Despite the current challenges facing the country, Ashraf Salman, Minister of Investment, is still defending the Egyptian economy’s ability to attract about $10bn worth of foreign direct investment (FDI) in 2014-2015.
The minister did not deny the difficulty of achieving this target figure, which was announced after he was appointed minster three months ago. “Since the beginning, the figure has been very, very difficult,” he said, pointing out that the estimate was based on the $4.4bn that was achieved in the first nine months of the current fiscal year. Achieving $1.3 – 1.4bn in the second quarter and therefore any possibility of exceeding $6bn in the year is an extremely difficult task. He repeated that it is feasible though, provided that the key challenges are overcome such as repaying foreign oil companies within a year to a year and a half.
Salman expects that foreign partners will resume large investments after the scheduling of arrears, which resulted in a slowdown of investment operations by the companies. He explained that the government is keen to complete the agreement with foreign partners as soon as possible, confirming that it will be followed by investments of no less than $6-6.5bn by oil companies after the payment of arrears is confirmed.
In a recent interview with Al Borsa, the Minister of Petroleum said that he will pay back $1.5bn by this September.
Ashraf Salman said that the FDI estimates are linked to a target growth of more than 3% and higher rates, in addition to being linked with his 2020 plan and the government’s commitment to clearly increase spending on education and health care to reach a rate set by the constitution in the coming years to 3% of GNP, which of course is a challenge. However, it is entirely necessary, given the legal obligation to not disregard the constitution and of course the importance of increasing spending on health and education systems, including raising the efficiency of treatment and health insurance within all levels of infrastructure.
He also explained that the government had no choice but to abide by the constitution, in addition to the fact that the upcoming parliament’s first priority will be monitoring the performance of the government and its commitment to the constitution, especially the health and education public priorities that need to be achieved.
The government recently revised its forecasted target growth rate to 4% instead of 3.2% as a result of the projects put forward by the President.
As long as there is still FDI, “investment in energy is at the top of our priorities,” said the Minister of Investment, who also noted that the estimate of $10bn in FDI relies on the opportunities available in the alternative energy sector. This sector is still expected to attract about $4bn during 2014-2015 after the cabinet agrees to fix feed-in-tariffs for renewable energy.
Salman pointed out that the Egyptian electrical network’s intended capacity is about 28 to 30,000 megawatts, but what is produced is actually between 21 to 26,000 megawatts. Consumption reaches up to 27,000 in peak times, which means that even in the best case scenario, or “theoretically” as the Minster put it, there is a deficit of a thousand megawatts which may at times reach 6,000 because of all sorts of reasons such as the targeting of electricity towers, or the lack of fuel and use of diesel, which decreases the efficiency of the stations and means they require longer maintenance periods.
As part of creating opportunities out of the crisis, the Minister of Investment noted that everyone has realised the dire need for investment to compensate for the deficit, as well as to provide energy for local foreign investments which are taking place side-by-side with expansion projects led by the State.
Short-term planning is no longer worthwhile in the face of those future requirements, so the plan is to double Egypt’s production of electricity, i.e. add an additional 30,000 megawatts, which will take at least 10 years to complete.
One has to wonder whether this extra energy can be created in the same way and with the same financing as the current 30,000 megawatts.
According to the Minister, the answer is an unequivocal “of course not,” pointing out that during the decade prior to 2011, only a 1,000 extra megawatts were added to the total capacity, a clear indication that the ability to double production over the next 10 years will be difficult, and that the main problem will be funding. There is no option apart from relying on the private sector to finance these projects, and the government has a clear vision to introduce this trend.
Salman pointed out that the private sector’s entry to the market must be done safely so that they can calculate the return on their investments. At the same time, the government must guarantee its technical capacity and financial resources to achieve the required investments. Consequently, Egypt’s energy plan will depend largely on expansion in alternative sources, especially solar and wind.
He said that the largest electricity company in the world in terms of energy management is Egypt Electric.
This explains the problems it faces, since the biggest global companies only manage about 5 to 7,000 megawatts with various production companies. Egypt on the other hand, needs the state to continue controlling transport activities and private sector participation in distribution, as and when required. However, if production is to be expanded, then the field must be opened up to the private sector completely, as 30,000 megawatts will require mega investments ranging between $35 and 40bn over the next decade.
He stressed that the priority for investment in energy has become clear to the government that the feed-in tariff and purchase agreement has been presented to the cabinet several times, and that they are completing their discussions to agree to an overall fair price for megawatts. This will give the investor an opportunity to work out the internal return of the project, as well as include agreements over prices of land and the right to use it for 25 years, rather than 20.
