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raiL
energy
forging new Links Investment in Egypt’s rail infrastructure is critical as the country rebuilds itself
Powering egypt’s future Examining the importance of Egypt’s energy sector as it moves forward
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eXcLUSiVe interVieW
man of SteeL Ahmed Abou Hashima, chairman and CEO, outlines his ambitions for Egyptian Steel
PLUS anaLySing the renaiSSance of PPP in egyPt
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EGYPT IS BACK gypt’s infrastructure investment plans continue to gather pace as the North African country shakes off the cloud of uncertainty that has hindered it over the last few years. With President Sisi having backed ambitious plans for the development of the country’s creaking infrastructure, the Egyptian government has spent a considerable amount of time courting foreign investment to come back to the shores of the Nile. This Egypt Infrastructure Report 2016 report aims to outline the challenges and opportunities facing the Land of the Pharaohs, with insight from some of the most authoritative voices in the region and industry. What has been particularly interesting to see is the optimism around Egypt, tempered with an acceptance that there remain a number of obstacles to overcome. Given the expertise available, I’m confident that Egypt’s infrastructure woes will soon be resolved.
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DOMINIC DE SOUSA (1959-2015) PRINTED BY pRINTwELL pRINTING pRESS LLC © Copyright 2016 CpI. All rights reserved while the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.
Gavin Davids Editor Infrastructure Middle East gavin.davids@cpimediagroup.com
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Egypt Infrastructure Report 2016
INFRASTRUCTURE MIDDLE EAST 1
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AnAlysis
pRIvATE-pUbLIC pARTNERShIpS
A RENAISSANCE FoR EgypTIAN ppp
Tim Armsby, partner at Eversheds International, asks whether the resurgence in PPP projects in Egypt is part of a wider shift in attitudes gypt was one of the first countries in the Middle East to seriously adopt PPP as an alternative procurement model for projects outside the energy sector. It established a PPP Central Unit (PPPCU) with specialist expertise within the Ministry of Finance in 2006 and launched a significant pipeline of projects shortly thereafter. The PPPCU was the beneficiary of a significant amount of training and development from donor organisations, and the International Finance Corporation (IFC) was appointed to act as lead transaction advisor on a number of projects. In 2010, a PPP Law was issued which provides a clear legal framework for PPP procurement.
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The combination of a clear pipeline, an experienced procurement team and credible partners attracted significant interest from both Egyptian and foreign developers and investors, but since the launch of the programme only one project has successfully reached financial close. During my time in Egypt, I worked on every PPP launched by PPPCU, including three concurrent mandates advising PPPCU on projects in the wastewater and healthcare sectors. Eversheds has recently been appointed in a consortium with Ernst & Young and WSP to advise the government on a new project: the Nile River Bus PPP. The first PPP to be launched in Egypt was the Egypt Schools PPP in 2007. This was an ambitious project for the development of 300 schools across the country. A key aspect of Egyptian PPPs Egypt Infrastructure Report 2016
is that payments are in local currency. As such, this project required Egyptian banks to lead on the funding of the project. It is arguable that the project was launched to market before the banks were fully ready to adopt the necessary financing structures required for such projects. For example, at the time of launch, the tenor of EGP denominated loans would not normally exceed seven years, which contributed to some delays in the procurement. A preferred bidder was eventually appointed, but the global financial crisis contributed to a key shareholder in the consortium commencing insolvency proceedings and the project was suspended. The suspension of the schools project was a significant setback for the programme, but Egypt was fortunate that Egyptian banks were not affected INFRASTRUCTURE MIDDLE EAST 3
AnAlysis
by the GFC and there was significant liquidity in the banking system. The next project to be launched, New Cairo Wastewater Treatment Plant, took a much simpler form and attracted significant interest from bidders. This project required the private sector to design, build, finance and operate a green-field wastewater treatment plant with a capex of $450 million. A consortium of Orascom Construction Industries and Aqualia was nominated the preferred bidder, and the project achieved financial close in December 2009. This was a landmark deal for Egypt, coming before issuance of the PPP Law and representing a first for Egyptian pound project financings in terms of size and tenor – setting a new benchmark of 15 years. On the back of this project, a number of new PPPs were launched to the market, including three projects on which I advised the government; 6th of October Wastewater Treatment Plant, Abu Rawash Wastewater Treatment Plant and New Alexandria University Hospitals Projects. The first transport project, Rod El Farag Axis Road, was also launched to the market, and a number of other projects were also in early development. In parallel, a PPP law was issued in 2010, with the executive regulations following in early 2011. The PPP law was widely lauded for being an extremely well drafted and comprehensive piece of legislation that established a strong framework for PPP procurement. This really was a high point for Egyptian PPPs, but as is now well documented, political events went on to stall the programme, as the Arab Spring swept east from Tunisia and entered Egypt. The Egyptian revolution caused most projects under procurement (including PPPs) to be suspended and projects under development faced force majeure issues. However, against the odds, a consortium comprising Bareeq Capital, Detac, G4S 4 INFRASTRUCTURE MIDDLE EAST
“A significant challenge to any financing at the moment is the low levels of foreign exchange in Egypt which have persisted since the revolution (a position aggravated by reduced tourism, shipping through the Suez Canal and repatriation of funds, as well as lower oil prices)” TIM ARMSby, pARTNER, EvERShEDS INTERNATIoNAL and Siemens was appointed the preferred bidder for the New Alexandria University Hospitals PPP and a contract was signed in April 2012, although this project has not yet achieved financial close. It will be evident from history that there is much to be positive about in terms of the Egyptian PPP programme. The country has an excellent PPP law providing a clear Egypt Infrastructure Report 2016
legislative basis for PPPs, it has a centre of expertise within the Ministry of Finance to manage procurements, and it has a clear business case for infrastructure projects and well developed pipeline, a large population and healthy banking system. What has prevented the successful closure of projects to date has largely been external events or ones outside the control of the central government. It was on this basis that PPPCU re-launched Abu Rawash Wastewater Treatment in 2013. The contract for this project, worth $2.69 billion, was awarded to a consortium led by Spanish water management firm FCC Aqualia in September 2015, and the parties are now working towards financial close. A significant challenge to any financing at the moment is the low level of foreign exchange in Egypt which has persisted since the revolution (a position aggravated by reduced tourism, shipping through the Suez Canal and repatriation of funds, as well as lower oil prices). This makes it difficult to obtain hard currency in the local market so as to be able to purchase equipment offshore. PPPCU has worked with the winning consortium to reduce the foreign currency component of its bid by 50%, to $110 million, and it was announced last week that the support of the Central Bank of Egypt has been obtained to ensure that the requisite foreign currency is available in line with the construction programme. On this basis, work is expected to start shortly based on a government-supported bridging loan, with full financial close by a syndicate of lenders comprising DFIs and local banks expected to occur within nine months. This will send an extremely positive message to the market. PPPCU is also progressing discussions with the successful consortium for the New Alexandria University Hospitals PPP, which was subject to Force Majeure issues preventing progression to
AnAlysis
financial close. These claims are expected to be resolved shortly, which will provide a strong precedent for future hospital projects in the pipeline. Beyond these two large capex projects, PPPCU has recently looked to launch a number of smaller PPPs to the market while the country’s economy recovers. These are expected to be accommodated primarily by the local market; some have independent revenue streams, and all are expected to be able to operate with minimal government support. Quick wins, to coin a phrase. One of these projects is the Nile River Bus scheme. This is a project that I am personally passionate about. As a past commuter in Cairo, I had to drive up and down the Corniche alongside the Nile most days to work. Whilst this has provided me with the skills necessary to drive on any road in the world, a reliable river bus network would have made my daily commute an entirely different experience. The aim of the project is to enable the private sector to implement a new mass transport scheme on the Nile in central Cairo. Around 30 terminals have been identified, some existing and some new,
and the private sector will develop these to implement a new service using a fleet of vessels which it will procure. The service is expected to complement existing modes of transport, provide new crossriver options and provide a modern and rapid north-south city transport route. The feasibility study for this project is close to completion and will be followed by a prequalification process for interested investors. Preparatory work is underway on a number of other projects, including in the ports, education, waste and healthcare sectors. With DFI support, the government is in the process of carrying out pre-feasibility studies and the IFC is to assist on some of the procurements. Speaking with Atter Hanoura, head of the PPPCU, at the Global Water Summit in Abu Dhabi, he was clear about the challenges and ready for the challenges it faces in the short term. Hanoura has been with the PPPCU since its early inception and is as knowledgeable as anyone can be on Egyptian PPPs. A key challenge to all projects seeking finance at the moment is the lack of hard currency. While this is expected to
improve in coming years, it is currently a major challenge to projects with a foreign component. Following the recent example of Abu Rawash, the PPPCU is ready to work with developers to meet these challenges and ensure that this revitalised and streamlined PPP programme will be a success. For example, this might include the possibility of allowing developers to bid on a foreign currency component as part of their proposal for a project. There is strong government support for PPPs, and a new National Infrastructure Plan under development expects 25% of projects to be procured as PPPs, which will create a long-term pipeline of projects that should prove attractive to Egyptian and foreign investors alike. This comes at a time when a revitalised programme has been launched in Kuwait, Dubai has issued a PPP law, and Oman and Qatar are in the process of developing PPP legislation and frameworks, the latter a scheme on which Eversheds, PwC and Mott MacDonald are advising. The coming years may see not just a renaissance for PPPs in Egypt, but a shift towards the use of PPPs in infrastructure development across the Middle East.
The Nile River Bus scheme will enable the private sector to implement a new mass transport scheme in central Cairo, with 30 terminals to be built along the river.
