Egypt’s privatization program looks to incentivize private sector IPOs

Egypt is gearing up for the first initial public offering (IPO) of a state-owned company in 13 years.

In parallel to the broader economic reform program, the Ministry of Investment and International Cooperation has been spearheading the government’s IPO Program since 2016. Offering state-owned companies on the stock exchange has been an absent phenomenon in Egypt for the past 13 years, since Egypt sold shares in Telecom Egypt, Alexandria Mineral Oils Company and Sidi Kerir Petrochemicals Company back in 2005.

“Economic reform and growth requires diversified funding sources, and the stock market is one of the important financial platforms to competitively allocate resources for the expansion of private and public sector companies that want to grow,” chairman of the Egyptian Exchange (EGX) Mohamed Farid tells Business Forward.

The ministry is considering 30 state-owned companies to be part of the program over the next three to five years, according to NI Capital, the program’s sole advisor and investment arm of the National Investment Bank (NIB).

Baker and McKenzie estimates that Egypt will attract about $332 million in IPOs in 2018

Enppi, the government-owned provider of services for petroleum, petrochemicals and power sectors, will most likely inaugurate the program, and it is currently being prepped for listing on  the EGX.

In 2015, governments worldwide raised a record $319.9 billion through privatization sales, according to the The PB Report 2015/2016, published by Privatization Barometer. Tracking the global privatization trends, the report states that “governments have announced major divestment plans that are likely to continue for at least the next two years, so the immediate future of privatization programs looks very bright.”

The five-year IPO program “aims to diversify investment sources by attracting investments worth $5 billion over three years,” the International Monetary Fund (IMF) said in a November 2016 statement. The program will initially focus on viable public companies in the financial services and banking, oil and gas, petrochemicals and real estate development sectors.

Baker and McKenzie estimates in its Global Transactions Forecast 2018 report that Egypt will attract about $332 million in domestic IPOs in 2018, jumping to $549 million in 2019.

Through the IPO program, the government is aiming to collect up to $10 billion over the next three to five years, Bloomberg reports.

The impact of the IPO program
The EGX is focusing on correcting its image to be a long-term investment and growth tool, and attracting more companies to be listed, Farid says, which is why it is focusing on diversifying investment opportunities for all investors.

Farid recalls that when the government decided to expand the ownership of state-owned companies in the 1990s, the stock market was revived.

“The government’s IPO program will support the EGX by increasing the pool of offered companies, which will increase the market’s attractiveness and trading sizes,” he says.

“Accelerating the offering of state-owned companies will incentivize private sector firms to be listed,” he adds.

Minister Sahar Nasr had previously mentioned that the majority stakes of the offered companies will remain under the control of the state, in an attempt to support the breadth and liquidity of Egypt’s stock market.

The government’s IPO program will also “contribute to the expansion of ownership of state-owned companies through the stock market, which will allow those companies to comply with governance standards and will enable the government to monitor and regularly evaluate the performance of those companies,” Farid says.

State-owned companies will use the stock market as a financing mechanism by increasing capital or offering a minority stake to the public to obtain the funding needed to grow and expand.

The perks of privatization
Back in 1999, “many emerging countries carried out privatization sales through public offerings on the local stock exchange, leading to significant increases in market capitalization,” writes scholar Enrico Perotti in his paper titled “Privatization, Political Risk and Stock Market Development in Emerging Economies.”

Listing these firms on the stock market resulted in a positive impact on risk-sharing in the market and an increase in investment opportunities for local investors, leading to a diversification of their portfolios and a deeper trading liquidity. This also led the government to facilitate stock market transactions, according to Perotti.

In Egypt’s case, the government is doing more than trying to include and attract local investors.

“With current economic conditions stabilizing, the IPO program is set to draw local and foreign interest and encourage investment in multiple strategic industries and sectors with future potential for growth and prosperity as well as increasing the transparency, enhancing good governance and disclosure practices of the companies to be listed,” the Ministry of Investment and International Cooperation says on its website.

It will also be the real test of the government’s broader reform program that began two years ago.

“Privatization is an ideal test for political commitment to market-oriented reforms, as it severely tests the determination of policymakers to resist the political backlash after the sale is completed,” Perotti adds.

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