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Viewing cable 05CAIRO5350, UPDATE ON EGYPT'S PRIVATIZATION PROGRAM

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Reference ID Created Released Classification Origin
05CAIRO5350 2005-07-13 16:42 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Cairo
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 CAIRO 005350 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: UPDATE ON EGYPT'S PRIVATIZATION PROGRAM 
 
REF:  A.  CAIRO 4374 
      B.  CAIRO 1329 
 
Sensitive but Unclassified.  Please protect accordingly. 
 
------- 
Summary 
------- 
 
1. (SBU) Since taking office in July 2004, Prime Minister 
Nazif's administration has reinvigorated the GOE's program 
to privatize state-owned industries.  Under the leadership 
of the new Ministry of Investment, the revitalized program 
aims to speed up privatizations by making public enterprises 
more efficient - and thus more attractive to potential 
investors - while also introducing good corporate governance 
principles.  The effort has paid off for the GOE, which 
completed a total of 19 privatizations from July 2004 to 
March 2005, generating LE 2.9 billion ($500 million) 
compared with five transactions generating LE 81 million 
($14 million) in the period July 2003-March 2004.  The GOE 
has promised even bolder steps in the near future for 
divestiture of formerly "strategic" industries.  Labor 
issues remain a concern, but the GOE has indicated that it 
will deal with workers' concerns on a case-by-case basis as 
public companies are privatized.  It is doubtful, however, 
that the GOE would approve any deals that would result in 
massive layoffs, particularly in an election year.  End 
summary. 
 
------------------------- 
Privatization revitalized 
------------------------- 
 
2.  (SBU) The GOE privatization program has undergone a 
complete makeover in concept and implementation in the last 
year under the Nazif administration's new Ministry of 
Investment (MOI).  Minister of Investment Mahmoud Mohieldin 
has been the driving force behind revitalization of the 
program, which he refers to as "asset management." 
Mohieldin has used his political weight, as a key member of 
the NDP economic policy apparatus, to garner support for 
broadening the scope of the program to include all public 
enterprises, the more competitive companies as well as those 
with large workforces that could be negatively affected by 
privatization.  He has made privatization a focal point of 
the macroeconomic reform effort led by the Minister of 
Finance, the Minister of Foreign Trade and Industry and 
Nazif himself, all of whom agree on the goals of stimulating 
private sector-driven growth and "marketing Egypt" as a 
destination for foreign investment. 
 
------------------------------------------- 
Pre-Nazif: Privatization in fits and starts 
------------------------------------------- 
 
3.  (U) The GOE has two categories of public enterprises: 
wholly state-owned companies regulated by Law 203 of 1991, 
and joint venture companies (including banks) with a public- 
private ownership mix, regulated by Law 159 of 1981.  When 
the privatization program began, the 314 wholly state-owned 
companies were grouped according to the type of economic 
activity they conducted and put under the supervision of 
holding companies (HCs).  The HCs managed the privatization 
of their affiliate companies, eventually dissolving when all 
of their affiliates had been privatized.  This process 
created a conflict of interest, especially for the HC 
chairmen.  Working efficiently to privatize all of their 
affiliates meant that the HC chairmen worked themselves out 
of a job.  Privatization was therefore a slow, sporadic 
process and after more than a decade of fits and starts, 
liquidations and restructuring, there were still seven HCs 
with 139 affiliate companies. 
 
4. (U) In 1999, after a cabinet change, the GOE decided to 
include the sale of public shares in joint venture companies 
under the rubric of the privatization program.  The Ministry 
of Economy and Foreign Trade (now the Ministry of Foreign 
Trade and Industry) began an inventory of joint ventures and 
their shareholder structure.  After a lengthy research 
process, the number of joint venture companies and banks was 
found to exceed 600, all with different percentages of 
public ownership.  In early 2000, the entire privatization 
program, including wholly state owned companies and joint 
ventures, was consolidated under the Ministry of Public 
Enterprises, where it remain until being subsumed by the new 
MOI in the July 2004 cabinet change. 
 
------------------------- 
Privatization under Nazif 
------------------------- 
 
5.  (U) Soon after MOI took over managing the privatization 
program, a three-pronged effort was undertaken to remake 
public enterprises by:  1) restructuring and re-engineering 
public companies to make them more efficient, and ultimately 
more attractive to potential purchasers; 2) implementing 
good corporate governance principles in all public 
companies; and 3) aggressively pursuing the advertisement 
and sale of public companies.  As part of the effort to 
introduce corporate governance principles, MOI published an 
OECD-based code of conduct for corporate governance and 
disclosure in public companies and began publishing the 
minutes of companies' general assembly meetings to increase 
transparency.  MOI also created a ministerial committee to 
assist investors in resolving disputes arising from 
privatization transactions.  The committee has already 
reportedly resolved 18 disputes, including several long- 
standing disputes from privatizations that occurred in the 
pre-Nazif era. 
 
