Investment in infrastructure boosts Egypt's construction sector

 

Since the country embarked on an ambitious IMFbacked economic reform programme in November 2016 the government has placed a strong emphasis on infrastructure and construction as a key engine of urban growth and financial stability. In the FY 2019/20 budget LE140bn ($8.6bn) was earmarked to obtain new resources, develop infrastructure, and improve roads, electricity, water and sanitation networks. According to the Ministry of Finance, in 2018/19 the government invested LE1.3bn ($80.1m) in construction and building, as well as LE15.3bn ($942.9m) in real estate activities, LE13.5bn ($832m) in water and sanitation projects, and LE3.3bn ($203.4m) in electricity networks.

Although construction remains a key sector, 2020 is likely to be a difficult year due to the effects of the Covid-19 pandemic, which has halted progress on a number of upcoming projects and resulted in a further decline in demand for building materials. However, given that a number of postponed projects have been rescheduled to 2021, the following year should see a pickup in activity. Moreover, as the country’s population rises, demand for housing and infrastructure is likely to remain stable, but it will be increasingly necessary for the government to seek support from the private sector (see analysis). “Demand for infrastructure development will continue in earnest after Covid-19, largely due to Egypt’s fast-growing population,” Osama Bishai, CEO of local firm Orascom Construction, told OBG. “However, after the crisis, finding sufficient financing may be a challenge, with the private sector likely to play a more prominent role going forward.”

Performance & Size

In recent years construction has been one of the most dynamic sectors in Egypt’s economy. Between 2013 and 2017 the country channelled over LE1trn ($61.6bn) towards infrastructure investment, according to the African Development Bank. In 2018/19 the Central Bank of Egypt (CBE) reported that the construction and building sector’s contribution to GDP at current prices grew by 24.8% to reach LE320.8bn ($19.8bn). At constant 2016/17 prices its contribution grew by 8.8% to reach LE233.6bn ($14.4bn). Construction and building represented approximately 6.2% of the country’s GDP in 2018/19, up from 5.9% the previous year. The CBE reported that a combined LE48.7bn ($3bn) was invested in the sector over this period, up 286.5% from LE12.6bn ($776.5m) in 2017/18.

An update to the “Global Construction Outlook to 2023” report published in September 2019 by consultancy firm GlobalData predicted that the sector will expand at a compound annual growth rate of 11.3% between 2019 and 2023. This will mainly be driven by rising investment in the sector.

However, this forecast does not reflect the economic impact of the outbreak of Covid-19 in early 2020, which is likely to affect investment in the sector and the progress of upcoming construction projects. In April 2020 President Abdel Fattah El Sisi announced that the launch of mega-projects such as the Grand Egyptian Museum and plans to move civil servants to the New Administrative Capital, which is being developed 35 km east of Cairo, would be postponed from 2020 to 2021 due to the pandemic. Nevertheless, measurable progress continues to be achieved on a number of major projects. In May 2020 international media reported that construction had resumed at the site of the new capital. That month the Ministry of Planning and Economic Development also announced that more than 229 projects with a combined value of LE47bn ($2.9bn) were set to be completed by the end of 2020.

International Standing

In recent years the construction sector has received a boost from international donors and multilateral financial institutions, which has helped to support growth and improve the country’s attractiveness for foreign investment. According to the CBE’s most recent available annual report, foreign direct investment (FDI) in the construction sector reached $590.8m in 2017/18, representing 4.5% of the total, up from $120.8m, or 0.9%, in 2016/17.

According to the “Africa Construction Trends” report published by Deloitte in 2018, Egypt had the largest number of construction projects in the continent, with 46, representing 9.5% of the total. The overall value of Egypt’s construction projects was also the highest in Africa, at $79.2bn, or 17%.

Egyptian contractors have increasingly been looking to the rest of the continent for investment opportunities. Local companies have the advantage of understanding the market, and as the continent’s growth continues to pick up, there is likely to be significant potential for Egyptian involvement in infrastructure, water and energy projects. For example, local firm Elsewedy Electric has operations in 14 African countries and has projects worth around $4bn. Moreover, Egyptian contractors are well placed to capitalise on the rise of mixed-used developments in Africa by exporting engineering and design services to projects across the continent.

In 2018 Egypt overtook Saudi Arabia as the second-largest projects market in the MENA region, with more than $33bn worth of contracts awarded that year. Indeed, Egypt was the only MENA country that saw an increase in overall spending on construction projects between 2016 and 2018.

Transport Infrastructure

In recent years the sector’s growth has in part been driven by government spending on large-scale infrastructure projects. In 2014 the government launched the National

Roads Project, which aims to update and expand 24,000 km of Egypt’s roads. In mid-October 2019 Kamel El Wazir, the minister of transport, said in a press statement that around 4500 km of roads had been constructed out of the total 7000 km under development. In 2019 the government implemented an additional 25 road projects worth LE8bn ($493m).

