KfW, the German government-owned development bank, signed a loan agreement last October for the enhancement of the Egyptian economic reform programme on behalf of the German government. A first tranche of €225m has already been disbursed, said Burkhard Hinz, director of the KfW Development Bank Office in Cairo, in an interview with Daily News Egypt, adding that Egyptian President Abdel Fattah Al-Sisi and German Chancellor Angela Merkel had discussed the possibility of a second tranche of the loan.
Why was the loan not disbursed in dollars and when might a potential second tranche be disbursed?
The Egyptian side requested the loan be disbursed in euros. I am not aware of the reasoning, but I could imagine that relatively favourable interest rates in euros—when compared to US dollars—might have been a strong argument. The timing of disbursement of the second tranche will depend on the conclusion of various formal requirements.
What are the details of KfW’s portfolio in Egypt?
The KfW Group consists of three segments. First, the KfW Development Bank, on behalf of the German government, has provided around €6bn to projects in Egypt by now and has an active portfolio of €1.8bn.
The second segment is KfW IPEX Bank, which offers tailored financing for German and European exports and investments. KfW IPEX Bank, for example, together with HSBC and Deutsche Bank, was the coordinating initial mandated lead arranger for the three gas power stations built by Elsewedy, Orascom, and Siemens with a total debt financing volume of €3.5bn.
The third segment is KfW DEG, which caters to private companies operating in emerging markets, with a current portfolio of about €100m in Egypt.
What is your opinion on the current state of the Egyptian economy?
It was a very brave decision by the Egyptian government to implement such fundamental reform measures. This is especially impressive since very few governments find the courage and the foresight—although obviously needed—to improve the future prospects of an economy at the expense of swallowing the bitter pill of major economic reform. However, if the Egyptian government is consistently implementing this comprehensive reform programme, it is likely that people will look back one day and realise that the current hardships were a temporary phenomenon followed by economic growth and employment.
What is your view of Egypt’s investment climate?
The Egyptian investment climate looks increasingly favourable with foreign direct investment picking up. Another clear sign of betterment is the decline in interest rates on the bond market, indicating that investors perceive less risk in lending money to the Egyptian government. This suggests that Egyptian debt is increasingly popular among investors. At the same time, recent external debt increases were substantial and are best to be kept at moderate levels.
To me, there is no doubt that Egypt will do better once the adjustment period of the structural reform is over. It’s a rocky road that entails many frictions in the short-run and it takes time until improvements reach employment levels and job creation in the medium- to long-run. However, indicators already point to success of the reforms.
What are the main challenges facing the country now?
For me, the big challenge is job creation, especially for the youth. On one hand, jobs are the economic foundations of families and are crucial to maintaining and improving standards of living. On the other hand, young people require jobs to apply and enhance their skills as well as to increase their aspiration of what they can achieve in life.
How can this issue be resolved?
I am constantly impressed by the entrepreneurial spirit in Egypt. There is great potential for job creation and innovativeness, since a certain entrepreneurial mindset is deeply rooted in Egyptian culture. At the same time, as outlined by President Abdel Fattah Al-Sisi, the current population growth of more than 2% poses a big challenge to the public and private sectors. First, there is a permanently increasing need for investments in infrastructure, such as schools, roads, health services, water supply, and energy. In addition—and probably equally challenging—is the creation of jobs for about 1 million youth entering the labour market each year. I am optimistic that with the right measures, this challenge can be turned into one of the assets of the Egyptian economy.
My personal impression—without being able to follow Arabic-language media—is that it might be beneficial to actively communicate the purpose of the ongoing reforms. Making people aware of the necessity and the prospects of the current adjustments may invoke understanding of the reasons behind short-term frictions and might help to get everyone on the same page.
Tell me about KfW’s efforts in job creation.
We believe that job creation is key and we can see that the government is working on many aspects in this regard. It is unlikely that the public sector has potential for further employment opportunities, thus recent efforts by the Egyptian government to strengthen the private sector employment are highly appreciated.
First, in terms of political/legal groundwork, the new bankruptcy and investment laws contribute to a convenient investment climate and eventually to job creation.
Second, quality infrastructure is a necessity for economic growth. Within our mandate of the Federal Government of Germany, we are working with the Egyptian government to upgrade and expand energy and water infrastructure which indirectly contributes to job creation.
Moreover, we promote sustainable economic development by fostering vocational training and access to finance for micro, small, and medium enterprises (MSMEs). These measures improve job availability directly. In this respect, KfW initiated, on behalf of the German government, the SANAD Fund for MSME, which facilitates access to finance for companies which usually find it hard to obtain credit on viable terms. In addition, we were setting up a credit line directed at MSMEs largely outside of Cairo via the National Bank of Egypt (NBE).
