Egypt's economy is recovering only slowly from the turmoil that followed its 2011 revolution
A $40 billion deal for Dubai firm Arabtec to build one million homes in Egypt may mark the start of politically-inspired Gulf investment in the country's creaking infrastructure, from housing to transport, power generation and agriculture.
Egypt's economy is recovering only slowly from the turmoil that followed its 2011 revolution. Its government lacks the cash to build infrastructure, while political and business risks are still far too high for most companies to invest in projects.
But with the Arabtec deal - one of the largest construction contracts ever announced in the region - Egyptian and Gulf governments appear to have found a formula to channel billions of dollars into the economy in a way that serves their political and economic interests.
The construction company said on Sunday that it had agreed with the Egyptian army to build the homes at 13 locations around the country on land provided free by the armed forces, which own a large amount of financial assets and real estate.
The deal lets the army-backed government tackle a housing shortage that has been a grievance bringing Egyptians onto the streets in the past three years. Army chief Field Marshal Abdel Fattah al-Sisi can tout the project in a presidential election campaign which he is expected to mount this year.
By using such deals to shore up the popularity of the Egyptian army, governments in the six-nation Gulf Cooperation Council (GCC) can keep at bay the Muslim Brotherhood, an arch-enemy of the Gulf monarchies. The Islamist movement ruled Egypt until its overthrow by the military last year.
Gulf companies awarded such projects can gain market share in Egypt with only moderate risk, since they have the backing and protection of their governments. In Arabtec's case, the deal could help to transform it from a mid-sized firm into a regional construction giant.
"We'll see similar deals in the coming period, whether it is in energy, oil and gas, roads," Karim Awad, co-chief executive of EFG-Hermes, Egypt's biggest investment bank, told Reuters. "Investors from the GCC are also showing interest in developing those sectors, including renewable energy."
Egypt's assistant minister of investment Neveen El Shafei said talks with potential Gulf investors "on various levels and different sectors are ongoing, and we hope more deals will be concluded in the near future".
The importance of the Arabtec deal goes well beyond its economic impact, said John Sfakianakis, chief investment strategist at MASIC, a Saudi Arabian investment firm.
"It's a state capitalist project of trans-national magnitude that basically tells the world that the GCC will be there to support Egypt no matter what," he said.
Saudi Arabia, the United Arab Emirates and Kuwait have promised over $12 billion in aid to Egypt since last July, when the army ousted President Mohamed Mursi, who was backed by the Brotherhood. Large sums of additional aid are expected.
In the initial months, the donors focused on averting a financial crisis, stabilising Egypt's foreign exchange reserves and helping the government to pay its operating costs. The Arabtec deal signals they have now begun trying to engineer stronger growth for the Egyptian economy, hoping to ease political tensions by cutting unemployment and raising living standards.
Construction of Arabtec's "middle-income" homes is expected to start in the third quarter of this year, with the first to be delivered in early 2017 and the whole project to be completed before 2020, the company said.
Some details of the plan have not been released and some have not been decided. But Arabtec's chief executive Hasan Ismaik told Reuters that initial financing would be provided by the UAE government, while the rest would come in the form of advance payments and instalments paid by the home buyers.
The homes will be bought over periods of 10 to 20 years, and Arabtec has reached agreements with 40 banks to provide financing to the buyers, Ismaik said. Last month, Egypt's central bank said it would deposit low-cost funds at banks so the money could be lent on as cheap mortgages.
By giving a central role in the project to a UAE company, the Arabtec deal appears to ease at least partly a concern of the Gulf donors: that their money could be wasted through corruption or Egypt's inefficient bureaucracy.
It is not clear that the project will be very profitable for Arabtec, which is listed on the Dubai stock market. This may explain the relatively sluggish reaction of Arabtec shares to the news; they rose only 1.7 percent on Monday.
Local financial firm Arqaam Capital kept its "buy" rating on the stock but said it feared Arabtec would enjoy only modest profit margins. It also said the company would face execution risks, since it had never managed a project nearly as large.
Ismaik himself indicated he was not counting on big profits: "We look at the project more as UAE aid toEgypt than we look at its expected revenue."
But Arabtec's overriding motivation may not be commercial; its largest shareholder is Abu Dhabi state fund Aabar , which owns a 22 percent stake. That makes it a logical vehicle for the UAE's economic diplomacy.
Even if profits are slim, the firm may benefit in other ways from the project. The contract is worth about $8 billion annually, more than five times Arabtec's 2012 revenues of $1.5 billion; by taking on the work, it may at a stroke become one of the largest construction contractors in the region.
The deal effectively uses some of the UAE's oil wealth to finance overseas growth of one of its leading firms, in much the same way that some Chinese construction firms have moved abroad by working on projects funded by China's government.
Aabar may already be compensating Arabtec in markets other than Egypt; last month the Abu Dhabifund said it would assign all future construction work in its $20 billion real estate portfolio around the world to the Dubai company.
Other areas where Gulf companies are likely to consider government-backed investments in Egyptinclude power generation, which has been a constraint on industrial growth, oil and gas extraction, which would earn the country badly needed foreign exchange, and agriculture, since food price inflation threatens political stability.
Saeed Mohammed al-Tayer, chief executive of state-owned Dubai Electricity and Water Authority, said on Monday he believed other UAE and Egyptian firms were discussing energy and petrochemical deals. He did not name the firms.
The UAE's Dana Gas, a privately-owned firm, said last month that it was upgrading an Egyptian natural gas production plant to increase its capacity by 25 percent.
The Egyptian government owes it $274 million in unpaid bills, according to Dana; investing in Egypt in line with governments' wishes could help it recover that money.
Gulf firms are already active in Egypt's farm sector. Since 2007 Abu Dhabi investment firm Jenaan has accumulated about 67,200 hectares of arable land there, growing wheat for Egyptian consumption.
The Arabtec deal "could mark the beginning of similar infrastructure projects that involve GCC companies which have experience and depth, but also the required financing and at the same time the willingness to undertake such mammoth projects," said Sfakianakis.