CAIRO - 18 June 2018: Last April, the Egyptian Cabinet approved a draft law to establish a sovereign wealth fund to manage state assets with a capital of LE 200 billion, and an issued and paid capital of LE 5 billion.
Once approved by the parliament, the fund will work toward optimizing state assets and better manage state companies, as part of wider plans to list public sector companies on the Egyptian Exchange (EGX).
Planning Minister Hala al-Saeed said the bill gives the fund the authority to establish sub-funds and contribute in similar Arab funds.
The fund will make use of the state’s unused assets, which amount to 3,000.
The state had announced in 2016 a five-year program to float 15-30 percent of public companies to attract investments and invigorate the stock market, with the first phase seeing 23 companies undergoing initial public offerings (IPOs) that are valued at LE 430 billion, according to a statement by the Ministry of Finance. A preliminary financial statement for the 2018/19 budget shows that the first phase of the state IPO program will yield LE 10 billion.
Financial analyst Ahmed Ezz El-Din says this fund will help optimize the value of state assets. Economic expert and former head of both Egyptian and Arab direct investment associations Hany Tawfik and Economist and Managing Director at Multiples Group, Omar El-Shenety echo similar feelings.
El-Shenety argues that some of the benefits of creating the fund could be floating public companies, converting illiquid assets to liquid ones and increasing the number of strategic investors in the state assets, the number of listed blue chips, as well as the stock market capitalization, and consequently further deepening the market.
El-Shenety explains that the fund can be used to better manage the public enterprises and supervise the IPOs, as well as manage the government’s stakes in these entities after the listing, and qualifying other enterprises in preparation for being listed. He adds that it can also be responsible for selling some underutilized assets including lands, building and real estate assets, and companies depending on its mandate.
“I think the revenues of the state IPOs will be used in financing the budget deficit and increasing the capital of the companies to implement their expansion plans,” he adds.
The Ministry of Finance is targeting a lower budget deficit of 8.4 percent of GDP (LE 438.59 billion) in the new budget for the fiscal year 2018/19, starting July 1, down from 9.8 percent projected in the current fiscal year.
“Establishing an asset’s sovereign wealth fund aims to contribute to the sustainable development and optimal use of public resources, in addition to improving the efficiency of infrastructure,” Saeed said.
“The establishment of this Egyptian sovereign fund leads to increasing the value added in the various economic sectors through partnership with international companies and institutions, in addition to the direct economic gains of the Egyptian economy, such as increasing investment, employment and optimal utilization of state assets and resources.”
This fund will improve Egypt’s competitive position and reduce the risk premium, which will have a positive effect on Egypt’s sovereign credit situation; thereby reducing the cost of debt servicing and, consequently, the government expenditure and budget deficit, according to the minister.
But while all experts interviewed welcome the initiative, they all warn that for the fund to be efficient and successful, it needs to operate independently from the government and enjoy a diverse portfolio.
To reach a balance between fast decision-making and preserving state-owned money, Saeed explained that several committees have been proposed for the fund, to manage investment, governance, internal auditing, risk and benefits.
She added that the fund will be managed mainly by the Ministry of Planning and Administrative Development, noting that a special unit has been established within the ministry to follow up and coordinate with other ministries to identify the unused assets.
Tawfik warns, however, about selling state assets to finance the budget deficit, adding that the state should mandate a private sector asset-management firm to run the fund and help develop these assets and optimize their revenues. “These assets are not government’s property, but is rather the people’s and the next generations’ assets.
The government should not find it easy to sell them,” he argues. “The government is not a good manager.”
El-Shenety agrees with Tawfik on the necessity of independence. “I hope it will be an independent fund that is managed away from the government and its different entities,” he tells Egypt Today Egypt. Similarly, Ezz El-Din stresses on the importance of the independence of the management from the government, and predicts that it would follow the UAE’s model of complete independence from the government.
He adds that it should still report and brief the government on its performance. “The government is not targeting profitability, but the fund does,” Ezz El-Din says.
A diversified portfolio
The fund management should form a diversified investment portfolio, Ezz El-Din explains, and making sure the right investment balance is struck in terms of long-term and short-term investments and the industries in their portfolio.
He explains that while short-term investments alone will risk stability, long-term alone will take years to reap its gains, adding that it should be a good, equal mix, or a 70/30 mix based on the capital budgeting studies and availability of investment opportunities.
“So far, no details have been announced on the nature of its portfolios.
The government is not required to announce all the details about the new fund, but at least it should reveal highlights about the main targeted sectors. This will provide an outlook for investment destinations in the country,” he adds.
To guarantee that this fund will fulfill its promises, Ezz El-Din highlights the importance of keeping its investment decisions away from any other intervening factors, and be based solely on economic feasibility.
Sovereign funds in the international context
The idea of sovereign funds appeared initially in major oil-producing countries that have big financial surpluses, including the Gulf states and Norway. Such funds aimed to reinvest the surpluses for future generations, but then it spread to other non-oil-producing countries to better manage their financial assets and natural resources to optimize their value and revenues.
For example, Abu Dhabi and Dubai sovereign funds are running both domestic and external assets, while Kuwait’s sovereign fund’s assets are all located aboard, and the majority of assets of Libya’s fund are external.
Given how the term came to be internationally, Tawfik argues that the fund should instead be named a “state asset management fund.”
“A sovereign fund like Norway’s runs assets worth 1 trillion dollars that are generated from budget surpluses from oil sales. Ours will be only running LE 5 billion and it will be running unutilized sate assets, not fiscal surpluses,” Tawfik says.