In one of the more unexpected twists of the Egyptian migration to a fairer economy, collaboration of commercial and state interests in public-private partnerships (PPPs) could resurface before the end of this year to develop crucial and sorely lacking infrastructure.
“If everything goes as we are planning, we will be tendering out one to two projects by the end of this year and another two to three projects in the first and second quarters of next year,” says Atter Hannoura, the director of Egypt’s PPP Central Unit at the Ministry of Finance.
Even though it was maligned before the revolution as a lackey of the old regime, the unit has been preparing a portfolio of new projects while the country rethought its politics. Hannoura would not put a number to the cumulative value of projects in the PPP pipeline because most are at the stage where pre-feasibility studies have yet to commence.
However, two projects are already further along in preparations: a $500 million wastewater treatment plant that will process 1.2 million cubic meters per day (cbm/d), and its 37-kilometer access road with two Nile crossings, which will cost around $400 million.
The PPP pipeline
This is quite a step up from Egypt’s first PPP project, a 250 cbm/d wastewater plant of worth EGP 800 million ($132.5 million) capital expenditure and EGP 2.6 billion ($430.7 million) transaction value, which the unit had tendered successfully shortly before the 2011 uprising. In the longer outlook of a few years, the prospects for Egyptian infrastructure PPPs could be much larger still, Hannoura enthuses, “The infrastructure gap in Egypt is big and I believe that no less than 30 to 40 percent of infrastructure projects could be tendered out to PPPs with combined values of over $100 billion in the next five or six years.”
This outlook is supported by Abraham Akkawi, partner and head of infrastructure and PPP advisory services in the Middle East and North Africa at global consultancy Ernst & Young. “I am optimistic. PPPs in Egypt will come back in six months if there is no move to the extreme right or left [in the political power],” he tells Executive.
Economic and social infrastructure developments rank at the top of Egypt’s investment needs today and have since long before the Tahrir uprising for democracy. The World Bank’s International Finance Corporation and other multilateral development banks (MDBs) see PPPs as the golden road to match development needs and investor supply in emerging countries. When the Egyptian government under Hosni Mubarak started the PPP Central Unit in June 2006 and the regime-aligned parliament adopted a PPP law in 2009, the initiative was praised as pioneering example for the Middle East by MDBs and international providers of consulting services, which, coincidentally, provide advisories required for structuring a PPP project.
However, the first project timelines which the PPP Central Unit internationally advertised with deliveries for 2009 to 2012 proved overambitious, as the global financial crisis cast its dark shadows over Egypt and all investment-seeking emerging markets. With the spread of the ‘Arab Spring’ to Cairo at the end of January 2011, many thought that the uncertainty in the political system would block Egypt’s ability to attract private investors to the complex, long-term deals that are the essence of PPPs. Whether structured as a concession for reaping operational revenues from end users or a contract where the government is the off-taker and paying partner of fees to the operator of the PPP project, PPPs must be designed for duration and contractual reliability.
Surviving the spring
As Hannoura admits, the Arab Spring “was winter for us”, but he emphasizes in the same breath that the bidders in maturing or early-stage tenders last year said they were committing themselves in up to 95 percent of the projects and only asked the unit “to extend deadlines.”
The four projects worked on by the unit at the time comprised two early-phase projects and two, more mature, hospital PPP projects with capital expenditures of up to EGP 1.3 billion ($215 million) and transaction values of up to EGP 3.1 billion ($515.5 million) each.
Not extending the deadlines would have been bad business for the Egyptian state as bidders would either have pulled out of the process or added massive risk premiums. “In this case we will be receiving costly bids from which we will suffer for the next 20 or 25 years of the concession period. [Thus] when the bidders asked for a three-month extension, we gave them six months extension,” Hannoura says; positive responses from four bidding consortia allowed the hospital tenders to be closed this spring.
The unit, however, had to cope with three needs: it had to keep alive the few PPP projects that were in various stages of preparation or tendering, it had to demonstrate to banks and bidders that Egypt was still a “mega market” for PPPs, and it had to convince political stakeholders in Egypt that PPP was the answer to their problems.
Success in closing the hospital tenders was good proof of life and sent the message of the PPP process’ survival straight to the private sector, but the more serious hurdles had to be taken on the political and administrative sides.
According to Hannoura, the previous way of handling PPPs was to prepare everything centrally and just hand the final documents for signature to the involved line ministries. The method was flawed by not engaging the ministries — which had to manage the projects under their authority — to feel ownership or perhaps even understand the projects.
The second big hurdle was Egypt’s parliament. The PPP law had been passed against the votes of the then minority opposition and their response was to critique the law sharply. The minority of 2009 is now the parliamentary majority of 2012. “They had been defeated on this law, they were very much against the law and said publicly that this was one of the laws that had been created to serve the interests of businessmen,” Hannoura says.
Countering that allegation by pointing out that the PPP law had to be transparent and up to international standards would not be enough to sway the Islamic parties. However, the chief advocate of PPP in Egypt launched a charm offensive by telling the new political majority that he was in favor of amending the PPP law. This offer led to a discussion on the concept’s merits with the concerned parliamentarians. Discussions on amendments to the law are a work in progress but in Hannoura’s opinion it is already a success: “The party issued a statement that the PPP law would remain in force with some minor amendments,” he says. “In my opinion, this was a 180-degree change and it was a success.”
As he adds that public-private partnerships are in full concert with an Islamic economy, he radiates the hands-on confidence of someone who is convinced of what he does. But this does not mean his job is a sinecure. The PPP Central Unit is “very short on cash” he declares and could urgently use between $8 million to $9 million as it is working to get its projects ready for tendering. This money would help fund advanced capacity building at the Central PPP Unit and its satellite units at line ministries ($1.5 million to $2 million) and to run an awareness campaign ($1 million). But the biggest chunk of cash on Hannoura’s wish list is for $5 million to $6 million to pay “transaction advisors”. Presumably it will be difficult to ready projects for tendering on credit.
Having funds for public information would also befit the unit’s website, which is still frozen with its most recent news as of the end of last month dating from May 25 — but alas, 2010, and opening with “President Mohamed Hosni…” Yet weightier concerns arise from the question if large-ticket PPPs will really give Egypt all they are hoped to deliver.
Building for the future
While it is globally undisputed and well proven that infrastructure is a crucial accelerator of economic growth and that Egypt has huge needs for the roads, railroads, recycling plants, ports, hospitals, schools and universities which Hannoura has on his list of projects to tender as PPPs, “We had a lot of mega projects and we learned nothing from them,” says Hisham el-Agamy, an executive director at the Swiss management school, IMD, and an Egyptian expatriate. He acknowledges the need for PPPs but in his view, something else is needed much more.
“What is really important for me as the son of a farmer coming from a small village is that we need jobs, real jobs,” Agamy says. “We have to understand what it means to create [small and medium-sized enterprises] and how to create the right atmosphere and dynamic for SMEs to grow and work on added-value products, not just commodities and low-cost products. Real jobs can only be created through SMEs and we have to be serious about that.”