Egypt's Business Climate

Published February 13th, 2000 - 02:00 GMT

Privatization 

 

The Egyptian government made a formal commitment to privatization in the early 1990s and announced a plan for the divestiture of 125 public enterprises over the following five years. The government has also decided to sell off its shares in more than 250 public joint venture companies. However, some observers claim that the privatization process is proceeded slowly due to a lack of serious government commitment. These sources feel that privatization is being implemented primarily to appease international financial institutions and send positive signals to the world. 

 

The privatization program in Egypt is two-fold. The first and most extensive part involves divestment of public sector holdings in production and manufacturing companies. To that end, two approaches are being undertaken: sales of shares through the stock exchange and sales of a strategic stake to anchor investors through public auction. 

The second stage of the program is the encouragement of private sector investment in sectors historically controlled and operated by the public sector including electricity, roads, airports, ports, oil and gas transmissions. For that purpose, new laws were passed by the Egyptian government authorizing private sector investment in public services. 

 

Law 203 of 1991 established the legal basis for privatization by removing the 314 public sector enterprises from the control of government ministers and restructuring them as affiliates under sixteen independent holding companies. In principle, the holding companies operate as private sector companies with full financial and managerial accountability. 

 

The government plans to privatize 99 companies in 2000 and aspires to complete privatization of all public-sector companies by 2001. Analysts believe this goal will be difficult to attain because of the time needed to restructure financially strained companies before they can be sold. 

 

For the most part, privatization has occurred in the construction, finance, tourism and transportation industries. Egypt is coming under increasing American and European pressure to open more of its service sectors, especially telecommunications. Investors are particularly interested in the country liberalizing this industry and ending the state's fixed-line monopoly, which will enable cheaper Internet access. The government has announced that it would sell a 10 percent stake in Telecom Egypt in 2000 and another 30 percent soon after. 

 

Other sales expected during late 1999 and 2000 include seven regional power companies. The government also approved in September 1999 the sale of the largest parts of the Suez Company for Loading and Unloading. It also agreed to sell equity in the Misr-Aswan Company for Fishing and Fish-procession and the Asyut company, which repairs vehicles. 

 

Other scheduled sales are for the Isma'ilia Tourism Company, the Helnan Dahab Hotel, the Cosmopolitan Hotel in Cairo, Delta Spinning & Weaving and Wadi Cotton Ginning. During 1999, Egypt sold two cement companies - Asyut Cement and Beni Suef Cement, for a total of about $500 million. 

 

As of the beginning of September 1999, there were still no plans to privatize the state-owned media, military production, the oil sector, Egypt Air or the Suez Canal Authority. While Egypt has been interested in privatizing its four leading banks since 1997, continuing disagreements concerning a sales method and the allowance of foreign shareholders continues to delay the sales.  

 

Other Reform Efforts 

 

In 1996, the Egyptian cabinet abolished a long-standing ban on foreign ownership of real estate in the country, which dated back to the socialist and nationalist policies of the 1960s. In 1998/99, the government passed further laws that would open the way for foreign and private sector involvement in the banking and insurance industries.  

 

Additionally, the Ministry of Interior has increased the number of raids on suspected technology pirates to stamp out Egypt's reputation of offering poor intellectual property rights. As a result, foreign computer software companies have committed to investing there. 

 

The government food subsidies, however, are likely to remain in place for some time, as Egypt learns from the Jordanian experience when it lifted bread subsidies in August 1996 that sparked riots. The government is doubling for 1999/2000 the number of bakeries supplying subsidized bread to 20,000. 

 

Major Development Projects 

 

President Mubarak continues to pursue ambitious development projects, including a free industrial zone in the Gulf of Suez. This venture aims to employ more than 250,000 workers and attract large-scale investment. The East Port Said container terminal, adjacent to the industrial zone, represents Egypt's first harbor to be built and operated by foreign partnership. The port's strategic location off the Mediterranean could be Egypt's gateway to international trade. It will also provide the private sector with an opportunity to manufacture export-oriented products. 

 

In another step to encourage non-oil exports, the government in mid-1999 cancelled taxes on exporters' income. Exporters had already received rebates of sales taxes and customs duties on inputs used to produce export commodities, but these allowances are still overdue. The latest decision will encourage companies currently producing for the domestic market to consider export opportunities, and should therefore increase non-oil exports in the long term. 

 

The vehicle assembly sector is showing impressive results. Most major international models are now produced at twelve assembly plants employing 75,000 workers. General Motors, Peugeot, Suzuki, Citroen, Daimler-Benz, and Hyundai all produce in Egypt. During 1999, Egypt signed its first comprehensive vehicle manufacturing venture between Daewoo Motors and Nasr Automobile Company. Operations will be located in Wadi Houf, a southern Cairo suburb. 

 

Telecommunications is another area where major reforms are underway. In 1999, the government granted two licenses to foreign companies for the right to operate 20,000 nationwide public payphones, each for a 10-year period. Egypt, like other countries in the region, is seeing a significant rise in mobile phone usage. By January 1999, six months after assuming control of the mobile network established by Telecom Egypt, Mobinil (France Telecom, Motorola and Orascom Technologies) nearly doubled the number of subscribers from 83,000 to 159,850. Mobinil's competition is Misr-Fone, which has 180,000 users. 

