OBG talks to Osama Bishai, Managing Director, Orascom Construction Industries (OCI)

 Interview: Osama Bishai

What are the biggest problems currently facing the domestic construction sector?

OSAMA BISHAI: The critical problem of 2011 has been the lack of decisiveness in initiating new projects and investments. No major projects were implemented in 2011 and we don’t expect many to emerge in the short term. The momentum of projects sanctioned during 2009-10 has fed contractor’s backlogs thus far, but if there is no immediate action taken – particularly for large projects in infrastructure and real estate – we will see a major slowdown in the Egyptian construction industry at the end of 2012 or the beginning of 2013. If the period of inaction is extended beyond that, everyone will suffer.

The government has only made plans to continue existing projects from 2010. I would like to see the Ministry of Housing launch new housing schemes, but the basic infrastructure to start these large-scale real estate projects is lacking. If Egypt plans to produce the 1m housing units that are needed to sustain population growth, the necessary infrastructure will have to be put in place first.

How much of a challenge will financing for future projects be over the medium term?

BISHAI: It all depends on why the money is needed. If the cash is needed to start a project, then it will be difficult, as interest rates are high and Egyptian banks are focusing on treasury bills and not supporting local business anymore. We are essentially competing against the government for collecting this money, but if there is a collective decision to push new infrastructure projects the banks will back it.

For infrastructure development over the short and medium term, I believe public-private partnerships (PPPs) will again become a priority in Egypt. PPPs in 2010 and at the beginning of 2011 proved a healthy trend and a sustainable model of doing business.

Since there is no clear policy on how government entities will be able to finance future borrowing for infrastructure development, PPPs will automatically become the alternative. Moreover, foreign investors will only invest if locals are investing, and locals will invest if there is a clear plan for the future.

What are the biggest legislative priorities for the sector at the moment?

BISHAI: Securing a construction permit has now become a major issue. This problem must be dealt with if Egypt wants to accelerate development. Land ownership procedures must be clearly written to avoid future legal issues, and a clear procedure for financing projects must also be developed. No projects should be initiated unless they already have the necessary financing available.

To what extent can contractors benefit from opportunities in neighbouring markets?

BISHAI: There are many opportunities for Egyptian contractors abroad. Services and infrastructure such as roads, bridges and power facilities are needed in countries like Saudi Arabia, Iraq and Algeria. As these countries continue to grow, so will their demand.

Egypt has its problems, but the rest of the world has its problems too. There is a worldwide recession and everyone is looking to the Middle East as a place with liquidity. Levels of competition have risen in the region and clients have become very demanding, expecting the highest quality and lowest price.

What impact has commodity volatility had on contractor balance sheets?

BISHAI: Volatility tends to affect larger firms involved in big projects, but recently there has not been much movement in terms of commodity prices. OCI does a lot of procurement in the early stages of a project to secure a low price. We are not speculators, and this helps us to deliver services. A good deal can be saved on indirect costs when material is secured early, but smaller companies do not always have this luxury.