In an interview with Daily News Egypt, the Egypt Director for the European Bank for Reconstruction and Development (EBRD), Philip ter Woort, talks about the bank’s business in Egypt.
What projects has the EBRD committed in Egypt?
The EBRD started investing in Egypt at the end of 2012, after its shareholders decided to extend the Bank’s regional mandate to the Southern Eastern Mediterranean region, and consequently we are the last international financial institution to become active in Egypt. Despite this relatively short period, the EBRD has already committed to Egypt investments in excess of €1bn through 26 projects, out of which: 28% is in the energy sector (including power); 26% to finance banks (including our strong cooperation with the National Bank of Egypt (NBE); 30% is related to industry, commerce, agribusiness projects; and finally 18% has been in infrastructure projects (transport, water and wastewater). The EBRD has had a good start in Egypt, but, of course, we would like to do more in support of Egypt’s economic development and we are working on a wide range of new projects. In this context, last year we financed about 15 projects for an aggregate investment of €550m, and this year we hope to exceed that amount.
Will you increase the portfolio regarding Egypt in 2016?
The EBRD is to a large extent a demand-driven institution; therefore it is often difficult to predict future business, as that is subject to economic drivers as well as the projects we are being presented with. The majority of the bank’s future activities in Egypt will continue to aim at supporting private sector development, and it is strongly correlated with the level of private sector activities in the country. Here we are seeing positive signs with a more engaged and active private sector, and on this basis we anticipate that the EBRD’s business volumes in the near future will be in the range of €700m-€800m.
Which sectors are the most promising in Egypt?
We aim to provide support to all sectors of the economy, though it is clear that the power sector is of pivotal importance to Egypt. The bank has therefore provided substantial focus supporting the Egyptian power sector during the last two years. In 2014, we have financed a large power project (West Damietta and El-Shabab power plants) for €139m, to convert these two open cycle power plants to combined-cycles, thereby increasing the aggregate capacity by 50% (to 2,250 MW) and improving efficiency levels of both plants to 51%. We are now considering providing a € 160m loan for the construction of a new gas-fired power plant in the Delta (Damanhour), subject to our internal approvals. One of the most exciting new developments in the Egyptian power sector is the focus on renewables.
The EBRD has played a prominent active role in assisting the government, New and Renewable Energy Authority (NREA), and Egypt ERA, to develop a bankable legal framework for renewable, with particular focus on the Power Purchase Agreement, a key document. On top of this, we are also in detailed discussions with many renewables developers to finance individual renewables projects, both under the Feed-in-Tariff schemes, as well as larger projects. The costs to develop these projects vary, but our approach is to finance a maximum of 30% of the total project costs. We hope to announce our first renewable projects in Egypt beginning 2016.
The EBRD is known for providing water and sanitation projects. What are the bank’s projects in this sector?
This is clearly a very important sector in Egypt, and one of the government’s priorities which will allow visible progress for the Egyptian people. As only about half of the Egyptian population is connected to sewage systems, it will take a concerted effort of all stakeholders to address this, and the EBRD intends to play its part. Last year, we provided a loan of €55m to expand a water and wastewater treatment plant in Kafr El-Sheikh. This project has a strong environmental component, including reducing the levels of waste in the Burullus Lake in Kafr El-Sheikh. We are in on-going discussions with the Holding Company for Water and Wastewater (HCWW) to identity a second project in the sector.
Are you co-financing any solid waste projects?
In the municipal sector, we are discussing with Cairo Governorate, and with the Ministry of Urban Planning and Informal Settlements, the possibility to provide technical support regarding the collection and processing of solid waste in the Cairo governorate. This technical support should assist the governorate and the ministry on deciding how to structure solid waste collection and treatment in Greater Cairo, going forward. We hope that, in the second half of 2016, we can start looking at possible finance projects for solid waste in the Cairo governorate.
High-energy intensive industries are also looking at solid waste as an alternative to gas, and the EBRD has already played a role in this exciting new field of development through an equity-finance of €9m to El-Sokhna AF (a subsidiary of the Lafarge Cement Egypt plant). The finance is part of a programme to develop an alternative input-fuel supply chain to the Lafarge Cement plan. This is an innovative project, as it attaches an economic value to solid waste, and we hope this project will act as a demonstration effect to be repeated. This project is also part of a wider effort to develop a neutral carbon path for the Egyptian cement industry.
The EBRD supports some Egyptian banks in financing SMEs. What are the recent requests you received, the bank’s decision, and how many loans did you give?
The SME sector is a very important sector for the EBRD, as SMEs are the backbone of most economies, including Egypt’s. The bank’s model is to capitalise on the wide branch network of local banks in the country, and to provide medium-term loans to local partner banks for on-lending to their existing or new SME clients. Our first client under this programme was the National Bank of Egypt (NBE), through the signing of a €39m loan, our first SMEs credit line in Egypt in the second half of 2013. We also signed a second SME loan with the NBE in 2014, which illustrates the need for such support. In addition, we signed two innovative new credit lines with NBE, a €24m ‘Energy Efficiency Facility’ to finance small-scale renewables and energy efficiency loans, and a €16m ‘Women in Business’ facility, for lending to women-led SMEs or mid-caps.
