Tuesday,17 July, 2018
Current issue | Issue 1141, 28 March - 3 April 2013
Tuesday,17 July, 2018
Issue 1141, 28 March - 3 April 2013

Ahram Weekly

Dreaming big?

The government is partnering with the private sector in order to commission much-needed projects, writes Niveen Wahish

Electricity Station
Electricity Station
Al-Ahram Weekly

Public Private Partnerships (PPP) is the new government buzzword these days, one of the schemes that the government plans to use in order to build much-needed infrastructure projects in Egypt.
Plans are already afoot to put up for tender between eight and 10 infrastructure projects with a total value of more than LE20 billion. The projects include everything from ports to Nile buses, wastewater treatment plants, hospitals, garbage recycling plants and sports stadiums.
The need to partner with the private sector in order to build such projects comes at a time when the government budget is already strained to meet its obligations, and Minister of Planning and International Cooperation Ashraf Al-Arabi said this week that the country’s budget deficit could reach LE185 billion by the end of the current fiscal year.
Al-Arabi was speaking at the two-day Second Annual PPP Investment Egypt Summit held in Cairo this week. The summit provided a platform for the government to meet with potential investors to discuss various aspects of projected PPP projects, including the legislative framework, financing and the potential projects themselves.
The minister said that the projects were an integral part of the government’s economic development plan, with estimates indicating three per cent growth in the current fiscal year, up from two per cent last year.
Al-Arabi projected a four per cent growth rate in 2013/14 and that to achieve these figures LE291 billion in new investments was needed.
The advantage of PPP is that projects can be built using private-sector investment. In a PPP project, such investment is used to finance the construction of the project, with the government covering payment for its services.
The scheme spares the government having to advance the huge sums needed for infrastructure projects. However, while in normal circumstances such projects would be considered attractive to investors, the current political and economic situation in Egypt has cast shadows over the investments.
According to Akihiro Yoshida, who oversees the energy infrastructure projects of a major Japanese corporation, Egypt is a promising market “when it is ready”. But that readiness would depend on how the situation develops in the country, he said, notably with regard to there being a clear roadmap for reforming the economy.
Until that happens, he said, the government was simply “dreaming big”.
Others are worried about other issues. Soung Eun Kim, a counselor at the embassy of the Republic of Korea in Cairo, said that Korean investors were not worried about issues such as currency fluctuations or political instability. But they did care about government guarantees of their profits.
Atter Hannoura, director of the Public Private Partnership Unit at the Ministry of Finance, told Al-Ahram Weekly that the government would guarantee payment for the services offered by the projects.
He explained that in most infrastructure projects such as wastewater treatment plants or power stations, the government guaranteed the purchase of the plants’ total production and there was no risk of a lack of demand.
In other projects, such as ports, the government did not bear the demand risk, he said, but investor revenues would come from operating the project.
Hannoura said that the subsidised pricing of such basic services should not be an issue for investors. “These services are already costing the government far larger sums than what it is making consumers pay,” he said, explaining that when the private sector came in, it would receive the sum agreed upon in the contract and the government would cover any subsidies.
The government would also gain from the greater efficiency of private-sector construction and management.
Hannoura said that in the past there had been problems with some projects set up under the PPP system, though these had affected other forms of PPP project, such as Build-Operate-Transfer (BOT) projects.
Such problems had mainly been due to faulty contracts, he said. Under new legislation issued in 2010, there was a balance between the public and the private interest and there were the necessary guarantees given by both parties to ensure the success of the projects.
Three projects have already been signed up for within the framework of the new law, he said.
Yet, for some these guarantees do not appear to be enough, and participants at this week’s Summit said that they were looking for stronger guarantees, especially in the light of currency fluctuations and political instability. Some wanted the government to get the guarantee of international financial institutions.
Muneer Ferozie, International Finance Corporation’s regional head of PPP for the Middle East, North Africa and Pakistan, told the Weekly that based on the PPP projects that Egypt had already signed up for the country’s track record was good.
However, conditions had recently changed, he said, and that in the light of the current political uncertainty investors might opt to focus on smaller projects where existing government guarantees were sufficient.
He acknowledged that procuring extra guarantees from international financial institutions would mean greater costs for the government, but he said that there was a possibility that the bigger projects would need the government to acquire these guarantees if it wanted to attract investors.
“It adds to the costs, but the costs are well worth it because they will attract investors and lenders,” he said. The advantage of international financial institutions guaranteeing the projects was that the cost of these would be much less than the market price, and the market might not cover this kind of risk in the first place.
However, Hannoura said that the guarantees could not only mean additional costs but also additional constraints. “If I get a guarantee now from international financial institutions, I will not be able to do without it later because investors will have got used to it. But the projects are long term. Even if I have to postpone the projects and not put this new layer on them, I am still better off.”
He explained that if the government chose to provide the guarantees that were being asked for, it would find itself paying higher prices five years later when the reason the guarantees were asked for would have disappeared.
Besides, he said, the government did not want to place itself at the mercy of such institutions. “If for any reason they refuse to guarantee the projects after investors have got used to their doing so, then we will have problems,” he added.
Hannoura was optimistic that investors would find the projects offered by the government attractive given Egypt’s potential in terms of its consumer base and the huge need for infrastructure projects.
Moreover, investor activity in Egypt would position them to acquire investments in neighbouring Libya and Sudan, where hundreds of infrastructure projects are waiting to be commissioned.
Hannoura said that Egypt’s advantage was that it was only a short distance away from such countries and that it was the most stable country in the region despite the present instability. Egypt was where investors would hire the necessary labour, technicians and consultants and where they would look for raw materials.
“After all, our region is one of the only ones in the world where there is any business at the moment. The rest of the world is affected by economic crisis or is in a state of saturation,” he said.

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