He has promises to keep,And Miles To Go Before He Can Sleep

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Two years into the job, he is routinely lauded in international circles for both his vision and the bluntness with which he implements it. It's gotten to the point where he seems almost invariably described in the foreign press as "Egypt's tough-minded investment minister."

"I think we are perceived to be credible in some circles, while there is, no doubt, skepticism in others. International institutions, think-tanks, investment banks and economists all understand that we are headed in the right direction and have taken the right measures," the minister says.

Rather than dwelling on surging foreign direct investment (FDI) figures and a windfall of proceeds from the once-moribund privatization program he brought back to life two summers ago, Mohieldin begins our discussion by bluntly stating that 20% of the population is still living under the poverty line and that more than 2 million are still officially unemployed.

"I know that the ordinary public is not going to be happy when they see that real economic growth is at 6% instead of 4%, or that the official unemployment rate is down to 9.5% from 9.9%," he says. "These are just meaningless figures to them. These macroeconomic indicators will not be welcomed [by the public] until they have a positive microeconomic impact, such as obvious improvements in the standard of living, more jobs and better opportunities for our youth. It will take time to hit some of these targets and achieve a trickle down effect."

Part of the problem, the minister notes, is that Egyptians have been promised for decades that if they hold on for just another year, everything will be just fine.

"We have actually been tackling 'economic reform' for quite a while," he says. "There have been different phases and speeds of reform in the past, and this is certainly not our first attempt at liberalization and privatization. This country has been suffering for a long time as officials tried to paint a very rosy picture of things. They kept claiming that things were starting to develop and improve, but that's not really the tune we're playing today.

"Instead, we are adopting blunt, straightforward measures that are perhaps the most aggressive reforms that Egypt has ever seen," he says.

That's why Mohieldin says he's done his best to never use the word ingazzat (achievements), a favorite term of past Cabinet members that has become laden with irony after so many years of misuse. "I don't think I, or anyone in this government, can be accused of trying to sugar-coat anything," he says. "This is very important. Giving people the facts may be initially upsetting, but I think that at the end of the day, they will come to respect you for it.

"Really, though, nothing will make people happy unless we really manage to put the economy back on track -- and that has not been the case so far. What we have at the moment are some limited positive developments here and there, particularly with FDI," Mohieldin says.

Still, the figures are nothing to scoff at: After Mohieldin took over the investment portfolio, non-oil FDI skyrocketed to $1.3 billion from a measly $407 million the year before.

"This fiscal year," he adds, "we expect roughly $5 billion in FDI. For the first time, we are seeing the non-oil sector attract significant investments and we are also seeing waves of FDI coming in from countries including Turkey, China and India, in addition to Europe, the US and the Gulf, which have been our traditional sources of investments.

"On the investment front, there has also been progress: New companies are opening and existing companies are expanding. We also have progress on the exports file and positive developments in the financial sector, but all of these are just bits and pieces that must eventually lead us to something else, something more tangible."

Two years into office, Mohieldin says tangible results will come from an accelerated and more transparent commitment to privatization, full implementation of the mortgage finance system and the elimination of dozens of small obstacles that still hobble investors.

Only then, he says, does the challenge become a political one.

Privatization
Mohieldin is both Egypt's first minister of investment and, at age 41, the youngest member of Prime Minister Ahmed Nazif's Cabinet. His portfolio is broad, including responsibility for creating an environment to support both foreign and local investment; improving the operations of regulatory bodies, including the Capital Market Authority (CMA) and the Mortgage Finance Authority; reviving the floundering mortgage finance market; sorting out the mess that is the insurance sector; and, of course, improving the performance of state-owned companies with a view to selling them to the private sector.

That last role, as Auctioneer-in-Chief for a gargantuan inventory of public-sector assets that has been weighing the economy down since the 1960s, is by far the most controversial and the one that has gotten him into the most trouble.

