When Egypt signed on to a US$ 12 billion loan in 2016, it pledged to make significant changes to the public business sector. Four years later and with another $5.2 billion from the IMF in hand— whose terms reiterated the initial mandate — the government is taking up the task of “redefining the role of state-owned companies in Egypt.”
Part of this “redefinition” is being ushered in on the back of the government-proposed amendments to the 1992 public business sector law, which were approved by the House of Representatives in July and ratified by President Abdel Fattah al-Sisi this week.
And one of the key changes will be in the composition of state-owned companies’ managing boards.
While the previous law stipulated that employees should make up 50 percent of the composition of the board of directors, according to the new amendments, a company’s board of directors will have one or two workers, depending on the total number of board members, which ranges from five to nine. So if the board has four members, excluding the chairman, worker representation will not exceed 25 percent in the best case.
The amendments further stipulate that the company must appoint two additional “independent” members who are “experts” to the board of directors. This would bring the total number of board members in the previous example to six, only one of whom is elected, which reduces the percentage of employee representation to less than 17 percent.
In addition to this, the amendments impose higher standards for transparency and disclosure on public business sector companies, as well as conditions for liquidating companies whose losses exceed half of their capital, a change that various parliamentarians criticized during debate on the House floor as opening the door to the liquidation of 40 percent of the sector, putting many people out of work.
The battle over the representation of workers in public business sector companies, however, is at the core of the dispute over amendments to the law, as parsing out what “redefining” the public business sector means differs depending on who you ask. With the law’s passage, the government has taken a definitive step toward eliminating workers’ influence on the management of public sector companies completely — an effort that began decades ago.
To pass the law, the government bypassed its historical partner in labor issues, the Egyptian Trade Union Federation, moving to pass the amendments after addressing some minor remarks by the State Council that did not require any “fundamental changes to the draft legislation,” says Said Arafa, the legal advisor to the Public Business Sector Ministry.
The amendments represent a major blow in a battle that the ETUF had already lost to the government. The latter did not make any concessions to its longtime traditional ally, which the government established in 1957 and has strongly supported in a joint battle against independent trade unions up until the new 2017 trade union law.
Public business sector companies used to be subject to a 1983 law governing public sector companies and organizations, which stipulated that worker representation on the board of directors must be 50 percent.
This law drew on a previous law from 1973 in order to define the conditions under which workers can be elected to the board of directors. The most important of these conditions was prohibiting employees in senior management positions or those who have authority to impose penalties from running in the elections, as well as reserving at least 50 percent of the elected seats to workers who do productive labor (in industrial businesses).
But the public business sector law promulgated in 1991 represented a fundamental shift in the history of state-owned companies, changing their nature from enterprises affiliated to government bodies to enterprises that are owned by holding companies whose operations and management are similar to those of the private sector.
The law mainly came in conjunction with the signing of an IMF agreement at the time. But it also paved the way for the launch of a privatization program that would expand so rapidly that Egypt would register the highest number of privatized companies in the region by 2008. The country would also register the highest revenues from privatization ($15.7 billion since 1988), according to Adam Hanieh’s book Lineages of Revolt: Issues of Contemporary Capitalism in the Middle East.
Saber Barakat, a labor union leader who served as board member in the Delta Steel Company for five years until 1991 and who later became a member of the trade union committee in the company, believes that the 1991 law gradually undermined the principle of labor representation on the boards of directors.
“Before the promulgation of the law in 1991, the rule was that the board of directors consists of eight members in addition to the chairman of the board. Half the members should be elected, and at least half of the elected members should be employees who have productive (non-managerial) roles,” says Barakat. “After that, the number of board members was reduced to half, which also meant that the number of elected members was reduced, and it was no longer necessary to elect a minimum number of productive workers. Also, it became possible that heads of departments and people in leadership positions could run for seats on the board of directors, which was not allowed before. On the other hand, all the non-elected members of the board became directly appointed”
Barakat added that after the 1991 law was passed, the 50 percent worker representation system was still enforced. “But in practice, it became customary to include part-time ‘experts’ on the board of directors, like banks who had such experts on the board who were not considered standard members. But ultimately that meant that eight people were sitting on the board, only two of whom were elected, which meant that the percentage of worker representation was pushed down to 25 percent,” he explains.
For this reason, Barakat believes that the new developments do not present any radical changes to the course that has been followed over the past decades, whose ultimate goal was to end worker representation in government companies completely.
For its part, the Egyptian Trade Union Federation strongly protested the draft amendments in a memo sent to the cabinet, parliament and state council, which Mada Masr obtained a copy of. The memo included a list of 13 amendments that the ETUF strongly opposes, including an article that gives the prime minister the right to transfer the ownership of any public sector company to any other party. The ETUF described this article as a “roundabout way back to privatization”.
The ETUF protested against denying its representatives from the boards of holding companies the right to attend the general assembly meetings of subsidiary companies. It also protested the reduction of the number of elected representatives on the board of directors, which as mentioned earlier went down to one member.
“But the battle was not between two equal parties,” says Kamal Abbas, the general coordinator of the Center for Trade Union and Workers Services. “The long and solid relationship between the federation and the government was never equal either. The federation knows the limits of protesting that is permitted within this relationship.”
To Abbas, the real reason behind the vehement opposition to the draft legislation is a different prejudice. “The amendments will affect the personal interests of the members of the federation, who benefited from attending the general assembly meetings. The federation that is now expressing concern over the return to privatization is the same entity that is implicated in passing privatization deals. For example, the general secretary of the federation, Mohamed Wahballah, helped push the deal to sell off [department store chain] Omar Effendi,” he explains.
Barakat also agrees that the main reason why the ETUF rejects the new amendments is that the federation’s representative will not be allowed to attend the general assembly meetings of the subsidiary companies. “All board members of the holding companies attend the general assembly meetings of the affiliated subsidiaries, including the federation’s representative on the board of a holding company. This means that the federation’s representative on the board of directors is also a member of the general assembly of every affiliated subsidiary company, which means that the representative receives attendance compensation for every general assembly meeting by the subsidiary companies,” he explains.
In addition to this, the new amendments prevent trade union organizations (the union committees in companies) from co-writing the work by-laws for employees with the company’s management. The amended text only allows for “consulting” the opinion of the trade union organization that the workers of a company are affiliated with.
Medhat Nafea, the former president of the Metallurgical Industries Holding Company, who resigned from his position in July, believes that taking away the right for trade union committees to draft work by-laws represents an “unnecessary clash with the Egyptian Trade Union Federation and a politically misguided step.”
On the other hand, Said Arafa defends the amendments. “The ministry’s point of view is that mutual understanding with trade unions is crucial, but we must understand that decisions regarding the by-laws must remain in the hands of the company’s management,” the ministry employee says. “The employee should only be concerned about the continuation of the company’s work, the consistent adherence to the by-laws, and the sustainable growth and profitability of the company, all of which will reflect later on the conditions of workers themselves.”
The amendments also impose higher levels of transparency and disclosure on public business sector companies, including companies not listed on the stock exchange. “As state-owned companies, it must be known how these companies are managed and what the outcome of their work is,” says Arafa, adding that the amendments require public business sector companies to disclose the outcome of their work twice a year, which is a first in the history of these companies.
For Arafa, the new disclosure requirements put higher standards than those stipulated by the 1981 companies law — to which private companies are subject — which does not oblige companies to this level of disclosure, unless they are listed on the stock exchange.
This approach is consistent with the requirements of the current IMF loan agreement, which Egypt obtained through the credit preparedness program months ago. The agreement calls for more transparency in state-own companies by updating the published financial reports of those companies by September.
