Chapter

6 Role of the Public and Private Sectors with Special Reference to Privatization: The Case of Egypt

Editor(s):
Saíd El-Naggar
Published Date:
June 1989
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Author(s)
Ibrahim Helmy Abdel-Rahman and Mohammed Sultan Abu Ali 

Introduction

Recent economic developments in many developed and developing countries have led to a critical review of current policies and practices, known as readjustment, or restructuring. One of the major questions invariably raised in such an exercise is the role of public and private sectors in the economy. This may be closely related to the general question of government intervention as regulator and manager of the economy, and as owner of productive enterprises.

What is called the “private” sector differs considerably from country to country. During an earlier period, the private sector may have been denied the opportunity to grow and gain experience and develop its capacity for playing a larger role in the economy. There are certain activities which by general consensus should be owned and managed by public authorities, while there are others which are better left to the private sector.

Experience has shown that public policies often do not follow such a common understanding. Such policies, under the influence of either liberal or socialist ideologies, and on the pretext of attaining noneconomic objectives, such as national security or social justice, tend to lead the economy toward either excessive public ownership or excessive private ownership. The relative roles of the two sectors may differ considerably according to the type of activities in primary, secondary, or tertiary economies. In general, many Arab countries are now considering the advisability and the possibility of increasing the relative role of the private sector.

In the industrial countries these policies have been considered mainly under the terms of deregulation and privatization, meaning the reduction and simplification of public controls on the one hand, and the transfer of ownership of public enterprises (totally or partially) to the private sector on the other. One may add a third approach, namely, improving the management of public enterprises by having private entities actually operate them, or by operating them closer to private management practices. Workers in public enterprises may be given priority under certain circumstances to share in the ownership of the “privatized” enterprise.

Privatization, in the specific meaning of transferring the ownership of publicly owned enterprises to the private sector, that is, divestiture, may be possible and advisable in certain countries and in certain cases. On the other hand, the creation of the proper environment for better management of both public and private business is a necessity in all countries. This policy may be called liberalization and deregulation, and is therefore closely related to national economic restructuring efforts.

Another important aspect is the measure to be recommended for increasing the share of the private sector in business activities in the future without selling any publicly owned units. This policy may create the opportunity for the private sector to build its capacity and gain the necessary experience to manage a greater share of economic activities. The government may also gradually gain experience and adjust to the situation of reducing, relatively, its share of ownership and management of productive enterprises.

This whole question of course has social and political implications. It was essential in this study, therefore, to examine the historical and economic events which accompanied the growth of the public sector in Egypt. The reverse process of reducing the absolute or relative share of the public sector has to take place in accordance with, and in conformity to, the evolving social and political concepts and policies, not only on the basis of economic and financial arguments.

In all cases, business decisions have to be guided by signals from the marketplace. There are frequently considerable imperfections in the market in developing countries. Monopolistic features and lack of transparency are common. Efforts have to be exercised to improve the working of the market system, or, if necessary, to supplement it by consultation and agreement between the policymaker and the business sector, both public and private. These consultations may include current and short-term problems as well as medium-term objectives. In this way, development planning and public policies may be harmonized with the business objectives of improved economic performance and the best mobilization and allocation of resources.

The problems facing the Egyptian economy could be summarized as a very high rate of inflation (presently about 27 percent a year); open unemployment (estimated at 16 percent of the total labor force in 1986); a high rate of population increase (2.7 percent annually); a slowdown in the rate of GDP growth (about 5 percent currently, compared with over 9 percent during the seventies); and other social problems such as acute housing shortages and congested cities. These problems are reflected in two main indicators: the deficits in the budget and the balance of payments.

These problems are the result of an accumulation of inappropriate policies (fiscal, monetary, pricing, foreign exchange, and trade). The external factors that adversely affected the economy in recent years were (a) a sharp decline in remittances of Egyptians working abroad; (b) the fast drop in oil prices (representing one third of the sources of foreign exchange earnings since the early eighties); and (c) the fall in the flow of net aid. Reforming the economy, however, requires comprehensive structural change as well as foreign assistance.

The sixties and seventies witnessed the expansion of nationalization and the growth of the public sector following independence in many developing countries. The result was that the public sector dominated the economy in varying degrees. This was certainly true of Egypt except for agriculture. It is generally supposed that the private sector is more efficient economically than the public sector, especially in certain activities. Hence, the call for privatization stems from the need for higher productivity and efficiency.

Privatization does not mean the abolition of the public sector. It is one of the facts of life that the public sector is here to stay, regardless of ideology and the prevailing social system. The question is: Which activities should be private and which should remain public? What are the right proportions between both sectors? And what can be done to achieve this goal?

Privatization seems to be in fashion at present. However, it has been practiced for a long time. In Japan, many firms which were built by the public sector were sold to the private sector. In Egypt, in the nineteenth century, land was totally public sector owned. At present it is almost totally owned by the private sector. This means that the process of privatization took place during the nineteenth and the twentieth centuries. More recently, and during the heavy period of nationalization in the 1960s, management contracts with foreign private companies were contracted for publicly owned firms (mainly hotels), and private foreign pharmaceutical companies were established. In housing, public sector companies built units that were sold to the private sector. Several examples could be cited to show that privatization in Egypt is neither new nor imported. This process should be judged on the basis of its benefits to the economy.

The purpose of this paper is to assess the scale of both public and private sectors in Egypt, with a view to reforming the economy and raising its productivity, which undoubtedly depends on many factors and policies.

The Public Sector in Egypt: Growth and Magnitude

Three events in the early 1950s marked the growth of the public sector in Egypt. The first event was the land reform laws that established an upper limit on land ownership, thus breaking down the large agricultural private holdings, but constituted an extension of the role of the state in managing agricultural activities. The second was the nationalization of the Suez Canal in 1956, after a series of well-known political maneuvers between Egypt and the Governments of the United States and the United Kingdom. The interlocking of politics and public management was very clear and indicative. Following nationalization, there was the invasion of Egypt by British, French, and Israeli forces. This led to the third event—the expropriation in 1956 by the Government of Egypt of the assets of nationals of the United Kingdom, France, and later Belgium. These assets included banks, insurance companies, and municipal and transport enterprises, as well as shares in many private economic companies.

Before 1956, the Government of Egypt did not follow a policy of expanding public ownership. As a matter of fact, from 1952 to 1956, there were many approaches to invite private capital (both domestic and foreign) to participate in development projects. New companies were granted seven years exemption from taxation; foreign investors were allowed to have a controlling share in new companies.

Recent History

Pre-1956

Public policy up to 1956 encouraged the establishment of major economic projects jointly with the private sector. 1 The private sector held only 37.5 percent of the shares of the Iron and Steel Company (1954), 70 percent of the capital of the National Chemical Company, and 52 percent of the General Company for Mining. The Development Industrial Bank (itself partially owned by the Government and by private banks) participated in more than 10 industrial companies. But relations between the Government and the private sector were marked by growing tension. The Government felt that private investors were reluctant to invest, and attributed this to political motives; on the other hand, the private sector (headed by the Central Bank and foreign banks and insurance companies, including the Suez Canal Company) were suspicious of the Government’s intentions, and the Government’s declarations did not reassure them.

The distrust between the two sides increased. From 1954 to 1956, the Government passed laws to permit the Minister of Finance to issue treasury bonds and certificates up to about LE 300 million. The Egyptian Sugar Company (and its subsidiary for distillation) was reorganized in 1956, with 51 percent public ownership. In 1955, a decree establishing a National Planning Committee was issued to draft a national comprehensive plan. This principle of national planning was embodied in the 1956 Constitution (Article 7), although Articles 8 and 11 declared that private ownership was secured and private and public sector activities should be harmonized to realize national objectives (Article 10). The authorities took pains to explain that those articles did not oppose private activities, and as a matter of fact, the first five-year plan was drawn up and approved in 1960 before the major nationalizations that came about later.

