Navigating Egypt's roads can be a daunting experience for even the most experienced motorist. Heavily congested traffic, badly maintained infrastructure and the daring antics of drivers can make for an unpleasant journey. Not only does the state of Egypt's roads impact on the comfort and safety of the country's residents, but it also has a detrimental effect on its wider development prospects.

It appears Cairo is recognising that poor transport infrastructure makes attracting foreign direct investment more difficult. It is this premise that is spurring the government into action. It has plans to upgrade parts of the existing 46,000-kilometre-long road network as well as build new routes.

The budget available for these projects has grown significantly. The General Authority for Roads, Bridges & Land Transport, which is responsible for expressways connecting Egyptian cities, has benefited from a major increase in the funds available to it.

'For the past five years, a typical budget has been in the order of£E 300 million ($52.6 million), which left us in need of more,' says Hisham Fouad, technical adviser to the roads authority. 'Finally, somebody listened and we were able to secure£E 1,500 million ($263 million) for capital projects in 2007/08. We have a list of projects based on the secured funds and have been promised additional funds for projects of national interest.'

Even so, funding such an enormous programme exclusively through state resources will not be possible. Significant private sector participation will be needed if Cairo is to implement all its transport infrastructure schemes successfully.

Public-private partnerships (PPP), a novel and much-lauded approach in Egypt, could offer a solution. The government hopes this type of risk-and-revenue-sharing arrangement could significantly reduce the financial burden currently weighing heavily on state coffers, while also attracting private sector know-how and management. 'Either we have PPP or we should forget about our ambitious plan,' says Azza Saleh, consultant to the Transport Ministry. 'The government will not finance more than one-third of it.'

Some attribute the government's new approach to the strong private sector credentials of its ministers. 'We really have a magnificent cabinet now led by Ahmed Nazif,' says Ibrahim Mahlab, chairman and chief executive officer of Arab Contractors (Osman Ahmed Osman & Company). 'Most of our ministers come from the private sectorOthat is why we welcome these kinds of partnerships between the private and public sectors.'

The government has already taken the first steps towards formulating a private investment strategy. A central unit charged with articulating a single and clear PPP policy has been set up at the Finance Ministry and the first pilot PPP scheme, to build 2,000 public schools, has been launched.

Road projects in particular have been identified as a priority for the introduction of partnerships between the state and the private sector. The sheer scope of planned road schemes and the importance attached to them by Cairo necessitates private investment. About half of the£E 70,000 million ($12,275 million) five-year infrastructure budget will go towards the implementation of road projects.

At least six new road projects have been earmarked for PPP financing, according to the government. Estimated to cost about£E 3,650 million ($641 million), they will add 1,320 kilometres to Egypt's road network.

But despite the government indicating a desire to exploit the PPP route, contractors say these projects are still a long way off.

'At the moment, there is no clear plan about whether roads will be part of a PPP scheme or not,' says the director of a local construction company. 'There have been talks about it. There have been indications that this could take place, but nothing has materialised. So far, everything uses the conventional approach, which is direct construction let to contractors through a normal bidding process.'

For private investors to commit to a road project in partnership with the public sector, several issues must first be resolved. Most importantly, Cairo must develop appropriate legal and contractual terms to guarantee clear and equitable risk and profit-sharing mechanisms.

'I think the main concern is that the terms of reference should be prepared in a proper legal structure to allow a balanced contract and relationship that gives the right guarantees to both parties,' says the director. 'In order to attract quality local players, the structure of the deal should be acceptable from a legal standpoint, from a risk standpoint and from a bankability standpoint.'

Encouragingly the government recognises this. 'Rail and road projects are quite technical and complicated,' says Saleh. 'When you offer them to the private sector, you have to structure the legal contracts to make sure risk is properly split [between] both parties.'

However, this is not an insurmountable problem and, with government backing, PPPs in transport could soon become a reality. 'All the challenges are manageable,' says Saleh. 'The cabinet is supportive and the atmosphere is quite open.'

The ministry is also seeking international legal advisers to help it formulate its approach.

In addition to contractual guarantees, potential developers need to feel they will be able to recoup the high capital costs associated with building a new road. Tolls on road users, which are already widely used in Egypt to raise public sector revenues, are one method available to investors.

The roads authority has recently increased toll collection on expressways and fines levied on truckers who overload vehicles, raising the average monthly revenue to£E 45 million ($7.9 million) from£E 20 million ($3.5 million).

'Investors would like to have revenues from tolls,' says Fouad. 'So your traffic volume has to be suitable for them to hang their hats on. We need to do feasibility studies, traffic counts and studies on the internal rate of return.'