Egypt Infrastructure Report 2016
INFRASTRUCTURE MIDDLE EAST 5
INTERVIEW
IN pRoFILE
A SENSE oF STEEL
Ahmed Abou Hashima, chairman and CEO of Egyptian Steel, meets Anoop Menon for an in-depth chat about the Egyptian steel market and how his company is set for success as infrastructure development picks up pace How has Egyptian Steel evolved over the years? I established Egyptian Steel in 2010 with my partners, who are prominent businessmen from Kuwait and Qatar. We decided to operate in two parallel lines, acquiring already existing steel plants and revamping them, and building new steel plants. Egyptian Steel acquired the steel plant of National Port Said Steel (NPSS), and another steel plant in Alexandria which hadn’t been operational for more than 15 years, and transformed it into a state-of-the-art plant operating with the most advanced eco-friendly technologies in the steel industry. We also have two mega projects, which are our new steel plants that are currently under construction in Beni Sueif and Al Ain Al Sokhna. These are massive plants, each with a production capacity of 830,000 tonnes per year. The Beni Sueif plant is scheduled to commence production in June 2016, and Al Ain Al Sokhna will follow in 2017. After all four plants reach full capacity, Egyptian Steel will acquire approximately 20% of the steel market in Egypt. We have 6 INFRASTRUCTURE MIDDLE EAST
“Steel is a strategic industry for any nation, and governments should take measures to protect the local manufacturers. The Egyptian government has previously set some import tariffs in an attempt to protect the national industry, but honestly it did not make much of a difference, as the protection fee was a mere 6.9%” Egypt Infrastructure Report 2016
evolved and grown into a force to reckon with in the Egyptian market in a mere six years, although all our competitors have been in the market for decades. I attribute this success to the dedication and hard work of every single person in the group, starting from the factory workers all the way up to shareholders, partners and myself. We have a vision, and this vision is conveyed to everyone in the group, each playing his role to contribute to the growth and development of our group. What is your take on current market demand for steel products in Egypt? There’s a very high demand in Egypt for steel products, especially with the increasing number of construction projects and infrastructure throughout the country. The demand in fact has always been high for steel; our population increases by 2.5 million per year. We have a shortage of eight million housing units, 45,000 schools and infrastructure. We are rebuilding our country and steel is essential. Therefore, I expect the demand to stay high and in fact increase in the upcoming phase.
INTERVIEW
Egypt Infrastructure Report 2016
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INTERVIEW
Once Egyptian Steel’s new mega plants are operational, it will be the sole manufacturer of green steel in the Middle East and Africa.
What are Egyptian Steel’s strengths as a steel products manufacturer? Are you worried about cheap imports? I’m proud to say that we have several points of strength at Egyptian Steel. First of all, when our two new mega projects are operational, we will be the sole manufacturer of green steel in the Middle East and Africa. Our new plants use the most advanced eco-friendly technologies, and they are massive steel plants, each with a production capacity of 830,000 tonnes a year. We are also very active with our CSR programmes. We are very involved 8 INFRASTRUCTURE MIDDLE EAST
with the community, and we act on lifting families off the poverty line. Steel is a strategic industry for any nation, and governments should take measures to protect the local manufacturers. The Egyptian government has previously set some import tariffs in an attempt to protect the national industry, but honestly it did not make much of a difference, as the protection fee was a mere 6.9%. Chinese rebar is subsidised for exporting by their government with 18%! Turkey, which is a main competitor, imposed 40% duties on Egypt Infrastructure Report 2016
Chinese steel. The solution is to have an import quota in Egypt, combined with a 20% duty on imported steel. That’s the way to protect this strategic national industry, which has 100 billion EGP of investments and employs around 80,000 workers. From your experience, what factors significantly affect profitability in your industry? Where do Egyptian Steel’s input costs stand at present, and how are you managing them? The raw materials, energy and the dollar exchange rate are the most
INTERVIEW
“There’s a lot of construction and infrastructure projects happening in Egypt, and we will continue to support and provide as much as we can for Egypt. After the two new mega projects are operational, our production will exceed two million tonnes a year” crucial factors that impact our profitability. But I always say that the biggest investment I have ever made was my investment in people. The people at Egyptian Steel are very highly qualified. They are capable of handling any situation, changes and even crisis. That’s the reason I always refer to them as the dream team. Will the recent gas find change the energy scenario in Egypt? It will have a very positive impact. First of all, Egypt will be selfsufficient in regards to the needed
energy, which will decrease the amount of dollars spent to import gas. More industrial projects will have the required energy to operate, which will lead to more exports, creating less stress on the Egyptian pound, and it will be able to face its devaluation in front of the US dollar, leading to an overall improvement of the economic environment. What is the breakdown of your sales between domestic market and exports? Currently, all our sales go to the local Egypt Infrastructure Report 2016
market. There’s a lot of construction and infrastructure projects happening in Egypt, and we will continue to support and provide as much as we can for Egypt. After the two new mega projects are operational, our production will exceed two million tonnes a year. It will depend on the local demand at that time, but we might dedicate 20% of the production capacity to exporting. What are your development plans for the future? How do you propose to fund them? INFRASTRUCTURE MIDDLE EAST 9
INTERVIEW
Our two new plants are the biggest out of all four owned and operated by Egyptian Steel Group. They are massive plants, each with a production capacity of 830,000 tonnes per year. They use the latest state-of-the-art eco-friendly technology and they will boost the group’s market share to almost 20-22% of the Egyptian steel production capacity. After these plants are operational, we are looking into expanding into the cement industry, and we are currently waiting for the licence for Egyptian Cement, the sister company of Egyptian Steel. My vision for Egyptian Steel Group is to be a one-stop shop for
“After these plants are operational, we are looking into expanding into the cement industry, and we are currently waiting for the licence for Egyptian Cement, the sister company of Egyptian Steel”
all building materials. We will also consider expanding into Africa, by replicating the plants in Egypt in an African country. Studies will be made to determine which African country has the best investment atmosphere, gas prices and skilled labour. As for the funding, we are always willing to negotiate with new investors. But we never had a problem in funding our projects; we’re a strong group with a solid reputation, local and foreign banks finance us, because we’re always prepared with thorough feasibility studies. Also, our old shareholders are always willing to invest more with us, as well as new shareholders.
Ahmed Abou Hashima says that plans are being drawn up to replicate the Egyptian Steel plants in another African country as part of an expansion strategy.
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Egypt Infrastructure Report 2016
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RAIL
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Egypt Infrastructure Report 2016
RAIL
EgypTIAN RAIL
FoRgINg LINkS
Investment in Egypt’s rail infrastructure is a critical component of drawing together a country that has repeatedly threatened to tear itself apart in recent years. Stephen White investigates how the situation is progressing
n overhaul and expansion of Egypt’s vast rail and metro network is being fasttracked to relieve pressure in the country’s cramped city centres, improve inter-city links and enhance freight movement. Modernisation is essential to improve efficiency and maintenance of the network, and the country is turning to both domestic and international investors to achieve its rail aspirations through a combination of direct contract tendering and public-private partnerships (PPPs). Minister for Transport Hany Dahy recently announced a list of projects in various transportation sectors for the coming 15 years, with investment worth $13.5 billion. Almost half of that money will need to be spent by the rail sector on two major areas, with the transport ministry
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Egypt Infrastructure Report 2016
planning three projects at a combined investment level of over $1 billion for freight development and a further $5 billion for high-speed rail lines. The Sisi government scored an early win with its rapid completion of the Suez Canal Zone, where it managed to cut the completion time by a number of years. In some ways, that success has raised expectations to unrealistic levels, especially as the benefits of the project are not yet perceived to be filtering back into the public’s pockets. A quarter of Egypt’s 80 million population lives in Cairo, and despite only 14% of them owning a vehicle, it remains a congested and difficult city to get around. Extension works on Cairo Metro Line 3 continue to crawl towards their 2022 completion. Once finished, this will open up an extra 17.7km of track and 15 stations with room for 1.5 million passengers. A JV comprising VINCI Construction Grands Projets, Bouygues Travaux INFRASTRUCTURE MIDDLE EAST 13
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Publics and Egypt’s Orascom Construction and Arabco Contractors was awarded a $1.24 billion contract to deliver the third phase (including the construction of a new rail tunnel beneath the Nile) of Line 3 in April. The project will create 5,000 jobs, according to Bouygues, and will involve more than 600 suppliers and subcontractors. Three further lines should be underway by its completion, including the $3.6 billion Line 4, which will add another 18km of track and eventually help take total capacity close to 5 million passengers per day. The Japan International Cooperation Agency (JICA) announced last month that it had raised the remaining $340 million required to complete funding for Phase 1 of the project. Arguably the most exciting initiative currently on the rail timetable is the planned high-speed network that would link the north and south of the country. Cutting travel times from Alexandria to Aswan to less than four hours, its construction could revolutionise travel across the country. Plans for a $10 billion IPO have yet to materialise into a proposal for the markets to evaluate, but an MoU was signed in March between Egyptian National Railways (ENR) and Spanish firm Talgo (for integrated mobile plant and high speed trains) suggests that progress is being made – albeit slowly. Critical updates to the signalling and communication are being rolled out at a much faster rate. French manufacturing company Alstom won a $115m contract from ENR last year to supply signalling equipment for the Beni Suef-Asyut line in Egypt. Alstom, which is also working with Thales on updating Cairo’s out-ofdate ticketing system, is providing a smartlock solution for the line, which is its new electronic interlocking system. 14 INFRASTRUCTURE MIDDLE EAST
the liberalisation of the Egyptian rail market will lead to increased competition and better performance.