What are the details of the vocational training projects?
Within our mandate, we are funding a study to assess the potential of two projects: first, the rehabilitation of technical schools by ensuring that they are equipped with labs and further tools that qualify students to have a smooth transition into the labour market, matching the skills demanded by the private sector. Second, from our experience in financing wind energy projects, we know that wind farms require strong operations and maintenance, thus we are looking at boosting the graduation of technicians potentially in the field of renewable energy.
What is the value of financing allocated for both projects?
We will have to wait for the results of the study in order to make an informed decision on the financing.
When will these projects start?
Conditional on the study findings, the projects are likely to start at the end of this year.
Which is the main local entity you work with in this context?
We are cooperating with the Ministry of Education and Technical Education as the main governmental entity. Moreover, it is likely that the private sector will be especially relevant for training vocational students.
Which companies will you work with?
We will wait for the results of the study and afterwards choose potential companies. To this end, we will also work with international and Egyptian associations. The private sector is likely to be very interested in such forms of cooperation.
You mentioned in a previous interview that KfW is involved in building roughly 100 schools in Upper Egypt. What are the updates of this project?
On behalf of the German government, we are supporting Egypt in building public primary schools in different regions. Currently, we are financing the Quality Education Support Programme with a first phase that includes 70 schools in Assiut and Sohag. A second phase will involve around 16 schools in Belbis, Sharqeya.
What is difference about these schools?
The schools create an environment that is especially conducive to effective learning. A combination of angling the buildings north and installing sun-blinds in front of the windows leads to classrooms being flooded with daylight without students being blinded by the sun. This makes the buildings also more ecological, requiring less artificial light. The school premises include playgrounds, which create a safe environment for kids to relax and have fun during breaks. Moreover, the design of the schools allows for renting out some of the unused space over the weekend to generate additional income.
These schools do not only teach how to read, write, and calculate, but they have a special emphasis on imparting so-called life skills, such as creative thinking, taking responsibility, assertiveness, or simply being on time. In a sound learning environment, such skills can be taught more effectively.
One of the most important benefits is that these kinds of learning-friendly schools are not more expensive to complete than usual public school buildings. Also, starting with the beginning of construction, a committee involving, for example, parents, teachers, or representatives of the municipality helps to establish ownership of the community.
Another feature is the School Maintenance Allocation Fund (SMAF), which rewards especially clean and well-maintained schools, setting incentives for school staff and students to take good care of the facilities.
We work with the General Authority for Educational Buildings to focus especially on areas that really need schools. Since 1996, we have completed six phases of school constructions under different project names.
When will the current phase be finished?
The schools are currently built by local contractors. This means that if a school is to be built in Assiut, we are carefully choosing contractors from Assiut to facilitate local job creation. I expect construction to be finished mid-next year. The German taxpayers supported the first phase with €36m, whereas the second phase costs €10m.
Would you please tell me more about your cooperation with other financial institutions in Egypt?
Currently, we are cooperating with European partners, including French and Swiss development agencies as well as institutions of the EU. This kind of cooperation significantly reduces transaction costs and can increase development impact, although each donor follows their own rules. However, we place great emphasis on the fact that the Egyptian project implementing agency is in the driver seat of each project.
While this cooperation has significant advantages, it also requires a more complex coordination as all partners need to follow their own rules and regulations. An early harmonisation and coordination of the processes is certainly challenging for all involved, but then results in a considerable efficiency gain during project implementation. In one water sector programme, for example, 71 single water supply and sanitation projects are being implemented under one umbrella.
Together with our European and Egyptian partners we also explore possibilities of a more rapid project implementation—of course within the framework of valid approval processes and procurement guidelines. It simply makes a big difference for the direct beneficiary whether a reliable water supply or a school is available in his town or village two years earlier or later.
What about KfW projects in the energy efficiency sector?
On behalf of the German government, KfW is currently establishing a couple of projects in the domain of energy efficiency. From our experience in Germany, we know that by adding insulation or solar heating, energy efficient real estate increases in value due to lower energy consumption and higher financial saving potential. With rising tariffs on electricity, such investments become increasingly relevant.
We are also considering credit lines which may target MSMEs or the vast potential for solar heating on rooftops.
KfW once mistakenly transferred money. Could that happen again?
A long time ago, KfW mistakenly transferred money due to an IT-automatism to another financial institution in the US. It goes without saying that this should have never happened. The reasons for this were examined in detail and comprehensive consequences were drawn, particularly by overhauling the IT infrastructure.
However, most of the money was transferred back to KfW. And, it has to be kept in mind that KfW, with its AAA rating has been consistently rated “world’s safest bank” by Global Finance Magazine for the last couple of years.