The presidency announced several times that it supports the implementation of billion-pound national mega projects whether in the infrastructure sector, logistic services sector, or land reclamation.
However, financing mechanisms remain a matter of controversy in governmental projects. A prominent example is the amendment of the government’s plan for land reclamation, decreasing the targeted area of reclamation from 4m acres to 1.5m acres due to limited funding sources.
Former prime minister Ibrahim Mehleb’s government was forced to create modern funding mechanisms for the same reason to dig the new Suez Canal by issuing investment certificates with attractive returns of around 12%.
The main question here is: how will the government fund the national projects it requires? The government aims to link the infrastructure of the Suez Canal Area Development Project in particular, according to former head of the project committee. It seeks to invest in a number of projects and offer others to the private sector whether through partnership or beneficial interest.
There are a number of funding scenarios presented before governmental projects, of which is reliance on government investment in the budget or banks to acquire direct loans. This is especially after the success of the Suez Canal investment certificates, which succeeded in collecting EGP 60m.
However, is the Suez Canal certificates experience repeatable? This is not unlikely according to Minister of Investment Ashraf Salman. Determining funding mechanisms will not be easy since it is controlled by several factors, most importantly the funding cost and limited financial sources.
The business community is also inquiring on is the repercussions of the government’s instructions to banks for its projects’ funding. More precisely, will government projects affect the sources of financing of private sector projects?
Repeating the experience of Suez Canal Certificates
Managing Director of Sphinx Private Equity Management Maryan Ghaly said there are a number of sources offered to decision making organs to fund national projects. On top of these sources is partnership between the government and private sector.
Funding from the budget and grants from GCC countries will be strongly present, especially since these countries demand reporting on how those funds are spent, Ghaly said.
According to the budget of the current fiscal year, recorded government investments are around EGP 75bn which equals 2.7% of total GDP, EGP 55bn of which are funded from public treasury resources and the rest in the form of grants, loans, and self-financing.
Ghaly said banking finance is considered one of the main funding sources of the government. However, banking finance does not have to be attributed to issuing investment certificates, which are offered by governmental banks with 12.5% interest, as the target of this step is raising demand for the Egyptian pound against the dollar.
The four governmental banks that offered saving certificates succeeded in collecting around EGP 61bn. Earlier, the National Bank of Egypt (NBE) Deputy Chairman Mahmoud Montasser announced that the sales outcome of the new saving certificates reached around EGP 39.3bn.
Meanwhile, Banque Misr Chairman Mohamed Eletreby said the certificates outcome increased to EGP 17.2bn while Chairman and CEO of Banque du Caire Mounir El Zahid said that his bank succeeded in acquiring around EGP 4.5bn. The certificates collected at the Industrial Development and Workers Bank of Egypt is EGP 60m.
“It is unlikely that the state will issue investment certificates, such as those issued to dig the new Suez Canal, since current projects will take a long time to prepare and another two years to be implemented,” Ghaly said.
Six months ago, Minister of Investment Ashraf Salman said the certificates can be issued for funding national projects that require large financial packages at once.
Ghaly also dismissed the belief that governmental instructions to banks to fund national projects will affect the funding of private sector projects since there is a decline in liquidity for loans compared to the period before the 25 January Revolution in 2011.
She is depending on the Central Bank of Egypt’s (CBE) report issued in October, which observed that local liquidity increased to EGP 1.79tn by the end of July, marking an EGP 34bn increase.
Crowding out the private sector for funding sources
Chairman of Archer Consulting Mohamed Nader has an opposite point of view. He believes the government crowded out the private sector due to its dependency on banks in covering the budget deficit and to fund its projects.
Nader said if two customers, one governmental and one private sector, requested a loan the bank will choose to fund the government project even if it requests larger funds since the government customer enjoys significant financial guarantees.
After analysing data issued from CBE, this opinion makes sense since the debt tools issued by the government, such as treasury bills and bonds records 54.8% of the banking system deposits until June 2015, compared to 35.8% by December 2010.
Meanwhile, loans to deposit rates declined to 41.4% in June while bank deposits targeting government debt instruments recorded EGP 953.2bn. The banking system’s deposits reached EGP 1.740tn by June 2015 whereas these instruments registered EGP 341.7bn in December 2010, marking a 180% growth rate.
Nader said issuing governmental bills and acquiring direct loans from banks are the most attractive funding methods for the government; therefore it is crowding out the private sector in terms of banking deposits.
He further dismissed the option of investment certificates, especially for funding certain national projects for several reasons. Most of the government’s projects focus on infrastructure and linking facilities, which do not require feasibility studies that include specific revenues to be used to refund loan instalments.
In Nader’s opinion, the best option is private sector partnership by granting companies the project’s concession rights for a certain period. For instance, a company may construct a road in exchange for the acquisition of the road’s toll, leasing shops and gasoline stations located on both sides of the roads.
The way of choosing optimal funding ways
Egyptian Private Equity Association’s (EPEA) Chairman Hany Tawfik criticised the mechanisms of offering national projects, which depend on the presidency or each ministry’s investments priorities and development projects.
Tawfik requested establishing a planning committee for national projects. This committee would focus on making a plan for national projects, their geographical extent, total investment costs, and their timetable.
There will be a second phase for the committee’s work, including prioritising the projects according to several measures such as investment cost and expected revenues, given the current limited funding sources and the decline of Gulf state grants compared to the past two years.
Tawfik determined the second measure in volume of operations and job opportunities provided by the projects, such as major projects implemented by the government focus on infrastructure without providing direct jobs. He said the current unemployment rates surpassed 13%, according to official statistics.
In the budget of FY 2015/2016, the Ministry of Finance is expected to decrease grants and aids to EGP 2.2bn, which is a major decrease since 2011. The grants reached their peak in FY 2013/2014, recording EGP 95.9bn, due to grants from Saudi Arabia and the UAE.
Regarding financial mechanisms of national projects, Tawfik said each project has convenient funding mechanisms. These mechanisms include direct loans, bonds, or partnership while a number of projects use self-funding such as Al-Dabaa nuclear plant, which will be funded by Russia in the form of long term loans.