ENR’s six-poiNt plaN to impRovE its NEtwoRk • Liberalisation of the market for railway transport services and increasing competition in the relevant market; • Increasing of the competitive power of the railway transport sector in relation to other modes of transport; • Predictability of the financial obligations of the government regarding the railway transport; • Significant enhancement of the operational performance (more efficient management and better work organisation) and financial indicators of railway companies; • Transport modernisation in accordance with market needs and the level of investment affordable by the government; • Stable and friendly legal and institutional framework to encourage private investment and PPPs in the railway transport sector
The smartlock solution would replace the existing electromechanical one. The company is also supplying trackside equipment and a telecommunication system and maintenance of the 240km railway line for five years. Likewise, Siemens has been awarded a contract by ENR to modernise 260km of railway network in Egypt with advanced technology for signalling, level crossings and communications. The upgrades, part of a national plan Egypt Infrastructure Report 2016
to modernise Egypt’s rail system, will increase safety and allow the railway’s maximum speed to be raised from 140km/h to 160km/h, boosting throughput of passenger trains and freight services. It may not cross the 200km/h barrier to be classed as highspeed, but it is rapid and typical of what is needed to make the network safer. The routes between Benha and Port Said to the northeast and Zagazig and Abu Kebir in the north
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of Cairo will have their mechanical interlocking systems replaced with modern, centrally controlled electronic systems from Siemens. New point mechanisms, level-crossing technology and communications infrastructure will also be implemented along the routes, which include approximately 20 stations. The contract will also include the equipping of the operations control centre in the city of Zagazig. The routes are expected
to be commissioned in 2020. “Broadly speaking, the project will modernise in order to boost the speed and safety of freight and passenger transport services,” Joerg Scheifler, senior EVP, Mobility, Siemens Middle East Egypt, tells Infrastructure ME. “It’s a perfect example of how we can use technology to upgrade mature infrastructure to modern standards of reliability, safety and operational efficiency.” Egypt Infrastructure Report 2016
Egypt’s first standard gauge railway opened in 1854; unsurprisingly, Scheifler describes the country as one of the most mature markets in the Middle East. “Siemens has decades of operational rail experience, meaning there is already a well-established, highly skilled pool of local talent specialising in the sector. It makes it much easier to transfer knowledge and skills in a country which has already developed an experienced workforce.” Scheifler describes Egypt as a great opportunity: a mature rail market with a large, well-established urban and inter-urban rail network which means “good potential” for upgrades, maintenance and spare-part supply. “Egypt is developing too; it’s a large country with an expanding population and urban connectivity is becoming increasingly important. A swift, reliable, modern and safe rail network is an important part of this development,” he remarks. “We’re talking about a national rail system which already accommodates around 500 million passengers and six million tonnes of freight a year, and this will increase. The planned rail expansion projects are therefore, of course, a good opportunity for our mobility business.” According to Scheifler, gaining indepth market and customer knowledge is one of the main challenges facing international companies as they look to get involved with rail infrastructure projects in Egypt. “It’s absolutely essential to understand, in a high level of detail, the requirements of the customer and the environment in which they are operating. We’ve been operating in Egypt for a very long time – we were working on rail projects in the 1970s, for example – so we are already integrated into the country’s infrastructure. Maintaining a INFRASTRUCTURE MIDDLE EAST 15
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continuous presence in Egypt has helped us to become a close, trusted advisor to our customers, and we have built our knowledge, our resources and our talents. We are well positioned, but this doesn’t happen overnight.” With the increase in investment and government spending, Egypt has an opportunity need to upgrade its rail systems – but is the planned increase in rail capacity feasible? “Absolutely, this planned capacity increase is feasible, and more than that – it’s essential. As I’ve said, the development of modern rail infrastructure is a key part of Egypt’s population and economic growth.”
“it’s a perfect example of how we can use technology to upgrade mature infrastructure to modern standards of reliability, safety and operational efficiency” JoERg SChEIFLER, SIEMENS MIDDLE EAST EgypT
makiNg thE mEtRo 2.0 More than 30 years after its first contract for the Greater Cairo Metro, Thales has signed new contracts to upgrade the fare collection system for Lines 1 and 2, as well as provide communications systems for the Al Thawra extension on Line 3 (Phase 3). Thales will deploy its TransCity fare collection solution, which uses its Web 2.0 technologies, on Lines 1 and 2, replacing the equipment installed in the 1980s. The new contracts entail delivery of 850 access gates, 100 vending terminals for ticket outlets and 75 portable ticket control terminals, as well as implementing new system architecture. The TransCity central system will supervise all data generated across the existing network. A consortium comprising Thales and Alstom is to implement fully integrated communication and supervision systems, for 15 new stations and an additional depot. thales will deliver 850 access gates, 100 vending terminals and 75 portable ticket control terminals.
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Egypt Infrastructure Report 2016
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ENERGY
EgyPTIAN ENERgy
PowERINg EgyPT’S FUTURE Stephen White looks at the importance of the Egyptian energy sector and the major projects shaping its future
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Egypt Infrastructure Report 2016
ENERGY
he shopping list of projects and initiatives that will power Egypt’s future may have passed over many palms since the turn of the decade, but there are signs that relative stability is leading to progress in the country. With a population of 84 million, which grows by almost 1 million per year, Egypt’s crackling power grid is desperately in need of upgrading. Power outages went from a daily inconvenience to a major political issue following the downfall of the Hosni Mubarak regime in 2011. Two years later, then President Mohammed Morsi blamed cuts to power on Mubarak supporters disrupting power lines. Providing a stable power supply remains high on the political agenda. Power demand in Egypt is dominated by domestic consumption. Egyptian homes take up 40% of total energy demand, while industrial use barely scratches a third (at 30%). As such, the power grid is feeding air conditioning, water heaters and washing machines, and like elsewhere in the region, demand is highest during the summer. Compared to its economic peers, the generation of 35,000MW from the power grid that was targeted by the government during peak usage in the summer of 2015 is still woefully inadequate for a country of its size at any time of the year. Saudi Arabia, for instance, has a population of 30 million and manages to push out 26,000MW. As well as being quite literally underpowered, the grid also struggles to maximise its capacity. Latest estimates suggest that the country’s power distribution losses are expected to increase from an estimated 20.4TWh in 2015 to 32.2TWh in 2025 (although as a percentage of total output, distribution
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Latest estimates suggest that Egypt’s power distribution losses are expected to increase from an estimated 20.4TWh in 2015 to 32.2TWh in 2025.
