Govt announces plans for partial privatization of 32 state companies, assets amid economic crisis

Thirty-two state companies will undergo partial privatization during the coming year, according to Prime Minister Mostafa Madbuly, who spoke in a live broadcast on Wednesday night.

Madbuly detailed the program as part of steps the government will be taking over the coming two years to confront the dollar scarcity hampering the national economy, a phenomenon Madbuly described as the “ongoing economic fallout” from Russia's invasion of Ukraine.

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 as part of 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.

How will the privatization program work?

Shares in the 32 companies will be offered for investment, said Madbuly, 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 debuts on the stock exchange and additional sales were due in nine already-listed companies.

But the offerings were delayed as a global wave of foreign capital flight from emerging markets saw investors exit Egypt at the end of the same year. Ultimately, public offerings were only ever made in the Eastern Company for Tobacco, e-Finance and Ghazl El-Mahalla Sporting Club, while other companies on the program, such as Abu Qir Fertilizers and Chemicals Industries Company and Alexandria Container and Cargo Holding Company, sold shares directly to strategic investors in the Gulf earlier this year.

Most of the companies on the program announced Wednesday evening are new. They include three banks — Banqué du Caire, the Arab African International Bank and the United Bank — as well as the military-owned Wataniya Company for the Sale and Distribution of Petroleum Products and Safi Waters, as well as companies in sectors that have never been subject to privatization before, such as the insurance sector.

The sales will be completed over the coming year, Madbuly said on Wednesday, and sales in eight of the 32 companies will be completed over the coming six months.

Partial privatization of the 32 companies, said Madbuly, demonstrates the seriousness of the state’s plans, drawn out in the state ownership policy document, to exit some economic sectors and to reduce its presence in others.

Egypt has been under pressure for years from the IMF, as well as other international institutions, to reduce the state’s footprint in the economy and expand space for the private sector: a change that the 2018 IPO program was intended to deliver.

Madbuly’s announcement also included a breakdown of how the upcoming sales will figure into these plans. Construction, chemicals, pharmaceuticals, financial auxiliary services, agriculture, food production and accommodation services are designated as sectors the state plans to completely exit.

Lowering state investments without entirely exiting is the target for some sectors, including banking, electricity generation, life insurance, transport, mining and laboratory chemicals, while oil and natural gas extraction and refining, Suez Canal companies and fertilizers are sectors where opening more space for the private sector is the goal.

So what has changed since the launch of the first IPO program in 2018?

It’s less that the conditions for sale have improved and more a question of urgency, according to EGX analyst Hesham Hamdy.

Early last year, the start of the Russian invasion of Ukraine caused another investor exit from Egypt’s bond market, with $20 billion draining from the country over the first half of the year. Compounded with high global inflation, the exit propelled a dollar shortage crisis that took a heavy toll on Egypt’s import-dependent market.

“In 2018, we did not have more than $150 billion in debt. The global situation was better than this. There was no coronavirus pandemic, or the Russian war on Ukraine,” Hamdy explained. “You had space to choose the timing and wait for the market to improve. Now you need a lot of dollars very quickly.”

Under these conditions, privatization could provide an alternative to unreliable inflows of hot money from the bond market. “Now we need to bring in foreign investments, not through debt instruments, because our debt ceiling is nearly at the maximum limit,” Hamdy continued. 

And will the program bring in the desired investment?

The same troubled market conditions pushing the government to relaunch the public offering in a bid for revenue have led many rising private sector companies to delay their IPOs or postpone them to next year to avoid selling off shares at too cheap a price.

Given the haste to bring in foreign exchange, the analyst also predicted that the IPOs would come with a discount on the share price — another common practice in initial offerings, he said.

But a successful offering of state-owned companies may enliven trade on the EGX and encourage other companies to reconsider and debut on the stock exchange as well, Hamdy believes.

As for the offerings program involving direct stake sales to strategic investors alongside the IPOs, Hamdy noted that “it is a common practice, since IPOs usually include no more than 5 percent of the shares and target individual investors.”

Gulf wealth funds, already making various purchases of state-owned assets and company stakes since the economic crisis began last year, are expected to be the targeted buyers for the larger stake sales. “We will not see many foreign investors pumping solid, direct investments. Globally, investments are going to US debt instruments,” due to the US Federal Reserve raising the interest rate multiple times recently, Hamdy said.

With Egypt’s corridor rate — the maximum interest rate offered by the central bank — raised to 16.75 percent, selling shares may be a cheaper solution than taking on more debt for private companies seeking to grow, he said.

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