With the beginning of the new year and after six months in office, the Minister of the Public Enterprise Sector, Hesham Tawfik, said that the government initial public offering (IPO) programme that starts with the Eastern Company for tobacco manufacturing will not be initiated before the end of the holidays in January, since most of the clients are foreigners. During an interview with Daily News Egypt, Tawfik explained that the company will not be floated before the price reaches EGP 18.7 per share, adding that it will be difficult to set a deadline for the programme anyway following the delay that occurred in the
wake of the emerging market (EM) crisis. He also discussed an agreement with the health minister concerning the repricing of the medication by some companies in order to enable them to attain profits and restructure their companies.
Furthermore, he clarified the ministry’s vision and its goals in the coming year, such as reorganisation losing companies, settling the debts of the companies, and developing the different sectors of yarn, textiles, steel, fertilisers and others. The transcript for the interview is below, lightly edited for clarity.
The ministry of public enterprise has prepared a new business strategy. What are the most important features of this plan and what has been achieved so far?
We have 121 subsidiaries of eight holding companies. The business results for the fiscal year (F Y) 2016/17 indicated that there are 73 companies that profited EGP 15bn and 48 companies that lost EGP 7.5bn, which means that total losses reached EGP 7. 5bn. These 48 have been losing for years. The shareholders’ equity reached a negative of EGP 39bn. We penned a development plan for 26 companies in the first phase, which realised losses of EGP 6.7bn,accounting for 90% of the total losses of the 48 companies. We studied the strengths and weaknesses of these companies, and reached a conclusion for the restructuring of them. In addition to the 26 companies, we have others that profited but still need restructuring, investment, and vision to increase their efficiency and profits. We are talking about 40 companies out of 121 companies that we will focus on in the first phase.
We have already started the operational procedures to restructure these companies, based on consultants’ reports and recommendations in order to identify the steps to be taken. In general, we know what needs to be done, but there has to be a specialist consultant to individually examine the case of each company and determine what should be done and then float them to reach a full structure.
We are dealing with a mix of local and international consultants, but the bulk of them are local. In the spinning and weaving sector, a US consultant has prepared a study of 11 volumes for the development of the sector.
What about the financing— the ministry has surveyed unexploited lands. How will they be utilised?
Financing will be through the exploitation of unneeded assets owned by companies. For example, there are a number of cotton ginning factories that are under developed and have been operational since 1894, but they are using more energy and outputting poor production, in addition to the lands.We have 25 ginning plants that are not needed, especially if we consider the new machines that will be imported. These will save energy and give better production. The number of plants will be cut to 11, then we will utilise the land of the other 14, which will return over EGP 25bn.
As for the land, we surveyed over 200 untapped assets. We are taking all the necessary step to sell these lands at a high value after changing their designated use. Most of these lands are assigned for industrial use and will be turned into residential areas. Funding will come mostly from the land sale. The public enterprise sector, is very rich in assets. There has
Minister of the Public Enterprise Sector, Hesham Tawfik been negligence in the past. We have currently put an end to it, and we are presently embarking on a radical development plan.
How will the land be sold?
The land will be sold through auctions carried out through companies under the supervision of the ministry. However, this will only happen after the completion of the most important step which is switching land use. We have set up a unit in the ministry that works particularly on this file, and they have called on real estate evaluators to quickly finish the assessment and to put up the lands in auctions as soon as possible.
When is the first auction expected?
The auctions will begin before the second quarter (Q2) of 2019. We will need about one and a half years to sell all the land plots. Most of these land will be sold, but part of them will be used on partnership systems, meaning that the ministry will bring in developers and contribute lands for the developer to carry out the development.
Following the sale of assets and land, what mechanism will be used for financing?
There are two levels of finance. The first level is that the same companies that sell some of their own assets will themselves use the sale proceeds to develop their subsidiaries. There will be no role
for the ministry here. The second level is that the sale proceeds will be used to develop the assets of another holding company. Hence the holding company that will sell its assets can reinvest through the development process by increasing its capital.
The ministry has exerted great efforts in the debt settlement file.What has been accomplished in this file and to what extent will the companies benefit from the settlements that will be made?
The total debts of the troubled companies to sovereigns bodies are about EGP 35bn. These are owed to several bodies, such as the ministries of petroleum, electricity, the National Investment Bank(NIB), the Egyptian Tax Authority and Social Insurance Authority.