 

Multinational companies are particularly active in the petroleum sector in Egypt. Among these are the Gulf of Suez Petroleum Company (GUPCO) which is a joint venture between the Egyptian General Petroleum Corporation (EGPC) and Amoco of the US, with more than $5 billion in investments. Amoco is also active in the development of compressed natural gas for automotive use and is developing an integrated business in Egypt involving a public station for vehicle and other fueling facilities. 

 

Other multinationals operating in Egypt in both oil and gas include Shell; Italy's Agip; Repsol of Spain; Mobil and Norsk Hydro of Norway. Technology has been bought from ABB Lummus Crest (USA) for the implementation of an ethylene/polyethylene plant at Ameriya-Alexandria; and EGPC has also signed a licensing agreement with British Petroleum for the production of polyethylene. 

 

Food processing is another industry that has attracted multinationals in Egypt. Production units have been set up to serve both the local market and neighboring countries. Thus, recent newcomers include Nestle, Heinz, Kellogg's, Cadbury, Pioneer Hi-bred and Unilever. Both Heinz and Cadbury are also working in association with the Kuwait Food Company in Egypt. 

 

Build Operate Transfer 

 

A government policy established in 1999 states that all power generation projects would be constructed on a build-own-operate-transfer basis. Thus far, three contracts have been awarded. 

 

In general, foreign and local investors are intensifying their involvement in both build-operate-transfer (BOT) and build-own-operate-transfer (BOOT) schemes in Egypt. Projects which have already been initiated include the construction of a thermal power station on a BOOT basis with two 325-megawatt generators, to be located at Sidi Krier on the Mediterranean coast, at an expected cost of about US$ 450 million (Siemens KWU has already won the contract to supply the generators), and a water-driven pumped storage plant at Ataqa near Suez, which will also have two 325-MW generators and is expected to cost some US$ 600 million. The pumped storage system would pump seawater into a basin in the mountains when the grid has plenty of slack and lower the water level to generate extra power during peak periods. Plans are also being drawn for a wind farm at Za'afarana on the Gulf of Suez, which will include a 300-MW turbine and cost about US$ 350 million. 

 

An additional project involves the construction of a private airport at Mersa Alam on the Red Sea Coast, 300 kilometers south of Hurgada and 800 kilometers south of Cairo, also to be built on a BOOT basis. Plans for a second international airport project, to be located on the Mediterranean coast near El Alamein, have been announced, and an offer for tenders has been issued. 

 

Other projects expected to go ahead on a BOT or BOOT basis include the construction of roads, hotels, restaurants, rest-stops and service stations along roadways, as well as the setting up of agricultural production and marketing schemes along urban and rural arteries. 

 

The four toll roads to be constructed are between Alexandria-El-Fayyoum, El-Fayyoum-Aswan, Dairout-Farafra and El-Kharga-El-Dweinat highways, and have a total length of 1,850 kilometers (1,150 miles). 

 

In the medium-term, the General Authority for Investment (GAFI) foresees BOT and BOOT being applied to other transport projects, such as the construction of new railroads and metropolitan lines to serve the huge new industrial and residential cities which have been built in desert areas. The Ministry of Transport and Communications is considering private sector involvement in the development of a new telecommunications infrastructure. 

 

Franchising 

 

Franchising has become a popular business practice for both foreigners and Egyptians, particularly in fast-food restaurants and clothing stores. Franchises in do-it-yourself systems, languages and computer training centers, pest control and gold plating have also sprouted. This market has experienced remarkable expansion since it began in 1970, and market sources expect continued growth at an annual rate of 10 to 20 percent.  

 

Brand conscious Egyptians, approximately 3 percent of the population or over two million consumers, are drawn to the increasingly popular and convenient service. Fare prices are high because of franchiser quality assurance standards and imported ingredients. 

 

The fastest growing area is primarily U.S. fast-food restaurants. As of 1999, there were 33 American franchisers including, Kentucky Fried Chicken, McDonalds, Pizza Hut, Subway, Taco Bell and Hard Rock Cafe. To address common problems such as customs delay, an International Franchise Committee was established as part of the American Chamber of Commerce in Egypt to meet with Egyptian government officials. 

 

Garment franchising is a relatively new and growing industry in Egypt. Using Egyptian workers and materials, garment franchises have met with great success in Egypt's increasingly freer market economy. Currently, approximately fifteen garment franchises exist in the Egyptian market. Egyptian businessmen themselves have begun their own homegrown franchises, particularly in the clothing industry, franchising their businesses to others. 

 

Principal Business Opportunities  

 

Rank. Sector 

1 Medical Equipment 

2 Packaging Equipment 

3 Oil & Gas Field Machinery 

4 Automotive Parts & Maintenance Equipment 

5 Construction Equipment & Building Materials 

6 Computers & Peripherals  

7 Paper & Paper-board 

8 Agricultural Equipment 

9 Telecommunications Equipment & Services 

10 Environmental Equipment & Services 

11 Franchising 

12 Electrical Power Systems 

13 Plastic Materials & Resins 

14 Food Processing Equipment 

15 Architectural, Construction and Engineering Services 

 

© 2000 Mena Report (www.menareport.com)

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