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Cablegate: Anti-Competitive Finding Tests Egypt's Regulatory Regime

VZCZCXYZ0010
RR RUEHWEB

DE RUEHEG #3097/01 2950758
ZNR UUUUU ZZH
R 220758Z OCT 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7261
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0351

UNCLAS CAIRO 003097

SIPDIS

SIPDIS
SENSITIVE

STATE FOR NEA/ELA, NEA/RA
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: PGOV ECON EG
SUBJECT: ANTI-COMPETITIVE FINDING TESTS EGYPT'S REGULATORY REGIME

REF: CAIRO 673

Sensitive but Unclassified. Please protect accordingly.

1. (U) Summary: The Egyptian Competition Authority (ECA) recently
released a report alleging anti-competitive collusion among 12
Egyptian cement producers. The Ministry of Trade and Industry
(MOTI) referred the companies to the Public Prosecutor for
prosecution under Egypt's competition law. If found guilty, the
companies could face fines of up to LE 10 million ($1.8 million).
The companies have rejected ECA's findings, and claim that the court
case will harm investment in Egypt. Analysts believe the fines will
not be sufficient to dissuade anti-competitive behaviour in the
cement sector. Investigation of the cement and steel sectors began
in July 2006 and findings for the steel sector are expected in
December. The cement case could serve as an indicator of the
Egyptian judicial system's capacity to handle complex commercial
cases. End Summary.

2. (U) In early October the ECA announced the results of an
investigation into anti-competitive practices in the cement sector.
The ECA found that 12 Egyptian cement companies, 11 of which are
privately-owned, colluded to manipulate prices and restrict market
distribution. After announcement of ECA's findings, the MOTI
referred the companies to the Public Prosecutor for prosecution
under Egypt's competition law. If the companies are found in
violation of the law, they face penalties ranging from LE 30,000
($5,000) to 10 million ($1.8 million). The court has not indicated
when it expects to rule, but contacts at ECA said the Public
Prosecutor has already discussed the findings of the investigation
with ECA Head Mona Yassin, and will soon question cement company
representatives directly.

3. (U) Cement prices fell from LE 380($69)/ton to LE 365 ($65)/ton
on news of ECA's findings. Shares of some cement companies also
fell: Cement Helwan shares dropped 1.7% to LE 40.6 ($7), Ameriya
Cement fell 1.6% to LE 30.9 ($5.60) and Cement Beni Suef plunged
2.3% to LE 143.4 ($25). Speaking to the press, representatives of
the cement companies rejected ECA's findings, claiming it is
impossible to divide market share and manipulate prices as alleged
in the ECA report. An official of National Cement Company (NCC),
Egypt's only majority public-owned cement producer and one of those
cited in the ECA report, told the press that NCC never colluded with
competitors on pricing. Company representatives predicted the court
would rule in their favour, and claimed that the case harms Egypt's
investment prospects, especially potential foreign investment. MOTI
officials countered that enforcement of fair competition will
encourage foreign investment.

4. (U) Local analysts have questioned the case's potential to curb
anti-competitive practices in the cement sector, noting that the
maximum fine under the competition law is equivalent to one day's
profit for some cement companies. Speaking on a local TV news show,
Ahmed Ezz, Deputy Chief of the Cement Exporters' Council and a
prominent NDP member, called the competition law "weak." Ezz said
he hoped, however, that a court ruling against the companies would
bring down domestic cement prices. (Comment: Ezz must walk a fine
line in this case. As Deputy Chief of the Cement Exporters'
Council, he is concerned with the industry's interests, but as a
member of the People's Assembly and NDP Economic Policy Committee,
he has to take a public stance in favor of free and fair
competition). Taher Helmy, former president of AmCham Egypt, told
reporters the case highlights Egypt's upholding of free market
principles. Omar Mehanna, current president of Amcham Egypt and
part owner of Suez Cement, one of the companies cited by ECA, said
he hoped the case would finally put to rest claims of
anti-competitive behavior in the cement sector.

5. (U) Minister of Trade Rachid initiated the ECA investigation of
Egypt's cement and steel companies in July 2006, when prices of both
commodities began rising as the region's construction boom
intensified. Cement retailers and dealers accused cement companies
of pushing up prices by lowering supplies. In February 2007, MOTI
asked cement producers to observe voluntary price caps, and imposed
export fees on cement and steel, citing shortages in the domestic
market as producers sold overseas for higher prices while benefiting
from subsidized energy at home (reftel). The initial export fees
proved ineffective in controlling prices, and the LE 65/ton fee on
cement exports was increased to LE 85/ton in August. ECA's
investigation of the steel companies is ongoing, and results are
expected in December.

6. (U) According to ECA officials, the investigation analyzed
Egypt's cement market from 2002 - 2006, using data from a variety of
sources, including cement producers themselves. ECA surveyed the
market and interviewed distributors, traders, and contractors in 15
Egyptian governorates. The data was analyzed in cooperation with
international experts from competition authorities of various
countries. The investigation found evidence of a cartel involving
agreements between cement companies on pricing, in violation to
Article (6)(a) of the competition law, as well as agreements to
restrict market supply, in violation to Article (6)(d) of the law.


7. (SBU) Comment: The outcome of this case will provide several
measures of the effectiveness of Egypt's economic reform program.
Although it is a relatively discrete case involving one sector of
the economy, it could serve as an indicator of the judicial system's
overall capacity to handle commercial cases. Improvement of
commercial and contract law enforcement is consistently cited by the
private sector as one of the major drawing points for increased
investment. The case will also measure the effectiveness of U.S.
assistance to Egypt's reform program, as USAID has provided
significant support to ECA in building technical capacity and to the
judicial system in handling commercial cases. Perhaps most
importantly, the case will demonstrate the GOE's commitment to
transparent regulation and law enforcement, even when the
enforcement threatens the interests of prominent political figures.
RICCIARDONE

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