Road Freight and Privatisation

The Case of Egypt

Nabil Abdel-Fattah, Richard Gray, Sharon Cullinane

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429785993
• Edition: 1
• Topic: Ciencias sociales
• Subtopic: Sociología

First published in 1999, this volume forms part of the Plymouth Studies in Contemporary Shipping series and focuses on Egyptian road freight privatisation. The series represents a unique collection of papers and edited texts from the leading maritime institute in Western Europe at the University of Plymouth. It covers all aspects of the industry from operations through to the logistical framework that supports the sector. Designed both for practising academics and the shipping and ports industry itself, the series, combining the output from some of the leading academic commentators in the world from the UK, Korea, Germany and Poland, is an original and novel contribution to the maritime debate.

1 Introduction

Background

Egypt, together with many other developing countries, has set out on a path towards large-scale privatisation of its industry and commerce as a means to achieving greater economic prosperity. Most of the economy is affected by this development, not least the road freight transport sector. The objectives of this book are to investigate and analyse the structure of the road freight industry in Egypt, and to identify how the privatisation and deregulation of that industry are being approached. It includes a review of the road freight industry’s performance, its problems during the transitional period leading to privatisation, and the current and likely future impact of economic reform on the industry. Since there is no single ideal route to privatisation, it also considers different privatisation options. For example, the existing large state sector road freight companies could continue as large-scale private entities, or their assets could be sold to the many small freight operators of the thriving co-operative sector. The book also looks at the impact of foreigners purchasing Egyptian road freight companies, a feasible development in a world of ever-increasing global alliances in international shipping and intermodal transport and a topic of much debate in Egypt.

All such developments are considered in the light of past Egyptian experience, and the lessons to be learnt from the privatisation of road freight in other countries are taken into account. Two countries in particular are considered - the UK and Hungary. There are good reasons for selecting these countries. The UK was one of the first countries in the world to deregulate its road haulage industry, and was also one of the leading countries in the privatisation processes that started in the late 1970s and continue to this day. It has experienced many forms of privatisation, and it also has a well- documented history of road freight privatisation. Hungary has been selected because it has some similarities with Egypt, in that it is also going through the process of privatisation and deregulation, and has a well-established road freight industry. The evidence of this book is supported by the findings of a Delphi study of Egyptian experts, undertaken by the authors, drawn from government, academia and the road freight and associated industries. The results of this study enable the book to include a specific Egyptian viewpoint.

There are three main groups of reader who are likely to have an interest in this book. First, it should have a general appeal to all those interested in the topic of privatisation, particularly its progress in developing countries. There are many paths to privatisation, not all of them successful. This book examines both successes and failures and seeks to adopt a critical approach. The very idea of privatisation has been called into question by some commentators, particularly in the context of transport, which often has prominent environmental and social factors to be taken into account. For this reason this book devotes a chapter to the external environmental or social costs associated with road haulage and its privatisation.

The book can also be seen as part of the increasing body of published work on business logistics and supply chain management. There has been a rapid growth of interest in logistics in recent years as manufacturers, retailers and other members of the supply chain appreciate the benefits of an integrated approach to production, the management of inventory, customer service and transport, particularly when associated with international distribution. The globalisation of international business and its supply chains has led to a worldwide demand for higher quality freight transport services by all transport modes. Most of the literature on logistics is associated with developed countries, particularly in North America and Western Europe, and there is a shortage of published work on logistics in or for developing countries, which are, nevertheless, part of the same global supply system. A chain is as strong as its weakest link, and a supply chain will similarly be no more efficient than its weakest logistics link. Poor transport systems in developing countries reduce the effectiveness of international supply chains and, consequently, the attractiveness of such countries for general industrial investment by overseas corporations.

The area of interest for the third group of readers is linked to the preceding theme. Those with an interest in developments in international shipping are aware of the growth of intermodal transport systems, particularly for containers moving by ocean liner services. Shipping companies can no longer only be interested in the sea journey of the goods and containers they are carrying, if they are to compete effectively. Exporters and importers increasingly require door-to-door services from factory to warehouse and want to undertake ‘one-stop shopping’, dealing with a single transport operator or logistics provider. It is seldom easy for ocean liner companies to integrate with the land system in developing countries, which often lack adequate road or rail infrastructures or suitable inland transport organisations. Since the road freight carried by the state sector in Egypt is strongly associated with traffic moving through seaports, the book is also a contribution to the international transport literature, specifically the interface between sea and land transport.

