🏭 Idle assets, reignited: In line with ongoing governmental initiatives to revitalize and employ underutilized production assets and enhance their operational efficiency, without resorting to sale or privatization, the state is leasing idle factories and offering them under a usufruct system — perhaps one of its more prominent current efforts to strike a balance between attracting private investment and maintaining ownership.

Following years of debate regarding privatization programs, the government and public-sector companies are seeking to activate a new model that would allow local, regional, and international investors to operate in idle or unused factories, particularly in the textiles, chemicals, and food industries. In doing so, these assets would re-enter the production cycle at a fraction of the cost.

A comprehensive program for the aforementioned model is currently under preparation in tandem with the revised government privatization program in an effort to give new life to long-idle assets, a government source told EnterpriseAM last week. Currently, the public sector possesses some 2 mn sqm of underutilized land, along with a slew of warehouses and factories, the source noted. The program would grant investors flexibility to modify these assets’ former functions in alignment with feasibility studies conducted by the Industrial Development Authority to ensure compliance.

The program covers all government entities, not just the public business sector. An inventory of underutilized and loss-making assets is currently underway to identify assets that may qualify for lease under the usufruct system or bottom-line-sharing arrangements in a bid to contribute to improving the financial position of state companies, our source explained.

New day, new private sector partnership: What this new model represents is essentially a practical application of the State Ownership Policy Document, which sets a framework for expanding private sector participation in the industrial and service sectors, be that through acquisition, operation, or long-term leasing. This model is expected to help alleviate the financial burden on holding companies affiliated with the Public Enterprises Ministry, all while introducing new investments to existing assets and increasing competitiveness.

The government is wagering on maximizing economic returns without compromising sovereignty over the assets. This leasing or temporary usufruct system may indeed prove a realistic alternative to more traditional forms of privatization, according to Polaris Parks General Manager Bassel Shoirah, who further explained that the objective isn’t the sale or leasing, but rather the revitalization of these assets.

The approach is also a safe wager for both parties, provided that the asset-owning entities adhere to sound procedures and avoid any interference with the operational aspects of the factory management, according to Shoirah. “Instead of the government looking for a means to restart the factory, an investor with technical readiness and funding can start working immediately, benefiting both parties,” he said.

Something old, something new, something borrowed: Most new investors exhibit a preference for entering into operation partnerships or leasing existing factories as opposed to building new ones, particularly in sectors that require specialized infrastructure or complex operational licenses — the kind that take quite some time to get a hold of — Shoirah notes.

Investors face a major problem with the delay in getting their investments into the Egyptian market, particularly for Turkish and Chinese investors operating in the spinning and weaving sector. Investors don’t want to spend 2-3 years building a factory from scratch, a government official told EnterpriseAM, they just want a ready-made factory to kick off operations.

For the program to succeed, however, several factors must be taken into consideration. These include contractual clarity, transparency of the selection process, and the government’s ability to regulate the operational relationship with investors, our sources said. If implemented correctly, this model is expected to become a main pillar in the state’s new industrial policy, encouraging private sector participation in the management of public assets over the coming years, Federation of Egyptian Industries board member Mohamed El Bahy told EnterpriseAM.

Despite the varying levels of infrastructure in underutilized assets from one location to another, Shoirah believes every asset has the “right customer” waiting for it. Good assets will manage to attract investors at high prices, he noted, while those requiring upkeep will also find someone to develop them in exchange for a reduced price on the lease. Furthermore, these leased factories would offer investors a hands-on test of the local market prior to pumping in larger investments, as operational costs in Egypt remain lower than in competing markets, he added.

Yet, the utilization of existing buildings for conversion into factories remains limited to no more than 20-30%, an industrial developer told EnterpriseAM. Factory design depends fundamentally on the nature of the production line and equipment, and not so much on the existing building’s structure, our source told us, further adding that some partnerships in current factories often require intermediaries to operate them, rather than industrial developers. On the other hand, vacant land provides great room for efficient factory planning that takes industrial activities into consideration.

Your top industrial development stories for the week:

  • Elsewedy Machinery expands into pumps with Naffco, Xylem tie-ups: Elsewedy Machinery launched a new Pumps Division to enter the water infrastructure, fire safety, and irrigation markets. The company became the official distributor for Naffco and partnered with Xylem to supply advanced, energy-efficient pumping systems across Egypt (press release (pdf)).
Tags: