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«Phase 1 Policy Assessment EGYPT DIMENSION I-2 Privatisation Policy and Public Private Partnerships July 2010 Partner: European Commission This report ...»

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BUSINESS CLIMATE DEVELOPMENT STRATEGY

Phase 1 Policy Assessment

EGYPT

DIMENSION I-2

Privatisation Policy and Public Private Partnerships

July 2010

Partner: European Commission

This report is issued under the authority of the Steering Groups of

the MENA-OECD Initiative

TABLE OF CONTENTS

EXECUTIVE SUMMARY

Achievements in Privatisation and Public-Private Partnerships

Challenges in Privatisation and Public-Private Partnerships

Recommendations in Privatisation and Public-Private Partnerships

INTRODUCTION

THE ASSESSMENT FRAMEWORK FOR PRIVATISATION POLICY AND PUBLIC PRIVATE

PARTNERSHIPS

Sub-Dimension 2.1.: Privatisation

2.1.1. Privatisation Strategy

2.1.2. Consultation and Communication

2.1.3. Foreign Ownership Restrictions

Sub-Dimension 2.2.: Public Private Partnership (PPP)

2.2.1. PPP Units

2.2.2. PPP Legislation

2.2.3. PPP Consultations

2.2.4. Approach to Cost-Benefit Assessment for PPP Projects

3.2.5. PPP Monitoring

CONCLUSION

Notes

ANNEX

A1. ASSESSOR INFORMATION

A2. KEY DATA

A3. GENERAL OBSERVATIONS

A4. OVERVIEW OF SCORES

A5. ASSESSMENT FRAMEWORK FOR PRIVATISATION AND PPP PROJECTS

A5.1. MEASURES

Notes to Annex

EXECUTIVE SUMMARY

This chapter analyses two aspects of the Egyptian government’s efforts to improve Egypt’s business climate in order to spur economic growth and job creation through greater private sector involvement in the economy. The current Egyptian government has pursued economic reform since coming to power in 2004, and a stated objective of the reforms has been to diversify the economy and increase the role and scope of the private sector.

One way to achieve that objective this is through privatisations: the government divests itself of enterprises that formally belong to the state and bring in private investors and managers to own and run the company. Within the OECD member states it is becoming increasingly rare for the state to be an active economic agent in most sectors outside of utilities and natural monopolies.

Another way to increase private-sector involvement in the economy is through public-private partnerships (PPP). These are partnerships between governments and private entities typically formed with a view to delivering more efficiently certain public goods and services, such as infrastructure development.

In the case of Egypt in particular, PPP schemes are intended to help upgrade, modernise, and expand the country’s dilapidated infrastructure (a separate chapter deals exclusively with infrastructure development).

The government renewed its commitment to privatisation in 2004, with a positive effect on the number of privatisation transactions and the value of proceeds during the period 2004-7. The objectives of the privatisation programme have been outlined in the Asset Management Programme (AMP) guidelines which were updated in late 2009. AMP guidelines state that transparency of the programme is enhanced by publishing the annual sales programme and the minutes of the annual meetings of the nine public holding companies. Foreign participation in privatisation in Egypt has been strong, and most of the government stakes in Joint Ventures have been sold to foreign investors. The largest privatisation transaction in Egypt was the sale of an 80%-share of Bank of Alexandria for around USD 1 billion to the Italian Bank Saopaolo. Non-discrimination has been strengthened by Egypt’s adherence to the OECD Declaration on International Investment in 2007.

Egypt has undertaken PPP projects in infrastructure since 1990. The most successful of these have been within the transport sector. A new PPP strategy was launched in 2006 and a new framework PPP law was finally adopted by parliament in May 2010 and came into force in July 2010. A Central PPP Unit has been established in the Ministry of Finance. Since its establishment, the PPP Unit has been working on five pilot projects: a PPP schools project (Education), an Alexandria University Hospitals project (Health), a Cairo Wastewater Treatment Plant, and two transport projects (Shubra/Banha Highway Project and Rod El Farag Access Project). The first successful PPP tender for a waste-water treatment plant in New Cairo was signed in mid-2009 and construction will begin in 2010. There are other pilot projects in the pipeline where three tenders have been opened, four are currently under preparation, and 10 projects are in the pipeline across sectors.

Achievements in Privatisation and Public-Private Partnerships A clear legal framework Egypt has had some success with its privatisation programme, having established a clear legal framework for the process. A series of laws and regulations from the early 1990s1 set out guidelines for the privatisation programme. Initially, 314 state-owned enterprises (SOEs)* were put up for sale and grouped into 27 holding companies, each one with a specialisation.2 In addition, since September 2002, it has also been possible for the government to sell state-owned shares in joint-venture companies.3 From 1993-2004, nearly 200 SOEs were fully or partially privatised.4 In addition to SOEs and government stakes in joint ventures – which are sold under the Asset Management Programme (AMP) operated by the Ministry of Investment – other companies can be privatised, too. These are referred to as “non-law 203” companies and they are dealt with by their line ministries, rather than the Ministry of Investment. Essentially, non-law 203 companies are so-called “strategic” companies in sectors such as electricity, telecoms, aviation, banks, all companies under the Suez Canal Authority, and large companies like the Arab Contractors.5





A positive result from initial privatisations

The first wave of privatisations yielded positive results, allowing the state to gradually withdraw from the economy and usher in more private-sector initiative, competition, and a more transparent investor climate, especially in the manufacturing and banking sectors.