The previous IMF agreement that Egypt had signed under the Extended Fund Facility program in 2016 had stipulated that the need to take several steps towards disclosure and transparency in state-owned companies, and it included a wide list of companies beyond just those affiliated with the Public Business Sector Ministry.
In December 2018, the government published a comprehensive report about the financial performance of state-owned companies for the first time, which was supposed to come out in June of 2018. In July of 2019, the IMF issued a statement commending Egypt’s efforts in increasing the transparency of state-owned enterprises.
The amendments also put forth fundamental changes to the conditions for liquidating money-losing companies. “This will facilitate the path to get rid of many companies that incurred historical losses because the state does not invest in them, not because the administrators or the workers are to blame,” says Khaled al-Fiqy, head of the General Union of Engineering, Metal and Electrical Workers and vice president of ETUF, to Mada Masr.
Prior to the amendments, the 1991 public business sector law stipulated that it was necessary to call the board of directors to an exceptional general assembly meeting — in the event that a company’s losses exceed half the issued share capital — to discuss whether to dissolve the company or continue operations.
The new amendments, however, stipulate that the company must increase its supply of capital if the value of its losses equals the total equity of the company’s shareholders. Shareholders’ equity consists of the issued capital of the company, emergency reserves set aside from annual profits, profits or losses of the year, and retained earnings from previous years.
If the capital of the company is not increased, an emergency general assembly will have to decide to either dissolve and liquidate the company or merge it with another company. The amendments gave companies whose losses reached that level a grace period of three years to regularize their status.
In its memorandum to the cabinet, the Egyptian Trade Union Federation warned that the amendments may lead to a wave of company liquidations, stating that the public business sector includes nearly 50 companies whose losses have surpassed their capital due to their already weak capital to assets ratio. “These companies have not been developed and no investments have been pumped into them for more than 40 years. Some of them still operate using machines from the 1930s and 1940s,” states the memo.
The ETUF had fought a media battle against Public Business Sector Minister Hisham Tawfik because of the latter’s statements that hinted at the possibility of liquidating the Egyptian Iron and Steel Company, a subsidiary to the Metallurgical Industries Holding Company and one of the most prominent examples of losing companies in the public business sector. In addition to this, two major companies, the National Cement Company and the Egyptian Navigation Company were liquidated under the auspices of Hisham Tawfik, who became minister in June of 2018. In successive statements, Tawfik defended the need to dissolve losing companies without offering any alternatives.
However, Said Arafa does not think that the amendments are intentionally paving the way for company liquidation. “Liquidation is not the goal,” he says. “Increasing the supply of capital as a condition to continue operating losing companies does not mean that only the government can intervene to supply more capital. Companies can acquire new partners, for instance. In this context, we want to encourage companies to seek all types of non-bank financing, like offering stock shares on the market.”
One of the amendments to the public business sector law will also allow state assets to be transferred into Egypt’s sovereign wealth fund, which is not subject to parliamentary oversight and is due to play a major role in pulling private sector investment into Egypt. Public Enterprise Minister Hesham Tawfiq said in particular that unused industrial land would be repurposed for real estate. Tawfiq assured MPs that any sale of public sector companies would be through auctions to guarantee the highest possible gain for state coffers. A final vote on the law was postponed.
At the close of June, the ministry announced that state-owned companies that perform similar functions will be merged, reducing the total number from 119 down to 90 in the coming fiscal year. “Loss-making companies” could also be “liquidated” in the future, and more companies merged to reduce the total further, sources told Youm7.
For Arafa, the new amendments fundamentally seek to mirror the management style of the private sector. “The public business sector is in fact a competitor to the private sector, and it is unfair for it to enter the competition without having the same tools as the private sector.
An anonymous official source from the Public Business Sector Ministry told Al-Dostor in August that 90 percent of the heads of the new boards will be chosen from among CEOs of private companies. According to the source, the choice is to bring entrepreneurial expertise and development to the public sector.
As long as we are in a competitive market, says Arafa, we should not abide by anything other than the free market regulations.