Up to 1952, the average new fixed capital investment totaled LE 113 million annually, but this rate fell to only LE 77 million in 1953–56. Part of this reduction may have been due to dwindling sterling reserves, which were released annually, after accumulating in London during World War II, yet the environment of distrust referred to above may also have been partially responsible for this reduction.

1957 onward

By the end of 1956, the invading forces had withdrawn and another phase in the evolution of the public sector in Egypt started. Apolitical alignment away from the leading Western powers then took place, which created a tendency toward the nonaligned movement and to closer relations with the Eastern bloc countries which had already in 1955 become the main suppliers of military equipment to Egypt. Egyptian imports were traditionally from the Western countries. Exports started to shift toward the Eastern bloc, especially after cotton—which was the major export item—lost most of its Western importers. The old economic operators, whether foreign institutions or leading large landowners and capitalists, became out of place after 1956 in the new political setup in Egypt.

The Economic Organization was therefore established in January 1957 in a form almost equal to a holding company. Its capital by law included the shares which the Egyptian Government over many previous years had acquired in a variety of economic enterprises. These included shares in five banks, three mining companies, five manufacturing companies, and Egypt Air. To these was added the Real Estate Bank, bringing the total initial capital to about LE 28 million. The organization was authorized to borrow or issue bonds up to another LE 25 million.

Also, early in 1957, laws were passed for the complete “Egyptianization” of banks, insurance companies, trade representations, and importers. Many of these institutions were sequestrated because of either total or partial ownership by “enemy” nationals. Shares thus acquired in about 20 enterprises had a total capital of LE 24 million by the end of 1957. They included the National Bank, Misr Insurance, 6 textile companies, 3 engineering and metallurgy companies, Portland Cement, and Eastern Tobacco Company. Ownership of another 19 companies passed by purchase from the sequestration agency to the Economic Organization. By the end of 1959, the Economic Organization had a capital of LE 64.9 million from four different sources, namely, original government shares in companies (35 percent), shares purchased from the sequestration agency (ex-foreign owned—33 percent), new companies established by the Economic Organization (12 percent), and equity capital in other companies (20 percent). Thus, 45 percent of the banking system and major insurance companies, in addition to oil and mining companies, belonged to it. The Economic Organization was organized as a holding company, allowing each of its units to have its board of directors and independent operations, and subject to supervision and general directives from the holding company.

Industrialization and Planning

Parallel with these events, there were major developments in industry. A separate ministry of industry was established in July 1956. A five-year first industrialization program was established in 1957 with total investments of about LE 250 million, that is, LE 50 million a year, 60 percent of which was to be in foreign currencies. Average investment in industry (private and public) in the years 1952–57 was about LE 9 million annually. The new program multiplied industrial investment more than fivefold. The sources of finance were not spelled out at first, and it was not surprising that considerable skepticism was expressed about the prospects of implementing such an ambitious program. Early in 1958, the U.S.S.R. offered a loan of 700 million rubles, with an interest rate of 2.5 percent a year. Soon after, the Federal Republic of Germany offered facilities totaling DM 545 million. Then followed Japan with ¥ 1,700 million. Within one year (1958), resources equivalent to LE 125 million in foreign currencies became available. The United States, the United Kingdom, France, and Belgium were conspicuously absent, while the Federal Republic of Germany and Japan were equally conspicuous by their presence. A special organization called Industrial Organization was established to work out detailed studies for the different projects, sign contracts for construction and supply of equipment, and complete each project until it passed the test runs and became an independent public enterprise. A second industrialization program of almost equal magnitude was drawn up in 1960 and was integrated within the comprehensive national social and economic development plan, 1960–64, which was approved in July 1960.

Not all the investments in these two major programs required the establishment of totally new companies. Much modernization, rehabilitation, and expansion took place in already existing publicly owned companies. The authors of the two programs, with government consent, presented these two programs as sufficient to boost the economy. It was soon realized that sectors other than industry also had to develop, and that development project by project, or even sector by sector, would have to be replaced by a general and comprehensive plan. This decision was taken early in 1957. The National Planning Committee, which was established in 1955 and then forgotten, was revived in a new form, and it was decided to disband the Council of National Economic Production and the Council of Public Services, and prepare a transitional development program for the two years 1958–59 and the first National Five-Year Plan by July 1960. This was done.

The First Plan

The plan required 40 percent of the fixed investments to be made by the private sector. The public sector, with the flow of external resources for industry, irrigation, and other activities, needed expansion of domestic resources. The relatively large economic activities after 1957 created an opportunity for increased profit by the private sector, which had benefited also from the emigration of many members of the foreign community and from “Egyptianization.” More revenues in taxes were expected, but were not forthcoming. Revenues were used for speculation and to establish light industries and quick high-return consumerism, with little attention to the more fundamental investments required for development, with the possible exception of land reclamation. The land reclaimed during the plan period is still a record.

A number of measures were announced to limit the flow of profits into consumption; 5 percent of profits distributed were to be mandatorily used to buy government bonds. Shareholders were not to receive dividends in any year of more than 10 percent over what they had received in the previous year.

This was reflected in a sharp drop in the dealings on the Alexandria and Cairo Stock Exchanges (see Table 1).

Table 1.Total Annual Dealings on Alexandria and Cairo Stock Exchanges
YearAlexandriaCairoTotal
(millions of Egyptian pounds)
1956255782
19584567112
1961162339
1963156
1977268
1982189
19842107109
198727230257
Source: “Capital Market Organization,” published in Al-Ahram El-Iktisadi (Cairo), February 22, 1988.
Source: “Capital Market Organization,” published in Al-Ahram El-Iktisadi (Cairo), February 22, 1988.

The 1957 law on credits and finances had previously established authority for the Central Bank to monitor the distribution of profits by the banks and, especially, investment in new companies. This last procedure was used originally by Bank Misr to establish a group of Egyptian companies which were much applauded as a challenge to the domination of foreign-owned companies. The Misr Bank experienced a severe liquidity crisis in the 1940s and was bailed out by the Government with certain conditions. By 1960, the bank had recovered and held 40 percent of all banking deposits. In the opinion of the Government, the Misr Bank, under the management of “the old guard” did not come into line with the new requirements and was therefore nationalized in 1960, together with the National Bank.

Nationalization

Toward the end of 1960, Belgian investments and economic activities, including the Heliopolis Company and the Cairo Tram and Electricity Companies, were nationalized. At the same time, the Government started establishing “public organizations” as economic and financial entities in many sectors. One of the first was the Pharmaceuticals sector, where activities under private management and ownership were suspected of manipulation affecting public order and security. The Misr Economic Organization was established to manage the companies belonging to Bank Misr. The Nasr Organization was also established to manage the industrial companies originating from the industrialization programs. By the end of 1961, all major public organizations were formed, the most important of which were the three mentioned above. Thus the public sector became an integrated entity and a major economic operator in the country.

The first five-year plan (1960–64) was criticized by both the right and the left. The capitalists and traditionalists doubted the whole approach and considered it unnecessary and ineffective compared with the liberal economic approach. The leftist thinkers found the plan modest and even regressive, since it did not anticipate any increase in the share of workers in the value added, and it allowed the private sector to continue to have 80 percent of the national production while investing only 40 percent or less in the total national development effort. The public share of production was dominant (60 percent) in the transport and communications sector, but only 4 percent in agriculture and 8 percent in industry, and even smaller in other sectors. While nationalization expanded public ownership in the business, financial, and modern industrial sectors, the result of such a situation was that it was many years before it reflected a larger share of production. As late as July 1988, the share of the private sector was only 59 percent, down from 80 percent in 1960.

