The potential pipeline for project finance deals in Egypt is set to swell this year, as the government looks to attract investors back to the country.

For the past three years, Egypt’s economic growth has barely climbed above an annual average of 2 per cent, while government debt had ballooned to 90.5 per cent of GDP by mid-2014. Hoping to convince the world it is back in business, the North African country is hosting an economic summit starting on 13 March in Sharm el-Sheikh, where it will showcase numerous projects. It is aiming to attract $10bn-$15bn in investment in key sectors such as energy, transport and water.

Private sector

Many of these planned projects will need to be funded by the private sector rather than from Egypt government coffers, whether through private equity, bonds, or tapping the bank market for corporate finance or more complex project financing structures.

There is no way a lot of the projects can be realised… without a lot of international financial support

Richard Keenan, Chadbourne & Parke

There is certainly a growing buzz about Egypt’s new potential among project financiers. “We are bullish on Egypt,” says Richard Keenan, a Dubai-based partner at US law firm Chadbourne & Parke. “Everyone wants to continue to see more stability in Egypt. There is definitely a will to see these projects develop. Given the size of the proposed projects, international financial support will be instrumental.”

Yet whether Egypt’s potential will translate into deals being funded and closed is not yet clear. “There is no way a lot of the projects can be realised, given their size, without a lot of international financial support,” says Keenan.

As part of a wide range of economic reforms, Cairo is pushing ahead with its public-private partnership (PPP) programme to support the development of key infrastructure.

It is planning to execute projects such as wastewater treatment plants and transport systems under PPP models, with the most likely form of funding to be project finance.

A total of 19 PPP schemes worth a total of up to £E29bn ($4.1bn) are currently planned. At least seven projects, worth a combined £E9bn, are ready to be tendered in 2015. By the end of 2016, a further £E16bn-£E20bn-worth of PPP schemes will have been tendered.

One of the most advanced of these projects is the Abu Rawash wastewater treatment plant. The main contract award is expected to be made in March. The project is initially to be financed through a short-term bridge loan of £E1bn-£E1.4bn to be raised from international and local banks.

The loan agreement will be signed the same day the contract award is made, to ensure project construction can start as soon as possible. The loan will be in place for about nine months before it is replaced with project financing.

Project doubts

Other projects planned include desalination plants, stadiums and ports. One of the requirements of the PPP projects is that the responsibility for financing lies with the private sector and prospective bidders must present a term sheet from banks if they wish to win a contract.

Some bankers have expressed doubts that all the planned schemes will find funding, suggesting the more strategically important developments, such as water projects, will be the most attractive to investors.

“The more speculative and less strategic projects, such as small transport projects and ferry services, could be difficult,” says a banker based in the Gulf. “You are trying to push the limits of the risk allocation and pass on demand risk, and that’s tough to do, even in a good market.”

It is expected guarantees from international export credit agencies (ECAs) will be necessary for international lenders to feel comfortable with the risks involved in supporting some of Egypt’s projects. 

Even some of the European ECAs are being cautious about Egyptian risk, with one representative from an agency remarking to MEED that his firm was still assessing whether to increase its exposure limits for the country.

Gulf lenders

The most likely source of bank debt will be Gulf lenders. At a government level, the UAE has poured billions of dollars of aid into Egypt to try to maintain stability after the 2013 leadership change that saw Mohamed Mursi removed from power.

Many UAE-based firms are making or considering investments in the country. For example, Arabtec Construction is working on a low-cost housing scheme, while Majid al-Futtaim is developing shopping malls in Cairo. UAE banks will inevitably be following their clients and supporting their projects. Dubai-based Emirates NBD expanded into Egypt in April last year, hoping to capitalise on the anticipated growth.

“Among Gulf banks, the sentiment is positive; they are looking at Egypt in a positive light,” says Nathan Weatherstone, head of project finance advisory at National Bank of Abu Dhabi.

Egypt had established some track record in closing PPP transactions before the Al-Sisi government came to power, closing its deal in the health sector in April 2012. The project was to design, build and operate two new speciality teaching hospitals at Alexandria University.

A consortium led by Bareeq Capital, an Egyptian private equity firm, along with UK’s G4S, Germany’s Siemens and Canada’s Detac, won 20-year concessions for the hospitals. The consortium was then charged with financing, designing, constructing, and maintaining the medical facilities for 20 years.

