Egypt's construction industry sees rapid expansion amid increased investment, new market entrants

 

As cranes tower over the skies of an ever-expanding Cairo and billboards advertising new housing developments, universities and malls sprout up all over the city, it is clear that after several years of fits and starts Egypt is in the midst of a construction boom. Large government priority projects, such as the New Administrative Capital, the expansion of the Cairo metro line and water treatment projects in Upper Egypt, continue to promote growth in the sector. International players – notably investors from the Gulf Cooperation Council (GCC) countries, China and the EU – continue to invest in a variety of sub-sectors across the industry. Key obstacles throughout 2016 came in the form of logistical problems due to the foreign currency shortage and depreciation of the pound.

INDUSTRY INDICATORS: Construction remains a growing contributor to Egypt’s overall GDP, steadily rising over the past years from 4.5% in FY 2012/13 to the most recent figure of 4.8% in FY 2015/16, according to Bank Audi’s “Egypt Economic 2016” report published in February 2016. The report also highlighted that the construction industry grew by 9.7% in 2015, continuing the trend of the sector’s increasing growth rate, measured at 5.9% in 2013 and 7.4% in 2014.

Mona El Baradei, executive manager of the Egyptian Banking Institute, told local media this growth was even higher at 10.8% in FY 2016/17. This expansion seems likely to continue. Ghada Alaa, a researcher at local investment bank Beltone Financial, told OBG that the current pipeline of construction projects is valued at $200bn, a significant proportion of which consists of large-scale infrastructure.

According to the Bank Audi report, the value of investments in construction activities also rose by 43.2% in 2015 reaching LE3.7bn (equivalent to $196.1m as of December 2016) following a decline of 19.1% in 2014. The report also noted that the private sector’s share of total investment in the construction industry, increased to 75.2% in 2015, up from 70% in 2014.

EMPLOYMENT: With regard to employment, industry in general accounts for almost a quarter of the overall workforce – around 24% in 2013, according to the most recent data from the World Bank. El Baradei also told local press that the construction sector specifically accounted for over half of this figure, explaining that construction projects employed 12.4% of all industrial staff at the end of FY 2014/15.

Ahmed Kafouri, deputy business development director at Hassan Allam Construction, told OBG, “The number of contractors has been decreasing overall in the last five years due to the dip in demand, but I expect it will pick back up because of the resurgence of construction projects in the market.” He noted that he has already witnessed a number of small, new contractors coming into the scene.

ENERGY PROJECTS: While new property developments – including the country’s planned multi-billion-dollar New Administrative Capital – will certainly help maintain a steady stream of projects, Beltone’s Alaa referred to the energy and infrastructure sectors as “two bright spots” on the construction landscape, with a number of projects currently in the pipeline or now being built. This is in part a reflection of the government’s efforts to meet the vast energy requirements of the country’s 92m-person population. Energy has been highlighted as one of the pillars of the Economic Development Dimension of the government’s Egypt Vision 2030 initiative, including a particular focus on renewable power sources.

In November 2015 Upper Egypt’s Aswan Governo-rate announced plans in the local press to build 39 solar energy plants, projects worth $3bn. Building on initiatives like this, Egypt’s New and Renewable Energy Authority (NREA), along with its partners, hosted the Solar Projects Egypt conference in September 2016 in Cairo. The agenda focused on discussion of plans for 2000 MW of solar power to be installed over the next two years and 9000 MW planned before 2022.

This strategy comes with support from the international community. In October 2016 the European Bank for Reconstruction and Development allocated €500m to help further develop the renewable energy sector in Egypt, and Germany’s Siemens has already signed €8bn worth of contracts to install natural gas power plants and wind turbines that would increase Egypt’s power generation capacity by 50%, or 16.4 GW. The NREA also solicited bids for the implementation phase of a wind farm in the Gulf of Suez due in June 2016. In August 2016 plans were announced to construct a Chinese-funded, $3.3bn, 1000-MW solar power station in 500-MW stages alongside a solar panel factory.