The planning approach gained acceptance in many developing countries after World War II, and public ownership of means of production was expanded in many countries at different stages of development. The private sector, in its quest for maximization of quick profit, seemed to neglect the requirements of social justice and fundamental investments in basic and infrastructure development projects.

Ideology

During all these years, new ideological thinking began to develop. Liberal policies were condemned as pro-imperialist and antirevolutionary. Socialist doctrines were hailed as historically inevitable. State management was to discard the concept of profit, and to establish “gains” for the workers and farmers, politically and economically. As happens in socialist countries, open unemployment is not permissible, so the practice of guaranteed public jobs for graduates was applied. The Egyptian ideology was nevertheless a mixture of the two schools and has remained so until now. The state had to be soft and paternalistic (except in matters of security); discipline in management became more and more relaxed; and remuneration became increasingly separated from productivity; this led to the loss of effectiveness of the incentive systems, even in the private sector. In 1962, a National Charter embodying the new thoughts and ideologies was announced, which included some recognition of the role of the private sector.

Further waves of nationalization developed in 1961 and subsequent years, and Law 117/1961 nationalized 80 companies. Law 118 stipulated that the Government would have a 50 percent share in the capital of 83 companies. Law 119 limited ownership of shares by individuals to LE 10,000 in 145 other companies. It is estimated that these measures involved some LE 200 million of capital and affected about 6,000 owners. The nationalization continued in 1962, to reach maritime transport companies, bakeries, and flour and rice mills. In 1963 nationalization was completed for all cotton ginning and cotton export. In August 1963, nationalization was completed for 228 mostly industrial companies, as well as road and river transport companies. Later in the same year, internal distribution department stores were nationalized, as well as six agricultural land development companies. Forty foreign insurance companies were nationalized, and a law was passed to limit land ownership to Egyptian nationals. Further actions were taken in 1964 with regard to 11 foreign trade companies and 119 construction companies. The 2 major oil extraction and distribution companies were nationalized.

After several attempts, the totality of enterprises belonging to the public sector were grouped in 37 organizations, according to their functions, under the supervision of different ministries as follows:

1.Ministry of Industrynine organizations
2.Ministry of Defenseone organization
3.Ministry of Agricultureone organization
4.Ministry of Transport and Communicationone organization
5.Ministry of Housing and Utilitiesfour organizations
6.Ministry of Laborone organization
7.Ministry of Land Reformthree organizations
8.Ministry of Statethree organizations
9.Ministry of Suppliesfour organizations
10.Ministry of Healthone organization
11.Ministry of Economyfive organizations
12.Ministry of Culturethree organizations
13.Ministry of Public Worksone organization

This structure has continued with some modifications until now. There have been many changes in defining the composition and functions of the boards of directors of each company and its relation to the relevant organization and to the minister concerned.

The Relative Share of Private Ownership by Sector

The general private climate of savings and investments was further affected by other measures, which, although economic, involved security. Maximum ceilings were established on earnings. Expropriations were used to punish political suspects. Travel abroad was extremely restricted and communications were censored. After some external military intervention, investment resources became very limited, and consequently basic and infrastructure facilities were not properly maintained. The very rapid acquisition by the public sector of existing enterprises naturally created a problem of staffing these units, especially with higher management; loyalty was considered more important than experience and qualifications. The training and breeding process for efficient qualified experts and managers was not active enough to meet requirements.

These facts are related to explain the reluctance of the private sector and individuals to return when the political system changed ten years later toward more liberalization and less use of restrictive measures.

In the 1970s, when the “Infitah” policy was announced, Egyptian private capital and entrepreneurship had to be reactivated under the umbrella of “foreign” and “Arab” capital rather than by itself. It turned out that the “Infitah” companies were mostly financed by Egyptians but in association with foreign and Arab capital.

Even now, toward the end of the 1980s and 25 years after the major nationalization drive, caution and fear of government intervention exist, though mostly in regard to policies other than nationalization.

It is useful to look now into the relative shares of both public and private sectors in different activities. Agriculture ownership is almost exclusively private, but the cropping pattern, pest control, and many agricultural inputs as well as marketing of the major crops are regulated by public agencies. Prices are fixed for major agricultural products, especially cotton, sugarcane, cereals, and other goods. Quotas of some crops have to be sold to the Government, while the rest of the crop can be freely marketed. Liberalization of these regulations, rather than public ownership, is more relevant to this sector.

On the other hand, mining (apart from oil) is mostly publicly owned, but leases are given to the private sector for exploration and exploitation. Oil exploration, extraction, refining, and distribution follow the usual patterns of association between the Government and transnational oil companies. Some downstream activities are in the hands of private companies. Gas is totally public as is electricity generation and distribution.

Manufacturing industries are now about 60 percent publicly owned (see Table 2), but the share of private ownership is increasing. Small industries and handicrafts are totally private. Seventy-five percent of industrial employment is in the private sector. The two largest sectors are the food and beverage industries and textiles, including ready-made clothes—one of the recent fast-growing activities. In the late 1970s the developing industries benefited from the relative availability of foreign exchange but ran into difficulties soon after. Heavy metallurgy and chemical industries had to be mainly publicly owned, but important downstream metalworking, machine-building, and electrical appliance industries are now mostly in the hands of the private sector.

Table 2.Some Indicators of the Relative Shares of Public and Private Sectors(percent)
1970/7119751979
IndicatorPublicPrivatePublicPrivatePublicPrivate
1. Industrial production742672286832
2. Total investments901084167723
3. Gross domestic product35.264.838.361.727.073.01
4. Production46.153.948.351.737.162.91
Source: Lines 1 and 2: A.S. Hussein (cited in fn. 1); Lines 3 and 4: Central Agency for Public Mobilization and Statistics (CAPMAS), unpublished statistics.

For 1981/82.

Source: Lines 1 and 2: A.S. Hussein (cited in fn. 1); Lines 3 and 4: Central Agency for Public Mobilization and Statistics (CAPMAS), unpublished statistics.

For 1981/82.

Communications are almost totally public, and so is the State Railway System after the disappearance of the light narrow-gauge railway which was privately owned. Road, river, and maritime transport are sectors covered jointly by public and private ownership. Aviation is almost a monopoly of the publicly owned Egypt Air Company.

Housing is predominantly private, although publicly financed and constructed low-cost housing projects are increasing. Major construction companies are publicly owned, but they contract with thousands of subcontractors and suppliers, which makes this activity in reality much more private than appears in the first instance. Foreign trade is becoming more mixed between public and private ownership. Internal trade is mostly private, though some major public sector companies and distribution retail outlets exist. The Government still monopolizes the cotton trade as well as the export of some other major crops.

The banking system until recently was totally public, but now, in addition to the 4 major public sector banks, there are about 95 smaller joint banks, privately owned, totally owned subsidiaries, and branches of foreign banks. The insurance sector is public, but recently a number of smaller private insurance companies were given licenses. Tourism is another fast-developing sector with an increasing share of private activities.

Public investment was obviously used mainly to build the infrastructure such as roads, harbors, water and sewage systems, transport, communications, and energy. It has been directed also to low-cost housing, schools, hospitals, and cultural centers. Private capital, both domestic and external, is active now in land reclamation, tourism, urban development, and trade and business. It is also active in hospitals and schools, and new large industrial centers are emerging in the new cities, especially in 10 Ramadan, Sadat, 6 October, and New Ameryya. Tourist expansion is now mostly private except in outlying areas. Considerable funds have been used to rehabilitate and modernize the industrial public sector companies, and to invest in joint projects with the private sector.

