An unwillingness to take currency risk on projects is delaying Egyptian projects with a high dollar requirement and could put the country’s public private partnership (PPP) pipeline at risk.

A consortium led by FCC Aqualia New Europe, and including Orascom, won the tender to develop the Abu Rawash wastewater treatment PPP, arranged financing for the $570 million project in September 2015. Lenders include the European Bank for Reconstruction and Development (EBRD), the World Bank, and five local banks.

The development includes the upgrading, operation and maintenance of Abu Rawash in Giza under a 25-year concession. The development will increase the plant’s capacity from 1.2 million cubic metres per day to 1.6 million cubic metres per day, as well as install a secondary treatment stage. Construction is expected to last three years.

Although the signing of financial documents with a government foreign exchange guarantee has been expected for months, Abu Rawash has been consistently delayed. Of the around $400 million of debt required, around half will need to be borrowed in US dollars to import equipment. But the rest of the debt needs to be borrowed in Egyptian pounds (EGP), according to Khaled El Degwy, concessions director at Orascom.

“We have to borrow in local currency because the project’s revenues are in local currency and are not indexed, otherwise we would be taking currency risk,” Degwy says. “No bank will lend dollars without indexation if your revenues are in EGP because the risk profile would be too high.”

There is some exchange risk mitigation in the documents though it only runs until financial close of the project and not for the full payback period of the loan. If the project is to borrow dollar denominated debt then the contract needs indexation to the payments to cover at least the payback period of the dollar loan, Degwy says.

Without such indexation, the sponsor runs the risk of exposure if EGP were to devalue relative to the dollar; Orascom and the other members of the consortium would receive the same availability payments in EGP that would then be worth less in dollars.

The problem is that someone – whether it’s the sponsor, the banks, or the government – will need to take the exchange risk. The banks are, perhaps understandably, about as keen as Orascom are to take this risk.

“The private sector won’t take exchange rate risk over 20 years.” Khalid Hamza, principal banker at the EBRD – which owns a 49% stake in Aqualia – tells IJGlobal. “In other markets the government will take on this risk to ensure private sector participation.”

“If the exchange rate mechanism is put in the documents and the EGP devalues then the availability payments (in EGP) will be higher, so there’s more liability on the government,” Hamza says.

Orascom has asked for a mitigant to be put in the document that shifts the risk over to the government.

“This is a priority project that was procured under an expedited schedule and saw its construction period reduced from four to three years, so a decision needs to be taken soon as the discussions have been dragging for some time,” Degwy says. “If this project doesn’t go through successfully then it’s a risk for other PPPs in the pipeline that have a high foreign currency component.”

“I don’t see many opportunities for PPP developments with high foreign currency requirements in the current setup.”

Other projects in Egypt’s PPP pipeline include the El Tor, Safaga, and El Alamein desalination plants; the Abu Tartour port project; and the Nile River Bus project.

For now, the sponsors of Abu Rawash are discussing their options with the lenders and Egypt’s PPP Central Unit to ensure the allocation of the dollars needed for imported materials.