International Business : Pressure Amid the Pyramids : Egypt Struggles With Ambitious Push for Privatization

When officials put the government-owned Al-Ahram Brewing Co. up for sale recently, they thought they had grounds for optimism.

The company’s signature Stella beer enjoys a near-monopoly in Egypt, and the brewery is one of the few government companies to actually turn a profit.

So Hamed Fahmy, who heads the huge state holding company that controls the brewery, was nonplussed when no buyer came forward with an offer even close to the asking price.

Rather, several European brewers who studied the offering advised Fahmy that the government assessment was twice the company’s actual value and that any new owner would have to spend millions on modernization and sanitation. Today, the brewery remains unsold.

Fahmy encountered similar resistance as he put other pieces of his Housing, Tourism & Cinema empire on the market, including luxury hotels in Cairo and Egypt’s only legal winery.

Privatization is the centerpiece of an ambitious economic reform effort intended to rescue the free-falling economy in Egypt, a country of 60 million that is the recipient of more than $800 million annually in U.S. aid and arguably America’s most important ally in the Arab world.

But as the brewery episode shows, there is a wide gap between plan and practice. Four years after Egypt identified 314 enterprises for sale, only a handful have found takers. The program, part of a debt-forgiveness agreement negotiated with the International Monetary Fund, is far behind schedule, slowed by bureaucratic inertia, inexperience, corruption and political crosscurrents.

Now, Western diplomats and economists fear Egypt has fallen so far behind its international competitors that it may be too late for it to catch up.

“You are changing 40 years of a master state economy with a lot of people who have a vested interest in keeping things the way they are,” said a Western economist based here. “People are very wary of selling off what they consider the people’s patrimony.”

In addition, said Medhat Hassanein, an independent economist and financial consultant, “there are labor problems, valuation conflicts, huge stocks of unsold products. . . . These are huge, accumulated problems that you can’t solve in one day or one year.”

The country has to produce 500,000 new jobs every year just to maintain unemployment at its current level, estimated by the World Bank to be 17.5% of the work force, or 2.8 million people. Right now, according to Western economists, 50,000 to 100,000 jobs a year are being created. And economic growth, “if it’s not negative, is hovering around zero,” one economist said.

About 70% of the unemployed are younger than 30, and they are mostly male; with them the economic issue assumes ominous political implications. The unemployed are prime recruits for the Islamic extremists who are engaged in a violent campaign to overthrow the government of President Hosni Mubarak and believed responsible for the unsuccessful attempt on Mubarak’s life last month.

“The economic situation is the main reason for the rising tide of fundamentalism,” said Hussein Amin, a professor of Islamic studies and an expert on Muslim militancy. “The extremists are using the economic situation to undermine” Mubarak.

One Western diplomat who has spent three years studying the fundamentalist rebellion said an economic turnaround is the key to Egypt’s long-term security.

Ironically, it is the prospect of more unemployment that provides the government with its strongest argument against accelerating the reforms.

Even the strongest advocates of privatization acknowledge that it will increase unemployment in the short term. Underemployment and padded payrolls are hallmarks of Egypt’s state-run enterprises, which are often headed by Mubarak political loyalists or retired military officers.

For example, after Dutch-owned Heineken studied the Al-Ahram brewery, company officials advised Fahmy they could produce the same amount of beer with one-tenth the 3,000 current employees.

The prospect of a sudden surge in unemployment unnerves Egypt’s leadership, particularly with parliamentary elections expected this fall. And economists admit that they cannot predict how long it might take for the predicted benefits of economic reform to kick in.

“I think the Egyptians are on the verge of missing the boat, but if I were in Mubarak’s shoes, I might do the same thing,” one U.S. economist said.

A $700-million program for retraining displaced workers has been created with the assistance of Western aid, but one official said it is underused because the pace of restructuring is so slow.

With only a handful of government enterprises sold, Egyptian officials recently turned to a new strategy. Egypt is now floating limited stock offerings, typically of 10%. Initial offerings have been oversubscribed, and with this encouragement, the stock plan is moving ahead.

Officials say the cash from stock sales will be used to upgrade companies’ assets and increase profitability, making them more attractive to potential buyers. But critics worry that the money will be used to prolong the tenure of current management.

Fahmy--a 58-year-old former architect who runs a conglomerate of 21 companies ranging from movie studios to airport duty-free shops that together employ 20,000 people--said a new management regimen calls for the firing of executives who fail to hit annual profit targets. He is also pressing ahead with privatization. Expected to be on the block next year, for example, is the sound and light show that illuminates the Pyramids of Giza nightly.

Mubarak says he is committed to restructuring, but emphasizes that it must be handled cautiously.

“We can’t do everything as, for example, the IMF wants us to do. They have only one prescription, to be implemented by all countries at one time,” he told The Times in April.

Egypt’s tradition of public ownership dates to 1952, when military officers led by Gamal Abdel Nasser overthrew King Farouk. Nasser, an admirer of the Soviet Union, installed a centralized, government-run economy.

Although Nasser’s successor, Anwar Sadat, moved Egypt out of the Soviet orbit and opened the economy to increased foreign investment, government still dominated the marketplace.

The economic news here is not all bad. The government has made significant progress in lowering government deficits, controlling inflation and monetary reform. And the country has advantages in the international marketplace: accessibility to the Middle East, Europe and Africa; modern infrastructure, and a low-cost, trainable work force.

“There is a huge risk to investing in Egypt, but there is a huge profit if you can stick it out,” said Hesham El-Ashmawy, an Egyptian-born Beverly Hills businessman who is embroiled in a six-year legal row over his efforts to buy a government-owned resort on the Gulf of Suez.

“I’m not against investing in Egypt; I’m against the bureaucracy in Egypt,” he said. “I may lose everything, but I have faith in the country.”

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Eyeing Egypt

Egypt’s gross domestic product declined steeply in the early 1990s but is expected to increase slightly in the next two years. While the country’s inflation rate has dropped markedly in the same period, its trade imbalance has escalated and its foreign debt has remained flat.

GDP

Percentage growth in gross domestic product:

1997 (projection): 1.7%

INFLATION

Percentage change, year to year:

1997 (projection): 6.0%

TRADE BALANCE

In billions of dollars:

1997 (projection): -$8.9

FOREIGN DEBT

In billions of dollars:

1997 (projection): $39.6

Source: Bank of America World Information Services