Energy sector

There are already some project finance deals in progress in Egypt. Tahrir Petrochemical Corporation is still negotiating about $3.4bn in funding and loan guarantees from ECAs to finance a petrochemicals plant being built in Ain Sokhna. The project’s total budget is about $7bn, with engineering, procurement and construction contracts valued at about $5bn.

We still need to make sure we are not just putting money down without the notion of when we will get it back

Richard Keenan, Chadbourne & Parke

The plant will be Egypt’s first naphtha cracker. Local firm Carbon Holdings has about a 34 per cent stake in the project.

European, Middle Eastern and South Korean companies are all playing a role in the construction of the plant and much of the funding is expected to come from ECAs such as Export-Import Bank of the US, Export-Import Bank of Korea, South Korean Insurance Corporation and Italy’s Sace.

The project has not yet reached financial close. It was anticipated it would close by the end of 2014, but it has spilt over into 2015 and will potentially be finalised within the first half of the year.

The renewables sector is another area that could require project finance. Egypt launched a 4,300MW renewables programme last year to help meet the growing demand for electricity in the country. At the beginning of the year, a total of 109 companies or consortiums were prequalified for the programme. The firms all proposed photovoltaic solar projects of between 500kW and 50MW. Some also submitted proposals for wind schemes.

Despite the initial enthusiasm for this programme, it is thought there will be limited commercial bank appetite to support the projects at first. It is likely development banks and multilaterals, such as the Washington-based World Bank’s International Finance Corporation or the European Bank for Reconstruction & Development, will have to step in to provide funding and guarantees to encourage banks to support the schemes.

“There are a lot of big question marks still,” says Keenan. “There was a bit of a rush to prequalify for the solar projects, but we still need to see a bankable power purchase agreement to have some more clarity on the down-payment of connection costs and mechanics.”

Currency risk

One of the issues with funding the renewables programme is the currency risk.The required long-term loans for the renewable projects are likely to be made in US dollars. Yet the tariffs for the renewables scheme will be paid in Egyptian pounds, although based on a US price per kilowatt, explains Keenan.

This means the sponsors will be paid in Egyptian pounds for their electricity and will have to convert pounds to dollars to make repayments to their lenders on the US dollar-denominated loan.

The convertibility of Egyptian pounds to dollars and the local US dollar liquidity will be of concern to both the project sponsors and bankers.

“These are the questions financiers will be looking at very hard,” says Keenan.

To get around some of these risks, it is likely that again export credit agencies will have to step in to provide guarantees on loans to give commercial bank lenders more comfort when lending to renewable projects.

Cairo has attempted to stabilise its currency by allowing the Egyptian pound to depreciate at the beginning of the year. The move by the central bank was thought to have been made to increase the country’s appeal to investors.

Egypt is also beginning to look for international project financing to support several planned coal power plants.

It is likely China will provide a large chunk of the funding through state-supported entities such as Export-Import Bank of China, following a number of preliminary agreements signed between Egyptian Electricity Holding Company and several Chinese coal-power generation firms at the end of last year.

There are at least two other coal-fired plants in the pipeline. The local Orascom Construction and Abu Dhabi’s International Petroleum Investment Company signed a memorandum of understanding with Cairo in October last year for the development of a 2,000-3,000MW power plant. The facility will be built near to the El-Hamrawein port on the Red Sea coast.

Abu Dhabi-based private investment firm Al-Nowais Company is also planning a 3,600MW plant in the area of south Sinai. According to sources, talks with potential lenders and financial advisers have started.

Funding role

It is likely Gulf lenders and international banks will take the key funding roles, being in a better position than local banks to provide the long-term dollar funding required for these projects.

“Local banks have constraints on US dollar funding,” says one Cairo-based banker. “We are very keen to be involved, but I think with the long tenors and amount of debt required in foreign currency, we would join in a smaller local currency tranche.” 

Egypt’s renewed vigour and pipeline of projects is definitely grabbing attention in the Gulf and internationally.

Financiers, however, will need to be certain Egypt is on a road to long-term stability before they part with too much money. In the meantime, entities such as ECAs and development banks will be paying a key role in channelling funding into the country.