EGYPT ANNOUNCES MASS PRIVATIZATION SCHEME

UNCLAS CAIRO 002408 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EINV PGOV EG SUBJECT: EGYPT ANNOUNCES MASS PRIVATIZATION SCHEME Sensitive but unclassified. Please handle accordingly. ¶1. (SBU) SUMMARY: On November 10, Minister of Investment Mahmoud Mohieddin announced a new privatization scheme whereby the GOE will transfer shares in 45 state-owned companies to 41 million Egyptian citizens within the next 12-14 months. The plan requires parliamentary approval, which he expects by March 2009. The shares, which will be distributed through the Egyptian postal authority, are expected to have an initial market value of LE 300-500, and can be held or sold. Reaction has been mixed, with some describing it as a way to avoid public opposition to continued privatization, and others saying that the plan is too complicated and has not been well thought through. We have heard some details from private sector participants in the planning process but Ministry of Investment officials have asked we speak to the minister directly; officials at other ministries are not willing to discuss the plan at all. We are pursuing an appointment with Mohieddin. END SUMMARY. ¶2. (U) On November 3, at the annual NDP party conference, Egyptian President Mubarak announced plans for a privatization scheme that would promote participation by Egyptian citizens as well as "social justice and equality." On November 10, Minister of Investment Mahmoud Mohieddin publicly announced some details. According to Mohieddin, the GOE will issue shares to the approximately 41 million Egyptian citizens over the age of 21 that would give them ownership in a range of state-owned companies. Egyptians will have one year to claim their shares, which will be made available through the Egyptian post office. At the end of the year, any unclaimed shares will be transferred into a "Generations Fund" which will hold some additional shares for Egyptians now underage, and legally too young to claim their vouchers. Mohieddin expects parliament to approve the legislation by March 2009, and that implementation would take 12-14 months. ¶3. (U) No draft of the proposed legislation has been released. However, according to details provided in the press, the GOE will retain about 30 percent ownership in companies dealing in goods and services, 51 percent in tourism and transportation companies and 67 percent ownership in strategic companies such as pharmaceutical, iron and steel, copper, sugar, fertilizer and cement companies. Reportedly approximately 45 companies out of the 155 companies �A;subject to privatization by law and under the Ministry of Investment's control will be included. Some companies have been left out because they are either losing money or are not commercially viable and require major restructuring. Other firms have already been partially privatized through other mechanisms and have reached the legal limit for private ownership. ¶4. (SBU) Each certificate will represent a single share in each of the companies being privatized. Current estimates put the value of the vouchers at LE 300-500 (US$55-$91) each, for a total nominal value of shares to be privatized under the plan of LE 12-20 billion (US$2.18bn-3.63bn). Beltone Financial Chairman Alaa El Din Saba, who has been working with the Ministry of Investment on the plan, told us the certificates will represent holdings in 45 companies which can only be "unbundled" under certain conditions. He specifically said this "is not a voucher program -- the shares that are distributed will intrinsically have value, unlike the Eastern European voucher system of the 1990s." ¶5. (SBU) Once the shares are distributed, interested buyers are expected to make tender offers for the shares through the market. On the opening day, the scheme's proponents argue that the stock exchange will find a market clearing price. They expect this price will be based on evaluations of the firms done by private companies, but that the government will not play a role. The tenders may include conditions, such as, for example, requiring that 51% of the shares for the company are offered, for the tender to be successful. Sellers, El Din Saba said, will register interest to sell through their brokers. Shares of individual companies can be unbundled and sold once a minimum threshold number of shares for a specific company are offered or if a specific tender is offered that an individual wants to participate in. In the case of Egyptians willing to sell, they will be paid for that single share, and will retain their remaining shares as a bundle. Those who have chosen not to sell will receive a stock certificate for the single share that has been "unbundled." El Din Saba said the firm Misr for Clearing, Settlement and Central Depository (MCSD) will be the entity responsibly for electronically tracing the values of all these shares. Currently there are approximately two million Egyptians holding stocks which are registered with MCSD and El Din Saba did not think it would be hard technologically to increase that to 41 million. It was not clear, also who would handle the initial sales. PRIVATIZATIONS SLOW IN RECENT YEARS -------------- ¶6. (SBU) The proposal is an effort to restart Egypt's privatization program, which had been effectively halted in recent years due to heavy public and political opposition. In the 1990s, the GOE privatized more than 200 industrial enterprises, realizing about LE 15.5 billion in revenues. The