Egypt, new dimensions, new frontiers

H.E. Dr. Mokhtar Khattab, Minister of Public Business Sector

Interview with:

H. E. Dr. Mokhtar Abd El-Moneim Khattab
Minister of Public Business Sector

February 23rd , 2000

2, Latin America street, Garden City, CAIRO-EGYPT
Tel: (202) 355 92 59
        (202) 355 92 87/8
Fax: (202) 355 92 33
Since the outbreak of the privatization program, endorsed by the IMF who ranked Egypt among the four best performing countries in the world regarding privatization in 1997, Egypt has already achieved major goals. How successful has this program proved to be in terms of the newly privatized companies' performance?

The critical success factors in our experience are:

  • First, high political commitment for reform both from the President and the different policy making counselors (the cabinet, Peoples Assembly, the ruling political party).

  • Second, an adequate legal framework.

  • Third, the acceptance of the public opinion. This was not the case in the late 80's. We should not forget that due to a long period of state intervention in every aspect of life: economy, society.. it was particularly problematic to change the old mentality in Egypt. Nevertheless, since the beginning of our reform program in 1991, increasingly favorable public opinion has been developed. When people feel that they live in better conditions, they become supportive.

  • Fourth, social care. In this respect, we provided our people working for public companies with a solution that privatization will not yield to a decrease in the welfare of the workers and employees. No one of them will be hurt. Moreover, privatization will lead to better welfare conditions.

  • The performance of our companies has improved. We surveyed some of the companies that had been already privatized two or three years ago. We found good results in 85 to 90 percent of the cases. However, we expect that the performance will improve in the medium and long run. In economics, in general, we distinguish between the long and short run according to the time it takes to change fixed assets. In the short run investors cannot change the structure of the project. In the medium to long run, 2 to 3 years, you can find a change in the volume and efficiency of the project. Therefore, we expect better success indicators over the coming five years.

    One of the obstacles that privatization programs are confronted with is labour opposition. You just mentioned that in Egypt you managed to solve this problem. What are the concrete measures the Egyptian government has adopted to address this issue?

    We have a very generous system to create loyalty among workers. The application of early retirement regime was always voluntary. The worker has the choice of staying at home receiving a salary or leaving the work and getting compensation and a monthly pension from the social security. On the other hand, when we sell a company through the stock market or to a strategic investor we offer workers 10 percent of the shares with a 20 percent discount of the market price, to be paid from their dividends in 8 to 10 annual installments. They do not pay cash. Furthermore, we happen to sell the whole company to workers provided it is small and not very sophisticated. If the labor is the main economic factor, we sell it to the workers.

    A large number of companies that were privatized have benefited from foreign investment. What has been the contribution of foreign investors to the improvement of the companies' performance?

    We encourage foreign direct investment because as a developing country, we need new technology and management in order to be able to cope with globalization and the competition it brings about. We need a close business linkage with the outside world, the multinational firms. We encourage foreigners to buy through the privatization program or to establish green-field projects. To this purpose, we offer investors packages of incentives. We encourage joint ventures between our producers and multinationals. It is the most efficient way to trade in the international markets and to acquire new technology. We are glad with some cases of privatization in which foreigners (including multinationals) have participated in.

    In many cases, the shareholding of the companies which have been privatized was diluted among numerous small investors; in some other cases you looked for an anchor investor. What is going to be the government's strategy in this new phase of the program?

    From the beginning, we were aware of this issue. This is in fact a problem of management rather than ownership. It is related though. When we were selling through the stock market, the shares of our companies were oversubscribed 3 to 5 times. We never sold 100% of the company through out this market. We left a managing portion of 35-45% to be sold to strategic investors besides the shares diluted among small investors. Our program is inspired in a French privatization program or experience, called noyaux dure. The objective was always to ensure a real private sector and the best management for the company. Therefore, in all cases we targeted a strategic investor, regardless we sold the company through the stock exchange or not.
    Some analysts say that time has come to switch from privatization to deregulation. Do you agree with this statement?

    This is a continuous process. The privatization and deregulation are not exclusive. Rather they compliment each other. A privatization act is also a step of deregulation. Therefore I agree with you that more deregulation measures will be needed. We cannot privatize and keep the private sector (included the privatized projects) under heavy government regulations.

    Nearly half of the 300 companies the government originally identified as candidates for privatization have already been privatized. There are some experts who say that the companies that are to be privatized in this new phase are not going to be so easily sold. Others disagree, indicating that, in fact, the most difficult task is already over since the government started by privatizing those companies operating in a competitive market, leaving the utilities sector which is concerned with monopolies for the last phase. What is your opinion?

    Of course, the loosing companies are always more difficult to be privatized than the profitable ones, like in any other commodity. However, our capacity to deal with difficult companies is increasing and therefore we can move faster than we initially thought. We are using new sale and promotional methods and our experience and reputation are attracting investments. For example, in the last 3 or 4 months we have sold 16 to 18 companies.

    What are the specific measures your ministry is adopting in order to make those non-profitable companies more attractive to investors?

    We are introducing structural reforms in those companies. We never sell distressed companies or those with serious financial problems. First, we reform and rather than introducing new hardware and new machinery we bring software. Software means systems, whether in the areas of production, maintenance, quality control, marketing or training. These systems are not very expensive and they deal with human resources.

    Egypt has remained relatively unaffected by the Asian crisis partially due to the fact that the country was not yet openly integrated in the global economy. Now that the country is moving faster towards globalization, what are the main challenges it has to face and what are the aspects of globalization that you may try to avoid?

    Our economy is integrated to some extent and degree. But we were affected less than this level of integration would suggest. Why? Because this is a question of quality rather than quantity. No matter how deeply integrated you are, what you need is to be well integrated. And in this respect, our integration, particularly in the financial aspect, was not based on hot money and short-term capital influx. Our integration was and is still fundamentally based on long-term financial influx, whetler in terms of foreign direct investment, concessionary debt, or state-to-state debt. Had we relied at large on short-term debt, commercial debt, or hot money in our portfolio investment the country would have been severely hit by the financial crisis.

    What would you like your contribution to the development of Egypt to be, with a special mention to the companies for which you are responsible?

    I hope that within two to three years, all public companies will have improved considerably, particularly those in the textile and metallurgical sectors. I want to see the country evolving towards a free market economy. I hope that we will reduce unemployment to the minimum, that we will be able to reach a sustained 7% growth rate. I want to see my people, Egyptians, enjoying better standards of living. And, more in particular, for those who are abroad, many of them being very talented people, I believe it is our responsibility to create the optimal conditions for them to return, but for this to happen we have to strengthen our institutions: universities, science and technology institutes.

    Egypt is a country with strong macroeconomic fundamentals, a large and fast growing market, and a diversified economy. Can you name some other advantages that investors should take into account when considering to invest in Egypt?

    We have a large labor and an ambitious young population eager to be trained and willing to improve their standards of living. Egypt has also a strong market of 60 to 65 million people not yet saturated. The country has a unique location, being the crossroad between Middle East, Africa and Europe. We have excellent relations with the outside world. We have created a favorable business and investment climate and we continue to improve it.

    Therefore, I invite investors to come to Egypt, benefit from the business opportunities, facilities and tourist attractions and to experience our hospitality.

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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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