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Wednesday, 24 June 2020

Is the lack of infrastructure at industrial zones slowing down development?

Is the lack of infrastructure at industrial zones slowing down their development? A dispute between the government and companies in industrial zones has been ratcheting up this year after the government quickened the pace at which it is repossessing land from businesses it alleges have been dithering on building their factories. For their part, companies we spoke with blame delays in building their factories on the slow pace at which the government is hooking them up to infrastructure. With the House of Representatives now being dragged into the dispute and the government looking to implement an ambitious industrial development plan, the Industrial Development Authority (IDA) is attempting to break the deadlock by starting an appeals committee to review land repossession.

A red tape problem? It appears that the IDA has been allocating land faster than utilities can be hooked up to plants. That’s because the funding has to be aligned and provided to the Housing Ministry before that ministry can begin building infrastructure.

And let’s be clear on one thing: There are no reports of issues at private-sector-run industrial zones, where the owner of the area is contractually required to provide utilities to its tenants. The issue is with state-designated zones.

Gov’t escalates industrial land repossession at industrial zones: The biggest problem facing companies looking to set up shop in industrial zones today is the pace at which the government has been repossessing land from investors, the 6th of October Investors Association Chairman Mohamed Khamis Shaaban told Enterprise. These projects, he says, have been stalled due to lack of utilities. The IDA has not released any official figures for how much land it has repossessed from investors, telling Enterprise that the situation is fluid and constantly changing. But a look at the domestic press suggests that more than 1k plots of land have been repossessed since October of last year, according to past statements by IDA chief Magdy Ghazi. We’ve also been seeing an influx of reports this month from several governorates of land repossessions, including in Wadi Natrun, where 2,175 feddans were repossessed this month, according to Sada El Balad.

This appears to be a problem in industrial zones outside of Cairo. “The utilities issue appears to be coming from new industrial zones in the governorates,” Ahram Security Group Chairman and head of 10 Ramadan Investors Association, Samir Aref tells Enterprise.

The government says taking back land is justified because the timetable given to companies to build their plants factors in utility installation times. A factory would be built in 18-24 months, which is more than enough time for utility problems to be fixed, Ghazy told Enterprise. “So by the time the factory is ready for operation, all the necessary infrastructure should be there.”

So what does it take to be considered “a serious industrial investor”? Companies allocated industrial permits and land by the IDA have six months to begin construction of a factory after receiving land. Once construction begins, they are then given 18-24 months to build their factory. If this timetable is not met, companies are given a warning and a 90-day grace period before a decision is taken by the IDA to repossess the land, which then be resold to new investors at market value, Ghazy tells us.

But companies say the problem is the pace of utility buildout: “Admittedly, some problems have been solved,” Shaaban said, highlighting the completion of a highway linking the 6th of October industrial zone to Alexandria port. But other utilities remain issues, including water, wastewater, and telecommunications. Shaaban told us that the government is focused on building new zones while existing ones are massive and companies are still waiting for utilities to be connected so that they can start building their factories.

So what’s been holding up the utilities? One explanation appears to be the involvement of multiple agencies in the land allocation and utility development process. While the IDA is responsible for issuing permits and allocating land, the Housing and Utilities Ministry that is responsible for building the infrastructure. However, to begin construction of utilities, the Housing Ministry needs to be assigned the project by the IDA and the government needs to provide the funding for the construction on request for the IDA, Assistant to the Housing Minister Tarek El Rifai told Enterprise.

Getting the funding is the primary hiccup in the process, El Rifai added. Then the Housing Ministry has to award contractors the tenders for the construction. It will then take 18-24 months for utilities to be installed. Water infrastructure can be challenging if the factory cannot be connected to an already-established water network and new water pumps or stations need to be built. He noted that if the industrial land falls under the jurisdiction of a governorate, then they would have to be roped into the process. This becomes an issue when installing water utilities

So to keep up with its ambitious industrial development plan, it appears that the IDA may be allocating land faster than it takes to get the utilities installed. The government has embarked on an EGP 11 bn plan that includes establishing 25 new industrial zones in the coming two years. Ghazy told us that the IDA will be ready to offer 3 mn sqm of industrial land by the end of the year.

Long-term, the IDA is lining up the funding for utilities upgrades at industrial zones: The two-year EGP 11 bn plan will also include modernizing and upgrading all of the nation’s 129 state-designated industrial zones. The FY2020-21 budget has allocated EGP 5 bn to readying 13 industrial zones across the nation, seven of which will be in Upper Egypt, said Ghazy. He noted that the IDA spent EGP 5 bn on the Upper Egypt Development Program during this fiscal year and is also spending an additional EGP 6 bn on upgrading four industrial zones in Qena and Sohag through 2023. The program is financed by the government and the World Bank and is linked to disbursement indicators to make the best use of the funding by funnelling investments into connecting utility infrastructure, services, and modernize management operations.

Short-term, the IDA’s recently-formed appeals committee seems to be hitting the right notes with the private sector: The IDA has formed an appeals committee to look into land repossession on a case-by-case basis, said Ghazy. If a company can prove that utilities have held up the process, the repossession order can be rescinded. The committee held its first meeting with companies last Wednesday. Mohamed Gineidy, chairman of the GMC Industrial Group, said the ministry’s efforts have been greatly appreciated. Companies we’ve spoken with and government officials all believe that the timetable for repossessing the land is fair and have not expressed a desire to see that changed.

So, move along, House. Nothing to see here: The issue has reached the House of Representatives, which discussed the matter during the industry committee meeting earlier this month, committee member Rep. Tarek Metwally told Enterprise. Metwally, however, did not say what was decided in the meeting.

Companies in state-designated industrial zones are more concerned about covid-19: It’s not just an issue of utilities, Gineidy tells us. He adds that industrial investors need further assistance, including disbursals of export subsidies and further cuts to gas prices, to survive the covid-19 crisis. Companies expanding in industrial zones also are having difficulty accessing some of the initiatives launched that aim to help alleviate the burden from the covid-19 crisis. Banks have been slow in implementing CBE initiatives, including last December’s EGP 100 bn stimulus program, said Shaaban.

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