The volume of business for construction companies affiliated to the Holding Company for Construction (HCC) have declined by 40% and 60% after the Central Bank of Egypt (CBE) decided to liberalise the exchange rate of the local currency. Companies were affected by the decline of financial liquidity with the increase of the prices of construction materials, as well as the government contracts’ continuation of using pre-flotation prices, awaiting the approval of the price differences.
In November, the CBE decided to liberalise the exchange rate of the Egyptian pound against the US dollar, which led to an increase in the price of the US dollar in the official market from EGP 8.88 to more than EGP 17.
Several companies affiliated to the HCC have demanded quick payment of compensations for the remaining businesses in the projects to be undertaken. These projects were affected by the increase of prices after the state’s decision to float the local currency.
They stressed the importance of extending the terms of contracts for eight months instead of three to six months, as recently approved by the cabinet, in order to avoid fines.
Ahmed Fouad, member of the board of directors of the Construction and Housing Company of the HCC, said that the cabinet has not provided any compensation to any construction company affiliated to the HCC, despite the Compensations Law which was approved by parliament last month.
He added that the late provision of compensations has lead to a decline in the performance rates of the affiliated construction companies, and projects have not been implemented due to the decrease in financial liquidity resulting from the increase of material prices.
Fouad explained that the construction companies affiliated to the HCC are preparing a study to look into the impact of the Egyptian pound’s flotation. The study will be completed by the end of January in order to be presented to the Minister of Public Sector Affairs Ashraf El-Sharkawy in February.
Fathy Sayed, vice president of financial and administrative affairs in the General Company for Construction-Roland, said that the company’s business has declined by 50% since the flotation due to the lack of financial liquidity.
He added that the large increases in the prices of materials, which have almost doubled, had led to reducing the company’s spending on work implementation, with the contracted companies continuing to use the old prices and not taking the price differences into consideration.
Sayed demanded paying quick compensations to the company that takes the difference of materials prices in the remaining projects into consideration, until full compensations are paid.
Right before the flotation, Sayed had stressed that the company has signed a contract to supply the needed equipment for water processing in Sharqeya, for the benefit of the National Authority for Potable Water and Sewage, while it imports the majority of equipment from abroad in US dollars.
Ismail Abdel Aziz, deputy head of the financial and administrative affairs in the General Egyptian Company for Buildings, said that the value of materials in the contracts implemented by the company has increased by 40% after the flotation.
He added that the company will not bear the implementation costs without obtaining the price difference of materials, due to the company’s inability to implement projects at the same prices, given its financial commitments at the end of every month, including the wages of its employees.
Abdel Aziz emphasised the importance of consulting the cabinet and construction companies before issuing compensations to contractors, in order to avoid financial losses and delays in projects currently being implemented.
A source from El Moqawlat El Masrya-Mokhtar Ibrahim Company called for speeding up compensating the projects implemented by the company and affected by the recent price hikes of building materials.
He added that many developers rejected amending contracts with contractors after the price increases of steel and cement.
The source warned against contractors’ reluctance to continue the implementation of projects due to companies’ inability to abide by contract terms and conditions. This applies especially to small companies that suffered big losses due to bearing high costs as a result of the increased prices and the lack of terms that keep their rights.
He pointed out that construction companies that implement residential projects will not face many problems because the Ministry of Housing decided to come up with compensations for price differentiations in collaboration with the Ministry of Finance.
He stressed that the Ministry of Housing must deal with all contractors alike, not only state-owned companies, and listen to their problems that followed the flotation.
He explained that a number of major construction companies rectified their situation in their new projects, and added more items to contracts signed in Egyptian pounds, attributing raw material price differentiations to the awarding body.
A source at the Egyptian Contracting Company-Al Abd said that the volume of the company’s business declined by 40% and 60% following the pound’s flotation.
He added that the financial returns on projects implemented by the company during the past two months declined by 20%, after construction material prices increased. The flotation led to increasing production costs which contributed to a lack of liquidity and the suspension of projects.
He explained that the company implemented projects that require more than 100 tonnes of steel and cement per month. The company cut its needs to 50 tonnes per month after the price hikes.
After the flotation, iron prices increased to register EGP 10,575 per tonne by the end of December.
The source called for speeding up the disbursement of compensation to companies so that projects are continued, especially after the subcontractors’ reluctance to complete some projects.
He pointed out that the grace period approved by the cabinet allows companies three months to complete housing works and six months for electromechanical works, which is inadequate in light of the lack of financial liquidity. The source demanded to extend the contract period to eight months instead of three to six months in order to avoid demurrage.
He pointed out that all companies affiliated to the HCC are currently operating at limited percentages of their capacities, and will fail to continue to bear successive losses after the flotation.
Construction companies’ subsidiaries to the HCC called on the cabinet and the New Urban Community Authority to calculate price differentiations in the contracts signed by the company and the government to implement projects.
The Housing Committee in the House of Representatives is preparing a draft law for compensating construction companies, supplies, and public services contracts with the government for price increases incurred in those contracts after the pound’s flotation.