Egypt Drags Its Feet In Privatization Tussle

A thorny legal issue facing Egypt’s government was laid bare last month when Prime Minister Hisham Kandil was given a suspended jail sentence for failing to implement a court ruling to renationalize a textile company sold off by the Hosni Mubarak administration.

The ruling, made in 2011, ordered the then government to repurchase textile company Tanta Flax and Oils from the Saudi Arabian investor who bought it in 2005, on the grounds that the company had been sold at below market value.

Egyptian courts have issued at least 11 rulings in the two years since the revolution that toppled Mubarak ordering the state to reverse deals signed by the former president’s administration. Dozens more lawsuits are currently being heard by courts, activist lawyers say.

The lawsuits have been brought by activists and lawyers who alleged that companies were sold off too cheaply and were representative of corrupt business practices during the Mubarak era.

The subsequent rulings have plunged a number of foreign companies operating in Egypt into legal limbo, exposing the government to the risk of costly international arbitration, that could scare off much-needed investment from abroad and adding to an already difficult business climate.

Lawyers and activists who filed the lawsuits say the court rulings should force a cleanup of business under the current government, led by President Mohamed Morsi.

Renationalizing former state enterprises, however, is not straightforward: some of the companies, including Tanta Flax and Oils, have already been broken up since passing to foreign ownership.

Morsi’s government is unsure how to proceed.

Only one of the rulings, related to the renationalization of Omar Effendi, one of Egypt’s oldest department store chains, has been implemented so far, hence the verdict of a one-year suspended jail sentence for Kandil.

Under Egypt’s constitution, ratified in December, public officials who fail to carry out court orders are to be removed from office.

The government said it would appeal against the sentence for Kandil, who was not prime minister when the ruling on Tanta Flax and Oils was issued.

Officially, Morsi’s Islamist-led government has set up committees to study how to carry out the renationalization of businesses. Privately, officials voice concern about the bad signal it sends to investors.

“All the issues are complicated,” manpower minister Khaled Elazhary told Reuters. “Who do we pay? Will we pay the value that the first buyer paid or the higher price paid by the second buyer?”

“We are trying to see how we can keep protecting the buyers’ rights and (return) the money they paid before.”

In at least one of the cases, the company had been sold to foreign investors 15 years ago.

Eight foreign firms at least, including Mexican cement giant CEMEX (CMXCPO.MX), are locked in appeals processes against renationalization that they hope will allow them to maintain their investments in the country.

As it appeals an initial court ruling, CEMEX is still running Assuit Cement Company, which it bought from the government in 1999, said Aly El Shalakany, a lawyer representing foreign investors in Egypt. But other foreign firms have been forced out and are waging legal battles from overseas.

Elazhary said implementing the rulings constituted a “new economic burden” that the cash-strapped government, facing a budget deficit of 11.5 percent of gross domestic product this fiscal year following a slump in revenues since the revolution, cannot afford.

As Cairo struggles to cover the costs of basic imports like wheat and fuel, some wonder how, even if the government managed to buy back the companies, it could afford to take over running factories and paying workers.

“I don’t see the government in a financial or technical position to do it,” said Ahmed Abou Saad, managing director of Rasmala Egypt Asset Management.

“LOSE-LOSE-LOSE SITUATION”

Mubarak sold off a number of state companies between 1991 and 2008 in an attempt to encourage growth of the private sector.

President Morsi’s government, elected last year, has said it will not privatize any state-owned companies. But it opposes taking back companies already sold off, on financial grounds and because it believes renationalization would send a negative signal to potential investors in Egypt.

Some say the court cases are having negative consequences for all parties involved.

“They don’t benefit the workers. The state doesn’t want these companies back. The cases create uncertainty at a time when we need investment,” said Shalakany.

“It’s a lose-lose-lose situation,” he said.

Economists say the threat of renationalization is another turnoff for foreign investors already reluctant to commit to new investments while the economic situation in Egypt is weak and policy is uncertain. Investor confidence has also been by dampened by Cairo delaying payments to international oil companies as it struggles to meet its energy bills.

Indorama Group, an Indonesian multinational textile group, initiated international arbitration against Egypt in 2011 even before a local court ordered the renationalization of a textile firm privatized in 2007 and bought by Indorama.

Following the uprising against Mubarak in early 2011, workers stormed the textile plant in the Nile Delta city of Menoufiya north of Cairo. They occupied the management offices, held managers hostage and beat them, said Charles Claypoole, a lawyer representing Indorama in the case it filed at the International Centre for the Resolution of Investment Disputes, or ICSID.

Indorama took the case to Washington DC-based ICSID, which is affiliated with the World Bank, in 2011.

“We’ve lost our investment and we’re claiming damages,” said Claypoole of Latham & Watkins law firm in London.

ICSID rulings must be enforced as though they were final judgments in the relevant country’s judiciary. Claims by companies like Indorama typically exceed $50 million.

Although activists say they are continuing to bring cases to keep pressure on the Morsi government to wipe out corruption and create a more transparent business climate, the government’s inaction makes them pessimistic.

“Looking at the lack of implementation of these verdicts, I don’t think the economic direction of the Morsi government is appearing that different from Mubarak’s,” said Alaa Abdeltawab of the Egyptian Center for Economic and Social Rights, which has filed many of the cases.

Reuters