Government plans to give public sector companies over to the public spell disaster ahead, writes Youssef Bishay* Once every decade the government drops its economic orthodoxy and surrenders to wild imagination. This time it proposes a free-share programme whereby ownership of 100-plus public sector companies will be transferred to 40 million members of the public, regardless of education or social condition. Shortly a chorus was set up in the media to explain how this inchoate programme would stimulate the incomes of the poor and save public sector companies from financial distress. This idea of free-share, however, should be gauged against some conceptual and operational criteria before it moves forward. Only few will disagree with the rationale behind the free-share idea; that is, to channel returns, if any, of public sector companies directly to their true owners, the general public. The philosophy of the programme, as expressed in official discourse, is to cut the government's intermediary role in running these companies, a role that is both costly and contentious. Another rationale behind the idea is that when the government micro-manages public enterprises (governed by Law 203/ 1991) it vests a 'producer' interest in the market at the expense of its regulatory role. The free-share programme will thus carve out the public sector portfolio to let the government exercise regulation more firmly and impartially. But such a compelling raison d'etre is insufficient to transform the free-share idea into a successful reality. The idea faces numerous barriers that make it far from being practical. Its primary goal of creating wealth for the poor is highly questionable on operational grounds. One part of the problem lies in the distributable value of public sector companies, which are generally undermined by a low return on capital and dim growth outlooks. This value will not be boosted, as many think, by leaving the lower outlier (debt-laden textile companies) out of the programme. In fact, this will have no effect as the government already ruled out the upper outlier as well, that is, cash-rich monopolies like oil refineries, Telecom Egypt, Eastern Tobacco, along with major utilities. The other part of the problem is that the beneficiary base is too broad. Without a proper mechanism to target the poor, distributing shares to 40 million people, irrespective of income level or other socio-economic criteria, is pointless. Without any targeting, the share of each beneficiary will shrink in value and become no more than a one-time bonus that evaporates with the first shopping spree. The equation suggested by the programme, with the sum of enterprise value as the nominator and the number of beneficiaries as the denominator, is distorted and will not make the poor any richer. It is also difficult to imagine how the economics of a programme of this scale would work. On the revenue side, it is unclear whether transfer of ownership would generate any revenue. On the cost side, the government will easily slip into a spending trap where costs of registry, database management and fraud detection would inflate and break all ceilings. Using the national ID database to administer the free-share programme, and perhaps minimise its costs, is easier said than done. In hindsight, this gigantic free- share programme will open cost silos in every direction. It will be useless if implementation costs outweigh the programme's desired outcomes. Other barriers will deter the free-share programme from improving the performance of public sector companies. Transferring ownership will probably have zero effect on their financials. Ownership has not always been the problem with public sector enterprises, nor is it going to be the solution. The main problem with a majority of public sector companies is not from public ownership per se, but lay rather with operations -- ie free cash flow, cyclicality, competition, etc. Bringing myriads of illiterate shareholders onboard will not raise the intrinsic value of these companies nor add new capital. Likewise, the free-share programme will not enhance company governance. Expanding the shareholder base in such a bizarre way will not make managers more accountable or decisions more transparent. Had the free-share programme made some conceptual sense, it would still have many feasibility checks to pass. Answering the 'why' question matters less if the 'how' question is not fully addressed. There are many straightforward, pre- tested ways that, if explored, would better alleviate poverty and public sector problems rather than simply flipping the ownership of enterprises over to an uninformed public. Egypt has not yet exhausted all of these options in order to test out odd solutions. If this programme does not undergo a careful cost-benefit analysis at this stage it will cost much and change little; just another case where the government's largesse with public funds seems to know no limit. * The writer is a Masters degree student in public management at the London School of Economics.
