Twelve years after the last privatisations took place in Egypt, the government is now offering state-owned companies for sale through initial public offerings (IPOs), a move it says will help raise $5 to $7 billion. The IPO programme also aims to widen the ownership base of such companies and enhance transparency and corporate governance in state-owned companies, and it is in line with IMF recommendations made last November. The first company on the IPO list is Ennpi, a giant subcontractor in the petroleum sector, which is expected to be offered for sale in the fourth quarter of 2017. Enppi's listing will be part of a five-year IPO programme, one government tool to fill Egypt's foreign financing gap that also includes issuing Eurobonds and borrowing from international financial institutions like the IMF. In July the government picked a consortium led by local investment bank CI Capital to act as lead managers for the Enppi listing. Experts are betting on Enppi's appeal to investors because of its sound financial performance. “It makes sense to start the IPO programme with a solid candidate like Enppi as this will boost confidence in future IPOs,” Youssef Beshai, a senior banker at French bank BNP Paribas, told Al-Ahram Weekly. Enppi's profits declined after 2011 due to the political turbulence following the 25 January Revolution. However, it returned to profitability in 2014, realising LE1 billion in 2016, 91 per cent higher than the previous year. “The slowdown in the exploration and production sector in recent years has negatively affected Enppi's earnings. However, recent oil and gas discoveries have helped it to win new business,” Beshai added. The company said in its last annual report that it had contracts in the newly discovered gas fields of Zhor, an offshore field located in the Egyptian sector of the Mediterranean Sea, and Taurus and Libra in the West Nile Delta. The flow of foreign direct investment (FDI) into the oil sector has been affected by the decline in global oil prices since 2014 and the accumulation of Egyptian General Petroleum Corporation (EGPC) arrears to foreign prospectors, which reached $6.3 billion in 2012, its highest ever level. “The ongoing repayment of the arrears will boost investment and generate new contracts for Enppi in the near future,” Beshai added. Prime, an Egyptian investment bank, said in a recent report that EGPC was planning to repay the outstanding arrears, amounting to $2.3 billion, to foreign companies in the coming three years. “One of the main sources of attraction in the Enppi IPO is its foreign contracts as these show its ability to raise revenues in hard currencies,” Radi Al-Helw, of Arqaam Capital, an investment firm, told the Weekly. Twenty-four per cent of Enppi's revenues in 2016 came from operations outside Egypt, according to the company's annual report. Enppi, which was established in 1978 and is currently working under Investment Law 8/1997, says on its website that it has successful business relationships with international partners like BP, Shell, British Gas and Saudi Aramco. The last time Egyptian state-owned companies were listed for sale on the stock exchange was in 2005 when 20 per cent of Telecom Egypt was offered to investors. Both the local and the global economies were growing at the time, guaranteeing the success of the offerings. The atmosphere of the coming IPO is different because of the current local and global economic slowdown. Al-Helw believes the market is heading to a more promising period resembling the first decade of the millennium after the 2003 devaluation and the introduction of economic reforms in Egypt, however. “It will revive again based on the 2016 devaluation and the current reforms,” he said. The IMF announced in November 2016 that it had approved a three-year loan arrangement under its Extended Fund Facility (EFF) for Egypt for an amount equivalent to about $12 billion. The EFF-supported programme includes reforms to curb the widening budget deficit and correct external balances, introducing a new value added tax (VAT) and raising fuel and electricity prices, along with adopting a flexible exchange rate. Under the IMF programme, Egypt's official foreign reserves have increased from $19 billion in November 2016 to $36 billion in July 2017, which has stabilised the local currency against the dollar. However, these reserves will be under pressure because of the repayment due of foreign debt in the near term. Prime described Egypt's high level of foreign reserves as “weak” because they are supported mainly by foreign debt. “Since the devaluation decision in November 2016, short-term portfolio investments have reached $10 billion, $7 billion of which will be due before the end of 2017,” it said, explaining the pressure on the government to attract foreign investments through IPOs. The government aims to raise up to $150 million from the Enppi offering, and it will be the first on a list of state-run companies to offer minority shares to the public, according to a recent statement by Minister of Investment and International Cooperation Sahar Nasr. Minister of Petroleum and Mineral Resources Tarek Al-Molla described Enppi as “the best-fitted company to inaugurate the IPO programme”. “I think Enppi will not be listed before the beginning of 2018 as then market readiness for the IPO will be enhanced by the current reforms,” Al-Helw told the Weekly. Speaking on condition of anonymity, a market expert said that the critical point in the Enppi IPO would be delayed capital expenditure. “This could affect the price of the shares negatively,” he said. “I think this IPO will attract mainly Gulf investors and local retail investors. It will not be so attractive to foreign investors because of the delayed expenditure factor,” he added. The IPOs have been criticised since they were announced last year, as some commentators have considered them to be a return to the ill-reputed privatisation programme carried out under the former Mubarak regime that gave the private sector control of some of Egypt's strategic sectors. “I do not think the Enppi IPO will undermine the current state dominance of the petroleum sector,” Beshai said, however. The sector has been governed by a stable regulatory framework based on production-sharing agreements since the 1950s, which entitle foreign companies to take on exploration investment but give the state pre-emption rights over the partner's share of production if needed. The government intends to offer minority shares in the companies through the IPO programme, while keeping majority stakes owned by the government in these enterprises, Nasr said in a statement. Government financial advisor NI Capital said in a statement that it was planning to list 24 per cent of Enppi shares on the stock market. “Enppi's listing does not resemble the earlier listing of Bank of Alexandria that offered a majority stake to a strategic investor. It is more like that of Telecom Egypt, where the state continues to retain a majority holding alongside fragmented private shareholders, a situation that puts pressure on it to enhance governance and performance,” Beshai said. “The IPO will help deepen the stock market and diversify market constituents. Apart from Alexandria Mineral Oils [AMOC] and Sedi Kerir Petrochemicals [Sidpec], we so far do not have liquid energy stocks on the market that offer exposure to Egypt's gigantic exploration and production sector,” he added.
