After decades of delay, privatization in Egypt is now taking off. [1] Since 1993, 119 of 314 state-owned enterprises (SOEs) have been fully or partially sold. [2] These have been mainly manufacturing ventures, but the government has also pledged to offer utilities, public sector banks and insurance companies, maritime and telecommunications firms and leading tourist hotels. In May 1998, the International Monetary Fund, long skeptical of the Mubarak regime’s commitment to privatization, pronounced itself satisfied with the program’s progress. Measured in terms of annual privatization receipts as a percentage of GDP, their report noted that Egypt ranks fourth internationally, trailing only Hungary, Malaysia and the Czech Republic.

Expanded financial markets have resulted. Between 1992 and 1996, trading volume in Egypt’s stock market increased nine-fold. The number of companies actively traded grew from 111 in 1985 to 354 in 1996, and Egypt has been listed in the International Finance Corporation’s emerging markets index since September of that year.

These developments have generated new controversies over capital ownership and social welfare. Raising these questions admits that the proponents of privatization have won the day — opposition from leftists, workers and recalcitrant state bureaucrats may still slow the pace of the selloff, but can no longer forestall it. Failure to concede this sidelines progressives from critical debates over how Egypt’s transition from state to private sector capitalism will continue.

How to Privatize?

There are a variety of methods by which to transfer the ownership of SOEs to the private sector. First, firms can be sold directly, and in total, to another company for a negotiated price. A modified version of this involves sales to an “anchor firm” or “strategic investor” through stock offerings; after a competitive bidding process the anchor purchases a majority block of shares, with the remainder broadly distributed through the stock market. Blocks of stock can also be offered without granting any single bidder a controlling interest.

Through voucher programs, which were undertaken in the Czech Republic, entitlements to purchase shares are allocated on an equal basis to all adult citizens, who may then choose either to hold their shares or sell them. Finally, employee stock ownership plans (ESOPs) allow workers to purchase a stake in the firms that employ them.

Egypt has employed several of these methods. By July 1998, nine firms had been sold to strategic investors, another 37 had a majority of shares floated on the stock market, while 19 companies saw 30-40 percent stakes floated. Many of these cases had 5 to 10 percent of their sales reserved for employee purchases, with employee shareholder associations (ESAs) set up for this purpose; 15 establishments, mostly land reclamation companies, had a full or majority stake given to employees. Twenty-five firms were liquidated and sold as assets.

Typically, neoliberal economists and lending agencies evaluate these methods according to the resulting efficiency and profitability of the firm. The underlying assumption — supportable in some but not all cases in Egypt — is that SOEs are inefficiently run, with a bloated workforce producing inferior products, all at a cost to the state. In this context, the arguments in favor of direct or strategic sales are twofold. First, they result in management by a capitalist firm presumably operating according to efficient market principles; and second, the anchor should be able to infuse the firm with new capital to modernize equipment and production techniques.

Nevertheless, some Western economists have seen a value in broader stock distribution, on the grounds that spreading property more evenly through the society is more egalitarian and enhances popular respect for property rights. The World Bank has spoken quite favorably about the Czech voucher program, which resulted in a higher proportion of the population owning stock there than in the US. [3] In initially advising Egypt’s privatization program, however, the Bank promoted the anchor firm model; the American Chamber of Commerce in Egypt likewise favors this approach.

Fear of Foreign Hands

Focusing narrowly on efficiency criteria ignores fundamental questions about the nationality of capital. Given Egypt’s prior experience with colonialism, there is widespread concern about returning the country’s strategic assets to foreign hands. The direct and anchor sale models privilege foreign buyers, because Egyptian businessmen generally lack sufficient capital to bid for large purchases, although consortia that pool local capitalists’ resources are developing.

Efficiency criteria also obscure concerns about the welfare of workers in privatized parastatals. In theory, ESOPs would increase workers’ influence over management decisions, thereby leading to more humane working environments, and less resort to layoffs. ESOPs would also ensure that capital remains in national hands, and could increase workers’ incomes.

