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Wednesday, 25 March 2020

How the Egyptian construction sector is responding to the covid-19 crisis: Osama Bishai, CEO of Orascom Construction

How the Egyptian construction sector is responding to the covid-19 crisis: Osama Bishai, CEO of Orascom Construction (PART 1 in a two-part series). Earlier this month our look at how infrastructure projects were faring in the early days of covid-19 had industry players tell us that projects have so far been largely unaffected. Fast forward three weeks and we’re looking at a very different world: Many businesses have instituted work-from-home policies, the government and the central bank have announced a raft of fiscal and monetary stimulus measures, flights have been grounded, and from today we will all be confined to our homes at night.

We spoke with two of the largest players in game to see how the industry is grappling with it all: Orascom Construction (our friends and associates on Hardhat) and Hassan Allam Holding. For part one this week, we spoke with Osama Bishai, CEO of Orascom Construction (OC) — part two, with Hassan and Amr Allam, runs next week.

Edited excerpts from our discussion with Osama:

The industry is looking at a slowdown as it imposes safeguards: Safety measures necessitated that OC temporarily slow work on some projects or suspend work on non-priority projects. These measures will be put in place for the next few weeks, after which we will assess the situation as new details emerge. Construction sites are potential hot zones for the spread of the disease, so these measures must be taken. I anticipate a substantial slowdown industry-wide as a result of these measures as all major contractors will have to adopt them. This is not altogether a bad thing as fighting this pandemic needs to be a coordinated effort.

We won’t know the real impact for another 6-12 weeks: It’s still too early to gauge how long this situation will last or what the full impact of it will be. I think we will get a clearer idea of the gravity of the crisis within 6-12 weeks. For now, the situation is very fluid, with circumstances changing every day. That said, I am an optimist. The world will survive.

The industry outlook for 2020: If the crisis continues, I anticipate that the industry slowdown will continue throughout 2020 as more valuable time of the infrastructure development cycle is lost. That will undoubtedly impact delivery on projects and deadlines. If the government or clients decide to accelerate the pace of work after the crisis, OC is ready to do it.

The industry is faces several risks at the moment. These range from rising unemployment and the likelihood of businesses going bust to the dynamics of global supply chains undergoing fundamental changes.

Smaller real estate projects and foreign companies are among the most vulnerable: Smaller scale building and real estate developments will likely be hit harder by the crisis than others. The slowdown is likely to be particularly acute for companies based out of the hardest hit countries. I can see delays down the road for projects that are Chinese-funded, as the likelihood of the disbursement of funds will slow down. I think the supply chain of the entire European Union (and not any one country in particular) will face increasing disruptions as factories shut down to slow the pace of infection. There’s also the human element, as foreign workers will need to go home to be with their families during these trying times.

Renewable energy offers hope: One way in which we see Egypt bucking a global trend is renewable energy. While globally, the oil price war between Saudi Arabia and Russia is expected to slow the development of renewable energy, this assessment isn’t really valid here. Egypt is slightly different because it has a solid pipeline of projects. Moving forward, I think Egypt’s gas needs to be used to create value-added products that can be then exported, while we rely more on renewables as our primary source of energy. That, coupled with improvements in technology that have lowered prices, renewables could end up being cheaper than fossil fuels, even at the rates they are today.

Through careful cash flow management, OC can weather the storm: We’re not too worried about the slowdown as we have a strong pipeline of projects. With our recent backlog, we are comfortable. Our focus now is maintaining our positive cashflow, because cash is key when weathering a crisis in our industry. We’re doing this by making our operations as efficient as possible while managing costs and avoiding unnecessary expenses, including avoiding renting or buying equipment we don’t absolutely need. This is being achieved by concentrating on essential operations and prioritizing essential projects. On the issue of unemployment, we have always retained our key people and talent during times of crises, and we do not expect to act differently this time.

OC has been working with its most vulnerable clients: In tandem with instituting safety measures for our workers, OC has made it a priority to communicate constantly with our clients and stakeholders. Not only to keep them informed, but to reach out to them in the event the covid-19 crisis has hit them hard. We don’t see an impact when it comes to projects that are funded through grants. But for clients that have been impacted, we’ve been working with them on their payment cycles. In general, there is a collaborative spirit all around and we don’t see contract disputes being a mainstay. On the contractor-side, I think force majeure can come into play in such unforeseen circumstances and on the client-side the industry has been very accommodating, with issues over payments being settled at the executive level. This type of collaboration is needed to help us all get by.

Gov’t stimulus has been supportive to clients: We’re also pleased with how the government has been reacting, as lower interest rates, increased liquidity and cuts to energy prices have helped our clients if not the construction industry directly. This goes to show how important government stimulus is in times of crisis.

The government must work with the construction sector to support employment: Because construction makes up a significant portion of the labor market, it is crucial that the government and construction industry players work together on initiatives that will help the sector and the economy as a whole.

There needs to be policies that prevent the industry from resorting to layoffs. These include deferring payment obligations on social insurance — which should help keep cash flow stable — and ensuring that arrears owed to contractors by the state be paid off as soon as possible. Accelerating payments to contractors will also help them meet their obligations to suppliers, some of whom are SMEs.

From crisis comes potential benefits: Moving forward, we need to take the lessons learned from the crisis and use it to our advantage. One prominent example would be to position Egypt as a key node in the global supply chain for construction materials and services. The crisis has impacted the supply chains from China to Europe. This will lead to a repositioning of distribution centers globally, and Egypt is in a great position to benefit from that.

Carving out a bigger place for the private sector: The government also needs to work more with the private sector on infrastructure. In the coming years we cannot continue without having the private sector investing alongside the government. Policymakers need to start thinking openly about how to do that while the crisis is going on, so that the private sector is primed for an upswing on infrastructure development when it eventually subsides.

A chance for dialogue and cooperation: The crisis could be a chance for the government and the industry to work on some of the wider issues that have been impacting construction, particularly when it comes to small and medium-sized operators. We feel that while some action has been taken on that front, there is still more to be done to make sure they can succeed and grow.

We also feel that the government can greatly benefit from our experience in crisis management, including on things such as converting civilian facilities to hospitals, and logistics and supply. We have experience and we can help.

And if there is one key takeaway I want it to be this: Dialogue and cooperation is what will help us get through it as an industry and as a country. We need to work together to address some of the issues we’ve experienced today while putting a plan in place for the post-corona world. If we do more of that, you can count on me to remain an optimist throughout the crisis and beyond.

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