Egypt Infrastructure Report 2016
losses will remain largely stable, fluctuating between 11% and 12%). Progress by the oil & gas sector in finding new sources of gas is being seen – perhaps prematurely – as a potential boon to both the economy and the energy sector (gas contributes 84% of fuel needs). In many ways, the ministers and officials representing the government of President Sisi are facing the same dilemmas as those before them when it comes to meeting current demand: how to expand Egypt’s largely gas-fired capacity while reducing its reliance on importing a fuel that it could be – as recent discoveries of gas reserves suggest – exporting for valuable dollars. While the government and energy authorities have found themselves continuing plans laid out many years before, firms that prequalified for projects several years ago are finding themselves restarting the process all over again. However, with power so vital for political, economic and social reasons, there are increasingly strong signs that they are coming to fruition this time around. There has certainly been a rise in the number of planned projects in the last year, and as BMI notes in its most recent review of the country, this has coincided with a surge in investment pledges from international investors within the power sector. “While not all of the pledged investment will translate into projects due to a still uncertain political environment, the relative stability under President Sisi has created an upside to our long-term forecasts as economic momentum gathers pace,” says the analyst in its Egypt Power Report Q2 2016. “We forecast total electricity generation will grow 4.5% in 2016 as the government brings new gas and coal capacity online in an attempt to INFRASTRUCTURE MIDDLE EAST 19
ENERGY
Gas kEy To EGypTian EnErGy sEcuriTy According to GlobalData, the eastern Mediterranean will become a major centre of revenue for countries with access to the massive Zohr gas field – with Egypt set to benefit the most. Italian oil firm Eni announced in August last year that it had discovered a “super giant” natural gas field, the largest find in the Mediterranean Sea off Egypt. Over a kilometre and a half below ground level, the Zohr Field could hold as much as 850 billion sqm of gas or the equivalent of 5.5 billion barrels of oil. Zohr is the largest gas discovery ever made in Egypt or the Mediterranean Sea, and could become one of the world’s largest natural-gas finds. It is also expected to close Egypt’s energy gap and could lead it to being a net exporter of gas in the future. The energy sector has proven to be a robust contributor to the Egyptian economy throughout its troubled recent history, and remains pivotal to its development. The Zohr discovery, alongside incremental economic reforms, has helped bolster its standing in international money markets and its ability to attract development funding. Credit rating agency Moody’s investor service recently announced that it had improved its evaluation of the Egyptian economy from negative to B3 stable, a fact quoted by Minister of International Cooperation Sahar Nasr as her government signed two agreements and 10 declarations of intent last month, worth $348 million, with the French Development Agency and the French government.
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overcome chronic power shortages.” Egypt’s power generation and capacity is forecast to average 4.3% and 3.7% growth rates respectively over the next decade, according to BMI. The government is also prioritising power generation for its heavy industry this year, and Electricity Minister Mohamed Shaker has pledged an extra 2,500-3,500MW of power generation capacity by 2017. The last 12 months has seen a flurry of project awards and pipeline announcements, with 6,882MW of additional capacity added to the grid since the beginning of 2015. Siemens, which has been active in the country since 1859, signed contracts worth more than $9 billion in March 2015 for high-efficiency natural gasfired power plants and wind power installations that will boost Egypt’s power generation capacity by more than 50% compared to the currently installed base. The projects will add an additional 16.4GW to Egypt’s national grid to support the country’s rapid economic development and meet its growing population’s demand for power. “With these unprecedented contracts, Siemens and its partners are supporting Egypt’s economic development by using highly efficient natural gas and renewable technologies to create an affordable, reliable and sustainable energy mix for the country’s future,” says Joe Kaeser, president and CEO of Siemens AG. Together with local Egyptian partners Elsewedy Electric and Orascom Construction, Siemens will supply (on a turnkey basis) three natural gas-fired combined cycle power plants, each with a capacity of 4.8GW. Achieving a total combined capacity of 14.4GW, the three plants – Beni Suef, Burullus and New Capital – will be powered by eight Siemens H-class gas turbines. Egypt Infrastructure Report 2016
84%
ric ’s elec t t p y g E es from 84% of Around g capacity com aining m tin genera a s, with the re ly from g t s l natura oelec tric, mo d r d ll oil-fire 16% hy High Dam. A ted to an ve r the A sw ave been con their plant s h natural ga s a s run on imar y fuel pr
The first two of the 12.6m long and 5.5m wide SGT5-8000H turbines for Beni Suef shipped in February and will be installed this month. Siemens is responsible for providing engineering, procurement and construction services for the Beni Suef combined-cycle power plant. The power plant will be built in four modules, each of which will have two H-class gas turbines, two heat recovery steam generators, one steam turbine and three generators. “We expect the plant in Beni Suef to feed electricity into the Egyptian power grid as early as the winter of 2016/2017,” explains Siemens power and gas division CEO Willi Meixner. “Siemens is helping its Egyptian partner to build a
ENERGY
The last 12 months has seen a flurry of project awards and pipeline announcements.
