By Ihab Aldobabby and Ahmed Farahat
Egypt’s successive governments have each renewed a bet on private sector participation in developing services projects under the Public Private Partnership (PPP) system. However, steps to begin tendering the projects move slowly and challenges abound.
In the financial statement of the general budget for the 2014/2015 fiscal year, Finance Minister Handy Kadry, said that he will focus on fiscal policy during the coming phase in order to re-prioritize public spending and achieve social justice. The process will involve moving growth rates forward through government investments and joint ventures between the public and private sectors under the umbrella of PPP partnerships.
AterHanoura, Chairman of the Public Private Partnerships Central Unit at the Finance Ministry, told Daily News Egypt , “We have 12 projects in the education, health, ports, and transport sectors. The projects are in different stages; some have been studied, others prepared for tender, and others still under study.”
Hanoura said that companies were prepared to bid for the Abo Rawash sewage station project. Amendments were introduced to the tender following directives issued by President Abdel Fattah Al-Sisi.
The project includes designing, funding, and expanding the station’s absorptive capacity of 1.2 million cubic meters to 1.6 million cubic meters daily, as well as the establishment of a second advanced treatment stage for the station. The project also provides for complete operations and maintenance for the plant, and is set to be implemented within 4 years.
Plant expansions were scheduled to be implemented and absorptive capacity expanded first, but the directives recently issued by Sisi stipulated that implementation take no more than 2 years and that the second treatment stage be completed first. The other stages of the project are to be implemented following these stipulations, according to Hanoura.
He added, “The amendments will increase investment costs for the plan, but they are beneficial overall. The amendments will limit pollution rates and unite us with alliances qualified to bid for the project, and have already been agreed upon.”
He pointed to the agreement between the European Bank for Reconstruction and Development, the International Finance Corporation (IFC), the National Bank of Egypt, Banque Misr, and Commercial International Bank (CIB), saying that these institutions were the main financiers of the new amendments to the project. The investment cost will not be re-evaluated and the banks will offer a loan to the winning alliance during the first stage of project implementation. This loan will be available until the start of the second phase, which will involve increasing the plant’s capacity.
According to previous estimates, the cost of investment in the Abu Rawash plant measured approximately EGP 2.5bn for 20 years, and the bid is scheduled to be awarded and the contract signed in February.
Four alliances are competing for the project, the first of which is led by Orascom Construction and includes France’s Viola, Spain’s Aqualia, and Egypt’s Ay-Kat. The second alliance is comprised of the UAE’s Metito, Germany’s Hochtief, and Turkey’s PWT. They are competing with giants Kharafi National and Degremont, Kuwaiti and French respectively.
These companies are qualified to compete in the tender in February and obtained the necessary documents and requirements attached to the contract in March.
They are given a deadline of 45 days to study the bid requirements, but sometimes companies request a longer duration to prepare more studies and inquiries.
Hanoura pointed out that the timeline between the date that the project is tendered and the date on which bids are submitted ranges between 5-7 months, including a six month period in which companies prepare bids.
In an attempt to refute criticisms that purportthat the unit has been slow in carrying out its work, Hanoura pulled out ten volumes of the contract concluded by the Ministry of Higher Education and the University of Alexandria with a consortium of companies to finance implementation, operation, and maintenance of the Al-Mouwasat University Hospital and the Smouha Maternity Hospital and Blood Bank.
He added: “Companies submit their bids in boxes carried by pick-up trucks, and we must read and examine all documents. The companies need periods of time to prepare bids and price services.”
Hanoura said, “If the unit or body offering the tender wants to delay awarding the bid, this decision must be well thought-out. In one of the tenders, the tender period was shortened to 3 months and the qualified companies requested more time to prepare the bids. However, the party offering the tender refused, which led to the companies withdrawing due to an insufficient duration of study.”
He explained that contracts for projects in which the private sector participates are different than equipment supply, construction, or service provision contracts, because the partnershipcontains all previous contracts, excluding the financial, design, and administrative aspects and maintenance plan. The contract period oftenlasts 20 years or more.