Structure of the book

The following six main themes are presented in this book:

• The growth of the private economy.
• Privatisation in Egypt.
• The Egyptian road freight industry.
• Road freight management under privatisation.
• Macroeconomic problems feeing privatisation of the road freight industry.
• The external cost of road freight under privatisation.

The growth of the private economy

The removal of central planning from an economy and the transfer of some or all economic activities to the private sector is widely assumed to lead to an increase in the efficiency of the whole economy. The essential argument in favour of private ownership is that it is integral to a market economy, enabling a rapid response to market signals. It is also claimed to provide significant longer-term opportunities for redistribution of wealth and income, although it must be admitted that the most immediate benefit that many governments derive from privatisation is the revenue from sales of state- owned assets. Whether or not privatisation will benefit a developing country such as Egypt in the longer run is still to be determined and, indeed, privatisation may bring its own problems such as increased pollution and other social and environmental costs external to the business undertaking. Nevertheless, the prevailing orthodox view is that increased privatisation will be beneficial to developing countries with a tradition of state ownership.

Privatisation may take many forms and, in particular, the impact of the time-scale of its introduction needs to be considered. For example, there is a so-called ‘shock therapy’ strategy which applies measures to achieve economic stability simultaneously with the privatisation process, as for example in Poland. Such a sudden and severe approach may prove very unsettling to a national economy. In contrast, the ‘strategy of gradualism’ relies on a package of measures of economic stabilisation as a precondition of the introduction of privatisation, as applied in Hungary and Egypt. In the latter case, the immediate social costs of economic reform and privatisation have been less severe than in countries applying the shock therapy approach.

A distinction should also be made between ‘spontaneous’ privatisation and ‘central’ privatisation. The former, applied for example in Hungary, is a decentralised process by which the managers and employees of a state-owned enterprise transform the entire enterprise or part of it into a private sector company. The process is usually initiated by the enterprise itself, and the terms of the deal are reached by negotiation with the employees. On the other hand, the approach of Egypt has been to apply centrally-controlled privatisation, which has required the government to allocate responsibility for the privatisation of state enterprises to one or more of its own agencies. This approach means that the government’s direct influence is still very strong during the privatisation process.

There are various methods of privatisation, which may be grouped under three headings; public flotation by fixed price offer or sale by tender; direct sale to a third party or by employee buy-out; and sale by vouchers. The voucher method of privatisation, used for example in Poland and Russia, is usually associated with large-scale privatisation applied as ‘shock therapy’. The management or employee buy-out is probably more desirable for promoting wider employee share ownership or lower transaction costs. This approach, together with public flotation, tends to be used in the gradual or case-by-case approach applied in Egypt, as well as in the UK and Hungary, although in substantially different ways in each country.

There are problems facing the introduction of privatisation to developing or transitional economies. For example, there is often a lack of domestic savings to finance privatisation, and although this could be overcome by allowing foreign capital to buy state-owned enterprises, the fear may exist of overseas ownership leading to foreign control or backdoor colonialism. The outcome of the privatisation process may be to create its own macroeconomic problems including increased prices, a decline in the real wages of employees, increased unemployment, and inequality of income distribution.

Privatisation in Egypt

The revolution of the 1950s led by President Nasser resulted in the state assuming a central role by introducing a planned economy through the nationalisation of all major businesses. However, by the middle of the 1970s, after Sadat succeeded Nasser as Egypt’s president, it had become clear that the Egyptian economy had proved to be inefficient under state ownership, and it was close to collapse for a number of reasons. In order to accelerate economic growth, Egypt started to replace central planning with an increase in market activity in the economy. Termed ‘infitah’ or ‘open door’ the more outward looking policy was designed to encourage both domestic and foreign private investment in Egypt. This was attempted through two main operations; first, by liberalising or deregulating the economy, and then by privatisation.

When Egypt started the liberalisation reform programme it was suffering from many economic problems, partly caused by rapid population growth, but also by internal inefficiencies, huge external debts and even misuse of foreign aid. As Harris (1988) put it, the causes of Egypt’s economic difficulties include ‘bureaucratic inefficiency, poor planning and inappropriate past policies resulting in cost/price distortions which have discouraged productive sectors and exports’. The decade after 197S tended to conceal these problems because of a degree of prosperity brought about by an oil-related rise in foreign exchange earnings. However, in the second half of the 1980s, when oil prices collapsed, it became clear to many that there was an urgent need to speed up economic reform and pursue a policy of privatisation.