A c rem Asw conv
powerful, reliable power supply system with proven power plant technology.” The plants will add power to the grid in stages. Plans call for an initial 4.4GW to go online before summer 2017 and the full 14.4GW to become available 38 months after the financing has closed and advance payments have been received. Once completed, the three power plants will be the largest in the world. Summer and the pressure it puts on the grid is fast approaching, and Kaeser outlines a plan to ease problems caused by the extra demand. “We have proposed a fast-track plan to provide 800MW of power generation capacity to deal with peak demand in
the summer of 2016,” he explains. “This plan consists of two main steps. Firstly, we will help refurbish the steam turbines at the Attaka thermal power plant, and Attaka and the combined cycle power plant at Kureimat will get upgrades enabling them to address demand peaks. Secondly, we have proposed the installation of distributed generation units to deliver additional power generation capacity on short notice close to locations where demand is the highest.” Desalination is becoming increasingly pivotal to ensuring potable water for domestic, industrial and tourism (which takes up 40% of demand) needs. The typically power-hungry technology has
been hamstrung by Egypt’s reliance on large-scale plants which have kept per unit costs above global averages. A research team at Egypt’s very own Alexandria University has developed a new desalination technology for the country that can produce potable water at reduced energy. Using a method called purge air pervaporation, it can, they claim, remove salt from water with minimal power usage. Under the process, the untreated water is first filtered through a membrane to remove larger particles. The filtered water is then vapourised under heat as the second step for purification. The vapour is finally condensed to produce pure
Egypt Infrastructure Report 2016
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ENERGY
water for drinking purposes. While the scheme remains in the early stage and a scaled roll-out is many years away, the government has continued to look at other technologies. Singaporebased Hyflux announced in March that it had secured a $500 million engineering, procurement and construction (EPC) contract for the Ain Sokhna Integrated Water and Power Project in Egypt. The project, which has daily production capacity of 150,000m3, will include an on-site 457MW combinedcycle gas turbine power facility, which will generate electricity for the desalination plant. Excess power will be dispatched to the grid and go towards supplying Egypt’s energy needs. “This project is significant to us because it is our first integrated water and power project abroad and demonstrates our ability to put together an innovative solution that is recognised internationally,” says Group CEO Olivia Lum. “The entry
into the Egyptian market presents exciting opportunities for Hyflux.” April saw GE follow up its 2015 $1.7 billion turbine deal with the Egyptian government with a $250 million contract to provide the Egyptian Electricity Transmission Company (EETC) with four gasinsulated substations (GIS). Once up and running, they will help connect 7GW of power to the national grid, equivalent to the electricity needs of more than 6.5 million Egyptian homes. “We are proud to continue our 30-year partnership with EETC by providing our latest grid technologies to help meet Egypt’s continuing and growing energy needs in a more efficient way,” says Ayman Khattab, CEO for GE North East Africa. “We are keen to support the government’s initiatives in the energy sector in both generation and transmission, in order to offer a more stable supply of electricity to Egyptian homes.”
Why you shouLd and shouLdn’T invEsT in EGypT strong points The country is in a geographically strategic location. Moreover, it offers a cheap and relatively qualified labour force. Its growing population constitutes a non-negligible market in the region. Its energy resources are attractive and the country has in recent years launched a public works policy (construction of a third metro line, expansion of the port of Sokhna and improvement and renovation of the rail network), which offers many investment opportunities to foreign companies. Finally, the government policy of large-scale liberalisation and improving its appeal to foreign investors is encouraging for foreign investment. Weak points Despite privatisation, the inefficient and loss-making public sector remains ubiquitous in some sectors. In addition, rapid population growth continues to curtail the improvement of the standard of living for Egyptians. In fact, the country reports a delay in its infrastructure which current investments are not able to make up for. Other obstacles to investment include excessive bureaucracy, a shortage of skilled labour, limited access to credit, slow and cumbersome customs procedures and non-tariff trade barriers. Source: Santander
obstacles to investing in Egyptian energy include excessive bureaucracy and a shortage of skilled labour.
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Egypt Infrastructure Report 2016
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Anoop Menon speaks to Imtiaz Mahtab, president of MESIA, to find out how Egypt is looking to secure energy resources and drive diversified economic growth through renewable energy
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Egypt Infrastructure Report 2016
renewable enerGY
lectricity peak demand in Egypt has been growing at an annual rate of 6% since 2004, higher than the annual economic growth rate of 4.4%. Investments have not kept up with the growth in electricity demand caused by population growth, the development of energy-intensive industries, and the increased use of electrical household appliances, particularly air conditioning. According to the Oxford Business
E
Group, Egypt’s power generating capacity must be scaled up to 50GW by 2025, nearly double the capacity today, with demand growing at an annual 10-12%. In parallel, falling gas production and increase in domestic gas demand from the power sector and industry have turned Egypt into a net importer of gas. The country is therefore investing in renewable energy as a viable and effective source to add to the gas-dominated energy mix. By 2020, Egypt aims to develop 2.5GW of wind, 1.7GW of PV and 1OOMW of CSP capacity.