On the nuclear front, Russia’s state-owned nuclear energy firm Rosatom is providing Egypt with a $25bn loan to finance 85% of the construction and operation of a 1200-MW nuclear power plant in Dabaa on the Mediterranean coast. It is due to be completed in 2022 and producing power by 2024. Lastly, in November 2016 the Egyptian Electricity Transmission Company signed a $757m loan with the Export-Import Bank of China to finance 1210 km of new electricity lines.

DOWNSTREAM: Related downstream industries are also expected to see a boost in activity. Kafouri told OBG that he predicts a new rise in the construction of petrochemicals plants. “I think the government has realised now that it is more viable to use gas in petrochemicals plants than to burn it,” he said. In May 2016 it was reported that Egypt’s Carbon Holdings had reached an agreement with the US government agency, the Overseas Private Investment Corporation (OPIC), enabling OPIC to provide financing worth between $4bn and $5bn for the Tahrir petrochemicals project. The $7bn project, located in Ain Sokhna at the southern end of the New Suez Canal, would be one of the largest petrochemicals facilities in Egypt.

Tarek Kabil, the minister of industry and trade, also told local press that at the January 2017 World Economic Forum Indonesia’s Indorama Industries had expressed interest in resuming engagement in the petrochemicals industry in the near future.

INFRASTRUCTURE: As for infrastructure, much of the planned activity is to happen under the National Project for Roads, launched in July 2014, which includes 39 roads with a total length of 4400 km at an investment of LE36bn ($2.1bn). This has already resulted in additional projects that should continue for the next three years, particularly in the New Administrative Capital city, located 45 km east of Cairo. Local press reports indicate that Orascom, Arab Contractors, Concord, and Holding Company for Construction and Development have already begun work on the roads as part of the first phase of construction in the new capital city. This focus on transportation infrastructure has also catalysed efforts to expand Cairo’s overburdened metro system (see analysis). In October 2016 the European Investment Bank (EIB) signed loan agreements worth €75m for 13 stock trains for the second line of the metro as part of a €740m loan package.

REAL ESTATE: In addition, new property developments are also being rolled out, which should further sustain the sector over the coming years. In particular, a number of mixed-use projects have been receiving attention across the construction sector, as Egypt experiments with new retail formats. Egyptian Remco Touristic Villages Construction Company announced it will begin work on a new LE4bn ($212m) mixed-use project called Stella Di Mare II, in Ain Sokhna in the Suez, expected to be completed by 2019. The coastal property along the Red Sea will include three hotels and 1865 housing units. Meanwhile, in May 2016 Dubai-based Al Habtoor announced plans to construct Mostakbal City, a mixed-use project to the north-east of Cairo. Covering a 45m-sq-metre area, it will house luxury hotels, villas and apartments, a school, a shopping complex and a golf course.

TARGETED REGIONS: Alongside plans for new power plants, factories, housing and transport infrastructure, there are a number of larger strategic developments, all in areas of the country targeted for further investment by the government, including the Golden Triangle and the Suez corridor. These projects, which have either recently been completed or are in the pipeline, have helped sustain construction activity and should maintain elevated demand for contractors over the medium term, provided they all come to fruition.

CANAL: The Suez Canal mega-project unveiled in 2015 prompted one of the most intensive bouts of construction work and continues to make headlines. The new canal, completed in 2016 and running parallel to the original, will help increase the daily average of transiting vessels to 97 ships by 2023 (up from 49 ships at present) and boost annual revenues from $5.3bn to $13.2bn in 2023. According to local press reports, revenues in the first quarter of 2016 reached $1.239bn, slightly up from $1.236bn in the same period in 2015. Success on this front throughout the year, however, was mixed. While recorded revenues during the late summer were higher than in 2015, local press reports indicated a 21-month low in revenues in November 2016, down 5% compared to the same month in 2015.

