Sold but not forgotten

By Gamal Essam El-Din
Almost four years following its privatisation, Kaha Company for Preserved Foods has come under the scrutiny of the People's Assembly Economic Affairs Committee.
During hearings initiated at the request of 33 deputies, it was alleged that Kaha's new ownership has deviated from stipulations of the 1997 agreement under which 90 per cent of its assets were sold to an anchor investor. Under this deal, Hassan Mohamed Ouf owner of the Alexandria International Food Company acquired Kaha which had been the country's foremost foodstuffs manufacturer for almost 50 years. Since the sale, the remaining 10 per cent of the company has been owned by Kaha's employee shareholder organisation.
Kaha's activities are being examined due to questions raised by a deputy for Qalyubiya, where the company is based. Mohamed Gamaleddin Abdel-Maqsoud, a member of the ruling National Democratic Party (NDP), argued that Ouf has contravened the 1997 agreement by using company assets as collateral to obtain credit which he has used for purposes other than to restructure and upgrade the enterprise.
Although Abdel-Maqsoud and other deputies had requested the formation of a fact-finding committee to investigate Kaha's performance, Speaker of the Assembly Fathi Sorour decided that the questions should be posed through parliament's Economic Affairs Committee.
Addressing the committee's meeting on Sunday, Minister of Public Enterprise Mukhtar Khattab said that Kaha is one of several entities sold to anchor investors on the understanding that they would transform the enterprises from loss-making to profitable companies.
Since the privatisation programme was initiated in 1991, 25 companies have been privatised in this manner and an additional 25 are slated to be transferred to private ownership by this method during the current year. And as of mid-2000, the sale of companies to anchor investors generated LE6.4 billion in revenues. Khattab referred to privatisation by sale to anchor investors as "the most complicated method of privatisation."
Enterprises sold in this way, said Khattab, were manufacturing interests that were in dire need of technological upgrading. It was believed that such a task could be best achieved by anchor investors with proven expertise in the specific manufacturing activities in which the public sector company was engaged. And Kaha, which was established in 1947 and employs 2,400 workers in its six factories, was in need of an extensive overhaul.
Khattab said the foodstuffs manufacturer had sustained staggering losses prior to its privatisation, reaching LE54 million in 1997. Its poor results were attributed to fierce competition from private sector foodstuffs companies.
Privatisation through sale to an anchor investor is subject to the approval of the Cabinet's Privatisation Committee and effected under the supervision of the Central Auditing Agency (CAA). "This means that the CAA closely monitored the privatisation deal in all of its stages," Khattab said.
Like other acquisitions by anchor investors, Kaha is being paid for through a down payment and instalments scheduled over a five-year period which begins following an 18-month grace period. According to Public Enterprise Ministry procedures, during this payment period the anchor investor may not use company assets in activities that are not related to the enterprise's business. Also during this period, the new owner may not terminate any employees.
According to Khattab, Ouf has mortgaged only 20 per cent of the company's shares to the National Bank of Egypt (NBE). "This means that he still holds the majority of shares and is therefore committed to upgrading the company's performance."
For Abdel-Maqsoud and other MPs, Khattab's "very brief response" was far from satisfactory. Abdel-Maqsoud said that he has additional information on the valuation process upon which Kaha's selling price -- LE144 million according to Khattab -- was set, and documents proving that this process resulted in the company's undervaluation.
Citing a report by the CAA, Abdel-Maqsoud alleged that immediately after Ouf made the LE35.4 million down payment for the acquisitions he began to neglect his obligations under the purchasing agreement. "First, he [Ouf] failed to submit a letter of guarantee which should have been for approximately LE108 million, as required by the deal. Then, he mortgaged the company's shares to the National Bank of Egypt to obtain a loan of LE75 million, although he had not paid for the company in its entirety. And finally, he disposed of some of the land assets owned by Kaha Company using the proceeds from their sale as though they were his own."
In Abdel-Maqsoud's words, the purchase of Kaha was for Ouf "an objective in itself," implying that the new owner of the foodstuffs enterprise had no intention of trying to revitalise the company. Abdel-Maqsoud expressed concern that this should have occurred at a time when the state is resorting to privatisation as a means of improving the financial and technical performance of public sector companies. He also alleged that Ouf used his acquisition of Kaha to obtain loans from Misr Exterior Bank and the Export Development Bank. "In spite of all these loans, the performance of Kaha Company is still faltering to the extent it is not able to settle LE8 million in arrears to its suppliers," Abdel-Maqsoud alleged.
The CAA's report about Kaha's privatisation said that Ouf had pledged that he would do his best to upgrade the company's manufacturing facilities, improve the quality of its products and open new export markets.
The assembly deputies who raised the issue of Kaha's performance, hailing from both the NDP and opposition, rallied behind Abdel-Maqsoud, especially in their statement that Minister Khattab's response "falls short of offering the facts required about Kaha's privatisation."
Abdel-Maqsoud and other deputies are expected to conduct a close review of the performance of companies sold to anchor investors.
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