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Wednesday, 12 January 2022

Infrastructure: What’s to come in 2022? (Part II)

Infrastructure: What’s to come in the year ahead? (Part II) — Water has been at the forefront of the government’s development plans amid the threats posed to our share of the resource by the Grand Ethiopian Renaissance Dam and climate change. As the government works on its USD 50 bn multi-year water-saving plan, this will remain the case this year, with necessity pushing water projects to move full speed ahead.

Wastewater treatment will definitely feature prominently: The El Hammam agricultural wastewater plant, which will process 6 mn cbm of water every day, is expected to El Hammam agricultural wastewater plant which will process 6 mn cbm of water every day. Once its inaugurated, the El Hammam plant will break the processing capacity record set by our Bahr Al Baqar wastewater treatment plant, which is the biggest of its kind in the world. The plant cost EGP 18 bn to build and can process 5.6 mn cubic meters per day (cbm/d) which will be transferred to North Sinai to contribute to the reclamation of 476k feddans.

And desalination plants are also in the works: Egypt’s sovereign wealth fund issued tenders in October for private companies to build 17 solar-powered desalination plants that will generate a combined 2.8 mn cbm/d of water by 2025. The projects are part of a USD 2.5 bn plan to quadruple our desalination capacity in the next five years. Saudi’s ACWA Power, Orascom Construction, and Hassan Allam Holding are among the firms that showed interest. Meanwhile, the year also saw a consortium of Orascom Construction (OC) and water treatment company Metito deliver a USD 130 mn seawater desalination plant in East Port Said, with a total capacity of 150k cbm/d.

Meanwhile, the private sector is seeing the potential in water-related activities with big plans for the year ahead: OC will continue to undertake projects across the full spectrum of the water sectors, including everything from treatment plants to water infrastructure, OC management told Enterprise. These projects will likely be under a build, own, operate (BOO) framework, they added. Meanwhile, Elsewedy Electric is banking on port projects, with several projects in the pipeline including dry ports in 6 October and Ain Sokhna and the company is currently bidding for the Tenth of Ramadan dry port, Elsewedy Electric Investor Relations Director Noha Agaiby told us.

And other firms are dipping their toes into the sector: Solar power producer KarmSolar launched a water solutions division this year called KarmWater. The new company creates solar-powered water desalination projects and is currently working on a project in Marsa Alam. Meanwhile, Qalaa Holdings’ Taqa Arabia established a new water treatment solutions company Taqa Water, which will cater to the industrial, real estate, agriculture, and tourism sectors.

With all this interest in water projects, Egypt has plans to locally manufacture components for water plants. We signed an agreement with US firms MPS Infrastructure and Aquatech to form a consortium with the National Authority for Military Production to set up facilities to manufacture equipment used in desalination and wastewater treatment plants.

That’s if supply chain issues don’t put a hamper on things: Supply chain issues continued to be disruptive to the sector this year, a trend that is likely to stay for years ahead, according to shipping giant Maersk and almost every other logistics business who has talked to the press lately. While there are signs that the situation might ease next year, according to The Guardian, Egypt is currently feeling the blow with non-oil business activity fell three months in a row as supply chain bottlenecks and inflationary pressures continued to weigh on private sector firms. The cost of energy and raw materials continued to rise sharply causing the pricetag on infrastructure projects to go up, while shipping costs rose more than 400% y-o-y.

Local companies found ways to mitigate the impact: Elsewedy’s main issue was the lower availability of materials during the supply crisis, Agaiby said. In 2021, they made sure to always have a safety stock of needed raw materials to ensure production in factories wasn’t interrupted. This system will continue in 2022 as long as the supply chain crisis remains, she added.

And in many cases, the price hikes are transferred to the clients — meaning companies working on infrastructure weren’t shouldering the load alone, Agaiby indicated.

And then we have the global high interest rate environment… Globally, interest rates have been rising on the back of the decision by the US Federal Reserve to take a more hawkish strategy towards its monetary policy, announcing in December that they're scheduled three rate hikes in 2022. This comes as inflation takes a toll on major markets across the world. Egypt has so far managed to breeze through somewhat unscathed, even choosing to leave rates on hold in the last Monetary Policy Committee meeting of 2021. However, inflation is expected to be flagged as an issue soon enough, analysts agree, due to persistent global inflation, potential electricity price increases, and a rise in demand following higher employment rates.

…which could impact funding from abroad: Both supply chain issues and higher inflation are expected to remain in 2022, OC Management told us. This could have a negative impact on the infrastructure sector as large-scale projects often require loans to fund the projects and higher interest rates mean that these projects will now cost more to finance, especially in the case of loans from abroad.

Luckily, Egypt is exploring new ways to locally fund development projects: The cabinet green-lit amendments to the Capital Markets Act in November that would pave the way for future flow securitization to be introduced. The instrument allows companies that provide services to the public a new way of accessing liquidity by backing future income. This would open securitization to new companies in sectors such as utilities, telecoms, healthcare and education and help them fund big-ticket spending on infrastructure, road, and transport projects without needing to wait for payments from their clients. Meanwhile, the FRA recently introduced sustainable development bonds, among other bond offerings, that could help provide financing for sustainable water projects.

Your top infrastructure stories for the week:

  • The government expects to finish in March its project to develop the areas adjacent to the Saladin-era aqueduct that runs from the Nile to the Citadel.
  • Nafeza is coming to air freight: The Customs Authority will this month begin a three-month trial extending its Advance Cargo Information (ACI) system to air freight, ahead of a full launch planned for April.
  • We could have a new EV partner by March: The government is in talks with two Chinese companies to partner with El Nasr Automotive to locally produce electric cars, with an eye to finalize terms later this month and sign final contracts by March.

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