JANUARY/FEBRUARY 1995, Pages 50, 111

Cairo Communique

Mubarak Slows Egypt's Privatization Drive

By James J. Napoli

Egypt was never anything but a reluctant bride for privatization of its economy, but even the faint celebratory ululations are beginning to trail off. The wedding guests are taking their cue from a decidedly unenthusiastic President Hosni Mubarak.

Mubarak, who has been plumping at every opportunity for quick international aid to get the autonomous Palestinian territories onto their feet, has at the same time been telling the International Monetary Fund and the World Bank to get off his back. He believes privatization and other aspects of economic restructuring, such as devaluation of the Egyptian pound, are going to have to slow down. His government is worried about the short-term repercussions, particularly the stimulus that rapid and possibly disruptive privatization could provide to radical Islamist groups.

Economists, however, are straining to see how the process could go much slower without coming to a stop. Under World Bank and IMF pressure, the government took its first feeble steps in 1990 to begin sale of its publicly owned enterprises, which the banks believed were a major—though certainly not the only—cause of Egypt's economic woes. Among its problems were excess demand for subsidized goods, serious inflation, balance-of-payments deficits, growing international indebtedness and foreign exchange shortages.

Governorates were allowed to sell off their own small businesses—about 1,700 of them. But their size and lack of political protection made them small potatoes. Only a few major enterprises, such as the Sheraton Cairo Hotel, Nasr Boilers, and Pepsi, have taken the plunge into privatization. This is despite government promises to sell off 315 companies producing about 30 percent of Egypt's economic output.

The bulk of the dominant state-owned enterprises, which are often uncompetitive and inefficient, remain in place, pressuring private capital to move abroad in search of more profitable and less regulated economic environments, according to a 1992 report put out by the U.S. Embassy.

Further, the Egyptian government has added to general mistrust about the seriousness of its privatization program by including the telecommunications industry on the out-of-bounds list for private investment, presumably because of concerns about national security.

One privatization specialist in Cairo observed, however, that exempting telecommunications from possible privatization endangers the entire process. Telecoms generate a lot of money, but they also use a lot as their owners try to keep up with rapid population growth and technological advances. Egypt already has one of the lowest saturation rates for telephones in the world with only three phones per 100 population—a population that is increasing by a million every nine months.

Privatization and other reforms can be destabilizing in the current political climate.

Most governments, he said, are not willing to sustain the rate of investment needed to keep their telecoms current, and they end up "killing the goose that laid the golden egg." The business is so technology-intensive that telecoms don't do well with the mediocre management and level of resources available to them as state-owned enterprises.

The specialist added that most countries have come to realize that they have to privatize their telecoms to compete in the global marketplace whether they want to or not. "They have no choice," he said. International investment firms also look to the sale of telecoms as an indicator of the commitment of government to the entire privatization process. Without it, most won't invest.

Local business leaders also are concerned that the old guard of state ownership—political leaders and managers still being weaned of Nasserism—are working behind the scenes to stall the process. That wouldn't be hard to do, considering the complexities involved in making a go of privatization.

Selling companies is only a part of it. Privatization also needs a flexible banking system, an active stock exchange and a supportive legal environment for success. Although the government has begun to improve all these areas of the market system, none is ready to handle a crush of private new, or newly privatized, companies. At the Cairo Stock Exchange, for example, computers are a relatively recent innovation; transactions take days to close and are still completed using paper certificates.

"The real overall constraint to Egypt's private sector is the lack of an appropriate business environment," said a recent World Bank study. While acknowledging "remarkable results" in the country's macro-economic reform programs, the study cites a series of constraints on the private sector, including lack of clear and open information on economic liberalization, breeding uncertainty among prospective investors; complex and restrictive labor laws; complex and prohibitive regulations on corporate approval and licensing; and generally inefficient and poor-caliber public institutions.

A Baksheesh-Driven Society

A factor that everyone quietly acknowledges but that few people publicly discuss is corruption, which is rampant in this baksheesh-driven society. Nearly two years ago, for example, a tentative effort to make an exception and privatize the Arab Republic of Egypt National Telecommunications Organization's (ARENTO's) cellular network was reportedly scotched amid talk about leaking tenders in the interests of top officials' sons.

More recently, The New York Times reported the capricious enforcement of government regulations to drive out of business ZAS airlines, a private competitor to the state-owned service, EgyptAir. Restrictions are also being imposed on other carriers to protect the national airline, which is on the not-for-sale list.

The ZAS case "highlights the lucrative concessions paid by government-owned industries to relatives of high officials, including the two sons of President Hosni Mubarak, and the lavish salaries paid the managers of these industries, although many are losing money," wrote Times reporter Chris Hedges.

From the government's point of view, privatization and other reforms being pushed by international banks in exchange for debt relief can be destabilizing in the current political climate.

Workers in state-owned industries, for instance, fear losing their jobs if their companies are sold into private hands on the reasonable premise that any job, no matter how poorly paid, is better than no job.

Egypt's labor situation already is volatile, with industrial unrest spreading through the Delta area. There was a bloody strike at Kafr Al-Dewar in October and, at this writing, there was growing fear of another strike over working conditions and pay in the giant clothes-manufacturing complex in Mahalla about 150 kilometers northeast of Cairo.

Government assurances that privatization would not mean massive unemployment mean little to most Egyptians, who have been bearing the brunt of deteriorating social and economic conditions over the past decade. Unemployment already is about 20 percent, and inflation has risen at a quick and steady pace. International bank pressures have resulted in higher prices for petroleum products, cigarettes, alcoholic beverages, telephone calls and railway tickets. The size of a loaf of subsidized baladi bread has shrunk.

All these are factors in improving the environment for extremist groups fomenting opposition to the government. That may account for the government's go-slow policy on privatization, though some would argue it's a policy that succeeds only in prolonging the agony.