Time Egypt got back on the privatisation track

It’s time for Egypt to dust off the privatisation file.

The long-running programme to sell state-owned companies began slowly in the mid-1990s – more than three decades after the government had taken over much of the Egyptian economy in the heady days of socialism – then roared ahead for several years after the ill-fated government of the prime minister Ahmed Nazif came to power in June 2004.

But in June 2008 it ground almost to a halt when an auction to sell Banque du Caire, the country’s third biggest state bank, was aborted because the offers were below what the government had expected.

The privatisation programme had been mired in controversy from the beginning, with many people believing assets were being sold too cheaply. Charges of corruption and back-room deals arose. Other people were opposed to the notion of privatisation in principle.

Now there is speculation that the government at the Sharm El Sheikh economic conference that begins tomorrow may be planning to announce a resumption of privatisation.

Reuters quoted the minister of supply Khaled Hanafi on February 22 as saying the government was considering selling shares in the state-owned Food Industries Holding Company in a sale that could raise between 3 and 4 billion Egyptian pounds (Dh1.44bn to Dh1.93bn).

Further, there have been reports that the petroleum ministry has been looking at a series of share offerings to raise funds.

If it is true the government plans to resume asset sales, this would be fantastic news for the country. After four years of political and economic turmoil, the government is in desperate need of funds, the economy needs more competition, and such a strong signal that the country is once again open for business would go a long way to jump-starting investment.

“It is in the benefit of the country to increase privatisation,” says Sultan Abou Ali, a Harvard-educated economist who was Egypt’s minister of the economy and foreign trade in the 1980s.

But he warns that this time around the government should go out of its way to build credibility, not just in the process of selling companies, but also in its management of the economy as a whole. It should announce transparent economic reform policies, and ensure that ministers are respectable, knowledgeable and come with a reputation for integrity.

In the year to the end of July, Egypt’s budget deficit was an unsustainable 12.5 per cent of GDP. Foreign and domestic debt has soared to about 2 trillion Egyptian pounds, or about 86 per cent of GDP. That is also unsustainable, and asset sales could plug at least part of the gap as the government gets its finances in order.

In its first 18 months, the Nazif government sold $2.7bn worth of assets, including a 20 per cent stake in the state fixed-line monopoly Telecom Egypt that fetched $890 million. The following year, 2007, it sold 80 per cent of Bank of Alexandria, the first and only of Egypt’s four large commercial state banks to be privatised so far, earning $1.8bn. Most of the state’s stakes in joint venture banks were also sold off, as were scores of other companies or stakes in companies.

The privatisations under Mr Nazif’s government were among several factors that helped to boost economic growth to a sizzling 7 per cent for several years.

The benefits of privatisation are not merely in raising funds for the state. Far more important is the competition created by having multiple owners in different parts of the economy, forcing them to become more efficient. Governments, wherever they are, almost always poor managers, especially when they act as a monopoly, and Egypt has been no exception.

Unlike the government, which is motivated by political considerations, private managers are motivated by profit, which means holding down costs and developing products that consumers actually want to buy. One of the favourite tricks of government is to stuff unnecessary workers into state companies for patronage or to bring down unemployment, something that was happening in Egypt as recently as Mr Morsi’s rule.

The government should withdraw from those sections of the economy where private businesses are more efficient, and instead concentrate on those areas where it has the advantage – in particular education, health care and infrastructure, where the benefit to the public goes beyond simple profit.

Huge parts of Egypt’s economy remain in state hands, including the state airline EgyptAir, three of its largest banks, much of the oil industry, insurance companies and vast holdings of real estate, including hotels and at least 100 historic and decaying apartment buildings in the centre of Egypt’s main cities.

The sale of state assets must be clean and transparent, and once companies are sold, there must be vigorous enforcement of anti-monopoly laws. The government must also concentrate on making it easier for private businesses to create employment elsewhere so that employees shed during the privatisations are able to find jobs.

Patrick Werr has worked as a financial writer in Egypt for 25 years for agencies including Reuters and Bloomberg News.


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