Egypt has adopted a gradualist approach to privatisation in order to minimise the social effects of economic restructuring. However, heavy external debts have reduced the government’s ability to accelerate the privatisation programme, despite some relief through foreign banking authorities writing off some of Egypt’s official (i.e. government) debts. With the reduction in the budget deficit, price adjustments, an increase in tax revenue, and through cutting subsidies, the Egyptian government has managed to accelerate the privatisation programme since 1993, although in 1996 the state sector still comprised 312 companies. The road freight industry forms an important component of the overall privatisation process because of its pivotal role in delivering goods to and from other industries, particularly international trade through the ports.

The Egyptian road freight industry

Egyptian road freight services became part of the state sector during the 1960s. The exception to this was small firms with less than five vehicles which were combined into associations to become the co-operative sector. By the end of the 1960s there were five large state sector road haulage companies, all mainly concerned with the transport of imports from the ports. In terms of tonnage carried, however, road freight was dominated by the cooperative sector by the beginning of the 1990s. There has also been a limited volume of private sector road haulage, although the distinction between the state and private sector is not always clear-cut.

The state sector companies have suffered during the 1990s for a number of reasons associated with unfair competition brought on by incomplete liberalisation of the transport sector. Subsidised railways and inland water transport companies have been able to offer lower prices. The co-operatives, with low overheads, have undercut the state sector companies, as have the transport departments of manufacturing companies, who traditionally carry only their own goods, but are permitted under deregulation to carry the goods of other companies. The former no longer pay a fee to the state sector companies, and the latter cross-subsidise road freight costs as part of their production costs.

Road freight management under privatisation

Privatisation is a global phenomenon, and it is enlightening to make international comparisons. For example, despite the many economic and socio-cultural differences between the UK and Egypt, it is possible to identify similar patterns and developments, although not necessarily taking place at the same time. In the UK a number of studies from the 1960s to the 1980s discovered that the quality of road freight management was deficient, particularly in the area of accurate or effective costing. However, in more recent times, British road freight or distribution companies have acquired a reputation for efficiency, especially compared with continental European competitors operating under more regulated systems. In Egypt, a recent United Nations report (UN-ESCWA, 1994) described the state sector freight operators as unable to undertake effective costing. In developed economies the customers of road hauliers are adopting a supply chain or logistics approach, taking into account many factors other than freight rates. They seek to obtain the best combination of inventory levels and locations, quality and speed of delivery, and other aspects of customer service. These are required at an affordable price, and although freight transport costs are not the only consideration, they are important. If Egypt is to operate an efficient road freight industry it will require many management skills, but an effective costing system is a prerequisite of effective management, and therefore the book focuses on that issue.

Macroeconomic problems facing privatisation of the road freight industry

The structure of the Egyptian road freight industry is compared with those in the UK and Hungary. They are all similar, in that the sector in each country is highly fragmented with a few large operators and many small operators. However, there are also striking differences. In the UK there is no state or co-operative sector, although there is a history of previously state-owned road haulage. In the UK the hire and reward sector (professional road freight operators) has grown relative to own-account operators (manufacturing or other companies carrying their own goods), although in Egypt the reverse is apparent. One reason for this is the much greater attention paid to quality of service by British road haulage companies in recent years, whereas in Egypt it appears that manufacturers do not trust the quality of the haulage sector and continue to use their own vehicles. Furthermore, manufacturers and retailers in developed economies such as Britain are more inclined to adopt an approach that takes into account a range of logistics factors, and therefore seek ‘value-added’ facilities in addition to transport, such as warehousing and inventory management.

On the face of it, Egypt and Hungary seem to have a similar recent structure of road freight industry with large state-owned companies in the process of privatisation, and with a thriving co-operative sector. Nevertheless, there are significant differences. For example, the ownership of the co-operatives differs in the two countries. In Egypt, the co-operatives are essentially a collection of small private firms, since the small operators own the capital of the co-operatives. In contrast, in Hungary the co-operatives themselves own the capital. This difference may have implications for the privatisation process, particularly since the co-operative operators in Egypt are seen as a market for the assets (e.g. vehicles) of state sector companies when they are privatised.

The external costs of road freight under privatisation

Efficient control of the int...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Acknowledgements
• 1 Introduction
• 2 The growth of the private economy
• 3 Privatisation in Egypt
• 4 Privatisation and the Egyptian road freight industry
• 5 Road freight management under privatisation
• 6 Macroeconomic problems facing road freight privatisation
• 7 External costs of road haulage
• 8 Conclusions
• References
• Appendix Delphi study of the Egyptian road freight industry