TMCnet News
Egypt risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC46C47Infrastructure riskC56C56Note: E=most risky; 100=most risky.SUMMARY Many aspects of Egypt's infrastructure have improved markedly in recent years. Most of the country is now connected by adequate main roads although local routes are often in a poor state of repair. Power generation has improved considerably with brown-outs less frequent than before. In addition, the telecommunications system is increasingly reliable. However, the port system remains inefficient and costly. The rail network is in dire need of investment. If the government is to improve the ports and railways as well as meet ambitious targets for expanding all of Egypt's infrastructure, it must exploit private financing methods such as build-operate-transfer (BOT). Enthusiasm for this approach has waned, at least temporarily; with the Egyptian pound depreciating, questions have arisen about governmental power-purchasing commitments made in dollars. SCENARIOS Wariness over purchasing agreements denominated in foreign currency restricts the use of private financing for infrastructure development (Moderate Risk) During the late 1990s, the government increasingly signalled its intent to rely on private financing schemes like build-own-operate-transfer (BOOT) to fund expansion of Egypt's infrastructure. However, the government of Atef Obeid re-appraised this policy because of concerns over the depreciation of the Egyptian pound, which has made it costlier to meet dollar-denominated purchasing agreements. (BOOT contracts have to be dollar-denominated to attract foreign lending.) The new government will be more willing to entertain the possibility of private financing, in particular given the recent strengthening of the Egyptian pound. However, the depreciation of the currency in recent years--more than 40% against the US dollar since January 2000--may still make such contracts prohibitively costly in local currency terms in the near term. As a result, although infrastructure will continue to be improved, progress may remain slow, especially in the areas of energy, transport, water and waste-water treatment. Businesses should ensure that local power grids have the capacity to meet their expanding needs and that reliability is adequate. Inefficient port facilities hamper transport (Moderate Risk) Egypts ports are costly and slow compared with their Mediterranean rivals: bureaucracy is a major impediment and customs duties are inconsistent. As a result, some exporters have chosen to ship goods by air, which is costlier. Recent governments have recognised the need to improve the ports. However, extensive investment is required if the facilities are to handle exports of the magnitude Egypt is targeting. Foreign companies wishing to transfer goods through the ports should make sure they follow regulations to the letter and should make contingency plans for delays. BACKGROUND (Background material is updated twice yearly. Last update: June 2nd, 2005) Natural Resources and the Environment Land use Egypts total land area is just under 1m sq km, of which only 35,190 sq km is settled and cultivated. About 95% of the land is uninhabitable desert, so that more than 97% of the population lives in the narrow strip of the Nile Valley that runs the length of the country, and in the Nile Delta. Population density in non-desert areas is therefore high, at about 870/sq km. The governorates of Cairo, Giza and Kalyoubia, which include Greater Cairo, contained 16.7m inhabitants in 2002. Cairo has a population density of about 31,700/sq km, and in some urban districts the density reaches more than 100,000/sq km. Government concerns about overcrowding in the Nile Valley and the destabilising social problems that could result were the main impetus behind the Southern Valley development project that aims to reclaim a large swathe of desert by pumping water from Lake Nasser. Environmental protection The government and the public are slowly becoming aware of the need for environmental protection, and the countrys first environmental action plan was produced in 1992 with assistance from the World Bank. With little rainfall, the country relies on the Nile to meet nearly all of its water needs. Egypt is currently categorised by the World Bank as under water stress and heading towards water scarcity; the action plan notes that about 90% of Egypts used water goes untreated, while 80% of industrial wastewater is probably discharged unmonitored. Air pollution is also appalling. According to the World Bank, the air in Cairo has the