Saving Egypt's public sector

Ahmed El-Sayed Al-Naggar
Sunday 6 Mar 2016

The Egyptian public sector has historically played an important role in the economy and society. It should be reformed, rather than being sold off to the private sector

Egypt seeks to move the economic growth process forward with every means possible, whether through local or Arab or foreign investment. This growth is the way to raise standards of life, create jobs and enable people to earn their living by themselves with dignity. If economic growth is accompanied with social justice it is easy to consolidate political and security stability, which is based on social consent not on an authoritarian grip.

The state’s institutions lay the legal and procedural framework and the economic and investment environment necessary for growth. It is supposed that this environment will attract the private sector, both on the local and foreign level, as well as the public sector. However, the state is directly responsible for the public sector’s status, capacities to create income, and jobs and for reforming it, if needed.

This sector is an important lever for economic development and represents the state’s capacity to play the role of the producer who drives the market and product prices towards balance and fairness, and in a consistent way linked to real production costs, away from greedy monopolistic practices.

Moreover, its existence provides the economy the opportunity to walk on both legs (namely; the public sector and local and foreign private sector), instead of walking on one leg.

The Egyptian public sector has played a historic role in leading economic development, putting Egypt at the top of the developing countries in its economic indicators in 1965, when Gross Domestic Product of Egypt was $5.1 billion in comparison to $3 billion in South Korea, around $4.4 billion in Thailand, about $3.8 billion in Indonesia and about $2.3 billion in Saudi Arabia in 1965. This means that all these countries came behind Egypt regarding GDP, although the public sector was predominant in the Egyptian economy at the time.

The public sector confronts the 1967 defeat and finances the war

The Egyptian public sector was the gigantic machine that enabled Egypt to rebuild its military infrastructure, along with arming its army, after the 1967 defeat. The people and official cohesion and mobilisation, and the coalescence between the state and the people in preparation for the war for regaining the land and dignity, formed an enormous motivation for the public sector to play a commendable role in financing the War of Attrition and in preparation for the big battle of October 1973. The Egyptian economy suffered monumental losses in the 1967 War.

Egypt lost 80 percent of its military equipment in that war. It also lost Sinai's resources, including oil, coal and touristic potentialities, after it fell under Zionist occupation. Moreover, it lost Suez Canal revenues, which reached $95.3 million in 1966 — equivalent to $219.2 million nowadays. Egypt also sustained huge losses in the form of the Suez Canal’s premises and equipment, estimated at $2.3 billion. Several industrial and residential buildings were sabotaged and destroyed partially or totally. Furthermore, Egypt lost a significant part of its touristic revenues in general, as well as its human victims.

The Egyptian prime minister estimated those accumulated losses in the mid-1970s to be about EGP 11 billion, equivalent to about $25 billion at the time where the pound exchange rate to the dollar was 2.3 dollars in the period between 1967 War and October 1973 War.

Despite the enormity of the economic losses that Egypt sustained due to the Zionist aggression in 1967, the Egyptian public sector enabled Egypt to stand steadfast, rebuild its military capabilities, meet basic social needs and finance the War of Attrition and after that the October War.

But this sector, in general, and some of its units in particular, was subjected to a tragic situation several years ago. This happened precisely when the state stopped organised planning for constructing new public industrial investments, almost four decades ago.

The main crisis of the public sector is represented in the absence of necessary financing for upgrading, and sometimes even for purchasing essential raw materials needed for work, the rigidity of those administering the public sector’s assets and the public business sector. In addition, some public sector units were afflicted for long periods with leaders characterised with limited efficiency and sometimes corruption, among those promoted for loyalty and not expertise.  

Wasting the public sector through privatisation

The second half of the 1970s heralded the beginning of deterioration in the Egyptian public sector. Since then, industrial development strategy was absent. The state stopped developing and upgrading its public sector, save some exceptions.

After this, an organised destruction process for that sector started. This took the form of deliberately mismanaging some of its components so as to turn them into losing units then selling them to local, Arab and foreign investors in deals most of which witnessed horrendous wastage of public money and unprecedented levels of corruption. The Egyptian judiciary decided the return some of those companies to the state in light of the corruption that tarnished these privatisation deals.

I have written many times about corruption in privatisation deals since a decade and a half until now, whether in the Strategic Economic Approaches Report published by Al-Ahram Centre for Political and Strategic Studies, in strategic books and journals, or in the pages of Al-Ahram newspaper. He who wishes to go back to the details of corruption in privatisation deals can return to previous articles or the aforementioned report. 