From his first day in Cabinet, Mohieldin a PhD who previously served as a senior advisor to Boutros-Ghali during the his terms as minister of economy and foreign trade knew exactly what he wanted to do with the public sector.

Mohieldin netted LE 5.6 billion in privatization proceeds during his first year in office, doubling the take from the previous four years combined. In fiscal year 2005-06, that figure should clock in at more than LE 10 billion.

The pace and number of privatization sales under the minister's watch were bound to cause a stir in a country in which economic nationalists still control the mainstream press and in which 'social implications' (including fears of unemployment, wage cuts and the emotional reaction to the sale of national icons) have served as constant brakes on sales.

Critics, including prominent members of the local press, have not only attacked the privatization program, but have belittled Mohieldin personally.

Still, he's doing his best to take the attacks with a grain of salt, saying, "It is important to remember that for ages and ages, this country and its people were not really able to express themselves and their views as they wished. It's only now that issues of unhappiness over some of the policies, programs and controversial issues issues that aren't unanimously loved, such as the privatization program are being voiced. People are sounding off like never before. You know, I have people today asking me about cases of privatization that took place in 1992-93. It's hard not to say, 'Guys, where were you before?' But the fact is that only now do we have the opportunity to express our views. I do welcome this, but it has a cost. It makes you feel uncomfortable, sometimes, and it's not incredibly encouraging. It also means we sometimes delay some measures of reform, but this is the cost of democracy and freedom."

The greatest test of Mohieldin's resolve came this past March, when his ministry tried for the fourth time since the privatization program was born in the early 1990s to sell Omar EffendiOmar Effendi Department Stores, a national icon that employs 6,000 people and that reported LE 2 million in profits for 2005 the first time in four years it was in the black.

Soon after Mohieldin announced he had reached a deal with AnwalAnwal, a major Saudi corporation, Yehia Abdel-Hady, then head of Benzione, a state-owned department store held under the Holding Company for Trade (HCT), filed a criminal complaint against both Mohieldin and HCT chief Hadi Fahmy.

Abdel-Hady alleged that the two had conspired to mismanage public funds by agreeing to sell Omar EffendiOmar Effendi at a price he claimed was far below its valuation.

In loud interviews with the press including bt Abdel-Hady alleged that he had headed an HCT-appointed committee that worked for a solid month to come up with a sticker price for Omar EffendiOmar Effendi, eventually arriving at a fair market value of LE 1.14 billion. Abdel-Hady claimed that after submitting his report, he was called into Fahmy's office and pressured to lower the estimate of the retailer's worth. Omar EffendiOmar Effendi, he claims to have been told, would be sold to AnwalAnwal for LE 504 million.

(For bt's coverage of Abdel-Hady and the recent controversy of the sale, see "Together, We All Fall Down," by Staff Writer Ahmed Namatella, bt April 2006, p. 36

In the public outcry that followed, Mohieldin was forced to put the sale on hold as he worked behind the scenes to control the damage. 'Behind the scenes' is key: On the advice of the Attorney General, Mohieldin did not speak about the issue in public while the Prosecutor-General's Office investigated the charges against him.

Although Prosecutor-General Maher Abdel Wahed has since cleared the minister of all charges, Mohieldin is still repairing the damage the controversy did to the privatization program.

In an address to the People's Assembly's Economic Committee at the time of the inquisition, Mohieldin explained that in addition to LE 504 million in cash, the AnwalAnwal offer also included the payment of LE 555 million for retirement and early retirement plans, the assumption of liability for LE 155 million in overdue tax payments as well as another LE 45 million in debts, and a promise to invest LE 200 million into the ailing chain. The total value of the bid, he said, was thus LE 1.09 billion, not far from the sticker price recommended by the committee.

Mohieldin is as adamant as ever that the sale was negotiated by the book with one exception, that is: the creation of the HCT committee headed by Abdel-Hady, which worked in parallel with the official valuation committee established three years ago by a decree of the former Ministry of Public Enterprise. (Mohieldin has not rescinded the decree; the official committee now serves under his ministry.)

