Welcome prospect: Though subject to debate, PPPs should remain favoured for large projects

Overburdened and dilapidated, Egypt’s transport infrastructure is in need of considerable expansion and rehabilitation. With the new government facing numerous demands and a limited budget, it is hard-pressed to provide the needed funds, so it is turning instead to the private sector by courting investment through public-private partnerships (PPPs).

PPPs represent a significant change in Egyptian thinking about public policy, economic development and the role of the state. A special PPP unit was created in 2006 at the Ministry of Finance and is responsible for coordinating all PPPs across all ministries and government bodies. Given its track record, the unit is seen as a model for the region. In 2008 it was commended for its performance among members of the Euro-Med zone and in 2009 was designated the best-performing government organisation in Africa.

IN FAVOUR: Although PPPs are still a relatively new practice within Egypt, these hybrid development schemes have become a centrepiece in Egypt’s recent efforts to update its transport sector. According to the World Bank, 11 large transport projects were financed through PPP arrangements between 1990 and 2010.

In the past decade alone, PPPs have been used to build, rehabilitate or manage some of Egypt’s most important transport facilities, including Damietta Port, Cairo International Airport, Alexandria International Container Terminals, Borg El Arab Airport and Luxor Airport. Previously, the Egyptian Railway Authority used PPP arrangements to refurbish and commercialise train stations in Cairo, Alexandra, Aswan, Luxor and Tanta. Egypt’s sixth five-year plan, which began in fiscal year 2007/08, reserves a prominent place for PPP financing in addressing infrastructure needs.

FINANCING: Given their size and considerable financing requirements, transport projects are particularly well suited to PPP financing models. Traditionally the domain of the state, Egypt’s transport has been opened up to private investment to great effect. In fiscal year 2008/09, for instance, more than one-third of the roughly $4bn in implemented investments in the transportation and logistics sector in the country was executed by the private sector.

This is for good reason. PPPs can help governments secure private sector funding and involvement, attract inward investment, and facilitate the transfer of technology, employment and expertise. Each of these will be important going forward as Egypt tackles the twin challenges of bringing its public debt under control while addressing a multitude of infrastructure needs in transport and other areas vital to economic growth.

LARGE NEEDS: PPPs have helped Egypt secure involvement from banks both within Egypt and from outside. Given the considerable investment required for transport projects, tapping financial institutions such as banks is particularly important. For their part, banks are drawn to PPPs because they come with government guarantees and are seen as being less risky than purely private ventures. In addition, when several banks agree to finance a project, risk can be distributed more widely across the numerous participants. Domestic banks do not yet possess the type of capital needed to fund the country’s PPPs, so they have begun partnering with international institutions.

Several large transport infrastructure projects are currently on hold as the political transition proceeds. According to the Ministry of Finance, 32 projects are being considered for tender within various ministries. This is one area where evolution is more likely than revolution. Although delays may be inevitable, the new government will likely push ahead with the PPP model for two main reasons. First, the new government is sympathetic to the ideologies that animated economic policy under Hosni Mubarak and will likewise favour the PPP model. Second, Egypt’s government will face a plethora of demands on its limited resources.

According to Hazem El Beblawi, the former minister of finance, PPPs will remain a critical instrument for Egyptian governments moving forward. Speaking at a PPP roundtable hosted by the British embassy in Cairo, El Beblawi underscored the government’s plan to attract more foreign investment – it has a medium-term target of boosting foreign investment to around 15% of the country’s GDP – with a particular focus on infrastructure. PPPs could well be a principal vehicle for reaching that objective.

STEPPING BACK: The Egyptian government would also like to reduce its hitherto dominant role in infrastructure investment. In the three years preceding the revolution, the state accounted for LE277bn ($46.36bn) of investment, a whopping 44% of the total. Although this figure was somewhat inflated by Keynesian efforts to protect the country against the global economic downturn, the biggest contributor has been a decline in private investment. Transport comes in at the top of the list, consuming 16% of all government investments over that period. Within transport, the government’s investment accounted for 60% of the total.

According to Atter Hanoura, who oversees the PPP unit within the Ministry of Finance, the government is keen to move the PPP projects forward. At present, 32 projects are being considered for PPP financing – many in the area of transport and logistics. Despite the extensive coverage of road and rail networks and the development of port facilities, investment opportunities in Egypt abound as demographers, urban planners and economists all predict much greater demand for transport infrastructure in the years ahead.

The General Authority for Investment foresees the need for an additional $8bn to expand and upgrade Egypt’s transport infrastructure. Securing that level of funding during a time of political transition in Egypt and economic uncertainty in much of the developed world is a challenge. But PPPs are particularly attractive instruments under such circumstances, as chastened investors and financial institutions scan the globe for more secure, long-term investment opportunities.

EYE ON FOREIGN INVESTMENT: The political turmoil over the past 18 months has made many private investors understandably cautious. Khaled Hussein, the chief commercial and operations officer for Egytrans, an integrated transport services company, acknowledges the challenge. “Given the political uncertainty, multinationals are less interested in Egypt for now, but that will change,” he told OBG.

The government has taken many steps to reassure potential investors. According to Sherif Nabil, an economic researcher at state-funded safety net the Social Fund for Development, a good legislative framework is a critical part of that effort. Within that context, the installation of a new government and the completion of Egypt’s political transition will certainly help.

In addition, Law No. 67 of 2010, which outlines the regulatory framework for tendering PPP projects, remains in force. That law contains several provisions that better reflect the practices of other emerging markets: the contribution rate of public funds in companies tendering for projects cannot exceed 20%; contract periods must be between five years and 30 years; and the projects to be implemented must be valued at no less than LE100m ($16.73m).

In fact, PPPs are emerging as a favoured means for securing foreign financial support, along with extending the expiration dates of existing loans. For instance, multinational bodies, such as the World Bank, European Bank for Reconstruction and Development, and European Investment Bank, tend to look favourably on projects organised through PPP financing.

CITIZEN CONCERNS: However, some remain critical of PPPs, wary of seeing the private sector involved in what has traditionally been the domain of the state. Egypt’s own history offers food for thought.

Although the Suez Canal predated the PPP model, it was essentially a PPP between the government of Egypt and the Compagnie Universelle du Canal Maritime de Suez, which had been created in 1858 to finance the digging of the canal. The project, along with the profligacy of Egypt’s later ruler, Khedive Ismail, bankrupted the state and paved the way for the British invasion and subsequent occupation. Those opposed to the neo-liberal economic order that characterised Mubarak’s rule see PPPs as a continuation, if not an acceleration, of that same imperial activity.

Such arguments, although somewhat misdirected, should still be acknowledged and will doubtless be debated in the newly emerging Egyptian political landscape. For the time being, however, the government is pushing ahead, seeing in PPPs a way of pursuing big ideas with its limited means.

The returns on those ideas could be very attractive for the country, particularly in the area of transport infrastructure and logistics. In a 2010 study the World Bank argued that by committing an additional 1% of GDP to infrastructure investment, the government could add 0.5% to annual GDP within a decade and 1% within two decades. The study concludes that the return on investment would be even higher if the government can secure a greater share of the initial capital from the private sector. The investment would, in effect, more than pay for itself. And at a time when Egypt has little money and many needs, that is a welcome prospect.

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The Report: Egypt 2012

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