In 1967/68, the public sector was estimated to have contributed 18.7 percent of GDP; it rose to 35.2 percent in 1970/71 and to 38.3 percent in 1975 (see Table 2). In 1979, however, it declined to 27 percent. The share of the private sector in total investment rose to 23 percent in 1979 compared with 10 percent in 1970/71. In the construction sector the share of the public sector companies declined from 87 percent in the early seventies to less than 60 percent in the eighties. The share also fell in the trade and banking sectors as indicated above.

In summary, there was a strong trend toward the dominance of the public sector over the economy. In the late seventies, the relative share of private sector participation in the economy increased. The present situation, however, is still characterized by a larger relative share for the public sector, except for agriculture.

Performance of the Business Sector

The performance of an economy depends on many factors. One is the degree of efficiency. Efficiency in turn is a function of many variables. For the purpose of this study, we will try to assess the effect of the two types of ownership on efficiency. There is nothing intrinsic in public ownership that makes it less efficient than private ownership. Experience shows, however, that private enterprises are more efficient than public sector enterprises. Furthermore, this seems to be true in certain activities and sectors.

The measure of efficiency is crucial in comparing the relative performance of both public and private enterprises. The financial profitability has many shortcomings, especially in view of market imperfections and price distortions. It remains nevertheless the most relevant indicator for the performance of economic units.

Definitions and Data

Public sector companies—defined from the legal point of view—are the units subject to Law No. 97 for the year 1983. These companies’ equity could have minor private sector participation. Private sector companies on the other hand constitute all other business units. Some of these companies could have major equity participation by public sector companies but they are considered private sector. This is mainly true of units covered by Law No. 43 for the year 1974, which is called in short, the Arab and Foreign Investment Law.

The total number of conventional public sector companies as of 1987 was 393.2 Those covered here are 257 companies, or 65 percent of the total. The coverage is believed to be fairly high. The sources of data are published figures in the financial statements of these companies. The comparison is between FY 1986/87 and FY 1987/88. These years basically reflect better performance for public sector companies than the previous years, since the Government was more aware of their profitability.

The private sector embraces three types of companies: corporations subject to Law No. 159 for the year 1981, companies subject to Law No. 43 for the year 1974, and companies of the informal sector. The small companies of the informal sector represent a large part of the private sector. These units do not have regular bookkeeping but are believed to be in general very profitable. Unfortunately, no information about them is available. If it had been, the profitability of the private sector would probably have been much higher than is presented here. Corporations subject to Law No. 159 are under the supervision of the Companies Department of the Ministry of Economy, which does not publish or maintain records of their financial performance. We therefore did not have access to any data from that source. Fortunately, the General Authority for Investment (GAFI) analyzes the financial performance of Law No. 43 companies. Data presented here are for 1984 and 1985; these data are not strictly comparable with data available for public sector companies.

Another source of strict noncomparability of the two groups is the measure of profitability.3 For the public sector companies we use the ratio of the balance of the current account to the total revenue. For the second group we use net profit to paid-up capital. The first measure could be biased upward compared with the second measure. The profitability of the private sector is therefore underestimated.

A more comprehensive and precise coverage would require a study by sample. This study should have wider coverage for the private sector and a unification of the measure of efficiency and profitability. The evidence presented in this paper will give orders of magnitude. It could be sufficient to assess the size of the public sector relative to the private sector and the need for privatization from other angles, such as curing the budget deficit and the balance of payments deficit.

Profitability of Public Sector Companies

The total number of public sector companies in the industrial sector is 116. Some companies realized profits while others incurred losses. The net result was a loss of LE 267 million in 1985/86, which declined to LE 229 million in 1986/87; these results by activity are shown in Table 3.

Table 3.Profitability of Public Sector Companies
ProfitsLossesNet Profit (Loss)
Activity1985/861986/871985/861986/871985/861986/87
Textiles (million Egyptian pounds)20.450.6198.6170.7(178.2)(120.1)
(number of companies)6825233131
Food industries (million Egyptian pounds)107.1140.768.371.238.869.5
(number of companies)9101091919
Chemicals (million Egyptian pounds)70.268.285.1128.1(14.9)(59.9)
(number of companies)101117162727
Engineering (million Egyptian pounds)63.646.454.853.28.8(6.8)
(number of companies)7413162020
Metallurgical (million Egyptian pounds)6.640.6120.6126.3(114.0)(85.7)
(number of companies)23871010
Mining (million Egyptian pounds)4.45.911.931.7(7.5)(25.8)
(number of companies)425799
Total (million Egyptian pounds)272.2352.3539.3581.2(267.0)(228.8)
(number of companies)38387878116116
Source: Ministry of Industry, A Report on the Evaluation of Performance and Financial Statements of the Industrial Sector (for FY 1985/86 (issued January 1987); for FY 1986/87 (issued March 1988)).
Source: Ministry of Industry, A Report on the Evaluation of Performance and Financial Statements of the Industrial Sector (for FY 1985/86 (issued January 1987); for FY 1986/87 (issued March 1988)).

Table 3 shows that only the food industry public sector companies realized profits in 1986, which were increased in 1987. The other industries incurred losses in 1987. The engineering industries, which realized LE 8.8 million in profits in 1986, incurred LE 6.8 million in losses in 1987.

The ratio of current surplus to total revenue on current account shows the same trend, in general, for public sector companies.4 This is shown in Table 4.

Table 4.Percentage of Surplus to Total Revenue on Current Account, 1986 and 1987
Sector and Public AuthorityNumber of CompaniesPercentage of Surplus to Total Current Revenue
19861987
Irrigation34.44.8
Industry
Textiles313.24.3
Food194.63.7
Chemical275.85.5
Engineering204.32.9
Metallurgical103.94.5
Mining92.73.4
Electricity
Distribution72.32.3
Construction and Manufacturing44.33.9
Reconstruction and Housing
Building materials124.54.0
Construction122.14.1
Housing710.511.6
Reconstruction33.41.3
Tourism1
Hotels49.0(3.7)
Misr Travel14.61.8
Transport
Roads78.07.4
Maritime transport1216.017.7
Economy
Banks85.74.9
Insurance419.719.3
Foreign trade1010.010.5
Supplies and Inland Trade
Consumer goods112.62.1
Mills and bakeries101.61.6
Rice mills96.19.6
Food and refrigeration121.00.8
Health and Medicine53.92.5
Sources: Financial statements and balance sheets of public sector companies.

For 1984 and 1985.

Sources: Financial statements and balance sheets of public sector companies.

For 1984 and 1985.

From Table 4 we find that 16 public authorities realized a surplus ratio of less than 6 percent. Only 6 authorities realized more than 6 percent (housing, roads, maritime transport, insurance, foreign trade, and rice mills5). The surplus ratio declined in 1987 compared with 1986 in 15 out of the 25 public authorities, or 60 percent.

The prevailing analysis that demonstrates the inefficiencies of the public sector enterprises on the basis of financial statements can be attributed to three main factors. The first, and most important, is the political intervention by the Government in forcing employment, ordering lower selling prices, and interfering with day-to-day decisions. The second is the inability of these companies to manage their own resources and hence the lack of flexibility in innovation and adjustment to changing demand. The third is the low level of management performance,6 especially as regards labor and wage relations, which has annulled the system of incentives and made it impossible to maintain the maximum discipline and quality products. Lower prices and higher wage bills represent in fact a subsidy from public sector companies to consumers and workers, which is not borne by corresponding private sector companies. On the other hand, the Government in most cases (such as raw materials and energy) actually subsidizes the public enterprises while sister private sector companies do not enjoy the same preferential treatment. The theoretical ratio of the share of labor to the share of capital in the value added is 65:35, or less than 2:1.7 This was maintained in only 5 authorities. For the other 20 authorities it was much higher. The share of wages is continuously rising regardless of the profitability of the companies, which violates the principle of raising productivity at a higher rate than wages to ensure enough capital accumulation for expansion and renovation.

Profitability of Law No. 43 Companies

Statistics issued by the General Authority for Investment (GAFI) for 1984 show that the total number of companies realizing profits was 386, with net profits of LE 337.1 million (see Table 5). These companies have a total paid-up capital of LE 1.4 billion. Losing companies numbered 183, with total losses of LE 184 million. Total paid-up capital was LE 652 million. Therefore, the total amount of paid-up capital of these companies was LE 2.03 billion with net profits of LE 153 million, that is, a ratio of 7.6 percent for a total of 569 companies.

Table 5.Financial Results for 1984(Law No. 43 Companies)
AgricultureIndustryFinanceTotal
Profitable Companies63157166386
(million Egyptian pounds)
Paid-up capital91.1288.8994.91,374.8
Net profit34.593.0209.6337.1
Percentage of net profit to paid-up capital38322125
Losing Companies327675183
(million Egyptian pounds)
Paid-up capital87.9241.1322.9651.9
Net loss32.056.495.4183.8
Percentage of net loss to paid-up capital36233028
Source: GAFI, Report of the Annual Activities of the Sector on Evaluation of Performance for 1985 (Cairo, March 1986).
Source: GAFI, Report of the Annual Activities of the Sector on Evaluation of Performance for 1985 (Cairo, March 1986).

As mentioned before, many public sector companies subscribed the capital of Law No. 43 companies. To assess the real performance of the conventional private sector companies one should compare the ratio of profits to losses for public and private sectors in these companies. Data available are shown in Table 6, which shows that the ratio of profit realized on public sector participation in the agriculture and construction sector was 0.37. That is to say, profits were less than 40 percent of the losses. The private sector, on the other hand, realized 2.22, which is six times better than the public sector. In industry, the ratio was 0.82 and 1.20 for the public sector and the private sector, respectively. In the financial and services sector the ratio was 0.94 and 4.57, respectively.

Table 6.Ratios of Profit to Loss for Public and Private Sectors by Type of Activity
SectorNumber of CompaniesPublicPrivateTotal
Agriculture and construction200.372.220.71
Industry300.821.201.00
Financial and services1100.944.571.97
Source: GAFI, Report of the Annual Activities of the Sector on Evaluation of Performance for 1985 (Cairo, March 1986).
Source: GAFI, Report of the Annual Activities of the Sector on Evaluation of Performance for 1985 (Cairo, March 1986).

These results, though rudimentary and inconclusive, may support the view that the profitability of the private sector is much higher than that of the public sector, especially because of the better management and effective incentive systems.8 Under comparable conditions, the proponents of the public sector companies when they were first established maintained that the private sector then was either unable or unwilling to establish the new activities. This argument may no longer hold true, certainly in some sectors. Another important aspect is that the private sector companies bear the risks of the business venture, while public sector companies pass the loss to the Government and are not stimulated to improve performance because of the inefficiency of the pricing and incentive systems applied to them.

Nevertheless, it is a general understanding and a prevailing wisdom that in similar activities, under comparable conditions and proper regulation, the private sector will outperform the public sector economically and financially.

Problems of the Business Sector

It is believed that if the data on the private sector had been more comprehensive, the evidence in favor of the better performance of the private sector would have been more conclusive. We should not conclude this section without pointing out that the business sector, both public and private, suffers from general problems. These problems could be summarized in four groups: internal factors; factors related to the banking system; general economic policies; and external factors.9

Internal factors

Several projects suffer for reasons related to internal factors either before operations or after.

Causes before operations:

  • Lack of effective feasibility studies.

  • Unbalanced financial structure, that is, a very high debt/equity ratio.

  • Excessively high capital costs of some projects.

  • Inexperienced entrepreneurs.

  • Wrong choice of production technology.

Causes during operations:

  • Lack of managerial efficiency.

  • High percentage of losses and waste.

  • Lack of quality control resulting in accumulation of stocks and, consequently, problems of liquidity.

  • Very high labor costs.

  • Inefficient marketing.

Factors related to the banking system

The banking system is partly responsible for the problems of some troubled companies. This stems from

  • Lack of follow-up on the project.

  • Untying the withdrawal from the loans to the percentage execution of the projects.

  • Lack of profound study of loan requests.

  • Allowing borrowers more funds than the borrowing limits.

  • Lack of efficient investigation of the borrowers and their credit-worthiness.

Factors related to general economic policies

  • Pricing policy, which gave more prominence to the social factors, resulted in underpricing and ultimately led to the bankruptcy of some projects.

  • Monetary policy: to fight inflation (which is presently estimated at more than 25 percent a year), credit ceilings were imposed. These ceilings prevented some projects from obtaining their financing requirements. This policy will not reduce inflation, since it curtails supply. Credit ceilings should therefore not curtail supply; that is to say, although credit ceilings are necessary for reducing inflation, they should be used selectively to avoid any reduction in increased supply.

  • Fiscal policy: excessive tax rates and bureaucratic procedures put a heavy burden on the performance of the business sector. There is scope for using fiscal policy in a way that will encourage more efficient operation of the production sector.

  • Foreign exchange and trade policies: the multiple exchange rate system and export and import procedure hindered many companies from operating efficiently. Steps toward removing these obstacles have been taken, but more are needed.

  • Bureaucracy: Egypt suffers from an abundance of red tape and bureaucracy. To reduce these disadvantages, it is necessary to deregulate the production system, liberalize many policies (especially pricing and quotas), and reduce employment in government through diverting manpower to production of goods and services after training and rehabilitation.

External factors

Several external factors were detrimental to many enterprises in Egypt.

  • The worldwide recession that prevailed after 1980/81. International cooperation is required to alleviate its negative effects.

  • The freezing of Egypt-Arab relations after the peace treaty of 1979—which resulted in excess capacity for some projects.

  • The growth of protectionism in the industrial countries that led to a reduction in the demand for commodities produced in the developing countries, including Egypt.

In conclusion, increasing the role of the private sector—as will be shown later in this study—is required and called for by the Government, which stresses the need to expand investment far beyond the resources that are likely to be available to it. This trend will thus lead to a more efficient economy. Nevertheless, the problems facing the Egyptian economy require a comprehensive economic reform program. 10 This program should correct the imbalances in the economy, which are mainly reflected in the huge deficit in both the budget and the balance of payments. Privatization in the wider sense is only one part of the reform. It should be coupled with, or even preceded by, appropriate fiscal, monetary, pricing, foreign exchange, education, and employment policies as well as by other social and economic policies.

Possible Consequences of Privatization

The rapid and extensive growth of the public sector in Egypt during the 1950s and the 1960s was accomplished, as shown earlier, under certain specific conditions and concepts. Those circumstances have now changed considerably. The Government now wants private investment, both domestic, Arab, and foreign, to expand in the coming years. The question is whether some of this expansion could be accomplished through the transfer of ownership (or management) of some public sector enterprises to the private sector, thus releasing funds to help the budget, or to be reinvested by the public sector in other enterprises. This last proposal has been put forward repeatedly by the Minister of Tourism with regard to some profitable and nonprofitable tourist establishments.11 In this section, an attempt is made to identify the possible consequences of privatizing an appreciable share of existing public sector companies.

Effects of Privatization

The possible main effects of privatization on the Egyptian economy could be reflected on the budget, market organization, and social atmosphere.

On the budget

Privatization could have positive effects on both capital and current accounts of the budget.

