UPDATE ON EGYPT'S PRIVATIZATION PROGRAM

UNCLAS SECTION 01 OF 03 CAIRO 005350

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E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: UPDATE ON EGYPT'S PRIVATIZATION PROGRAM

REF: A. CAIRO 4374

B. CAIRO 1329

Sensitive but Unclassified. Please protect accordingly.

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Summary
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1. (SBU) Since taking office in July 2004, Prime Minister
Nazif's administration has reinvigorated the GOE's program
to privatize state-owned industries. Under the leadership
of the new Ministry of Investment, the revitalized program
aims to speed up privatizations by making public enterprises
more efficient - and thus more attractive to potential
investors - while also introducing good corporate governance
principles. The effort has paid off for the GOE, which
completed a total of 19 privatizations from July 2004 to
March 2005, generating LE 2.9 billion ($500 million)
compared with five transactions generating LE 81 million
($14 million) in the period July 2003-March 2004. The GOE
has promised even bolder steps in the near future for
divestiture of formerly "strategic" industries. Labor
issues remain a concern, but the GOE has indicated that it
will deal with workers' concerns on a case-by-case basis as
public companies are privatized. It is doubtful, however,
that the GOE would approve any deals that would result in
massive layoffs, particularly in an election year. End
summary.

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Privatization revitalized
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2. (SBU) The GOE privatization program has undergone a
complete makeover in concept and implementation in the last
year under the Nazif administration's new Ministry of
Investment (MOI). Minister of Investment Mahmoud Mohieldin
has been the driving force behind revitalization of the
program, which he refers to as "asset management."
Mohieldin has used his political weight, as a key member of
the NDP economic policy apparatus, to garner support for
broadening the scope of the program to include all public
enterprises, the more competitive companies as well as those
with large workforces that could be negatively affected by
privatization. He has made privatization a focal point of
the macroeconomic reform effort led by the Minister of
Finance, the Minister of Foreign Trade and Industry and
Nazif himself, all of whom agree on the goals of stimulating
private sector-driven growth and "marketing Egypt" as a
destination for foreign investment.

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Pre-Nazif: Privatization in fits and starts
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3. (U) The GOE has two categories of public enterprises:
wholly state-owned companies regulated by Law 203 of 1991,
and joint venture companies (including banks) with a public-
private ownership mix, regulated by Law 159 of 1981. When
the privatization program began, the 314 wholly state-owned
companies were grouped according to the type of economic
activity they conducted and put under the supervision of
holding companies (HCs). The HCs managed the privatization
of their affiliate companies, eventually dissolving when all
of their affiliates had been privatized. This process
created a conflict of interest, especially for the HC
chairmen. Working efficiently to privatize all of their
affiliates meant that the HC chairmen worked themselves out
of a job. Privatization was therefore a slow, sporadic
process and after more than a decade of fits and starts,
liquidations and restructuring, there were still seven HCs
with 139 affiliate companies.


4. (U) In 1999, after a cabinet change, the GOE decided to
include the sale of public shares in joint venture companies
under the rubric of the privatization program. The Ministry
of Economy and Foreign Trade (now the Ministry of Foreign
Trade and Industry) began an inventory of joint ventures and
their shareholder structure. After a lengthy research
process, the number of joint venture companies and banks was
found to exceed 600, all with different percentages of
public ownership. In early 2000, the entire privatization
program, including wholly state owned companies and joint
ventures, was consolidated under the Ministry of Public
Enterprises, where it remain until being subsumed by the new
MOI in the July 2004 cabinet change.

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Privatization under Nazif
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5. (U) Soon after MOI took over managing the privatization
program, a three-pronged effort was undertaken to remake
public enterprises by: 1) restructuring and re-engineering
public companies to make them more efficient, and ultimately
more attractive to potential purchasers; 2) implementing
good corporate governance principles in all public
companies; and 3) aggressively pursuing the advertisement
and sale of public companies. As part of the effort to
introduce corporate governance principles, MOI published an
OECD-based code of conduct for corporate governance and
disclosure in public companies and began publishing the
minutes of companies' general assembly meetings to increase
transparency. MOI also created a ministerial committee to
assist investors in resolving disputes arising from
privatization transactions. The committee has already
reportedly resolved 18 disputes, including several long-
standing disputes from privatizations that occurred in the
pre-Nazif era.


