Partnering for success: PPPs are increasingly regarded as an ideal way to fund public projects

Over the past 20 years, there has been a clear trend in many countries towards using the private sector to run public services or to commission new infrastructure projects, often-times in public-private partnerships (PPPs), and Egypt is no exception. Egypt first adopted the principle of PPPs under the Hosni Mubarak regime. In 2010, the government issued a special law, Law 67, to improve regulation of such contracts. The regulations allow for longer time-frames and detail the offtake payment criteria, as well as setting out a framework for the tendering process. Law 67 also set up a central PPP unit at the Ministry of Finance (MoF) to provide expertise to other ministries, and to act as a one-stop shop for investors and enable the MoF to exercise greater control over the PPP process and the final contract.

HOW IT WORKS: Egypt has taken the opportunity to learn from the experiences of other countries, including “teething problems” that come with any new practise. It has also learned to remove some of the weaknesses of earlier infrastructure contracts with foreign investors. Law 67 lays out a number of stages for the bidding process, which are designed to increase transparency and allow both sides to add feedback at the various stages.

The initiation of a given project normally rests with the relevant line ministry or government agency, which passes the project on to the PPP unit to determine whether it is suitable for this type of financing method. If the unit finds that the project meets the necessary criteria, it then calls for expressions of interest. After that it conducts a pre-feasibility study, then a pre-qualifying round, then invites final bids. Responsibility for awarding the contract ultimately lies with the line department, but the MoF’s PPP unit sits in on the process. The PPP unit also provides some help with the performance and monitoring once the tender has been issued.

GETTING INPUT: The Egyptian government employs international groups to act as consultants, but these have no input at the evaluation stage. All documents are available in both English and Arabic, but in case of contradiction, the Arabic version takes precedence. In addition to projects tendered under Law 67, a number of sectors that depend on generated user fees to payback investors (such as ports) have their own specific laws to govern private sector investment and involvement.

Until now, two projects have been tendered under Law 67, while around 15 PPP projects have reached the pre-feasibility stage. One of these new projects was the development of a 250,000-cu-metre per day wastewater treatment plant at New Cairo, which was awarded in 2009 to a consortium of Orascom Construction Industries and Spanish group Aqualia. The total value of the contract was LE2.65bn ($332.31m) over a 20-year period, and the plant was due to open in mid-2013. The wastewater treatment plant is expected to serve more than 1m people and will have a final capacity of 500,000 cu metres per day. The second project is the construction of two teaching hospitals in Alexandria, a population centre of 7.4m people. The first is the Mowassat Specialised University Hospital, a 224-bed hospital for neurosurgery, neurology and nephrology patients. The other centre, the Smouha Maternity University Hospital, is specific to obstetrics and gynaecology, with a total of 200 beds and a blood bank.

UPCOMING PROJECTS: Among the 15 contracts in the pipeline is the 40-km Shoubra-Banha motorway, which is due for tender in the fourth quarter of 2013. The roadway is expected to carry 125,000 cars per day. Another project is a 107-km railway set to connect the inner Cairo suburb of Ain Shams to the industrial centre in 10th of Ramadan City. The project, including 14 stations, is due for tender by the end of 2013, with the contract signing to take place in the first quarter of 2015.

The second and third phases of the Cairo Contact Centre (CCC) Park project, which involves constructing 27 office buildings, were due for tender in June 2013, with the contract awarded in the second quarter of 2014. The project was designed to encourage Egypt’s burgeoning outsourcing and call centre industry, which ranked as the fourth most attractive call centre destination, only after China, India and Malaysia. When complete the CCC Park is expected to generate more than $1.2bn in annual revenues and create more than 100,000 jobs.

Another contract is planned to expand the Abu Rawash wastewater treatment plant, a 20-year project to expand the capacity of the plant from 1.2m cu metres a day to 1.6m cu metres a day. Four PPP teams were shortlisted for the project in May 2013.

Other projects set to be funded through PPPs include a number of wastewater and desalination plants on the Red Sea coast and the Rod El Farag Corridor. The Rod El Farag Corridor is meant to connect the Cairo Ring Road and the district of Shubra to the Cairo-Alexandria Desert Highway. THE NEED FOR PPPs: Given the deterioration in the state’s financial capacity, the importance of PPPs in developing the country’s infrastructure and housing stock is all the more clear. For example, in September 2012, then-Finance Minister Momtaz Al Saeed told a project finance and PPP conference organised in Cairo by the Egyptian government that state coffers were only able to cover around two-thirds of the expenditure in the state budget.

CONTRACT MODELS: Egypt uses a variety of models for its PPP contracts. Service contracts are a specific service unit of a public corporation or ministry (such as billing and payment collection of a public utility). It is unbundled and contracted out to the private sector. Management contracts, meanwhile, involve a private contractor taking over the day-today management of a public corporation but the state retains ownership and continues to formulate long-term strategy. In build-operate-transfer (BOT) and build-own-operate (BOO) contracts, the state guarantees to take a certain output at a certain price (such as electricity, for example), often though not exclusively through a bulk supply contract. This is done with or without the option to assume ownership of the facilities involved at the end of the contract term. For a concession contract, investors form a special purpose vehicle to operate a given public service, but they resort to commercial lenders for long-term financing without a specific financial guarantee to the government.

Although Egypt is passing through a challenging period, urgent financial needs mean that governments of whatever stripe are likely to retain the PPP system as a key method for providing value at a time when there is intense pressure on the public purse. The country’s PPP law is well designed to encourage such business practises and looks set to attract investors to help in developing Egypt’s infrastructure.