{"id":614782,"date":"2024-02-07T00:00:00","date_gmt":"2024-02-07T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/hardhats\/how-will-public-spending-cuts-impact-infrastructure-projects\/"},"modified":"2024-02-07T00:00:00","modified_gmt":"2024-02-07T00:00:00","slug":"how-will-public-spending-cuts-impact-infrastructure-projects","status":"publish","type":"hardhat","link":"https:\/\/enterpriseam.com\/egypt\/hardhats\/how-will-public-spending-cuts-impact-infrastructure-projects\/","title":{"rendered":"How will public spending cuts impact infrastructure projects?"},"content":{"rendered":"

The government is tightening its belt: <\/strong>The government this week officialized a decision<\/a> to slash 15% of allocated investment funds in the current fiscal year\u2019s budget in a bid<\/a> to curtail public spending, lower external debt, and encourage<\/a> local production. <\/p>\n

By the numbers:<\/strong> The move will help the government save an estimated EGP 150-200 bn worth of expenditures, a senior government source told Enterprise, adding that the exact value of the cuts will become clearer once the Madbouly government tallies provisions for projects funded in foreign currency. <\/p>\n

And any new projects are getting put on halt: <\/strong>The move will also see the government push back any new projects until at least 30 June 2024. Until then, state entities are not allowed to ink any new contracts \u2014 via direct orders or tenders \u2014 or to enter into any external financing agreements to begin new projects.<\/p>\n

Remember: <\/strong>The government in November issued a decision<\/a> banning FX spending on any new project until June 2024. The cabinet decision also ruled out any \u201cunnecessary\u201d FX spending by state entities, with the Finance Ministry having to sign off on any exemptions.<\/p>\n

The decision is an abrupt u-turn:<\/strong> The state had budgeted<\/a> for a significant increase in public spending this year, with EGP 586.7 bn earmarked for investments, a 56% rise from the previous fiscal year. Funds allocated for investment in the budget constituted around 19.6% of budgeted expenditures and contribute some 5% of GDP, a senior government source told Enterprise.<\/p>\n

The decision will be particularly difficult for the construction industry: <\/strong>The sector has been suffering through a liquidity crisis triggered by the devaluation of the EGP, in addition to pricing difficulties and raw material shortages, Egyptian Federation of Construction and Building Contractors head Mohamed Sami Saad previously told<\/a> Enterprise. On top of this, the state has not yet delivered on its promise for some EGP 40 bn in compensation<\/a>, Saad had told us.<\/p>\n

Where do the affected state entities go from here? <\/strong>Low-cost local financing, self-financing, and public-private partnerships (PPPs) are viable alternatives for public sector companies and entities whose projects have been hit by the spending cuts, our source told us. Pursuing these other routes can also help the nation retain its rate of GDP growth, the source added.<\/p>\n

Local alternatives to get around FX spending restrictions and keep the cogs turning: <\/strong>The Arab Organization for Industrialization<\/a> and Military Production Ministry factories are currently working to offer local alternatives to imported supplies and materials that require FX, our government source told us. These efforts are directed towards minimizing interruptions to ongoing projects, with a specific focus on spare parts and components used for maintenance. <\/p>\n

\n

BUT NOT EVERYONE WILL BE AFFECTED-<\/p>\n

The lucky ones: <\/strong>The government will prioritize \u201cnecessary investments\u201d and projects that are over 70% complete. Investment projects specifically approved by the cabinet will also be exempted from the decision and priority will be given to contracts with large- and medium-sized local companies to bolster their resilience, our sources explained.<\/p>\n

The health sector \u2014 including university hospitals \u2014 will also be exempt: <\/strong>The health sector is excluded to avoid compromising progress that has been made towards improving the nation\u2019s health indicators, our sources told us.<\/p>\n

As will GASC: <\/strong>The government will continue to focus on securing development financing and grants for state grain buyer GASC \u2014 which just last month inked an agreement<\/a> for a EUR 56 mn grant from the French Development Agency to develop the country\u2019s field silos.<\/p>\n

Investments in petroleum products by the Egyptian General Petroleum Corporation are<\/strong> deemed crucial<\/strong>,as are projects aimed at expanding storage capacity. The government also wants to be financially able to encourage further investment in oil and natural gas exploration.<\/p>\n

The Defense Ministry and Interior Ministry will also also be exempt from the rules<\/strong>, as will any entities and projects affiliated with them. <\/p>\n

A big chunk of transportation projects are in the clear:<\/strong> The majority of transportation projects are 50-70% complete, a source at the Transportation Ministry told us. While other transportation projects \u2014 including the monorail and Cairo\u2019s electric light rail train (LRT) <\/strong>\u2014 have already secured the needed funding and need to be completed to service the debt that\u2019s already been incurred to finance them, the source added. <\/p>\n

While some other infrastructure projects had already come to a halt before the new<\/strong> restrictions came in: <\/strong>The government\u2019s plan to upgrade and reinforce the lining<\/a> of some 20k km of water canals \u2014 announced back in 2020<\/a> \u2014 grinded to a halt last year on the back of rising costs, a source at the Irrigation Ministry told Enterprise. However, the state will continue to renovate the remaining canals<\/a> in villages under its Decent Life initiative to improve water efficiency and preserve water resources.<\/p>\n

\n

\n

Your top infrastructure stories for the week:<\/strong><\/p>\n