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Privatization Initiative Raises Questions
Privatization Initiative Raises Questions
Minister of Investment Mahmoud Mohieldin and National Democratic Party (NDP) Vice Chairman Gamal Mubarak announced on November 10 a proposal to adopt “voucher privatization” or “mass privatization” of 86 public companies out of a total of 153 slated for privatization. Under the proposed scheme, the government would distribute shares to some 40 million Egyptians aged 21 years and above, thus entitling them to share in the operating income of the enterprises. The Ministry of Investment w
Thursday, December 4,2008 02:15
by Ibrahim Saif, Farah Choucair Carnegie Endowment

Minister of Investment Mahmoud Mohieldin and National Democratic Party (NDP) Vice Chairman Gamal Mubarak announced on November 10 a proposal to adopt “voucher privatization” or “mass privatization” of 86 public companies out of a total of 153 slated for privatization. Under the proposed scheme, the government would distribute shares to some 40 million Egyptians aged 21 years and above, thus entitling them to share in the operating income of the enterprises. The Ministry of Investment will assess the face value of the shares. The government has prepared a draft law on the management of public assets that provides for voucher privatization, and will halt the current privatization program until parliament acts on the bill.

Public sector dominance in Egypt is rooted in the post-independence Arab socialist period that left virtually all of the economies with a statist model of development. Playing the role of employer of first resort, state-owned enterprises (SOEs) emerged as a source of rapid employment expansion, motivated by with the need to generate support for the government. The case of Egypt is extreme, with the government promising every university graduate a job in the public sector from the early 1960s until the late 1980s. By the 1980s, the poorly performing state-owned enterprises (SOEs), which made up some 40 percent of GDP, crippled the economy.
 
Privatization first appeared on the policy agenda in 1991, when the IMF imposed it on Egypt as a standard feature of the conditionality attached to structural adjustment loans and economic liberalization programs. Politically, privatization was difficult to accept, as it threatened the ruling elite’s desired image as the guardian of the national interest. Forced to restructure the SOEs, the government resorted to various privatization techniques: 26 percent of companies were privatized through sale to an Employee Shareholder"s Association, 28 percent through shares offered on the stock market, 24 percent by means of liquidation and asset sales, and 22 percent through sales to anchor investors.
 
After eighteen years of conventional privatization, the new NDP proposal raises questions about motives behind this highly publicized shift. Senior government officials explained that the government has been developing the scheme for three years as part of achieving President Hosni Mubarak’s vision of the need for “greater involvement of the people in managing public assets.” In an interview with al-Ahram Weekly on November 13, NDP member Sabri al-Shabrawi (reportedly the brains behind the new proposal), said that “it is about time the Egyptians got back part of what is rightfully theirs. This is what private ownership should be about, not the concentration of wealth in the hands of a few.” Such statements suggest that the initiative is part of an effort to show that the economic reforms championed by possible presidential successor Gamal Mubarak will benefit all Egyptians rather than only the business tycoons who are known to be his close associates.
 
The stated objectives of the NDP’s new privatization scheme are fraught with serious theoretical and practical shortcomings. First, the scheme reflects a rudimentary understanding of the concept of ownership and state, two concepts central to this issue, and of the interaction between public and private enterprises. At the structural level, the evaluation of hundreds of privatization initiatives has led to a consensus in the literature that ownership does not matter. Privatization (or more specifically, successful privatization initiatives) is not about the transfer of assets from the public to the private sphere. The transfer of property rights from the state to the private sector creates better incentives for efficiency if, and only if,this transfer is secured in parallel with an increase in competition and regulation of the economic system. And the latter cannot be achieved without well-established institutions that prevent the creation of private monopolies. Hence, a “share in ownership” will give nothing to Egyptian citizens and will not achieve the announced objective of a more even distribution of wealth.
 
On the practical level, it is entirely unclear how Egyptians would receive profits from these companies. The mechanism for the distribution of shares and profits overlooks the deficient institutional settings of the country and the state of public service and bureaucracies. As one third of the eligible citizens are illiterate, the existing conditions serve as an easy gateway for the rise of opportunistic businessmen. How exactly forty million Egyptians would engage in the management of the privatized firms remains a mystery.
 
Among the troubling aspects of the initiative is that Egyptian officials show no signs so far of having learned from the mistakes Eastern Europeans made in the 1990s. Mass privatization in Eastern Europe did not lead to an even distribution of private wealth but to a greater concentration of wealth in the hands of black market businessmen and former Communist officials. When auctions were held, not only were prices low, but the buyers were confined to a small group, leading to the rise of oligarchs who have stripped down productive capacity, divested assets, and often exported the profits abroad.
 
This is not to say that mass privatization did not appeal—politically—in Eastern Europe. Privatization in Czechoslovakia received significant public support, leading to the election of Vaclav Klaus, the architect of its economic transformation, as prime minister of the Czech Republic in 1992. In Russia, President Yeltsin devoted his major speech on the first anniversary of the failed communist coup in 1992 to the announcement of voucher privatization. In short, the politics of Eastern Europe demanded mass privatization.
 
The current social unrest in Egypt, which has taken the form of labor and other protests motivated by rising poverty and a widening income distribution gap, points in the same direction: the current politics of Egypt demands mass privatization. With the diminishing welfare role of the state, the Egyptian government seeks to reclaim its role as guardian of public interest, a role increasingly challenged by protest movements and opposition parties. In order to appear somewhat responsive, the government has begun a dialogue with selected opposition parties and promised that the new privatization scheme will be subject to at least a year of parliamentary and public debate. If past experience is any guide, however, such debates will have little impact on the ultimate fate of the new privatization plan.
 
Ibrahim Saif is a resident scholar and Farah Choucair is a research assistant at the Carnegie Middle East Center in Beirut.

This commentary is reprinted with permission from  Carnegie Endowment for International Peace.

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