Despite the challenges that Egypt is experiencing, Minister of Investemen Salman Ashraf, the Minister of Investment, is standing behind the Egyptian economy’s ability to attract foreign direct investment (FDI) at about $10bn during the 2014-2015 year. The minister did not shy away from admitting the difficulty of reaching that target, which he had announced when he took office three months ago. “From the very beginning this number proved very very difficult,” he said.
Why was the $10bn FDI target for the current fiscal year identified despite the economy being in the initial stages of recovery?
This number was chosen based on the $4.7bn achieved over nine months on 30 June 2014 and a second quarter estimate of approximately $1.3bn to $1.4bn. Crossing the $6bn threshold is very difficult for one year, but repetition makes it more feasible. That depends on oil companies’ abilities to pay foreign partners and make a timetable to schedule repayments over a one or one and a half year period.
It is expected that the foreign partners will resume injecting large investment repayments of delayed payments. The debts resulted in a slowdown in investments by companies, so the government is keen on completing the agreement with the foreign partners as soon as possible.
This process will be followed by investments totalling at least $6bn to $6.5bn by companies investing in the oil sector. The delayed payments to foreign partners are approximately $6bn and rescheduled payment is currently being agreed upon.
The estimated size of FDI is associated with targeted growth rates of 3% and eventually pushing this to a higher rate. It is also linked with the 2020 Plan as well as the government’s commitments to increase spending on education and healthcare up to 3% of the GNP. This rate was stipulated in the constitution for the coming years, and it represents a challenge.
How do you see investment in the energy sector in light of the current situation?
Investment in energy is at the top of our priorities. The estimate of $10bn for FDI comes at a time when foreign investments is at its lowest, betting on opportunities in the alternative energy sector. This sector is expected to attract $4bn during the 2014/2015 fiscal year after the cabinet approved both the feed-in tariff and energy purchasing model for the private sector.
Regarding creating opportunities from the crisis, everyone has become fully aware of the need for investment to compensate for the deficit while also supplying fuel for targeted local foreign investments and the expansion projects that the government is leading. The energy crisis has another face, and that is a huge opportunity for investments.
Short-term planning is no longer meaningful in overcoming these future requirements; as a result, the plan is to double Egypt’s electricity production capacity by adding an additional 30,000 (MW), which would require 10 years and many stages.
Can this additional capacity be completed and funded in the same way as the current 30,000 MW?
Of course not. For 10 years before 2011, an additional 1,000 megawatts were added to total current capacity, an indicator of our ability to double production over the next 10 years. The problem will lie in funding, and we have no other option than to rely on the private sector to fund these projects. The government has a clear vision for moving in this direction.
It is natural for the state to be in control of transportation activities and the private sector must participate in distribution, but expanding production must be made available to the private sector entirely and production must be doubled to 30,000 megawatts through investments ranging from $35bn to $40bn over 10 years.
Investment in energy has become clear a clear priority for the government. The feed-in tariff and purchase agreement have been presented to the cabinet several times and discussions are underway to produce an integrated, fair price for 1 MW. This will allow the investor an opportunity to achieve an acceptable internal rate of return (IRR) for the project while agreements will also ensure the price of usufruct. Discussions are currently taking place to increase the period of usufruct from 20 to 25 years.
Are new investments expected to arrive in the field of new energy?
I expect investments to arrive to the energy sector immediately following the adoption of the feed-in tariff as well, as energy purchase agreements, as there will be a real opportunity for the investor to achieve a profit. Power stations are expecting investments in fixed income instruments and financing from international financial institutions.
Are there any offers from energy companies to set up power plants for new and renewable energy?
There are already offers from the private sector to the Ministry of Electricity, as well as a consortium of Arab and foreign companies to set up a 3,500 megawatt plant, while local investors have shown interest in the sector and a willingness to supply investments following the adoption of the feed-in tariff.
Also, around 6,000 megawatts have been offered to the private sector enough with the goal of attracting investments worth $8bn to be implemented over an 18-month period, meaning that $4bn will be attained during FY 2014-2015.
What do you expect from private sector investments in energy?
I expect a positive impact as well as other private sector investments in petrochemicals for example. At present, providing additional energy to these projects is not possible, but the private sector can begin working as soon the start of energy projects are confirmed and a date is set for production.
A contract has been signed for the economic zone in the northwest Gulf of Suez between Egyptian and Greek investors to establish a petrochemicals project with investments estimated at $600m over two years. Total investments for this project exceed that value several times.
How was the $10bn of FDI on energy, excluding electricity and oil, estimated?
There are many other projects, but energy occupies the largest share. Others include the acquisition of the glass factory owned by Citadel, and Al-Futtaim Group’s expansion after resolving its problems and many other projects in various sectors.
What is the current status of accumulated dispute settlements with investors?
I will not give details on any settlements with investors regarding their accumulated disputes for several years, but the government is exerting its best efforts to resolve all outstanding disputes and it is not appropriate to announce any details before reaching a final settlement with investors. There were problems that fell under the jurisdiction of the courts and a law was issued to ensure that they do not recur in the future.