Egypt Infrastructure Report 2016
“The UAE, Egypt, Jordan, Morocco and Pakistan are the countries in the region with the best solar frameworks in the region, but 2016 belongs to the UAE and Egypt,” says Imtiaz Mahtab, president, Middle East Solar Industry Association (MESIA). Currently, Egypt deploys several different development models for renewable energy projects. These include bilateral agreements between the government and private developers, Feed-in Tariff (FiT) – where the government pays set tariffs for renewable energy – and
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renewable enerGY
Egypt announced its FiT programme in 2015, to tap into the country’s renewable energy potential. It targets 2.3GW of solar power by 2017, of which 2GW will be centralised PV plants.
Build-Own-Operate and BuildOperate-Transfer tenders for more competitive bidding by developers. Egypt announced its FiT programme in 2015, to tap the country’s renewable energy potential. It targets 2.3GW of solar by 2017, of which 2GW will be centralised PV plants and 300MW will be distributed PV plants under 500kW. 26 INFRASTRUCTURE MIDDLE EAST
In October 2015, the country received prequalification submissions in competitive bidding for 250MW of wind, 200MW of PV and 50MW of CSP. According to Middle East Solar Outlook for 2016, the first tender was heavily oversubscribed. The land at project sites at Benban/Aswan (1,750MW) and Zafarana/Suez (350MW) has been Egypt Infrastructure Report 2016
allocated to successful bidders who need to achieve financial close before FiT expires in September this year. In summer 2015, Egyptian Electricity Transport Company (EETC) and New and Renewable Energy Authority (NREA) announced tenders for 200MW of PV and 5MW of CSP in the West Nile region.
renewable enerGY
“Banks in the region, including Egyptian banks, see renewable energy as an alternative investment, which it is certainly not. It is mainstream investment” IMTIAz MAHTAb, pRESIDENT, MESIA Close to 1.5GW of solar PV plants will start construction this year. Mahtab praises the FiT programme adopted by Jordan and Egypt, which he believes has helped raise the profile of the renewable energy sector in both countries. “FiT helps spark the market and create visibility for the players. IPP is one-off and doesn’t help create
an industry. I believe there should be a phased-out FiT program where you improve every year,” he says. But Mahtab also recognises that the overall trend is towards tender-based independent power projects (IPP) involving competitive bidding. “In large-scale IPPs you can drive the costs down, but Egypt Infrastructure Report 2016
organising the tender involves a lot of administrative work which can slow down the implementation.” According to an APICORP study – Renewables in the Arab world: A New Phase – although there is strong interest in the Egyptian market, some funding challenges remain. International commercial banks fear the devaluation of the currency and want guarantees about the availability of foreign currency. “In Egypt, the contract is signed in Egyptian pounds,” explains Mahtab. “As an investor, you are bringing in the dollars because you purchase the equipment. You invest in Egypt in dollars but you are being paid in pounds. They don’t give a guarantee on your investment risk or recoverability, and in case of failure of other party, do you get paid for your investment, and do you get paid in dollars or EGP?” “Today, repatriation of money and the convertibility is difficult. However, Egypt plans to address investment guarantee and convertibility risk very soon. Once they solve it, the cost of the project will fall because the investor will ask for less guarantees.” In the interim, the government is relying on international lenders like the IFC and the European Bank for Reconstruction and Development (EBRD) for financing. The EBRD will provide $500m in funding for renewable projects in 2016. Mahtab continues: “The key challenge in solar projects is financing, as one third of the cost is financing. The cost of equipment – PV panels, balance of plant – will continue to go down. However, banks in the region, including Egyptian banks, see renewable energy as an alternative investment, which it is certainly not. It is mainstream investment. Today, we have more than 300GW of solar INFRASTRUCTURE MIDDLE EAST 27
renewable enerGY
installed worldwide, and every year people are investing more than $140bn in solar. It is well understood and the risks are covered. I don’t think local banks have a good understanding of the risks. For example, there is no fuel supply risk with solar. The risk is much less than running a plant, where the logistics of the fuel and safety come into play.” According to EFG Hermes, Egypt is working on a range of measures to make opportunities more accessible to equity investors and lenders alike, including ensuring currency stability for settling renewable energy tariffs and funding the capital expenditure requirements of power projects. “We are bullish in the short to medium term on Egypt’s renewable
“The UAE, Egypt, Jordan, Morocco and Pakistan are the countries in the region with the best solar frameworks in the region, but 2016 belongs to the UAE and to Egypt” IMTIAz MAHTAb, pRESIDENT, MESIA
energy projects. But it’s a matter of properly executing the first feedin-tariff wave. The Government’s implementation of the regulatory framework is one of the biggest challenges. Once the right implementation plan is in place, then it will be easy for international lenders to be fully comfortable with Egypt’s renewables sector,” said Bakr Abdel-Wahab, managing director of Infrastructure Private Equity at EFG Hermes, in a statement issued prior to the World Future Energy Summit (WFES) 2016. EFG Hermes predicts a debt and equity investment opportunity of approximately $6-7 billion for Egypt’s FiT renewable energy programme to 2018.
According to EFG Hermes, Egypt is working on a range of measures to make opportunities more accessible to equity investors and lenders alike.
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Egypt Infrastructure Report 2016