New bill proposes financialization of public utilities providers

State-owned and private public services and utilities companies, including electricity, water and gas providers, may be allowed to monetize and trade their future revenues for sale to investors, after a new bill proposed last week by the Financial Regulatory Authority. 

The step would push Egypt’s public services into the domain of financialization in a bid to increase profits and allow public projects and services to be financed through loans outside the annual fiscal budget to reduce pressure on the public treasury, according to economists and finance professionals who spoke to Mada Masr. 

Yet, they also said the bill raises questions about the cost for the public who will use the services. 

Technically called “future flow securitization,” the financing method suggested by the the new draft legislation would “allow an enterprise to monetize existing and predictable cash flows expected to continue over the ordinary course of business,” and “the flows generated by the company are used to pay the debt service to the investors on the financing,” according to the Inter-American Development Bank Group.

The bill would introduce kinds of financial instruments for public utilities and services companies, including “revenue-based financing” or “royalty-based financing,” where investors purchase debt in companies in exchange for a regular share of the company’s income for a period determined in the contract. According to this financing instrument, debt servicing schemes could vary depending on how well the company is doing in terms of revenues and profits. 

Recently proposed by the regulatory body, the bill is still in its early legislative lifespan and the Cabinet is yet to review it. Depending on the Cabinet's review, the bill could either be shelved or make its way to the Parliament.

This new financing instrument could be used by several services sectors, such as electricity, natural gas, water management, communications, roads and bridges, transportation of people and goods, subways, railways, health, education, and housing, said the authority’s director Mohamed Omran.  

While the bill, which would amend the 1992 financial markets law, has received praise from some banking and financial market experts for opening alternative financing sources for public companies, economists and other banking experts worry that it amounts to a potentially volatile form of finanziation of key public utilities and services, such as health and education whose provision should be immune to market shocks. 

For economist Wael Gamal, the bill is a further step in the “general push” toward treating public utilities as a “profit-generating economic activities'' whose financing methods are like those of private corporations.

“This direction toward securitizing public services could put them at the mercy of hot money and the volatility and changes of the global market,” Gamal told Mada Masr, referring to the trend whereby money moves quickly in and out of whichever market happens to provide the highest short-term interest rate to foreign investors at any given moment. “It puts the future of your public utilities and services not only in the hands of the local debt market but in the hands of foreign investors,” who can get rid of these bonds any time the economy is shaken by a negative externality or they have better investment opportunities elsewhere. 

However, Mohamed Kamal, a top executive at a securities brokerage company, told Mada Masr that the legislation does not necessarily aim to transform public services into profit-oriented entities, but rather to “provide services at their actual cost.” According to Kamal, the state’s strategy is to “liberalize” the prices of public services alongside supporting those who cannot afford them in different ways. In that sense, according to Kamal, public utilities and services companies shield their future revenues and prevent future losses. 

Several public service providers, such as the Egyptian Company for Metro Management and Operation, the Egyptian Railway Authority, and the Egyptian Electricity Holding Company, have sustained significant losses and debt over the last years after decades of financial mismanagement and negligence. With the rollout of the International Monetary Fund-backed structural adjustment program, several of these services saw several price hikes, with the metro tickets prices more than quadrupling in less than five years and train tickets almost doubling. According to privately owned news outlet Masrawy, the Electricity Holding Company sustained losses of around LE15 billion between 2014 and 2019 and, as of January 2021, the sector owes a whopping LE100 billion of debt according to the state-owned Al-Akhbar news outlet. 

However, for Gamal, the concerns over the financing methods extend beyond profit shortfalls for public utilities to how they might be applied to the fields of health and education. 

“These sectors should be tied to public budgets, which fall under the oversight of Parliament and ideally also civil society, who both identify the priorities and the targets of spending, while also monitoring the budget performance to assess not only how much was spent but also whether this spending has achieved its social and economic targets,” said Gamal, questioning how this financialization would affect the decision making for issues, such as setting the tuition fees of public schools and universities. “Would you make it now based on the social and educational considerations and targets or you will now be concerned with repaying the debt when it is linked to revenues?”

Salwa al-Antary, the former head of research at the National Bank of Egypt, shares these concerns: “Big loans require big guarantees, and since the guarantee here is public utilities, we should raise the question of what will happen to the price of the services provided? Will the prices increase so that the revenue increases, and, in turn, the financing is larger? What about sectors, such as education and healthcare, which should be mainly non-profit oriented?”

For Gamal, the move toward “securitization” comes “at a time when the whole world is realizing that these services should never be left to market mechanisms after years of gutting the welfare state has left healthcare systems in a dilemma during the pandemic.” The legislation would undermine social considerations in the planning and development of public services that treat sectors like health and education as a human right that should be accessible for all people, he added. 

Putting social considerations and future hikes of prices of services aside, experts also pointed at the uncertainties surrounding the possible risks facing investors. 

Although Kamal thinks that the state’s recent changes to the business model for how public utilities and services companies give protection for possible investors interested in revenue-based financing, Antary said that the current amendments do not lay out clear protections for investors in this kind of debt. “What if the company or project does not achieve the targeted revenues? Who is the guaranteeing party here? Do investors have the right to take over the asset if the entity fails to make paybacks? All of these are questions that need to be answered and looked at,” added Antary. 

At a political level, Gamal says that there are lots of uncertainties about this bill that need to be clarified by the government, adding that the government needs to clarify how these loans will come under the oversight of the Parliament and how the government will manage the tension between social benefits and the profit imperative.