The Suez Canal, built under a 99-year build-operate-transfer (BOT) agreement and the first Middle East private finance project of the modern era, was completed in October 1869.
A sceptic from the UK wrote at the time: It is legitimate to doubt that the canals receipts could ever be sufficient to recover its maintenance fee.
Almost 146 years later, similar sentiments are being expressed about the attractiveness of providing project finance generally, and creating new public-private partnerships (PPPs) in particular, to Egyptian borrowers.
The power sector looks interesting, provided the financing is in dollars, says a financier who asked not to be named. But in other sectors, like roads and water, project finance will continue to be a struggle. The returns are simply not there.
Source of income
The Suez Canal PPP has bequeathed an extraordinary legacy. The canal permanently changed the shape of global trade and continues to be a vital source of income for the Egyptian economy and government.
The Washington-based IMF forecasts the canal will earn Egypt $5.6bn in fees in the financial year ending 30 June, equivalent to more than 7 per cent of the total value of exports.
But the achievements came at a terrible price. The original Suez Canal project cost almost twice its budgeted estimate to build and revenues were disappointing. The British government stepped in on behalf of UK creditors to take over the scheme and also took control of the whole country.
On the 87th anniversary of its completion, the Suez Canal was nationalised, setting in motion a sequence of events that still reverberate across the Middle East.
This extraordinary tale shows that mobilising private finance for vital infrastructure, particularly when it comes from overseas, is much more than a technical challenge. If carried out incorrectly, it can lead to financial ruin and, as happened in Egypt, the loss of national independence. Some would argue the country was effectively part of the British Empire until the final withdrawal of British troops in 1954.
Memories matter in Egypt. The unhappy experience with foreign private finance continues to shape public opinion and condition Egypts capacity to press ahead with PPPs and other privatisation measures.
President Gamal Abdel Nasser, who announced the nationalisation of the canal in 1956, radically extended public ownership to major industries and land. In 1974, his successor President Anwar Sadat announced an open-door policy to promote private trade and investment. The results were modest.
A more decisive moment came with approval of Law 203 in June 1991, which incorporated 27 government holding companies in anticipation of the sell-off of 314 state firms. By the end of 2002, 189 had been sold. Transactions included the sale of leases for land owned by the state.
Prompted by the World Bank, Egypt started to explore ways that local and foreign investment could be mobilised in infrastructure projects. Initial deals were completed on a project-by-project basis.
In April 2008, stakes in Alexandria International Container Terminals (AICT) were sold. AICT holds the concession to operate and maintain two container terminals in Alexandria and Dakahliya ports. Investors say the project has performed well and delivered satisfactory returns.
A more comprehensive approach to PPP was launched in 2006 with the enthusiastic backing of Yousuf Boutros Ghali, a former IMF economist and Egypts finance minister from 2004 until 2011.
That year, legislation created a framework for mobilising finance for infrastructure and established the PPP Central Unit, a department within the Finance Ministry empowered to develop and launch major projects.
The unit says it has 19 PPP projects, with a combined value of up to £E29bn ($3.8bn), that are due to go to tender soon, or are at the pre-feasibility/feasibility stage. Later this month, confirmation is expected of the BOT project to modernise and expand the Abu Rawash wastewater treatment plant.
The scheme will require long-term project finance, but that opportunity is principally for local financiers. The Abu Rawash tariff is in Egyptian pounds, says a senior representative of a major international bank. That is why there are only two bidders and both are local. You dont have international investors interested in water or sewage at present.
International banks are looking toward opportunities outside the PPP programme. The juiciest reside in the electricity sector. Power cuts last summer highlighted the parlous state of Egypts electricity industry. The government is pressing ahead with an emergency power programme to be procured on an engineering, procurement and construction basis. The aim is to expand power generation capacity by 6,500MW by the end of the year.
The result is an unprecedented demand from power developers for finance and advice about raising funding for projects that range in size from several hundred million dollars to several billion dollars. Bankers are encouraged, but warn it will take time for deals to mature.