But a lack of resources means the authority wants potential investors to carry out their own research. 'We are open to investors doing their own studies,' says Fouad. 'They take lots of funding. Even though we are flushed with cash, demand is ever greater so we cannot spend on studies. It is a vicious circle.'

Contractors say that offering investors the opportunity to develop land alongside roads could give them a sufficient incentive to participate in PPP projects. Selling the developed land on at a premium would again guarantee a significant return on investment.

Other countries have adopted pain/gain mechanisms into contracts to incentivise both the public and the private sector. Depending on the risk and revenue sharing arrangements, the government could offer to cover a percentage of the losses accrued by the investor if a project misses its projected revenue targets. Conversely, if it exceeds projections, the government will take a share of the profits.

For the time being, investors may prefer to finance road maintenance projects rather than new infrastructure schemes. 'There are some discussions with the World Bank about performance-based contracts for maintenance for a two-to-three-year period,' says Fouad. 'PPP projects for maintenance are more manageable.'

Fees from tolls are established, reducing the revenue risk, and capital investment required by the private sector is much lower.

There is plenty of maintenance work to go around. Currently,£E 800 million-900 million ($140 million-158 million) worth of maintenance projects are being tendered using traditional procurement. The roads authority relies on the Finance Ministry for the cash to maintain its 23,000 kilometres of expressways. It is allocated£E 200 million-250 million ($35 million-44 million) a year for maintenance work and covers the remaining costs itself using 80-90 per cent of the revenue it collects from tolls and levies.

Uncertainty surrounding PPP mechanisms is not preventing work from going ahead under traditional forms of contract. The roads authority has been allocated£E 1,500 million ($263 million) on top of its budget to build one-third of the Cairo ring road. The Housing & Development Ministry and the National Service are responsible for the other two thirds.

The roads authority has issued tender documents to a number of consultants. The winning firm will finalise the road outline for its 130-kilometre share of the project, as well as examining its social and environmental impact. The authority is preparing to invite bids from contractors.

Outside Cairo, construction has started on the 340-kilometre road connecting Sohag to the Red Sea coast. The government has allocated£E 200 million ($35 million) for the preliminary works, which is being carried out by the local Hassan Allam & Sons. However, the project is expected to cost£E 640 million-700 million ($112 million-123 million) and the government is likely to offer the bulk of the work to an investor on a build-operate-transfer or PPP basis.

Two other major road network projects are also under development. The Japan International Co-operation Agency (Jica) completed its Cairo Urban Toll Expressway Network study in April 2006. The outcome was a network alignment proposal consisting of 10 new expressways. The study suggested involving the private sector in operating and maintaining the network, and possibly in the construction of the corridors at a later stage. In August, Jica will launch a year-long study to set priority routes for the metropolitan expressway.

The World Bank is working on a similar project. Under its Greater Cairo Development project, the bank is assessing the feasibility of PPP or private sector concession arrangements for the construction of a west-wing expressway with a public transport corridor.

The two projects are going ahead separately, but Jica says the two organisations could co-operate on financing the new network.

The Transport Ministry is also seeking to widen and improve the road infrastructure in the Nile Delta. A local consultant is carrying out feasibility studies to determine how best to upgrade the roads. Depending on its recommendations, the network's capacity may be doubled by road widening or, where the land for this is not available, construction of an elevated highway, which could accommodate trade traffic.

Finally, progress has been made on several road upgrade projects. In June, the state-owned General Nile Company for Road Construction was awarded the£E 700 million ($123 million) contract to upgrade a 140-kilometre stretch of the 282-kilometre northern coastal road.

And further south, Arab Contractors was selected for the£E 420 million ($74 million) upgrade of 50 kilometres of the Cairo-Alexandria desert road. Tenders for the upgrade of the remaining 75 kilometres of the road will be issued in July. All of these projects represent only a small proportion of the work that still needs to be done to expand and improve Egypt's road networks, so it is no wonder PPPs are more and more appealing to Cairo.

Contractors are also eager to see the government move in that direction, provided it happens on the right terms. 'We believe there are quite a few entities that are willing to bring in funds to finance infrastructure projects, and obviously this would allow the government to focus mainly on the projects that it needs to finance from its own resources,' says the local construction company director.

While it is clear that a large part of the government's roadbuilding plan will be unachievable without private sector involvement, it remains to be seen just how much private investment is needed and how much will be secured. 'We have a general idea about projects,' says Fouad. 'It is the individual agreements between the public and private sectors that will show how much the private sector is willing to finance. There is no specific hard target that we are working towards.'

If and when the government adopts the PPP approach for its road infrastructure projects, it will be only the first step towards tapping the potential of private finance. Cairo will then need to convince private companies that their investments will be both secure and financially worthwhile.