To kick-start mega development projects in Egypt, the Egyptian
government is using one of Egypt's cornerstone resources as a
starting point: the Suez Canal, known as the New Suez Chanel
Project. The project is due for completion on August 6 2015.
The financing of mega projects, in a country that has
suffered economic hardship in the past few years, is a
challenging objective. Surprisingly to many critics, who were
skeptical at the time, Egypt has successfully sourced funding
for the first part of the development project (expansion of the
Canal) by resorting to the local market. A reported $8.5
billion has been secured within eight days. Investments came
directly from the Egyptian market and both retail and
institutional investors participated. The financing structure
used was fairly simple, yet had attractive returns. Five-year
investment certificates with a 12% interest rate, paying
quarterly dividends (first distribution received by investors)
came in 10, 100 and 1,000 Egyptian pound ($1.40-$140)
denominations sold by local banks to investors.
An important question will be whether Egypt can expect to
rely on similar funding structures for the remainder of its
major projects announced during the Egyptian Economic
Development Conference held in Sharm El- Sheikh during March
The answer is a simple no, in our view. The Egyptian
government is well aware of this and has indicated the types of
financial structures it is considering.
The five-year macroeconomic strategy and the draft budget
summary of Egypt announced by the Egyptian government
highlighted promoting investment and public private
partnerships (PPPs) as one of the key structures for financing
upcoming projects. In addition, continued debt instruments and
taxation and revenue reforms would permit the government to
continue spending to facilitate, but not undertake, numerous
projects in the pipeline. On the PPP side, the Egyptian
government announced a potential pipeline of up to an estimated
E£28 billion in the coming two years. These projects will
be adopted using structures available under the Egyptian PPP
Law issued in 2010. The government has also announced that it
will continue to manage standard project finance related
investor concerns, through a series of measures, including
providing sovereign guarantees as reasonably required. With
participation of foreign investors, including international
financial institutions, such pipeline projects can be realised
and will be an important step in the right direction.
Despite Egypt's overall debt position, the government must
continue to spend strategically in specific social sectors to
facilitate the completion of infrastructure projects.
Conventional debt instruments, and the associated legal
structures alone are no longer sustainable options.
The financing of Egypt's aggressive projects' pipeline will
require a lot more involvement at the private sector level both
locally, and by securing more foreign investment.
With the legislative reform agenda having been launched,
including the so-called Unified Investment Law provisions (Law
17 of 2015), a pool of financing structures will need to be
considered on both the debt and equity sides. These will
include Islamic finance options, structured finance and hybrid
debt and equity finance options.
Our recommendation would be to focus more on equity finance
options, whether in PPP-structured projects or even in projects
not structured under the umbrella of conventional PPPs.
Consideration can be given to launching greenfield initial
public offerings for some of the projects announced not only
strictly covered under the PPP Law which requires
multi-structure components. Public, retail and institutional
investors, could be attracted as partners in some upcoming
projects rather than merely becoming creditors. All this
remains a form of PPP, but can also be offered to the wider
public rather than the investment certificated used to fund the
Suez Canal project. This would encourage investors to seek
long-term profit sharing for such important projects.
Resorting to convertible bonds could also be supportive in
ultimately providing equity financing structures, once
conversion is practised.
By all means, debt will continue to be an intrinsic
component for financing Egypt's future projects. However,
introducing new diversified options is a pressing requirement
that is recognised by the government.
Experiences from foreign partners in terms of legal finance
structures will also play a part in informing Egypt's evolving
funding needs. Dubai's achievements in developing successful
legal structures for finance options is a clear example.
Advisors will therefore need to look beyond conventional
finance structures and build on experiences adopted throughout