worlds highest lead content, eight times over the internationally accepted safety level. Egyptian industries are estimated to dump at least ten tonnes/minute of solid waste, 33% of which goes into uncontrolled landfills, canal banks and drains. The 1992 action plan paved the way for a new Environmental Conservation Law in 1994 that amalgamated existing legislation and penalties, and added new provisions covering hazardous waste and environmental management. After a lengthy grace period, it came into effect at the end of February 1998. The law also enhanced the powers of the Egyptian Environmental Affairs Agency (EEAA), the priority of which is to combat industrial pollution. However, limited resources, weak political power and official concern that jobs may be lost if regulations are too strictly enforced have reduced its effectiveness. The 1994 law makes environmental impact assessments mandatory for all proposed projects, but owing to a shortage of manpower these are to be introduced gradually. Priority areas include oil, tourism, large industrial projects and infrastructure. Transport, Communications and the Internet Railways The rail system, which has 9,400 km of track, is the oldest in the region. Modernisation will be required if the goals of carrying containerised transport from Egyptian ports to continental Africa and increasing the 7% share of domestic freight moved by rail are to be realised. The rail network carries some 800m passengers/year, or 2.3m passengers/day (excluding the estimated 10,000 passengers/day who ride on top of carriages without a ticket), and some 12m tonnes/year of goods. Nevertheless, with cheap third-class trains serving more than 80% of passengers, revenue only covers around 63% of expenses. Egyptian National Railways receives some E1.4bn/year in government subsidy, and is considered to be underfunded. Pressure for modernisation and reform followed Egypts worst-ever rail disaster on February 20th 2002. According to official statistics, at least 361 people were killed and some 60 seriously injured when fire swept through seven packed third-class carriages of a Cairo to Luxor train. The train was not equipped with fire alarms, fire extinguishers or emergency brakes. According to the public prosecutor, maintenance standards on the national rail system were inadequate, as were warning systems and supervisory capacity. Cairos 4.5-km metro line opened in 1987. It completes a 45-km regional line between Al Marg and the industrial centre of Helwan, which by 1997 was carrying up to 1.4m passengers/day, making it one of the most intensively used systems in the world. Work began in June 1993 on a second, 18.8-km linefrom Shoubra al-Kheima to Tahrir Square and under the Nile to Giza. The fourth and final phase of the second line, a 3-km extension from Cairo University to AlUmraniya in the Giza suburbs, was completed in October 2000, increasing line capacity to 1.8m passengers/day. A third, 29-km line is planned and will run from Imbaba to Cairo airport. The government invited bids on a build-operate-transfer (BOT) basis for a rapid transport system to link Cairo to satellite industrial conurbations such as 6th October City and Sadat City, but no further progress has yet been made. A 46-km metro rail system for Alexandria is under review. Roads Following an extensive modernisation and expansion programme that was begun in the 1980s, Egypt had 45,500 km of paved roads by 2003, but many are in poor condition. A 113-km Greater Cairo ring road is all but completed. The four-lane, 9.5-km Mubarak Peace suspension bridge over the Suez Canal near Ismailia that links Sinai with the rest of Egypt was inaugurated in 2001, when a nearby railway bridge was also completed. The first suspension bridge over the River Nile (the 1-km, E120m Aswan Bridge) was officially opened in December 2002. The Mediterranean coastal road is also being renovated as it forms part of the link between North Africa and Europes Mediterranean road network via the Gibraltar crossing. Some 85% of domestic freight and 60% of passenger movements are by road. Road safety is of major concern as Egypt has one of the highest incidences of traffic fatalities in the world, with an official death toll of 6,000 people in 2002, and 28,000 injuries. Air services The state-owned carrier, EgyptAir, is by far the largest Egyptian airline, carrying some 4.4m passengers in 2001. The 71-year-old airline is a significant economic actor, employing some 22,000 people. However, the airline's share of tourist traffic is constrained by a reputation for poor service and