Egypt's construction sector aims to increase contribution to GDP and fair market sharing

 

Egypt is beginning the task of boosting GDP growth and creating job opportunities for its rapidly expanding population. Construction has traditionally been one of the most labour-intensive sectors in the country. However, a December 2015 study by the Egyptian Centre for Economic Studies (ECES) found that while the industry is an important provider of employment opportunities in the country, there is considerable room for improvement in terms of its contribution to GDP.

HIRING ROLE: According to the ECES report, around 2.7m Egyptians were employed in the sector between 2009 and 2014, accounting on average for 11% of the national workforce. This figure matched the manufacturing and wholesale and retail trade sectors as the second-largest source of jobs in the economy, behind agriculture at 28%. The volume of workers involved in the construction sector compares favourably to other markets at similar levels of economic development. For example, the rate in Egypt is roughly double that of major Asian economies such as the Philippines and Indonesia, where the construction sector’s share of national employment runs at approximately 5%.

EFFICIENT COMPETITION: However, a high volume of workers does not necessarily translate into higher output or productivity. In fact, despite its central role as a job provider, the sector’s contribution to GDP over the same period stood at approximately 5%. The manufacturing sector, meanwhile, which employs roughly the same amount of people, accounted for 17% of total GDP in 2014, and the mining and agriculture sectors contributed 15% each. Construction’s relatively low contribution comes despite the increasing size, technical ability and capacity of local private contractors.

The limited growth in GDP contribution can be partly attributed to the prominent role played by government-owned companies, which has a distorting effect on the sector and inhibits output. The Public Sector Law of 1991 establishes equal treatment for private sector players as they pursue opportunities in Egypt, but implementation is uneven, which has concerned private contractors. In January 2017, for example, local press reports suggested that authorities were dealing more favourably with state-owned builders on restructuring contracts, something that became necessary due to the significant currency depreciation in late 2016.

FOCAL POINTS: There is also a large difference in the types of projects taken on by private and public players. The private sector has traditionally focused on areas such as petroleum activities and residential buildings, and, according to the ECES report, in 2013 only 4% of their operations were in core infrastructure such as roads and bridges. Around 30% of public sector operations, meanwhile, were for roads and bridges, with utilities infrastructure such as electricity stations and sewage plants accounting for the second-largest share.

Private sector builders suffered more than their state-owned counterparts from economic upheaval following the 2011 revolution. According to the ECES, the portion of private sector investment in the construction industry fell from 83% of the total in FY 2010/11 to 52% in FY 2011/12. Since then, renewed optimism has resulted in private sector interest bouncing back, but domestic builders remain vulnerable to economic challenges, including currency risk.

STOKING GROWTH: There have been a number of initiatives to help promote growth for private sector contractors. In December 2016, for example, the International Finance Corporation announced it was investing $20m in Hassan Allam Holding in a bid to support Egypt’s construction sector and promote job creation. Hassan Allam employs more than 16,000 people and is one of a small number of private sector operators capable of competing with state-owned enterprises in core infrastructure areas, such as water treatment facilities, power plants, and roads and bridges.

Cash injection, therefore, represents a useful fillip to the private sector and may help increase participation in traditionally public-dominated areas.

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The Report: Egypt 2017

Construction chapter from The Report: Egypt 2017