Thomas White Global Investing
Egypt Stamp
July 9, 2010
A Postcard from Africa
Egypt: Privatization Troubles Peak

A factory on the banks of the River Nile

Privatization began in the 1990s in Egypt, and the government quickly found buyers for prized factories such as cement and beer units.

Recently, workers at the Tanta Flax and Oils Company ended a 15-day strike at the factory, reaching a compromise brokered by the Manpower Ministry. Notably, one of their demands included a call for an increase in their meal allowances to match those given at public sector factories in Egypt. The underlying root of the simmering discontent in Egypt? Privatization has not been the most popular move the Egyptian government has ever undertaken. And Tanta Flax and Oils was one of the largest companies in Egypt to be privatized as part of an ambitious privatization plan that began in the 1990s, aimed at reviving an economy from decades of slumber. But the strike by the Tanta Flax and Oils workers has not been an isolated case.

This year, Egypt has seen a surge of protests, most often from workers who resent the loss of job security, social protection and other benefits that come attached with a public sector firm. After all, before privatization, the state had provided cradle to grave care. The man widely considered the architect of Egypt’s privatization program, Minister of Investment Mahmoud Mohieldin, has often attracted disapproval from Egyptians wary of the ‘social cost’ of privatization as he revealed in a recent interview to the Wall Street Journal. And the government appears to have caved in to the criticism.

With around 149 companies of the nearly 300 original public sector companies left to be privatized, the Egyptian government raised eyebrows when it recently announced it would end the sale of public assets, replacing the initiative with what Mohieldin termed the ‘asset management program for state-owned enterprises.’ He was quick to state that this did not mean the end of privatization, but rather an acknowledgement that the remaining public sector companies are mainly distressed units, which a private sector company might find hard to restructure. The most financially sound firms were quickly sold at the beginning of the privatization program in the 1990s, and it is only these troubled entities, like some spinning and weaving companies, that are left behind. These companies are now effectively the government’s burden, or as Mohieldin prefers to nametag them ‘government monopolies.’ But Mohieldin insists there are plans to restructure these companies, and some will acquire a stock market listing once the market environment in Egypt improves, post financial-recession.

Privatization has been a thorny issue in Egypt, and doubts have been raised in the past about the valuation of companies that were sold, as well as the rampant corruption that allegedly accompanied many of the deals. This has led the Egyptian public to view the move rather cynically. With labor dissent peaking, and a presidential election due next year, the government has shown that it has been keen to rouse the privatization rabble. Now the focus is on moving ahead, especially given that Egypt aims to achieve a growth rate of 8.5% by 2015. Mohieldin insists that the remaining companies are not really the leeches that they are made out to be, sucking on the nation’s resources, pointing out that they contribute just around 5% to the gross domestic product. Despite Mohieldin’s confidence, it seems that the final chapter in Egypt’s long tumultuous journey into privatization has not been written yet.

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