Egypt's history of privatisation

Beesan Kassab , Thursday 28 Jun 2018

Egypt’s history of privatising public-sector companies has not always been bright

Stock market
Shares from public-sector companies will be offered on the stock market (Photo: Mohamed Abdou)

The government has announced the resumption of its privatisation programme by offering shares from many public-sector companies on the stock market, causing some to look back at earlier episodes of privatisation in the country.

For Gamal Othman, a former employee of the Tanta Flax and Oils Company, the privatisation programme changed his life, as well as his company.

Some 13 years ago, Othman worked as a technician in the then state-owned company that exports flax seeds and fibres and was affiliated to the Holding Company for Chemical Industries. Then it was privatised and became entirely owned by the Wadi Company for the Export of Agricultural Products.

The sale was the result of a decree issued by the Ministerial Committee for Privatisation formed in 2000 and tasked with selecting public-sector companies for sale and setting the terms of their privatisation.

After the privatisation of the company, Othman and hundreds of his fellow employees were deprived of the health insurance guaranteed when it was in the public sector.

Salaries went down as the new owners shut down factories for specific periods. Protesting employees were fired, Othman said. In 2009, the Chemical Industries Syndicate decided to support a strike.

The lockout lasted for six months before the company signed a collective agreement with the workers mediated by the Ministry of Manpower. However, work only resumed for a month before another strike of more than six more months was held.

As a result of pressures from the company and the ministry many workers took early retirement. They then started a lawsuit contesting the terms of the original privatisation.

In September 2011, the sale of the company was annulled by judicial decree following the corruption in the original privatisation process. The state retook possession of the company, and the employees filed another lawsuit to be reinstated.

The story ended when the Ministry of Finance offered each employee LE65,000 in a compensation deal. Othman’s struggle, which lasted from 2005 to 2017, ended, but the company has not resumed production since.

The case is similar to that of others in Egypt’s history of privatisation that goes back to 1991 as part of what was the then government’s Economic Reform and Structural Transformation Programme.

According to the Egyptian Centre for Economic and Social Rights (ECESR), an NGO, out of 27,370 workers “17,633 were forced to take early retirement after being exposed to pressure” in the 1990s during the privatisation of six public-sector companies, including Omar Effendi, the Tanta Flax and Oils Company, Shebin Textiles, Maragel Steaming, the Nile Company for Cotton Ginning and the Arab Company for Trade.

Only 6,193 workers remained employed with the new private companies, “which means that employment shrunk by 78 per cent at these companies,” the ECESR said.

Pro-privatisation commentators do not deny the negative impacts the process has had on employment. Karim Badreddin, a financial economist, wrote on the World Bank blog an article entitled “Privatisation: The Key to Solving Egypt’s Economic Woes”, for example, in which he says that “employment declined in almost 75 per cent of the privatised companies.”

“As a result [of the programme], 382 state-owned enterprises were fully or partially privatised,” he wrote.

Alia Al-Mahdi, former dean of Cairo University’s Faculty of Economics and Political Science, told Al-Ahram Weekly that the reduced employment in state-owned companies was a weight off the state’s shoulders.

The burden had been the result of state policy in the 1960s to expand public-sector employment at about the same time that most of the public sector was being created.

Privatisation in Egypt has gone through two stages in recent decades, the first from 1991 to 1997 and the second from 2004 to 2010.

“The first stage came to a halt as a result of the Asian Financial Crisis, which obliged foreign investors to sell their shares to make up for losses on Asian markets,” Al-Mahdi said.

“This phase witnessed the selling of shares on the Egyptian stock market at very cheap prices. Many people who bought these shares later sold them at exorbitant prices, accumulating huge fortunes as a result. This smeared the whole process,” she said.

The pace of privatisation has not always been the same, however, and it only really picked up in 2003 when the judgement in the Tanta Company lawsuit was issued. This said that the Ministerial Committee for Privatisation had issued “a decree to sell 127 [state-owned] companies, 113 of which are to be sold within the next three years [2004, 2005 and 2006].”

In the same year, the currency was floated, increasing the value of state assets in the eyes of investors due to the decrease in the value of the pound.

Foreign investment in 2002-03 increased by 64 per cent over the year before to reach $700.6 million, $439.7 million of which came through selling shares in local companies to foreign investors, according to figures from the Central Bank of Egypt.

The government began to privatise much of the public sector in the early 1990s in line with International Monetary Fund conditions for a loan granted on the back of a local financial crisis.

The Supreme Constitutional Court rejected an appeal against the constitutionality of the public-business law which paved the way for the privatisation programme. The appeal was based on an apparent contradiction between privatisation and the principles of socialism, on which the constitution was officially based at the time.

On 10 November 2008, then minister of investment Mahmoud Mohieddin and vice president of the then ruling National Democratic Party (NDP) Gamal Mubarak suggested distributing coupons for citizens to acquire free shares in 86 public-sector companies, out of the 153 slated for privatisation.

According to the plan, the government would distribute shares among 40 million people aged 21 or above, allowing them to receive a stake in the companies. However, the offer was then retracted.

During the privatisation process that followed, countless lawsuits were filed, resulting in the cancellation of many deals. Lawsuits contested the sale of 24 companies, six of which were halted.

Interim president Adli Mansour issued Law 32/2014 on 22 April 2014 to prevent any party other than the contracting parties to file a lawsuit against contracts between the government and a party that wished to invest or buy.

A lawsuit was filed against the constitutionality of the law at the Supreme Constitutional Court, which meant suspending all related suits until the law had been deemed constitutional or unconstitutional.

*A version of this article appears in print in the 28 June 2018 edition of Al-Ahram Weekly with headline: The history of privatisation  

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