean that we are selling or getting rid of these companies,” Al-Garhi said, adding that the companies chosen would be successful and have proven growth potential. The criteria used to choose the companies are unknown, according to Allen Sandeep, head of research at Naeem Brokerage. Meanwhile, for the IPOs to be well-received, Sandeep believes the floated assets need to be attractive. This means they should have high earnings, be cash-generating, have strong management and good future growth potential. Pricing is also an important determinant of the success of the offers as fairly priced IPOs would generate investor interest, especially given the recent backdrop of expensive flotations, he added. As for the method of offering the assets, Mohamed Bahaa, managing partner of NGage Consulting which specialises in public strategy and government relations, explained that IPOs are usually a favourable option if privatisation is undertaken for the purpose of injecting new capital and diversifying the shareholder base of already successful and desirable enterprises. When issued, the IPOs will be the first public offerings of government-owned firms since 2005, when shares in Telecom Egypt, AMOC, and Sidi Kerir were offered. Presented as a component of a plan to secure more foreign currency, it is expected that part of the issues will target foreign institutional investors or offer some shares in dollars. “It makes sense, as attracting foreign investment and currencies, through Global Depository Receipts (GDRs) for instance, should also be one of the prime objectives of the divestment plan, just like any other emerging economy that is looking to bolster its foreign currency reserves,” Sandeep said. Egypt's international reserves have been under pressure since the 25 January Revolution in 2011. A decline in foreign investment as well as tourism receipts has stripped government coffers of badly needed hard currency and resulted in the halving of the value of the country's foreign reserves which stood at $36 billion on the eve of the revolution. The reserves had dropped to $15.5 billion in July, their lowest level in 16 months as the government repaid $2 billion of debt due to Qatar, Libya and the Paris Club of creditor countries. The power companies on offer will include those managing the three Siemens power plants in Burullus, Beni Sweif and the new capital, a source from the Electricity Ministry told the Al-Borsa daily this week. NI Capital, a financial company affiliated to the National Investment Bank, will establish the companies in three months' time. The state Electricity Holding Company will retain 50 per cent ownership of each. Bahaa believes the decision to deregulate the electricity industry to allow private-sector operators to generate, distribute and sell electricity has come as a result of repeated power cuts and the need to upgrade and expand Egypt's power capacity. Also on the block for partial privatisation are companies in the oil sector. Tarek Al-Molla, the minister of oil, told Reuters that eight oil companies were being studied by the Ministry of Investment, “paving the way to issuing some of their shares on the bourse or increasing their capital.” The companies include the Middle East Oil Refinery (MIDOR), the Egyptian Ethylene and Derivatives Company (ETHYDCO), the Alexandria Mineral Oils Company (AMOC), and the Misr Fertilisers Production Company (MOPCO). The names of the other four companies were not revealed. As for the banks, it seems that Banque du Caire will be the first whose shares will be offered on the market. In March Central Bank of Egypt (CBE) Governor Tarek Amer said a 40 per cent stake in the Arab African International Bank (AAIB) and a 20 per cent stake in Banque du Caire would be offered on the stock market at the end of the year. The Banque du Caire offering is said to be through a capital increase, and the Bank is Egypt's smallest state-owned bank in terms of asset value. It posted net profits of LE2.02 billion in 2015. Thus far, there has not been talk about the offering of AAIB, which is 50 per cent owned by the government and also has Kuwaiti investors. Meanwhile, the Kuwait Finance House (KFH) is interested in acquiring the CBE's 99.9 per cent stake in the United Bank of Egypt, according to Amwal Al-Ghad, an online business news site. KFH is to start due-diligence procedures this month, if preliminary negotiations go through, it reported. According to Bahaa, in addition to securing foreign currency the idea of resurrecting the privatisation schemes has many benefits. “The main goal of privatisation is to directly provide returns from the sale of the state-owned companies, increase the companies' capital, and increase the productivity, efficiency and profitability of such companies,” he said. For the government, privatisation will either directly benefit it as an existing shareholder or benefit it indirectly through the increased tax returns from such firms, he said. For the companies involved, “there are many structural and governance advantages to privatisation that would enable them to act more swiftly,” Bahaa said. “The lack of political interference and short-term thinking as a result of privatisation would ensure that such enterprises are set up and geared towards strategic and sustainable growth, with proper investment in organisational and industrial infrastructure upgrades,” he added. Public enterprise companies will not be part of the listings, according to Minster of Investment Dalia Khorshid. These are state-owned firms subject to law 203 of 1991 and consist of 314 public companies selected to be privatised in the early 1990s and divided among 27 holding companies on the basis of their specialisation. After many of the companies were privatised, the number of holding companies declined to eight. Since his appointment in September 2015, Public Enterprise Minister Ashraf Al-Sharkawi has been a vocal opponent of privatising state assets. He has said on several occasions that the public enterprise companies and their assets should be restructured and not sold. Egypt's previous privatisation deals also faced allegations of corruption in the process of selecting, valuing and selling state-owned enterprises. The government was accused of “wasting public funds” by selling the public enterprises at less than their fair value and with no regard to their employees. Some critics claimed that even though the process was intended for loss-making enterprises, many profitable state-owned companies were privatised at below their fair value. Bahaa believes that this time round the process of privatisation will be more transparent and will involve a number of international consultants and reputable investment banks to ensure that fair values are sought. Observers hope that putting these companies on the block will help to energise the local stock market. This has been experiencing a hard time due to the country's foreign currency problems together with the world emerging markets crisis. Only a handful of new offerings has been introduced to the market over the last five years. Its gains from the beginning of the year stand at 18 per cent. “The local market is ready to accommodate this over supply of shares, but this will also depend on the pricing and attractiveness of returns,” Sandeep noted. Some 270 companies are listed on the Egyptian stock market, and the number of active investors is between 80,000 and 100,000.
A look at the past A 2006 POLICY viewpoint published by the Egyptian Centre for Economic Studies, a think tank, reviewed Egypt's privatisation programme since it started in 1991. Entitled “Towards a National Consensus on the Privatisation Programme,” the paper showed that between 1991 and 2006, 289 privatisations took place worth a total of LE37.76 billion. The programme focused on selling profitable companies first, with loss-making companies to be sold at a later stage. According to Hanaa Kheireddin and Amal Rifaat, the authors of the report, privatisation moved at a slow pace from 1991 until early 2004. It picked up considerably in 2004-05. Although the majority of international studies indicate the positive impact of privatisation on corporate performance, these also stress that this is subject to the government adopting policies that promote competition and the implementation of an effective regulatory framework that controls monopolistic practices, conducts sales operations in a manner characterised by transparency, and designs mechanisms to compensate those affected. The policy viewpoint recommended postponing the privatisation of utility companies at the time. It said that World Bank studies had shown that the privatisation of public utilities could lead to consumers incurring additional costs due to increases in the prices of services after privatisation. The authors recommended the postponement of the privatisation of utility companies until the completion of the legislative and regulatory framework necessary for the protection of consumers, thus ensuring public support for the privatisation process. They also recommended that the privatisation of certain sectors be limited to Egyptians only to avoid foreign control. These included public services, banks and energy companies. Despite the fact that the privatisation process went through 18 stages, there was controversy on the accurate valuation of some companies. The policy viewpoint stressed the need for transparency and disclosure of the whole process in order for this to be avoided. “It is important that privatisation receipts are not used to fund the budget deficit and that instead they should be used to finance social and economic infrastructure projects or existing debt,” the authors concluded in the 2006 paper, adding that there should be full disclosure of how the receipts were spent.