While the canal was largely built by the military, it has nonetheless spurred a number of ancillary developments in the area, including construction of a new industrial zone and related intermodal facilities. In September 2016 Mohab Mameesh, head of the Suez Canal Authority, told local press that the Suez Canal Area Development Project will officially launch in 2017, with initiatives such as the development of part of the Port of Adabiya to manufacture ships in partnership with the Armed Forces. Other plans for development of the area include a deal with Russia to build an industrial port announced in November 2016 that could be expanded to a 2000-ha industrial zone.

GOLDEN TRIANGLE: The government has also begun exploring the development of the mineral-rich area located between the governorates of Qena and Red Sea in Upper Egypt known as the Golden Triangle. Italian consulting firm D’Appolonia was selected in March 2015 to oversee the development master plan, which is expected to be largely driven by industrial and extractive activities, including copper mining, fertiliser projects and unconventional gas production. Galal Soliman, the head of the technical committee for developing the Golden Triangle zone, told local media in June 2016 that the first phase of works will focus primarily on agriculture and water conservation, while also redeveloping old tourism sites. To support the zone’s progress, the EIB signed an agreement with the government to provide consultancy services for the Port of Safaga project in October 2016.

NEW CAPITAL: The new capital development south of Cairo’s city centre has also been making headlines since its launch in March 2015 and has already provided large-scale infrastructure opportunities. In addition to a new power plant built by Siemens and local Egyptian partners Elsewedy Electric and Orascom, slated for operation in summer 2017, work has also begun on the capital itself. The initial construction phase began in April 2016 as an Egyptian-Chinese effort with a consortium that includes Arab Contractors, the Petroleum Projects and Technical Consultations Company, and China’s state-owned Construction Engineering Corporation. The China Fortune Land Development Company also added its name to the roster in October 2016 upon signing a $20bn deal to construct and manage a mixed-use development of homes and offices as part of the second phase of construction the new capital city.

It was also announced that Egypt would be accepting additional bids for other companies to take part in this first phase of construction. The overall price tag of $45bn and timeline of 12 years will provide numerous subsequent opportunities for involvement.

Elsewhere in Cairo, Sahar Nasr, minister of international cooperation, and Takehiro Kagawa, Japanese ambassador to Egypt, signed an agreement in October 2016 for Japan to provide a $460m loan to construct the second phase of the Grand Egyptian Museum. The new museum is scheduled to open by the end of 2017, once the first phase of construction is complete. All construction phases will be complete in 2022.

DOMESTIC PLAYERS: Domestic contractors continue to play prominent roles in some of Egypt’s biggest construction projects. Orascom Construction and Arab Contractors are among the largest, with both firms ranked in the top 100 of the Engineering News-Record’s “Top-250 International Contractors”. Orascom, founded in 1950 as the El Nasr Civil Works Company, employs approximately 53,000 people and operates in 25 countries. The company reported a profit of $48.5m in the first six months of 2016, up by 8.5% from the same period in 2015, with a backlog of $7.5bn. Much of this revenue comes from Orascom’s participation in development of the Suez Canal, as well as the expansion of the Cairo Metro.

Arab Contractors, which has been operating since 1955, has also seen a steady increase in engagement in their native Egypt, with the company’s new domestic contracts rising from LE5.7bn ($302.1m) to LE9.6bn ($508.8m) between FY 2012/13 and FY 2013/14. The firm has 77,000 employees in more than 29 countries. The company is also heavily involved in construction of the new capital city. In August 2016 it estimated that its contracts to build roads, housing units and utilities in the new administrative city were worth approximately LE2bn ($106m) in total.

Other local construction and contracting firms include Talaat Moustafa Group, a community real estate developer, and Sixth of October Development and Investment Company, known as SODIC.

INTERNATIONAL ENTRANTS: On the international side, GCC-based companies, particularly from Saudi Arabia and the UAE, continue to be among the most active investors in construction. Chinese companies have also entered the market and are playing a significant role in financing and constructing the new capital city. In January 2016 it was announced that the China State Construction Engineering Corporation would be heavily involved in the initial phases of the new capital, and in April 2016 construction of the project with China at the forefront was confirmed. “The Chinese entering the market, with contracts for the New Administrative Capital, will boost the sector,” Ismail Shaker, CEO of Shaker Consulting Group, told OBG. “They have a proven track record, and while they are not necessarily cheap, they are hopefully here to stay.”

