The construction industry is changing and outdated legislation isn’t keeping up: Local contracting companies that have historically relied on the government for projects have a difficult few years ahead, with a EGP 1 tn cap on public investments planned for the next fiscal year meaning that they’re going to have to increasingly look elsewhere to find contracts to ink. An uptick of foreign investment and from the domestic private sector — especially following the EGP float and Ras El Hekma agreement — could very well fill the gap, but outdated legislation and regulations for structuring contracts that are not aligned with international standards means that many Egyptian companies are missing out, industry insiders told Enterprise.

We’re going to be seeing a lot less tenders for state projects: The state’s efforts to promote the private sector and calls from bodies like the IMF to rationalize fiscal policy and slow spending on infrastructure projects has meant that Egypt has been keen to emphasize to international backers and investors its commitment to its new policy objectives for the upcoming fiscal year. In addition to the EGP 1 tn cap on public investment in the next fiscal year, state-funded investments will focus on ongoing national projects that are at least 70% complete and expected to enter the operational phase within a year or two at most. New national projects will also only get funding if they get the go-ahead from the cabinet.

But as one door closes, another opens: Following the float of the national currency and the announcement of the goliath USD 35 bn Ras El Hekma project, foreign and domestic funds have readied for a boom in the country’s real estate sector and construction industry more generally. Developers have been keen to tout their expansion plans for this new economic reality and further foreign-funded projects. After having expanded under state infrastructure plans, many local contractors are now shifting their focus to the foreign companies looking to invest in Egypt, Contractors Union member Mamdouh Morshedy told Enterprise.

However, local — and mostly smaller — contracting companies are missing out on the new projects: Several industry insiders who spoke with Enterprise told us that some foreign investors hire foreign contractors and consultants for their projects here because of a lack of regulation specifying how contracts should be drawn up between local contractors and companies that aren’t owned by the Egyptian government.

This is especially true for projects funded by international lenders: Local contractors are reluctant to submit bids for projects funded by international lenders like the World Bank, European Bank for Reconstruction and Development, and the African Development Bank because they adhere to international standards in contracts that aren’t part of the country’s regulatory framework, Egyptian Federation for Construction and Building Contractors (EFCBC) head Mohamed Sami Saad told Enterprise.

A regulatory framework exists, but only for contracts with the government: The 2018 Public Contracts Act governs government contracts with local contractors, but with the shift away from the government to the private sector — often from the Gulf and elsewhere abroad — regulatory frameworks for contracts with non-state entities need to be developed, Saad told us.

New regulations for construction contracts that align with international standards are badly needed: If the country is to realize its goal of attracting further investment and becoming a construction hub in the region, new standards through contracts that align with the standards laid out by the International Federation of Consulting Engineers (FIDIC) need to be put in place, Saad said.

FIDIC contracts? FIDIC contracts have set out globally recognized international standards for the consulting industry that balance the interests of contracting companies and other stakeholders. FIDIC contracts ensure a balanced relationship, clear rights and obligations for both parties, and include specific guidelines to address project-specific issues without upsetting the risk balance.

It’s already practiced by big players: EFCBC board member Shams El Din Youssef highlighted that some companies in Egypt already operate under FIDIC guidelines, particularly those with sufficient financial solvency to engage in projects funded by international bodies or local projects financed by loans that apply FIDIC contracts. Meanwhile, other companies working on local projects adhere to the current law.

The construction industry is pushing for new legislation that aligns with international practices established by FIDIC: "We proposed a balanced contract to the Finance Ministry that mirrors FIDIC contracts, which ensures best procedural practices in construction and legal methods for resolving disputes related to construction contracts," Saad told Enterprise. Saad expects the Finance Ministry and Housing Ministry to soon study and approve their requests.

But, the regulatory frameworks governing contracts with government authorities also need updating: The 2018 Public Contracts Act favors the assigning authority and the expense of contractors, Morshedy told us, explaining that there is not the same mutual protection offered to both parties as in FIDIC contracts. Contracting companies can also face fines for late delivery and often take out high interest loans to meet timelines. Current standards also lack provisions for dealing with potential risks, including natural disasters and force majeure, Youssef said.

Government acknowledges the problem: Atter Hannoura, director of the Finance Ministry’s PPP unit, told Enterprise that many Egyptian companies do not participate or have their bids rejected due to administrative issues or unclear terms, despite having excellent technical proposals. He emphasized that the government is working with contractors and consultancy firms, to position them as service providers for international bodies with plans to increase their funding in the region based on standards common to most international entities.

Your top infrastructure stories for the week:

  • NTRA joins forces with Huawei to bolster cyber security: Egypt’s National Telecom Regulatory Authority (NTRA) has signed an MoU with Chinese telecom giant Huawei to buff up the country’s national cyber security practices and foster a secure digital ecosystem, Huawei said in a statement (pdf).
  • Linking Egyptian, Italian ports: An affiliate of Egypt-based Pan Marine Group, Medkon Lines Egypt, is considering opening a new line between Alexandria and an unnamed Italian port in order to facilitate trade movement between Egypt and Europe, Pan Marine Executive Director Marwan El Shazly told Al Mal. Shipments between the two ports will occur twice a month, he added, without providing a specific timeline.
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