Cairo casts its net for investment

10 November 2009

The country is seeking foreign funding for a $15bn programme of infrastructure projects

Cairo has, until recently, struggled to consistently deliver the level of economic growth it needs to meet the demands of its huge and rapidly expanding population.

Chronic traffic congestion clogs up many of the most important transport arteries in the country’s towns and cities, while electricity, water and wastewater networks struggle to cope with demand. But unlike many of its oil-rich counter-parts in the Gulf and North Africa, Cairo lacks the finances for the capital expenditure required to modernise its public services and infrastructure.

The Finance Ministry faces an enormous budget deficit, which stood at 6.9 per cent of gross domestic product (GDP) at the end of June, the end of Egypt’s financial year. It is a deficit Finance Minister Youssef Boutros-Ghali is committed to bringing down through economic reform.

Public spending

To make matters worse, the economic slowdown over the past 12 months has hit Cairo’s budget revenues. It must therefore find new sources of funding if it is to modernise its infrastructure while keeping on top of its budget deficit.

The predicament is nothing new. For years, Cairo has sought to attract private sector investors to pay for necessary upgrades in public services and infrastructure. And with a population of about 77 million people – one of the biggest in the region – there is, on paper at least, enough consumer potential to attract investor interest.

Yet with per capita GDP of only $2,162 a year, one of the lowest in the region, the reality is that it is difficult for private sector investors to make a business case for expensive up-front investments in infrastructure, such as roads and wastewater plants.

However, a new plan being pushed by Investment Minister Mahmoud Mohieldin, one of the leading figures behind Cairo’s economic reforms, could provide the solution to the country’s public spending problem. Mohieldin has put together a comprehensive list of much-needed projects, which he will tout to potential investors. The £E82bn ($15bn) programme of work, across 11 sectors, is designed to transform the country’s infrastructure.

The 47 projects contained in the plan have already been approved, both by the Investment Ministry and the ministry responsible for each sector involved. In addition, the Investment Ministry is promoting a further £E32bn worth of projects, which it unveiled in the first half of 2009. Mohieldin expects to add another £E6-16bn worth of infrastructure projects to the list within 12 months.

Mohieldin hopes to award a total of £E120-130bn worth of project contracts before the end of June 2011, with most of the construction work to be completed by the end of June 2012. Some are so large in scale that they will inevitably take longer. “Some of these projects are demanding in terms of time,” says Mohieldin. “The marina in Luxor, for example, could be very tight to do in two years. The railway projects will take three years and the medical cities two years.”

Announcing projects is the easy part; Mohieldin’s real challenge will be to secure the investment needed to deliver the schemes. Over the next few months, he will take his programme of projects to capital cities in the Far East in an attempt to attract investment.

“Some of these projects are demanding in terms of time. The marina in Luxor, for example, could be very tight to do in two years”

Mahmoud Mohieldin, Investment Minister

Mohieldin’s track record in attracting foreign direct investment (FDI) is impressive. Since he became investment minister in 2004, he has presided over a five-fold increase in in-bound FDI. Foreign companies invested $2.2bn in the country in 2004 and $11.6bn in 2007, according to the UN Conference on Trade & Development.

FDI has slowed since then, along with Egypt’s economy, as a result of the global economic downturn. In 2008, companies invested $9.5bn in the country. A further fall in 2009 seems likely. The International Monetary Fund forecasts that the economy will grow by 4.5-5 per cent in the year to the end of June 2010, which would be its slowest rate in almost a decade.

The main sectors that the government has identified as potential targets for FDI are tourism and ports, where the Investment Ministry is seeking to attract £E24.6bn and £E15bn respectively. 

The Tourism Ministry wants to attract the bulk of the money it is seeking to two planned developments in Marsa Matruh governorate on the country’s Mediterranean coast. The larger of the two – the Ras el-Hekma project – will cover 10.5 square kilometres and include 3,000 hotel rooms at a cost of £E12bn.

The second megaproject, at a site just east of El-Alamein, is earmarked for an investment of £E10bn, although the Tourism Ministry has yet to say what it wants at the site. The other two tourism projects are a £E1.6bn redevelopment of the marina at Luxor in Upper Egypt and a 25-year concession to build and operate a £E1bn development on the shores of Lake Qarun in Faiyum governorate, about 80 kilometres southwest of Cairo.

The Transport Ministry has identified 13 port projects it wants to award over the next 18 months. One of the biggest is a £E5.2bn build- operate-transfer contract for a bulk terminal specialising in importing iron ore and exporting finished products at Adabiya Port on the Red Sea. Adabiya is one of several facilities near the southern terminus of the Suez Canal, one of the Egyptian government’s main sources of revenue.

The Transport Ministry is also planning to award build-operate-transfer contracts to six ports along the Nile at a total cost of £E5.2bn. The deadline for technical bids for the six projects, which are intended to boost Egypt’s use of the river as a means of transport, is 19 November.

The other major port project in the programme is a three-part, £E4.4bn investment in East Port Said. The ministry wants to award one build-operate-transfer contract for a ship refuelling station, a second to develop the port’s logistics, and a third to build a container terminal at the site. No deadlines have yet been set for any of the three schemes.

The Investment Ministry’s approach is an unusual one. This is the first time the government has drawn up a list of its priority projects with the intention of marketing them to foreign governments and foreign companies.

Other countries in the region have tried to entice foreign investment by promoting priority sectors, rather than individual projects. Morocco, for example, has identified tourism, infrastructure and IT services as its priority sectors and allows the private sector to invest where it wants. The state’s role has been confined to removing barriers to investment.

Investment focus

Mohieldin is concentrating on infrastructure partly because the country needs it, but also because he believes FDI will be attracted to such projects. He says there has been a change of interest on the part of investors towards investment in tangibles, such as infrastructure projects.

Since 2004, many of the big investments in the country have been in the oil and gas sector or in the privatisation of some of the state’s largest enterprises. Infrastructure projects, which only pay a fixed rate of return, will be a tougher sell, says David Cowan, Africa economist at US bank Citigroup. “The government is casting around for ways to attract FDI into Egypt,” says Cowan. “I am not a great fan of trying to dictate to the private sector where it should allocate capital. In some ways, this reflects a little bit of Egypt’s socialist past. Instead of doing this, they should remove all the other barriers to investment and move up the [World Bank’s] Doing Business index.”

Investors will probably clamour for some projects, but ignore others, according to Cowan. “The ports figure [of total investment] is the most realistic out of all of these,” he says.

The £E7.5bn the Housing Ministry is seeking for three new desalination plants and two wastewater plants will be harder to find. “The amount that people can pay for water supplies is much lower than in Europe or the Gulf,” says Cowan.

Meanwhile, the private sector is continuing to make major investments in Egypt. According to Marwan Elaraby, managing director of Citadel Capital, an Egyptian private equity firm, the consortium of companies investing in the $2bn-plus Mostorod refinery will raise enough capital for work to start on the project by the end of March next year. If the financing goes ahead, it will be the largest ever project finance deal in any North African country.

Citadel is the majority shareholder – with an 85 per cent stake – in Egyptian Refining Company, which itself holds 40 per cent of the equity in Mostorod. South Korea’s GS Engineering & Construction Corporation and Japan’s Mitsui & Company both hold 30 per cent stakes and will raise most of the money.

Infrastructure has long been neglected in Egypt, which makes Mohieldin’s focus on roads, trains, ports and hospitals most welcome. Some of these projects will succeed in raising funding in the private sector, but others, including some of those that would do most to improve the lives of ordinary Egyptians, are more likely to secure funding from the African Development Bank or the World Bank. In these cases, Mohieldin should really be seeking funding elsewhere.

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