He pointed out that a month and a half ago, the Ministry of Investment started working with the Ministry of Electricity to complete a model that would allow the private sector to work with new energy sources and that has clear steps and answers for any questions that may be raised by investors.
Salman also expressed optimism that investments in new energy will come immediately after these new model and tariff agreements are adopted, and that there will be a real opportunity for the investor to achieve a profit, especially since power stations receive internal financing from state bodies.
The Ministry of Electricity has already received requests from the private sector and the Ministry of Investment has also received a request from a consortium of Arab and foreign companies to set up a 3,500-megawatt plant. Local investors have expressed an interest in investing in the section following the adoption of the tariff.
He pointed out that the asking capacity from the private sector, about 6,000 megawatts, will attract investments of about $8bn over a period of 18 months, which will mean about $4m during 2014 and 2015.
The expected positive impact from the private sector’s entry into new energy markets also extends to other investments such as petrochemicals, since the current situation cannot provide any additional energy to those projects. The introduction of new investments will mean these projects can start working as soon as they are confirmed and the dates are set.
Salman revealed that they have signed a contract the economic zone in the northwest Gulf of Suez with Egyptian and Greek investors to establish a petrochemical project in two years with an estimated investment of about $600m, with the total investment exceeding that figure several times.
In response to Al-Borsa’s question about the Ministry’s reliance on this $10bn worth of FDI for energy alone, the minister said that there are in fact many other projects such as the acquisition deal of a glass factory owned by Citadel, the expansion of Al-Futtaim Group, but that energy occupies the largest share.
He stressed that economic and investment zones will certainly receive attention since they have an advantage of being the only operations in these areas such as the northwest Gulf of Suez, so the mandates on their land are not in the hands of others – the investor will receive all rights to use the land and the price will be determined by the cabinet of the region who will also help in obtaining the licenses required for the project.
The Minister of Investment refused to disclose any details of compromises made with investors when their disputes accumulated several years ago, pointing out that the government is making an effort to end all outstanding problems and that it would be inappropriate to announce any details before making a final settlement with the investors. He said that it would also be wrong not to classify the problems since they included matters of jurisdiction and a law has since been issued that will ensure they do not recur in the future.
As for the problems that have been issued with final rulings, there is still no way to end them and the ministry is still negotiating with the majority of investors.
The Minister of Investment mentioned that there are still problems related to land licensing and administrative procedures relating to some of the cases, especially those dealing with state contracts or privatization, and that they are currently trying to resolve them. But, having to deal with governorates, the Tourism Development Authority, the Industrialisation Authority and other entities who work with investors is proving difficult. They hope that the problems will be resolved when the ‘unified investment’ law is issued.
Salman also revealed that the draft law has been finished and is being reviewed, meaning that they are nearly ready to release it in its final form. He explained that it aims to allow the investor to cooperate with just one body who has all of the details of the state’s investment map and the facilities and procedures required by investors.
He then pointed out that the project does not make the Investment Authority the ruling body in land licensing due to logistical difficulties and what it would need in terms of substantial financial resources, but that the authority will become both a body and an agent representing the state’s views so that an investor need not deal with more than one agency. Their commissioners will have the power to make decisions and sign agreements after reviewing proposals.
The draft law grants incentives for developing certain geographic areas and facilitates procedures in others. The move will be completed when other laws concerning insolvency, regulation and bonds are also issued.
When questioned about the possible government approval of incentives such as tax exemptions, in light of the current shortfall of budget resources, the Minister of Investment said that he proposes to grant tax exemptions in certain areas that needed to be developed, according to the state’s strategy. He emphasised that he “proposes to exempt certain areas” but that “it is still premature to know whether this will be accepted as a general policy or not.”
Regarding the public enterprise sector, one of the main files that the Minister of Investment possesses is filled with historical crises related to employment and dwindling factories and loss of major companies, etc. Salman insisted that he will start assigning permissions to the business sector in mid-September, so that a number of financial advisers can evaluate these companies and achieve assessment indicators. Additionally, they will try to develop and improve the performance of some of the companies under clear growth opportunities that will allow them to optimise their potential to increase revenues, reduce losses and achieve profitability.
He explained that the partnership with the private sector in branches of retail companies such as Hanno and Almasnoat Almisryia achieved a positive outcome. There will also be an expansion in the coming period. He pointed out that he prefers partnership with factories to use branches as outlets for the sale of locally manufactured products. Moreover, there will also be an expansion in the outlets and products enterprise sector with private sector companies in order to repeat the model on revenue gains.