There are agreements for settlement with three parties worth EGP 23bn, owed to the ministry of electricity, the
ministry of petroleum, and the NIB. We are targeting to sign protocols with the remaining amount over the next three months. Payment will be made in accordance to these protocols through a land swap mostly, and in some cases in cash. It has been agreed that the payment of any new commitments will be in cash. After paying these debts, companies will be able to recover their activity in a way that allows them to pay their debts and improve their financial structures.
The IPO’s file is one of the ministry’s most important files, and is at the top of the government’s concerns. But the conditions of EM and the stock market prevented it from taking off.When will the programme start, and when will the Eastern Company for tobacco manufacturing be offered or, more accurately, what are the price limits at which the offer is made?
We are now in a holiday season and
since the bulk of the potential investors of the Eastern Company are foreign, I cannot address them before the middle of January.There will be no float of shares in 2018. The price limits at which Eastern Tobacco will be introduced are EGP 18.7 per share.The current price is a little over EGP 17 per share, approaching the limit. When the share price hits EGP 18. 7 it should remain stable for some time. Then, the NIB will welcome the float.
The decision of the Cabinet states that the shares of the company offered for sale shall be sold according to the average price per share in the month preceding the contract with the NIB. EFG-Hermes has been hired in October, but the IPO was delayed. What will you do?
The contract will not change, and we are committed to the prime minister’s decision and to the average price in the month preceding the contract at EGP 18.7 per share. The IPO will not take place before share price reaches this value.
And what about the planned government IPO porgramme in general. Are there any changes in the list of companies being offered or the timetable for the IPO?
We have to wait to complete the first phase, which did not start yet, then decide. We do not yet know when the first stage companies will be offered. Therefore, a certain period of time cannot be set, it will be determined according to the stock market situation and EMs. It may take longer, hence a need might arise to reschedule the IPO. With regard to the companies listed, after the first phase, a list will be made for the second phase, which will include 10 companies. At that time we can review the list. So far, there is no change in the plan, or more precisely, when we finish the first stage, we can determine whether there will be a change or not in later stages.
With the ministry of finance needing funds at the moment, especially with its external commitments and delaying the disbursement of the International Monetary Fund (IMF) tranche for December? Will the government bring forward the IPO programme ?
The money that will be raised from the offering of companies is only a drop in the ocean. The purpose of the sale is not financial as much as it aims to raise the efficiency of companies by increasing the contribution of the private sector, as well as attracting equity financing for the companies and will also help expand the Egyptian stock market’s capitalisation. The secondary objective is to support the state treasury.
The main target is to allocate the money to holding companies. For instance, Eastern Company is a subsidiary of the Chemical Industries Holding Company, which is indebted to other subsidiaries and will need money to repay these debts. There is another dimension, namely, that these funds go to the ministry of finance, if the holding companies that own the shares do not need the raised funds.
Privatisation has a such a bad reputation in Egypt. Is the ministry worried about the resale of companies to the private sector?
Privatisation is the right word for companies exiting the public sector and entering into the private sector. But I want to explain something important, this bad reputation resulted from the fact that many companies privatised in the early nineties have had problems and these problems stemmed from being sold to a strategic investor—that is, the seller did not follow the necessary procedures to obtain the highest price, or proper procedures to maintain the company’s activity. Many strategic investors who bought public sector companies had the right to take assets, liquidate the company, and sell the assets.
Now the situation is different, the new programme is basically a public offering on the stock exchange. The exception will be the presence of strategic investors, which did not happen until now. If that happens, though, it will be done with restrictions to ensure that the investor continues running the company. This is the difference between old-time privatisation and today’s.
How will you address fears of workers with the return of privatization?
We are in talks with all concerned parties, and we involve them in the stages of the appropriate decision making process of the companies, to ensure the interests of the state, while maintaining the workers’ rights. We also reviewed the ideas of union leaders on the reform and development of companies. The ministry issued instructions to the holding companies to abide by what has been agreed on and impose Law No 96 for 2018 related to granting bonuses for employees of the holding companies
and their subsidiaries. The bonuses of holding companies’ employees exceed, under this law, the minimum set for government employees. This was welcomed by union leaders.
There are two special cases in this file so we have started with them, the Nile Cotton Ginning Company and Omar Effendi. With regard to the Nile Cotton Ginning Company, we focused on solving this situation because it belongs to 5,200 investors that have been ignored by the government since 2011. We talked with them and reached solutions to implement the return verdict and enabled them to free their funds and compensate the government. In this case, we will return the shares to their ownership and the company will belong to them. They will hence be free to sell the assets and the lands since the company stopped production. But the most important thing in this agreement was the basis of selling the land. It was agreed to evaluate the lands now using the residential use evaluation and the industrial use evaluation then use the price difference to compensate the government. That way, the verdict will be enforced, and helped investors to free the company and its assets.
For Omar Effendi, the company is in our possession and under our management, yet it has been crippled in losses for 10 years. The company has debts to local and foreign bodies, which have increased. The management was able to reschedule the loans and lower the interest paid. A few days ago, we witnessed the signing of an agreement to settle the dispute between the company and the International Finance Corporation concerning the indebtedness owed to the corporation, as well as its share in the company’s capital worth $35m. This was a huge burden on the Holding Company for Construction and Development that managed the company. If no real estate development takes place for the company, it will be very difficult to revive it. After finishing these two cases, we will deal with the remaining cases.
The ministry adopts a different approach to losing and low-profit companies? Will we witness new mergers and liquidation in the coming period?
Merger is exception, not a general solution, and we only resort to them when the company’s case calls for it. For example, we have three public transport companies under the Holding Company of Maritime and Land Transport. For the world, these are just lines merged in one company. Foreign trade companies should also be merged to save expenses. When there is an incentive for a merger, we will do so.This does not mean turning a corner towards profitability, as it will
need more plans to restructure companies. As for the liquidation, only one company, the National Company of Cement, was liquidated. This was the last solution when there were no other alternatives. We resorted to this decision after making sure that it is useless to inject any investment or undertake any development to reduce losses.
El Nasr Automotive Manufacturing Company is also one of the important files at the ministry’s table, especially with the dream of manufacturing an Egyptian car.There have been talks for a global partnership. Have you received offers yet?
We seek and strive to have a global partner like the situation in Morocco.We are talking with the ministries of industry and investment to reach a global partner and target export mainly.We sat with one of the world’s biggest companies last week to talk about possible partnership. We have not yet received any actual offers. But there is a need to turn Egypt into a base for manufacturing and export. Instead of concentrating on automotive assembly, we want to add local value to manufacturing. This will only happen by directing production to foreign markets. Hence, our goal is to attract an investor who does not want to manufacture only for the domestic market, but also wants to target external markets. El Nasr can be the base that will be used by the partner investors for manufacturing and exports. There are calls for Egypt to manufacture cars and it is possible that El Nasr may play this role. Hence, it is our goal to choose the right partner. El Nasr is a gem that will be retained for a partner capable of producing 50,000-60,000 cars per year. Despite the company’s annual losses marking EGP 12m, when I visited the site, I expressed my admiration for them, and the maintenance of equipment in the best form.
What are the criteria for choosing a foreign partner?
We will choose the foreign partner on a technical basis. And the deal would be a partnership contract, based on the sharing of profits and not a contribution rate. For example, the goal is currently to produce100,000 cars, but if production is only 3,000-5,000, we will then terminate the partnership and impose a fine as stipulated in the contract.
The merger may be determined by the global partner we are looking for. The merger is an exception to the rule and only when there is an incentive. If we agree with an investor to produce 60,000 cars, then we may discuss a merger as the capacity of El Nasr alone cannot achieve that goal.
There is always a confusion between the role of the sovereign wealth fund and the role of the ministry. Can you summarise the difference?
There is no conflict between the role of the fund and the role of the ministry. Egypt’s Sovereign Wealth Fund aims to invest the unexploited assets as well as developing the exploited ones. For example, a company that has a land can
contribute it for a project and Egypt’s Sovereign Fund can finance this project, or it can also buy the entire land. The role of the fund is preserving the rights of future generations in the public assets. It will be specialised in investing and developing unutilised assets. There may be cooperation between the ministry and the fund to exploit the assets of any company. I have already agreed with the minister of planning to put some of the ministry’s assets in this fund, through two sub-funds as a start. These sub-funds will be dedicated for hotel management and real estate development.
What is the ministry’s plan for the pharmaceutical companies and the problem of medication pricing?
We have a big problem in these companies, as they are losing. There were 570 pharmaceutical products losing in the public enterprise sector. We agreed with the minister of health to reconsider the pricing of medications. The types of medicines produced by these companies are not produced by the private sector and we produce them at very low prices of EGP 1-10.
When production stalls, the private sector imports the medicine at five or seven folds the price. So, we offered to provide them at reasonable prices in order to make some profits and continue production. The ministry of health started to fix the prices. We managed to achieve profits that en- abled us to invest in the development of these companies. There is a plan for exporting to Africa and Arab countries. Here, it should be noted that pharmaceutical companies’ restructuring
plans are worth EGP 750m and will all be funded from untapped assets.
Where is the development textile sector currently standing?
Only nine of 23 textile companies in the sector lost EGP 2.7bn, which is the biggest loss in the ministry’s companies. Holding companies have conducted a detailed study with a global consultant,which identified the needs of the 23 companies in terms of machinery and ginning equipment. Therefore, we decided to start with some companies which represent 60% of the factories we have, and to complete that in the coming one and a half years. We will renew all the machinery and begin producing for profit. This includes the Mahalla Textile Company, Misr Fine Spinning and Weaving, Kafr Al-Dawwar, Misr Helwan Spinning and Weaving, and Damietta for Spinning and Weaving. A plan has also been put in place to integrate com- panies into 10 instead of 23. There will be three major industrial complexes that will be the foundation for the industry starting from spinning to garments in Mahalla, Kafr Al-Dawwar, and Helwan. And we have already started to work out a plan for the entire industry with unprecedented investment figures over the next three years, in order to modernise the entire industry. Some factories will have equipment from the best sup- pliers of machinery in the world, at an estimated cost of up to EGP 25bn.
What about the development of the Egyptian Iron and Steel Company?
An international consultant made some recommendations to assess the condition of the furnaces and determine the actual development required, which we have done. We started operations at a maximum capacity of 420, 000 tonnes and will stop in January for the consultant to re-evaluate the situation.
We hope that there will not be major damage so that we can begin the tender procedures. We will not make direct offers, but will do so through a tender, even though some companies, including Russian ones, are offering to be involved in the development process.
Can the Egyptian Iron and Steel Company face the same fate of the National Company of Cement?
We are keen to develop the Egyptian Iron and Steel Company. We have been operating the furnaces at full capacity for four months now, based on the consultant’s recommendation to evaluate their condition and prepare an integrated plan to develop the company. The position of the development project will be evaluated in February to ascertain the technical and financial feasibility. This plant was built in the 1950s. Until 2008, the company was profiting, even if poorly, due to the old age of machinery. Yet, since then, the company starting incurring losses, due to the variables of prices of energy and row materials. In 2014, the company hired an international consultant to study the development potential.
The tender was floated in 2017 but was suspended to renew the study. On 17 August 2018, we received the new results that indicated that the condition will be very different from 2014, so we cancelled the tender.
In addition to investment in machinery and equipment, we are focusing on investment in human resources. We aim to automate business within companies through the system of planning and management of resources (ERP).This is a system that can be used to significantly raise efficiency. The private sector adopted this system 30 years ago. We aim to apply it in 70 of 120 companies, which are the companies whose sizes will enable us to spend that much on development. The other companies are small, so it will not be feasible to introduce this system into them. A tender for the consultancy job will be opened on Sunday. Then, we will begin preparing the specifications and prospectus to begin implementing the project in Q2 of 2019.
We also established central marketing and sales departments in holding companies.With the exception of a few companies with marketing units, many are still unable to market their products, which reduces their ability to attract marketing staff.
What about the ministry’s mandate to the housing companies affiliated to the Holding Company for Construction and Development to submit an action plan for the development of 50% of their land portfolios?
Companies are going at a good pace in this file. The companies submitted their development plans and they are currently being reviewed. Heliopolis Company for Housing and Development will not report to us but to the board of directors, being part of the IPO programme. It will then be a joint company. We will be only shareholders with 30-40% of the company.
There was a proposal from the Egyptian Capital Market Association to re-examine the stamp duty and capital gains.Where is this standing now?
Stamp and capital gains taxes are under discussion with the ministry of finance and we expect to reach a final decision soon. The ministry of finance is responsible for this file, but I act as a mediator because I have an industrial experience.