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 003746 
 
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 EG
SUBJECT: NAZIF SLOWS DOWN EGYPT'S PRIVATIZATION PROGRAM 
 
REF: A) CAIRO 01474 
     B) CAIRO 01493 
 
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Summary 
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¶1. (SBU) Stock market volatility, mounting political 
opposition, and sectoral sensitivities are obliging the 
Nazif administration to reconsider the rapid pace of 
privatization that has been its hallmark for almost two 
years.  The GOE is attempting a variety of countermeasures 
to enable the continuation of its plans, albeit more slowly. 
End summary. 
 
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Nazif applies the brakes 
------------------------ 
 
¶2. (U) Until recently, the Nazif government had implemented 
the privatization project much more aggressively than its 
predecessors, who were more focused on political 
acceptability and limited social disturbance.  The number of 
privatization transactions increased from 13 in FY 2003/04 
to 28 in FY 2004/05 (Nazif took office in summer 2004), and 
to 49 in the first three quarters of FY 2005/06 (July 2005 
to March 2006).  Between FY 2000/01 and the end of the third 
quarter of FY 2005/06, transactions had increased by 158%. 
 
¶3. (U) However, the GOE has slowed the pace of the program 
since the start of 2006.  Statistics released by the 
Ministry of Investment (MOI) show that the number of 
quarterly privatization transactions has fallen from 25 in 
Q1-2005/06, to 17 in Q2-2005/06, to 10 in Q3-2005/06 
(January-March 2006). Proceeds from transactions in the 
third quarter were LE 3.3 billion, down from LE 5.1 billion 
in the first quarter of 2005/06. 
 
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A volatile stock market 
----------------------- 
 
¶4. (U) The GOE last month announced that it would reduce the 
use of initial public offerings (IPOs) as a means of 
privatization, due to volatile stock market conditions and 
withdrawal of capital, and would instead seek principal 
investors for some of the major companies on its 
privatization agenda.  Minister of Investment Mahmoud 
Mohieldin noted that the GOE could no longer expect an IPO 
to be subscribed many times over, which was the case through 
most of 2005.  In March, the GOE was forced to postpone 
indefinitely an IPO of 7% of Egypt Aluminum - the largest 
aluminum smelter and exporter in Egypt - due to inadequate 
demand for the shares offered. 
 
¶5. (SBU) The fact that the GOE is now reducing the number of 
previously-planned IPO privatizations is one cause of the 
noticeable slowdown in overall transactions, at least since 
March.  For the future, this means the administration has 
one less viable/lucrative option for privatization.  In 
2005, although not more than 20% of transactions were in the 
form of IPOs, these generated more than 50% of total 
privatization returns (for instance, in the sales of shares 
in petrochemical companies and Telecom Egypt).  Major 
investor negotiations tend to be more time-consuming and 
challenging for the GOE than stock market offers, since long 
term investment considerations and not just price tend to be 
at stake.  Nevertheless, the government is expecting 
considerable proceeds to be realized from strategic investor 
sales in the foreseeable future, through offering majority 
stakes (60%) in petrochemical companies Sidi Krir and AMOC. 
 
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Increasingly vocal challenges 
----------------------------- 
 
¶6. (SBU) Since the first few months of 2006, opposition to 
the privatization program has increased in the local media, 
as papers representing trends across the political spectrum 
have begun to accuse the Minister of Investment of "selling 
Egypt."  Criticism of a lack of transparency on planned 
sales, asset valuations, and the status of negotiations has 
also become more pronounced.  On the rhetorical level, the 
GOE has responded by denying that the program has moved with 
excessive speed, emphasizing that privatization has been GOE 
policy since the Economic Reform and Structural Adjustment 
Program of the early 1990s, and not simply the policy of the 
MOI. 
¶7. (SBU) Simultaneously, in an apparent attempt to disarm 
critics, the GOE has instituted an organizational change: 
Prime Minister Nazif in early June issued an amendment to 
the executive regulations of the Public Enterprise Law, 
stipulating that offers of public companies are to be 
referred first to the Economic Ministerial Group, which 
would include the popular pro-labor Minister of Manpower, 
Aisha Abdel Hadi.  Such an inter-ministerial group for 
reviewing privatization plans existed under earlier 
administrations but fell into disuse under Nazif, which 
helped create the public impression that the MOI acted alone 
in deciding on privatizations. 
 