There is a huge prospect in Egypt. But it will take time, maybe one to two years, before the larger projects secure financing, says Mario Salameh, head of project finance in the Middle East and North Africa at UK bank HSBC.
There is a huge prospect in Egypt. But it will take time before the larger projects secure financing
Mario Salameh, HSBC
Many question whether local banks can rise to the challenge. Egyptian banks have very strong balance sheets and they have money to support big projects, says Amr Abourabia, assistant vice-president at Pharos Investment Banking in Cairo. But the problem here is that they have plenty of Egyptian pounds but not enough dollars.
The scarcity of dollar liquidity is the result of chronic uncertainty about the value of the Egyptian pound against the dollar. At the end of May, it was almost 10 per cent lower than it was 12 months earlier. With the markets expecting further weakness in the local currency, no one is ready to offer dollars to Egyptian borrowers.
Concerns about a possible further sharp fall in the pound against the dollar continue to weigh on the market.
Forecasts of a strong rebound in tourism in the third quarter and growing confidence in the capacity of President Abdul Fattah al-Sisis government to deliver on economic reform should help stabilise the Egyptian currency. But this will take time.
In the meantime, projects need cash. The governments budget for the year ending 2016 should have been published in March. The IMF forecasts that Egypts deficit will fall to 11 per cent of GDP this year from more than 14 per cent in 2012/13. Gross debt now stands at about 90 per cent of GDP.
The government has shown it is willing to cut subsidies and increase taxes, but this commitment has yet to be comprehensively tested. It is likely to seek to contain spending. That means there is not much money for infrastructure investment.
The private sector is going to have to do more, but local banks do not have dollars, foreign banks do not like political and exchange rate risks, and it will take time for project finance on the requisite scale to be mobilised, whatever happens.
Some say what is needed is a big, groundbreaking deal. When a couple of those projects take off, confidence will be quickly restored, Abourabia says.
But most international banks are not yet ready to make the commitment to infrastructure Egypt needs.
The fact is that only multilateral institutions can make a difference at this point, says an international banker. They have a major role both in helping bridge Egypts finance gap and in getting international banks involved in the market more quickly.
Project finance opportunities in power sector
Egyptian Electricity Holding Company (EEHC) emergency power plan Banks are planning to provide corporate finance to the client, which will pay for projects in dollars. International banks say there needs to be export credit cover to deal with political risk, plus Finance Ministry guarantees.
The first contract to benefit from international bank financing calls for Italys Ansaldo to build the 6 October power plant in Giza. Sace is providing a 13-year guarantee for a e210m loan to be provided to EEHC to pay for the contract. Bankers say that Germanys Hermes is close to confirming it will guarantee EEHC loans. They are waiting for the Japanese Bank for International Cooperation (Jbic) to confirm it will guarantee and finance Egyptian power projects.
Renewable projects. Egypt plans to build up to 2,300MW of solar and 2,000MW of wind power projects in the first round of its renewable programme.
In December 2014, a new Renewable Energy Law was enacted. It recognises three project structures: those procured and operated by the National Renewable Energy Agency; those tendered by Egyptian Electricity Transmission Company on a build-own-operate basis under a long-term power purchase agreement; and those developed by investors to sell power on the basis of a feed-in tariff approved in September last year.
More than 80 projects have been proposed that will benefit from the feed-in tariff. All three types of project will need either project or corporate finance. The International Finance Corporation (IFC) estimates that $7bn-$8bn will be needed for Egypts renewable projects. This is well beyond the capacity of local and international banks planning to provide project finance.
IPPs President Abdul Fattah al-Sisi is due to sign the new electricity law by the end of May. This will allow the privatisation of Egypts electricity generation and transmission industry.
Local and foreign investors have shown interest in the possibility of developing IPPs. They include an Orascom-led consortium that has announced it plans to finance a 3,000MW coal-fired power plant mainly through debt in a partnership with the Abu Dhabis International Petroleum Investment Company (Ipic).