Guaranteed reconstruction business

Ahmed Abdel-Hafez, Tuesday 8 Sep 2020

Egypt is well-placed to snap up reconstruction projects in the region owing to the strength of its banking system

Guaranteed reconstruction business
Guaranteed reconstruction business

The construction sector in Egypt is receiving the lion’s share of letters of guarantee issued by the banking system, followed by the import-export sector, said Amr Kamal, a member of the Letters of Guarantee Committee at the International Chamber of Commerce (ICC) in Paris, in an interview with Ahmed Abdel-Hafez.

A letter of guarantee is a type of contract issued by a bank on behalf of a customer that has entered a contract to purchase goods from a supplier. It lets the supplier know that it will be paid, even if the customer of the bank defaults, and it is typically used by companies working abroad, among them in the construction sector.

“Egypt’s construction sector has a good chance for business in countries of the region where political and security stability are returning and governments are putting forward reconstruction plans to help to restore normal life,” Kamal said. Such countries include the oil-rich states of Libya and Iraq, where Egypt’s construction companies would be well-placed to win contracts using letters of guarantee.

Egypt’s banking sector has an excellent reputation at home and in the Arab and African countries where it is trusted as an issuer of letters of guarantee. The sector is very highly regarded despite the circumstances of recent years, Kamal said, and its reputation is built on wide experience in the region where Egypt’s banks are known to fulfil their obligations unlike the banking sectors in other countries like Turkey, he added.

“Recently, the Turkish banks cancelled all the letters of guarantee they had provided to the Libyan government as guarantees for projects by Turkish companies in Libya, giving the Turkish banking sector a bad reputation,” Kamal said.

“Such incidents give Egypt more room to expand its share of reconstruction projects in the region, since both Egypt’s banking and construction sectors have a sound reputation in Africa and the Arab world.”

In answer to the question of how Egyptian companies could access letters of guarantee for projects in neighbouring countries, Kamal said that “each bank has a network of correspondents across the globe. If an Egyptian company wants to carry out a project in Iraq or Algeria, for example, banks operating in Egypt issue letters of guarantee addressed to banks operating in these countries.

“The Iraqi or Algerian banks then issue a corresponding letter of guarantee for the same amount and with the same conditions. Once the company receives the letter, it presents it to the foreign government along with other documentation for operating permits.”

The government could also play a role in promoting the prospects of Egyptian companies operating abroad, Kamal added. “It would be best if the Egyptian government had a long-term strategy of opening branches of Egyptian banks in countries that are promising markets for construction and other active economic sectors because the presence of branches of Egyptian banks in these target markets would make things much easier,” he said.

“It would strengthen the position of Egyptian companies. However, until this happens, the banks will rely on their network of correspondents because the establishment of a bank is different in each country, and some require a long time to do so.”

“Egypt’s strategy for supporting its companies working overseas should also include recommending cuts in commission rates in letters of guarantee from two to one per cent, for example. It should reduce the 30 per cent cover that banks require from companies to issue a letter of guarantee, to provide liquidity for companies operating overseas,” Kamal said.

“More importantly, the language of these letters of guarantee must be very precise and specific and comply with the international regulations issued by the Banking Commission of the ICC since these are the global standards today for letters of guarantee around the world” and are the rules that regulate the contractual relationship between the bank and clients operating with its guarantee.

Egyptian banks have extensive experience in drafting letters of guarantee, which are more than 60 per cent compliant with ICC regulations for letters issued for companies operating overseas. Such letters should include precise descriptions of any violations or negligence by the contracted company that could result in the letter being revoked. Complying with ICC rules also facilitates fairer conflict-resolution should litigation arise.

In answer to a question regarding risks taken into account when calculating credit-ratings, Kamal said that “each country and economic sector has a risk rating based on the credit assessment of each project and country. It is only logical that the value of letters of guarantee should be higher when the risk factor is higher in certain sectors or countries due to war or natural disasters.

 “It is therefore crucial for the Egyptian government to have a strategy supporting companies operating overseas and to balance between risks and opportunities with a view to helping these companies grow their businesses.”

*A version of this article appears in print in the 10 September, 2020 edition of Al-Ahram Weekly

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