"The existence of two committees carrying out two valuations confused everyone," Mohieldin admits, saying it was an aberration. "The committee that caused the problem was under the impression that Omar EffendiOmar Effendi could be sold for the value of its assets, not as a company."

Debate over how the ailing retailer should be sold is hardly a new one: In 1999, the year it was last offered to the market, there was a national argument over whether to include the land on which Omar EffendiOmar Effendi stores sit. Ultimately, the government decided not to, saying the price with land included would be so astronomical as to scare off investors.

Then, as now, the state will retain ownership of the land, leasing it to the new owner.

Three months after the case first made headlines, the controversy has died down and Mohieldin insists that "the deal is on" and "the investor is still happy with the transaction." But HCT has not yet finalized the sale, let alone resubmitted the file for his approval.

"I expect that it will take a few weeks before we hear from the holding company, and there are still some questions on the issues that have to be answered in Parliament in the coming days and weeks. But the deal will be finalized if everything is satisfactory on the technical and financial files," Mohieldin says.

The minister says that if nothing else, he's learned one key lesson from the affair: the importance of communication. "Communication was pathetic throughout the whole mess," says Mohieldin. "It was based on the assumption that this is the sixteenth year of privatization. When you have been at it for 16 years, it's easy to assume there is an accumulated body of public knowledge of what's happening. To my surprise, this isn't the case. That's why the ministry is working now to communicate better with the public through the media.

From now on, Mohieldin says he will go much further to make upcoming sales a matter of national concern.

"When I went to the parliamentary committee to answer questions on Omar EffendiOmar Effendi, they asked how come I was selling a company without announcing it to the public," he recalls. "The fact of the matter is that we had 10 or so adverts in the newspapers, but it seems that wasn't enough. It was suggested that I might use television to announce the intention to privatize, which is something that I intend to do from now on. We need to work on some major PR, not to promote the Ministry of Investment, but to give people the facts.

"People still do not know the basic principles of privatization," he says.

Today, Mohieldin says he also regrets having taken the Attorney General's advice to remain silent during the first three weeks of the debate: "This was not really fair to [the ministry] or to the program. From the fifth to the twenty-first of March, I did not appear on a single television show. The lesson here with all due respect to the Attorney General is that if people are using a particular form of media to get their messages out, I will be using it as well.

"It is very natural that the media will have a critical mind and will focus on negative matters it's what sells and what people like to read and believe in but at the end of the day, I'm saying that this has a negative impact on reform. It delays certain measures, antagonizes many people and ultimately slows down the pace of what we are trying to do.

"We have managed to sell close to LE 20 billion [of state assets] in less than two years," he continues, "but we lost close to LE 1 billion worth of transactions directly from the Omar EffendiOmar Effendi problem. I hope we make up for lost ground in a few months' time, but it's a trade-off: You can't ask for democracy and freedom of speech without paying the price. In this case, it is the public that paid the price. Personally, it cost me only a few more hours spent with Parliament and with the trade unions.

"Still, I would rather see the country enjoying more freedom of speech and liberty in general, even if it means that we pay a short-term price by losing some transactions or that a minister of investment is made unhappy for a little while," Mohieldin chuckles.

In the months since, the minister has begun drafting a new article for the Executive Regulations of the Public Enterprise Act that will require the minister of investment to present the Cabinet's Economic Team and the minister of manpower with a brief on how he or she plans to sell each public company.

"I told the Prime Minister that I needed a ministerial committee to have a look at what's happening. This is basically a proposal to make sure that everybody is fully in the loop on each transaction. I don't see this as an impediment to our efforts in any way. They are a group of sensible people and it's in their best interests to have the privatization done efficiently, effectively and transparently," he says.

