PRIVATIZING SUGAR MAY BE BITTER IN THE SHORT TERM

UNCLAS SECTION 01 OF 02 CAIRO 001493

SIPDIS

SENSITIVE

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV EIND EG
SUBJECT: PRIVATIZING SUGAR MAY BE BITTER IN THE SHORT TERM

Sensitive but Unclassified. Please protect accordingly.

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Summary
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1. (SBU) The Egyptian Ministry of Investment (MOI) recently
announced plans to sell 36% of Delta Sugar, a joint venture
company, in an initial public offering (IPO). Announcement
of the sale follows an earlier announcement that another
public sector sugar producer, El Nobareyah, would be put up
for sale. MOI's privatization plans for the sugar industry
have drawn criticism from parliamentarians, who blame the
proposed sales for the recent increase in consumer sugar
prices. MOI claims the consumer price increase is the
result of domestic demand outstripping domestic production
and rising import prices. The food ration system also
appears to have been affected by the increase in sugar
prices, as ration-card holders report reduced sugar rations
or none at all. In addition, the GOE has increased its
projected budget for food subsidies by 80% for the coming
fiscal year. MOI's long-term plan to meet Egypt's sugar
demand is solicitation of private sector investment in the
sugar industry to expand domestic production. MOI may be
using sugar as a test case for privatization of public
sector food production companies. End summary.

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Is privatization the problem...
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2. (U) The MOI recently announced plans for partial
privatization of Delta Sugar Company, Egypt's largest
producer of beet sugar, through an IPO. Delta is a joint
venture company, of which the GOE owns 87.9%. Thirty six
percent of the GOE's shares in the company will be sold in
the IPO over the next two months. Press reports indicate
that MOI is still considering sale of the remaining public
shares, possibly to an anchor investor. Prior to
announcement of the Delta IPO, MOI also placed another
public sugar company, El-Nobareyah Sugar, up for sale. El
Nobareyah, established in November 2004, is still in its
development phase and has not yet begun producing sugar.
MOI has also indicated that the largest public sugar company
- Sugar and Integrated Industries Co. (SIIC) - though not
yet slated for sale, may also be privatized.


3. (U) MOI's privatization plans for the sugar industry
have stirred controversy in the People's Assembly (PA),
where the concept of privatization finds little support.
Shortly after announcement of the Delta IPO, the Industrial
Committee of the PA voiced is strong opposition to the move.
Parliamentarians blamed MOI's privatization plans for the
recent increase in sugar prices in the Egyptian market.
Since early February, consumer prices for sugar have risen
from approximately LE 2.50-2.75/kg to as high as LE 3.60/kg
in some stores.

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...or Egypt's sweet tooth?
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4. (U) According to MOI, the rise in sugar prices has less
to do with privatization than with the imbalance in Egypt's
sugar consumption vis--vis it production. Although Egypt
is the largest producer of sugar in the Middle East, it is
also the largest sugar consumer, with domestic demand
considerably outstripping production. In 2005, Egypt
produced 1.36 metric tons (MT) of sugar but consumed 2.5 MT.
Imports covered the nearly 50% gap, with Brazil taking first
place as Egypt's largest foreign source (0.98 MT in 2005, of
a total 1.2 MT in sugar imports). The recent rise in world
sugar prices is therefore the main cause of the increase in
consumer prices in Egypt, according to MOI. The price of
imported sugar rose from LE 1625 ($285)/ton to LE 2519
($440)/ton between January and March 2006.

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Short (term) and not sweet
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5. (U) The discrepancy between Egypt's production and
consumption of sugar also has implications for the GOE's
food ration system, a Nasser-era program that provides free
monthly rations of basic food items to certain pensioners,
widows, orphans and various other disadvantaged populations.
Despite statements in the press from the Ministry of Trade
and Industry that Egypt has sugar reserves of 660 thousand
tons, equivalent to 7 months of imports, ration-card holders
have reported receiving less than their full sugar quota or
no sugar at all. On March 4, the GOE announced that 4 items
in the ration basket, pasta, margarine, beans and lentils,
would be eliminated over the next two months and the ration
of sugar increased from 1 to 2 kilos per month. The
redistribution of goods in the ration basket allows the GOE
to accommodate the rise in sugar import prices without
increasing the budget for that particular program. The
budget projection for the overall food subsidy program,
however, has risen dramatically. The GOE recently announced
that it would increase its budget allocation from LE 35.3
billion to LE 56 billion - an 80% increase - in FY 2006/07
to cover increases in prices of imported consumer goods,
including sugar.


6. (U) The MOI has indicated in press reports that it plans
to increase Egypt's sugar production in the long term by
issuing tenders for new private-sector investment projects
in the sugar industry. Aiming for investments of
approximately LE 1.1 billion, the tenders would increase
beet sugar recovery by adding a new line that would increase
production at the Daqahliyya Sugar Company - another public
sector firm - by 25,000 tons. Additional tenders will be
issued to construct a new factory to produce 250,000 tons of
sugar. MOI also believes that partial privatization of
other sugar companies may improve the operating methods and
efficiency of the companies.

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Comment
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7. (SBU) MOI's plans for partial privatization of the sugar
industry are the first to touch on the food production
sector. That the plan is for partial rather than full
privatization indicates that the GOE is either not
comfortable divesting the entire public stake in this sector
or is testing public reaction before proceeding with
additional privatization in the food industry. Currently
MOI has plans to sell minority shares in 4 flour mills by
the end of FY 2005/06 (i.e., by June 30, 2006). Flour is
likely to be even less price-elastic than sugar as bread is
a staple for Egypt's poor. End comment.