unreliability. Its reputation was further damaged by the high-profile crash of an EgyptAir Boeing off the east coast of the US in 1999. The volatility of the tourism sector in recent years has added to the company's difficulties. EgyptAir reported a loss of US$300m in fiscal 2002 (ended June 30th 2002), and E321m (US$55m, using the average exchange rate for 2003) in fiscal 2003. The airline has embarked on a number of initiatives to improve its finances since the long-standing chairman, Mohammed Fahim Rayan was replaced in 2002. An attempt to break up the monolithic structure imposed on the organisation by Mr Rayan, by dividing the airline into subsidiaries under a main holding company, was abandoned after only nine months, when a new chairman reimposed centralised control. However, under the advice of international consultants the airline has sought to reduce its operational costs, and in February 2004 announced the axing of 14 unprofitable international routes. Most large European airlines operate flights to Egypt. Although EgyptAir's domestic monopoly has been progressively curtailed, notably by the award of licences to private domestic operators, it is still protected by the fact that international airlines are prohibited from operating charter flights to Cairo airport. Domestic airlines have suffered from the volatility of the tourism industry in recent years and from the sharp depreciation of the Egyptian pound, which has raised foreign currency-denominated costs. Several have folded. The reputation of domestic airlines--and the aviation sector as a whole--has been damaged by the crash of a Flash Airlines Boeing 737 off Sharm al-Sheikh in January 2004, killing 148 people, mostly French holidaymakers. Investigators have pointed towards technical failure as the cause of the crash. However, the incident does not appear to have had a major impact on arrivals. Airports exist in major tourist and population centres, but EgyptAirs control of the main concessions such as ground handling and catering has led to costly and poor quality services. Egypt has 19 airports, 18 of which are owned by the government. To allow for the projected rise in tourist numbers the government had announced a US$2bn programme to upgrade 16 of its 19 airports and to build seven new ones on a build-operate-transfer (BOT) basis. Egypt's first private airport, at Marsa Alam on the Red Sea, opened in 2001. However, concerned about extending its foreign currency obligations, the government now appears to favour a return to conventional financing, and both a planned new terminal for Cairo airport and a new terminal planned for Sharm al-Sheikh airport will be financed through World Bank loans. In a development that could signal some liberalisation in the sector, the World Bank has requested that EgyptAir gauge interest from foreign operators to manage six international airports including Cairo, Sharm al-Sheikh and Hurghada. Waterways and ports Egypts navigable waterways total about 3,100 km, divided almost equally between the River Nile and canals, and carry about 4% of domestic freight. Alexandria is the main port, with a handling capacity of 23.2m tonnes/year, but it has attracted criticism for its crumbling infrastructure and inefficient administration. Egypts seaports have a total cargo handling capacity of 67m t/y and process some 85-90% of Egypts international trade. The governments first experiments with privately run ports are at Ain Sukna on the Red Sea south of Suez, and at East Port Said at the mouth of the Suez Canal. Ain Sukna, equipped and operated under a 30-year BOOT concession by a consortium led by Stevedoring Services (US), was officially opened in October 2002. East Port Said, to be operated on the same terms by ECT International (Netherlands) in partnership with Maersk (Denmark), has been delayed by budgetary constraints. Although Ain Sukna is intended for international trade and to serve a nearby industrial zone, the government aims to capitalise on East Port Saids strategic location. As every container ship on the Asia-Europe route passes through Egypts catchment area, the new port has the opportunity to become the transshipment hub of the eastern Mediterranean. Both ports are to have adjacent special economic zones. The Suez Canal The Suez Canal is an important source of foreign exchange. Revenue rose to a record high of US$2.2bn in 2002/03, a 23% rise on the US$1.9bn recorded in 2001/02 and looked set to set a new record in 2003/04 reaching US$2.1bn in the first three-quarters of the year alone. The Suez Canal Authority had expected revenue to fall