A Guide to Egypt's Challenges: The Public Sector & Privatisation

Bassem Sabry , Thursday 16 Aug 2012

Bassem Sabry provides a multi-pronged overview of the political, economic and social challenges facing Egypt's first post-Mubarak president, with an emphasis on the everyday problems facing average Egyptians

Omar Effiendi
Omar Effiendi

The years of Anwar Sadat's presidency marked a shift in Egypt’s economic policy, from a socialist structure to a more mixed economy. 

By the early 1990s, Egypt was decidedly moving towards a more market-oriented economy and streamlining its public sector through privatisation and restructuring. 
The official stated policy of the privatisation was to divest poorly performing companies to private investors who could inject their capital and expertise into turning the enterprises around. 
The goal eventually became detailed as the privatisation of around 314 specific public-sector companies. 
The process, however, slowed and grew more difficult after the government had finished selling off its most attractive industries, such as cement operations.
It was left with firms that held insufficient appeal for investors, whether due to specific company issues or the outdated nature of the enterprise itself. Egypt's state-owned textile plants were one example.
Eventually, the policies saw a de facto change, generally opening up to the private sector and Foreign Direct Investment.
In time, however, the privatisation program became the focus of public outrage. 
Accusations arose that the government was selling well-performing companies and significantly undervaluing its privatised companies to favour well-connected their buyers. Despite promises that their jobs were secure, workers were also being laid off by the new owners.
But the government remained steadfast in its privatisation and liberalisation efforts. By the mid=2000s, corporate tax rates were slashed to 20 per cent and more flexible hiring and firing policies were implemented in the public sector. Symbolically, the reference in the constitution to socialism as the economic system of the state was removed.
 And indeed, Egypt won accolades from international organisations for its economic reforms. In 2009 it was the world's top reformer for a third year in a row according to the World Bank and IMF. Private investment figures soared and FDI reached $14 billion in 2008, before the financial crisis. It was expected to reach around $20 billion by 2013/2014, though worries of rising economic inequality overshadowed the strong figures. 
Privatisation remained mired in controversy, and by 2010 the programme came to an effective halt as the government could not readily sell the remaining 149 companies. This led to a temporary shift of focus towards restructuring.
The January revolution necessarily put the privatisation programme under a bright and not entirely flattering spotlight. 
According to the Washington Post, Magda Kandil, the executive director of the ECES -- a local think tank that previously laid the intellectual groundwork for much of the privatisation and liberalisation efforts -- said the programme "became [one of] crony capitalism." 
Kandil further stated that over the 20 years of the programme’s existence, the state only recouped one tenth of the value of the sold assets: $9.6 billion from a potential $104 billion.
By July 2011, in a largely political move following the revolution, the government officially announced the end of the privatisation programme.
In September of that year, a landmark ruling returned three companies to the public sector, citing egregious undervaluation. According to the case, one company was sold in 1994 at $17 million, a quarter of its alleged value. Another was sold in 2006 at LE84 million, despite being value at LE211 million a decade
earlier. The third deal was cancelled after the investor failed to complete his scheduled payments.
In addition, around 6.5 million public sector workers and civil servants are employed by the state, taking a substantial toll on the state budget.
Some 150 troubled companies remain in the public sector from the original batch slated for privatisation. In 2010, the Investment Minister claimed in an interview they contributed about 5 per cent of GDP.
With a public that has grown somewhat distrustful of economic liberalisation, Egypt is faced with the challenge of deciding how to handle a public sector in dire need of reform. 
The new government may have to choose between a problematic re-expansion of the public sector, maintenance of the status quo, or the continuation of its downsizing efforts. 
With Islamist-majority political parties steadfastly liberal when it comes to economics, and many secular political forces closer to the centre, the commitment to market-oriented policies is likely to continue.
The question will remain: how to balance a commitment to free markets, the elusive principle of social justice at the forefront of the uprising, and public sector reform. 
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