Egypt, new dimensions, new frontiers

Eng. Salah Diab, Chief Executive Officer

Egypt -

Interview with:

Eng. Salah Diab,
Chief Executive Officer

Cairo, May 14th, 2000
I understand that PICO is 25 years old this year. Could you provide us with a brief overview of PICO and the companies under its umbrella?

PICO is one of the most diversified companies in Egypt, as well as being a leader in most of its activities. In the field of Petroleum, we are in the service business and work very closely with Halliburton, who are our strategic partners in Egypt, as well as with other big, multinational companies. We are also an oil producer and were the first and so far the only Egyptian independent producing oil. Our concessions are mainly small, and therefore not terribly interesting to the majors such as Total, Shell, British Gas and companies of the sort. Collectively we are acknowledging the production of something in the region of 20,000 BPD and have plans to expand and double this volume in about two years. Also, we have plans to increase our productivity to double our existing output, probably in two years time, too.

We also have a chain of pastry shops called "La Poire", which currently has 22 outlet stores, and we hope to have 40 outlets by the end of 2001. Today in Egypt, the younger generation makes up about 60% of the population, and we have noticed that we are not addressing the needs of the younger generations. The plan is to plug in and establish something in the fashion of "Starbucks", serving coffee and other products to accommodate the rapid pace of Life nowadays.

Another part of our activities is the agriculture business, in which we are market leader. We apply the latest technology to make use of niche markets in Europe and elsewhere. We have contributed to technology transfer in this segment, particularly in cultivation of desert land.

Another component is PICO Investments. This is itself very diversified. We seek participation in strategic investments and unique projects, which serve our long-term goals and bring synergy gains in many cases.

All of this is basically a bird's eye view of what we actually do.

In regards to your PICO Investments, I understand that PICO also owns shares in EBB (Egyptian British Bank)?

Yes, the family owns almost 20% of shares and is on the board. As founding members of EBB, we have been with the bank since its inception. It has produced a remarkable profit return in his annual profits, managing to increase them by 70% annually. HSBC is very happy with the performance of the bank and they are providing it with a lot of assistance, technical and otherwise, as well as having a very challenging plan to grow with the bank.

What would you say are some important financial figures for PICO, like turnover and net profit for the last fiscal year?

Our turnover for the entire group is well over a billion Egyptian pounds per annum. This figure is not indicative - it is the bottom line that is important.

What your reader should know is the difference between Egyptian entrepreneurs and businesses compared with those of Middle East or the Gulf region. In Egypt, any type of private business or service began after 1975, since before this everything was state-owned. Therefore no privately held companies can be older than 25 years. When you start private enterprise here, you usually work with very relaxed margins, as the there is very little competition due the newness of the business. Three or four years ago everybody started feeling the squeeze. Competition is now the name of the game and with the new WTO regulations you have to compete not only locally but against exported goods as well. So most of the existing Egyptian institutions are only now reaching puberty. I've been in business 25 years and I have only reached this stage two or three years ago, so effectively I'm only three years old. If you compare us with Saudi companies for example, which have been in business for the past, say fifty years, they reached this stage 28 years ago. This is where you find the mega contractors, the mega car dealers and the mega everything in the Gulf region versus Egyptians who are still getting their game together.

We have also seen in Egypt strong growth from family companies going public, going international and exporting their product...

I am generally speaking about business in Egypt. Everyone now is getting their game together and re-thinking and re-inventing their businesses. Human resources play a vital role in this process. Five years ago I would have dismissed this issue as a luxury. Another important point is IT. Five years ago I would see it as something that was simply in fashion. Now it is "to be or not to be". These are the concerns of Egyptian companies that wish to remain in existence.

In the agricultural sector PICO is a leader. You have acquired new technology such as pre-cooling, which allows exports to arrive at their destinations ripe. Do you feel that this is going to increase your export capacity even more?

Yes, we are constantly acquiring new technology and investing heavily in R&D. For instance we are looking at new ways of transportation that will cut down our costs considerably and make us more competitive. We are looking at ways to re-define our handling system, so as to minimize double handling. These new techniques have been learnt by visiting locations such as South America for bananas and the Canary Islands for strawberries. We have acquired this knowledge from neighbouring countries such as Israel, and taken that information to a point where we are now surpassing it.