He added, “Each portion of the project will be priced separately, which will require an audit in order for the price of the service to be determined. This will entail that either the competitor wins the bid and incurs large costs that will impact them throughout the period of the contract, or they refuse the offer. In the second case, the company is surrounded by potential risks and conducts extra studies, and for this reason the period between offering the project and awarding the project is quite long.”
He said that the High Committee for Participation agreedto offer three projects and conduct studies. These include a river bus project, a technological zone in Maadi, and a real estate automation project with a total investment cost of EGP 1.86bn.
Hanoura emphasized, “We are looking to launch major projects with private sector participation in the coming period.”
The government is hoping to assign development for service projects to private investors in order to ease the burden on the public budget, which currently suffers from a chronic shortfall that has been estimated at EGP 240bn for FY 2014/2015, equivalent to 10 percent of GDP.
He said that the river bus project will cost between EGP 500-600m and aims to increase the river transport fleet as well as the number of workers and passengers by offering 50, 100, and 200-passenger buses. The new buses willhelp reduce waiting periods to 10 minutes at most, while also serving to increase speed from 12 to 25km per hour.
The project includes funding for design, development, operation, and maintenance of 16 existing marinas and the addition of approximately 12 new ones.
Hanoura said that the PPP Central Unitopened the bidding process in order to select a consultant for the river bus project, and 13 consultants of various nationalities applied. The winning consultant will be chosen within the month through an agreement with the European Bank for Reconstruction and Development to finance studies for the project,which will come into fruition after the tender is offered.
The second project that the Supreme Committee of the PPP Central Unit agreed upon involves automating real estate in order to jumpstart complete documentation services across the country in 270 new offices. The process will take placeby engineering the development of documentation offices and existing main offices in all parts of Egypt, as well as renewing the connections between them. The project also provides for existing applications to be developed in order to host cloud computing and for some services to be provided to citizens through mobile phones, email, and hot lines.
Hanoura said that the project will require investments worth EGP 560m, and thePPP Central Unitis currently conducting negotiations with two bodies to fund feasibility studies for the project. Tender procedures are set to begin next month.
Approval has been granted to offer the first phase of a technological zone project in Maadifor bidding at a cost of EGP 700m.
This project includes the construction of several buildings in the technological investment area in order to export communications services to meet growing local and global needs for communications and information technology services and communications centers. A growing need also exists to absorb expansions, develop services locally, and export them globally. The project will provide approximately 40,000 direct employment opportunities.
Hanoura said that projects involving private sector cooperation have succeeded in Egypt and form a point of interest in some Arab and African countries, who have borrowed a law regulating partnerships between the government and the private sector or large portions therein.
He also pointed out that the European Bank for Reconstruction and Development requested to acquiesce a share of Orascom/Aqualia, which conducted a project involving a wastewater treatment plant in New Cairo through an alliance between the two companies. The companies were awarded the project at the end of June 2009, and the value of the contract was EGP 2.646bn.
The goal of the project was to design, build, fund, operate, and manage a wastewater treatment plant with a capacity of 250,000 cubic meters daily to treat wastewater in New Cairo, Madinaty, and Mostaqbal. The duration of this project has been set at 18 years.
Hanoura said that an international financing organization like the European Bank for Reconstruction and Development has requested to invest in a project with private sector participation. This is an indication of the success of these projects, he noted.
He added that the PPP Central Unit approved a request submitted by the bank and the company is still awaiting permission from the Urban Communities Authority, the body that offered the project for a tender.
Hanoura stated that a lack of studies represents the biggest challenge facing the projects involved, because the parties offering the tender often present the project as an idea only. After this, study is required of authorizations to implement the project through a partnership.
He added, “Sometimes, we bring together information on the projects from the street. This is a difficult matter;for example, studies for the river bus project were supposed to have been completed within 12 weeks. The studies took 10 months to finalize due to a lack of information available from the party offering the tender, which required that consultant contracts be amended so that they would also be assigned data collection.”
