Tuesday, Oct 24, 2017
Infrastructure | Africa | Egypt

Construction in Egypt

Orascom Construction intends on being an integral part of Egypt's recovery by supplying services for the country's mega projects


2 years ago

Mr. Osama Bishai, CEO of Orascom Construction Egypt
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Mr. Osama Bishai

CEO of Orascom Construction Egypt

www.ahram.org.eg

Osama Bishai, Orascom Construction's CEO, explains why Egypt's economy is poised for a take off. With the first successful dual listing on Egypt and UAE exchanges, 2015 is proving to be a fortuitous year for the company.

The world is beginning to notice Egypt’s recovery and its growing potential.  How optimistic are you regarding Egypt’s future, and do you feel this current government is on the right track with their current reforms? 

Personally, I’m very optimistic from a business and construction perspective as there is a strong focus on stimulating the economy through infrastructure projects and developing a better platform for foreign investment.  The current administration has a tendency to encourage local contractors, which will create more experience within Egypt rather than forcing the sector to become dependent on foreign contractors regarding technical skills.

The challenge lies in sustainability.  We need to have a continuous, long-term plan utilizing a model for at least 4-5 years. As a contractor, we only take into account the next 18-24 months as this is the usual lifetime of projects and opportunities that we must examine. We hope that after the Egypt Economic Development Conference (EEDC), and within the next few months, there will be a master plan for the next 5-7 years outlining where to invest, and how much money should be earmarked for various projects.

Secondly, we are pleased with the government’s fresh approach to ensuring swift execution of its initiatives.  A good example is the Emergency Power Program that was adopted in December 2014.  Reliable players were selected to enter the market, build a power plant, and bridge the gap in power generation while meeting a challenging deadline. This jump started the amelioration of the problems we have in energy. This is a commendable approach as it shows guts, commitment and a real political will behind the commercial aspect of having power.

With this approach, there is confidence in the market, which is evident in the stock market.  Even in ourselves, we are listing a capital increase in the market this week.  The demand we’ve seen in the capital increase was 6 times oversubscribed, which reflects the confidence not only in the group but in the Egyptian market.

There are a few goals with the EEDC.  One is to change the perception of Egypt abroad, which is one of its biggest goals, in order to increase Foreign Direct Investment (FDI).  The government is expecting to raise about $20 billion for these projects.  Do you think the country is ready to receive this type of investment?

Yes, these projects are needed. We are formatting a loan with the government as one of the initiatives, but as it commenced in November 2014, it is not strictly related to the conference.  We are endeavoring on a privately owned coal-fired power plant.  The first phase of that investment is more than $3 billion dollars, meaning that the value of the investment is there.  The challenge is how this will be managed and tackled by the government since every investor needs a counterpart to give the required approvals and permits.  The government has the challenge of being able to accommodate, adapt, and support all of these private initiatives. The government can be applauded for building the platform and generating the will but the next step is in helping us to succeed.  We need to acknowledge that when there is $20 to $30 billion of new investments, the critical question is how to manage it all.  Like any company, when such investments are received, in the first 2 minutes there is pure elation, but in the 3rd minute, worry sets in on how to best secure it. However, it’s a good problem to worry about. 

Orascom Construction is attending the conference to promote Egypt because if this economy performs well it translates onto the performance of our business.  We are an investment vehicle in the stock market, which is an indirect way of bringing FDIs into the country through people owning shares in our company. We think the conference will be a success, and we need to start thinking about how we are going to manage that success to bring it to the finish line.

What are your expectations, as a company, of the conference, and what do you think is the most important post conference agenda for the government to follow?  What needs to happen?

As a company, whatever we are planning from an investment point, we don’t need the conference to execute as we are an active player in the market regardless. We are not an outsider who has been invited to look into Egypt. We know Egypt, we are committed to Egypt, and we are bullish about Egypt. For us, the expectation is to attract more foreign direct investors.  As a contractor, when these investors come in, we realize that these firms will need to build something at some point. Even if I am not a direct beneficiary of this construction, it increases the overall market share, which allows me to gain more work whether through this opportunity or another; we benefit either way. It is important that this conference brings Egypt back to the memory of many international investors.

Investors have very short memories.  If you disappear from the radar for 4 years, you are essentially forgotten. I traveled extensively between 2011 and 2013, and one of the players I was talking to said that they stopped including Egypt as part of their strategic monthly meetings. With this conference, our most important objective is to bring Egypt back on the investment map. Now we’ll witness players returning, who are saying, “Let’s look into Egypt.” We have 90 million people with a great consumer market.  There is a huge market for infrastructure.  We need power, roads, hospitals and health care as these are still far behind in terms of where they need to be.

ORASCOM Construction was listed on the Dubai NASDAQ 2 days ago, and it was oversubscribed six times.  Since it has been listed, the stock has come back down. Can you comment on the success of this listing and your expectations once you are listed on the Cairo Stock Exchange?

Let me explain the transaction because it is complicated even for us.  Our OCI N.V. entity has made a capital reduction and given a dividend to the existing shareholders in the form of shares in a new entity called ORASCOM Construction in Dubai.  So the listing in Dubai is a new entity with the same shareholders. There is no oversubscription. Our second step entailed a capital increase of 11 percent, and this was oversubscribed six times and was listed in the Egyptian market in the first ever dual listing between Egypt and the UAE. I think the success of this is attributed to our track record and the trust people have in our brand name.  Also, they were thirsty to put money into a national champion.  We are a vehicle for investors in this country, plus the lack of any of other players in the market makes us a great attraction. Secondly, we originated this business as family contractors 60 years ago. In the 90’s, we started building Telecom infrastructure. We built for the hotels and resorts until 1994 when they became independent. We were the ones to build the cement business that was divested. While the corporate team was looking at cement expansions, we began initiatives for our fertilizer business. We are the real engine, the heart and soul of the whole group.