sale of the department store Omar Effendi and the Bank of Alexandria took place in 2006. In May 2008, the GOE postponed the sale of Banque du Caire, claiming offers from potential buyers were not high enough. Likewise, the sale of four state-owned insurance companies, promised in 2005, has also not taken place. About 170 industrial enterprises remain in public hands, not including GOE control of the financial and insurance sectors and GOE participation in approximately 500 joint-venture companies. The Egyptian military also has a considerable (though not precisely known) presence in the economy through its holdings in both military and non-military industries. It is estimated that the GOE retains direct economic management of one-third of the Egyptian economy. ¶7. (SBU) At a recent discussion hosted by the Ambassador, Beltone Financial Chairman El Din Saba defended the proposal under heavy criticism from several representatives from business, academia and the financial community. In his view, the ultimate goal of privatization cannot be achieved through traditional means, due to public mistrust of the GOE, charges of corruption and the inability of the GOE to set a reasonable price. He cited the failure in May to sell Banque du Caire as an example. Potential investors had spent considerable time and money putting together reasonable offers for the bank. Ultimately, however, the GOE valuation committee composed of "junior officials" who knew very little about business or the markets, rejected the sale after a minimum acceptable price was set which did not reflect the bank's true value. ¶8. (SBU) The goal of this new scheme, according to El Din Saba, will be for the market to set share prices. Eventually, it is hoped that a strategic, private sector investor will buy a controlling interest, with the end goal remaining that of improving efficiency and productivity of these firms. By releasing the shares to the public, he said, it will be up to Egyptians, and the market, not the government, to determine the appropriate price. Advocates of the plan hope that transferring the ownership of the assets to the public will resonate with the public and help the government to make privatization more popular. Investors would have to buy shares through the stock market, shielding the GOE from criticism that government officials were bribed, or that public assets are being undervalued. "It will be the people who are selling," he said. ¶9. (SBU) El Din Saba acknowledged the problems of mass privatization in eastern Europe after the collapse of the Soviet Union, but argued that there were two important differences between those programs and this one. First, he said, in contrast to citizens of former Soviet bloc countries, Egyptians understand how the market works. "No Egyptian farmer, even if he is illiterate and uneducated, will not sell his crop for less than the market price." Also, he said, those countries did not have functioning capital markets and regulatory authorities. The plan also avoids another problem that the eastern European schemes faced was that the governments, in many cases, didn't set fair prices, and generated bad publicity as a result. REACTION TO THE PLAN -------------- ¶10. (SBU) Others are not so sure. Some participants in the Ambassador's roundtable argued the system was too complicated. They raised concerns about the twenty percent fee that the owners would have to pay when shares are sold. There were worries that middlemen would buy shares from uneducated Egyptians for far less than a fair price, and that brokers and banks would be the main beneficiaries. Finally, and most importantly, most of our interlocutors argued Egyptians would not understand initially that the goal of the program was to turn the companies over to strategic investors but that once they did, they would be angry, and would feel they had been lied to. The logistics of the plan remain complicated as well, as it will be hard for the GOE to distribute so many shares and then keep track of them. El Din Saba, for example, said the program relies on brokers, of which there are very few in most parts of Egypt outside the major metropolitan areas. ¶11. (SBU) El Din Saba conceded that the government had done a poor job explaining the program in its initial media launch. This is typical in Egypt, and as a result, even when reform plans are credible, the public and the media assume the worst, as seems to be happening here. Critics of the proposal at the economic roundtable argued that while the previous attempts at privatization hadn't been particularly successful, it was because of lack of government explanation and honesty, not because the goal was wrong. Introducing a brand new, complicated process doesn't address the fundamental problem which is the government has no credibility when it tries to reform, even if the reform is well intended. While El Din Saba is a clear champion of the new proposal, even he was critical of some elements. In particular, he criticized the GOE decision not to offer seventy percent of all the companies for sale, and described the decision to categorize some firms as "strategic" as Nasserist. On the government side, one very senior official who was willing to comment said Ministry of Investment officials had not thought the proposal through carefully enough and expressed concern about the plan. We will continue to report on this proposal as additional details become available, and are pursuing an appointment with Mohieddin. Scobey