Some time this spring, Cairo will sell Banque du Caire to a foreign bank, generating a sizeable privatisation receipt for the government and providing a much-needed injection of new thinking into Egypt’s third-largest bank. Even though liquidity is dissipating worldwide, the sale of Banque du Caire will be one of the biggest privatisations in the country’s history.
Egypt’s political leaders need to privatise more such institutions to sustain the drive for economic liberalisation that began with the appointment of a new cabinet in 2004. The government has privatised large state enterprises including the Bank of Alexandria over the past few years, but the economy is still dominated by the state. Egypt’s civil service employs 5.6 million people and ministers need to transfer more of these jobs to the private sector before Egypt can shake off its reputation as a state-run economy.
The cabinet of Prime Minister Ahmed Nazif has successfully attracted the private sector to Egypt. Foreign direct investment (FDI) for the financial year ending in June 2007 was more than $11bn, a record for the country and an vast improvement on the $407m in foreign investment in the year ending June 2004.
In late 2004, President Hosni Mubarak appointed Nazif with a mandate to attract investment. Nazif’s cabinet is full of liberal-minded economic reformers. Finance Minister Youssef Boutros Ghali has supervised the general policy initiatives. Investment Minister Mahmoud Mohieldin has introduced the specific reforms that have attracted foreign investors, and the individual ministries have liberalised their sectors.
The Egyptian economy has responded directly to the increased level of FDI. Growth in gross domestic product (GDP) climbed from 4.5 per cent in 2004 to 6.8 per cent in 2005, the first year that FDI increased sharply. The economy grew by 7 per cent in 2007 and is forecast to grow by 6.8 per cent this year. Net investment reached $6.1bn in the year to the end of June 2006, followed by $11.1bn in new investment over the 12 months to the end of June 2007.
It is not surprising that investors have poured into Egypt. The country is a relatively liberal economically, compared with the Gulf Arab states and other countries of North Africa. Foreigners can buy shares on the Cairo & Alexandria Stock Exchanges. Better still, inward investors can own 100 per cent of the capital in their Egyptian subsidiaries. There is no requirement to partner with a local business.
In addition, the investment opportunities are spread throughout the economy, rather than being concentrated in one or two sectors, and Egypt’s telecoms market is the fastest-growing in the Arabic-speaking world.
In the Middle East, only Iran, which carries greater political risk for investors, is signing up mobile phone customers at a faster rate than Egypt. The number of people with mobile phones increased by 75 per cent in Egypt in 2007, and all three mobile operators added more than 3 million customers. Mobinil, which is owned by Egypt’s Orascom Telecom and France Telecom, added more than 5 million customers. Vodafone Egypt, which is jointly owned by the UK’s Vodafone and Telecom Egypt, added more than 4 million, growing its customer base by 42 per cent. A third operator, Etisalat from the UAE, launched in May 2007 and had signed up 3 million people by the end of December 2007.
Other foreign investors will be attracted by a new licence to build and operate a fixed-line network in the country. Bids are due by 19 June. Already, Etisalat, France Telecom and Orascom Telecom have purchased the book of rules for the auction. Three other companies – Alkan and Giza Systems, both local, and Atheeb from Saudi Arabia – have also bought the rulebook.
The fixed-line and mobile phone markets in Egypt lay dormant for years. Mobinil and Vodafone Egypt got their mobile phone licences in 1998, but only began to compete in earnest with each other in May 2006 – the month that the telecoms regulator announced the auction process for a third operator. As a result, Egypt’s telecoms sector needs competition and liberalisation.
The government is steadily creating new markets for foreign investors. If it can meet its own deadlines, Egypt will kickstart the Middle East’s largest programme of public-private partnership (PPP) deals later this year.
The country’s crumbling transport infrastructure, its schools and its hospitals will all be transformed by new private sector investment estimated by the Investment Ministry at more than $10bn over the next five years.
Private sector companies will be awarded build-operate-transfer contracts for tranches of construction work.
A special PPP unit in the Finance Ministry will soon award its first contract to build 354 new schools. Other school-building projects will follow, with contracts to build 2,200 schools expected over the next five years. Several companies have already prequalified for the project: Abu Dhabi Investment Company, the UK’s Babcock & Brown, Bouygues Batiment International from France, Kuwait’s Kharafi Group, the local Samcrete, Saudi Binladin Group and Saudi Oger. “We had Orascom prequalify for the project, but it is not going to bid after all,” says one civil servant who works for the unit.
The second PPP contract will be to build a wastewater plant with a capacity of 250,000 cubic metres a day. The International Finance Corporation, an arm of the World Bank, expects to complete due diligence on the deal by the end of April. Seven consortiums have already prequalified for the competition. “Probably 10 will be prequalified,” says the civil servant.
PPP appeals to Egypt’s cash-strapped government because the financing does not count towards government spending. Egypt has one of the largest budget deficits in the region. Mohieldin expects the deficit to reach 6.9 per cent of GDP by the end of the financial year in June. Ratings agency Standard & Poor’s is making the same forecast. “We are not going to allow the budget deficit to go above its current level,” says Mohieldin.
If the government is to keep its promise on the deficit, it has to continue using PPPs to finance its infrastructure spending.
Mohieldin is responsible for introducing PPPs to Egypt. He published a strategy paper on using PPPs to finance infrastructure spending in 2005. Mohieldin pushed for the creation of a dedicated unit at the Finance Ministry, which includes people from the Investment Ministry. It was eventually set up in June 2006. Mohieldin also supervised the introduction of a unified law covering PPPs in all sectors of the economy. Egypt already had laws that allow private companies to build roads. Mohieldin replaced these with the unified law.
PPP financing will spread across the economy in 2008. A massive irrigation project is planned in the West Nile Delta. The Health Ministry is working on deals to build four hospitals and two university teaching hospitals. Three more wastewater plants are also under consideration. Contracts to build roads, railways and ports are also expected.
Egypt’s costly subsidies on fuel and food present investors with another opportunity. No one expects Egypt to follow the recent example of Jordan in trying to scrap subsidies, but some reform is likely. Private equity business Citadel Capital – owned by Egyptians and backed by Gulf Arabs – has invested $8bn in Egyptian firms that it maintains will benefit from the slow reform of subsidies.
For example, Citadel bought a gas distribution business because it predicts the government will stop subsidising liquefied petroleum gas and start subsidising natural gas, says Marwan al-Araby, one of its partners.
“The traditional source of heating in homes is cooking cylinders,” says Al-Araby. “We should be switching from using liquefied petroleum gas to natural gas so that the liquefied petroleum gas can be used as feedstock for petrochemicals. They will try to move people away from liquefied petroleum gas. The government has not invested in the infrastructure. This makes it a good business.”
The private equity firm is building a refinery to produce diesel because most vehicles in Egypt use diesel rather than petrol. “Diesel is the prime mover for public transportation,” says Al-Araby. “The country would come to a standstill if it did not have diesel. The government estimates the new refinery will provide $200m in savings.”
Investors are showing increasing trust in the Egyptian government. President Mubarak shows every sign of keeping the government in place so that foreigners will continue to invest in the country. Egypt has done so well, in part, because investors believe liberalisation will continue. Key ministers, such as Boutros Ghali and Mohieldin, need to make sure it does.
Foreign direct investment in Eqypt has multiplied by 27 times between 2004 and 2007.