The government is trying out a new technique to get companies slated for privatisation off its hands. Niveen Wahish reports Click to view caption Things have been slow for privatisation of late. This year only six companies have been floated. There have even been rumours that the Egyptian government informed World Bank President James Wolfensohn that it was calling off its privatisation programme. However, this has been denied by Minister of Public Enterprise Mukhtar Khattab, who said that Egypt has requested the support of the World Bank in revitalising the programme. Moreover, as Mohamed Hassouna, head of valuation and financial analysis at the Ministry of Public Enterprise's (MPEs) Public Enterprise Office (PEO) said, "how can the government be calling the privatisation programme off when the PEO is broadening its list of companies promoting privatisation." The PEO has recently placed advertisements in newspapers calling for promoters to be short-listed. According to these adverts, promoters must have the expertise to analyse the financial status of the companies up for sale, they must define a sale strategy, woo investors, prepare documentation and promotional literature, and supervise the entire sales process. As such, the government is studying the possibility of using a "capitalisation" approach in order to make privatisation more attractive. According to Hassouna, this would involve a strategic investor boosting a company's capital. The aim of the capital increase is to enable the investor to possess majority shares (51 per cent or over) and turn management over to the new investor. Once the transfer from government to private sector management is completed, the company would switch from Law 203 to a Law 159 joint- stock company. The new approach was discussed by the Cabinet last week. It was decided that the MPE continue studying it and present it for approval to the higher ministerial committee for privatisation when it meets in a few weeks. Capitalisation is unlikely to be an alternative to existing privatisation methods, such as a straightforward sale, operational restructuring or liquidation. Rather, it is an attempt to get closer to the investor and revive the privatisation process. Hassouna stressed that this technique cannot just be used for any company. Companies for which capitalisation may be an option have to be carefully chosen. There has to be a market for the products of the company to insure continuity, he said. Once this is satisfactorily achieved, the company can be financially restructured. Hassouna also stressed that the speed of turnaround is critical to the success of this approach. Some companies, notably those in chemical, engineering and food industries could be open to this option. To make a company more attractive with this technique, there has to be a willingness by the government to assume part of the debt, excess labour, even any assets or inventory that the investor may not wish to retain, said Hassouna. Capitalisation differs from regular privatisation methods in that money paid by the investor to increase the capital of the company is retained and may be used for restructuring, buying machinery or settling debts. This is an advantage according to Hisham Hassabou, professor of accounting at Ain Shams University. For a regular sale, the investor would have to pay to buy the company, then raise more funds to pump into the company. Additionally, the government gets to keep a share in those companies which Hassabou describes as "key units to the Egyptian economy", rather than relinquishing ownership to a limited number of investors. However, the use of capitalisation results in money paid not being added to privatisation proceeds. Currently, privatisation proceeds are some LE17 billion, of which around LE14 billion have actually reached government hands. Half of that amount went to the government treasury, while the rest was used to settle company debts or finance early retirement schemes. However, Hassabou explained that once a company is in good financial health, the government can sell off its shares at a higher price. By doing that, he added, it will also be acting as a market maker. Should the government sell its shares on the stock market, it will be putting good stocks on the market and thus creating demand and widening the company's ownership base. This technique, said Hassabou, is applicable not just to public sector companies, but public utilities as well. However, despite all the advantages of this technique, Hassabou is doubtful of its success. Privatisation is slow not because of poor sales methods, but because of a poor investment climate. "Investors have to regain their trust in the Egyptian economy and in government announcements," he added.
