Egyptian PPP outlook positive despite of financing challenges

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Public Private Partnerships (PPP) in Egypt could face financing challenges with some international financial institutions reluctant to receive payments in the local currency, a number of industry sources told mergermarket. Nevertheless, the outlook for PPPs in Egypt remains relatively positive, according to industry players.

In February, the Egyptian government extended deadlines for PPP projects pursuant to domestic and international investors’ requests, to enable investors to keep up with changes in the country. Investors need to update their studies to cope with new political developments as well as managing fluctuations in foreign exchange rates, Atter Hannoura, director of Public Private Partnership Central Unit said.

“We have been trying to avoid losing investors to ensure we have enough competition,” he said.

Currency issue

In June, the country’s foreign exchange rate started to stabilise, especially against the USD. However, foreign banks, which have shown “great interest” in getting involved in PPPs in Egypt, remain keen to receive guarantees against exchange rate fluctuations. The request has been rejected by the Egyptian government, Hannoura said.

“Foreign financial institutions thought we have financing issues, and wanted to better conditions for themselves,” he said. Currently, there are around 1trn Egyptian pounds (USD 169.4bn) in deposits within Egyptian banks that need to be used, Hannoura said.

Although some international financial institutions have issues mitigating local currency fluctuations, the appetite for PPPs remains, even in the current challenging situation, said Michael Lacey, managing partner at legal firm SNR Denton. The firm is advising the Egyptian government on an Alexandria wastewater treatment project that is currently on hold.

“I think when the projects start rolling out and an elected government that reflects the will of the people is behind such PPP programmes, people will find a way to make money out of this,” Lacey added.

Western vs Asian finance

The European Investment Bank (EIB) has EUR 7bn in lending facilities for the MENA region, of which 50% will be allocated to the private sector, according to a source at EIB. The mitigation of local currency is, however, an obstacle to financing any PPP project in Egypt, the source said, adding that it “cannot take a 15-year risk at a local currency,” the source said.

The Egyptian government should use a mix of local and international currencies, according to Martin Amison, partner at the UK-based law firm Trowers & Hamlins, which advises the Egyptian government on a number of PPP projects. He said he would be “surprised” to see all PPP schemes financed in Egyptian pounds. Most countries doing PPPs have to borrow from outside their borders, and weak currency issues have to be addressed, he said. The government should reconsider its currency position, at least for larger projects, he added.

“The Egyptian government should consider giving more currency guarantees for a while to attract investment in the short term, due to the “current financial situation of the country,” Ashraf Shoukri, ex-senior legal advisor to the Minister of Finance concurred. However, he also noted that currency risks are something investors have to deal with on mega projects.

As long as there are sufficient financial participants, the currency mitigation is not going to be a problem, Lacey added

Asian banks have also shown interest in Egypt. Exim Bank of Korea said it would give special interest rates for Korean companies participating in PPPs in Egypt to assist them in competing for projects, Hannoura said. Japan Bank for International Cooperation (JBIC) offered similar conditions, though both lenders said they would limit financing for machinery bought in their own territories, according to Hannoura.

Political risk guarantees

Another issue raised by PPP investors as well as financiers after the recent political unrest is a demand for political risk guarantees. Once again, this request was rejected by the Egyptian government.

“The World Bank, MEGA, the European Investment Bank and the IFC all approached us to give these guarantees,” Hannoura said. “If we do this, then we acknowledge that the government cannot fulfill commitments, which is not true.”

The issue is irrelevant at the moment given that there would be not be any payments before at least four years from now, he said, as that is when the government would typically start repaying PPP investors.

The Ministry of Finance provides sovereign guarantees for payments, which is enough for investors, Shoukri said, even in times of turmoil. Shoukri, who helped draft the PPP law in Egypt, noted that Egyptian PPP contracts include guarantees to protect investors against changes in the law.

Positive outlook for PPPs

In August 2011, the PPP unit started to receive approaches from Egyptian banks like Banque Misr and the National Bank of Egypt, Commercial International Bank (CIB), HSBC, Alexandria Sanpaolo, and NSGB. Banks said they were ready to finance the PPPs and that they no longer required political risk guarantees, according to Hannoura.

The government thus decided to go ahead with PPP programmes, starting with the Alexandria hospitals project, proof that PPPs are not facing any financing problems, Hannoura said.

In 18 October 2011, the government received two bids from different consortia, including Siemens and OCI, for a 20-year contract of two university hospitals in Alexandria, according to a previous report.

The PPP unit is now studying the bankability of some pipeline projects, including the Abu Rawash Wastewater Treatment Plant, pursuant to new developments in the country, Hannoura noted.

Banque du Caire (BDC), the Egyptian state-owned bank, still has an appetite for financing PPPs in Egypt, depending on the nature of each project, according to a source at the bank. Like all state-owned banks, BDC has to support national projects like PPPs, the source said.

InfraMed, an infrastructure fund co-founded by EFG Hermes, has recently approached the PPP unit for a list of projects and prequalified investors so they can approach them to offer finance, he added. InfraMed provides both equity and debt finance, Hannoura said.

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