This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 CAIRO 001493 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR NUGENT/ADKINS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON EFIN EINV EIND EG
SUBJECT: PRIVATIZING SUGAR MAY BE BITTER IN THE SHORT TERM 
 
Sensitive but Unclassified.  Please protect accordingly. 
 
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Summary 
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¶1.  (SBU) The Egyptian Ministry of Investment (MOI) recently 
announced plans to sell 36% of Delta Sugar, a joint venture 
company, in an initial public offering (IPO).  Announcement 
of the sale follows an earlier announcement that another 
public sector sugar producer, El Nobareyah, would be put up 
for sale.  MOI's privatization plans for the sugar industry 
have drawn criticism from parliamentarians, who blame the 
proposed sales for the recent increase in consumer sugar 
prices.  MOI claims the consumer price increase is the 
result of domestic demand outstripping domestic production 
and rising import prices.  The food ration system also 
appears to have been affected by the increase in sugar 
prices, as ration-card holders report reduced sugar rations 
or none at all.  In addition, the GOE has increased its 
projected budget for food subsidies by 80% for the coming 
fiscal year.  MOI's long-term plan to meet Egypt's sugar 
demand is solicitation of private sector investment in the 
sugar industry to expand domestic production.  MOI may be 
using sugar as a test case for privatization of public 
sector food production companies.  End summary. 
 
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Is privatization the problem... 
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¶2.  (U) The MOI recently announced plans for partial 
privatization of Delta Sugar Company, Egypt's largest 
producer of beet sugar, through an IPO.  Delta is a joint 
venture company, of which the GOE owns 87.9%.  Thirty six 
percent of the GOE's shares in the company will be sold in 
the IPO over the next two months.  Press reports indicate 
that MOI is still considering sale of the remaining public 
shares, possibly to an anchor investor.  Prior to 
announcement of the Delta IPO, MOI also placed another 
public sugar company, El-Nobareyah Sugar, up for sale.  El 
Nobareyah, established in November 2004, is still in its 
development phase and has not yet begun producing sugar. 
MOI has also indicated that the largest public sugar company 
- Sugar and Integrated Industries Co. (SIIC) - though not 
yet slated for sale, may also be privatized. 
 
¶3.  (U) MOI's privatization plans for the sugar industry 
have stirred controversy in the People's Assembly (PA), 
where the concept of privatization finds little support. 
Shortly after announcement of the Delta IPO, the Industrial 
Committee of the PA voiced is strong opposition to the move. 
Parliamentarians blamed MOI's privatization plans for the 
recent increase in sugar prices in the Egyptian market. 
Since early February, consumer prices for sugar have risen 
from approximately LE 2.50-2.75/kg to as high as LE 3.60/kg 
in some stores. 
 
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...or Egypt's sweet tooth? 
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¶4.  (U) According to MOI, the rise in sugar prices has less 
to do with privatization than with the imbalance in Egypt's 
sugar consumption vis--vis it production.  Although Egypt 
is the largest producer of sugar in the Middle East, it is 
also the largest sugar consumer, with domestic demand 
considerably outstripping production.  In 2005, Egypt 
produced 1.36 metric tons (MT) of sugar but consumed 2.5 MT. 
Imports covered the nearly 50% gap, with Brazil taking first 
place as Egypt's largest foreign source (0.98 MT in 2005, of 
a total 1.2 MT in sugar imports).  The recent rise in world 
sugar prices is therefore the main cause of the increase in 
consumer prices in Egypt, according to MOI.  The price of 
imported sugar rose from LE 1625 ($285)/ton to LE 2519 
($440)/ton between January and March 2006. 
 
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Short (term) and not sweet 
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¶5.  (U) The discrepancy between Egypt's production and 
consumption of sugar also has implications for the GOE's 
food ration system, a Nasser-era program that provides free 
monthly rations of basic food items to certain pensioners, 
widows, orphans and various other disadvantaged populations. 
Despite statements in the press from the Ministry of Trade 
and Industry that Egypt has sugar reserves of 660 thousand 
tons, equivalent to 7 months of imports, ration-card holders 
have reported receiving less than their full sugar quota or 
no sugar at all.  On March 4, the GOE announced that 4 items 
in the ration basket, pasta, margarine, beans and lentils, 
would be eliminated over the next two months and the ration 
of sugar increased from 1 to 2 kilos per month.  The 
redistribution of goods in the ration basket allows the GOE 
to accommodate the rise in sugar import prices without 
increasing the budget for that particular program.  The 
budget projection for the overall food subsidy program, 
however, has risen dramatically.  The GOE recently announced 
that it would increase its budget allocation from LE 35.3 
billion to LE 56 billion - an 80% increase - in FY 2006/07 
to cover increases in prices of imported consumer goods, 
including sugar. 
 
¶6.  (U) The MOI has indicated in press reports that it plans 
to increase Egypt's sugar production in the long term by 
issuing tenders for new private-sector investment projects 
in the sugar industry.  Aiming for investments of 
approximately LE 1.1 billion, the tenders would increase 
beet sugar recovery by adding a new line that would increase 
production at the Daqahliyya Sugar Company - another public 
sector firm - by 25,000 tons.  Additional tenders will be 
issued to construct a new factory to produce 250,000 tons of 
sugar.  MOI also believes that partial privatization of 
other sugar companies may improve the operating methods and 
efficiency of the companies. 
 
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Comment 
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¶7.  (SBU) MOI's plans for partial privatization of the sugar 
industry are the first to touch on the food production 
sector.  That the plan is for partial rather than full 
privatization indicates that the GOE is either not 
comfortable divesting the entire public stake in this sector 
or is testing public reaction before proceeding with 
additional privatization in the food industry.  Currently 
MOI has plans to sell minority shares in 4 flour mills by 
the end of FY 2005/06 (i.e., by June 30, 2006).  Flour is 
likely to be even less price-elastic than sugar as bread is 
a staple for Egypt's poor.  End comment.