in the event of war in Iraq as vessels would take alternative routes because of security fears and high war risk insurance premiums. However, in the event revenue has been boosted by larger than usual numbers of warships transiting the canal as these pay premium rates. Traffic has also been bolstered by the US$441m expansion project in progress that aims to deepen the canal to allow for ships with a draught of 72 ft by 2010, and is already allowing the transit of bigger oil tankers through the canal. There has also been greater co-operation with the Suez-Mediterranean (Sumed) pipeline, which was proving to be a major competitor in the oil-related business. Oil tonnage through the canal increased by 10% in 2002/03. Oil traditionally represents 25% of Suez Canal revenue, the rest being dry cargo. A US$1.5bn, five-year project to create a new bypass channel that would reduce crossing times from 14 hours to 11 hours, will be completed in 2006. Suez-Mediterranean pipeline In operation since January 1977, the Sumed pipeline provides an alternative to the Suez Canal route for oil between the Red Sea and the Mediterranean. Owned jointly by Egypt, which has a 50% share, but which also receives transit dues estimated at 27% of the crude transport costs, along with Abu Dhabi, Saudi Arabia and Kuwait (15% each), and Qatar (5%), the pipeline carries the loads of tankers in the up to 500,000 dead-weight (dwt) range with draughts of up to 75 ft that are too deep to pass through the Suez Canal. The pipelines operating capacity was expanded to 2.3m barrels/day (117m t/y) in 1994. Storage capacity had increased to 7m barrels by mid-1996 and the pipeline has been working at full capacity since then. Egypt has an extensive network of oil product pipelines for domestic distribution. There are also crude lines to supply refineries and to convey oil to export terminals, as well as gas links connecting producing fields to consumers. Internet Internet use is constrained by cost, language, rates of literacy, inadequate infrastructure and skills shortages, while e-commerce, still in its infancy, is beset by legal and regulatory hurdles. However, with strong support from the government, which hopes to turn the country from an IT laggard into an IT hub, Egypt is witnessing something of an Internet boom. There was an estimated 3.5m internet users in 2004, up from 535,000 in 2000. In a bold move, the government launched free Internet services in January 2002. The consumer no longer pays fees to Internet service providers (ISPs), but instead pays only the price of a regular call--extremely cheap by international standards. ISPs lease access ports from the state fixed-line monopoly, TE, and purchase a dial-up number, which they then market to consumers. In return, TE pays the ISPs 70% of the revenue from connections made through their phone number. However, the measure is controversial with ISPs who complain of high leasing rates and say their profit margins are low. Many of the smaller ISPs among the 64 in operation when the new system was introduced have since closed. To encourage the development of the Information Communications Technology (ICT) industry, the government has lowered import tariffs on computers, computer equipment and software to 5%. Domestic hardware manufacturing capabilities are limited--essentially hardware is either imported completed or in parts and assembled in Egypt. In late 2002 the government launched "the affordable personal computer initiative", which aims to raise the ownership of computers from 1.5m (one-third of which were owned by businesses) to 6.5m within five years. The scheme allows buyers to pay in instalments over a period of up to three years at a below-market interest rate. Under the scheme 18 local companies assemble the computers using largely imported parts. About 65,000 computers were sold through the scheme from its launch to March 2004. However, as with most industries, personal computer (PC) sales have suffered because of the depreciation of the Egyptian pound (25% in 2003 alone and 45% since the start of 2000). According to the Ministry of Communications and Information Technology (MCIT), PC sales were around 300,000 in 2002. A massive, five-year e-government programme that aims to modernise state administration was launched in 2002 and is expected to continue at least until 2012. Under the national ICT plan the government had set the highly ambitions target of raising software exports from US$100m in 2002 to US$1bn within three years, and to US$2.5bn by 2009. The programme envisaged establishing a series of dedicated