Privatisations are a tricky fourth leg of Egypt’s reforms

Let's hope the Egyptian government is brave and sells controlling stakes in as many companies as feasible, rather than minority holdings

Egypt’s government in the past few weeks has completed the three toughest parts of its economic reform. It devalued the currency, reduced fuel subsidies and implemented a value-added tax. These represent three legs of a classic IMF programme: pricing of the currency to reduce a balance of payments deficit, and reducing spending and raising new revenue to reduce a budget deficit.

Yet there is still one major leg that promises to have far-reaching effects and might prove not to be so easy: privatisation. Officials say the government plans to sell minority stakes in a long list of companies.

Mohamed Khodeir, the chairman of the General Authority for Investment, says the general plan is to sell stakes of not more than 25 per cent, leaving the government in firm control.

But just as the central bank surprised us with a full flotation of the currency rather than the expected string of small, timid devaluations, let’s hope the government surprises us by bravely pressing ahead and selling controlling stakes in as many companies as feasible.

The government has announced an impressive list of those destined for the auction block, including stakes in three banks, five oil companies and four electricity companies. It is reported to be studying sales of stakes in many others as well. Most would be sold via offerings on the stock market.

This would be the first major privatisation push since Ahmed Nazif’s government began selling companies when it came to power in 2004. That wave of sales came largely to an end in 2008 after the government aborted the sale of Banque du Caire, the country’s third biggest state bank – officially because the size of the offers was less than what was hoped for, but most likely because of a groundswell of protest by a public who believed the country was selling its crown jewels for a pittance.

The Nazif-era privatisations were driven largely out of the belief that the economy needed more competition and that getting companies out of the hands of the government was the best way to do so. This time around, the intent seems mainly to earn money for a cash-starved government.

At the same time, officials seem to appreciate that listing new companies on the stock exchange would improve governance, since publicly traded companies are required to publish quarterly financial statements. It would also create a surge of liq­uidity and diversification that would help to attract investors to the market.

Dalia Khorshid, the investment minister, told Bloomberg in September the government hoped to earn up to US$10 billion over three to five years from asset sales.

The central bank will sell stakes in two banks, including 20 per cent of Banque du Caire and 20 per cent of Arab African International Bank (AAIB), on the stock exchange, it said early this year. It will also sell a controlling stake in the much smaller United Bank to a strategic investor.

Banque du Caire earned a profit after taxes last year of 2.02 billion Egyptian pounds (Dh419.9 million) on end-year assets of 91.44bn pounds, while AAIB earned $213.1m on assets of $13.47bn. By contrast, the country’s largest private bank, CIB, earned a profit after taxes of 4.64bn pounds on assets of 179.19bn pounds.

The five oil companies in which the government plans to sell stakes include the $1.4bn Midor (Middle East Oil Refinery) and Ethydco, which operates a $1.9bn ethylene plant that came on stream two months ago.

The four electricity companies consist of three that will run each of three Siemens power plants now under construction, and a fourth that was created to maintain the plants. The plants, each tied for first place as the world’s biggest generators, cost a combined €6 billion (Dh23.41bn).

Beyond that, the government is said to be dusting off the list of unsold companies coming under the ministry of public enterprises. Let us hope the government also considers selling some of its vast pro­perty and hotel holdings as well as companies long deemed to be untouchable, such National Bank of Egypt, Banque Misr and EgyptAir. The government has no business owning apartment buildings in central Cairo.

The government has been identifying companies, doing due diligence, setting monetary targets, studying how the sales will be arranged and testing investor appetite. NI Capital, a government-owned investment bank that the cabinet set up last year, has been advising on the asset sales.

“Quite a lot of it has already been done,” said Mr Khodeir.

He says the government has been paving the way for the sales by first solving Egypt’s electricity shortages, building infrastructure such as roads and ports and floating the currency. “This makes the IPOs more attractive,” he said.

Patrick Werr has worked as a financial writer in Egypt for 26 years

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