There are two speeds to Egypt’s project finance market. On the one hand deals adding value to the oil and gas industry, like petrochemicals and fertiliser plants, continue to progress despite political uncertainty ahead of this June’s presidential elections. On the other, the revolution and its uncertain aftermath have brought progress on public private partnerships (PPP) to a halt.

Egypt’s PPP pipeline, one of the most promising in the MENA region, and which had demonstrated early promise, is now frustratingly frozen. Egypt offers the prospect of strong PPP dealflow in coming years, given its large population of 80 million, and increasing popular demand for better utilities, hospitals, schools and transport networks. These infrastructure upgrades would require as much as $45 billion in investment over the next five years, according to local investment bank EFG-Hermes.

Add to this a liquid domestic bank market, growing local expertise and a PPP law that was enacted in 2010 to try and encourage private investment in infrastructure, and the building blocks are all still in place. If the presidential election ushers in a new period of political stability, PPP activity should start picking up once again.

PPP to perk up?

The E£2.5 billion ($407 million) concession for new hospitals in Alexandria will be the first test of whether a recovery is possible. In March, the government named a consortium of Arab Academy, Bareeq Capital, Detac, Siemens and G4S preferred bidder on the project, which involves building two 200-bed hospitals and a blood bank. The selection reawakened interest in a drawn-out process that began more than three years ago. Political uncertainty has taken its toll, and only two of 14 original pre- qualifying consortiums submitted final bids, but the hospital should serve as a usable precedent for other deals and convince investors that Egypt can make good on its pipeline.

Other projects that could also come to market include the Rod El Farag highway and the massive Abu Rawash wastewater build- operate transfer concession, which attracted seven prequalified bidders last year but hit the buffers with the revolution. Egypt’s only PPP precedent, the $475 million New Cairo wastewater plant, owned and operated by Spanish group Aqualia and Orascom Industries, which won the plant’s 20-year concession in 2009, shows that it can be done.

Egypt’s banks should be in a good position to fund PPP projects. Concession revenues will be in local currency to protect government from any decline in the value of the Egyptian pound. Local banks, and to a lesser extent international banks with access to local deposits or local retail arms in Egypt, will find it comparatively easy to get comfortable with these revenue streams. Multilaterals are also increasingly looking at the Egyptian PPP market, including the European Bank for Reconstruction and Development, the International Finance Corporation and the African Development Bank. These lenders are also exploring using new or existing equity funds that they manage, invest in, or control, to increase market equity capacity.

Islamic finance may also be a component of forthcoming deals, although it has not been a feature of any Egyptian financings to date. A handful of Egyptian banks now have Central Bank licences to offer Islamic finance, and regional Islamic lenders in Saudi Arabia and the United Arab Emirates are looking at ways to show their support for the Egyptian economy in the aftermath of the revolution. “It would be possible to adapt Islamic structures to a PPP model, and I think we’ll see more Islamic finance in deals from now on,” says Caroline Miller Smith, a partner at White & Case in London.

Chinese and Korean ECAs have also expressed interest in helping their manufacturers supply capital goods to Egyptian projects. But currency risk is likely to be an obstacle to foreign lenders financing long-dated Egyptian infrastructure concessions. Lenders have suggested that the government include a proportion of dollar revenues in concession payment structures, and power and water deals, which have higher proportions of dollar costs, are the most obvious candidates. The Dairute independent power project, for instance, is likely to feature some dollar financing.

But despite the possibilities, concerns cloud the immediate future of PPP. Local bank appetite is strong but there are only five or six institutions that can lend out to 15 years, slightly inside the optimum 20-year tenor for local PPP concessions. Market participants talk of a less coordinated approach at the Ministry of Finance’s PPP Unit that could result in only the strongest projects surviving. They worry that a project’s bankability will require due diligence that can stand up to international standards. “Before the revolution the PPP Unit was clearly running and marshalling projects. Now it’s not clear whether it is the PPP unit or other ministries pushing their own agendas. The question is whether projects will be up to the same standard and if there will there be the same level of coordination,” says Andrew Newbery, managing partner of Herbert Smith’s Abu Dhabi office.

The interim government has prioritised projects in the education and health sectors, which has led to some deals in less favoured sectors being cancelled. The 6th October wastewater treatment plant has been scrapped, and road projects may also fall victim to this change in priorities. One Cairo-based observer believes the rehabilitation of the Cairo-Alexandria toll road, and its expansion into a freeway, which has been in pre-tendering for some time, will also be dropped. The problem here, the observer said, is that the government will find it hard to deal with the road’s environmental and social risks in a way that lenders find palatable. The Cairo- Alexandria project will involve the relocation of communities that have grown up along the route, and the Equator Principles, to which most lenders directly or indirectly adhere, require a long and onerous process of mitigating environmental and social risks.

