Déja Vu

Egypt’s Arab Spring in 2011 resulted in its PPP pipeline coming to a halt. It now faces fresh uncertainty following Mohammed Morsi’s recent ousting from office, reports Aaron Weinman.

 

The fall of Mohammed Morsi as Egypt’s first elected leader has raised a whole host of questions about the future of the country, and left many investors wondering whether their money will be safe in the nation’s nascent PPP market.


Atter Hannoura, the head of Egypt’s PPP unit, has insisted that his organisation is here to stay, but the vice-like grip the Egyptian Army has means there is no immediate knowledge over the future of the country’s central government and with that, no certainty over its PPP pipeline.  


When it comes to PPP, Egypt has long had big ambitions that have fallen victim to circumstance. Its first foray into the sector – a huge schools programme – collapsed in on itself around the time of the global financial crisis. The next, more manageable PPP pipeline was parked when the Arab Spring ended that administration.


Today, Egypt’s PPP pipeline has plans for between 12 and 15 projects covering road and maritime transport, wastewater and social infrastructure such as sports stadia. Immediately, it is the Abu Rawash wastewater tender and the Safaga Port projects that appear most progressed. 


In April this year, Egypt’s PPP authority, which is a sub-sector of its Ministry of Finance, announced four shortlisted bidders on the Abu Rawash wastewater treatment plant as well as a group of local banks to finance a portion of the project. 


But the Safaga Port tender, which was originally due in July, has been pushed back. According to Hannoura, the tender will still be launched as a design, build, finance and maintenance PPP, although it has to wait until the new government is sworn in.  While the future of the government remains unknown, what’s not in question is the country’s immediate need for aid, infrastructure, power and water. Multilateral financial institutions like the Islamic Development Bank (IDB) and the International Finance Corporation (IFC) have continued to support Egypt’s infrastructure pipeline from both a financial and advisory perspective. 


Nada Shousha, the IFC’s country manager for Egypt, says the organisation is continuing to press ahead with PPP projects in the country despite the current uncertainty. 


“Currently the IFC is advising the government of Egypt on two PPPs for the design, construction, financing and management of two Alexandria University teaching hospitals that will be national centres of excellence,” she says. “We’re also providing capacity building and various pre-feasibility studies on other potential PPPs.” 


The IDB, meanwhile, is mulling a $10bn request from the PPP unit to bolster Egypt’s infrastructure over the next five years. While discussions are still in its infancy, Hannoura is confident in securing the funds after positive talks with Ahmed Mohamed Ali, the head of the IDB. 


Aside from transport infrastructure, Egypt is experiencing increased demand for power and water. According to Shousha, the demand for electricity between today and 2017 will exceed the capacity and resources of the Egyptian government. To keep pace, the Ministry of Electricity and Energy alongside its main power utility, the Egyptian Electricity Holding Company, “aims to increase electricity supply in the country through private sector participation under a new Independent Power Producer (IPP) Programme”. 


“This programme aims to develop a series of IPPs at five sites around Egypt, which will provide 3,500 megawatts of new power,” Shousha adds. “The IFC will provide transaction advice to introduce PPPs through a competitive bidding process.” 


Given the unwavering support from multilateral financiers, it is no surprise that PPPs remain high on the agenda, as the institutions want to see a firm and transparent tender process that may potentially usher in the next wave of the country’s infrastructure. Overall objectives, according to an IFC statement, include meeting “growing demand for electricity, increase private sector participation; alleviate short-term fiscal government burden and transfer appropriate risks associated with delivery and operations to the private sector”. 


But conducting business in Egypt isn’t an open-and-shut case for the private sector. A source in the Islamic finance sector says his team has “no lines available for Egypt at present”. Concerns such as political stability and transparency are commonly used when describing Egypt’s investment potential. 
“The only way we could do business there right now is with Export Credit Agency support, wrapping up the political risk with various insurance policies,” the source adds. “This would only change if there is more political stability emerging in the next few years.” 


“Given the current state of security in Egypt, it is going to be very difficult to perform anything definitive and with authority,” says Charles Lloyd, partner at PwC in Abu Dhabi. “Although given the potential Egypt has, once there is more political and policy stability we would be very happy to invest.” 


Egypt’s potential is something that has never been in doubt, especially as an investment destination in the Middle East. Kate Orviss a partner at law firm Pinsent Masons in London, says international interest could be reignited if political stability can be found. “Just after the army stepped in to remove Morsi the stock market rose, the Sawiris family pledged more support and more money was pledged from Saudi Arabia and the United Arab Emirates,” she points out.


“Whether the market is quite so confident in light of the current position, I’m not so sure. The situation in Egypt is a grave concern, not just for the infrastructure market but in wider political and economic terms.” 


Hannoura says it is business as usual at the PPP unit as his team continues to work tirelessly to bring projects to tender. He has outlined two new desalination tenders, which he intends to open up to the private sector: the Hurghada and Sharm El Sheikh desalination plants. Both projects are still at pre-feasibility stages, but were due to be released to the market in July this year. Naturally, the political upheaval has forced the PPP unit to extend its timeframe and they now have a three-month window to iron out any concerns, Hannoura says. 


Laughlan Waterston, deputy head of infrastructure, transport and Islamic finance at SMBC, says bidders would have weighed up the risks in current projects after the initial uprising. “When the Arab Spring initially sprung, the Export Credit Agency, which was involved in Egypt’s projects from earlier on, included political risk insurance,” he says. 


This time around, bidders will have weighed up the risks, and while the instability has scared some international investors, Waterston says domestic and regional investor appetite has grown significantly. Combine this with the support from multilateral institutions, he suggests obtaining substantial levels of private finance is not going to be an issue. 


Where the challenge exists is in acquiring private sector expertise to help turn finished infrastructure into a reality. This, alongside political instability, is what is holding Egypt back. 


The pieces are in place to launch to market, but it’s anyone’s guess as to which direction infrastructure will head. But in many ways, the country is ahead of many other countries despite its internal turmoil.


What Egypt does have is a stable PPP unit, projects that assess the needs of the Egyptian people and financial support in place. All anyone can do is play the waiting game, alongside Egypt’s PPP unit standing patiently on the starting line.