On the capital budget

In a recent study at the Center for Information on the Public Sector,12 total invested capital in public sector companies at the end of 1987 was estimated at LE 84.2 billion. The sources of financing are LE 7.5 billion in capital and LE 61.1 billion in loans. The exact market value of these companies is not known. In addition to these units the invested capital in the economic organizations is estimated at LE 56.6 billion (mainly oil and the Suez Canal). These organizations are left out of the ad hoc proposal for privatization under examination here at this stage.

The market value of some public sector companies is expected to be higher than the value of invested capital (profitable units), that of others to be less (losing units). Evaluation of the relative magnitudes of these companies deserves a detailed assessment. For this study, it is assumed that the appreciation in the value of successful public sector companies is equal to the depreciation of the troubled public sector companies. This would enable us to assume that the market value of public sector companies is LE 84.2 billion. Thus a 10 percent privatization of the public sector would realize LE 8.4 billion as revenue to the state budget.

If this operation is carried out over five years, the corresponding revenue will be LE 1.7 billion annually. In other countries, privatization operations required arranging special funds for their financing,13 especially when shares are bought by workers and are paid for by deductions from their wages in succeeding years.

On current expenditures and revenues

Privatization could increase current revenues by liberalizing public sector companies and affording better management to their units. It might also reduce current expenditure through fewer subsidies, assuming that there will be no indirect effects that may force compensatory payments and wage increases, thus putting a further burden on the budget. Table 7 shows the main fiscal indicators that are relevant to our analysis.

Table 7.Revenues, Expenditure, and Subsidies, 1974–85
Percent of GDPPercent of Subsidies to Expenditures
YearExpendituresRevenueDeficit
197447.827.320.519.8
197557.829.228.620.6
197750.033.017.015.6
1980/8158.342.515.815.6
1982/8362.642.020.614.1
1984/8558.234.723.514.5
Sources: World Bank, Egypt: Economic Management in a Period of Transition, May 8, 1978, and Current Economic Situation and Economic Reform Program, July 14, 1986.
Sources: World Bank, Egypt: Economic Management in a Period of Transition, May 8, 1978, and Current Economic Situation and Economic Reform Program, July 14, 1986.

Table 7 shows that the budget deficit as a percentage of GDP fluctuated from as high as 28.6 percent in 1975 to as low as 15.8 percent in 1980/81. It rose again to 23.5 percent in 1984/85. This percentage exceeds the safe ratio and is the main source of inflationary pressures in the economy. Total subsidies as a percentage of expenditures were highest at 20.6 percent in 1975 and were reduced to 14.5 percent in 1984/85. Part of this subsidization is presented directly or indirectly to public sector companies.

Privatization is therefore expected to be an effective policy in curing the budget deficit. It would also lead to lower inflation while maintaining or even increasing national production.

Less monopoly

With the exception of natural monopolies, the monopoly of public sector companies harms consumers.14 It has been shown that the concentration of production leads to a higher probability of collusive behavior on the part of producers (see Table 8).

Table 8.Degree of Concentration Probability of Collusion
Percentage Market Share of the Four Largest CompaniesProbability of Collusion
76 to 100High
51 to 75Average
26 to 50Low
Less than 25Very low

The monopoly of public sector companies in Egypt harmed the consumer by neglecting quality and productivity, reflected either in huge low-quality stocks or in the consumers obligation to buy these products because of a lack of substitutes. With the open-door policy followed since 1974, the degree of public sector company monopoly was reduced in many activities. This policy motivated public sector companies to improve quality and raise productivity through renovation, among other things. It is apparent now in industries such as ready-made garments, foodstuffs, and building materials. More privatization, in the wider sense, would realize more benefits, but it is necessary to regulate the market by preventing monopoly and collusion by private sector companies. Suitable forms of antitrust laws would have to be enforced.

Other benefits

Privatization could bring other benefits to the Egyptian economy. Egypt suffers from the foreign debt problem. Privatizing part of the public sector companies could improve the foreign indebtedness profile through payments and/or debt/equity swaps. The sense of belonging could be intensified through widening the ownership base among Egyptians. The capital market could be enlarged by the shares of privatized public sector companies. Reliable data on income distribution in Egypt are not available. Privatization, especially if it is directed toward government employees and public sector workers, could lead to more equitable income distribution.15

Forms of Privatization

The various forms of privatization have been widely discussed and will not be repeated here.16 Liberalization, deregulation, and management contracts for public sector companies have been widely used in Egypt. An increased share of private investment in total planned investment is reflected in the successive fiscal year programs.

Selling the shares of the public sector companies in Law No. 43 companies could be easily done, since these shares are circulated on the stock exchange. Privatization in the narrow meaning, that is, divestiture, is widely opposed and faces many obstacles.

Obstacles to Privatization

Although privatization may be recommended in certain cases for Egypt as a matter of expediency, divestiture faces strong obstacles and objections, stemming from several sources, economic and political, (including pressure groups) and from the question of the appropriate choice of units to be privatized.

Pressure groups

Several groups would object to privatization in the form of divestiture. The main ones are some government authorities, management of public sector companies, and workers and labor unions. For government authorities, the objection might be based either on ideological grounds17 or on fears of having less authority in terms of promotion of employees, granting quotas of commodities, etc. Public sector company management and workers object to privatization because it might lead to loss of their jobs or the need to be more productive. Privatization in the long run would lead to creation of more job opportunities. In the short run arrangements should be made for unemployment compensation if it happens on a wide scale.

The problem of choice

If it is decided to privatize some units of public sector companies, which ones should be chosen? Are they profitable or losing enterprises? Would these companies be in strategic or nonstrategic industry? Are there certain activities (e.g., agriculture, tourism, trade, construction) which are more suitable than others (e.g., basic industries)? The evaluation of assets is one major obstacle for all parties who might be involved in the process of privatization.18 These are not easy questions to answer. If it is decided to privatize the losing companies, the question arises: Who is going to buy them? If they were profitable, one would ask: Why? And what are the gains? As a practical guide, privatization might start in some profitable and losing units and in areas which are not strategic.19

Other obstacles

Privatization might face several other obstacles. These might relate to political uncertainty and macroeconomic weaknesses, which might not create the proper environment for the operation of privatized enterprises. The lack of a developed capital market constitutes another obstacle to privatization.20

In conclusion, privatization is not an easy process. To obtain its advantages it is necessary to mitigate the objections it faces. Arrangements are needed to compensate for its negative effects. One such requirement is to improve the environment for investments and business management.

Improving the Environment for Investments and Business Management and Increasing the Private Sector Role

Since 1985

There is clear evidence that in the past few years since the reduction in the price of oil, both official policies and the public at large in Egypt are more sympathetic to having the private sector play a greater role in social and economic development—in an atmosphere of more liberal rules and regulations. Lower oil prices meant a reduction in the export earnings of Egypt and, indirectly, lower remittances from workers in the oil exporting countries. Oil export proceeds are expected to diminish gradually because of the increasing domestic consumption from the same oil yield. Prospects of utilizing natural gas have actually partially compensated the energy balance. Also, energy conservation—mainly through a price escalation plan that has been consistently recommended—may have contributed. There has been no clear evidence until now that remittances have decreased, though the rate of increase is lower than before. One has to differentiate between the fact that the total wage bill received by Egyptians working in Arab countries has actually diminished and the other figure of how much of these earnings have entered the country and been recorded in official channels. The two figures can differ considerably. There is the rate of saving, which may have increased saving by the workers in an atmosphere of apprehension and insecurity of employment. Then there is the possibility that always exists that some savings may have been retained abroad. There are widely different estimates of the total funds held by Egyptians in foreign countries. These estimates are reported to be in billions of dollars.21 Some of these funds may have been the result of capital flight from the country.