Privatisations accelerate under the new government 2004-8

Under the Ahmed Nazif administration the privatisation programme was revived and brought under Ministry of Investment. In 2005-6 and 2006-7 privatisation receipts represented 2.5% and 1.9% of GDP respectively. This increase was primarily due to the two large non-law 203 privatisations: the sale of a state-owned bank, the Bank of Alexandria, and the part-privatisation of Telecom Egypt, which alone accounted for 0.9% and 1.3% of GDP respectively.

No restrictions on foreign ownership of privatised companies

There are no restrictions on foreign investor participation in privatisation projects in Egypt. There remain some sectors where foreign investment is only allowed in the form of joint-venture companies in which foreign equity does not exceed 49%. Such sectors are construction, maritime transport, air transport and courier services, all considered strategic and associated with national security issues.

Foreign participation in privatisation in Egypt has generally been strong, and most of the government stakes in joint ventures have been sold to foreign investors.

The PPP programme finally has its legal framework Egypt’s results with regard to its PPP programme have been slower to emerge. However, some important results have been achieved. These include the formulation of an overall PPP strategy in 2006 and the putting in place of a number of mechanisms, such as the PPP Central Unit which is in charge of planning and managing PPP projects. The progress of PPP in Egypt will be greatly enhanced by the passing of the PPP framework law in June 2010.

Challenges in Privatisation and Public-Private Partnerships The privatisation programme has stalled and the government’s plans remain unclear The privatisation programme stalled in 2008, against the backdrop of the mounting international financial crisis. The programme was halted, pending the reformulation of the government’s privatisation strategy, and this has brought some confusion to the investor community. A scheme to distribute, free of charge, a number of shares to Egypt’s adult citizens, was shelved in late 2009. A new strategy is under formulation and a new draft law, which maps out the responsibilities of the Asset Management Fund and the new Fund for Future Generations, was made public in late 2009. However, until the new law has been passed – most likely during the 2010-11 – parliamentary session, confusion will continue to surround the direction of the government’s policy.

The scope of the privatisation programme is too wide

Egypt’s privatisation policy framework in its current format is too ambitious. It seeks to meet multiple and at times conflicting objectives, such as both improving efficiency and creating jobs, which gives rise to a large number of cross-cutting policy issues. These need to be identified, prioritised, and adequately addressed. As regards the overall strategy and objectives, these have still not been made public, continuing to create suspicion among the population.

The privatisation programme lacks transparency

With regard to the privatisation process itself, an overall lack of transparency is also problematic.

There is a lack of important details, such as exactly how many public enterprises are to be privatised and when they will be offered for sale. The government does indicate on its website that it guarantees transparency through the distribution of fact sheets and summaries of the companies and major assets governed by Law 203. However, investors and the private sector community have reported cases where the government had announced that it was putting public enterprises up for privatisation, only to withdraw them without justification or explanation.

The key principle of the AMP is to operate within a “clearly announced and well communicated programme”. Although the government has communicated the benefits of the privatisation process before and attempted to address public concerns over employment, it will need to clarify its intentions and the key elements of its strategy in order to revitalise the process again.

The PPP Central Unit has encountered resistance from line ministries

With regard to the government’s PPP programme, the Central PPP Unit has encountered some initial problems. These include ensuring the buy-in of portfolio ministries and the successful establishment of satellite PPP units; finalising the draft PPP legislation; providing capacity building to other government entities, and finalising and completing the initial pilot projects. There has been resistance from the line ministries against the idea of a central unit with an overall co-ordination function. This may well signal a communication problem. The line ministries have not yet seen the value added of the PPP Central Unit and are uncertain of the benefits that it can provide.

Some PPP pilot projects have failed to attract investor interest

Issues have also arisen regarding the choice of pilot projects – an initial, and very ambitious, project to find a private investor to build and manage 150 schools failed to attract any interest. There are also question marks over the availability of sufficient funding through local commercial banks, while the strict independence of outside consultants has also been raised.

Recommendations in Privatisation and Public-Private Partnerships In view of the challenges that still remain if Egypt is to successfully implement its privatisation and PPP programmes, the MENA-OECD Investment Programme has a number of suggestions.

A clear privatisation strategy is needed The government should put in place and make public a clear privatisation strategy, which would spell out the objectives and details of its privatisation programme. It should also insert the programme into Egypt’s broader economic reform effort and, in particular, look at ways for private sector involvement to improve the economic performance of the chosen companies and sectors. The new strategy should be made public through an effective communication plan which would target both the general public and private investors in order to ensure support for the programme and mobilise investors. Moreover, a full public debate prior to the passing of the new framework law would enhance the government’s image and improve transparency.

Transparency of all processes should be enhanced

The transparency and efficiency of the privatisation programme should be enhanced by announcing the sales schedule in official newspapers and on the Ministry of Investment’s website to ensure it is made public and reaches all investors. Other means of increasing transparency are: select advisors and buyers through a competitive process; put conflict-of-interest guidelines in place; and ensure that competition and regulatory frameworks are in place prior to sale (e.g. enact a new competition law or amend the existing one, if necessary).

Adequate and resources should be given to carry out the privatisation programme

Sufficient resources should be made available to address the challenges of the new privatisation programme identified in the strategy. These can relate to staffing, to staff training, to communication, and to the drawing up of the proper guidelines and regulatory framework.

Proper competitive processes should be instaured



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