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Egyptian Investment Push

Posted in Middle East Business by thomthumb84 on November 8, 2009
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As the economic crisis continues to affect the Middle East many investors and developers are looking for projects in North Africa – particularly in Egypt. A number of major players have already begun circling Egypt on the look out for new projects. One of the most exciting projectsin- waiting was announced by Dubai based Al-Futtaim, who are currently looking for land in Egypt for a development similar to the $3.7 billion Cairo Festival City project on the outskirts of the capital. Philip Evans, Director of Commercial and Retail Leasing for Al-Futtaim Group Real Estate, did not present a time frame for the new development he said a new project would be similar to Festival City, a commercial and residential development in the suburb of New Cairo. “If we found the right site tomorrow, we would buy the right site tomorrow. It is just a question of the right site becoming available,” he said.

The firm expects to complete Cairo Festival City in 2015, a company statement stated. That site’s residential villas will go on sale in early November this year and its central commercial area will open in 2012 according to company executives.

 

Egypt projects

 

Qatar’s Barwa Real Estate announced in August that it would begin work on a $9 billion Cairo project in Q1 2010. The integrated and mixed use project is expected to spread over 2,000 feddans in New Cairo and take 10 to 12 years to complete. And Emaar Misr, a subsidiary of Dubai’s Emaar Properties, has already completed the construction of 5,000 homes in their new ‘Mivida’ community within New Cairo City. Mivida is the third master-planned community by Emaar Misr in Egypt, and follows the success of Uptown Cairo and Marassi, both currently progressing as per schedule.

Work on the Business Park of Mivida and Cairo Gate is also currently being undertaken. Throughout the region, it seems, interest is rising – but at a cautious pace. As Jalil Mekouar, Head of Middle East and Africa at Jones Lang LeSalle Hotels, said recently: “I definitely see expansion continuing… but it will be rationalised and focused as opposed to ‘let’s go out there as fast as we can’,”

Dr Khaled Sedky, Chief Portfolio Officer of Palm Hills Developments – an Egyptian firm, said: “At one time, when the crisis came, we thought ‘what are we going to do with Egypt? But a few months later, we discovered it had nothing to do with the crisis … the market is there and demand is organic.” “The country is opening up beautifully, and the government is doing a wonderful job to promote tourism and investment. Egypt is a market that will stay shining.” Philip Evans went further, saying that Egypt had “massive potential” and added: “The fundamental economics are good, and the forecasts are extremely good.”

 

Advantages

 

So what is the attraction within Egypt at the moment? Of course part of the appeal lies in trouble back home. Real Estate has taken a dramatic knock throughout the Gulf, particularly in Dubai, as projects run slow or are scrapped altogether. Property prices, which have fallen by around 50% from their peak last year, are forecast to shed a further 10% in 2009 and have a 20% chance of picking up before 2011, according to a recent Reuters poll. In contrast to this house prices in Egypt have declined by up to 15% and are set to stabilise at current levels for the rest of the year, stated EFG-Hermes in Cairo.

However, it is not just trouble at home that has made Egypt a particularly appealing target. There is a growing demand for real estate. The population of about 80 million is creating demand for about 30,000 new homes a year. “We haven’t had to import demand like in places such as Dubai. People want better houses, better offices, and more shops. About 95 per cent of our customer base is Egyptian.” said Youssef Hammad, the chief commercial officer of SODIC, one of the country’s biggest property developers.

Demand is not confined to residential and commercial construction. According to Mansour, the infrastructure and transport sector in Egypt recently attracted $3.5 billion in foreign direct investment and will continue to grow. As in any country, he said, infrastructure is the backbone of Egypt’s economy and the Egyptian government is therefore consciously pushing forwards with infrastructure projects to deal with the growing population. New projects include investments within the country’s railway network, roads and ports. Mahamed Mansour, Egypt’s Transport Minister, announced in February 2008 that an investment of EGP90bn ($16.3bn) would be made in the country’s road, rail, port and waterway infrastructure over a five-year period. Improvements are also being made to the country’s airports in order to cater for increased airline passenger numbers.

According to Daily News Egypt, the Egyptian Ministry of Investment has announced several ambitious airport projects. The plans include an EGP2bn project for a new Mubarek Airport in Cairo, an allocation of EGP6bn for other new airports and EGP5bn towards airport improvements. The country has already signed a MoU with the National Bank of Egypt to invest in the country’s roads and intends to spend 2.5 billion on railway projects – including the construction of a monorail in Alexandria. Throughout the world various contractors – dealing in electrification to signage, Intelligent Transportation Systems, and design and engineering— are being encouraged to form joint ventures with Egyptian organizations and start breaking into the infrastructure market. ‘Opportunities exist for businesses of all sizes’, Mansour told a meeting of the American Chamber of Commerce in Egypt. He maintained that even though money is tight in many parts of the world, spending continues in Egypt.

