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After Seventeen Years of Privatization on the Nile, Are We Heading Toward A New Privatization Scheme?

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01 November 2026

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03 November 2026

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Abstract
After 17 years of conventional privatization, Egypt is changing course. Recently, the government proposed a new privatization scheme called the Egyptian Citizenship Ownership Program (ECOP), aimed at speeding up the privatization program, widening equity ownership, and improving firm performance. The proposed program is different¾in design, proposed implementation, institutional settings, and macroeconomic environment¾-than those implemented in transition economies during the early and mid-1990s. We argue that the ECOP is designed to solve a specific problem, the need to rapidly privatize a large number of firms in circumstances where only a few potential buyers had sufficient funds to purchase. The ECOP also provides a means of transferring these assets to the population at large, and hence it is politically acceptable and renders a practical solution to accelerating privatization of the entire enterprise sector. By giving firms to the public for free or at a nominal fee, the process is designed to give individual citizens a greater stake in the new economic system by making them owners of the assets of the country, so it also addresses the issue of economic justice.
Keywords: 
privatization
;  
ECOP
;  
performance improvements
;  
Egypt
Subject: 
Business, Economics and Management  -   Finance

I. Introduction

Privatization has been a major political and economic phenomenon over the past three decades, and researchers continue to target it for both theoretical and empirical work. Although the government of Konrad Adenauer, in the Federal Republic of Germany, was the first government to launch the first large-scale privatization through selling a majority stake in Volkswagen, the Conservative government under Margaret Thatcher is without question the most important historically (Megginson, 2005). Following Thatcher’s initiative in early 1980s, the privatization wave spread across the globe during the 1990s, which is considered the greatest transfer of ownership in the history of corporations. Given that most socialist and communist economies from every region in the world started implementing economic reform programs, the reduction in size of the public sector through privatization became an important part of such programs. Cumulative privatization proceeds reached approximately US$ 1,230 billion over the 1977-2003 period (Bortolotti and Faccio, 2009), and now exceed US$ 1,820 billion.
In this context, Egypt has also pursued privatization. In an effort to improve its economy, Egypt launched a privatization program in 1991 as a part of its economic reform program aimed at emphasizing free market economics, enhancing competition, improving firm performance and encouraging the private sector to lead the economy. The first step in Egypt’s privatization program was to cut off subsidies to SOEs (Field, 1995). In 1991 Egypt’s 314 SOEs were grouped under 27 holding companies (reduced to nine by 2008) responsible for all affiliates in various sectors. Although there are many empirical studies that focus on Egypt, as we show later in Section III, and these show significant improvements in firm performance following privatization, the continuation of the program for 17 years casts doubt on the expected timeframe to end this program. This is especially true given the fact that the state still controls 153 firms, as a sole owner or owner of a majority stake, compared with 314 firms at the beginning of the program.1
Given the current situation, we argue the newly proposed ECOP privatization can be seen as the best available method, not only to speed up the privatization program but also to complete it, to widen equity ownership base and to improve firm performance. We also argue that the proposed program is completely different—in its design, implementation, institutional settings and macroeconomic environment—than those implemented in transition economies in early and mid-1990s. The ECOP is designed to solve a specific problem, the need to rapidly privatize a large number of firms in circumstances where only a few potential buyers had sufficient funds to purchase. Also, it provides a means of transferring these assets to the population at large, and hence it is politically acceptable and offers a practical solution for accelerating privatization of the entire enterprise sector. By giving firms to the public for free or at a nominal fee, there is also an element of economic justice in that the ECOP will give the public a greater stake in the new economic system by making them owners of the assets of the country.
The paper spells out some policy implications. First, we suggest that the state should not keep more than 30 percent stake in any firm that is part of this program. Instead, the state should enhance the legal and regulatory framework and build a better regulatory and supervisory environment to ensure a level playing field that encourages competition and ensure that a private sector monopoly will not replace a state monopoly. Second, we advise the government to expand the ECOP to incorporate state assets--such as telecoms, oil, and airlines--in addition to the state-owned enterprises (SOEs) that are governed under Law 203 of 1991. Third, we argue that it is unlikely that this program will have a significant negative impact on the national budget, since the state will collect a levy on the first transaction of selling bundles of the ECOP and will also capture any increases in corporate tax collections resulting from expected improvements in privatized firms’ profitability. Finally, the state can control any inflationary pressures that might arise due to possible increases in private consumption through fiscal or monetary policy, by cutting government spending, or by increasing interest rates, as needed. We expect that this program, if implemented, will have a positive impact on the economy at large, though only time and actual experience can tell whether or not our proposition holds true.
The rest of the paper is organized as follows. In Section II, we provide the theoretical and conceptual framework of privatization in the light of several theories that explain the superiority of private ownership over public ownership, and the economic efficiency gains that are likely to emerge from transferring ownership and control from the state to the private sector. We provide a summary of selected empirical studies on privatization and their findings in Section III. Section IV, briefly, highlights the development of the Egyptian privatization program and discuss thoroughly the proposed ECOP, followed by comparing the new initiative with those implemented in transition economies of Eastern Europe, the Russian Federation, and Ex-Soviet Union countries in Section V. Section VI concludes the paper and spells out some policy implications.

II. Theoretical and Conceptual Framework of Privatization

"Goodbye state capitalism, hello popular capitalism" has been the driving force of privatization around the world since the late 1970s. In this context, privatization—as a simple concept—refers to transferring state ownership in SOEs to the private sector. The main purpose of privatization, at least from the economic efficiency point of view, is to enable firms to operate efficiently and to improve their performance since managers of these firms are subject to the pressures of financial markets and the monitoring and discipline of profit-oriented investors. Additionally, the change in ownership and control of privatized firms shifts firm’s objectives and managers’ incentives away from those that are imposed on them by politicians, toward those that aim to maximize efficiency, profitability, and shareholders’ wealth. By becoming privately owned, firms would have many more entrepreneurial opportunities because they would not be subject to government control (D’Souza, Megginson, and Nash, 2001).2
However, there are several theories that explain the superiority of private ownership over public ownership, and the economic efficiency gains that are likely to emerge from the transfer of ownership and control of assets from the state to the private sector.
Property Rights Theory: According to this theory, differences in the performance of public and private sectors could be due to marked differences in attenuation of property rights (Demsetz, 1966, 1967; Furubton and Pejovich, 1972; De Alessi, 1980; and Davies, 1981). Property rights in SOEs are attenuated partly because they cannot be easily transferable, which implies that the cost and rewards of economic activities do not accrue more directly to individuals responsible for the property rights. The general conclusion from the property rights theory is that the more attenuated property rights are the less efficient the firm will be, because attenuation weakens the rewards-penalties systems that are necessary for cost minimizing behavior.
Principal/Agent Theory: This theory extends the property rights approach and focuses on differences in the monitoring mechanisms and incentives which public and private managers are subject to as agents of shareholders. The theory claims that managers in SOEs are welfare maximization oriented3 while their peers in the private sector are profit maximization oriented (Vickers and Yarrow, 1988; Bös, 1991; and Bös and Peters, 1991). Changing ownership and control to the private sector results is changing firm objectives from a weighted welfare function to profit maximization and also changing the incentive structure by linking reward to the level of performance.
Public Choice Theory: This is based on the bureaucratic approach, in which public enterprises are seen as instruments to enhance the utility functions of politicians through maximization of votes and budgets (Niskanen, 1971; Buchanan, 1972; Blankart, 1983; and Boycko, et al., 1996). The proponents of this theory hold that government departments pursue objectives that do not maximize profits and usually pursue goals such as maximizing budgets and employment, minimizing risk, and making socially rather than economically rational investment. Boycko, et al. (1996) propose a model of privatization within the framework of public choice theory, which shows that privatization will lead to effective restructuring of SOEs that are currently producing at inefficiently high levels to maximize employment, only if both cash flow rights and control rights are transferred to the private sector. This will make it difficult for the government to bribe managers through offering them operating subsidies to produce at inefficient levels. Therefore, cutting the "soft budget constraint" is important to improving performance.
Organizational Theories: These theories emphasize the role of organizational characteristics in determining firm performance (Dunsire, 1991; Hartley and Parker, 1991; Bishop and Thompson, 1994; and Martin and Parker, 1997). Proponents of organizational theories argue that differences in the performance of public and private firms are due to differences in management, goals, labor, communication and reporting systems, and organizational structure. Nevertheless, in all four of the above-mentioned theories of privatization, there is a consensus that ownership matters and does affect the internal efficiency of divested firms, by prompting cost-minimizing behavior and improving their allocative efficiency.
Finally, within the hard and soft budget constraint debate, Kornai (1980, 1986, and 1993) suggests that state-owned enterprises face a soft budget constraint, through provision of subsidies, implying that the firm can survive without necessarily covering its costs, and this encourages inefficiency. Thus, if the credibility of the threat of termination or liquidation is weak, incentives to increase efficiency are also weakened (Kornai, 1993; Raiser, 1994; Qian and Roland, 1996; Berglof and Roland, 1998; and Bertero and Rondi, 2000).

III. Selected Empirical Studies

Most of the existing privatization research examined the impact of privatization on firm performance. Interestingly, while privatization is based on the premise that it will improve firm performance and help countries to grow, the ultimate outcome can be hard to identify. At the macro level, a cross-country study of transition economies by Zinnes, et al. (2001) finds that privatization does not by itself increase GDP growth, but it suggests that a positive effect exists when privatization is accompanied by in-depth institutional reforms.4
On firm level, Perotti (1995), in his seminal work on privatization, mentions that a public tender sale should be chosen so that the state could achieve a full increase in firm value. However, he argues that the evidence on actual privatization programs shows a completely different picture. Consequently, we expect that firm performance depends on the extent of state ownership involvement.
As a matter of fact, recent surveys of privatization studies show a large variation of outcomes, ranging from no significant effect of privatization on performance (Bevan, et al., 1999), to cautiously concluding that privatization around the world improves firm performance (Megginson and Netter, 2001), to being fairly confident that privatization tends to improve performance (Shirley and Walsh, 2001; and Djankov and Murrell, 2002). One possible explanation behind the inconstancy of the impact of privatization on firm performance is that each study dealt with a different dataset with limited access to corporate governance issues (ownership structure and/or board of director composition). Nevertheless, the majority of previous studies that focus on the impact of privatization on firm performance conclude that divestment usually has a significant positive impact of privatization on profitability, operating efficiency, outputs, capital investment spending and capital structure of privatized firms.
On the other hand, few empirical studies look at the impact of different post-privatization ownership structures on firm performance. In this context, Barberis, et al. (1996) find that changes in ownership and management styles are likely to lead to a value-maximizing restructuring in Russian privatized firms. For 706 Czech Republic privatized firms, Claessens, et al. (1997) find that concentrated ownership structure, ownership by local investors, and ownership by bank-sponsored investment privatization funds increase profitability and Tobin’s q. In a more recent study, Kocenda and Svejnar (2002) indicate that in the post-privatization period, private ownership, relative to state ownership, tends to be associated with superior performance in terms of certain profitability and efficiency indicators.
In addition, not only ownership structure might matter in explaining firm performance, but also the composition of the board of directors. In this context, Kaplan and Minton (1994) provide evidence that, in Japan, outside directors are an effective corporate governance mechanism and, on average, they improve corporate performance. Also, several empirical studies find that top management replacements increase future post-privatization firm performance (Barberis, et al., 1996, and Claessens and Djankov, 1999)
The aforementioned studies and other related studies on privatization have been, mainly, limited to those of developed economies or large emerging economies. It seems, then, that small economies such as those in the Middle East and North Africa (MENA) are very much understudied in the literature. However, Ben Naceur, Ghazouani and Omran (2007) examine a sample of 95 privatized firms from the MENA region (mainly Egypt, Jordan, Morocco and Tunisia) and find that these firms experienced significant increases in profitability and operating efficiency, and significant declines in employment and leverage. They also show that profitability changes are negatively related to state control and positively related to foreign ownership. The study concludes that privatized firms become more productive in environments where property rights are better protected and enforced and that foreign investors influence firms’ productivity through their monitoring role.
As for Egypt, Mohammed Omran has produced a series of studies (2004a,b; 2005; 2007; and 2009) documenting that privatization, on average, increases profitability, operating efficiency, capital expenditures. On the other hand, he also documents significant decreases in employment and leverage after privatization. His studies additionally show that ownership concentration and ownership identity, in particular ownership by foreign investors, positively impact firm performance, while employee ownership concentration has a negative impact. He does not limit these findings to privatized firm, but he documents that banks with higher private ownership involvement and reduced state-ownership stakes are associated with better performance.5 In his most recent study (2009), Omran shows that the state is highly advised to relinquish control and allow for changes in the board of directors following privatization as changing ownership, per se, might not have an impact on firm performance unless it is coupled with new management styles.

IV. Privatization Progress and Egyptian Citizenship Ownership Program

Egypt has long been considered a state-directed economy, because SOEs handled most of Egypt’s economic activities between 1960 and 1990, under the direction of various ministries. Poor management and weak capitalization inevitably had a negative effect on the SOEs’ efficiency and financial viability (Road, 1997). In an effort to improve the Egyptian economy, the government launched a privatization program in 1991 as a part of its wider economic reform program. The first step in Egypt’s privatization program was to cut off subsidies to SOEs, followed by removing them from direct ministerial control (Field, 1995). Under the government’s strategy for divestment of SOEs, three approaches were initially undertaken. The first was to sell shares through the domestic stock market as minority and majority initial public offerings (IPOs). The second approach was to sell either entire or majority share stakes to anchor-investors through public auctions. The third approach was to sell firms to employee shareholder associations, or ESAs (McKinney, 1996). In addition to these steps, some firms were liquidated because they were deemed not to be economically viable due to excessive debt burdens. As seen in Table 1, Egypt’s privatization program, which actually started in 1994, had a slow beginning. However, following the appointment of a new cabinet in 1996, the privatization program was accelerated. The new cabinet publicized its privatization program, attracting much international interest. In order to increase the stock supply in Egypt’s capital market, the government concentrated on control privatization rather than revenue privatization;6 consequently, the value of privatized firms accelerated significantly until 1998. Selling SOEs to anchor investors was the common practice during the period 1998-2001, after which the privatization program was delayed for many economic reasons including a liquidity shortage, a foreign currency crisis, and the overall negative performance of the Egyptian stock market.
When the new government took office in July 2004 the Ministry of Investment was given the responsibility for managing the SOEs. Given the aggressive structural, economic and financial reform programs adopted by this new cabinet, the impetus to re-launch a privatization program—called “the asset management program”—started to emerge again. However, the new asset management strategy focused mainly on financial, operational and labor related restructuring efforts. As a result, SOEs’ outstanding debt decreased significantly7 and net profits reached nearly $1 billion, compared with $236 million in losses during 2003.8 The new asset management program was able to achieve a significant jump in the privatization proceeds through selling state assets in public and joint-venture companies, though total proceeds were only $365 million.9
Although several empirical studies document that privatization typically leads to significant improvements in firm performance, the continuation of the program for 17 years casts doubt on the expected timeframe for ending this program. Consequently, policy makers were urged to search for alternative, innovative ideas, to help the state divest from the 153 firms it still controls. In the current situation, the program faces several difficulties regarding valuation procedures, and it is difficult to privatize where only a few potential buyers have sufficient funds to purchase. As a result, there is a compelling need to adopt new approaches for transferring full or partial state ownership in SOEs to the private sector.
A.
Details of the Egyptian Citizen Ownership Program (ECOP)
The Egyptian government recently proposed the ECOP and submitted enabling legislation to Parliament. Under this proposal, the state is planning to relinquish ownership in approximately 85 SOEs out of the current population of 153, and these are divided into three groups:
  • The first group is a set of firms in which the state is willing to relinquish only 33 percent of its ownership, and plans to retain 67 percent, as these firms operate in strategic sectors and/or have monopoly positions (such as pharmaceutical, steel, sugar and aluminum industries).
  • A second group consists of firms in which the state will retain an absolute ownership majority (51 percent) and relinquish only 49 percent. This group of firms is less strategically important than the first group, but the state is still unwilling to give up control to the private sector, since most of these firms have historical symbols such as famous hotels.
  • The third group represents those firms in which the state is willing to give up ownership and control. According to the proposed program, the state will retain only 30 percent and will distribute 70 percent to citizens. Firms in this group do not have monopoly positions, do not operate in strategic sectors, and do not own any historical symbols.
The proposed ECOP is designed to give citizens, aged 21 years and older, a direct ownership stake for free in SOEs that are part of the privatization wave in the form of a portfolio or "bundle" of shares. Every bundle is identical in terms of the number and identity of firms and the percentage of ownership in each firm. An important aspect of the ECOP is that it is limited only to SOEs that are governed under Law 203 of 1991. If the ECOP proves successful, it may be expanded to incorporate state assets other than those SOEs, such as petroleum and electricity distribution firms, state-owned banks, and Egypt Air (the state-owned airline). We believe that private ownership involvement in these firms and banks will increase direct benefits of citizens from state assets and will ensure that these assets will be subject to same governance and monitoring and management style like private firms. Consequently, we expect to witness significant improvements in these economic entities and in their contribution to the economy at large.
A separate and autonomous entity will be established to supervise and implement the ECOP, since the number of beneficiaries from it is expected to exceed 40 million citizens. The proposed new holding company will be allocated the state’s ownership in firms that will be subject to privatization and will then distribute this ownership to citizens. Given the very complicated logistical and technological infrastructure that will be required to implement this program, this holding company will need to be well structured and supported by highly skilled people who have a mandate to run the program without interference from other ministries or government bodies. This will minimize conflict of interest among state entities that might participate directly or indirectly in implementing the ECOP. Nevertheless, the holding company will need to run a very aggressive educational and media awareness campaign, not only to increase people’s knowledge regarding the program but also to explain the share bundle, describe how to receive it, and discuss options regarding to keep the bundle and benefit from its dividends, sell it, or invest it through privatization investment funds that will be established, or even donate it. The bottom line here is that every citizen will have full control over his/her investment decision regarding his/her bundle.
The second entity that will be created as part of the ECOP is a fund for future generations for those who will not benefit directly from this program because they are below the proposed minimum age to receive a bundle. Although this idea is motivated by a desire to achieve generational equity by considering future generations, the proposed distribution of bundles between this fund and citizens above the minimum age will inevitably lack fairness.10 To achieve this, the proportional ownership distribution should reflect the fact that around 45 percent of the population is not subject to direct benefit from this program, so this proposed fund will receive 45 percent of distributed bundles. On the other hand, the mandate of this fund will be to set a clear, transparent and flexible strategy for investing the assets of this fund in a way that maximizes its returns and determines the channels of spending on which the fund should concentrate.
Finally, the ECOP will create a third new entity, called the "Egyptian Agency for State Asset Management.” This proposed new agency will serve as the private investment arm of the state, focusing on reforming SOEs and improving their efficiency further to maximize state wealth and to sustain return on investments. The agency will be mandated with exercising the state’s ownership function in all firms under its portfolio. The creation of this agency should help separate the ownership and regulatory functions of state agencies, thus reducing the scope of political interference in business operations while enhancing the process of more restructuring and managing firms on a purely commercial basis. As a controlling stakeholder, this agency will not have the option of being a silent investor, because doing so would create a vacuum of governance for its investee firms. To achieve its purpose, the agency will actively participate in the governance of investee firms and restructure them to enhance their values. However, given the current structure of the SOEs, in which every economic group of firms is controlled by a holding company, the structure of the proposed agency must be designed in a way that allows for direct control by this agency over all SOEs without any potential blocking from holding companies.
This asset management agency should be governed by flexible rules and regulations that allow it to attract professionals to its board of directors, to take decisions in a timely manner based on economic criteria, and to execute major activities such as mergers and acquisitions, liquidations, capital increases, and public private partnerships based on market rules—rather than on current rules that hinder SOEs from performing as efficiently as the private sector. Several countries around the world have established similar independent entities to run state ownership in SOEs, including Australia (OIAG), China (SASAC), Malaysia (Khazanah), New Zealand (CCMAU), Singapore (Temasek), South Korea (GIEs) and, recently, Vietnam (SCIC).
B.
Discussion of the ECOP’s Prospects and Plans
So, what can we conclude from discussion of the ESOP presented above? Collectively, we believe that the newly proposed privatization approach (ECOP) could be seen as the best available method to overcome the obstacles to privatization in Egypt and to complete the divestment program. The ECOP has a good chance to widen the equity ownership base among Egyptian citizens and to improve firm performance. The ECOP could help transfer a large number of SOEs to the private sector, especially since the state was able to privatize only two firms annually, on average, over the past four years. Additionally, this program would enable all Egyptian to own some of the state’s assets, since the transfer of equity ownership from the state to citizens will be free. In case of SIPs, when people were allowed to subscribe, a majority of Egyptians were unable to benefit from reduced subscription price either because of a lack of knowledge or inadequate financial capacity. In this context, Omran (2005) documents the phenomenon of underpricing SIPs for 53 privatized firms in Egypt from 1994-1998; in which investors were able to achieve significant initial excess returns.11 Furthermore, we believe that the ECOP provides a means of transferring state assets—in which the government does not see any economic, social or political necessity to retain operating control—to the population at large, in a way that is politically acceptable. Also, this program could create a large number of real owners, so that this will widen equity ownership base and reduce ownership concentration in the hands of a few investors.
C.
Macroeconomic Aspects of the ECOP
We now examine the impact of the ECOP on certain macroeconomic indicators such as the budget deficit and inflation rates. The government’s estimations do not foresee any negative impact from this program on the budget, or if any it will be minimal. Reviewing the amount of revenue collected from privatizing SOEs during the previous five years clearly indicates that the ECOP should yield similar amounts. More precisely, since the proposed program imposes one-time 15 percent levy on the first trading of bundles after listing in the stock exchange, this should yield the government revenues of around $525 million—an amount that is equivalent to seven years of what the budget collected every year, on average, from selling SOEs during the past five years.12 Tax collections from privatized firms that are part of this program are also expected to increase since global empirical evidence suggests that firms will experience significant improvements in their performance after privatizations. Additionally, the market values of the remaining state ownership of these firms are expected to increase due to significant improvements in firms’ performance.
Finally, it is of interest to predict the impact of the ECOP on household spending behavior and hence on inflation rates, given the criticism currently levied at the program suggesting that people will immediately sell their bundles in exchange for consumer goods. Such a behavior would turn the distributed bundles into "hot money," which could promote hyperinflation. This view seems to be supported by the experience of Britain, Canada, and other countries--including Egypt--where a significant number of people sold their shares soon after privatization (Boutchkova and Megginson, 2000). Redistributing the existing SOEs from state ownership into the hands of citizens does not create new money by itself and thus can presumably increase the inflation rate. The implicit assumption is that if somebody sells his bundle he/she will spend all the proceeds on the purchase of consumer goods, yet this is far from the truth. People usually behave rationally; otherwise, we would observe people spending immediately all gifts or inheritance from their relatives. Instead, we can see that a normal household will use only a small part of the unexpectedly acquired wealth on the instantaneous increase of consumption while he/she will save and invest the rest to make the growth of future consumption possible.
There is little reason to expect that after the end of distributing bundles, all people will try to sell them and spend the proceeds on consumption. On the contrary, it can be expected that people will spend only a small part and then either save the rest or invest it in profit generating assets. The majority of people are risk averse, so they will likely be content with lower but also safer returns. In the British and Canadian privatization experience, many people rapidly sold the shares they purchased to invest in less risky assets and did not spend the proceeds all at once. For the same reason, we expect that some people in Egypt will put their bundles in privatization investment funds, but the majority will sell their bundles in order to reinvest in a form better suited to their preferences such as saving accounts in banks or post offices.
The above analysis is based on two economic theories that deal with savings/consumption choice at the macroeconomic level. These are the "permanent income hypothesis" of Milton Friedman (1957)13 and the "life cycle hypothesis" of Ando and Modigliani (1957).14 For several decades both of these theories have had an honored place in macroeconomic textbooks and have been empirically tested many times using data from numerous countries. Most of these empirical tests have confirmed the theories’ essential validity, finding that the regression coefficient of the wealth variable equals approximately to 6 percent. In the Egyptian context, this implies that from a sudden and unexpected increase of the wealth of the households acquired as a result of the proposed ECOP about 6 percent will be spent for immediate consumption and the rest will be saved or invested. Even were the regression coefficient on the wealth variable to be double to 12 percent instead of 6 percent, we expect that the part of the ECOP that will be used for consumption will not exceed $400 million.
If we look at the size of household consumption in the fiscal year 2007/2008, which is around $119 billion, we can understand that any extra consumption in the range of $400 million because of the ECOP is a very insignificant amount. This relatively small, though non-trivial, increase in aggregate demand may be at least partly compensated for by the increased aggregate supply of investable assets. If this is not the case, the government can apply restrictive fiscal or monetary policies to compensate for the increased household consumption by reducing government spending or increasing the interest rates, if needed, and that could push down the consumption demand to a balanced level.

V. Mass/Voucher Privatization and ECOP: Similarities and Differences

At first glance, many people assume that the ECOP is another mass/voucher privatization similar to those widely adopted in Eastern Europe, Russian Federation and Ex-Soviet Union countries in the early and mid-1990s. We argue that this not the case, but to document why we must highlight the transition economies’ experience and compare them with the ECOP to show the key similarities and differences between them.
It is striking for anyone surveying privatization to find a huge number of empirical and survey papers that tackle the impact of mass/voucher privatization on both economic and firm performance. However, the survey paper by Djankov and Murrell (2002), which cites over 100 academic articles, can be considered the single most important paper examining transition economies. Some 27 countries adopted mass privatization and, in the process, were able to privatize more than 15,000 large enterprises. Most of these countries distribute vouchers for free or at a nominal fee to be used later in bidding for state assets. However, the exact design of each program differs from one country to another. For example, in the Russian Federation, the government gave priority to workers and managers of SOEs. This permitted insiders (managers and controlling shareholders) to engage in extensive self-dealing transactions between insiders and the firm, in which the insiders profit at the firm’s expense, which the government did nothing to control. We note also that mass privatization was the primary method of privatization in most of these countries and a secondary method in a few others.
Several empirical studies show that the unfavorable economic and political conditions during the time of mass privatization in most transition economies had significant negative impacts on firm performance and the economy at large. For example, there was widespread asset stripping in the Russian Federation due to insider privatization, while voucher investment funds often used their influence not to restructure firms, but to tunnel away their profits in the Czech Republic. As scandals proliferated in the Czech Republic, foreign investors also withdrew--foreign direct and portfolio investment dropped from $103 million in 1995 to $57 million in 1996 and turned negative in early 1997—even as the continuing small direct investments were more than offset by withdrawals by portfolio investors (Black, et al., 2000 and Megginson and Netter, 2001). However, there is a consensus among transition economy researchers that privatization has a positive impact on firm performance and the economy at large in several Central and Eastern European countries in the long-run, but results were much less positive in the Russian Federation and Ex-Soviet Union countries. Generally speaking, empirical evidence indicates that private ownership is associated with better firm performance than state ownership. Moreover, foreign ownership, where allowed, is associated with greater post-privatization firm performance improvement than is purely domestic ownership. Moreover, it is found that employee and managerial ownership is associated with worse firm performance and the performance improves more when new managers are brought in to run a firm following privatization (Megginson, 2005).15
What is important here is to understand, briefly, why mass privatization was not successful, in particular in the short-run. In this context, experience has clearly shown the need to put in place the prerequisite legal, regulatory, and institutional framework, and to ensure a prudential macroeconomic environment is in place before implementing a huge program like mass privatization, particularly since SOEs in several transition economies dominated economic activity. This drives Black, et al., (2002, p. 1802) to state, “Initial conditions, especially the quality of institutions, matters more, and privatization matters less, than we thought in the early 1990s.” This means that all transition economy countries, though at different levels, implemented mass privatization program without having the necessary environment or enabling factors such as rule of law, contract enforceability, property rights, and a low level of corruption. Additionally, distributing vouchers to be used later in bidding for SOEs required an efficient and sophisticated capital market with deep and liquid stock exchange and several years of operation that enabled people to understand how to deal with equity instruments, and this was absent. Not only that, but voucher privatization should be accompanied by a sound legal and regulatory framework governing capital market operations, close surveillance over transactions and high level of transparency, disclosure and investors protection, in particular of minority rights.
For voucher privatization to be successful there should also be a stable and sound macroeconomic environment with low level of inflation that encourages private investment and reasonable real GDP growth rates, while providing promising investment opportunities, creating jobs and improving living standards. The economic environment should be characterized by a private-sector driven economy with clear, prudent, and transparent fiscal and monetary policies aiming at price stabilization while promoting economic growth. If we look at macroeconomic environments in transition economies prior to privatization, it is evident that these economies suffered significantly after the collapse of communist regimes in late 1980s. As Svejnar (2002) shows, all transition economies experienced significant output declines, ranging from 13-25 percent in most Central and Eastern European countries to over 40 percent for Baltic states to approximately 45 percent in the Russian Federation and even more for Ex-Soviet Union states. Also, we believe that any large scale privatization should be preceded by financial restructuring and liberalization policies for both banks and non-bank financial institutions, creating strong financial institutions with strict and prudential supervision and encouraging competition and allowing the private sector—both domestic and foreign—to participate in all financial activities.16 The conclusion from several research studies is that economies that lacked most of the above-mentioned prerequisites experienced very negative results from mass privatization and suffered more compared with those who had better enabling factors (Fischer, 2001; Roland, 2001; and Svejnar, 2002).
If we look at the Egyptian economy (Table 2), we can notice how significantly different it is from the transition economies at the time these were implementing mass privatization programs. The Egyptian economy has been a market oriented one for many years, and the private sector plays the key role in almost all economic activities. The economy also enjoys high growth rates (on average 7 percent during the past three years) and has demonstrated the ability to attract significant amounts of foreign direct investment (FDI) and portfolio flows. During the past three years, net FDI reached more than $30 billion and net foreign inflows through the Egyptian exchange exceeded $2 billion. Furthermore, the financial sector experienced a comprehensive reform program comprising banks and non-bank financial institutions. This resulted in a very sound and strong banking sector and capital markets with high levels of transparency, disclosure, and investor protection. The Egyptian Exchange witnessed unprecedented performance in the past few years, measured by market capitalization, value of trade, turnover ratio and institutional and foreign participation rates. We argue that the great depth and breadth that the Egyptian Exchange enjoys should be a key factor in implementing the ECOP.
When we compare the proposed ECOP with other mass privatization programs, it is in fact hard to see any similarities besides two common characteristics. The first is transferring a large number of firms17 from the state to the private sector and the second is that this equity transfer is free or at a nominal fee. Other than these two common characteristics, most other characteristics differ markedly. While mass privatization was based, mainly on distributing vouchers for free or at a nominal fee to be used later in bidding for state assets, the proposed ECOP is designed to give direct ownership in SOEs to citizens in the form of a portfolio or bundle
One other key distinction between the privatization programs of the transition countries and Egypt’s ECOP is that most of transition programs left firms without real owners because the state gave up the entire ownership and control to citizens (and employees) through voucher privatization. Thus, it was hard to effectively improve good corporate governance, disclosure and transparency and follow up reporting systems to monitor firm performance in the post-privatization period. However, the design of the ECOP avoids this lack of governance by requiring the state to remain a real owner of at least a 30 percent stake in each firm to be included in the program. That should allow the state to monitor and manage these firms and to follow up their performance during the transitional period until some sort of ownership concentration is created and new real owners are able to be represented on the board of directors of these firms.
Although we understand the state’s decision to retain control of firms in groups one and two--because firms in both groups have monopoly, strategic or even social or historical dimensions--we argue, at least from the economic point of view, that the state should not retain more than 30 percent in any firm that is part of the ECOP for reasons related to corporate governance during the transitional period until real owners are created and then the state is highly advised to relinquish the remaining 30 percent when market conditions improve and more potential buyers have sufficient funds to purchase stock.
Instead of claiming that many firms have monopoly positions, the state should put in place strict and rigorous rules and regulations that prevent monopoly acts and encourage competition—and then enforce the rules. In fact, the reduction in state ownership is not the only factor that improves the performance of privatized firms. The competitive environment and capital-market discipline also increase the efficiency of these firms (Castro and Uhlenbruck, 1997). In this context, Vickers and Yarrow (1991) suggest that competition can greatly improve monitoring possibilities and hence increase incentives for productive efficiency. Also, when competition increases, private ownership offers incentives and motivation for managers to proactively adopt profit-maximizing behavior (Stano, 1975; and Alchian, 1977). In addition, D’Souza and Megginson (1999) indicate that privatized firms that work in competitive industries are likely to yield solid and rapid economic benefits, as long as there are no economy-wide distortions that hinder competition.
In the same vein, the claim that the state intends to retain majority control over firms that produce medical and food products to help poor people is not convincing. This issue is very controversial, and the government is reluctant to tackle it. We advise the state to face and solve the entire subsidization system in Egypt and to explore better mechanisms to move from in-kind subsidies to a cash subsidy mechanism. This initiative could replace the nearly half-century old system of subsidizing food, energy, and services with a program that includes cash paid only to the needy. This will also promote social justice, as economists have long been convinced that most subsidies go to those who don’t deserve them. Also, retaining state control majority in firms to subsidize their product prices makes it difficult to determine the exact performance of these firms as long as they sell their products at lower prices. Not only this, but such practices of using state authority to stifle competition by subsidizing certain products is a form of market distortion.
In a separate, but a related issue, the proposed ECOP puts rules and limits on the mechanism of trading bundles before they are listed in the stock exchange. Only Egyptian individuals, institutions, or privatization investment funds that will be created specifically for this program will be allowed to trade. We suggest speeding up the process of listing these bundles on the stock exchange as long as the capacity of this exchange can handle the expected large number of new individual owners of these bundles. Once listed, these bundles and their underlying assets will be subject to the same rules and regulations that govern listed firms and trading activities. This will not limit trading activities to Egyptians only but will allow foreigners to participate, so that we would expect to witness more liquidity, changing ownership and control, and more potential acquisition opportunities. Consequently, we expect to see significant performance improvements for firms that represent the underlying assets of these bundles because they will have better disclosure, transparency, monitoring and corporate governance practices.

VI. Concluding Remarks and Some Policy Implications

In this paper, we focus on the Egyptian privatization program since 1991 and shed light on the impact of this program on the performance of privatized firms. The previous research studies document that privatization, on average, increases profitability, operating efficiency, and capital expenditures. Conversely, significant decreases in employment and leverage are documented for privatized firms in Egypt. Although we believe that the Egyptian privatization program—in the form of case-by-case privatization—leads to significant improvements in firm performance, the continuation of the program for 17 years and the large number of SOEs remaining in state hands suggests that a change must be made to conclude the privatization program within any reasonable time frame. Consequently, we suggest that the newly proposed ECOP should be considered a suitable alternative, not only to speed up the privatization program but also to complete it, to widen the equity ownership base, and to improve firm performance.
This paper spells the key details of the ECOP that has been submitted to the Egyptian Parliament and describes the policy objectives that the program is designed to achieve. After looking at other mass/voucher privatization programs that were implemented in transition economies in early and mid-1990s, we find that the proposed ECOP program differs significantly from these programs in terms of the design, implementation, institutional settings and macroeconomic environment. We believe that the ECOP is supposed to solve a specific problem, the need to rapidly privatize a large number of firms in circumstances where only a few potential buyers had sufficient funds to purchase. Also, it provides a means of transferring these assets to the population at large, and hence it is politically acceptable and renders a practical solution to accelerate privatization of the entire enterprise sector. By giving firms to the public for free or at a nominal fee, there is also a belief that the process will give the public a greater stake in the new economic system by making them owners of the assets of the country and achieve a measure of economic justice.
Finally, we offer several policy recommendations and extensions. First, we suggest that the state should not keep more than a 30 percent stake in any firm that is part of this program. Instead, the state should enhance the legal and regulatory framework and build a better regulatory and supervisory environment to ensure a level playing field that encourages competition to ensure that private sector monopoly does not replace state monopoly. Second, we advise the state to face and solve the entire subsidization system in Egypt and to explore better mechanisms to move from in-kind subsidy to cash subsidy mechanisms instead of retaining state control majority in firm to subsidize their product prices. Third, we urge the government to expand the ECOP to incorporate state assets other than SOEs that are governed under Law 203 of 1991. Fourth, we believe it unlikely that this program will have any negative impact on the budget, since the state is supposed to collect a levy on the first trading of bundles after listing in the stock exchange, and will also capture any increases in corporate tax collections due to the expected improvements in privatized firms’ profitability. Finally, the market value of the remaining state ownership of these firms are expected to increase due to significant improvements in firms’ performance. We are hopeful that the ECOP will be passed by Egypt’s Parliament and implemented with dispatch.

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1
Although more than 80 countries have undertaken privatization initiatives, few have spent the same amount of time only partially implementing their privatization programs as has Egypt.
2
Similarly, as we explain later, when Hartley and Parker (1991) developed a conceptual framework based on property rights and public choice approaches, they showed that privatized firms are more efficient than SOEs because profit motivation is absent for public firms, as they concentrate, mainly, on social objectives.
3
Additionally, managers will seek to maximize their own utility at the expense of the state. Evidence of self-interested managerial behavior includes the consumption of some firm resources in the form of prerequisites and the avoidance of optimal risk positions, whereby risk-averse managers bypass profitable opportunities and instead inject liquidity in less viable investments to achieve personal objectives and to be better connected with politicians and powerful people.
4
For a complete list of recent works on privatization, see Megginson and Natter (2001), Djankov and Murrell (2002), Megginson (2005) and for Egypt see Omran (2004a,b; 2005; 2007 and 2009).
5
Mohieldin and Nasr (2007) also find similar results, indicating that retaining government ownership can adversely affect the performance of Egyptian banks.
6
Control privatization means selling 51% or more of SOE’s shares to the private sector, while revenue privatization refers to selling less than 50%.
7
Total outstanding debt decreased from $5.6 billion to only $1.8 billion.
8
For more details, please see the Ministry of Investment, Annual Report, 2008.
9
Total privatization proceeds from July 2004 until 2008 to reach around $7 billion.
10
It is proposed that the future fund for generations will receive as minimum as three percent (firms who are part of the first group) and as maximum as ten percent (firms who are part of the third group).
11
The initial excess return of investing in 53 SIPs between 1994 and 1998 is an average of 8 percent. This average return would be obtained by an investor who bought SIPs at the offer price and sold them at the end of the first trading day. In some cases, investors were able to achieve more than 50 percent. Only those with knowledge and financial capability were able to reap the benefits of underpricing SIPs. To give an idea of the impact of the ECOP, it is expected that 41 million will benefit from this program compared with 348.000 investors who are considered the largest number ever in the history of any IPOs or SIPs in the Egyptian stock market (Egyptian Telecom was privatized in December 2005 and was able to attract the above-mentioned number of subscribers).
12
The state was able to collect around $364 billion during the past five years-- an average of $72 million per year--while we expect that the market values of the bundles are to be around $3.25 million, so that a one-time 15 percent levy is expected to feed the budget by the same amount of $72 million every year for slightly more than seven years.
13
The theory is based on the assumption that people distinguish between permanent and transitory changes in their incomes. Permanent income is the capacity to generate a certain level of income in the long run. In contrast, transitory income involves temporary and mostly random variations up and down from the permanent income. Transitory income may be, therefore, either positive or negative. Friedman’s theory asserts that people determine their consumption expenditures exclusively according to their permanent income. Transitory income does not cause any change in consumption expenditures. It only increases or decreases savings.
14
This theory is based on a similar assumption about rational behavior of households, but it formulates the model in a somewhat different way. The result is again very close to the result of Friedman’s model. The life cycle hypothesis starts with the observation that in each year of its life a typical household owns a certain amount of previously saved or inherited property. The household estimates the expected future flow of labor income in the remainder of its life cycle and also the expected future changes in the real interest rate. Using this information, and its preferences between the present and future consumption, the household decides what amount the members will consume each year and how much will be saved. Thus, the life cycle hypothesis explains how a rational household spreads optimally consumption over its life span so that members can build up their wealth by saving during the years of high labor income and drawing from it in times when their labor income is low or zero.
15
For more details, please see Pohl, et al., 1997; Berg, et al., 1999; Frydman, et al., 2006; Zinnes, et al.,2001 and Claessens and Djankov, 2002. And for Russian federation, please see Black, et al. 2000.
16
For comprehensive analysis on prerequisites that should have been in place before heading to mass privatization, please see Black, et al. (2000).
17
There is a big difference, even here. The total number of firms that the ECOP will privatize is expected to be around 85, compared with several thousand firms in many mass privatization programs.
Table 1. Number of Privatized Firms in Egypt. The table shows the number of privatized firms classified by the method of sale, year-by-year, and according to the industry in which each firm operates. It also shows the value of privatized firms for each year and the total through December 2003.
Table 1. Number of Privatized Firms in Egypt. The table shows the number of privatized firms classified by the method of sale, year-by-year, and according to the industry in which each firm operates. It also shows the value of privatized firms for each year and the total through December 2003.
Year
Method		 Full and control privatization Revenue privatization Yearly total
Anchor investor IPO* ESA** Liquidation IPO* Asset sales Leases Number Value***
1993 – – – 6 – – – 6 n.a.
1994 3 - 7 2 1 – – 13 664
1995 0 1 3 2 6 – – 12 1216
1996 3 14 – 1 6 1 - 25 2792
1997 3 14 3 3 2 1 1 27 3148
1998 2 8 12 6 1 3 - 32 2358
1999 9 - 5 7 – 4 6 31 2785
2000 5 1 - 3 – 6 10 25 2476
2001 4 - 1 2 – 3 1 11 1075
2002 2 1 3 6 51
2003 6 3 9 114
Total 29 38 33 33 16 27 21 197 16679
Usable Data 5 31 0 0 16 0 0 52 11150
Source: Omran (2009). * Initial Public Offering. ** Employees shareholders association. *** Millions of Egyptian pounds (rate 1 L.E.=0.174 US$ as of July 2006).
Table 2. Selected Macroeconomic and Stock Market Indicators for Egypt (2003-2008). The table shows some macroeconomic indicators in the past five-years. It also provides selected indicators on the financial sector; in particular stock market indicators. All figures and ratios are based on fiscal year and calendar year basis for economic and financial indicators, respectively.
Table 2. Selected Macroeconomic and Stock Market Indicators for Egypt (2003-2008). The table shows some macroeconomic indicators in the past five-years. It also provides selected indicators on the financial sector; in particular stock market indicators. All figures and ratios are based on fiscal year and calendar year basis for economic and financial indicators, respectively.
Indicators Year
2003/04 2004/05 2005/06 2006/07 2007/08
GDP Growth Rate 4.1% 4.6% 6.9% 7.1% 7.2%
Private Sector Contribution to GDP 62.2% 61.7% 60.3% 61.5% 61.9%
Total Public Investments (US$ Billion) 6.8 7.8 7.8 10.3 11.9
Total Private Investments (US$ Billion) 6.0 7.7 11.5 17.0 24.3
Private Investments / Total Investments 47% 50% 60% 62% 67%
Foreign Direct Investments (US$ Billion) 2.1 3.9 6.1 11.1 13.2
Budget Deficit as a Percentage of GDP) 9.5% 9.6% 8.2% 7.3% 6.9%
Inflation Rate (Annual) 4.9% 11.4% 4.2% 10.9% 11.7%
Net International Reserves (US$ Billion) 14.8 19.3 22.9 28.6 34.6
Market Capitalization (US$ Billion)* 37.6 79.4 93.4 139.7 85.5
Market Capitalization as a Percentage of GDP)* 53% 87% 80% 105% 52%
Turnover Ratio * 14.2% 31.1% 48.7% 38.7% 69.6%
Value of Trade (US$ Billion)* 6.8 27.9 50.2 66.0 94
Net Foreign Inflows (US$ Billion)* 0.04 1.08 3.22 -0.67 14.52
Net Foreign Inflows excluding deals (US$ Billion)* 0.15 0.65 1.43 0.93 -0.18
Institutions Participation as a Percentage of Value Traded* 47% 47% 40% 45% 53%
Foreign Participation as a Percentage of Value Traded* 20.5% 16. 4% 16.6% 19.2% 20%
Arab Participation as a Percentage of Value Traded* 7.0% 13.9% 13.6% 12.5% 10%
Source: Ministry of Economic Development, Central Bank of Egypt, and The Egyptian Exchange, Annual Reports (Various Issues). * Based on calendar year.
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