He revealed that Hanno’s profit had increased from EGP 3.3m last year to nearly EGP 10m and that Almasnoat Almisryia had managed to end their losses of EGP 5.7m. This resulted in equality between revenues and expenditures, thanks to the model of partnership with the private sector.
He explained that the plan is to develop the enterprise sector and increase cooperation and joint development of companies with the same nature or those that can assist in the completion of activities by other companies. For instance, why not develop a partnership with companies like Heliopolis, which is a successful real estate developer? And why not participate with companies that own lands that can be used?
The Minister of Investment put an end to the ongoing rumours about resorting to the stock exchange to appeal for funding to increase the companies’ capital. He emphasised that he has been informed by the cabinet that their policy is “no sale,” either directly or by increasing capital for initial public offering (IPO). He added that his mission is “the development of assets and restructuring of the business sector.”
And, as a financial consultant before becoming a minister, Ashraf Salman said that he thinks it is wrong, especially at this time, to sell companies that have significant growth potential, but are just in need of restructuring.
He said that resorting to partnership with other companies should only be done under one condition, and that is if they no longer have a place in the portfolio companies, such as tourism development companies who could partner with the Ain Sokhna Land Holding company.
The Minister of Investment said that the financing structure for companies in the public enterprise sector includes a limited percentage of loans and debts in relation to capital, so to resort to increasing capital would be the wrong decision.
He also alluded to a number of companies such as Sayed Pharmaceuticals who achieved revenues of EGP 320m last year and EGP 22m in net profit, and who need EGP 100m to be able to expand their production line of capsules. Given that, why not increase their capital since their virtual capacity reaches EGP 300m, according to cash flows.
He added that the Arab Pharmaceutical Company’s profits are limited, given their ageing production lines but that they have zero debts. Consequently, developing them would not be the best decision, but increasing their capital would.
Salman criticised one example of cooperation with the private enterprise sector, the absence of a distinction between textile and cotton, since cotton companies make profit and textile companies represent the biggest problems in the business portfolio.
He revealed plans for a new look for the textile sector, having studied the company Mahalla, which achieved revenues of EGP 1bn but made losses close to half that value. They are preparing another financial study that aims to pump EGP 250m pounds of working capital into the company to double its production capacity, in the hope that they can break even.
He pointed out that the study revealed that increasing the production capacity of the company using the same machinery and equipment from the current 30% to 70 % will mean a reduction of losses by about EGP 100m.
Additionally, he said that the negotiations with the private sector confirmed his willingness to buy the companies’ products if they increase their production, but he rejected the idea of buying existing stock since it is in poor condition.
The Minister of Investment explained that he will soon be presenting a restructuring plan for the company and financial studies to double their production capacity, to the National Investment Bank, in hopes of obtaining a loan worth EGP 250m. He pointed out that the move to provide working capital could be followed by many other development prospects.
He also added that the iron and steel plant needs to be treated differently and if the state wants to retain that industry then they should establish a new plant with modern technology, using the land and licences already owned by the Iron and Steel Company, which will require at least $900m.
The minister revealed that they are once again looking at a proposal for comprehensive cement licenses for investors who are able to provide the energy needed to support the import of gas and build power plants. He explained that some people are responding to his vision in terms of the need for new energy by saying that existing plants currently only operate at half their capacity due to a lack of energy, and that by turning to coal or gas, things will change. This should be taken into account when assessing whether or not the market actually does need to double its power resources.
The Minster of Investment stressed the importance of the Suez Canal as a development project that will stimulate the economy, especially in light of current subsidy cuts and the imposition of certain taxes. He also expects that the project will see returns of about $3bn to $4bn a year within a year of completion, since it will decrease waiting time for ships, who in the growing global trade and commerce, resort to faster alternatives, down from 18 hours.
Salman also revealed that somewhat surprisingly, Egypt has received bids from a number of European and Gulf countries to fund the entire project, but that the Egyptian leadership had refused to involve any non-Egyptian entity in the channel, referring to the Chinese offer to ensure that the fully executed and funded, in exchange for half of its revenues.
Given the fears of competition in the private sector and the increasing role of sovereign authorities in the economy and investment, Salman confirmed that the government is keen to encourage both local and foreign direct investment and eliminate the obstacles before them. The government is well aware that the private sector is able to develop and achieve growth rates of 6-7%, but that does not mean that government and energy projects (such as the 30,000 megawatt increase), as well as petrochemical and other projects that were established as a result, will be solely theirs for the taking.
Nonetheless, at the same time, the state’s assets and the maximisation of their revenues are managed through this partnership with the private sector, without any kind of compromise on their assets. For this reason alone, it is certain that the government cannot achieve their target growth rates without the involvement of the private sector, Salman emphasised.