As for the disputes for which final judgments have been issued, there is no way to resolve them except through negotiations with the investors, which is already underway.
In addition to these disputes, there are others pertaining to the land licensing and administrative procedures numbering several times more than disputes surrounding certain state or privatisation contract provisions. We have witnessed progress in resolving the disputes which became entangled with the governorates as well as the Tourism Activation Authority and Industrial Activation Authority, among other entities that deals with investors. I expect an end to the disputes with the issuance of the unified investment law.
What is the current situation for the unified investment law?
The law has been completed and several copies of it were reviewed. Its preparation in the final form aims to activate the investors’ deals with a single party that has all investment map details, as well as all necessary facilities and procedures required from projects. It also aims to notify the Investment Authority of all lands and their development schemes to present them to investors with their own pricing system.
The project doesn’t make the Investment Authority the state’s party at allocating lands – this is because it’s logistically difficult and requires substantial financial resources – but the authority will become an agent of the state’s parties so investors don’t have to deal with more than one party. However, one-stop representatives of parties in the Investment Authority have to be authorised to make decisions after reviewing models from the Investment Authority, and then sign them.
The project includes a law for providing incentives to specific geographical areas in order to develop them and facilitate procedures in other areas. This step comes along with the issuance of bankruptcy law, market exiting organising, and the unified law of lands.
Can the government agree on investment incentives that include tax breaks for certain areas?
I propose granting tax breaks to certain areas that need development according to the state’s strategy in expanding inhabited geographic areas. I’m also proposing breaks for other areas. However, I’m not sure if it would be accepted as a general policy or if it’s premature.
What is the truth behind rumours that the stock exchange has increased the capital of business firms?
There is no truth behind those rumours. And the policy adopted by the cabinet is “no selling”, whether directly or through increasing IPO [initial public offering] capital. And its mission is to “develop and restructure business assets”.
As a financial consultant becoming a minister, my personal opinion is that it’s wrong to sell firms that need restructuring and have a significant opportunity to grow and maximise value. The timing is also wrong.
Resorting to a partnership with other parties is subject to the unavailability of the role in companies’ portfolios, like tourism development companies that we can resort to in order to partner in the land of Ain Sokhna owned by the holding company. Other than that, we could consider sacrificing part of the profits while they could be shifted to the company in the business sector.
The financial structure of business firms includes limited percentages of loans and debts versus capital, thus resorting to increasing capital is a wrong decision based on the funding costs.
A number of companies, such as Sayyed Pharmaceutical Ind has achieved revenues of EGP 320m last year, and net profit was EGP 22m. It can be expanded with a line of capsules production that needs EGP 100m, so why increase its capital when its default capacity reaches EGP 300m, according to its cash flows?
The Arab Company for Pharmaceuticals attains weak revenues but has zero debts – thus the best way to develop it is not through a tender or capital increase.
Business sectors shouldn’t be dealt with as one thing, such as the absence of distinction between textile and cotton. While cotton companies are making profits; textile is the biggest problem in the business portfolio.
A new perspective of textile sectors was revealed through a study of Mahalla Textile Company which attains revenues of EGP 1bn, and losses of nearly half its revenues. There’s a financial study being prepared aiming to inject EGP 250m working capital for the company to double its production capacity, leading to an end to the losses and the company breaking even.
The study revealed that the increase in the company’s production capacity with the same machinery and equipment was from 30% to 70%, which means a reduction of losses of EGP 100m, doubling production capacity and ending the losses.
Negotiations with the private sector confirmed its willingness to buy the company’s products if production energy increased. However, it turned down the inventory due to its lack of demand and poor condition.
Moreover, a restructure plan of the company as well as a financial study will be presented to the National Investment Bank, in order to obtain a loan worth EGP 250m to double the production capacity. The providence of capital can be followed by many development aspects.
What about the Iron and Steel Company’s factory?
It needs different handling if the state wants to keep this industry. A new factory with modern technologies must be established, using lands and licensing owned by the Iron and Steel Company, which requires at least $900m.
How important is the new Suez Canal project?
It’s very important considering it’s a development project that stimulates the economy under reduced energy subsidies, imposing taxes and the lack of any deflationary pressures. Then there’s the projects revenues, adding $3m- $4m a year after the project is finished depending on ships that wait for 18 hours, in addition to the growth of global trade and trades that resorts to faster alternatives to passing through the Suez Canal.
He revealed that Egypt has received bids from several European and Gulf countries to fund the entire project, but the Egyptian authority has refused the intervention of any non-Egyptian entity in the project. He alluded to a Chinese bid to entirely undertake and fund the project, and receive half of its revenues in exchange.
What about the private sector’s concerns of the state crowding it out?
The government is keen to encourage local and foreign direct investments and remove all obstacles in their way. The government is completely convinced that the private sector will achieve the development – and the 6%-7% growth rates – not the government. Energy projects that target 30,000 MW are all for the private sector as well as petrochemical projects and other projects to be established as soon as energy is available.
At the same time, the government wants to manage the state’s assets and maximise its revenues; one tool to do that is through partnerships with the private sector without a waiver of assets. There is a certainty that the government can’t attain target growth rates without the private sector.