When the idea of privatisation was raised in its early beginnings in Egypt, the objective was, according to what was reported, to sell the losing public companies at the time, for losses indicate mismanagement. Consequently, selling to the private sector, always seeking the biggest amount of profit, can transform them into profitable companies.

It was said that privatisation was the entry point for widening the ownership base and making a larger number of citizens participate in the ownership of companies owned by the public sector. This was to taken as something humorous rather than serious because the widest ownership base ever is the public sector’s ownership, which is owned by the entire population. The idea of selling those companies to foreigners was not raised.

Years passed before turning the idea into reality. When the idea began to be applied, the best and most profitable companies and hotels were offered for sale and what was mentioned earlier, concerning selling losing companies, was forgotten. This was because the objective was persuading citizens of the idea.

Privatisation advocates inside and outside Egypt exploited a favourable world climate after the privatisation wave in Britain, the US, and some other Western countries, the disintegration of the former Soviet Union and the collapse of its old system.

In brief, Egypt suffered during the application of the privatisation programme from extortion, especially that this extortion was made through creditor countries to Egypt and through the International Monetary Fund, which in its most important role became an agent of creditor countries in the face of debtor countries.

The privatisation of the Egyptian public sector constituted a main demand of the IMF and the creditor countries — a precondition for Egypt to reschedule its debt and drop parts of it.

All these circumstances contributed to the prevalence of inconsistent ideological logic whenever this issue was raised. Sometimes the matter seemed as if the public sector was a sin or a nightmare that should be removed in order to realise economic take-off. This was stated although it developed and its role grew in advanced industrial capitalist countries as a mechanism to address the Great Depression in the 1930s, when the state intervened in order to regain balance of the economy and to raise levels of employment through public expenditure.

The public sector’s role grew in those countries after World War II when it became necessary that the state intervene in order to rebuild the economy devastated by war and to reach breakthroughs in some vital fields of the economy and national security.

In most cases in developing countries, the public sector was established due to the private sector’s inability to execute projects necessary for realising economic progress, bridging the backwardness gap vis-a-vis advanced economies and laying the foundations for a strong economy able to interact with the international economy on a firm basis.

Consequently, this public sector has undertaken and is playing an important role, especially in developing economies, and it can be reformed and corruption within it prevented and combated if present.

This can be achieved if there is a democratic system that permits rotation of political power, on the one hand, and also ensures that the chief executive officer in any public company or public authority does not stay in his position more than five years, as a mechanism to prevent rigidity and block the formation of corrupt cliques. 

Privatisation is not economic liberalisation because nobody can claim that the British economy before Thatcher, who led the privatisation process, or the US economy before Reagan, who launched the privatisation process, were socialist economies or were based on central planning, because simply they were the most liberalised economies in the world in the sense of providing total freedom to the private sector to work in all fields along with liberalising external economic relations to a high degree.

The truth is that embracing the policy of liberalisation in the advanced industrial countries was not a transformation towards liberalising those economies, because they were liberal early on. However, it was a transformation towards marginalising the state’s direct economic role for the sake of maximising the hegemony of the private sector over the economy. This after it proved its ability over long years to realise the economic objectives of the state internally and externally, and maximise economic power as a main constituent of the state’s comprehensive power, as well as being committed to public burdens represented basically in paying taxes.

In addition, the gigantic volumes of oil surpluses and Asian trade surpluses were directed towards money markets and real estate sectors in the West, and especially the British and American ones. This led to great disturbances in money markets and the rising of real estate bubbles. Thus, the state decided to restrict unbridled money with fixed assets through the privatisation programme.

However, it is necessary to point out that while the state’s direct economic role, or its role as a producer of commodities and services, was marginalised in the advanced industrial capitalist countries, the state preserved and even increased its indirect role in the economy through public expenditure as well as formulating public economic policies.

The state’s public expenditure percentage within the GDP in 2012 reached around 47 percent in France, 44.9 percent in Belgium, 41.9 percent in the Netherlands, 41.8 percent in Britain, 40.7 percent in Italy and 54.6 percent in Greece. The percentage reached 30.5 percent in Egypt in the same year, according to the World Bank’s World Development Indicators Report for 2015.

As for Egypt, there was no single reason for privatising the public sector and its best profitable companies and hotels. Egypt was an importer of capital services, not a country having money surpluses or its banks and markets enjoying the flow of huge volumes of money, as was the case in Britain.