Reforms

 

The Government has also introduced a raft of economic reforms apparently designed to lure international investment including slashing taxes and seeking to streamline its customs to boost investment.

“The Egyptian government has liberalised a lot of the laws and removed a lot of the red tape surrounding real estate, so it’s a much more business-friendly place to be, compared to many years ago,” said Hammad.

However, despite these reforms many developers believe further steps could be taken by the government to remove the remains of red tape and attract further foreign investment. “Banking is up to speed and the country is not lacking liquidity, creativity, land, expertise or demand,” said Sedky. “However, legislation is something that needs to be worked out to allow greater feasibility for real estate developers and investors, and specifically for foreign direct investment and private-public partnerships.”

There is also great demand to overhaul the country’s mortgage system in order to encourage the younger population to participate in the housing market. It appears that the government is already pushing forwards with such an approach. Mahmoud Mohieldin, the Investment Minister, said in August that Egypt intended to amend its mortgage finance regulations to make home loans more readily available to young people. Both the deliberate and fortunate attractions within the Egyptian construction industry have made the country a highly desirable location for would-be investors, particularly those who are currently facing such considerable problems back home. And many lessons can, and will, be learnt by surrounding countries within North Africa who are eager to attract Gulf investors.

 

Future

Clearly the emphasis must lie in providing projects worth investing in while ensuring that the business environment is open and financially appealing for those who have taken a hit on their home ground. Morocco is just such a country and has already begun taking steps to attract investors. “In Morocco, there is still a lack of transparency in many areas such as legal, financing and administrative. Local authorities are aware of these problems … and there have been concrete actions put in place.” said Karim Beqqali, managing director at CB Richard Ellis for Morocco. If such steps are pursued throughout the area further investment from the Gulf will not be far behind.

New round of oil bids in Iraq

 Iraq is currently holding a second round of oil bids to establish which companies will be granted access to Iraq’s vast untapped oil. The original round of tenders, held in June this year, was considered by many to have been a failure. Much of this was blamed upon a con tinuing reluctance to let foreign companies into the country on commercial terms. A report by the United States Energy Information Administration calculated that the oil in ten still undeveloped Iraqi fields would fill about 41 billion barrels, worth a staggering $3 trillion at current market prices. When the prize is so significant it’s no surprise that the world’s oil companies are so keen to edge their way into the country. But Iraq is not going to give up these vast reserves to the first company to come along and any real progress will only be made through compromise and foresight on either side.

Obstacles

A number of commentators have laid the blame for the “tortoise speed” at which oil field licenses are being awarded squarely at the feet of the Baghdad Oil Ministry. It is argued that the Ministry repelled potential companies by insisting upon preliminary exploration and drilling work in order to provide unusually big upfront loans before they can be considered for long term deals.

A company executive was quoted as saying: “The ministry set very restrictive and unacceptable terms,” Christopher Walker, a former Middle East Correspondent of The Times, said: “It is no secret that Iraq’s parliament, still full of MPs who are wary of foreigners they fear are coming to “steal Iraq’s oil”, has obstructed progress which could have greatly assisted a timely return to economic normality by failing to pass the required laws.”

This paranoia within the establishment only further exacerbated a difficult and unattractive environment for foreign investors. Doubts were raised about International companies having to partner with state-owned firms and the requirement to share management of the fields, despite fully financing their development.

These factors, in combination with a lack of local know-how and a stubborn insistence on only offering rock-bottom fees to those foreign companies bidding to get the oil out left few companies enthusiastic about the proposition. The Ministry was, reportedly, only willing to pay for each extra barrel produced in a vain hope to return the country to its 1972 position when Iraq nationalised its oil industry and threw the majors out. Under the 20- year service contracts, firms would be paid a per-barrel fee for any crude they pumped in excess of a minimum production target.

“The oil ministry bottom line of remuneration for each extra produced barrel isn’t workable,” an executive from Japan Petroleum Exploration Co. Ltd. said. The 30 international companies that took part in the auction wanted far more for the use of their technologies and expertise than Iraq was prepared to pay. “There is something wrong here either in the ministry’s calculations or those of the companies,” said an official with Royal Dutch Shell PLC.