In June 2019 President El Sisi inaugurated the LE170bn ($10.5bn) Rod El Farag Axis Bridge, which was awarded a Guinness World Record for the widest cable-stayed bridge. The bridge, which is 67.4 metres wide, was built to ease congestion in Cairo.

Additionally, in August 2019 the government awarded contracts to Bombardier Transportation, the Germany-headquartered rail equipment division of Canadian multinational Bombardier, and local firms Orascom Construction and Arab Contractors, for the development of two new monorail lines, with a total value exceeding $4.5m. The first line will extend 54 km from the east of Cairo to the New Administrative Capital, and the second, covering 42 km, will connect 6th of October City and Giza.

There are also plans to build a metro network in Alexandria, which will run from Abu Qir to Borg Al Arab, with an operating capacity of 10,000-15,000 commuters per hour. In November 2019 local media reported that the technical and financial studies had been completed, the project’s design had been finalised and construction would be assigned to a Chinese company. Construction was scheduled to begin in the first quarter of 2020, to be implemented over two years in three phases, but as of May 2020 there had been no further announcements regarding the project’s progress.

In August 2019 the government completed its comprehensive plan to construct seven dry ports and logistics zones, which will be connected to the country’s rail network and used to transport products to industrial complexes around the world.

The first of these dry ports, which is also set to be the first of its kind in Egypt, will be a 40.5-ha facility located in 6th of October City, which will serve the city’s industrial zone as well as the seaports of Alexandria and Dekheila. In addition, dry ports will be constructed in 10th of Ramadan City and Beni Suef. The former will be 60 km long and cost an estimated LE2.4bn ($147.9m) to build. It is hoped that, when they are completed, the new facilities will help to ease congestion at the country’s seaports and speed up Customs procedures, as well as create new employment opportunities.

Meanwhile, in 2019 Damietta Port Authority signed a memorandum of understanding with Germany-headquartered Eurogate Terminals and Contship Italia to establish what will be the largest logistics zone in the MENA region. The zone will include a railway line, dry port and cargo distribution area, with a total investment of €750m in the first phase. The project will help Damietta Port become a leading regional logistics hub and open up new markets for Egyptian exports, as well as attract foreign investment. The new terminal is scheduled to be ready for operations by the end of 2022.

Power & Water

In addition to transport infrastructure, the government has made the development of a sustainable energy mix a priority. “While infrastructure continues to drive construction activity, other segments such as health, education and energy are picking up, driven by population growth and rising demand,” Waleed Abdel Fattah, senior vice-president and Africa regional manager at Hill International, told OBG. Recent energy projects include the construction of three new power plants built in partnership with German firm Siemens, which came on-line in mid-2018; the Benban Solar Park, which is expected to provide 1650 MW of new capacity through the construction of 32 power plants; and the $30bn El Dabaa Nuclear Power Plant, which will be the first of its kind in Egypt and the largest nuclear power plant in Africa.

Water infrastructure is also a priority for the government, as water security has become an issue of increasing national importance. In 2019 Mohamed Abdel Atti, minister of water resources and irrigation, announced plans to invest more than $50bn to combat water scarcity by 2037. The strategy aims to overcome water shortages by expanding the use of modern irrigation methods, constructing water distillation stations, and encouraging sustainable and efficient water usage.

In November 2019 engineering, construction and infrastructure firm Hassan Allam Holding (HAH) signed an agreement to receive a $20bn loan from the European Bank for Reconstruction and Development. The loan will help HAH to acquire stakes in specialised engineering and water desalination companies and invest in training programmes for its employees. In May 2020 Hassan Allam, CEO of HAH, told local media that he remained confident in the continued growth of the construction sector despite the disruption caused by Covid-19, and that the company was looking to expand further into the country’s burgeoning water and wastewater treatment segment. “As the population continues to rise, being able to supply citizens with water away from the Nile will be vital to tackling issues of overcrowding,” Hassan Allam told OBG.

Residential & Social Developments

The sector’s growth has also been driven by the construction of new cities and residential areas to accommodate the growing population. In late 2019 Hala El Saeed, minister of planning, monitoring and administrative reform, announced that since 2014 the government had invested LE175bn ($10.8bn) in the development of new smart, environmentally friendly cities, which are expected to accommodate up to 26m people once they are completed. In 2018/19 the New Urban Communities Authority (NUCA), the government entity responsible for overseeing the development of new urban centres, invested LE55bn ($3.9bn) in such cities, up from LE32bn ($2bn) the previous year. In January 2020 NUCA announced that it planned to invest an additional LE44bn ($2.7bn) in roads and city projects in the first six months of the year.

