Corruption investigations stall construction in Egypt

01 March 2011

Land deal investigations threaten real-estate projects

Development companies in Egypt are warning that the country’s construction sector could grind to a halt as a result of a government crackdown on corruption and ongoing delays to government-backed infrastructure projects.

Private-sector real-estate developments in Egypt have stalled since the uprising that began in late January. Work initially stopped as protests and looting threatened the security of construction workers and their equipment, but developers say work has not restarted on many projects because the government is now investigating land deals that were signed by the former regime with private-sector investors (MEED 4:2:11).

Projects on hold
(Percentage of $307bn)
On hold/Cancelled40.698
Rest265.899
 306.597
Source: MEED Projects

On 1 March, a judicial panel in Cairo concluded that the sale of land to local developer Palm Hills Development was illegal because it was sold too cheaply. The decision follows a similar court ruling in 2010 that said the $3bn Madinaty project developed by the local Talaat Moustafa Group Holding (TMG) should be not go ahead because land was sold at below the market rate.

“The market rate does not apply for large land deals, there are so many other factors to consider,” says a major real-estate developer in Cairo. “The Ministry of Housing has done nothing wrong. They were pushing for the maximum returns for the government, without a doubt.”

Egypt’s project market by status ($bn)
Design32.326
Tender16
Prequalification3
Execution71.771
Exploration8.183
Feed0.65
On Hold36.85
Planned56.513
Study47.561
Cancelled3.848
Complete29.915
Total306.597
Source: MEED Projects

The drive to investigate corruption started under the previous regime, but has been ramped up since President Hosni Mubarak stepped down and was replaced by an interim military government. As corruption investigations widen, developers in Cairo say they are unable to continue with development. “The situation is very serious. It is affecting all the major developers,” says the developer. “We have to wait and see what happens. Right now we can’t make decisions, we can’t move forward, we need to know what the situation is.”

Developers are also concerned by the prospect of industrial action demanding increased wages despite a military ban on strikes. “Our contractors are threatened by strikes, which could create further delays and force costs up,” says the developer. “If that happens, your returns tumble and you projections are useless.”

Contractors working in Cairo say that strikes are now a major concern. “We stopped work during the protests to protect our people and equipment, we now want to start work again, but we are facing strikes,” says a contractor working in Cairo. “The situation looks pretty bad.”

The largest real-estate developers in Egypt are TMG, 6 October Development & Investment Company (Sodic), and Palm Hills Development. They are joined by Gulf-based developers, such as Damac Properties, Emaar Properties, Majid al-Futtaim and the Al-Futtaim Group from the UAE, and Doha-based Qatari Diar Real Estate Investment Company.

Egypt’s government-backed projects also have an uncertain future. The body in charge of public-private partnership (PPP) projects wants to delay the bidding schedule for up to five projects as a result of the political turmoil in the country.

The director of the PPP Central Unit, Rania Zayed, said that she was requesting that the Supreme Committee for PPPs meet later in March to confirm the changes to the bidding process for five projects, as well as to decide the future strategy for 38 PPP projects planned in the country.

The projects affected include the Rod el-Farag highway project, bids for which are due to be submitted in May and could be delayed until after presidential elections are held in September. Bids for two hospital projects in Alexandria are due to be received in March, which are also likely to be extended until after the Egyptian elections.

The other projects affected are the Abu Rawash and the 6 October wastewater schemes, as well as the Dariut power project.

When the Supreme Committee for PPPs meets, it will also decide whether or not to develop the Dariut project under the PPP Central Unit. If the decision is made to keep it under the PPP Central Unit’s remit, it will mean all funding raised for the project will have to be denominated in Egyptian pounds.

Zayed, who is also a senior adviser to the Finance Ministry, said on the sidelines of the MEED Project Finance Conference 2011 in Dubai, that Egypt had been planning to raise $5bn from international investors for a fund that will take equity stakes in Egyptian PPP during 2011. However, the uprising in Egypt has delayed those plans. Instead she expects to try to start approaching investors in 2012.

The fund will be split along sector lines, including transport, utilities and social infrastructure, so investors can choose to contribute to the fund, but stipulate that their money will be used for specific sectors. The fund will have a life of seven to eight years and Zayed says it will ultimately issue bonds to refinance itself. The fund is called the Long Term Financing Facility and is expected to issue bonds along sector lines.

In total, Egypt has about $15bn of PPP schemes planned, covering sectors including education, healthcare, roads, utilities, prisons and metro projects.

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