ICT parks or smart villages. The first such village, a E2bn, 450-acre project in Giza, opened in September 2003. It aims to produce 30,000 job opportunities and exports of up to US$600m/year. The MCIT has also enticed a number of large ICT firms to operate training and certification programmes in Egypt, including IBM, Microsoft, Cisco and Lucent Technologies (all US). There are about 6,000 students enrolled in such schemes--which last anything from three weeks to six months--at any one time. Mass media Under Mr Mubarak the opposition press has enjoyed greater freedom of expression, although constraints persist and journalists have been imprisoned. With a circulation of around 850,000, the semi-official daily Al Akhbar is Egypts best-selling newspaper, followed by the more establishment-oriented AlAhram, with a circulation of 500,000. Although the press is subject to the control of the Higher Press Council, the four main publishing houses, the AlAhram Group, Dar al-Hilal, Dar Akhbar al-Yom and Dar al-Gomhouriya control most of the press, competing as commercially independent units. Of the opposition press, comprising some three dailies and 40 magazines or periodicals, Al Wafd, the mouthpiece of New Wafd, is by far the most popular, and has a circulation of around 50,000. Al Shaab, the Socialist Labour Partys paper, which has been suspended since May 2000, is the voice of the Islamists, while Al Ahali represents left-wing and often satirical views, and Al Ahrar the liberals. An independent newspaper Al Masri al-Yom was launched in June 2004. Economic news and views are covered in the state Al Ahram al-Iqtisadi or the private Al Alam al-Yom. Newspaper penetration is still low, at around 40copies/day per 1,000 people. With illiteracy rates still high, television is the most influential mass medium. More than 89% of households possessed a television in 2000, while 70% of Egyptians are believed to listen to the radio. The Arab Television Service started broadcasting in 1960 and there are currently two national and six regional channels in operation. Using the pan-Arab satellite, Arabsat, in December 1990 the Egyptian Satellite Channel began transmission of Egyptian programmes throughout the Arab world. In 1991 the US Cable News Network (CNN) started transmission in Egypt on a subscription basis. In April 1996 Egypt launched its first satellite, Nilesat, which offers 84 television channels and 400 radio stations. A second satellite was launched in August 2000. The first private satellite stations, al-Mehwar and Dream, began transmission in November 2001, and the first private FM radio stations, Nile FM and Negoum FM, began broadcasting in June 2003. There are eight state-run radio networks. A new duty-free Media Production City has been established in 6th October City near Cairo as part of Egypts plan to challenge the dominance of Saudi and Western satellite broadcasters. Telecommunications Infrastructure The modernisation, expansion and liberalisation of telecommunications services and related infrastructure is a national development priority. A US$1.1bn, three-year plan to make the country a regional information technology (IT) hub was announced in 2000 and Egypt signed the World Trade Organisation (WTO) Basic Telecommunications Agreement in June 2002, thereby committing itself to greater liberalisation of the sector. The telecoms network has undergone extensive modernisation in recent years. Egypt became the 59th member of the WTO IT Agreement in April 2003, which commits it to removing all tariffs, duties and charges on IT imports by January 2005. Between 1981 and June 2004 the number of fixed lines in operation, run by the state-owned land line monopoly, Telecom Egypt (TE), increased from 510,000 lines to 9.2m (raising penetration to about 13%). The goal is to improve teleaccessibility from 40% to 90% by 2010. MobiNil, a consortium comprising France Telecom Mobile International, Motorola (US) and four local partners--Orascom Telecom, the Al Ahram press group, Motorolas agent in Egypt, Systel, and Alcatels agent, Raouf Abdel-Messih--took over the state mobile phone network from TE in May 1998, although Orascom Telecom later bought out Motorola. The consortium inherited 83,500 subscribers and a waiting list of around 25,000 others. By June 2004 subscriptions had risen to 3.6m. A second private consortium, Vodafone Egypt, comprising Vodafone (UK), AirTouch (US) before its merger, Mobile Systems International (UK), CGSAT (France), the local Alkan Group, the state-owned Banque du Caire, and the investment house EFG-Hermes, launched