Some of these funds may have been invested abroad by Egyptians who are actually permanent residents abroad. The part of these funds that is of great interest to this discussion is the liquid money placed in short-term financial investment that can voluntarily be quickly shifted to enter the country. There have been fears also that the oil shock might reduce the current income from the Suez Canal, because of lower (or stagnant) world consumption and because of the diversion of oil transport across land by pipelines. The new pipelines during the last few years brought crude oil to the Red Sea and not to the Mediterranean. On the positive side, tourism receipts increased appreciably after a very low year in 1985/86. The conclusion therefore is that on balance the fall in foreign receipts may have been softer than was originally expected, but the psychological effect of being more on guard has fortunately remained.

Delicate Balancing

The general economic strategy in the country remained one of insisting on the rate of investment indicated in the national plan, thus maintaining annual growth of about 5-6 percent in fixed prices. Inflation has actually been on the rise, with the consequent expectations of pressures on wages and prices. Relatively high investment rates are in themselves inflationary—especially when long gestation periods exist—except for the part paid for from external sources. Efforts to contain public and private consumption have so far been modestly successful. Public policy encourages trends of political diversity and democratization, which by necessity is a slow process. In the meantime extreme opinions are voiced from the left and the right. A strong Islamic fundamental movement (which is mostly nonmilitant, except for small groups which have already clashed with the authorities) is spreading. The delicate political balancing act has so far created a situation of stability but with some apprehension. Economically, major macroeconomic structural imbalances have not been resolved. The usual duel between proponents and opponents of public sector versus private sector continues and the official pronouncements are rather ambiguous and reserved in recommending that both sectors be active and cooperative in working for national objectives.

The same delicate balancing approach is followed as regards the problems of external debts. Negotiations with the International Monetary Fund (IMF) and major creditors are proceeding, with interim and partial agreements, but without renouncing the obligation not to accept conditions that in the opinion of the Egyptian authorities would be detrimental socially and politically. In this way, a continued flow of bilateral and multilateral capital is assured within limits to pay for basic imports of food and other commodities and to finance the share of the public sector in the development program. In this mosaic pattern not all measures are always consistent or harmonious at any one time. The IMF recommends restricted expansion of credits from the banking system to fight inflation. At the same time, the Government implores the private sector to shoulder a larger share of national investments, while the financing of such activities is constrained by credit ceilings. Simultaneously, a large amount of funds has been accumulated during the last few years by the private investment companies which have lured the depositors by interest rates that are almost double those paid by the banks.

The private sector faces difficulties in meeting its obligations to banks, especially in the case of dollar loans whose equivalent in Egyptian pounds has increased because of the depreciating exchange rate of the pound against the dollar. In addition the private sector has to seek local and foreign currencies to continue its current activities and expand investment. This is a complicated operation under the existing rules of access to foreign exchange for different purposes. It is becoming more manageable with the partial unification of the exchange systems and the fairly encouraging flow of foreign currencies sold to the banks, which has been higher than all previous expectations. The public sector companies are still increasing their indebtedness to the national banks (from which they are allowed to draw without security) but they experience difficulties in securing the foreign exchange they require, even if it has been allotted to them by the proper authorities.

Bureaucracy

For many years, public pronouncements repeatedly stressed the need to fight bureaucracy, rationalize business management, and reform the public sector; one favorite proposal has been to separate economic management from ownership. This seems a reasonable idea that does not cost any money or reduce authority Another proposal is to appoint external members to the board of the public company, while, if desired, keeping the present committee of directors as an internal coordinating mechanism. Then there are the usual age-old wise slogans of relating remuneration to productivity and creating an effective system of incentives and control, which are still repeated on every occasion. As an example, all authorities meet frequently with investors to “solve” their problems. Similar meetings are held with exporters, with senior managers, and with other groups, but complaints about obstructive bureaucracy, lack of prompt decisions, conflicting rules, and ambiguous regulations continue year after year. The public and private sectors share these difficulties as they share complaints about irregularities and kick-back payments, while senior (and junior) officials shy away from responsibility or protect themselves from possible accusations by pushing papers vertically or horizontally on to committees. With the low salaries of public officials and the huge sums of money involved in licensing a building or approving a business contract, there is the temptation of money and the fear of being called to defend oneself against criminal accusations. Certain groups of public employees have been granted salary scales and pension systems and assured of better employment after retirement, which has made them the envy of all of the others. There appears to have been some concrete improvement in certain areas such as information, data and training, in decentralizing decision making, and in involving community representatives in local public management.

All of these difficulties face public and private business enterprises equally. But (as mentioned earlier) official policy and the accepted views encourage the private sector to increase its activities. More attention has been given recently to small business (especially small industries), which for a long time has been neglected. The reason is the sudden discovery that unemployment is increasing—especially among youth. A rate of open unemployment of 16 percent was reported in the 1986 census.

On the other hand, the proposals to “liquidate” the public sector or any part of it raise anger and opposition. The discussions about the derelict San Stefano hotel in Alexandria attracted attention recently; it was a farce logically but significant politically. This incident revealed the underlying opposition to social and economic rationality, which is disguised in vague terms as protecting the gains of the poor and the working classes and fighting the plots of imperialists against the national interests. Under these circumstances, no businessman will easily venture into any public sector small bakery or gas station. This situation is likely to remain, especially because of the much wider opportunities open to the private sector to invest in other branches and industries. Signs of the changing environment are appearing, particularly in the tourism and foreign trade sectors.

Business Management

Business management and investment face difficulties from the bureaucracy and from the heavy regulations that have been imposed on them. This applies to all businesses—starting from the small farmer or the small shopkeeper to the manager of the one-billion-dollar steel factory in Dekheila—and by public and private business. There have been considerable improvements during the last ten to fifteen years. But on the other hand, new and increasing difficulties have emerged which are generated by labor management and by the top-heavy, expensive, and inefficient hierarchy, which in some cases reflects group nepotism and “centers of power.” Efforts must be intensified in the area of streamlining business decisions and enabling management to plan ahead and raise productivity, and not under the slogan of “privatization” in the narrow sense of liquidating public enterprises. This may not be the recommended policy for all time. As a matter of fact, even if some of these enterprises were to be offered for sale, buyers might not be found. The prospective buyers may not accept, for example, retaining the same working force nor accept the Government as a partner.22 Small investors (possibly including workers) may not have enough confidence or capital mobilization to exercise their authority as shareholders. The buyers may ask for privileges such as market protection, excessive tax exemptions, or even a public subsidy to run the business, in addition to hard negotiations about the price of assets and the assessment of liabilities.

As indicated in the first section, the growth of the public sector since 1952 took place in stages, in which political expediency and economic factors were combined. Ideology came later, in circumstances which no longer exist. Now these same ideologies, in addition to some negative experiences since the “Infitah” policy was announced, demand careful consideration before too much dependence and trust is placed on domestic and foreign capital to “overrun the country.” It is to be hoped that these fears can be assuaged in the coming years and a balance between private and public ownership and management reached in successive steps and with nationwide acceptance.

Even now, certain small units of the public sector may be candidates for private management (as has happened in some hotels) or for partial private ownership. Private investors might welcome, or even request, public partnership in some projects. Foreign private partners are accepted readily by the public sector, and there is no reason not to expect a similar attitude toward efficient and qualified private Egyptians—as long as the objective remains better economic efficiency within an acceptable social and political environment.

