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Distraction offerings: What’s behind Egypt’s ambitious plan to sell shares in state companies

Last month, the government announced its intention to offer 32 state-owned companies across 18 economic sectors for partial privatization, through public offerings on the stock exchange and offering stakes to strategic investors, within a year of the announcement.

The 32 offerings represent a repackaging of companies and assets that the government has been attempting to levy for foreign investment for the past five years in an earlier version of its public offering program. Yet the 2018 IPO program stumbled due to hostile market conditions. Mada Masr spoke with an investment expert to try and understand what’s different this time.

The announcement came as Egypt, which has been under pressure for years from the International Monetary Fund to reduce the state’s footprint in the economy and expand space for the private sector, has been struggling to mitigate the crisis set off by Russia’s invasion of Ukraine that plunged an economy built on risky government policies into turmoil.

But is offering such a large number of companies to investors viable within the government’s proposed timeline? Sources close to the offering program who have spoken to Mada Masr paint it as an infeasible program rolled out to pacify demands for reform from the lending organization, while the government buys more time to politically maneuver.

Egypt’s long-delayed privatization program dates back to 2018, but the government has struggled to sell shares of the firms due to adverse market conditions and internal pushback around dismantling longstanding pillars of the political-economic landscape. Now, however, with the worsening crisis, the government is urgently looking to shore up the supply of dollars.

Part of what makes this such an urgent goal is the IMF economic program that the state agreed to at the close of last year.

The lending institution estimated the financing gap at the end of last year at about US$17 billion during the 46-month economic reform program, including about $5.04 billion until the end of June alone.

According to the program, Egypt aspired to bridge this gap by borrowing from international institutions. But the bulk of that gap was supposed to be filled by offering shares of state-owned companies to investors.

Per the program, Egypt is supposed to sell up to $2 billion in assets to foreign investors, specifically from the Gulf, by June. During the fiscal year 2023/24, Egypt is supposed to sell $4.6 billion in assets, followed by assets worth $1.8 billion in 2024/25.

Shares in the 32 companies will be offered for investment, Prime Minister Mostafa Madbuly said in February, either to strategic investors or via public offerings on the Egyptian Exchange or by a combination of both routes.

In some cases, investors will be invited to channel money into a particular company to represent an overall increase in that company’s value, he said, while in other cases, existing shares in the company could also be sold to a particular investor or sold publicly on the stock exchange.

The multiple approaches represent a change of tactic from the 2018 version of the IPO program, in which 23 companies were chalked to undergo partial privatization via public offerings. Fourteen companies were due to debut on the stock exchange and additional sales were slated for nine already-listed companies.

However, so far, the Egyptian government’s efforts to offer stakes in 32 companies have not resulted in any progress, either through public or private offerings.

A government source close to the privatization plan told Mada Masr that the proposed scale of offers is unlikely to happen, as the government is currently still taking the initial steps to prepare the companies for the offering, including preparing the tenders to choose the investment banks and legal offices that will handle the share sales for some of the companies.

At best, the source expects only eight companies to be offered throughout this year, including Port Said Container and Cargo Handling Company, Damietta Container and Cargo Handling Company, the Egyptian Ethylene and Derivatives Company, petroleum engineering firm Enppi, Middle East Oil Refinery, Assiut Oil Refining Company, the Egyptian Methanex Methanol Company, and El Wady for Phosphate Industries and Fertilizers — the last five of which were not named among the 32 companies announced by the Cabinet last month.

The state-owned investment bank NI Capital is set to manage these tenders, while the Sovereign Fund of Egypt is expected to handle offering some of the companies directly to strategic investors, the source added.

A high-level source at NI Capital told Mada Masr that it would be difficult to complete even 25 percent of the offerings announced by the prime minister within a year. The source explained that the process for offering companies on the Egyptian Exchange takes six months for companies still not prepared for an IPO and three months for those who are.

Another issue, the source noted, is that successive IPOs will lead to declining share prices as things progress “according to the law of supply and demand.”

Only the Port Said and Damietta container companies were registered on the EGX at the close of 2022, the source added, but they are still undergoing share price evaluation by financial consultancy FinBi.

A source at FinBi confirmed that the share price evaluation is still ongoing for the two companies, after which they will need to be approved by the Financial Regulatory Authority, to be followed by the process of promoting the offering — a step that will take at least three months.

As a result, the first IPO is not expected to take place until the midway point of 2023, making the government’s hopes to offer all 32 companies within a year nearly impossible to fulfill, the source added.

A high-level source at the Egyptian Exchange concurs with the consultant and government source.

“Implementing the full program is very difficult to do within a year due to several factors, including that the government has not yet decided on the percentages that will be offered on the stock exchange and the percentages that will be offered to strategic investors, as well as on which option is the bigger priority, especially since everyone knows that the sales are aimed at obtaining dollar resources. Therefore, we expect that the offerings will be postponed or delayed,” the source said.

The source added that many companies may have financial commitments to settle or are undergoing developments that need to be completed before the long offering process starts.

As for the companies to be offered directly to strategic investors, a source informed of the sovereign wealth fund’s dealings told Mada Masr that the five companies have already added to the fund’s pre-IPO sub-fund to start marketing them to Gulf wealth funds: Salhia Investment and Development Company, Misr Life Insurance, and Egyptian Linear Alkyl Benzene, as well as the military-owned Wataniya Petroleum and Safi Water (the latter was not named in last month’s announcement).

But difficulties face the offering of the two military-owned companies in particular, as the sovereign fund source noted that there are disagreements between the government and the companies’ shareholders who disapprove of the sale, which has prevented companies from being added to the sub-fund.

In the face of these delays, why did the government launch such an ambitious program?

Several of the sources say that the program was proposed as a means of “political maneuvering” with the aim of appeasing the reform demanded by the IMF.

The IMF is set to begin the first review of Egypt’s adherence to the structural adjustment program that came with last year’s loan.

A government source previously told Mada Masr that the government will have little margin to maneuver on its own in implementing the IMF program, as it will be facing increased scrutiny from the financing agency.

But Egypt has looked at the IMF loan as a “certificate of trust” in its economy, even as it navigates the increasingly rocky terrain that has become its bilateral relations with Gulf countries. Courting Gulf investment, Egypt’s primary channel for financing, is not a purely economic affair. Political, diplomatic and security sources who spoke to Mada Masr in the past have documented a growing sense of frustration at the highest levels with the compromises Egypt has been forced to make in order to secure vital economic support from Gulf countries.

Singling out the United Arab Emirates, one source went so far as to describe the UAE’s activities in Egypt as more of “a patronage presence” rather than “foreign investment.”

While Egypt has pursued warmer relations with Qatar, it has also found Doha driving a hard bargain on several fronts, most notably in the negotiations over Vodafone Egypt, given the Qataris’ awareness of Egypt’s increasingly desperate position.

With few other options, however, Egypt continues to sit at the bargaining table with Gulf investment funds.

But in many ways, it is a race against the clock, and not just the IMF clock.

Egypt’s foreign debt rose to $155.7 billion at the end of last June, an increase of $17.8 billion from June of 2021, according to the latest reports from the central bank on the international situation of the Egyptian economy. Egypt is supposed to repay $20 billion in loans and debt maturity in the current year, in addition to a financing gap of about $12.6 billion in the current account in the fiscal year 2022/23 budget, according to the estimates of the IMF which Mada Masr has reviewed.

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