Egypt opens door for private sector investment in infrastructure

Marwa Hussein, Reuters, Thursday 16 Feb 2012

A government declaration amends dispute resolution mechanisms for public private partnerships, encouraging foreign investment; detractors, however, believe formula has not always proven to be successful

Egypt wants to attract the private in infrastructure projects to fill the increasing budget deficit. (Reuters)

Egypt amended its rules for public private partnerships (PPP) to allow disputes to be resolved through arbitration rather than through Egyptian courts. The government also said that Egypt was looking at three joint PPP projects in the Cairo area worth a total amount of LE11 billion.

The aim of the new declaration was to encourage the private sector to pour money in the Egyptian economy in infrastructure projects aimed at reducing the increasing budget deficit.

"The move is part of a series of measures to make PPP more attractive to investors," said Atter Hannoura, director of the Ministry of Finance's PPP Central Unit.

Under the new rule, arbitrations would be carried out at the Cairo International Arbitration Centre and be based on the regulations and procedures of the United Nations Commission on International Trade Law (UNCITRAL), he said.

Each party involved in a dispute would select one arbitrator and both would have to agree on a third; arbitrators could be Egyptians or foreigners.

Foreign investors tend to look for neutral, third-party arbitrators because PPP disputes usually pit investors against governments, said a PPP specialist based outside of Egypt.

The three new projects offered are a LE980 million wastewater treatment plant at Sixth of October City, a LE5.5 billion treatment plant at Abu Rawash and a LE4.5 billion road from Sixth of October to Cairo's Rod el-Farag district.

"For the coming three projects, we asked the committee to approve arbitration as the dispute resolution arm rather than the courts," Hannoura said, adding that the three projects were now in the tendering phase.

A fourth PPP project for hospitals in Alexandria will be awarded within weeks, Hannoura added.

"The modifications were probably implemented now to reassure investors after the many cases where Egyptian courts issued verdicts of renationalization. Egypt historically used to lose in international arbitration. But the problem of PPP is much deeper, as I see it", said Ahmed Galal, managing director of the Economic Research Forum (ERF).

Egypt introduced a law on PPP in May 2010 under the mandate of prime minister Ahmed Nazif's government, the last cabinet before Mubarak's ouster. However, PPP projects existed in Egypt before the adoption of the law. In 2006, the minister of finance created the PPP Central Unit. The first PPP project in the country took place in 2007 and concerned the construction and maintenance of 300 schools during the first phase of the creation of over 2,210 new schools.

The law focused mainly on big infrastructure projects as it was concerned with contracts exceeding LE100 million ($16.6 million) and had a concession period of between five and 30 years.

PPP was meant to replace another system of public private partnership known as BOT (Built, Operate, Transfer) or BOOT (Built, Own, Operate, Transfer) that Egypt widely adopted in infrastructure projects during the nineties.

Years afterwards, the government realised its mistake and officially recognised the disadvantages of the BOT system but not before sustaining big losses from the implementation of 13 BOT projects. In those contracts, the government assumed all risks including fluctuating exchange rates. The problem escalated after the Egyptian Pound was devaluated in 2003.

In the space of few months, the pound lost more half of its value against the dollar. The BOT has also cost eastern Asian countries billions after the 1997 crisis when the local currencies of many of these countries collapsed.

"In addition, the government agreed to buy, at a fixed price, full production of these projects, regardless of the supply and demand law. The government also assured the private sector delivery of raw materials at subsidized prices," explains Ahmed Galal.

The government decided to replace BOT with PPP. "BOT is obsolete. Now the Public Private Partnership (PPP) will be widely applied," said Youssef Boutros Ghali the former minister of finance, at the time.

Opponents to BOT were not happy with the new push for PPP, as they are seen as a variation of BOT. "PPP has even more disadvantages, its losses for the government are more considerable as the government, in this case, will bear part of the cost. The disadvantage of PPP would be recognised one day but not till after more resources and money are lost," believes Galal.

Many PPP projects internationally have been rejected because they are financially inefficient and the quality of the service is reduced. In 1994, in France, Compagnie Générale des Eaux (later named Vivendi) was convicted after providing polluted water to the inhabitants of Trégueux. In Canada, the government auditor estimated that the Confederation Bridge in Canada would have cost much less money if done by the public sector.

Galal believes that the PPP structure itself opens the door to corruption as the final decision is in the hand of bureaucrats and lacks tight legal regulations. "Each contract has its own parameters which affects competitiveness. There is not a common rule for all the projects in one specific sector like electricity, water, roads. This means the market doesn't function properly," argues Galal.

Galal, who has been a senior economist at the World Bank, believes the model some Latin America countries followed to encourage private sector involvement in infrastructure projects is much more appropriate.

These countries have fixed unified rules for investing in each sector, so investment policies, pricing, regulation, supervision bodies are properly and clearly set out. The governments also establish a clear list of its needs in each sector. "The environment like this is more appropriate, the private sector takes its risks and the market functions," summarizes Ahmed Galal.

For him, it was a big mistake for the government to heavily invest time in projects like PPP in order to reduce the budget deficit, as the development process should not only be trigged by such an objective. "Filling the deficit is important but other aspects like the needs of the market are equally as important," adds Galal.

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