The Case
If the Omar EffendiOmar Effendi flap was a minor obstacle on the road to privatization, the ongoing correction on the Cairo and Alexandria Stock Exchange is more akin to a medium-sized minefield that will take some time to clear. Mohieldin admits that the bourse's slump could delay the sale of at least a handful of key assets in the short term.

With the benchmark CASE30 Index having lost 25.17% year-to-date, the CASE has gone from being the best-performing exchange in the world for three years running to one of the three worst. At press time, seven of the 10 worst performers globally were in the Arab world. Saudi Arabia, which has lost more than one-third of its value, is the biggest loser, followed by Dubai and Egypt.

According to a recent Economist report, "Stock markets in the emerging economies have fallen by 16% in dollar terms since the second week of May. Mutual funds dedicated to emerging markets, which attracted more money in the first four months of this year than in the whole of 2005, said goodbye to $5 billion in the week leading up to May 24."

Mohieldin says the key to getting around the slump is to be creative in how offerings are executed.

"We are using different mixes of privatization methods: IPOs, private placements and sales to strategic investors. Despite the fact that the stock markets are down, there won't really be a long-term delay. We'll use different methods to push forward," he says.

The sale of the Bank of Alexandria, which should be the biggest (and certainly the most high-profile) deal of the year, is still on track. Mohieldin says he plans to sell 70-75% of the smallest of the Big Four state-owned banks to a strategic investor and offer at least 15-20% to the public through an IPO on the CASE during the fourth quarter of this year. Five percent of BoA's shares are to be reserved for an employee stock ownership program.

"I think the market will be in a completely different shape by the fourth quarter. Perhaps a transaction of this nature is what's needed to lift things up. Privatization in general, whether it's in this country or elsewhere, is never really an issue of love, but it shouldn't be one of hate either. It is a necessary decision that has to be made; if not, the implications are detrimental for both the companies and the economy at large. It is my responsibility to take care of both worker's rights and the country's finances, so you can rest assured that we will not be selling cheap at any stage. When it comes to the integrity of valuations, the only problem comes when real estate is involved. If we manage to take real estate out of the equation, which is basically the case today, then I think we will be okay," says Mohieldin.

As to loud demands from retail investors, many of whom have lost their shirts in the correction, that CMA Chairman Hani Sarie El-Din and CASE boss Maged Shawky be replaced? Mohieldin isn't listening.

"They have to find somebody to blame when the market is down," the minister says, "but no one thought to thank anyone when it was up 125% last year. Governments should only be blamed if one of three things happens: If there are bad policies, regulations or operational procedures. But if the policies are right, the regulations are effective and the operations efficient, then we shouldn't really be asked about the ups and downs of the market.

"There are lots of mixed expectations for markets worldwide," he continues. "Here, we have to look at the fundamentals of the market and the fact that, in general, [shares of] actively traded companies are today at roughly at 15-30% of their fair market value, so one can expect some positive developments in the near future."

Laws vs mindsets
The minister also hopes to see some "positive developments" on the legislative front in the very near future not through the passage of new acts of Parliament, but through more forceful and complete implementation of existing laws.

"We've done well implementing laws concerning two things that are very much under my jurisdiction: financial regulations and investment promotion," Mohieldin says.

The Investment Promotion Act (law 8 of 1997), the act under which Mohieldin opened the General Authority for Investment and Free Zones (GAFI)'s One-Stop Shop for investor services, was neither the brainchild of Mohieldin nor anyone else in the Nazif Cabinet. It's the way it is being implemented that's changing.

"I remember back in 1998, we invited Professor Charles Goodhart of the London School of Economics to participate in a conference. He commented on a paper I wrote with Dr. Ziad Bahaa El-Din [now head of GAFI] on prudential regulation in Egypt. He said that in terms of sets of laws and measures, there was no problem here, but that the quality of implementation left a lot to be desired. His comments proved to be correct.

"All the banking difficulties in the late 1990s [when financial institutions over-extended credit and failed to make adequate provisions] and the problems we experienced with forex regulations were due improper enforcement of existing laws. At that time, we had managed to change some of the variables including interest rates and reserve requirements but we didn't change or liberalize the minds of those responsible for reform."