Any new administration will have to do much more to attract the private sector to its priority areas. The cash-strapped government’s ability to agree to lender-friendly contract provisions – like promising generous termination payments – is also in doubt. After the elections it will have to assuage worries that it is a risky counterparty on education and health concessions. “If the private sector builds and offers basic services in schools it will be looking for a return of between 10-15%,” says Mansoor Ahmed, regional director of healthcare and education PPP at Colliers. He believes lender enthusiasm for public healthcare projects will remain muted until Egypt has mandatory health insurance. Demand and clinical risk in the Alexandria Hospital project lies with the government, since the concession isn’t structured around hospital usage levels.

Hydrocarbon helpers

Although PPP may have demonstrated scant signs of progress, other sectors are. Global banks remain keen to finance oil and gas deals secured against reserves in the ground and with dollar revenues. That said, only the odd deal has scraped through because the interim government has not granted any new oil and gas concessions.

In the first oil and gas financing to close in the region since the Arab Spring, Calgary-listed Sea Dragon Energy signed a new debt facility to develop its Egyptian assets late last year. The 5- year senior secured $50 million loan is reserve-based, with its availability, which currently stands at $20 million, linked to regularly updated forecast reserves, production and receivables. Sea Dragon is also attempting to buy several concessions from Citadel-managed Golden Crescent Investments, with a $147 million mixture of cash and shares, but had to renegotiate the purchase as market conditions worsened, and was due to seek shareholder approval for a payment in equity and convertible debt as Project Finance went to press.

It’s busier downstream in refining and petrochemicals. The $3.5 billion extension of the Egyptian Refinery Company’s (ERC) operations in the greater Cairo area could close this July, some 18 months after it was meant to close. The delays have resulted from the developer’s decision to work with different public sector partners in the aftermath of the revolution. The refinery is slated to increase ERC’s production to over 4 million tons of refined products, most of it destined for the domestic market.

The financing comes primarily from development finance institutions and export credit agencies, and local banks are not represented in the deal. Amongst the participants in the $2.2 billion debt financing are the AfDB, with a $225 million loan, the IFC with a $120 million loan from and the EIB with a $450 million loan. Pricing, “still a way off,” according to one source familiar with the process, will be higher than the levels agreed before the revolution.

The AfDB says it is looking at a pipeline of other projects with a developmental impact that includes, along with PPP, export-orientated petrochemical projects and agri-business ventures. The challenge for the AfDB is that it can’t lend beyond a ceiling that it sets to ensure it spreads its exposures fairly across the region. “We have been exposed to Egypt for a long time – we are one of the biggest funders of the energy and power sector,” says Tarek Ammar, a private sector specialist at the bank.

Elsewhere, the Egyptian Hydrocarbons Corporation plans to develop a $3.5 billion naphtha cracker and olefins complex that will allow it to produce a broad slate of basic petrochemicals. It hopes that Egyptian banks will support the project, since they entirely funded the $298 million debt financing of EHC’s ammonium nitrate facility in 2011. “Egyptian banks are enthusiastic backers when it comes to well-structured projects,” says Philip Stopford, head of White & Case’s WEMA project and infrastructure finance group. But this EHC complex, given its size, will require a mixture of local and international debt. Its financing will feature a direct loan from US Ex-Im, and other ECAs are also expected to both lend directly and provide cover to commercial lenders.

Egyptian Petrochemical Holding Company, Echem, is also said to be near close on its $1.9 billion polyethylene project. The debt portion stands at $1.25 billion and sources familiar with the process say that 5 local banks will participate in the financing and that the sponsors are also negotiating with multilaterals. The Egyptian Chemical Industries Company, Kima, is developing an $800 million fertiliser plant in Aswan with a debt requirement of $450 million. “They’ve signed the EPC and are moving on with the financing. It’s fully underwritten and is expected to close soon,” said Tamer Seif El-Din, head of project finance, syndications and structured finance at Banque Misr in Cairo.

It says something that Egypt’s project finance market has kept going despite the political upheaval. It adds to hope that once the new government has its feet under the table, and lenders and sponsors are again comfortable, the PPP market will pick up. Given pent-up demand for freshwater, power and roads from a population that has discovered the power of direct action, Egypt is a neighbour the region can’t afford to ignore. “People just need a system in place; they’ll deal with whatever it is,” says Mohammed Abdel Wahab at Zulficar Partners in Cairo.