In the oil business we are looking at a serious investment in the vicinity of $200 million for a gas recycling project at one of our concessions called HOPE. This will have an LNG output as well. Without focusing on new technologies and R&D, we would not be able to develop our business and grow so rapidly wether in agriculture or in the oil sector.

What is your export strategy? I understand that your exports have dramatically increased over the past few years, like export of strawberries, for instance, from 50 tons to over 10,000 tons.

True. We focus on exports since it creates a balance between Foreign Currency income and Costs in local currency. Basically, we are hedged against currency fluctuations by the diversified nature of Pico. We have three sources of dollar income - oil field services, oil production and exports of agricultural goods. This creates a stable organization against currency devaluation or anything of the sort. In actual fact, if currency devaluation occurs it is better for exporters, so we are not nervous. We are not saying that devaluation is inevitable but it is a strong possibility. The Egyptian pound cannot remain linked to the dollar forever. Most of our exports are to Europe, and while the French franc or the Deutchmark sway against the dollar, our Egyptian pound remained stable against the Dollar for almost 9 years. This is absurd! The internal and external value of the Egyptian pound has changed in these 9 years; this has to be reflected by the exchange rates. This is a point of exclamation.

As I've said, a part of the natural life cycle of business is: start-up, growth, maturity and eventually decline. Anything is bound to decline if you do not attend to it. Previously, our group's companies were classified as independent activities; they started very small to the point that they were on the same balance sheet. They then grew in a way so as to become independent businesses that were financially tied to the same group or the corporation. As I said, we have reached a point where we have to re-invent ourselves and discovered that we would like to abolish the corporate law in our group of companies. We want stand-alone companies, totally independent and with no money infusion between the companies.

When do expect this to happen, and when do expect this new structure to be adopted?

By the first of October this year. What will be central is the auditing - a very strong central auditing unit. The auditing disciplines and procedures will have to be ruthless. Apart from this central unit, we want stand-alone operations and companies. The idea of sharing services must be limited.

One of the sectors you touched on is the engineering sector. What are the major opportunities in the engineering arena that you are looking to develop? I understand that you are heavily involved in the construction and railway industry?

What the railway authority wants to spin-off as BOOT services, we are ready to take. This is what we address. Everything goes in tandem with the behavior of the other big companies. The Railway Authority is planning to sub-contract the maintenance of the locomotives and their fleet, and we are ready to participate in this project through our cooperation with the General Motors Electromotive Division.
You have a business development division within the engineering sector. What is the purpose of this division, and how is it developing contracts and different business opportunities for the engineering sector of the company?

It acts as an integrated line of services and sales, as not every line is blessed with the comprehensiveness of Caterpillar for example. Caterpillar produces everything for the construction business from bulldozers to forklifts, generators and everything. The challenge is that we have to develop a spectrum of activities under our roof from different vendors and different countries. This is where we need our business development. A Caterpillar dealer has everything the industry requires - on the other hand we need to source all of our requirements from different suppliers. Only then do you have a package comparable to other people. When you come to PICO with a requirement, we should be able to fulfill all your needs in the construction business.

In light of the growth within the construction industry, how are you looking to develop business operations in construction?

There was a liquidity problem, with the big Contractors, which the government is now addressing because of delays in payment. Then there were large projects, which were called Harmonic projects and they proved not to be terribly Phaoronic. I do not know who defines what is Pharonic, but these projects should be discussed in a democratic forum of some kind, rather than someone investing in a project in the middle of nowhere and calling it Phaoronic.

Things of this magnitude must be discussed. The High Dam for example, was properly discussed, there was controversy of course, but at least it was discussed. If you look at the investments in Toshka or Al Waienat, this was not the case. I do not deny the viability of these projects, what I do question is their priority. I think that there are other projects of greater urgency.

Looking at investment opportunities, what is the strategy of the financial arm of PICO? Is it looking to invest in new business opportunities, such as upcoming privatisations?

