Handover needs some juggling




Restructuring of labour has been used to keep the schedule on course

By Mark Huband in Cairo

Financial Times, 13 May 1997

The government’s moves to sell its majority stake in 246 companies face the inevitable problems of share price fluctuations and the difficulty of packaging companies which require substantial restructuring.

So far more than 40 of the companies earmarked for sale have experienced some degree of privatisation, with many of them now being 51 per cent or more in private hands – although the government retains a large shareholding in most of these.

Privatisation is being slowed by attempts – which have so far come to nothing – to strike a deal with creditor banks for the rescheduling of the E£1.5bn debt of 15 state-owned lossmakers – with a similar amount owed in interest.

Meanwhile, the government is planning to issue bonds worth $1bn this year, with the aims of achieving a benchmark sovereign credit rating and raising funds which would be used to assist in the repayment of public sector debt to the public sector banks – much of it owed by lossmaking companies. One of the four main public sector banks – believed to be Bank of Alexandria – is itself under consideration for privatisation by the end of the year, and the government is keen to wipe the debt slate clean before it moves the bank into the private sector.

In an effort to prevent the privatisation schedule veering radically off course, the government has keenly pursued pre-privatisation labour restructuring. Men aged over 50 and women over 45, who have worked for public sector companies for more than 20 years, are eligible for lump sum compensation of E£12,000 to E£35,000 if they accept early retirement.

The government has paid out E£200m to workers who have accepted this offer. Companies which remain to be restructured are expected to require a similar amount and about E£300m will be needed for redundancy payments to employees in companies which are likely to be liquidated, says Mr Atef Obeid, the minister for public enterprise.

The government estimates that overstaffing in the 948,000-strong public sector, which has been reduced by 120,000 since the privatisation programme started last year, represents about 18 per cent of the workforce. However, as labour costs account for only 12 per cent to 14 per cent of turnover, it does not see overstaffing as the main concern of future investors.

“The lossmaking companies are easier to sell than the profitable ones,” says Mr Ahmed Galal, executive director of the Egyptian Centre for Economic Studies think-tank, “because the potential for growth is much greater in a lossmaker than a profitable company. “The government has come to the conclusion that fixing the companies in all aspects before privatisation is a bad idea because you are supposedly selling it to somebody who knows that business. You’re better off letting that person fix it.”

Debate is centring on the number of companies needing to be closed altogether. Mr Obeid says there are 20, but others say there are many more.

“Sixty to 80 per cent of the companies left for sale are junk,” says one well-placed economist. “And the government is running out of companies that can be easily disposed of on the stock market.”

Also, with stock prices so high, it cannot put out large tranches of companies that are already issued at low prices. The privatisation process is going to become much more difficult.  The government has raised more than E£5bn from privatisation, and E£11.2bn is expected to be raised from equity. This income, which is held by the central bank, is enough to prompt officials to start the search for anchor investors.

“The second phase (of privatisation) will have three features,” says Mr Obeid. “More will be sold in companies whose stock has already been put on the market, but we will sell at the right time.

“Second, we will be preparing the giants – major textile companies, aluminium, sugar – to be sold through the stock market.

“And third, I do think that the introduction of private investment in the utilities has to be given the opportunity to show that private investment is feasible and can provide quality service at reasonable cost. Once you get that done, you do have showcases.

“The new and good thing that is happening now is that joint funds –  Egyptian and foreign – are being mobilised in preparation for a deal.”

Concern about the ability of the capital market to soak up the $2.1bn capital inflow to Egypt in fiscal 1996-97 when macroeconomic reform targets remain vulnerable to being knocked off course, has subsided due to institutional reform of the stock exchange and, until very recently, the readiness of investors to snap up shares in the new privatisations.

Regulation of the stock exchange – where 30 broking houses are excluded from voting for the new board of directors after having committed a variety of misdemeanours – is expected to undergo a significant overhaul by mid-June. Brokers will have their influence diluted by representatives of other financial groups – including mutual funds – being given a voice in the running of business.

Similar institutional reforms intended to ensure that foreign portfolio investors are not deterred, and that they are followed by foreign direct investors, are regarded as necessary to ensure that the pace of privatisation is maintained.

Legal uncertainties remain a concern. “The taxation of foreign mutual funds is an area the capital market law did not address, leaving the foreign mutual funds liable to pay tax,” says Mr Ziad Bahaa Eldin, a Cairo-based specialist in company law.

“There is also some question as to whether the newly-privatised companies can immediately become investment companies, allowing them to benefit from the tax holidays afforded to start-up companies. Broadly-speaking the legal environment needs to be tackled much more seriously than it is.”

© Financial Times