People who understand the company and the stock know that we are the same company that they saw back in 1999, but slightly bigger, smarter, with more experience and diversity.

What was the reason behind the divestment?

At some point, you reach a size where you feel that it’s time for each entity to start moving in different directions. In examining ORASCOM Construction Company, I would initially see that most of the money available was directed to fertilizer growth, which obviously makes sense to the shareholders. There is only so much cash to allocate in one sector or another, and fertilizers are huge investments.  For example, we have a plant in Iowa, and it was a $2 billion investment cost. These are huge projects, and we cannot simply invest in infrastructure and power while involved in a myriad of large projects, which was one reason for the divestment.

I also think that fertilizer has grown to a size where the potential growth on green fields will not be substantial. They might grow through acquisition, but the green field opportunities will not be there.  There is also the clarity for investors. The 2 businesses are not really that similar, although we created value by being a contractor to build green field investments.  Some investors would like to see greater clarity in how construction is performing and how fertilizer is performing.  The mixture is confusing to some shareholders. There are some investors who would like to focus on agro and related businesses while others would like to focus strictly on construction. We felt it was a better value and offered clarity for the shareholders to begin moving the two in different directions.

OCI is diversified all over the Middle East and Europe, but also heavily invested in the US.  Could you talk a bit more about your company’s involvement in the US and do you see your investments continuing to be focused on the US or will they return to Egypt?

First of all, the move to the US was based on the shale gas story. Secondly, the gas in the US is still the most competitive gas price compared to the rest of the world.  Thirdly, it’s there and you can go and either deal directly with the producer or through a bank who will work with you. The mechanism of access to gas is very efficient, simple and straightforward. One of the largest consumers in fertilizers are the Americans.  Iowa is in the corn belt- there are savings on transportation and there is access to cheap gas. Whether the growth will continue there or not, I cannot judge because that is supply and demand. In reference to new investments in the US, whether ours or other players, it fills in the gap of importing fertilizer within the US.  The amount of importation within the US is large enough. The current low prices of oil will have a negative impact on the prices of shale oil and associated gases in the US.

What do you think will be the biggest challenges facing Egypt over the next 5 years?

The first challenge would be how to sustain the growth. The second challenge will be maintaining the fiscal discipline to manage FDIs, spending, foreign currency, minimizing subsidies, and dealing with the people as far as price increases in fuel and energy.  From a business standpoint, I think our biggest challenge is the availability of talent and human capital after 4-5 years.  There has been a drain of talent flowing out to the Middle East, Canada and the US. Education is also a challenge here, so it’s not like we are developing enough talent here.  There needs to be a certain level of education to improve and to support what we would like to achieve.

In trying to create a more educated workforce, what are some of the CSR initiatives that ORASCOM is involved in?

We initiated the programs, and everyone is copying our CSR initiatives.  We have more than 120 graduates from Ivy-League Universities working in Egypt or in the company or other companies.  We require that they return to work in Egypt for 3 years.  We are supporting scholarships in local universities. The best people we have in this company are the ones who finished their education while having on-the-job training and continued to stay on in the company. We are spending significant sums of money on training and education.

What are some other key strategies that you will be concentrating on for the rest of the year?

I want to achieve financial closure for this coal-fired plant this year, which will prove difficult.  That would be a demonstration of our business model. We do construction, we use our cash flow, we invest, we create opportunity and we build it.

Can you elaborate on Orascom’s involvement with Suez Canal projects?

The development of the access is really interesting considering Egypt could be like Panama or any other area where you are creating value around a transportation hub. The challenge is to find the right businesses to fit. Egyptians have liked grandiose things from the time we started building the pyramids. I think we should think a little bit simpler than that. In Panama today, one finds financial services. Today, Panamanian-based companies could be incorporated where offshore business have access to free cash flow. If you talk to those in charge of the Master Plan, industrial areas are spoken of.  However, storage hubs, transit businesses, and more dynamic rather than long-term industries need to be taken into consideration since they take a long time to become established.

Entrenching the tunnels underground is important because we all believe in the long-term that Sinai is a good place to invest. It has a lot of good features like the Mediterranean where you can have tourism and businesses. In the south, you have tourism all year round.  The Sinai has good minerals that you could invest in, so creating a transportation network is the first infrastructure you need to build to develop the area.  We are involved in 3 projects with Arab contractors. The concept is really smart to have this network extend to Sinai. Integrating Sinai into Egypt is also a security issue. We don’t want it to be a playground for terrorists.

What are some other areas that ORASCOM is involved in besides the Suez Canal?

Once the Master Plan is announced, we will be very involved in the Canal’s infrastructure. As a contractor and as an investor, the design needs to fit our criteria, which creates value for the shareholders. We are not willing to undertake any unnecessary risks. 

The expectation of the canal is that the spin-off industries will be much larger than the canal itself.  Could that become the focal point for your business?

The Master Plan needs to reflect realistic numbers and forecasts; however, this is still to be seen. This project deserves to be a stand-alone issue in itself without the buzz associated with the conference. The Suez Canal Authority is focused on managing the vessels traversing in and out of the waterway. Now they want to manage the development of the entire access. The Authority needs to hire approximately 200 top-notch executives who are able to manage billions of dollars in capital. They are not at this stage yet.



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