$230 billion gap in infrastructure financing: What Egypt could do to fill the void in the next 20 years

During a roundtable meeting at the World Economic Forum meeting in Davos late January, Minister of Investment and International Cooperation Sahar Nasr said that Egypt has leaped greatly in infrastructure projects and legislative reforms. However, a recent World Bank report claims the opposite, stating that the country is expected to suffer a financing gap in infrastructure projects worth $230 billion in the next 20 years.

The report, entitled “Egypt: Enabling private investment and commercial financing in infrastructure,” adds that Egypt could provide up to $445 billion in financing but first needs $675 billion to meet market needs; thus, creating the gap. Sectorial investment gaps reported included $180 billion in transport, over $45 billion in water and between $11 billion and $16 billion in oil and gas, accounting for the Zohr gas field alone.

Current financial sources
Most state institutions depend on self-financing or other state subsidies to finance their projects, including the New Urban Communities Authority (NUCA) – a subsidiary of the Ministry of Housing, Utilities and Urban Communities.

“All infrastructure projects carried out by the NUCA are self-financed; in some cases, we may resort to bank loans to save up on a certain project budget,” vice chairman of the NUCA’s Planning and Projects Department Ragaa Fouad tells Business Forward.

Fouad confirms that the authority covers construction costs from revenues generated from its real estate and infrastructure projects.

The Egyptian government has financed most of its infrastructure projects through government securities and bank loans guaranteed by the Ministry of Finance, including tranches from local banks who contributed a total of $200 million to each project, according to the World Bank report.

However, only a few state institutions are considered credit-worthy by banks, it adds. Local banks can provide foreign currency loans to projects that generate foreign exchange revenues, which is not the case for projects that provide domestic services.

The report adds that some potential financing sources are not being fully utilized, such as Islamic financing and non-bank financial assets. The latter could be pension funds or insurances, which are mostly invested in government securities, solidified in treasury bills and bonds.

Other potential sources for financing are uncommon in Egypt, namely project bonds, mezzanine debt, asset securitization, swaps and hedging.

Some potential financing sources are not being fully utilized

Setbacks in financing infrastructure projects
Although infrastructure projects mainly depend on government financing which in return relies on securities, the report mentions that Egypt’s securities markets are underdeveloped, equivalent to 30 percent of the GDP, ranking lower than other Middle East economies.

Among other challenges that the World Bank outlines is that the decision-making process for publicly financed projects is not integrated with the investment decisions made to pursue public-private projects (PPP) and that there is a tendency to overinvest in new projects amid a separation carried out between capital and recurrent expenditure decisions.

It adds that there is a lack of clarity to which PPP projects are suitable for private sector contribution, including desalination plants, airports and roads, which have been mainly led by the public sector.

The World Bank further suggests that the private sector should have access to data and information compiled about government subsidiaries in each project.

The energy sector is among the successful sectors implementing PPPs

Steps to boosting finance
There are a number of steps that the Ministry of Finance could follow to facilitate and increase financing opportunities to infrastructure projects, according to the report, such as supporting Islamic financing to infrastructure projects by finalizing regulations for corporate and government Sukuk instruments.

The World Bank also suggests that infrastructure financing could be increased by improving funding streams which involves shifting from reliance on tax payers to a reliance on user fees. PPPs are a part of this shift, if implemented in a manner that guarantees efficient gains.

Managing director at Multiples Group for Private Equity and Investment Banking Omar El-Shenety suggests to Business Forward that the government and state institutions should rely on proper pricing for different services. This should come in parallel to managing each sector’s consumption when applying fiscal policy reforms that encourage sustainable consumption in infrastructure projects, which in return will ensure proper finance management.

“I believe experiences of other developing countries suggest that PPPs, build-own-operate (BOO) and build-own-operate-transfer (BOOT) models are more sustainable and can really boost infrastructure areas, such as utilities and transportation,” El-Shenety explains.

“Local banks have the capacity and the liquidity to support PPP-investments, especially if the private sector is involved and more specifically if international foreign investors are involved,” he says.

According to insights provided to Business Forward by the European Investment Bank (EIB), private finance is usually involved in PPPs which is considered a good solution; however, it bears significant risks and management responsibilities.

The energy sector is among the successful sectors implementing PPPs in terms of investment needs and available structures. “Egypt deploys a variety of frameworks for energy PPPs, including competitive auctions, feed-in tariff schemes, bilaterally negotiated transactions and more recently a nascent regulation for private-to-private independent power producers,” according to the EIB. These structures opened the door for private investors to engage in energy sector finance.

The EIB has managed to secure EUR1.25 million through its MED 5P program to fund transaction advisory services to Egypt’s Ministry of Trade and Industry and the PPP Central Unit in the Ministry of Finance for structuring and procuring the Safaga Industrial Port in the Red Sea, for instance.

The World Bank report suggests that the Ministry of Finance should amend the PPP law to ensure that conflict resolution, value of money, fiscal affordability and risk management are being undertaken when implementing infrastructure projects.

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