$3bn: Value of Madinaty project that is currently under investigation in Egypt
33: Projects Egypt was planning to develop using the public-private partnership model
Egypt’s construction sector is reeling from the country’s most turbulent political environment in recent history. The revolution saw long-serving leader Hosni Mubarak ousted and charged with complicity in the killing of protesters as well as corruption offences. It also led to the prosecution of several former government ministers and leading businessmen, including the housing and tourism ministers.
The biggest impact would have been and is in the private sector. Financial viability is an issue
Raouf Ghali, Hill International
Many of the corruption allegations relate to land purchases conducted outside 1998 legislation that requires land to be auctioned. Investigating land sales is now a priority for the country’s Central Auditing Agency, which has been spurred on by the tide of opinion against public land being sold too cheaply for the development of luxury premises that few can afford.
Project delays in Egypt
As a result of the investigations and the economic malaise, private developments have been put on hold across Egypt. “No developer is immune to land litigation,” wrote Germany’s Deutsche Bank in its April 2011 Egypt real estate report.
“If early events since the regime change are any indication, we believe there could be further litigation against land deals with unclear outcomes for developers. The process is likely to be protracted.”
The most high-profile investigation involves the $3bn Madinaty project under development by local Talaat Moustafa Group (TMG). The scheme is spread over 33.6 million square metres of land northeast of Cairo. The state alleges that the land for the project should have been sold in a public auction. TMG says that the direct allocation of the land was made legally and in the public interest.
“The New Madinaty contract was signed on 8 November, 2010 after the New Urban Communities Authority (Nuca) had re-assigned the land by a direct order to the Arab Company for Projects & Urban Development, a subsidiary of TMG Holding,” said the developer in a statement published in July. It went on to say that the transaction was conducted “in accordance to Article No.31 (repeated) of law 148 of 2006, issued in amendment to the law of Tenders and Auctions to realise public interest requirements from the Madinaty project.”
Deutsche Bank says the case highlights a discrepancy in Egyptian law with legislation giving Nuca the authority to conduct direct sales, and a 1998 piece of legislation that rules it must only be sold via auction. All eyes are on the Egypt’s Administrative Court, which is due to make a final ruling on the case on the 22 November. “The judgment should set the tone for the entire sector,” says Deutsche Bank.
Consultants working for private clients confirm that real-estate schemes have either been put on hold or slowed considerably.
“The biggest impact would have been and is in the private sector. Financial viability is an issue,” says Raouf Ghali, president of the international project group at US consultant Hill International. “The absorbtion rate right now is different than it was two years ago. Developers are considering whether the market is strong enough to absorb the square footage that they intended to roll out.”
Hill International is working on several schemes throughout Egypt, including the $550m Grand Egyptian Museum.
Unfortunately for Egypt’s major contractors, the public sector is not picking up the slack in the private sector. New contracts are not being awarded and contractors have complained about the lack of a visible pipeline of new projects. “In the public sector whatever is ongoing continues, but no new initiatives were put out,” says Ghali.
As a result, Egyptian contractors are becoming more active in overseas markets, with Libya set to become a key focus over the next five years. Egypt’s biggest contractors Orascom Construction Industries and Arab Contractors (Osman Ahmed Osman & Co) are already active in the region.
Existing infrastructure schemes
Although the revolution has clearly delayed progress, existing schemes are moving forward. Bids are being evaluated for the main construction contract on the Grand Egyptian Museum. Ghali says the project team is on track to make an award in January. “We are in the final stages of evaluation. Obviously it is a very important project for tourism and culture and it is being financed by the Japanese funding agencies, so it got a little more relief as it is not tearing down local budgets. We are lucky that the situation has not really affected the project that much.”
Schemes such as the third line of Cairo’s metro and a series of road and water projects are also continuing. Notably, a developer keen to demonstrate its renewed commitment to Egypt is government-owned Qatari Diar. In October, it signed contracts worth $543.8m with Athens-based CCC for its Nile Corniche scheme in Cairo and its Sharm el-Sheikh hotel project.
The Nile Corniche development is spread over 9,360 sq m and includes two towers (north and south), with several residential and hotel accommodation blocks. Retail outlets, restaurants and office blocks will occupy an additional 197,000 sq m of land. The scheme also includes a 647-space underground car park, a library, children’s centre and indoor and outdoor swimming pools. New York-based Michael Graves Architects is the principal designer for the project, while the UK’s Arup is the structural designer. Qatari Diar says that the scheme will create 4,000 local jobs and the Sharm el-Sheikh hotel a further 1,500. It also says that 70 per cent of the raw materials for the project will be locally sourced.
An area that has made less progress is the country’s programme to develop projects under public-private partnerships. In October, MEED reported that the future of the public-private partnership (PPP) programme looked doubtful as Egypt’s PPP Central Unit was loath to make any awards until a new government was in place and the head of the unit, Rania Zayed had resigned. The fear was the political uncertainty would not only affect pricing, but also deter investors. Bids for several schemes were invited under the PPP law enacted by the Mubarak government in May 2010. Firms that submitted proposals say that they have heard nothing since bidding for projects opened.
Egypt was planning to carry out 33 projects under its PPP programme from highways and hospitals to wastewater treatment works and schools. To date, firms have prequalified or bid for a host of PPPs, including the $100m Abu Rawash and 6th October City wastewater treatment projects, the $1bn Rod el-Farag Highway and the $118m Alexandria Hospitals. “A new government must consider whether PPP offers best value for Egypt, I don’t expect to see any awards for a long time,” says the Egyptian head of an international consultant.
Although many projects remain on hold, Hill International says it has changed its strategy to look at smaller projects and as a result has won some new contracts to keep its 80 local staff busy. “We have picked up a couple of small projects. We won the contract for the Ritz Carlton Nile Hotel, which is a revamping of what used to be the Nile Hotel. It is owned by the Ministry of Tourism and we picked up [work with] Metro – a growing supermarket chain. Things are going well,” he says.
“We want to retain the staff that we have in Egypt, so we want to keep them busy and support the country and its economy.”
Future strategy for projects in Egypt
It is uncertain what delivery mechanisms Egypt will use to procure future infrastructure projects, but new projects are needed. Housing and transport schemes are vital along with investment in utilities as population growth puts pressure on the already strained public services.
“The good thing about Egypt is that it needs everything because the population growth is so tremendous. Everything is a priority. You need utilities and infrastructure,” says Ghali. “You still need a big boost on tourism and tourist sites such as Sharm el-Sheikh, which I believe needs a lot of revamping, and renovation to airports, rail and an extension of the Cairo metro.”
In the short term, the political transition and land investigations will continue to delay projects and deter new investment, but in the medium-to-long term, Cairo is desperate to improve its infrastructure. How it chooses to do this under the new government remains to be seen.