Cablegate: Egypt Announces Mass Privatization Scheme


DE RUEHEG #2408/01 3291355
R 241355Z NOV 08




E.O. 12958: N/A

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

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

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.

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.

© Scoop Media

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