Identifier
Created
Classification
Origin
05CAIRO8161
2005-10-24 13:00:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Cairo
Cable title:  

GOE PRIVATIZES "STRATEGIC" FIRMS, WITHIN LIMITS

Tags:  ECON EFIN EINV EIND EG 
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UNCLAS SECTION 01 OF 02 CAIRO 008161 

SIPDIS

SENSITIVE

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN EINV EIND EG
SUBJECT: GOE PRIVATIZES "STRATEGIC" FIRMS, WITHIN LIMITS

This message is not for Internet distribution.

-------
Summary
-------

UNCLAS SECTION 01 OF 02 CAIRO 008161

SIPDIS

SENSITIVE

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN EINV EIND EG
SUBJECT: GOE PRIVATIZES "STRATEGIC" FIRMS, WITHIN LIMITS

This message is not for Internet distribution.

--------------
Summary
--------------


1. (SBU) The Ministry of Investment (MOI) has recently
acted to extend the revitalized privatization program to
cover petrochemical firms, which were previously considered
untouchable "strategic" companies, theoretically important
to Egypt's overall economic security. Nevertheless, there
remain limits as to what the Nazif Cabinet, through Minister
of Investment Dr. Mahmoud Mohieldin, can do on strategic
enterprises, as demonstrated by the retention of key
fertilizer-producing companies. Concerns over the social
and economic impact of privatizations - especially with
parliamentary elections on the immediate horizon - provide a
check on the program, the MOI's protestations
notwithstanding. End summary.

--------------
The Petrochemicals Wave
--------------


2. (U) In the past few months the MOI has floated 20% of
shares in two very profitable joint venture firms (JVs) in
the energy sector, Sidi Krir Petrochemicals Co. (SIDPEC) and
Alexandria Mineral Oil Company (AMOC). SIDPEC is Egypt's
largest producer of ethylene and polyethelene, while AMOC,
though accounting for only 2% of Egypt's total refinery
output, operates two modern complexes for mineral oils and
paraffin wax production. Both initial public offerings
(IPOs) were greatly oversubscribed; the two tranches of
SIDPEC shares put on the market were oversubscribed by 2.5
and 5 times, respectively, while for AMOC, overselling
reached 26% and 34% for the two consecutive tranches.
(Note: While the over-subscription is indicative of the
attractiveness of these firms, it should be taken in
context. Stock market mechanisms in Egypt allow limitless
calls for shares with only a small amount required to be
paid upfront. End note.)


3. (SBU) The two IPOs not only stimulated the stock market
but also contributed to growth in privatization proceeds,
which reached LE 5.1 billion during the first quarter of FY

2006 (July to September) alone. The June SIDPEC offering
topped out at 21.0 million shares at LE 70 per share, for a
total value of LE 1.5 billion; mid-September sales of AMOC
stock came to 86.1 million shares at LE 45 per share, for a
total of LE 900 million. In a recent meeting with Econoff,
Mohamed Hassouna, Advisor for Public Enterprises to the
Minister of Investment, revealed that given the success of
the IPOs, the GOE will soon offer shares in yet a third
petrochemical firm, Middle East Oil Refinery (MIDOR).


4. (SBU) Hassouna explained that the sales technique
introduced by the MOI for these JVs, and others to follow,
involves floating 20-30% of shares on the stock market, and
then selling 50-60% to an anchor investor, while retaining
20% for the GOE. Minister of Investment Mohieldin believes
this approach serves the dual aims of stimulating the stock
market and improving management of the companies through
sale to a major investor. Citibank and the National Bank of
Egypt have already been chosen as promoters for SIDPEC's
anchor investor tender offering. Hassouna also described
MOI's technique of "market sounding," i.e., making public
statements regarding upcoming privatizations to get a sense
of the market's reaction before actually making the IPOs.
Hassouna believes this technique was partly responsible for
the success of the petrochemical offers.

--------------
The Opposition
--------------



5. (SBU) MOI has not been immune to criticism over the
sales, despite the success, from certain quarters. Al-Araby
newspaper, the mouthpiece of the nationalist, statist
Nasserist Party, for instance, on September 25 complained
that the GOE had opened the door for increased dominance by
international capitalist enterprises over key industries.
Aziz Sidky, Egypt's prime minister from 1972-1973 - the
period during which the "public enterprises" were first
created - similarly expressed dismay. MOI responded to the
criticism by insisting that profitable sales are not only
important for the companies' future viability but are also
economically justifiable in the near term.


6. (SBU) The overriding concern for MOI, whether in the
petrochemical industry or elsewhere, remains labor
opposition. According to Hassouna, Mohieldin regularly
meets with labor unions and labor representatives on the
boards of directors of public sector companies. Unlike in
previous years, MOI also includes labor representatives in
the actual privatization negotiations with potential
investors. In most cases, workers are offered excellent
early retirement packages if downsizing is a part of the
negotiations. Hassouna opined that workers frequently
object to privatization on principle without understanding
the mechanics; once they begin to understand the mechanics
and realize that they will not be dismissed without any
compensation, they generally stand down on their opposition.

-------------- --------------
"Strategic" Sectors Remain: the Case of Fertilizers
-------------- --------------



7. (SBU) Domestic social and economic considerations still
put a damper on the prospects for privatization of some
industries, despite statements from MOI that "nothing is off
the table." A case in point is the fertilizer sector,
which, according to Hassouna, foreign investors - especially
from India and China - have been eyeing for some time.
Hassouna stated that the GOE fears damage to domestic
agricultural production if foreign investors take charge of
the fertilizer sector and begin exporting the bulk of
Egypt's fertilizer output. For this reason, three "core"
fertilizer companies - KIMA, Delta and Al-Nasr Mining - will
not be entirely privatized but will remain a "safety valve"
(Hassouna noted that Mohieldin strongly resists using the
term "strategic"),although there are plans to offer up 20-
30% of Al-Nasr, which holds the monopoly over phosphate
quarries.


8. (SBU) Mohieldin has also set up a Sectoral Study
Committee to probe the possibility of deregulating the
fertilizer industry. (Comment: Setting up the committee is
likely a means to pay lip service to the "nothing is off the
table" concept. End comment.) Asian investors interested
in the fertilizer sector have not been put off entirely, and
have actually established greenfield fertilizer projects in
Egyptian free zones. Several Asian producers recently
signed an MOU with Al Nasr Mining Co. to supply the raw
material needed in these greenfield projects. One hundred
percent of the output of these projects is exported to Asia.

--------------
Comment
--------------


9. (SBU) Mohieldin said recently in an interview with the
Oxford Business Group "privatization is one of the
components - not the component - of reform." This was
likely an effort to curb public suspicion that the GOE plans
to give away the store to foreigners, unmindful of dangers
to labor and economic security. The Minister claimed he did
not fear innovation in the Egyptian privatization program -
or, as he has re-dubbed it, the "asset management program."
He claimed that innovation has contributed to smoothing out
many bumpy parts in the privatization process.
Nevertheless, even as he touches previously untouchable
industries, Mohieldin claims he will moderate the pace of
privatization and work hard to manage expectations. We
would be surprised if the MOI were to pull off any more
controversial privatization deals prior to next month's
parliamentary elections. End comment.