VZCZCXYZ0001
RR RUEHWEB

DE RUEHEG #2408/01 3291355
ZNR UUUUU ZZH
R 241355Z NOV 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0914
INFO RUCPDOC/USDOC WASHDC 0426
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS CAIRO 002408 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EINV PGOV EG
SUBJECT: EGYPT ANNOUNCES MASS PRIVATIZATION SCHEME 
 
Sensitive but unclassified.  Please handle accordingly. 
 
¶1. (SBU) SUMMARY:  On November 10, Minister of Investment Mahmoud 
Mohieddin announced a new privatization scheme whereby the GOE will 
transfer shares in 45 state-owned companies to 41 million Egyptian 
citizens within the next 12-14 months.  The plan requires 
parliamentary approval, which he expects by March 2009.  The shares, 
which will be distributed through the Egyptian postal authority, are 
expected to have an initial market value of LE 300-500, and can be 
held or sold.  Reaction has been mixed, with some describing it as a 
way to avoid public opposition to continued privatization, and 
others saying that the plan is too complicated and has not been well 
thought through.  We have heard some details from private sector 
participants in the planning process but Ministry of Investment 
officials have asked we speak to the minister directly; officials at 
other ministries are not willing to discuss the plan at all.  We are 
pursuing an appointment with Mohieddin.  END SUMMARY. 
 
¶2.  (U) On November 3, at the annual NDP party conference, Egyptian 
President Mubarak announced plans for a privatization scheme that 
would promote participation by Egyptian citizens as well as "social 
justice and equality."  On November 10, Minister of Investment 
Mahmoud Mohieddin publicly announced some details.  According to 
Mohieddin, the GOE will issue shares to the approximately 41 million 
Egyptian citizens over the age of 21 that would give them ownership 
in a range of state-owned companies.  Egyptians will have one year 
to claim their shares, which will be made available through the 
Egyptian post office.  At the end of the year, any unclaimed shares 
will be transferred into a "Generations Fund" which will hold some 
additional shares for Egyptians now underage, and legally too young 
to claim their vouchers.  Mohieddin expects parliament to approve 
the legislation by March 2009, and that implementation would take 
12-14 months. 
 
¶3.  (U) No draft of the proposed legislation has been released. 
However, according to details provided in the press, the GOE will 
retain about 30 percent ownership in companies dealing in goods and 
services, 51 percent in tourism and transportation companies and 67 
percent ownership in strategic companies such as pharmaceutical, 
iron and steel, copper, sugar, fertilizer and cement companies. 
Reportedly approximately 45 companies out of the 155 companies 
subject to privatization by law and under the Ministry of 
Investment's control will be included.  Some companies have been 
left out because they are either losing money or are not 
commercially viable and require major restructuring.  Other firms 
have already been partially privatized through other mechanisms and 
have reached the legal limit for private ownership. 
 
¶4.  (SBU) Each certificate will represent a single share in each of 
the companies being privatized.  Current estimates put the value of 
the vouchers at LE 300-500 (US$55-$91) each, for a total nominal 
value of shares to be privatized under the plan of LE 12-20 billion 
(US$2.18bn-3.63bn).  Beltone Financial Chairman Alaa El Din Saba, 
who has been working with the Ministry of Investment on the plan, 
told us the certificates will represent holdings in 45 companies 
which can only be "unbundled" under certain conditions.  He 
specifically said this "is not a voucher program -- the shares that 
are distributed will intrinsically have value, unlike the Eastern 
European voucher system of the 1990s." 
 
¶5.  (SBU) Once the shares are distributed, interested buyers are 
expected to make tender offers for the shares through the market. 
On the opening day, the scheme's proponents argue that the stock 
exchange will find a market clearing price.  They expect this price 
will be based on evaluations of the firms done by private companies, 
but that the government will not play a role.   The tenders may 
include conditions, such as, for example, requiring that 51% of the 
shares for the company are offered, for the tender to be successful. 
 Sellers, El Din Saba said, will register interest to sell through 
their brokers.  Shares of individual companies can be unbundled and 
sold once a minimum threshold number of shares for a specific 
company are offered or if a specific tender is offered that an 
individual wants to participate in.  In the case of Egyptians 
willing to sell, they will be paid for that single share, and will 
retain their remaining shares as a bundle.  Those who have chosen 
not to sell will receive a stock certificate for the single share 
that has been "unbundled."   El Din Saba said the firm Misr for 
Clearing, Settlement and Central Depository (MCSD) will be the 
entity responsibly for electronically tracing the values of all 
these shares.  Currently there are approximately two million 
Egyptians holding stocks which are registered with MCSD and El Din 
Saba did not think it would be hard technologically to increase that 
to 41 million.  It was not clear, also who would handle the initial 
sales. 
 