There are, though, a handful of areas in which Mohieldin says he wants to see new legislation, including measures to promote access to finance and credit instruments for a wider pool of borrowers. Existing bankruptcy laws and exit mechanisms need to be revised, too, as they actively discourage entrepreneurship.

"When we first started studying the impediments to investment in this country, we came up with a list of close to 14 different obstacles. Among them were macroeconomic stability, foreign exchange problems, taxes, customs and issues related to customs and tax administration," he says. "I think we have managed to fix many of these problems during the past two years. But it takes only one critical obstacle to halt investment. You may have everything land, talent, skills but because you don't have access to finance, for example, you are not able to proceed.

"Today, we are left with four main problems: access to land, access to finance, dispute settlement procedures, and problems related to bureaucracy. I believe that exit rules, including bankruptcy, do require some changes in legislation, and we are about to introduce specialized economic and commercial courts which will facilitate and solve in a timely manner a wide set problems the business community now faces."

Reviving the new (and still ailing) mortgage finance system is at the top of Mohieldin's To-Do List. Although first passed by the People's Assembly in 2001, the Mortgage Finance Act has already been amended once and has so far proven a disappointment to the many who understand that it could revolutionize the way the economy -- and, indeed, society -- operate. The minister has a more-than-passing interest in seeing mortgages available to would-be homeowners nationwide: It is, after all, his baby.

(For a view of the potential impact of the mortgage system, see our exclusive interview with Beltone Financial Chairman Alaa Saba in the May 2006 issue of bt, page 118).

"The Mortgage Finance Act is something I created," Mohieldin says, "and it's an instance where I am establishing something from scratch. I'm not continuing something started by a predecessor. I am determined to make it work."

The minister notes that while just 12 banks and two companies are now offering mortgages, Central Bank of Egypt Governor Farouk El-Okda is encouraging other banks to jump on the bandwagon.

"I would like to emphasize that the laws and the regulatory framework governing mortgage finance are now well established [to global standards], including two major things we have spent two years developing: a liquidity facility and a re-mortgage company. These should be operational within weeks. At the same time, lending rates are now down to 11% and 12% from 14-16%. I don't believe they will be going down any further, but that's up to the Central Bank. On the property registration front, there have been some important developments as well: Today, we have a sensible law that caps property registration fees a maximum of LE 2,000 rather than the old rule of 3% with no maximum, which was ridiculous."

(Properties must be properly registered and all fees paid before they can be sold in a mortgage-financed transaction.)

In fiscal year 2004-05, the year Mohieldin says "mortgage financing really started," more than LE 250 million in transactions were carried out. He hopes that figure will more than double this year.

So where does he go from there? As Mohieldin sees it, it's about coming up with a vision the entire country can buy into, then piecing the puzzle together one painstaking step after another.

"All we have done so far is put together bits and pieces a more sound financial sector, more FDI, faster privatization and so on, " he says, "but what we are really after is to transform Egypt into one of the top 20 economies in the world. That should be on everyone's To-Do List.

"This is not a pipe dream," he asserts. "It will take enormous effort, but it can be done. Those countries that have recently made it to the OECD [Organization for Economic Cooperation and Development], such as the Czech Republic and Mexico, were nowhere close 20 years ago, but they made it by taking themselves seriously. We have to do the same. Think about it: In 1965, Egypt was much better off than South Korea. Today, we are very happy if we manage to bring attract just one Korean company to work in Egypt.

"That's only going to change when we start working on an implementable vision just like other countries that have developed themselves into major economic powers. This will need not only economic development, but political development, too. All of these counties are liberal democracies.

"From now on," Mohieldin says, "I think the transition for Egypt will be one on the political front rather than the economic one. We really have to start building the case for a new Egypt."

By Hadia Mostafa

© Business Today Egypt 2006