Certain Islamists have advocated giving workers a controlling interest in their firms. [4] In 1995, most labor activists I interviewed saw this as complicity in privatization, but a few did support experimentation with ESOPs. Ordinary workers have varied responses to these programs, which mostly limit them to minority ownership. At one large textile factory, workers opposed participation in a proposed ESA because it appeared unlikely to empower them to remove corrupt and incompetent state managers. [5] Finally, to the degree that ESOPs would financially benefit former parastatal workers, this may be unfair to the remaining masses, who were supposedly the collective owners of Egypt’s SOEs.

Domestic or Foreign Capital?

Privatization has already dramatically increased the presence of foreign capital in Egypt. Foreign portfolio investment accounted for about 30 percent of the total market capitalization of $20 billion in 1997, with foreign investors owning roughly 20 percent of negotiable shares on the exchange. More than 700 foreign institutions and funds are involved in the Egyptian market, and several international investment funds have been set up to concentrate exclusively on Egyptian securities. Government officials themselves recently expressed fears that a high proportion of foreign holdings in the stock market are only speculative, and hence injurious to the country’s long-term development goals.

Anxieties about multinational penetration have infused the debate over how the proceeds of privatization should be used. Under advice from multilateral lenders, the government has dedicated much of the money to retiring the public sector debt held by state-owned banks, a policy that will make the banks themselves more attractive to buyers. Others argue, however, that the proceeds could be spent to help modernize and restructure some of the remaining SOEs, rendering them more competitive and hence no longer in need of sale.

Difficulties have also arisen when foreign purchasers have attempted to cooperate with local firms in submitting bids. Such a dispute recently scuttled plans to sell a majority stake in the Ameriyya Cement Company. France’s Lafarge Coppée was slated to make the purchase with ASEC, an Egyptian firm that provides specialized management services to the cement industry, but the deal collapsed over ASEC’s objections to Lafarge positioning itself as the lead bidder. As Minister of Industry in the early 1990s, ASEC chairman Muhammad ‘Abd al-Wahhab was seen as the cabinet’s most outspoken SOE defender. He is now rumored to belong to a cartel of corrupt state managers making illicit profits from the cement industry’s liberalization. [6]

Albeit sometimes expressed in noxious anti-Semitic language, some opposition parties have raised a legitimate fear that parastatals will be purchased by Israelis, and then deliberately managed to ensure that Egypt remains technologically less developed. This specter surfaced in a recent debate over privatizing maritime facilities, since the Israeli ambassador had earlier revealed some Israeli companies’ interests in purchasing a state-owned stevedoring company. Initially, these concerns led ‘Atif ‘Ubayd, the public enterprise sector minister, to restrict share sales in maritime companies to ten percent; though this number was later increased, the government subsequently decided to postpone maritime privatization.

Finally, suspicions of foreign intentions have fostered disputes over the pricing of firms to be sold. Sharp disagreements between government officials and international consultants hired to evaluate the firms delayed the start of the program. Even after intense bidding for some strategic sales and oversubscription of some public offerings, some western economists continue to charge that the government is demanding too high prices, while domestic critics accuse the government of undervaluing Egypt’s assets. [7]

All of this resurrects and refocuses earlier debates on the relationship between class and nation. Is there an Egyptian “national project” to further industrialize? And, if so, can private domestic capitalists realize it better than state managers did? Rather than continuing to oppose privatization, should leftists instead support Egyptian capitalists in their struggles to limit sales to foreign investors?

Social Welfare Concerns

Leftists have also opposed privatization because of its potential deleterious consequences for workers. In the former socialist countries and “mixed economies” like Egypt, civil servants and public sector workers have enjoyed protection against layoffs, access to pensions and social insurance and even company-provided housing and day care. Combined with food subsidies and price controls, these protections and benefits constituted a form of welfare, different from the means-tested, cash grant systems used in some western countries. Intended to ease the strain of these programs on government budgets, privatization typically entails an end to guaranteed employment schemes, and is associated with broader structural adjustment programs that subject basic necessities to market pricing mechanisms. Thus, reforms effectively remove existing social safety nets, usually before establishing alternatives.

