Cairo struggles to attract power and water sector investment

Egypt is trying to attract a larger number of private developers to invest in its power and water sector, but continued political upheaval is causing projects to be delayed. Published in MEED, 8 January 2014

As Egypt’s military and civilian leaders vie for control of the levers of political power, the rest of the population is left wondering if the country’s political classes will ever be able to sort out their electrical power needs. Over recent years, power outages have been all too common, particularly during the summer months when locals turn to their air-conditioning units for relief from the heat.

According to Egyptian Electricity Holding Company (EEHC), the state-owned body in charge of production, transmission and distribution systems, Egypt had about 29,074MW of installed capacity at the end of June 2012, compared with peak demand of 25,705MW. However, a combination of ageing networks and rapidly rising demand means that rolling blackouts and service interruptions have become a fact of life for many people.

Capacity targets

Demand is currently growing by more than 7 per cent a year and the authorities have been struggling to bring additional capacity online at a similar rate, although there is no shortage of plans to add more generating units.

Under EEHC’s current five-year plan, which covers the period from mid-2012 to mid-2017, 12,400MW of thermal generating capacity is due to be added, of which 11,100MW will be commissioned during the five-year period itself and the remaining 1,300MW will be commissioned during the following fiscal year, 2017/18. The plan also includes further investment in the country’s transmission and distribution networks.

Data from other sources suggests that even more capacity could be added in the coming years. According to the Ministry of Electricity & Energy, the planned capacity increases by mid-2017 amount to 17,840MW, including close to 3,000MW from renewable sources, principally wind power. One industry source suggests that as much as 45,000MW could be added to the system in the decade after that, at a cost of some $72bn.

Having plans is one thing, but getting the projects off the ground, particularly at a time of political upheaval, is proving to be a more difficult task. The latest setback came in December, when the ministry announced it was extending until March the bid deadline for the build-own-operate contract on a planned 2,250MW combined-cycle power plant at Dairut, in the central Assiut governorate. The scheme entails three 750MW units being built on the site at an estimated total cost of $2.2bn.

The Dairut project was originally launched in early 2010, but has suffered a series of delays. In June 2010, 10 firms or groups were prequalified for the scheme, with bids due to follow soon after and an award scheduled for November that year. Prior to the latest delay, the bids had been due for submission this month.

It is not clear what has caused the latest delay to the project, but the slow progress is illustrative of the power sector as a whole.

International funding

One significant issue has been the difficulty in obtaining funding for new power plants. Traditionally, the government has relied on financing from international institutions. In July 2005, for example, the African Development Bank approved a loan of E175.9m ($240m) to co-finance the Kureimat power plant near Cairo and it has since agreed to provide a further $1.2bn to support a series of other power generation schemes around the country.

More recently, in June, the Washington-based World Bank approved a $585m loan to support the 1,950MW Helwan South power plant, a project that is also being supported by the Kuwait Fund for Arab Economic Development. Additionally, in October, the European Investment Bank agreed to provide E205m to support the E413m cost of converting an existing open-cycle gas turbine power plant at El-Shabab to a combined-cycle facility, increasing its generating capacity from 1,000MW to 1,500MW in the process.

But perhaps wary of having to rely too heavily on such multilateral institutions, Cairo appears keen to widen its sources of funding and has been trying to attract more private developers by launching several independent power projects (IPPs).

“Most schemes are financed through international financial institutions and the appetite for these is becoming more limited now, so Egypt is pushing towards IPPs,” says one senior industry executive in the country.

Under EEHC’s five-year plan, close to half of the new capacity is supposed to come from private providers. The state-owned body will build and operate 6,900MW of the planned 12,400MW increase, but the private sector will provide the remaining 5,500MW. Dairut is one component of this private sector provision, alongside a 1,300MW facility at Qena in Upper Egypt and a 1,950MW plant at Beni Suef, to the south of Cairo. When these three projects were announced by the ministry in March 2013, it claimed they would help to end the problem of power outages.

The Egyptian authorities have previously attracted private firms to build, own and operate three power plants, at Sidi Krir in the West Delta region and at Suez Gulf and Port Said East in the East Delta region. These units came on stream between 2001 and 2003.

Lacking appeal

However, it may be harder to arrange such projects now, given the attitude of international banks towards the country in light of the political instability of recent years. “We consider Egypt as uninvestable until all the political constituencies are engaged,” says one senior US banker, speaking in general terms about the opportunities at the moment.

Another executive at a large Asian bank that is heavily involved in the Middle East says putting money into Egypt’s power sector is too risky at the moment, as is the case for neighbouring Libya. “We are not lending into Libya and Egypt at the moment,” he says. “IPPs are heavily reliant on what the government has to offer and their willingness to step in in case of problems. We struggle with sovereign risk with Egypt, even with guarantees from the Ministry of Finance. The situation will have to improve [before we change our approach]. We’re still in a wait-and-see mode.”

Egypt needs as much external investment in its power sector as it can get because the government’s own finances are in such a parlous state. In the past financial year, which ended on 30 June, the government ran a deficit equivalent to 14 per cent of gross domestic product (GDP). The US’ Fitch Ratings expects that to fall slightly to 12 per cent of GDP in the current financial year and to drop again the year after. However, even with these improvements, the agency points out that the government’s room for manoeuvre is still very limited, with interest payments, wages, salaries and subsidies accounting for 75 per cent of total spending.

International donors, most notably the Gulf states of Saudi Arabia, Kuwait and the UAE, have helped to ease the situation. Some $15bn has been pledged in deposits, grants and project spending since Mohamed Mursi was thrown out of office in a coup in July last year, and $10.7bn of that has already reached Egypt. That has helped to fund a number of stimulus packages, but it is not clear how much of it will go to shoring up the country’s power sector.

Alongside the planned increases in generating capacity, the government has also been trying to tackle rising demand and the high costs of subsidies. In January, it announced the latest price increases intended to help curb electricity use. However, almost all households still benefit from electricity subsidies and residential users account for the biggest share of demand, at 42 per cent of the total. They are also not always prompt payers of bills. The UK-based Economist Intelligence Unit says a combination of subsidies and payment arrears by consumers has left EEHC with a major revenue shortfall and has affected its own payments for natural gas, the fuel used for about 80 per cent of Egypt’s power generation needs.

Cross-border links

While the country struggles to match its generating capacity with rising demand in the short term, in the longer term there will be further help from its allies and benefactors in the Gulf. Late last year, Riyadh formally agreed to build a 3,000MW, 1,500-kilometre transmission cable to Egypt to supply it with electricity. That followed a memorandum of understanding to build a cross-border connection, which was signed on 1 June last year.

Some financial support for the scheme has already been secured from the Kuwait-based Arab Fund for Economic & Social Development. In its final board meeting of 2013, held in early December, it approved a KD45m ($160m) loan for the interconnection project. That will be a welcome, albeit small, contribution to the total cost of the scheme, which has been estimated at $1.6bn-2.1bn.

A survey of the route has already been completed. Tenders for the construction contract are expected to be launched in the first quarter of 2014, with work due to begin the following year.

Egypt already has interconnection agreements with Jordan and Libya, and the link with the Gulf will add to its electricity security. However, the interconnection scheme with Saudi Arabia could yet fall foul of the political upheaval in Egypt. The project has already been delayed several times and the uncertain political situation means that industry figures are having to take a realistic if not pessimistic approach to the future.

“The government changes have had an impact on power projects,” says the senior industry executive. “We hope things will improve, but before that happens we might see more problems.”