2021 Yearender: More room for the private sector

Sherine Abdel-Razek , Saturday 25 Dec 2021

Bloomberg and Al-Ahly Pharos Research

The last two months of the year witnessed the government revisiting its privatisation programme with the initial public offerings (IPOs) of two state-owned companies: E-finance for Digital and Financial Investments and Abu Qir Fertilisers, one of the largest local producers.

The two IPOs are to be followed by others that have been promised since 2018 but have been delayed by the emerging markets slowdown and the Covid-19 pandemic.

Hisham Tawfik, minister of public enterprises, said the offerings of stakes in four other state-owned companies would be completed during the first half of 2022.

The IPOs pipeline, according to official statements, includes the Banque du Caire, the Ghazl Al-Mahala Sporting Club, and some military-owned and operated companies. The offerings are among many steps taken throughout the year to give more room to the private sector in the economy.

After decades of the Eastern Company monopolising the market for cigarette production in Egypt, the Industrial Development Authority (IDA) is launching a call for tenders for licences to manufacture cigarettes.

The government earlier this year annulled a previous decision to put a 20 per cent ceiling on foreign investments in local schools, opening the door for more private inflows into the sector.

Also, The government earlier this year annulled a previous decision to put a 20 per cent ceiling on foreign investments in local schools, opening the door for more private inflows into the sector.

Despite the large size of the Egyptian private sector — it contributes about 72 per cent of GDP and absorbs about 78.4 per cent of employment — it is a sector that faces structural challenges that limit its ability to advance development.

The local private sector landscape lacks dynamism, with only three limited liability companies created annually on average for every 10,000 working-age persons, compared to an average of 20 in developing countries, according to a report by the European Bank for Reconstruction and Development (EBRD).

The EBRD’s study also noted that the sector is characterised by a comparatively low probability of growing and generating new jobs over time. Small and micro companies form the vast majority of private sector firms, reaching 97 per cent of the total number and providing nearly two-thirds of total paid jobs.

Furthermore, private sector firms are uncompetitive, with  only five per cent of Egyptian firms engaged in export activities. “Poor export performance is partially sustained by the tendency of firms to focus their activities locally given the large size of the domestic market,” it said.

 In addition, “the economy is characterised by a high level of protection through tariff and non-tariff barriers, and a lack of supporting structures to facilitate firms’ expansion to global markets — especially for small and medium-sized enterprises (SMEs), that are resource-constrained.” it added.

On 16 November, the cabinet issued a statement noting that based on a study conducted by its Information and Decision Support Centre (IDSC), the government is considering withdrawing gradually from certain sectors.

The study said that in order to empower the private sector, there was a need to identify the strategic sectors that the state should continue to have a foothold in, the industries it could withdraw from gradually giving a greater role to the private sector, and the ones it could totally exit.

“Our goal is to provide more room for the private sector to make a larger contribution to the implementation of many of the development and service projects that are being established at this stage,” the statement quoted Prime Minister Mustafa Madbouli as saying.

The cabinet said it would regularly review which state-owned enterprises it needs to keep in the government portfolio based on annual discussions with private businesses. There is also a plan to set up a body to supervise and manage companies that will remain in the state’s hands.

The government still owns large parts of the economy, a fact that has been much criticised by international financial institutions calling for more private investment both local and foreign.

International Monetary Fund (IMF) Mission Chief for Egypt Celine Allard told Reuters in June that the state retained a relatively significant role in the economy and sometimes state-owned enterprises had benefited from advantages.

“Our recommendation is to gradually reduce the role of the state in the economy in order to allow the private sector to unleash Egypt’s growth potential,” Allard said.

A World Bank study launched in early 2021 said state-owned enterprises often receive special tax exemptions and enjoy a regulatory environment that favours incumbents, causing private investors to shy away.

Foreign direct investment in Egypt for the fiscal year ending in June 2021 declined by 30 per cent year on year to $5.2 billion due to the pandemic. The level of foreign investments in the stock market is also worrying, with foreigners being net sellers since September 2020.

“The return of foreign investors needs a strong pipeline of IPOs, investor-focused programmes, and a strong regulatory framework,” noted a report by Al-Ahly Pharos, a local investment bank.  

Egypt has not attracted the strong private investment that would help reduce poverty and absorb an estimated 800,000 workers entering the labour force every year, according to the World Bank report.

Financial institutions and local observers believe that the state’s withdrawal from some aspects of the economy would end the perception that the state and military companies are crowding out private investment.

More importantly, a wider role for the private sector especially in infrastructure projects would help bridge the infrastructure gap in Egypt that the World Bank put at $230 billion over the coming 20 years.

Some $180 billion of the projected gap is in transport, while water infrastructure needs $45 billion in investment above current baseline projections.

Egyptian lawmakers in mid-November approved amendments to public-private partnership (PPP) regulations in Egypt that could open the door for the private sector to partner with the government in transport, energy, communications, and healthcare projects in a smoother way as compared to the previously used competitive bidding process.

The partnerships are to cover all phases of projects starting with designing, financing, and maintenance.

While the original PPP law was passed in 2010, there were some successful PPP projects in Egypt before that. Mobinil Egypt, for example, the country’s first mobile operator, now totally in private hands and known as Orange, was a PPP project.

National projects launched in 1996 like the Tahrir Garage, the Marsa Alam Airport, the Al-Alamain International Airport, the Sidi Krir power plant, the Fayoum-Aswan Highway, and the Khargah-Sharik Al-Ouynat Highway were all projects accomplished through partnerships between the state and private companies.

One of the most successful PPP projects in Egypt so far has been the $4.3 billion Egyptian Refining Company (ERC), which started operations last year and is capable of producing 4.7 million tons of refined oil products and derivatives per year.

But there are hurdles limiting private-sector growth, the World Bank said.

The presence of state-owned enterprises in almost every sector of the economy feeds a perception of widespread activity and even overstretch, and the multitude of laws under which they operate makes it difficult for investors to assess their weight in the economy, their market share, and whether they operate under the same conditions as private-sector firms, it said.

“The widespread presence of state-owned enterprises across the economy affects competition and distorts market outcomes,” the World Bank said.

It also underscores the poor performance of the commercial justice system, which increases investment risks and disproportionately affects smaller enterprises. The weak enforcement of contracts further compounds Egypt’s lack of a transparent, streamlined, and predictable regulatory environment, the World Bank said.  

Another important shortcoming, according to the report, is the lack of a clear separation between the state’s regulatory, policy, and operational bodies in certain markets, a fact which creates an inherent conflict of interest.

The report gave the example of the ICT sector, where the incumbent operator Telecom Egypt (TE), which holds a dominant market position, and the National Telecommunications Regulatory Authority (NTRA), the regulator, operate under the oversight of the Ministry of Communications and Information Technology, which is charged with setting policy for the whole sector.

“The state has to be a regulator, not an owner of economic activity.” Naguib Sawiris, a business mogul whose family owns businesses in telecom, tourism, and construction sectors, told AFP in an inerview in November.

“There’s still competition from the government, so foreign investors are a bit scared off. I myself don’t even bid when I see government firms (in the race) because it’s not a level-playing field.”

*A version of this article appears in print in the 23 December, 2021 edition of Al-Ahram Weekly.

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