Privatisation processes block the way to building new investments, because simply they lead to directing the money aimed at building these new investments to purchasing actually existing and productive assets. Hence, there is no addition of any productive asset, just monetary flows for the government according to the amount and value it has sold of public assets.

Given that the state in Egypt did not have a unified stand towards the idea of selling public assets in the form of companies, hotels and lands at the time of selling civilian public sector, the army’s economic sector, which produces military and civilian commodities, witnessed rapid growth. Thus, a significant role for the state in the economy remained, albeit of a military character.

This sector works according to different mechanisms and enjoys special privileges, particularly in the fields of employment and taxes in a way that public and private companies don’t enjoy, which compete with it in the civilian economy.

An independent ministry and essential reform of the public sector

More than a decade ago, the public sector became an orphan when it came under the control of the Ministry of Investment. Since then, the ministry took charge of privatising it, while the idea of reforming it was discarded. Even when it was reported that there are ongoing reform operations, it was actually unfair selling operations of some of the best pieces of land that were owned by some companies to the benefit of creditor banks.

Now the whole matter seems as a nightmare, for several big public sector companies are suffering from losses and the state is obliged to spend huge sums annually in order to provide extra incomes for those companies’ personnel in the form of incentives helping them to face life's demands.

This bleeding will continue with the state's social responsibility substituted for the logic of “putting out fires”. However, it does not favour the public sector’s real reform, or building and consolidating the culture of self-reliance.

As it was mentioned at the beginning of the article, the dilemma that confronts public sector companies, and even national newspapers and their printers, is the absence of necessary finance for upgrading machines and equipment in order to raise productivity levels and capital, along with the absence of necessary finance for purchasing raw materials and intermediate goods.

Consequently, utmost priority must be given to pump big sums of money into public sector companies in order to upgrade machines and provide raw materials. If this is realised, these companies can operate at maximum capacity and higher productivity levels. This performance will enable it to stop losses and realise profits, which can finance the incomes of public sector personnel and leave surpluses to be directed to the state’s general budget, helping accumulate financial reserves. Reform must be accompanied with elevating the value of work and committing personnel to work time and its quality in a way that doesn’t permit any form of manipulation to waste working hours.

Moreover, continuous training in order to enhance efficiency will be significant in this context. Furthermore, terminating disguised unemployment is to be done gradually, via stopping any appointments until reaching the needed numbers for actual employment, based on rules of excellence and efficiency, which are matters of high importance in reforming the public sector.

Given that the Open Door culture and attracting Arab and foreign investment are linked historically with neglecting the public sector, or looking down upon it, maybe it will be more appropriate to return to its former independence the Ministry of Public Business. This ministry should be responsible for taking care of, reforming, and developing state-owned companies and turning them into projects capable of meeting the demands of their personnel and also capable of realising profits, leading to accumulating reserves and financing, directing surpluses to the state.

Whenever discussion about conducting essential reform of the public sector is started, the first question that jumps to the fore is how to make the necessary money for financing this reform available?

The truth is that the state can do this within its public expenditure, especially after the drop in oil prices has taken care of lowering energy subsidies enormously, where oil prices plunged currently to less than a quarter of the levels in the summer of 2014. Public companies’ assets should be treated efficiently and flexibly in a way that enables them to finance this reform in most cases.

For instance, Tanta Linen Company, which is established on 83 feddans in the area of Mit Hebeish in Tanta about 50 kilometres from Cairo-Alexandria Agricultural Road, can exploit about 16 feddans (i.e., 67,200 square metres) in real estate activities, commodity fairs and entertainment areas. Thus, it will garner huge revenues, some of which can be used in developing and upgrading machines and factories in an inspiring way. It can even move the factories to a new industrial city (let it be Sadat City) and build residences and institutions providing educational and health services to workers who will move to such a city. It can evacuate the old factories totally and exploit their vast areas in residential, commercial and administrative projects, the revenues to be used in financing the upgrading process, providing raw materials, moving factories and keeping strategic financial reserves that can be used as a banking investment until needed in financing new expansions or new productive investments.

This is the case in many companies. In all cases, the situation remaining as it is, and the repetition of workers’ tensions due to the companies’ mediocre productivity, losses and repeated need for state subsidies, is totally unacceptable. This matter should be decided in a scientific, economic and social way all at once. This should be done in order to preserve companies, upgrading them until they become a tributary for growth, creating jobs, increasing exports and become a weighty cog in the wheel of economic revival, instead of being a heavy burden at the current time.

The writer is chairman of the board of Al-Ahram Establishment.

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