PRIVATIZATIONS SLOW IN RECENT YEARS 
----------------------------------- 
¶6.  (SBU) The proposal is an effort to restart Egypt's privatization 
program, which had been effectively halted in recent years due to 
heavy public and political opposition.  In the 1990s, the GOE 
privatized more than 200 industrial enterprises, realizing about LE 
15.5 billion in revenues.  The sale of the department store Omar 
Effendi and the Bank of Alexandria took place in 2006.  In May 2008, 
the GOE postponed the sale of Banque du Caire, claiming offers from 
potential buyers were not high enough.  Likewise, the sale of four 
state-owned insurance companies, promised in 2005, has also not 
taken place.  About 170 industrial enterprises remain in public 
hands, not including GOE control of the financial and insurance 
sectors and GOE participation in approximately 500 joint-venture 
companies.  The Egyptian military also has a considerable (though 
not precisely known) presence in the economy through its holdings in 
both military and non-military industries.  It is estimated that the 
GOE retains direct economic management of one-third of the Egyptian 
economy. 
 
¶7.  (SBU) At a recent discussion hosted by the Ambassador, Beltone 
Financial Chairman El Din Saba defended the proposal under heavy 
criticism from several representatives from business, academia and 
the financial community.  In his view, the ultimate goal of 
privatization cannot be achieved through traditional means, due to 
public mistrust of the GOE, charges of corruption and the inability 
of the GOE to set a reasonable price.  He cited the failure in May 
to sell Banque du Caire as an example.  Potential investors had 
spent considerable time and money putting together reasonable offers 
for the bank.  Ultimately, however, the GOE valuation committee 
composed of "junior officials" who knew very little about business 
or the markets, rejected the sale after a minimum acceptable price 
was set which did not reflect the bank's true value. 
 
¶8.  (SBU) The goal of this new scheme, according to El Din Saba, 
will be for the market to set share prices.  Eventually, it is hoped 
that a strategic, private sector investor will buy a controlling 
interest, with the end goal remaining that of improving efficiency 
and productivity of these firms.  By releasing the shares to the 
public, he said, it will be up to Egyptians, and the market, not the 
government, to determine the appropriate price. Advocates of the 
plan hope that transferring the ownership of the assets to the 
public will resonate with the public and help the government to make 
privatization more popular.  Investors would have to buy shares 
through the stock market, shielding the GOE from criticism that 
government officials were bribed, or that public assets are being 
undervalued. "It will be the people who are selling," he said. 
 
¶9.  (SBU) El Din Saba acknowledged the problems of mass 
privatization in eastern Europe after the collapse of the Soviet 
Union, but argued that there were two important differences between 
those programs and this one.  First, he said, in contrast to 
citizens of former Soviet bloc countries, Egyptians understand how 
the market works.  "No Egyptian farmer, even if he is illiterate and 
uneducated, will not sell his crop for less than the market price." 
Also, he said, those countries did not have functioning capital 
markets and regulatory authorities.  The plan also avoids another 
problem that the eastern European schemes faced was that the 
governments, in many cases, didn't set fair prices, and generated 
bad publicity as a result. 
 
REACTION TO THE PLAN 
---------------------- 
¶10.  (SBU) Others are not so sure.  Some participants in the 
Ambassador's roundtable argued the system was too complicated.  They 
raised concerns about the twenty percent fee that the owners would 
have to pay when shares are sold.  There were worries that middlemen 
would buy shares from uneducated Egyptians for far less than a fair 
price, and that brokers and banks would be the main beneficiaries. 
Finally, and most importantly, most of our interlocutors argued 
Egyptians would not understand initially that the goal of the 
program was to turn the companies over to strategic investors but 
that once they did, they would be angry, and would feel they had 
been lied to.  The logistics of the plan remain complicated as well, 
as it will be hard for the GOE to distribute so many shares and then 
keep track of them.  El Din Saba, for example, said the program 
relies on brokers, of which there are very few in most parts of 
Egypt outside the major metropolitan areas. 
 
 
¶11.  (SBU)  El Din Saba conceded that the government had done a poor 
job explaining the program in its initial media launch.  This is 
typical in Egypt, and as a result, even when reform plans are 
credible, the public and the media assume the worst, as seems to be 
happening here.  Critics of the proposal at the economic roundtable 
argued that while the previous attempts at privatization hadn't been 
particularly successful, it was because of lack of government 
explanation and honesty, not because the goal was wrong. 
Introducing a brand new, complicated process doesn't address the 
fundamental problem which is the government has no credibility when 
it tries to reform, even if the reform is well intended.  While El 
Din Saba is a clear champion of the new proposal, even he was 
critical of some elements.  In particular, he criticized the GOE 
decision not to offer seventy percent of all the companies for sale, 
and described the decision to categorize some firms as "strategic" 
as Nasserist.  On the government side, one very senior official who 
was willing to comment said Ministry of Investment officials had not 
thought the proposal through carefully enough and expressed concern 
about the plan.  We will continue to report on this proposal as 
additional details become available, and are pursuing an appointment 
with Mohieddin. 
Scobey