In order to guarantee a high standard of living in the new urban areas, the government has been tasked with ensuring that adequate services such as hospitals and educational institutions are available. As a result, social infrastructure has become a major growth area in recent years. In 2019 Khaled Abdel Ghaffar, the minister of higher education and scientific research, announced that eight new international universities would be built in the New Administrative Capital by 2020. In September 2019 local media reported that two new smart universities had opened in the New Administrative Capital and New Cairo. That same month the government also approved a draft decision to construct an institution in the New Administrative Capital that would contain several branches of international universities. However, as of June 2020 no further announcements had been made about the progress of these plans.

New Administrative Capital

The development of the new capital city is one of the government’s priorities due to the vast availability of land and investment opportunities. Although the plans were delayed by the outbreak of Covid-19, in May 2020 progress resumed with new measures ensuring that the number of workers present on the site does not exceed 70% of normal capacity. Local media reported that month that the Ministry of Housing, Utilities and Urban Communities aims to deliver two residential districts by late 2021, while the city’s business district should be complete by early 2022. An additional six neighbourhoods are being developed by private firms and the military. Upon completion, the New Administrative Capital will contain more than 23,000 residential units, as well as an international airport, 35 sq km of public gardens and parks, and an office park.

Building Materials

The year 2019 saw a decline in the price of most building materials. This was largely attributed to measures taken by the government in October 2019 to cut the price of natural gas for cement, metallurgy and ceramics manufacturers, a move that helped to reduce production costs and increase the international competitiveness of Egyptian companies. Natural gas prices for cement producers fell from $8 per 1m British thermal units (btu) to $6 per 1m btu. For iron, steel, aluminium, copper, ceramic and porcelain manufacturers, gas prices decreased from $7 per 1m btu to $5.50 per 1m btu. As a result, the price of steel bars declined by 16.8% year-on-year (y-o-y) in December 2019 to LE10,400 ($641) per tonne, while Portland cement decreased by 5.8% to LE800 ($49.30) per tonne over the same period. Egypt had the lowest cement prices in Africa in 2019, at $4 per 50 kg.

Commodity prices across Egypt fell sharply as a result of the outbreak of Covid-19 in the first half of 2020, and the building materials market was no exception as construction activity slowed. In response, the government cut natural gas prices for cement manufacturers to $4.5 per 1m btu in March 2020. However, local media reported that sector players were unsure whether these measures would be enough to prevent significant losses. That month cement prices fell by 3% compared to February 2020. In April 2020 local sales of cement fell by 12.6% y-o-y. Although as of May 2020 construction has resumed on some projects, namely the New Administrative Capital, the full extent of the pandemic’s effects on the building materials market remains to be seen.

Regulations

In recent years the government has undertaken a number of reforms to legalise the status of properties that do not meet structural integrity requirements and reduce the number of informal settlements. In July 2019 Prime Minister Mostafa Madbouly issued executive regulations for the Construction Violations Reconciliation Law No. 17, which aim to settle building code violations and tackle the number of errant builders.

The regulations state that violations will be punished by a fine of between 5% and 100% of the value of the plot of land. These include a 5% fine if a building does not follow the architectural plan; a 20% fine if it does not conform to the construction plan; a 25% fine if neither the construction nor the architectural plans are followed, but the building abides by regulations limiting plot size and the number of storeys; a 50% fine if the property has been built without a permit; and a 100% fine if the property violates the building code, is constructed without a permit and is built in an unsuitable area. Fees for requesting settlement are set at LE5000 ($308), and settlement fines can be paid in quarterly instalments over a maximum of three years after paying a minimum of 25% of the fine upfront. Plots of land are valued by a committee comprising accredited real estate specialists from the Financial Regulatory Authority and a representative from the Ministry of Finance. In January that year President El Sisi ratified Law No. 1 of 2020, which extended the reconciliation period from six months to up to one year.

Outlook

With strong growth in 2018/19 and a number of large-scale projects under way, the construction sector began 2020 in a good position. Although the outbreak of Covid-19 has affected the timeline of upcoming developments, as of May 2020 progress had restarted on a number of projects.

Given that the country has a large population, at around 100m as of early 2020, Egypt already has a considerable latent demand for residential and social infrastructure. At the same time, investment in infrastructure projects has continued to rise, with the private sector playing an increasingly key role.

As government funds are likely to be redirected to providing relief during the pandemic, it will be even more important for the government to attract private and foreign investment. This will be a crucial factor in ensuring that the sector can recover once lockdown measures are lifted and projects resume.

With more than $120bn worth of planned projects in progress as of early 2020, the long-term outlook looks promising and sector players are confident that there are a number of potential growth areas.

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The Report: Egypt 2020

Construction & Real Estate chapter from The Report: Egypt 2020

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