In addition, in March 2016 the local press reported on a summit meeting between South Korean President Park Geun-hye and President Abdel Fattah El Sisi, during which Egypt and South Korea signed a total of nine memoranda of understanding enabling Korean companies to play a larger role in infrastructure construction projects, including work in the New Suez Canal, a desalination project worth $850m scheduled to begin in 2016, and the Cairo Metro Line 5 Project, which is estimated to cost around $2.5bn.

BUSINESS ENVIRONMENT: Foreign interest in the construction sector continued to grow throughout 2016. Sherif Sweillam, associate director for business development in the Egypt office of UK-headquartered construction consultancy Gleeds, told OBG that he had noticed an uptick in international interest. “Originally, when we first started here in Egypt, we had to convince people of the benefits of getting an international project and cost management on board,” Sweillam said. “These days we don’t have the same problem, because we have international companies coming into the market already recognising the importance of what we do.” Both Sweillam and Alaa added that as a result of the energy boom with projects, there is international appetite among companies already in the market trying to upgrade their status.

The government has been working to increase this international interest and translate it into investment. Ramez W Shafik, business development manager at global construction consulting firm Hill International, highlighted the efforts of the authorities, telling OBG, “The government is working hard on making it easy for developers and investors to do business. They’re trying to remove all the obstacles and make it smoother for them, but this requires a lot of regulations to be changed to allow for this movement.” In December 2015 local press reported coordination between the Egyptian Federation for Construction and Building Contractors and the Ministry of Finance on a new system for tenders and bids to increase the rights of contracting companies, pending ministry approval.

LEGAL FRAMEWORK: In December 2016 the Ministry of Investment released its much-debated draft Investment Law aimed at increasing foreign direct investment across all sectors (see Economy chapter). The new law includes a number of provisions intended to incentivise international investors, including allowances for residency permits during the project period, exemptions from documentation fees and stamp taxes, a forthcoming online system to register companies, a 2% unified Customs tax on imported equipment and the freedom to employ 20% foreign employees, up from a cap of 10%. The law also tackles a contested issue of settling foreign investors’ disputes, establishing procedures to treat local and foreign companies equally. The new law was approved by the Cabinet in January 2017, and as of February 2017 the newly merged Ministry of Investment and International Cooperation was in the process of preparing the executive regulations needed to implement it.

Alaa cited other steps the government has been taking to entice additional investments, including liberalising the power sector and implementing more innovative financing schemes, such as engineering, procurement and construction (EPC) plus financing contracts. Independent power producer projects are already benefitting, with the Siemens power project in the new capital tendered using EPC+ financing.

While these efforts are all steps in a helpful direction, there is still work to be done to improve the operating environment on a number of axes so as to compel further interest. An April 2016 IMF report indicated that Egypt requires key structural reforms to entice increased investment, as the country ranked in the lower 20th-40th percentile on measurements such as bureaucracy, infrastructure and regulations.

Similarly, according to the “Doing Business 2017” report published by the World Bank, Egypt remains below the UAE, Turkey, Jordan and the regional MENA average in terms of ease of doing business, at 122nd position out of 190 economies. However, it is improving on previous years in overall rank and as well as individual topics. It took 218 days to complete building permit procedures between 2010 and 2013 (compared to a regional average of 146-150), but this figure dropped to 179 in 2014 and 145 in the 2017 report.

CONSTRUCTION MATERIALS: The building material segment – one of Egypt’s larger industrial subsectors – faced some headwinds in 2015-16. Cement prices fluctuated, ranging from a record low of LE450 ($23.85) per tonne to a peak of LE808 ($42.82) per tonne. This was due in large part to the March 2016 currency devaluation and the November 2016 decision to float the Egyptian pound, as well as disruptions to power supply (see analysis). Indeed, heavy industry in general has shouldered a large part of the burden of the energy shortage in the country, with many firms forced to reduce output due to lack of power supply.