operations in November 1998, and by June 2004 had 3m subscribers. Overall, mobile teledensity had risen to 9.3% by June 2004. TE had wanted to launch a third national mobile operator in 2003 with a strategic partner once the period of exclusivity for MobiNil and Vodafone Egypt ended in November 2002, but its plans faltered owing to a lack of international interest and because of cost considerations. A compromise was found under which TE agreed to relinquish its licence and instead buy a 25.5% stake in Vodafone Egypt with the reimbursed E1.9bn licence fee. Vodafone and TE agreed to establish jointly a new company, Wataneya, to hold 51% of Vodafone Egypt. Vodafone ensured that it would retain a 24.6% shareholding in Vodafone Egypt directly, in addition to its stake in Wataneya, thereby retaining management control. As part of the agreement TE has consented to stay out of the mobile-phone market until November 2007. Instead, Vodafone Egypt and MobiNil will each pay the NTRA E1.24bn over four years for the use of TE's vacant frequency, allowing for expansion and improved service. Legislation introduced in 1998 removed Telecom Egypts monopoly and made it a joint stock company. Officially valued at US$6bn-7bn, an initial public offering of 20% plus 5% to the companys Employees Shareholder Association, was postponed in October 2000 because of poor market conditions. TE has since said it wants to sell a stake of up to 34% to a strategic investor. However, these plans do not appear to have made much progress. This is partly the result of a period of global telecoms industry consolidation following the technology- market crash of 2000. However, it may also prove difficult to attract multinationals unless they are given some kind of managerial control. The government appears determined to retain a majority stake in TE. The telecoms law passed in February 2002 gives the government a free hand in selling a stake in TE, but stipulates that the state must retain more than 50% of the company. The local Alkan trading group introduced a satellite telecoms system in October 1996. Energy The switch to gas Demand for power has continued to rise rapidly as a result of demographic and economic growth. The shortcomings of hydroelectric power, which used to provide over 25% of Egypts electricity, were highlighted in 1988 during the water crisis that followed eight years of drought in the catchment areas of the River Nile. In response the government launched a crash programme to build power stations that would depend mainly on locally produced natural gas, with the additional bonus that oil would be saved for export. Installed capacity now stands at 17,000 mw, of which 84% is based on natural gas and the rest split between hydroelectric and thermal power. The Ministry of Electricity and Energy is implementing plans to bring on stream 12,875 mw of new power generating capacity over the next ten years. In the first phase, financed by development agencies, 4,500 mw will be added by mid-2007, based on an assumed annual increase in demand of 7.5%. In the second phase 8,375 mw will be added by mid-2012, assuming annual demand growth of 6.6% from 2008. Egypts first build-own-operate-transfer (BOOT) power plant, at Sidi Kreir, began operation in January 2002, and two 680-mw BOOT plants at Ain Sukna and at East Port Said have since come on stream. However, the government has now reverted to conventional financing methods. A US$300m scheme linking the power grids of Egypt, Jordan and Syria was inaugurated in March 2001 as part of a six-nation power sharing project that also involved Lebanon, Turkey and Iraq. The US$150m link from Egypt to Jordan via a Taba-Aqaba submarine cable was completed in October 1998. The wider grid will join with the unified European electricity grid and that of the six Gulf Co-operation Council states. Other energy sources Nuclear plans in the 1980s, including a US$1bn nuclear power station at AlDabaa, were shelved owing to cost and safety considerations. In November 1997 an Argentinian-built US$100m, 22-mw research nuclear reactor became operational, replacing the 2-mw facility built by the Soviet Union at Inshas, north-east of Cairo, in 1961. Egypt now generates about 150 mw of wind power, mostly sited at Zafraana on the Gulf of Suez, but also at Hurghada and on the north coast. There are also plans to build a part-solar power plant at Kureimat as a BOOT project, which will have 30 mw of solar capacity out of a total planned capacity of 150 mw. The World Bank is expected to offset the difference in cost between the solar and thermal projects. |