The Private Sector’s Share in Future Development

The five-year plan, 1987/88–1991/92, envisages a large increase in the share of the private sector in the plan investments, almost threefold in the production sectors and double in total (see Table 9). The long-range projections by the Ministry of Planning up to the year 2002 (in two five-year plans beyond the current one) are drawn up assuming an average annual growth of GDP of over 6 percent, which will bring GDP from the 1987 value of LE 44 billion to LE 109 billion in constant prices. These figures are obviously tentative, but significant.

Table 9.Planned Investments by Private Sector in Previous and Current Five-Year Plans
1982/83–1986/87Planned,

1987/88–1991/92
Sector(million Egyptian Pounds)(percent)(million Egyptian Pounds)(percent)Percentage Increase
Agriculture1,186.212.82,65014.7123
Industry1,722.818.66,40035.6271
Electricity0.4
Construction2.95503.0104
Total physical goods3,220.734.79,60053.3198
Transport and Communication371.54.01,4007.8277
Trade42.80.5800.487
Banking and insurance21.70.2
Tourism180.51.92201.222
Total productive services616.56.61,7009.5176
Housing5,284.456.96,60036.625
Other social Services64.70.71000.655
Total social Services5,349.157.66,70037.225
Grand Total9,285.3100.018,000100.094
Source: Ministry of Planning.
Source: Ministry of Planning.

The highest rates of growth are expected in tourism (450 percent), industry (380 percent), and housing (250 percent). There will be little increase in oil (possibly more in gas), and an annual rate of growth of agricultural income of about 4 percent. The three fastest-growing sectors are those in which the private sector has the experience to make the best investment choices. These three sectors will have to be the most active geographically outside the presently populated areas. They are therefore the sectors that will best define the future physical and economic map of Egypt. If these assumptions are accepted even qualitatively, the private sector will have to start now to be in a position not only to fulfill the estimates of the current plan but also to get ready for larger responsibilities in the future. A proper course of action in this respect would include the revision of policies to improve the climate and performance of business (public and private; domestic, Arab, and foreign), while not neglecting social objectives. The best way to serve people is to give them opportunities for real and gainful employment. Income distribution will continue to be a just objective, but there has to be income. Labor and capital productivity would have to be raised to much higher levels than at present.

All of this bodes well for the future; starting now from delicate and fragile economic and social structures, the private sector could develop quickly. Within this frame of thinking, policy reforms for improving the climate for investment and business management (public and private) would have to take precedence—without excluding any feasible change of ownership from public to private.

Prospects

The prospects as outlined in the previous section constitute what may be called a scenario of continuation of current policies. The main feature is to maintain a critical balance between different factors while continuing to promote development as represented by the plan and avoiding any abrupt moves that might disturb the balance of contending demands. Increasing the efficiency of public machinery, streamlining services given to the public, and encouraging private business (while not impinging directly on public sector business) are some of the features of such a scenario.

However, balance cannot easily be maintained at all levels and for all sectors all the time. Factors, such as inflation, unemployment, and population growth, are continuously changing. With a relatively open society, the freedom of expression available, and political tolerance, ideas—from the right and left—may take hold here and there. In addition, external factors are also influential and are constantly changing: the problems of servicing the external debt while maintaining a net flow of resources into the economy; foreign exchange receipts depending on oil and other exports are likely to diminish, while import prices, particularly for food, may fluctuate, as they are actually doing from year to year; and peace efforts in the region have not yet borne fruit and tensions abound. For any appreciable increase in investment by the domestic and external sectors to take place, a feeling of future stability is essential; otherwise there might be capital flight.

Let us then assume a second scenario, in which the prospects of stability and security are reasonably assured. It would then be possible to liberalize public controls and develop further the share of the private sector in the economy. It might even be possible to start some divestiture of the public ownership of enterprises. The private sector by then would have become more experienced and more capable of assuming greater risks (and benefits) in its business expansion in different sectors. One also has to assume that the bureaucracy would have improved qualitatively, and that malpractice and graft would have considerably decreased.

According to this second scenario, the labor force would be more fully utilized in the new jobs created by expansion, and the investment projects would have introduced a certain degree of management and technological innovation to maintain the competitiveness of Egyptian production of goods and services in the internal and external markets.

The shift from the first to the second scenario may happen in a succession of steps. It may also be stimulated by some basic change in policies, education, guaranteed employment, and better enforcement of the established rules. Such changes may quickly influence behavior and attitudes—which are undoubtedly prerequisites for creating a stronger national development movement. In particular, better public and private management systems would be possible, as well as incentives and disincentives appropriate for increasing skills and attaining higher productivity.

It is clear therefore that privatization, in the narrow sense of divestiture, is only a small element in a broad field of measures and conditions that relate to economic and social development as a whole. If privatization was to start too early, it might create repercussions unfavorable to the final objectives. Delay, however, might deny the economy important resources that could otherwise be better used. Movements can always start slowly and, if viable, will quickly gain momentum. This can happen to privatization, if and when it starts in an appropriate environment. The tourism sector may be such a starting point, as well as the import and export trade and inland trade activities.

It is unlikely that the public sector will grow in the future as it did in the past. The wider margins imposed—by the private distribution trades in vegetables and fruit both on the consumer and the producer—have recently led the Government to propose expanding the number of publicly owned distribution outlets. In handling the case of “private financing companies,” pressures have been exerted gently to direct the resources of these companies toward the plan projects. Regulations are being expanded to save energy and water and to improve security in Nile shipping. Relatively large amounts of funds are still allocated to the public sector in the annual development plans. For example, in the industrial sector supervised by the Ministry of Industry, LE 964.5 million are allocated this year, which includes LE 415.9 million for replacement and renovation, LE 353 million to complete projects under construction, and LE 195.5 million for new projects. In addition, the military factories (Ministry for Civilian Production) will receive LE 333 million, which includes LE 149.2 million for replacement and renovation, LE 124 million for completing projects under construction, and LE 59 million for new projects.23 Additional funds for activities such as cement, building materials, pharmaceuticals, construction, and printing are available. Hence, the industrial public sector is still increasing its capital and capacity. The question arises whether the private sector would have been able and willing to enter into some of these public sector investments as a partner.

The prospects clearly depend also on the private sector itself, which must first gain the confidence of savers and small investors. It has to improve its capacity to identify viable projects and appropriate technological and management innovations. Cooperation with outside partners may be necessary, but utilization of domestic resources, skills, and technology would also have to be maximized. Short-term profit objectives would have to be combined with the longer-term objectives of institutional development, the capacity to take risks, and the flexibility to benefit from emerging opportunities. The current difficulties faced by banks and other intermediate financing institutions would have to be resolved to establish capital markets, to better mobilize national savings, and to allocate them most efficiently. Representative organizations of the private business communities, such as chambers of commerce and industrial federations, would have to play a more active role in the collective examination of business problems and effective consultation on public policies.

All these matters are closely related and could be phased in with the efforts to restructure the economy and to reduce the current macro-economic imbalances.

The private investor in Egypt now has a number of alternatives open to him. First, there is the share allocated to the private sector in the planned investments, which amounts to about 40 percent of the total national investments, although it is likely to vary from one sector to another. Second, the Government would probably like the private sector to assume larger investments. In particular, the Government is ready to turn over some of the investments now allocated to the public sector to the private sector if it finds a sponsor. Third, private investors may come forward to buy a public enterprise that the Government is ready to privatize, as actually happened in some tourist companies.

It is recognized that the private sector has deposits in banks, additional future savings, and funds held abroad. In recent months, prospects for a greater flow of Arab capital into Egypt have improved. It is therefore obvious that a greater investment by the private sector is both welcome and desirable, especially in view of the Government’s domestic and external borrowing. It may not be necessary therefore to press the issue of divestiture now, except on the basis of selectively reducing the burden on public finance and increasing the national product and efficiency, but not as a policy all across the board.

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