As an effort to alleviate this pressure, in March 2016 the Egyptian government announced that it would reduce the price of natural gas back to 2014 levels for steel and iron factories. Mohamed Hanafi, director-general of the Chamber of Metallurgical Industries in the Federation of Egyptian Industries, announced that production from steel factories was expected increase by 100% following this new policy.

By June 2016, however, this policy had not yet been implemented. In fact, in the local press, Egypt’s state gas board (EGAS) announced that in August it planned to divert natural gas supplies away from industry in order to meet increased demand from electric power plants. Then in November 2016 it was announced that the government had cancelled the gas price reduction due to high real cost of fuel caused by the average price of imports and locally produced supplies.

Nevertheless, in 2016 cement producers had been planning to further expand their production capacities. In the first quarter of the year, 37 companies applied for licences to construct new cement plants, adding to the country’s existing 70m tonnes of capacity – 15m of which is surplus to existing demand.

The November 2016 decision to float the pound also affected the construction materials market, at least initially, by increasing commodity prices. However, Mamdouh Badr El Din, head of the real estate investment division at the Federation of the Egyptian Chambers of Commerce, told local press in November 2016 to expect decreases in steel, cement and other input prices once that foreign exchange rate stabilises.

KEY CHALLENGES: In addition to these volatile energy costs, a number of key challenges remain in the construction sector. According to Alaa, the “main challenge will continue to be sourcing foreign currency, and we could witness some delays in general because of the problems of securing foreign currency”. For most of 2016 Egypt faced a severe foreign currency shortage. This culminated in November 2016 when the central bank floated the pound to meet some of the economic reform criteria set by the IMF in exchange for a three-year, $12bn loan (see Economy chapter). Policymakers hope the move will enhance Egypt’s international competitiveness, and regain foreign investment and tourism revenues; however, until prices stabilise and access to foreign currency improves, there continues to be a heavy impact on construction and real estate, with delays of highly publicised launches and openings. “Inflation is around 11%, which is cost we have to absorb at the end of the day,” Ahmed Hafez, chairman and managing director of Ideal Standard MENA, told OBG. “Due to competition we can only increase prices by 5%; the rest needs to be made up by reducing production costs.”

PLANNING: Shafik also highlighted the trial of making sure project timelines are efficiently synced, especially when it comes to the large-scale builds and new planned cities under way. “The government needs the correct planning and vision that will continue, so that things will move ahead on the standard and consistent vision that they have,” he told OBG. Ensuring that the tenders for each phase of a project are issued in advance will be critical to the success of these projects and cooperation is seen as key. “Participation between the Egyptian government and private investors is the roadmap to carry out all of the mega-projects that are planned,” Darwish Ahmed Hassnin, CEO of Saudi Egyptian Construction Company, told OBG.

OUTLOOK: The Ministry of Finance cites construction as one of the most important sectors in terms of contribution to economic growth over the coming years. With strong demand for energy and infrastructure projects, as well as real estate, the sector is likely to see stable expansion. However, it has not been immune to the short-term economic instability in the aftermath of the currency float, posing challenges amid potential.

Alaa remains hopeful, telling OBG, “We have a very positive view of the sector as a whole in terms of growth, especially since we started to see the positive initiatives from the government to stimulate the sector in 2015. The subsectors that we are really positive on are the infrastructure sector, and more specifically the power sector. It has significantly outperformed in the last year, and we think it will continue to do so.”

Growing stability is key to Egypt’s continuing position as a prosperous market. “Over the past couple of years we have witnessed a bit of stability – things are starting to calm down,” Sweillam told OBG. “Things were chaotic, people were stopping projects and investment in the market, but now we witness companies restarting projects or continuing with their plans, as well as new companies getting into the markets.”

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The Report: Egypt 2017

Construction chapter from The Report: Egypt 2017