6. (U) MOI also began a campaign to advertise the newly
revamped privatization program. The thrust of the ad
campaign was that the GOE was committed to removing
obstacles that had blocked or slowed privatizations in the
past. Labor and debt issues would be dealt with on a case-
by-case basis, foreign private sector interest was
encouraged rather than feared as it had been under previous
administrations, and no sectors were off-limits or
"strategic" as in the past. On behalf of MOI, Microsoft
Chairman Bill Gates launched a website,
www.investment.gov.eg in January 2005, to serve as Egypt's
investment portal. The GOE then took its investment
campaign to the May 2005 World Economic Forum in an effort
to drum up more foreign investment.


7. (U) The result of MOI's efforts has been a rekindling of
interest among foreign investors. A list of 41 local and
international financial institutions, including Citibank,
Goldman Sachs and Merrill Lynch, are now working with MOI as
advisors/consultants on privatization. A number of
prominent foreign companies - such as Ciments Francais, La
Farge Titan and Michelin - concluded multi-million dollar
deals to purchase public companies such as Suez Cement (ref
B). From July 2004 to March 2005, the GOE completed 19
privatizations, generating LE 2.9 billion in revenue,
compared with only five transactions that generated LE 81
million in the period July 2003-March 2004. MOI expects the
total value of privatizations in fiscal year 2004/2005 to
exceed LE 3 billion, almost double the aggregate value of
sales for the period 2001 through June 2004. The budget for
fiscal year 2005/2006 (July 2005-June 2006) projects
revenues from privatization will reach LE 5 billion (ref A).

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Privatization expanded
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8. (U) As noted above, MOI has included in the
privatization program companies that were not previously
slated for sale. Prior administrations considered certain
companies "cash cows" that were too valuable for the GOE to
sell. Likewise, certain sectors, such as petrochemicals and
telecoms, were considered "strategic" and therefore off
limits to private ownership, especially foreign private
ownership. In June MOI sold 20% of the GOE's stake in Sidi
Krir petrochemical company on the Cairo and Alexandria Stock
Exchange (CASE) for LE 70/share. The company's shares have
dominated trading by volume and value on the CASE in the
last several weeks and recently closed at LE 105/share. A
number of other high profile companies are also in the
pipeline, including petroleum company AMOC and Eastern
Tobacco Company (one of the GOE's "cash cows"). MOI has
also indicated it will offer a significant stake in Telecom
Egypt by the end of 2005. Shares of several public
companies, possibly including Telecom Egypt, will also soon
be registered on the New York Stock Exchange to further open
channels for foreign investment. (Note: An update on
privatization in the banking sector will be sent septel.
End note).

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Labor issues
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10. (SBU) One of the difficult issues for the GOE as it
divests its public assets is the reaction of labor. The GOE
deals with excess labor in companies to be privatized by
offering early retirement packages, which are largely funded
by proceeds from privatization. Senior GOE officials
continue to provide public reassurances that labor issues
will be resolved amicably and a safety net will be provided
for workers affected by privatization, in keeping with the
GOE's general policy of protection of low-income earners.
The MOI is working on a new early retirement system designed
to more closely address workers' concerns and improve the
financial management of privatization proceeds that will be
used to fund the early retirements.


11. (SBU) Nevertheless, in state-owned enterprises,
particularly those burdened with surplus manpower like
textiles, iron, and steel, concerned workers have expressed
opposition to privatization through their representatives in
parliament, through strikes and in the opposition press.
The proposed sale of shares in Suez and Torah Cement
Companies late last year triggered strikes that were
resolved only after MOI obtained the purchaser's commitment
not to lay off workers for three years (ref B). Mohamed
Hassouna, Advisor to the Minister on Privatization Affairs,
told Econoff that MOI is "keeping channels open to workers,"
and cooperating with the Egyptian Trade Union Federation
(ETUF) on a case-by-case basis to resolve potential problems
with privatization deals. It would be surprising, however,
for the GOE to conclude any deals that risk large-scale
layoffs from labor-intensive industries prior to Egypt's
October elections.
CORBIN