US embassy cable - 05CAIRO8161

UNCLAS SECTION 01 OF 02 CAIRO 008161 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON, EFIN, EINV, EIND, EG, Privitization 
SUBJECT: GOE PRIVATIZES "STRATEGIC" FIRMS, WITHIN LIMITS 
 
This message is not for Internet distribution. 
 
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Summary 
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1.  (SBU) The Ministry of Investment (MOI) has recently 
acted to extend the revitalized privatization program to 
cover petrochemical firms, which were previously considered 
untouchable "strategic" companies, theoretically important 
to Egypt's overall economic security.  Nevertheless, there 
remain limits as to what the Nazif Cabinet, through Minister 
of Investment Dr. Mahmoud Mohieldin, can do on strategic 
enterprises, as demonstrated by the retention of key 
fertilizer-producing companies.  Concerns over the social 
and economic impact of privatizations - especially with 
parliamentary elections on the immediate horizon - provide a 
check on the program, the MOI's protestations 
notwithstanding.  End summary. 
 
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The Petrochemicals Wave 
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2.  (U) In the past few months the MOI has floated 20% of 
shares in two very profitable joint venture firms (JVs) in 
the energy sector, Sidi Krir Petrochemicals Co. (SIDPEC) and 
Alexandria Mineral Oil Company (AMOC).  SIDPEC is Egypt's 
largest producer of ethylene and polyethelene, while AMOC, 
though accounting for only 2% of Egypt's total refinery 
output, operates two modern complexes for mineral oils and 
paraffin wax production.  Both initial public offerings 
(IPOs) were greatly oversubscribed; the two tranches of 
SIDPEC shares put on the market were oversubscribed by 2.5 
and 5 times, respectively, while for AMOC, overselling 
reached 26% and 34% for the two consecutive tranches. 
(Note: While the over-subscription is indicative of the 
attractiveness of these firms, it should be taken in 
context.  Stock market mechanisms in Egypt allow limitless 
calls for shares with only a small amount required to be 
paid upfront.  End note.) 
 
3.  (SBU) The two IPOs not only stimulated the stock market 
but also contributed to growth in privatization proceeds, 
which reached LE 5.1 billion during the first quarter of FY 
2006 (July to September) alone.  The June SIDPEC offering 
topped out at 21.0 million shares at LE 70 per share, for a 
total value of LE 1.5 billion; mid-September sales of AMOC 
stock came to 86.1 million shares at LE 45 per share, for a 
total of LE 900 million.  In a recent meeting with Econoff, 
Mohamed Hassouna, Advisor for Public Enterprises to the 
Minister of Investment, revealed that given the success of 
the IPOs, the GOE will soon offer shares in yet a third 
petrochemical firm, Middle East Oil Refinery (MIDOR). 
 
4.  (SBU) Hassouna explained that the sales technique 
introduced by the MOI for these JVs, and others to follow, 
involves floating 20-30% of shares on the stock market, and 
then selling 50-60% to an anchor investor, while retaining 
20% for the GOE.  Minister of Investment Mohieldin believes 
this approach serves the dual aims of stimulating the stock 
market and improving management of the companies through 
sale to a major investor.  Citibank and the National Bank of 
Egypt have already been chosen as promoters for SIDPEC's 
anchor investor tender offering.  Hassouna also described 
MOI's technique of "market sounding," i.e., making public 
statements regarding upcoming privatizations to get a sense 
of the market's reaction before actually making the IPOs. 
Hassouna believes this technique was partly responsible for 
the success of the petrochemical offers. 
 
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The Opposition 
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5.  (SBU) MOI has not been immune to criticism over the 
sales, despite the success, from certain quarters.  Al-Araby 
newspaper, the mouthpiece of the nationalist, statist 
Nasserist Party, for instance, on September 25 complained 
that the GOE had opened the door for increased dominance by 
international capitalist enterprises over key industries. 
Aziz Sidky, Egypt's prime minister from 1972-1973 - the 
period during which the "public enterprises" were first 
created - similarly expressed dismay.  MOI responded to the 
criticism by insisting that profitable sales are not only 
important for the companies' future viability but are also 
economically justifiable in the near term. 
 
6.  (SBU) The overriding concern for MOI, whether in the 
petrochemical industry or elsewhere, remains labor 
opposition.  According to Hassouna, Mohieldin regularly 
meets with labor unions and labor representatives on the 
boards of directors of public sector companies.  Unlike in 
previous years, MOI also includes labor representatives in 
the actual privatization negotiations with potential 
investors.  In most cases, workers are offered excellent 
early retirement packages if downsizing is a part of the 
negotiations.  Hassouna opined that workers frequently 
object to privatization on principle without understanding 
the mechanics; once they begin to understand the mechanics 
and realize that they will not be dismissed without any 
compensation, they generally stand down on their opposition. 
 
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"Strategic" Sectors Remain: the Case of Fertilizers 
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7.  (SBU) Domestic social and economic considerations still 
put a damper on the prospects for privatization of some 
industries, despite statements from MOI that "nothing is off 
the table."  A case in point is the fertilizer sector, 
which, according to Hassouna, foreign investors - especially 
from India and China - have been eyeing for some time. 
Hassouna stated that the GOE fears damage to domestic 
agricultural production if foreign investors take charge of 
the fertilizer sector and begin exporting the bulk of 
Egypt's fertilizer output.  For this reason, three "core" 
fertilizer companies - KIMA, Delta and Al-Nasr Mining - will 
not be entirely privatized but will remain a "safety valve" 
(Hassouna noted that Mohieldin strongly resists using the 
term "strategic"), although there are plans to offer up 20- 
30% of Al-Nasr, which holds the monopoly over phosphate 
quarries. 
 
8.  (SBU) Mohieldin has also set up a Sectoral Study 
Committee to probe the possibility of deregulating the 
fertilizer industry.  (Comment: Setting up the committee is 
likely a means to pay lip service to the "nothing is off the 
table" concept.  End comment.)  Asian investors interested 
in the fertilizer sector have not been put off entirely, and 
have actually established greenfield fertilizer projects in 
Egyptian free zones.  Several Asian producers recently 
signed an MOU with Al Nasr Mining Co. to supply the raw 
material needed in these greenfield projects.  One hundred 
percent of the output of these projects is exported to Asia. 
 
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Comment 
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9. (SBU) Mohieldin said recently in an interview with the 
Oxford Business Group "privatization is one of the 
components - not the component - of reform."  This was 
likely an effort to curb public suspicion that the GOE plans 
to give away the store to foreigners, unmindful of dangers 
to labor and economic security.  The Minister claimed he did 
not fear innovation in the Egyptian privatization program - 
or, as he has re-dubbed it, the "asset management program." 
He claimed that innovation has contributed to smoothing out 
many bumpy parts in the privatization process. 
Nevertheless, even as he touches previously untouchable 
industries, Mohieldin claims he will moderate the pace of 
privatization and work hard to manage expectations.  We 
would be surprised if the MOI were to pull off any more 
controversial privatization deals prior to next month's 
parliamentary elections.  End comment.