6.  (U) MOI also began a campaign to advertise the newly 
revamped privatization program.  The thrust of the ad 
campaign was that the GOE was committed to removing 
obstacles that had blocked or slowed privatizations in the 
past.  Labor and debt issues would be dealt with on a case- 
by-case basis, foreign private sector interest was 
encouraged rather than feared as it had been under previous 
administrations, and no sectors were off-limits or 
"strategic" as in the past.  On behalf of MOI, Microsoft 
Chairman Bill Gates launched a website, 
www.investment.gov.eg in January 2005, to serve as Egypt's 
investment portal.  The GOE then took its investment 
campaign to the May 2005 World Economic Forum in an effort 
to drum up more foreign investment. 
 
7.  (U) The result of MOI's efforts has been a rekindling of 
interest among foreign investors.  A list of 41 local and 
international financial institutions, including Citibank, 
Goldman Sachs and Merrill Lynch, are now working with MOI as 
advisors/consultants on privatization.  A number of 
prominent foreign companies - such as Ciments Francais, La 
Farge Titan and Michelin - concluded multi-million dollar 
deals to purchase public companies such as Suez Cement (ref 
B).  From July 2004 to March 2005, the GOE completed 19 
privatizations, generating LE 2.9 billion in revenue, 
compared with only five transactions that generated LE 81 
million in the period July 2003-March 2004.  MOI expects the 
total value of privatizations in fiscal year 2004/2005 to 
exceed LE 3 billion, almost double the aggregate value of 
sales for the period 2001 through June 2004.  The budget for 
fiscal year 2005/2006 (July 2005-June 2006) projects 
revenues from privatization will reach LE 5 billion (ref A). 
 
---------------------- 
Privatization expanded 
---------------------- 
 
8.  (U) As noted above, MOI has included in the 
privatization program companies that were not previously 
slated for sale.  Prior administrations considered certain 
companies "cash cows" that were too valuable for the GOE to 
sell.  Likewise, certain sectors, such as petrochemicals and 
telecoms, were considered "strategic" and therefore off 
limits to private ownership, especially foreign private 
ownership.  In June MOI sold 20% of the GOE's stake in Sidi 
Krir petrochemical company on the Cairo and Alexandria Stock 
Exchange (CASE) for LE 70/share.  The company's shares have 
dominated trading by volume and value on the CASE in the 
last several weeks and recently closed at LE 105/share.  A 
number of other high profile companies are also in the 
pipeline, including petroleum company AMOC and Eastern 
Tobacco Company (one of the GOE's "cash cows").  MOI has 
also indicated it will offer a significant stake in Telecom 
Egypt by the end of 2005.  Shares of several public 
companies, possibly including Telecom Egypt, will also soon 
be registered on the New York Stock Exchange to further open 
channels for foreign investment.  (Note:  An update on 
privatization in the banking sector will be sent septel. 
End note). 
 
------------ 
Labor issues 
------------ 
10.  (SBU) One of the difficult issues for the GOE as it 
divests its public assets is the reaction of labor.  The GOE 
deals with excess labor in companies to be privatized by 
offering early retirement packages, which are largely funded 
by proceeds from privatization.  Senior GOE officials 
continue to provide public reassurances that labor issues 
will be resolved amicably and a safety net will be provided 
for workers affected by privatization, in keeping with the 
GOE's general policy of protection of low-income earners. 
The MOI is working on a new early retirement system designed 
to more closely address workers' concerns and improve the 
financial management of privatization proceeds that will be 
used to fund the early retirements. 
 
11.  (SBU) Nevertheless, in state-owned enterprises, 
particularly those burdened with surplus manpower like 
textiles, iron, and steel, concerned workers have expressed 
opposition to privatization through their representatives in 
parliament, through strikes and in the opposition press. 
The proposed sale of shares in Suez and Torah Cement 
Companies late last year triggered strikes that were 
resolved only after MOI obtained the purchaser's commitment 
not to lay off workers for three years (ref B).  Mohamed 
Hassouna, Advisor to the Minister on Privatization Affairs, 
told Econoff that MOI is "keeping channels open to workers," 
and cooperating with the Egyptian Trade Union Federation 
(ETUF) on a case-by-case basis to resolve potential problems 
with privatization deals.  It would be surprising, however, 
for the GOE to conclude any deals that risk large-scale 
layoffs from labor-intensive industries prior to Egypt's 
October elections. 
CORBIN