This year, we have signed a similar SME loan of €77m with QNB Al-Ahly, which reflects an increased demand from local banks to look at the SME market segment, partly driven by government yields coming down. In addition, we are discussing with the National Bank of Kuwait (NBK) a similar €39m SME loan. The EBRD in Egypt also offers a separate line of engagement with SMEs through its “Small Business Support” (SBS) programme, which facilitates advisory services to SMEs covering a wide range of areas, such as strategy, marketing, human resources, management information services and assistance in developing business plans to seek finance. To date, in excess of 260 Egyptian SMEs have been the direct beneficiary of this successful programme. The SBS support is very complimentary to the direct finance support the EBRD can give to Egyptian SMEs, or through our local partner banks.
The Central Bank of Egypt’s (CBE) policies aim to limit hard currency, affecting the business of some SMEs. Do these policies affect your business with SMEs or your loans?
It is good banking practice to match the currency of our loans to the currency of the future expected revenue streams of our clients. Therefore, for local customers with no access to foreign currency and with no foreseen export sales, we would consider lending Egyptian pounds instead of foreign currency. The foreign exchange situation is currently indeed challenging for companies, but the assumption is that this is temporary and that, on the back of anticipated foreign direct investments and increased tourist generated revenues, the foreign exchange reserves will start to improve.
Will the bank participate in the 1m acres reclamation project?
The overall concept of the 1m acres reclamation projects is good, but before a good concept can turn into a bankable project, more information and work are needed for the banks to be able to make well-informed credit decisions. One important question is how the project will be sub-divided into smaller components, and the way the government will proceed allowing external parties to bid for these projects. We hope there will be more clarity in the coming months which will allow us to look into this project in detail. One possible new area of engagement is a decision by the EBRD to use Egypt as a pilot country for irrigation projects. This is rather exciting as we hope that the EBRD can play a constructive role in improving the efficiency of current irrigation practices in Egypt.
When would Egypt become a full country of operation for the EBRD?
We are working closely together with all the EBRD’s shareholders, including the Egyptian authorities, on a decision over Egypt becoming a ‘full recipient country’. The EBRD shareholders are expected to discuss this issue again soon.
Egypt became recently a member in the Asian Infrastructure Investment Bank (AIIB) – will this affect your portfolio regarding Egypt?
I only see positives here. First of all, the demand for finance in Egypt is high, and will remain so for the years to come and consequently there is room for all of us. Secondly, the AIIB can play an important role in mobilising Chinese and Asian capital for Egypt. Moreover, we traditionally cooperate with development and financial institutions, and the AIIB will be a brand new institute, and we would very much welcome to work together and to share our expertise and our experience in Egypt, as well as in our traditional countries of operations.
One of the bank’s roles is to attract new investors to the Egyptian market. What are the bank’s achievements in this regard?
A core component to EBRD’s mission in Egypt is to mobilise external capital by inviting international banks as co-financiers in our projects in Egypt. Another way is to promote Egypt to international investors and, for instance, in the coming week, I will be in Taiwan to address a large number of Taiwanese businessmen and investors about the investment opportunities in Egypt.
Does the issue of freezing Juhayna CEO Safwan Thabet’s assets and referring Mohamed Farid Khamis of Oriental Weavers to the prosecution on charges of monopoly affect the flow of investments in Egypt?
We never comment on such ongoing cases in any country. In general, though, foreign investors look at a wide range of considerations prior to deciding to invest in a country, and the predictability of the external environment is, of course, an important consideration. Investors could be interested to see how the judicial process evolves in such cases.
What is your opinion regarding the Egyptian market in general?
I am cautiously optimistic as over the last 12 months, the country has made significant strides forward both economically as well as improving its attractiveness as an investment destination. The reforms announced in mid-2014 are reflective of a seismic change in the economic direction of the country. Assuming continued reforms on energy and subsidies, increased private sector engagement and solid social framework, the trajectory of Egypt looks positive.
What is your opinion on the new Suez Canal?
The New Suez Canal Project is, of course, already a fantastic success for national pride as well as in terms of execution. The long-term economic benefits of the New Suez Canal will be dependent on the growth of the world economy and related trade flows, which will determine the number of ships crossing the canal in the future. In the short-term, the Suez Canal Zone project is very interesting as it allows the development of light industry, logistics and infrastructure near the New Suez Canal benefitting from Egypt’s excellent geographical location and proximity to 8% of the world’s trade flow. We are discussing related project with a wide range of stakeholders, as we are very interested to provide our support to bankable projects in a wide range of sectors. The EBRD has developed an “Infrastructure Project Preparation Facility”, which is a newly established donor fund allowing the quick mobilisation of international project development advisors. The objective of this new programme is to allow countries to fast-track development projects, and we hope that we can put this to good use in Egypt as well.
Will the bank issue new studies regarding Egypt?
The EBRD’s flagship study is its annual EBRD Transition Report, which provides an annual comparison of all EBRD’s countries of operations vis-à-vis each other in terms of progress made to liberalise their respective economies. In addition, the bank works on more specific sectoral or cross-sectoral reports, for instance an analysis on possible constraints for SMEs in Egypt to access the local equity capital markets.