ANTI-COMPETITIVE FINDING TESTS EGYPT'S REGULATORY REGIME

UNCLAS CAIRO 003097 SIPDIS SIPDIS SENSITIVE STATE FOR NEA/ELA, NEA/RA USAID FOR ANE/MEA MCCLOUD AND RILEY TREASURY FOR MATHIASON AND HIRSON COMMERCE FOR 4520/ITA/ANESA/OBERG E.O. 12958: N/A TAGS: PGOV ECON EG SUBJECT: ANTI-COMPETITIVE FINDING TESTS EGYPT'S REGULATORY REGIME REF: CAIRO 673 Sensitive but Unclassified. Please protect accordingly. ¶1. (U) Summary: The Egyptian Competition Authority (ECA) recently released a report alleging anti-competitive collusion among 12 Egyptian cement producers. The Ministry of Trade and Industry (MOTI) referred the companies to the Public Prosecutor for prosecution under Egypt's competition law. If found guilty, the companies could face fines of up to LE 10 million ($1.8 million). The companies have rejected ECA's findings, and claim that the court case will harm investment in Egypt. Analysts believe the fines will not be sufficient to dissuade anti-competitive behaviour in the cement sector. Investigation of the cement and steel sectors began in July 2006 and findings for the steel sector are expected in December. The cement case could serve as an indicator of the Egyptian judicial system's capacity to handle complex commercial cases. End Summary. ¶2. (U) In early October the ECA announced the results of an investigation into anti-competitive practices in the cement sector. The ECA found that 12 Egyptian cement companies, 11 of which are privately-owned, colluded to manipulate prices and restrict market distribution. After announcement of ECA's findings, the MOTI referred the companies to the Public Prosecutor for prosecution under Egypt's competition law. If the companies are found in violation of the law, they face penalties ranging from LE 30,000 ($5,000) to 10 million ($1.8 million). The court has not indicated when it expects to rule, but contacts at ECA said the Public Prosecutor has already discussed the findings of the investigation with ECA Head Mona Yassin, and will soon question cement company representatives directly. ¶3. (U) Cement prices fell from LE 380($69)/ton to LE 365 ($65)/ton on news of ECA's findings. Shares of some cement companies also fell: Cement Helwan shares dropped 1.7% to LE 40.6 ($7),Ameriya Cement fell 1.6% to LE 30.9 ($5.60) and Cement Beni Suef plunged 2.3% to LE 143.4 ($25). Speaking to the press, representatives of the cement companies rejected ECA's findings, claiming it is impossible to divide market share and manipulate prices as alleged in the ECA report. An official of National Cement Company (NCC), Egypt's only majority public-owned cement producer and one of those cited in the ECA report, told the press that NCC never colluded with competitors on pricing. Company representatives predicted the court would rule in their favour, and claimed that the case harms Egypt's investment prospects, especially potential foreign investment. MOTI officials countered that enforcement of fair competition will encourage foreign investment. ¶4. (U) Local analysts have questioned the case's potential to curb anti-competitive practices in the cement sector, noting that the maximum fine under the competition law is equivalent to one day's profit for some cement companies. Speaking on a local TV news show, Ahmed Ezz, Deputy Chief of the Cement Exporters' Council and a prominent NDP member, called the competition law "weak." Ezz said he hoped, however, that a court ruling against the companies would bring down domestic cement prices. (Comment: Ezz must walk a fine line in this case. As Deputy Chief of the Cement Exporters' Council, he is concerned with the industry's interests, but as a member of the People's Assembly and NDP Economic Policy Committee, he has to take a public stance in favor of free and fair competition). Taher Helmy, former president of AmCham Egypt, told reporters the case highlights Egypt's upholding of free market principles. Omar Mehanna, current president of Amcham Egypt and part owner of Suez Cement, one of the companies cited by ECA, said he hoped the case would finally put to rest claims of anti-competitive behavior in the cement sector. ¶5. (U) Minister of Trade Rachid initiated the ECA investigation of Egypt's cement and steel companies in July 2006, when prices of both commodities began rising as the region's construction boom intensified. Cement retailers and dealers accused cement companies of pushing up prices by lowering supplies. In February 2007, MOTI asked cement producers to observe voluntary price caps, and imposed export fees on cement and steel, citing shortages in the domestic market as producers sold overseas for higher prices while benefiting from subsidized energy at home (reftel). The initial export fees proved ineffective in controlling prices, and the LE 65/ton fee on cement exports was increased to LE 85/ton in August. ECA's investigation of the steel companies is ongoing, and results are expected in December. ¶6. (U) According to ECA officials, the investigation analyzed Egypt's cement market from 2002 - 2006, using data from a variety of sources, including cement producers themselves. ECA surveyed the market and interviewed distributors, traders, and contractors in 15 Egyptian governorates. The data was analyzed in cooperation with international experts from competition authorities of various countries. The investigation found evidence of a cartel involving agreements between cement companies on pricing, in violation to Article (6)(a) of the competition law, as well as agreements to restrict market supply, in violation to Article (6)(d) of the law. ¶7. (SBU) Comment: The outcome of this case will provide several measures of the effectiveness of Egypt's economic reform program. Although it is a relatively discrete case involving one sector of the economy, it could serve as an indicator of the judicial system's overall capacity to handle commercial cases. Improvement of commercial and contract law enforcement is consistently cited by the private sector as one of the major drawing points for increased investment. The case will also measure the effectiveness of U.S. assistance to Egypt's reform program, as USAID has provided significant support to ECA in building technical capacity and to the judicial system in handling commercial cases. Perhaps most importantly, the case will demonstrate the GOE's commitment to transparent regulation and law enforcement, even when the enforcement threatens the interests of prominent political figures. RICCIARDONE