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Egypt’s investment problems: The Cemex case

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Iris Boutros

Iris Boutros

By Iris Boutros

The young, new Minister of Investment, Yehia Hamed recently announced that the government would not sell or privatise any of the public sector companies while in a meeting with the Egyptian Aluminum Company in Naga Hammadi, Qena, according to Egypt’s State Information Service on 14 May. He assured workers of public sector companies that they would never be fired, as these firms are what he referred to as “the genuine locomotive of development in Egypt”.

Following the ousting of former president Hosni Mubarak, the privatisation of state-owned enterprises (SOEs) during his tenure have been heavily scrutinised, with the legality of a few sales challenged in matters filed before the courts. One case, the Cemex case, is particularly illustrative of some of Egypt’s current investment problems. This is not because the privatisation of SOEs is the penultimate issue for investors. But because the case embodies at least two very salient issues for investing in Egypt right now: investors’ anxieties over risks and a paradigm shift in doing business in Egypt.

Cemex, a Mexico-based company, is one of the world’s largest building materials suppliers and cement producers. In 1999, Cemex bought 90% of the Assiut Cement Company, a SOE at the time, for $580m in cash and assumed debt, and currently owns a 95.8% stake. On Thursday, 13 September 2012, the Primary Court of Assiut cancelled Cemex’s privatisation contract and ordered the company to be returned to state ownership and rehire 2,545 of the original 3,777 employees dismissed after the change in ownership. The court also found Cemex responsible for covering all financial obligations and dues incurred from 1999 until the time of the ruling.

For Cemex, the court’s ruling was more problematic than just the Assiut Cement Company. On 14 September 2012, Cemex was scheduled to complete a $6.2bn refinancing agreement with over 55 banks and institutions globally. The Assiut court’s ruling halted the scheduled signing. At that moment, not only was Cemex legally liable for debts for a company it would no longer own with no compensation for investments made, but also its investment in Egypt interrupted a much-needed global refinancing deal. Although Cemex did complete the refinancing agreement on 17 September and until now has retained ownership of the company, damage to investor confidence was done.

Investors in the Egyptian market face greater risks since the start of the 25 January Revolution. Before, the risks of doing business in Egypt were outweighed by opportunities to make higher returns relative to other markets. Egypt-specific risks around dealing with obstacles of government bureaucracies and the inability to make labour adjustments because of the labour law were worth taking, evidenced by the relatively high investment levels in pre-revolutionary Egypt. But now, with lower levels of security, consistent transport disruptions, poor macroeconomic fundamentals, currency instability, and serious questions around contract enforcement, the risk profile investors face is significantly different and returns may be lower as well. And until now, the government has not clearly articulated a vision and strategy on how to allay investors’ fears.

The Cemex case also highlights elements of the paradigm shift in doing business in Egypt, particularly with respect to labour. The case was filed after months of repeated labour strikes. Labour protests are very common in post-revolutionary Egypt and have been staged by virtually every type of worker in Egypt: factory employees, transport workers, staff of major ports, doctors, nurses, teachers, the police, etc. Protests among government employees have been particularly frequent since the start of the revolution.

Raising wages and making temporary workers permanent employees have been a popular strategy to resolve labour disputes. Unfortunately, this has serious budgetary ramifications and will likely have a strong impact on market reservation wages, which translate to higher labour costs. Coupled with higher costs and risks of financing and higher energy costs, these significant changes in important factors of productivity are major elements of the paradigm shift in doing business in post-revolutionary Egypt.

Now suppose the Assiut Cement Company had been returned to state ownership and the 2,545 dismissed workers were reinstated. How would this 1999 status quo have met the company’s 2012 reality? When Cemex bought its majority stake in the company, it received high praise as a global innovator, a somewhat surprising label for a cement company from Mexico. It was more profitable than either France’s Lafarge or Switzerland’s Holcim, its two big international rivals.

Cemex’s corporate philosophy involves wholeheartedly embracing new technology and imposing tightly controlled standards worldwide for both its technology and management style. Reduction in labour use in the Assiut Cement Company was a result of leaner and more modern business operations and the greater use of information technology. Cemex introduced significantly more environmentally friendly manufacturing processes. For instance, it partially powers manufacturing operations with alternative fuels such as agricultural waste from a company-owned farm nearby, reducing carbon dioxide emissions. It also increased production capacity from 3.8 million metric tonnes per year to 5.7 million metric tonnes per year with fewer employees.

The Cemex case embodies serious challenges investors currently face in Egypt. With labour, capital, and energy more expensive, and greater risks and uncertainty, are improvements in productivity possible to still meet profit expectations? How would the addition of these 2,545 employees have affected the operations and profitability of the company given the 2012 reality? Whether the higher returns the Egyptian market offers investors relative to other markets still justify investment in Egypt in the current climate is certainly a case-specific issue. But for certain, the decision to invest in post-revolutionary Egypt is a very different than before with a different risk profile and a paradigm shift in doing business.

Moreover, although not the focus here, the Cemex case brings to light a few other important issues for Egypt and President Mohamed Morsi’s cabinet. First, Cemex retained ownership in part because the ruling court did not have jurisdiction over the matter. Questions of the legitimacy of judicial rulings are increasing without clear answers. Second, how the current government will handle serious and legitimate grievances with respect to the selling of state assets by the previous regime is still unclear. The ultimate outcome of the Cemex case has not cleared questions about the legitimacy of the sale. Many of those currently invested in Egypt have concerns about past deals and are unwilling or unable to make further investments without a clear understanding of their exposure. These are also the most likely to invest, given they have experience in the local market.

As a private company, the Assiut Cement Company has recently secured a contract to supply the concrete for the construction of a new tidal barrage and hydroelectric power plant in the Nile River. The EGP 2.4bn project funded by the Egyptian and German governments will have a total power generation of 32 megawatts, is expected to irrigate 1.7 million acres of soil, and will improve navigation on the Nile. Employment generation during construction is estimated to be 6,000 direct and indirect jobs. The project will benefit from Cemex’s global technical expertise.

Investment Minister Hamed’s recent announcement on SOEs in the context of a high budget deficit means that Egypt needs, now more than ever, to benefit from its 146 SOEs. One has to wonder whether the Assiut Cement Company would have done its part under state ownership in adding value to the “locomotive” of Egypt’s development in the way that it will in this project and in the market. This certainly would not justify an illegitimate sale of state assets but it does raise questions on how SOEs will fair in doing business in post-revolutionary Egypt and whether the minister of investment has a clear strategy given his strong assurances about their future.

Iris Boutros is an applied economist and strategist. She focuses on balanced growth, investment and decision-making


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