We are looking at IT projects, not because they are in fashion at the moment, but because there is a lot of potential in this field. We look for its hidden value. We are currently working on a project with an immense educational and cultural value. What attracts us to IT projects is the educational dimension. The revolution that happened in the communication technologies recently is a tool not an end itself. We should be able to utilize this technology for eductional purposes and elminate the language barriers between different cultures. I think the best investment is always the investment in people.

Many companies, such as banks, are forming consortiums in order to win privatisation bids. Is this something that your company is looking to do?

No, on the banking front, we are satisfied by moving through the banking enterprise we are presently involved in. It is not a gold rush, and we are not just grabbing blindly at anything that is being privatised. We are concentrating on our own businesses, and making them competitive. Moreover, we do not want to get into the financial quicksand of excessive borrowing.

You mentioned earlier the increasing need to be competitive. What characteristics of PICO give the group its competitive edge?

Our financial structure, our investment policy, our dedication to R&D and new technologies, constitute our competitive edge.

As we have income in local currency, some of which is seasonal, and, some of which comes in instalments from the machinery division. In the pastry business the cycle is one day. In the oil business the income is in dollars. And all this makes for a good financial mix.

Our Investment Policy tends to search for hidden values, for the roads not taken "and that has made all the difference" as Robert Frost once wrote.

Applying new technologies allows us to challenge given notions, to modify the context in which we exist. Desert cultivation is one proof of our ability to change the context.

We have to be six months ahead of the competition, since our competitors are always quick to follow our lead. PICO has been the first in many new developments. We were the first company to become involved in desert agriculture, and we imported all the strawberry varieties that are exported today, and we were the first to export strawberry mother plantations as well as being the leading developer of banana cultivation in the Egyptian desert.

How will the PICO 2100 Strategy help develop your competitive edge?

We think our new structure will enable us to expand and manifest our investment policy efficiently and effectively. The idea of decentralization is to allow every business to develop itself further without having to wait in a queue for attention. We are trying to extend our various business cycles in order to get better returns.

In international business, there is a saying that contacts equal contracts. What is PICO doing to increase its contacts?

We believe that sustainable contacts are a natural result of good reputation. We do not have a specific plan to increase the number of our contacts. We are aware of the value of contacts, but we feel that we are safer without a formal structure for this. Contacts, which develop on their own accord and because of our reputation, are much more sustainable and reflect the loyalty of our clients. That's an intangible asset of our business.

Could you tell us about your strategy to strengthen your exports to the EU, and diversify your exports?

We do not just export to the EU, we export to the Far East and to Arab countries as well. These are very interesting markets, and although they are not as rewarding as Europe, they are important large scale outlets.

Are you going after the African and Asian markets as well?

In reality we are not really looking to the African markets for exports. They have good climates for growing their own produce, and they lack the affluence to import the deluxe goods that we produce. If this context changes, we are very flexible to approach African markets.

Are there certain areas in your company where there is room for strategic investment on the part of foreign companies?

Yes, we are always open to advances from foreign companies who are interested in investing. Wherever you go, you always need an enlightened and intelligent local partner. The classic example of this is the HSBC Bank; their local partnership has allowed them to outperform the other banks. A good blend between foreign and Egyptian resources is very important for success. The GM story, the truck assembly plant, is another great example of this. The blend between Egyptian and Foreign investors is just right as well.

What are the biggest challenges that you have faced, and how have you overcome these?

The challenges arise when the parameters of the game change, and you suddenly find yourself forced to adapt. If we apply the laws of nature to our business, we find that the species that will endure changing contexts, were not particularly the strongest or the most intelligent, but the most adaptable. Recently the banking rules for letters of credit changed, and we needed to make fully paid letters of credit for imports, as opposed to the 10% that sufficed previously. You have to be flexible and modify your plans, and this is what we do. We have lost a few opportunities, and it is not always a win-win situation, but we are confident about the future and our ability to adapt and lead

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© World INvestment NEws, 2000.
This is the electronic edition of the special country report on Egypt published in Forbes Global Magazine.
August 7th 2000 Issue.
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