Search for justice begins in Egypt

17 April 2011

Investigations into alleged corruption by Mubarak’s government is having a severe impact on some of Egypt’s largest industrial and construction firms

Key fact

Shares in Palm Hills fell 59 per cent after news that it was under investigation for land deals

Source: MEED

On 13 April, Egypt’s prosecutor general ordered the detention of former president Hosni Mubarak and his sons, Alaa and Gamal. The news came as a victory for the demonstrators that had remained on the streets for several more weeks following the uprising, calling for the former president and senior members of his administration to be put on trial.

Among the protesters’ demands are that Mubarak and his associates be called to account for alleged corruption in the awarding of contracts and the alleged misappropriation of state funds.

Some action has already being taken. European Union members decided on 21 March to freeze the assets of the former president and leading members of his regime. A committee has been set up to attempt to recover the frozen assets.

Lengthy investigation

The value of the assets is unknown and is unlikely to be disclosed during what is expected to be a lengthy investigation. Media reports that the personal fortune of Mubarak could amount to as much as $70bn have been largely dismissed by economists.

But investigations into alleged corruption in the award of contracts by Mubarak’s government could have economic repercussions that go far beyond the return of frozen assets. The contracts concerned involve some of the largest listed companies in the country, particularly in the construction and industrial sectors.

Investors are likely to be cautious, particularly in those sectors … seen to be vulnerable to investigations

Ahmed Ezz, the chairman of Ezz Steel, was arrested on 17 February and is under investigation for the alleged squandering of public funds. Ezz, a senior figure in Mubarak’s government, is charged with taking control of state-owned Al-Dekheila Steel and buying products from it at below market value.

On 6 April, the funds of former prime minister Atef Obeid were seized along with those of two other senior officials for their involvement in the sale of state-owned Assiut Cement to Mexico’s Cemex, allegedly for below the market price. The same day, former housing minister Ibrahim Soliman was arrested for allegedly selling land to Sodic, Egypt’s third-largest real-estate developer, at less than the market value. Magdi Rasekh, Sodic’s non-executive chairman, was also detained.

A second former housing minister, Ahmed el-Maghrabi is also under investigation, over the sale of land in the 6th October City of Cairo to Palm Hills, the country’s second-largest real-estate developer.

A judicial panel ruled in March the land was sold at below the market price and that the deal should be cancelled. Yasseem Mansour, Palm Hill’s chairman and chief executive, is also facing trial over the deal.

The companies involved have been at pains to stress that their performance will not be affected by the investigations. Ezz Steel has stated that the investigations into its chairman will not impact operations at the company.

Palm Hills says the land deals under investigation represent only 7.5 per cent of the company’s land bank, while Sodic has stressed that Rasekh’s share in the firm is just 0.0017 per cent of its total value.

But there is no doubt that the combination of political instability and corruption investigations has had a severe impact on the firms. The share price of all three leading real-estate developers dropped when Cairo’s stock market reopened on 23 March after a seven-week hiatus. Shares in Palm Hills fell 59 per cent between 1 January and 7 April, compared with a market average of 24 per cent.

Palm Hills is seeking to return land from another deal in 6th October City to the government in order to generate cashflow and reduce its liabilities. The company has also stated that it expects few, if any new contracts, to be agreed in the first half of 2011, and that it plans to halve its construction budget.

Egypt elections awaited

The long-term economic strategy of the Egyptian government will remain unclear until after elections scheduled for September, which will substitute the current transitional administration with a new parliament and executive.

Investors are concerned that if the elections return a substantial number of seats for the Muslim Brotherhood, as expected, the business-friendly policies that were the hallmark of the Mubarak government since 2003 will be replaced with more populist measures. These could include the nationalisation of companies in which associates of Mubarak played a prominent role, such as Ezz Steel.

But nationalisation is just one of several options available to the new government. The purchase of a strategic stake in the company by private investors would be an equally viable solution. While any new government will want to ensure there is a greater trickle down of Egypt’s income to the poorer segments of society, they are unlikely to completely overhaul an economic model that provided the country with consistently high economic growth for most of the past decade.

In the interim, however, investors are likely to be cautious, particularly in those sectors of the economy that are seen to be vulnerable to investigations by the state prosecutor.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications