Egypt Business Network
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Dr. Nilgün Birgören Premium Member Group moderatorThe company name is only visible to registered members.A Private Concern
A new law makes it easier for private companies in Egypt to invest in everything from hospitals to power stations. Advocates say it’s the only way to bridge the country’s yawning infrastructure gap, but not everyone is sold on the idea of turning over essential services to private enterprise.
Here is an interesting article I would like to share with you:
Hours before the People’s Assembly was scheduled to open debate on one of the country’s most important new laws in years, officials from the finance ministry sat down with their counterparts at the National Institute of Planning, a state research body focused on development issues.
The finance officials were hoping to win over the planners in what was fast becoming a major debate within the halls of government.
The law before Parliament would throw open public infrastructure projects to private investment, something the finance ministry had been championing.
It was, they said, the only way the government could extend essential services to the millions of Egyptians who lack basics like clean drinking water, safe roads and a reliable power supply.
But economists and political scientists from the planning institute soon clashed with the officials. The researchers said the new law could open the door to corruption and allow the state to neglect its civic responsibilities.
After hours of discussions, a wide gulf remained between both sides.
Meanwhile, far from the National Planning Institute on the outskirts of Cairo, work was continuing on a sprawling LE 2.5 billion wastewater treatment plant.
The facility, which will serve New Cairo, is a unique venture: It is neither owned nor paid for by the government. It is the result of a partnership between Orascom Construction Industries and Spanish water company Aqualia, which are responsible for designing, financing, building, operating and maintaining the station.
The LE 2.5 billion plant is a pilot project whose potential was to eventually spell the end of the debate within the government.
On May 11, less than two months after it was first debated in Parliament, and a couple of weeks after the meeting at the planning institute, the infrastructure was passed to cheers from legislators.
The law is part of a drive to dramatically increase foreign investment and overhaul the country’s aging infrastructure network.
According to a 2008 World Bank study, if Egypt wants to sustain growth of around 7% to 8%, it needs to invest at least LE 73 billion annually in roads, railways, power plants and water works.
But the government isn’t even coming close. It spent less than half that in FY2009/2010, and much of the money came in the form of a stimulus package designed to offset the effects of the global financial crisis. In the previous fiscal year, only LE 15 billion went towards infrastructure.
The new law is designed to plug those holes.
It allows private firms to build, operate and maintain the underpinnings of society without getting parliamentary approval, an important departure from the old framework. Companies only need the go-ahead from a government ministry before they can invest in infrastructure and a host of public services that include health care and education.
While local media have characterized the law as a form of privatization, that is not strictly true. The government will not put public utility companies, hospitals or schools on the block as it has done in the past with state-run firms. Instead, the law encourages the private sector to invest in new developments with the state holding a minority share, an arrangement commonly known as a public-private partnership.
Supporters say the measures have the potential to remake the face of the country by stoking private investment in projects the government simply cannot afford, improving the lives of millions of Egyptians.
But opponents question the wisdom of handing over essential services to companies motivated more by the bottom line than the public good. They say consumers could wind up paying more for public services, especially if, as some worry, hefty state subsidies disappear. At the same time, critics contend that the bill provides little oversight for the tendering process, opening the door for corruption and foreign control over essential domestic services.
The Infrastructure Gap
During the last several years, the government has called a nationwide effort to improve infrastructure and public services its top priority.
Spending on water treatment plants is expected to hit LE 12.5 billion this fiscal year, almost as much as the last three years combined, while investments in drinking water projects are expected to almost double next year to LE 9.8 billion.
But some studies suggest there’s a lot more work to do. A report by the state-run National Council for Human Rights stated that 76% of Egypt’s villages drink water mixed with sewage, and that the water flowing to 38 million people is not suitable for human use. Last year, 1,000 residents in Al Barada’a village in the Daqahliyah governorate caught typhoid after drinking polluted water, a scandal that caused national outrage.
Infrastructure failures, though, haven’t been limited to water services.
In 2009, Minister of Transportation Mohamed Mansour resigned after a train crash in El-Ayyat killed 18 and injured 50. As with most other fatal accidents, the cause of the crash was a lack of modern signaling equipment. The same year, five governorates in Upper Egypt were plunged into darkness when electrical generators at a High Dam station failed due to lack of maintenance.
When confronted about disasters like these, officials have a familiar refrain: There is not enough money in the budget for a national makeover and the already high deficit, LE 98 billion or 8.4% of GDP, makes borrowing a non-starter.
“We will need at least LE 120 billion to connect all Egyptians to wastewater stations, to build roads the way they should be, and to upgrade universities,” said Finance Minister Youssef Boutros Ghali during Shura Council deliberations on the new law.
“I have LE 30 billion each year [to spend on all infrastructure projects].”
Those pressures pushed the government to pass the 39-clause public-private partnership law, which it says will dramatically reduce the time it takes for privately funded projects to get off the ground.
Holding private tenders for public infrastructure used to be a process tangled in red tape. In the case of the New Cairo wastewater plant, the process took almost two years.
The new law streamlines the process, bypassing Parliament entirely. Ministries requiring infrastructure projects go to the public-private partnership unit at the Ministry of Finance. The ministry then conducts a feasibility study and offers a public tender.
It’s a model that has the government thinking big. Officials want the private sector to carry out LE 25 billion worth of projects annually for the next five years. The public-private partnership unit is now working on 17 projects, including wastewater plants, water desalination stations, public hospitals, bread distribution centers, highways and public schools.
From Private to Public and Back Again
Egypt is no stranger to privatization. Before the 1952 revolution, Cairo’s public buses were privately run and so were most of the capital’s water companies.
The revolution saw those firms transferred to state hands, a process that was mimicked in dozens of nations.
But the global tide turned in the 1970s and 1980s with the election of conservative governments under Margaret Thatcher in the UK and Ronald Reagan in the US, fierce proponents of free markets who turned the private sector loose.
In the early and mid-1990s, developing countries followed suit. From 1990-2001 about half of the world’s private sector infrastructure investment was concentrated in Latin America and South America.
By 1997, investments in new projects reached $130 billion (LE 715 billion) worldwide. Telecommunication networks and power plants in Argentina and Brazil led the growth, while countries in East Asia focused on injecting private funds into their power grids.
The last decade especially has seen an explosion of private infrastructure investments in developing countries; from 2002-2008, funding jumped 69%. In 2008, investments totaled $155 billion (LE 849 billion), according to the World Bank.
Along the way, the view of private-sector involvement has changed. Many countries, smarting from the political fallout of governmental fire sales — the liquidation of Russia’s oil and natural gas assets being a prime example — have abandoned outright privatization in favor of public-private partnerships.
Even the World Bank, a staunch supporter of privatization during the 1980s and 1990s says pure privatization is not the only option anymore.
Advocates say there are several benefits to moving infrastructure into predominantly private hands. In a study of developing countries such as Argentina, Cote d’Ivoire, Gabon, the Philippines, Morocco, and Bolivia, the World Bank says access to drinking water, sanitation services and electricity increased, in some cases dramatically.
For the first time, poor neighborhoods in Argentina’s Buenos Aires and Georgia’s Tbilisi had water and electricity 24/7.
The bank also said wasted energy in Argentina, Chile and Peru was cut nearly in half and uncollected utilities fees plunged. In Namibia, the latter dropped from 49% to 7%.
But in several cases, private involvement in public services came at a price. In France, for example, a public-private partnership resulted in water prices 10% higher than they were under a state-run company.
The Opposition
In Egypt, the government expects that privatization will expand the reach of services dramatically, but not everyone is convinced.
Critics say privatization throws into doubt the future of government subsidies, whose death would drastically raise prices for consumers.
For example, 65% of Egyptians receive stipends that amount to three-quarters of their water bill, according to the Holding Company for Water and Wastewater (HCWW).
The state-owned firm, established in 2004, issued a statement recently following criticism from Parliament members who said water prices were too high. HCWW said the cost of subsidies is already draining company coffers.
Professor Ibrahim El-Issawy, an economist at the government’s National Planning Institute, thinks it’s unlikely the state will help out consumers if private companies take over.
“The government is now complaining about subsidies all the time,” he says. “It is hard to imagine the government paying for these services later.”
While prices will initially be fixed, one clause allows private investors to raise rates with the government’s stamp of approval. The government has said that it will not allow private companies to charge people directly for services. But the new law does not explicitly say the state will buy services from private companies and resell them to the public at affordable rates.
With no guarantees from the government, critics worry that prices will go up across the board, and the desperately poor may not be able to afford basic services. But creating subsidies that only target the needy, as opposed to the entire population, is a complicated problem that the government hasn’t yet been able to solve.
“The solution is very clear, yet the implementation is very difficult,” the World Bank’s Noumba says. “There are poor households, who should be supported, in the same community where other households are making enough money and should not get the subsidy. How to make the subsidy explicit and not implicit, this is something that will take a lot of work to implement.”
Backroom Dealing
In 2000, the United Nations Commission on International Trade Law released a framework for countries looking to create public-private partnership laws. Independent researcher Mohamed Taqiadeen, who specializes in water contracts, says the new public-partnership law is missing 14 clauses from the UN model.
Among other things, the law leaves out minimum capital requirements for private-sector firms and does not specify who owns a project once the initial contract ends.
“Maybe the goal was to keep the contracts flexible. Yet, I think it was better to take the [whole UN framework], instead of summarizing the law,” says Taqiadeen.
With a lack of clear guidelines on how tenders are to be awarded, lawyer and independent Parliament member Alaa Abdelmonem worries that the law, which does not require parliamentary approval of contracts, leaves the door wide open for corruption.
“The thing I’m worried about the most is that those contracts are not regulated by the law that regulated public procurement,” he says. “This presents a huge opportunity for corruption,” he says.
Should that happen, critics say there is little hope of rooting it out. The Central Agency for Public Mobilization and Statistics (CAPMAS) is a state organization that tracks government spending and oversees projects in which the government has a stake of 25% or more. But the new privatization law states that government participation in projects is limited to 20%.
“Why did they put in this clause? Because they wanted to escape CAPMAS supervision,” says Parliament member Saad Khalifa, who is affiliated with the Muslim Brotherhood. “We asked them to change it to make the ratio 25% or higher so CAPMAS supervises those projects. They said no. Why? Because CAPMAS reveals corruption.”
Economist El-Issawy is also skeptical of the law’s lack of transparency. During a discussion with finance ministry officials, he said he was told the text of the law was solid, but the implementation fell outside the ministry’s responsibilities.
“We should not pretend this law is being applied in a society other than Egypt. We have evidence on how laws are implemented here.”
Noumba disagrees, believing that removing the public sector from day-to-day commercial work will cut down on corruption. “When I saw the draft of the law, there were enough clauses to assure that a tender is awarded to the most qualified private company,” he says.
A lack of public hearings or expert forums during the law’s conception has people like Taqiadeen worried that the act, which cleared the upper and lower houses of Parliament in less than two months, was rushed.
“The Egyptian criminal law was passed in 1948, and until this day, it is a valid, solid law,” Taqiadeen says. “Do you know why? Because it was not rushed. Legislators took enough time in deliberations and discussions.”
Foreign Intervention
The privatization plan has raised a wave of criticism from Parliament members, including opposition member Mohamed El-Omda, who worried that foreign multinationals could end up controlling essential services.
While he doesn’t oppose the concept of public-private partnerships, he prefers to limit private participation to Egyptian companies — a demand shared by 20 other Parliament members.
“We asked the government to allow only Egyptian companies, and to start applying the law with a test phase followed by evaluation. Yet, the majority dismissed the deliberations altogether,” El-Omda says.
The government said that idea would be a setback to economic policies that encourage foreign investment.
While Noumba sympathizes with nationalists, he believes domestic companies may lack the necessary expertise to pull off major infrastructure projects. He supports partnerships between local companies and international firms with more expertise, at least at the outset.
Meanwhile, Khalifa says opening up infrastructure development to international firms could leave the government saddled with hefty legal bills if the deal goes sour.
“When we have disputes with foreign investors, they sue us in international arbitration centers. We don’t have experience in those kinds of cases, and we end up wasting more money,” Khalifa says, referring to the case of businessman Wagih Siag.
Siag, who holds Egyptian and Italian citizenship, was awarded a piece of land in Taba by the government on which to build a tourist resort. The land, on the border with Israel, was later withdrawn by the government for undisclosed national security reasons.
Siag contested the case, and last year the International Commercial Arbitration Center in Washington ordered the government to pay him $134 million (LE 737 million) in damages.
The End Game
The demands of El-Omda and his colleagues in Parliament reflect a growing disenchantment with privatization in all its forms, a skepticism that extends all the way up the governmental ladder.
Zakarya Azmy, President Hosni Mubarak’s chief of staff and one of the president’s assigned Parliament members, called out “privatization thieves” who sold state companies on the cheap during the last two decades, demanding investigations into the sales.
While the government promises it will not repeat the same mistakes under the new public-private partnership law, some question whether the state really needs to turn to the private sector.
Economist El-Issawy says the shortage of infrastructure funds is rooted in the mismanagement of government revenue streams like taxes on incomes and corporations.
El-Issawy reckons that nearly LE 70 billion in revenue goes uncollected every year. That does not include the money the government is missing out on because of what some call overly-generous tax policies.
“Look into companies’ tax rates, which were decreased from 40% to 20%. Look into tax holidays for private schools and universities who charge premium fees for a specific class,” he says. “These are wasted resources the government should use to carry out its social role in building public services.”
While the law is still in its infancy, several companies are jockeying to be the first into what is likely to be a highly profitable market. In January, Orascom Construction Industries and American investment bank Morgan Stanley announced the creation of a 50-50 joint venture to develop infrastructure in the MENA region. (The companies have declined to give details about the venture.)
With public-private partnership projects lined up and more on the way, more private investment in infrastructure is a fait accompli.
If executed correctly, people could see services delivered more quickly and more efficiently. But there is still considerable doubt as to whether citizens are the first and last priority. In the end, government oversight (or lack thereof) could decide whether or not Egyptians find their cups running over or running empty.
Source: Financial Times
- 22 Jun 2010, 4:36 pm
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Desiree McCourt Premium Member Group moderatorThe company name is only visible to registered members.- 01 Jul 2010, 10:41 am
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Dr. Nilgün Birgören Premium Member Group moderatorThe company name is only visible to registered members.
Re^2: A Private Concern
Hi Desiree,
I will try to find the link.
However, provided the link, wouldn't it be 'long' the same?
Regards from istanbul,
Nilgun
- 01 Jul 2010, 8:02 pm