Legally, all employees in large (over 50 workers) workplaces in Egypt should enjoy job security and social protection. But private sector industrialists typically found ways to evade the labor laws, thus making parastatal workers relatively privileged. Addressing similar conditions in many mixed economies, one neoliberal rationale for structural adjustment holds that such workers must suffer “transitional pain” so that reforms can benefit the truly disadvantaged. [8]

Labor opposition to reforms, in Egypt and elsewhere, has forced rethinking of that philosophy. Since 1996, the World Bank has been funding schemes in some countries to compensate workers laid off due to privatization, and/ or to provide job retraining. In Egypt, where a law to permit mass layoffs in the public sector and newly privatized firms has not yet been passed, the government has been promoting early retirement schemes as a means to shrink parastatals’ workforces prior to sale.

Egypt’s early retirement program is paid for by a social development fund financed by foreign donors and privatization proceeds. It offers workers an up-front cash payment based on their anticipated salary losses, along with a monthly stipend. [9] However, the latter may be less that half the pension the worker would have received under the old system. Workers claim it is insufficient to meet regular expenses, and that their prospects for finding new employment to supplement the stipend are bleak. The rationale for the lump sum approach is that recipients should invest in a small business, or in stocks, thus fostering economic growth. But many are tempted to spend the money on large-scale expenses, such as marrying their children. Those who do so, or whose investment schemes fail, thus face a dismal future. Workers also questioned whether their jobs could be saved if the government instead invested the early retirement funds in modernizing their factories.

Reports in 1997 indicated that program enrollment was falling short of government targets, and labor activists charged that some workers were being pressured into enrolling under threat of wage cuts or transfer. The rate of acceptance has risen in recent months, however, as workers increasingly fear that once the new labor law is enacted — it is scheduled to go to parliament this year — they will risk being fired with no compensation whatsoever in a country which lacks unemployment insurance.

Are jobs a right that governments must provide to all whom the private sector does not hire? Or should the left just push for western-style unemployment and welfare systems to protect workers from the ravages of capitalist labor markets? In principle, there is no reason for progressives to oppose the replacement of universalistic protection schemes with targeted programs — why should governments subsidize the well-off? But effective social safety nets require accountable and efficient governments. In the 1980s, when the Mubarak regime considered replacing food subsidies with cash grants and ration cards for the poor, some economists voiced legitimate objections that corruption and bureaucratic incompetence would prevent the aid from reaching the truly needy. These same problems would confront any program to provide unemployment relief.

Conclusion

This article has intentionally raised more questions than it answers. The global sweep of privatization makes it possible to study different approaches’ effects on ownership, employment and social welfare. This is an urgent task for the left.

Endnotes

[1] I am grateful to Robert Vitalis, Samer Shehata, Joel Beinin and several members of the Middle East Report editorial committee for helpful comments on earlier drafts of this article.
[2] Unless otherwise noted, information on Egyptian privatization since 1996 is drawn from al-Ahram Weekly, Middle East Economic Digest and Business Monthly. On privatization battles before 1996, see my Labor and the State in Egypt: Workers, Unions and Economic Restructuring (New York: Columbia University Press, 1997).
[3] World Bank, Bureaucrats in Business (New York: Oxford University Press, 1995), p. 202.
[4] Al-Sha‘b, April 19, 1994.
[5] Samer Shehata, “Working Class Politics and Culture in Egypt,” Ph.D. dissertation, Princeton University, forthcoming.
[6] The latter point was contributed by John Skafianakos.
[7] For more on valuation controversies, see Sophia Anninos, “The Value of Privatization,” paper presented at the 1998 Middle East Studies Association conference.
[8] John Waterbury, Exposed to Innumerable Delusions: Public Enterprise and State Power in Egypt, India, Mexico and Turkey (Cambridge: Cambridge University Press, 1993), p. 235, and World Bank, World Development Report 1995, pp. 103-08.
[9] This discussion is based primarily on interviews I conducted with labor activists and social researchers conducted in Cairo in January 1999.

How to cite this article:

Marsha Pripstein Posusney "Egyptian Privatization," Middle East Report 210 (Spring 1999).

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