¶8. (SBU) Nevertheless, a senior MOI official charged with 
privatization told Econoff that growing opposition could 
further slow the pace of the program.  Complicating the 
problem for the MOI, according to the same official, is the 
more pronounced, outspoken presence of Muslim Brotherhood 
(MB)-affiliated representatives in the parliament since late 
¶2005.  (Comment: Opposition in parliament has often been a 
thorn in the side of the MOI with respect to privatization, 
but the problem could become even more difficult given the 
MB's penchant for challenging GOE policies.  End comment.) 
 
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Labor unrest 
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¶9. (U) In the second half of 2005, and increasingly in early 
2006, the labor force in recently privatized enterprises 
engaged in vocal protest against disruptions in work 
patterns.  For instance, in early April, opposition 
newspaper al-Ahaly reported a labor protest that took place 
in front of the People's Assembly building, organized by 
workers of privatized Al-Nobareyah Company for Agricultural 
Engineering and Mechanization.  A few days later, workers of 
the Gelatin Company of Alexandria initiated a sit-in before 
the Ministry of Investment, protesting the failure of the 
new investor who bought the company to provide them certain 
financial dues. 
 
¶10. (SBU) The projected sale of retail chain Omar Effendi 
Co. - with its labor force of 6000 and high-profile history 
as the proud flagship of Egyptian retailing - has generated 
more controversy than any other sale to date (ref A) and the 
MOI admits that defending the privatization plan for the 
company has sapped considerable GOE energy.  In early June, 
the Chairman of the Holding Company for Trade, which manages 
Omar Effendi, finally announced an end to four months of 
negotiations with the investor.  The Chairman noted - 
without providing a timeline - that the holding company 
board and assembly still had to approve the sale.  In like 
manner, protracted negotiations over the privatization of 
the Al Nasr Glass Factory are apparently being stymied by 
labor.  Last week, a company official indicated that the 
labor syndicate committee of the factory had made additional 
demands that were being incorporated in the negotiations. 
According to opposition paper al-Wafd, the investor intended 
to lay off 1600 workers of the factory and retain only 200. 
(Comment:  Both examples of prolonged inability to complete 
privatization negotiations signify a more cautious approach 
by the GOE with regard to labor, and unwillingness to 
provoke more protests.  End comment.) 
 
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Sectoral issues 
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¶11. (SBU) Sector-specific issues also have contributed to 
popular opposition and thus the slowdown in the 
privatization program, a case in point being that of the 
sugar industry (ref B).  Disturbances in the local market 
due to supply shortages and rising sugar prices over the 
last few months forced the GOE to cancel the privatization 
of four companies (Delta, Daqahliyya, Fayoum, and El 
Nobareyah), in favor of inviting private sector investment 
in new production lines in GOE-owned companies as a stop-gap 
measure.  The pharmaceutical industry is similarly price- 
sensitive given GOE price controls.  Since 1991, the GOE has 
banned the sale of a controlling stake in any pharmaceutical 
company, and since 1996, has permitted sales of only 40% 
stakes in five companies through the stock market. 
Announcements since January 2006 that the administration 
would sell a stake in the Chemical Industries Development 
Co. (CID) have thus met with a barrage of accusations that 
the GOE is abandoning social concerns. According to MOI, 
sale of 40% of CID is presently being undertaken through the 
stock market. 
 
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Comment 
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¶12. (SBU) No longer able to ignore the negative 
repercussions of its crash drive to privatize, the Nazif 
administration is moving toward the conclusion that a 
gradualist approach is more appropriate in the Egyptian 
case.  However, the public is likely to continue seeing the 
generation of high short-term returns - at the expense of 
perceived long-term national interests - as the motive for 
sales, unless the MOI provides a more compelling social cost- 
benefit argument for public consumption.  End comment.