A leading Iraqi oil ministry official involved in organizing the bid round didn’t agree. “Our prices aren’t far from reality and they are reasonable,” said Abdul Mahdy al-Ameedi, deputy director general at the oil ministry’s petroleum contracts and licensing directorate. Iraqi Prime Minister Nuri al-Maliki denied that the oil auction had been a failure. He said: “We cannot talk about failure,” he told reporters in Baghdad. “The government and the oil ministry will not stop working to resume the investment that Iraq will need.”

 

First round

As a result of the undesirable conditions only one agreement with BP and the China National Petroleum Corp (CNPC) was contracted and this was signed only recently. Under the agreement, signed in October following much behind-the-scenes negotiation and the sweetening by Iraq of its taxation terms, BP and CNPC pledged to invest $15 billion in Iraq to build up output at the country’s vast Rumaila oil field. BP and CNPC plan to boost the Rumaila field’s capacity near Basra to 2.85 million barrels of oil a day. Rumaila, a vast reservoir of fossil fuel in southern Iraq, is said to hold 17 billion barrels of oil.

For many the actual signing of this contract is the first sign of the development of a more open market within the country and a new wave of interest is already flooding in. A consortium grouping U.S. and European oil giants Exxon Mobil Corp. and Royal Dutch Shell PLC has already signed a $50 billion deal to develop West Qurna Stage 1 field. The structure of the deal, which is essentially a service contract, won’t allow foreign companies to boost their own reported reserves and production numbers. Still, executives see them as providing access to Iraqi oil officials and a chance to work in the country’s fields, both crucial if Iraq continues to open up to international companies. “I am very happy today with this achievement,” Iraqi Oil Minister Hussain al-Shahristani said during the signing ceremony in the Iraqi capital. “Iraq is now on its way to develop its oil industry.”

Under the terms of the 20- year contract, the two companies are targeting a more than sevenfold increase in output in seven years — from the current 280,000 barrels per day to 2.325 million barrels per day. Further to this a consortium led by Italy’s Eni SpA, have signed an initial agreement to develop the 4.1 billion barrel Zubair oil field, which lies near West Quran and Rumaila. Eni and its partners, the U.S.’s Occidental Petroleum Corp. and South Korea’s KOGAS, aim to boost output to 1.1 million barrels per day within seven years, up from the current 200,000 barrels per day. According al-Shahristani, the combined project output from Rumaila, West Qurna Stage I and Zubair will exceed 6 million barrels a day in six to seven years, with the companies expected to invest a total of about $100 billion in the projects. Things do, then, appear to be looking up for the second round of bids in December when 10 unexplored oil and gas fields will be up for grabs. Exxon Mobil, Lukoil, CNPC and other oil giants are among the more than 40 companies that are eligible to participate in that auction.

 

Politics

However, as is so often the case with such unfeasibly large prizes, politics continues to play a fundamental role. Maliki has already had to attack lawmakers for summoning the Oil Minister to discuss his distribution of the nation’s oil wealth, saying this sent the wrong message to those wanting to invest in Iraq. Iraq’s government and lawmakers are divided over who has the right to authorize foreign oil deals, and parliamentarians are set to question Oil Minister Hussain al-Shahristani.

 The Prime Minister has also suggested that the recent and catastrophic suicide attacks within the city were designed to deter investors. “Unfortunately, the (bombs) coincide with the calls to question the oil minister … This questioning gives a discouraging message to the companies willing to enter Iraq’s oil market. It is in harmony with the saboteurs’ message.”

A number of analysts have also suggested that BP and CNPC will be very cautious about pouring investment funds into Rumaila until they know the outcome of next year’s election. Mahmoud al-Jubouri, an oil expert with Iraq’s South Oil Company, which has run Rumaila and will be BP’s partner, said: “They (the il firms) are not on firm ground. They will wait until they are assured that the deal is recognised by the next government.” The 20-year service contract that the firms signed with Iraq on Tuesday allows them to do just that. BP and CNPC are committed to spending $300 million in the first 33 months, a small amount for the oil majors and a comfortable length of time in which to guarantee some production increase.

 

Outcome

It appears that even political history could prove a spanner in the works as Iraqi oil of- ficials continue to complain that oil reservoirs may be damaged following Saddam Hussein’s push to produce too much oil too quickly without necessary precautions against future damage. Under such conditions the future of oil production within the country is not yet clear.

If progress is to be made it is vital that the country embraces outside parties and presents some concrete guarantees for potential investors. In doing so the chances of a slight loss for Iraqis is possible in the short term. However, the long term benefits, in terms of future investment, are beyond doubt.

Published in Issue 7, November 2009, of The Falcon (An Egyptian Gulf Bank Publication)

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