Hanouranoted that Eng. Prime Minister Ibrahim Mehleb decided to establish a sub-unit for private sector partnerships in all ministries and authorities that can offer projects for a tender in partnership with the private sector. The Central Unit will be charged with training employees of the sub-units in other ministries.
He added that each sub-unit would include technical, legal, and financial personnel, and PPP Central Unit officials would train employees of these units on participation project studies.
He pointed out that a committee is being formed in the Cairo governorate to facilitate follow-up on implementation of the river bus project, along with with other committees at the Ministries of Communications and Education.
Hanoura also said that high interest and inflation rates and currency fluctuations do not represent the biggest fears for companies applying to compete for partnership projects, since they study these indicators and take them into account during the bidding process.
“The companies are looking for political and economic stability to ensure that the projects will succeed. It is wrong to hold a tender and oblige companies to bid in unstable circumstances because the body offering the tender in this case will see two outcomes: either the companies will be reluctant to compete, or they will give high prices for financial offers.”
Hanoura pointed out that a major project was offered for bidding previously by the Ministry of Water Resources and Irrigation to connect the waters of the Nile with 250,000 feddan (1 feddan = 4,200 meters) on the Cairo-Alexandria Desert Road. The goal was to reclaim the space after sanitizing water wells in the area. The area itself is characterized by quality agricultural products, a large proportion of which are exported.
He said that a major project was scheduled to be offered for a tender in 2011 before the January 25th Revolution. Following the revolution, the Irrigation Ministry conducted tender procedures. The Central Unit felt that the project should be postponed, but Irrigation officials refused to delay the tender until after May 2011, the deadline for companies to submit bids, because the World Bank was charged with financing the studies and the financing contract would expire in July 2011.
Hanoura added, “The result was that two out of four companies withdrew, and the day on which bids were supposed to be offered, a third company withdrew. Those that remained submitted tender prices at more than 3 times more than what was previously estimated.”
Hanoura said that England is most successful in public-private partnerships and currently boasts 1200 such projects, of which 750 have been fully implemented while the rest remain in various stages of construction or tendering.
He pointed out that these projects were carried out over nearly 35 years. During the first ten years, four projects were implemented, and that number grew to 20 over the subsequent 5 years. Over the last 20 years, 700 public-private partnership projects have been implemented.
He stated that the sectors that find it most difficult to work under this model on a global level are education and health, as these fields require 3 years from the beginning of the tender through financial closure. England implements these projects over 12-15 months, of which 3 months are allocated to studies and the rest to the tender and award.
He continued: “If projects are underway in England that are similar to those in Egypt, and sectors with solid expertise are in existence like health, schools, and hospitals, they will require between 8-9 months from the start of the tender through the award. These are good rates, taking into account government bidding contracts that are have been worked on for a number of years.”
He said that contracts for private sector participation projects in Egypt have set mechanisms to solve potential disputes. Partnership laws stipulates that it is permissible to use arbitration mechanisms to resolve disputes that arise from contracts after the Supreme Committee approves the measure. The Supreme Committee monitors the program, and all projects that are negotiated include a dispute resolution mechanism through arbitration. The High Council has the right to refuse or accept arbitration.
“The arbitration system stipulates that the headquarters for arbitration is located in the Cairo Regional Centre for Commercial Arbitration, and that Egyptian law is the main source for arbitration for projects implemented in Egypt.”
He said that the presence of arbitration headquarters in Cairo does not mean that it is local arbitration, taking into account the fact that this is an international body and that its domestic location does not necessarily make it ‘local.’
He stated that if a dispute arrives at arbitration, the UNCITRAL rules adopted by the United Nations will be followed, under which the UN prepared international trade law.
In conclusion, Hanoura said that arbitration is the final stage of solving a dispute, and in each stage of adjudication, the company may not abandon its contractual obligations. The same stipulation applies to the government as well.