Public sector for sale, but no buyers

While the government may believe it is doing its best to privatise the companies left on its portfolio, not everyone is satisfied with how it is going about it. Niveen Wahish reports
Figures on the number of companies left on the privatisation portfolio of the Ministry of Public Enterprise (MPE) vary greatly depending on the source. All, however, do reflect one thing in common: well over half of the 314 companies slated for privatisation are still in government hands. Mohamed Hassouna, head of the valuation and financial analysis unit at the Public Enterprise Office (PEO), puts the record straight. Speaking to Al-Ahram Weekly, he says that, to date, 185 privatisation transactions have taken place. That does not necessarily mean that this number of companies has been sold, but that of the 185 transactions there were 54 partial privatisations. So far, only 131 companies have actually been taken off government hands -- whether to anchor investors, majority public offering, employee shareholders associations, or liquidations. Thus, while 183 of the original 314 companies remain in government hands, only 129 have not entered the market in any form. How long it will actually take for the transfer to materialise remains unpredictable.
"It will take time," Hassouna said. "We cannot be held responsible for something out of our hands," he said in response to accusations that the pace of privatisation has been sluggish.
"The market is demand-driven," he added, pointing out that with the current economic slowdown, investors have a hard time procuring the cash to buy companies being privatised.
In dealing with the remaining companies, the government has not left a stone unturned. Last year, the MPE put out advertisements for two sets of companies. The first was launched at the beginning of 2001 for 49 additional viable and ready companies, and the second was launched in September of the same year for 49 companies in dire condition. While these ads are purely for promotional purposes, they serve in "sounding out the market," Hassouna said. He added that the actual sale advertisements must be placed by the holding companies concerned.
It is through these ads that the interest in the MPE-offered companies is revealed, Hassouna says, especially for those in the engineering, mining, food, marine transport, textiles and weaving, trade, and contracting industries. To encourage investors to make an actual bid for the available companies, especially those in tumultuous states, the MPE and the holding companies concerned are coupling the offering incentives with a great display of flexibility in closing deals -- such as the deferred sale of Abu Zabal Fertilisers in which the investor took the company under a three-year lease contract.
Incentives include a five-year tax holiday, assumption of the company's bank debts, responsibility for the excess labour, and allowing the investor to rent the land rather than purchase it. To facilitate things further, Hassouna said that there was a proposal now that MPE be allowed to sell loss-making companies without placing a minimum price on the deal. "This will either mean a modification to law 203 or the passage of a new law," he said. The reasoning behind this method is that the cost of keeping the company under public sector control, even if it is profitable, is greater than if the company were sold at any price. Several weeks ago, Mukhtar Khattab, public enterprise sector minister, told the People's Assembly that there were 66 faltering companies on the MPE's portfolio which have cost the government some LE12 billion over the past 10 years. Furthermore, these companies will need at least LE25 billion to set straight their financial position.
The new approach of selling a company without a pre-set minimum price was hailed as "very exciting" by Alexander Berg, managing director of Carana Corporation's Privatisation Coordination Support Unit. He said that it correlates with MPE's efforts to sell distressed companies.
Another source who preferred to remain anonymous also applauded the idea, but said that it needed to be implemented not just for faltering companies, but all the companies slated for privatisation. He acknowledged the that such a measure would affect privatisation proceeds, but said, "Raising revenue is one of many more important targets such as increasing productivity, raising the competitiveness of the companies and creating a more effective industrial sector."
Until the idea materialises into law, however, the MPE is making the most of what it has. Hassouna said that article 26 of the executive statutes of law 203 allowed the general assembly of the company in question, and the holding company concerned, to accept bids below the initial valuation from investors. The general assembly and the ministerial committee for privatisation are authorised to accept these bids. This tool had been used in at least 15 transactions, Hassouna said, adding that the prices accepted were sometimes 30 to 40 per cent below their valuations.
"There were also a couple of times when this tool was used on profitable companies as well," he said, the logic behind this being that there were factors other than profitability that needed to be taken into account. He said that new competition, for example, may be entering the market, posing a potential threat to the company's performance; the company may be in need of a cash injection, new management or a new marketing strategy. "The private sector is better at providing all this," he said.
Selling at any price, however, is not the ideal means of privatisation in the view of Hesham Hasabou, professor of accounting at Ain Shams University, and member of the specialised national councils. "If these companies are worthless, no one will be interested in acquiring them," he says. By selling at any price, the government has lost track of the real purpose of privatisation, which is to increase the efficiency of these entities. In his opinion, what the government is trying to do is get rid of as many companies as possible in the shortest time.
But the government is not displaying the same flexibility with other entities which investors may be more thirsty for. These include Telecom Egypt, the electricity companies and banks. By putting off the privatisation of Telecom Egypt (TE), the government is implying that it can predict the market. "If TE was sold two years ago, it would have been selling into a boom market," said an unnamed source, adding that the government was postponing the benefits of privatisation in exchange for uncertainty.
But not everyone sees eye-to-eye with this view. Another source who preferred to withhold his name said that, for the Egyptian government, TE was a cash cow. "It's a good source of income for the government whether it is sold or not," he said. He was sceptical of the idea that the benefits of TE lie in that it will activate the stock market. "That will only be temporary," he said. The market would not really be active unless there were structural change. "There has to be a constant flow of new players and people have to regain their confidence in the process," he said.
Confidence was also highlighted by Hasabou as critical to success, but he added that another approach to privatisation was needed. He recommended that, rather than sell companies, the government should increase their capital, giving the private sector majority shareholding and management while maintaining its share and cashing in on the revenues. As for the large companies which may be too expensive for the private sector, these need to be broken down into smaller entities making them more attractive.
The plight of the government's privatisation programme continues, as too, does the public's critique.
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