The slow but promising rise of Egypt

The slow but promising rise of Egypt

Paul Sullivan | Professor, NDU. Georgetown NCUSAR
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Some important changes are underway in Egypt's energy and infrastructure sectors, showing hopeful signs for the country's future. New discoveries, investments, and infrastructure improvement are good signs of recovery

I have been involved with Egypt since 1993, when I started at the American University in Cairo teaching, researching and writing about this amazing country and the region. I lived in the country for six years doing this and writing for newspapers, etc., and have traveled to it for extended visits for many years. Over many years I have watched and see the ups and downs, the good times and the bad. One thing I am certain about is that the media often gets the place very wrong. It certainly often get the people very wrong. During my most recent trip of a month this July I found nothing but warmth and welcome. There are some things that are important and powerful about the average Egyptians: the have immense patience, they are resilient, and they have a sense of hospitality that few have – even in their poverty and in the extreme difficulties of the lives of many.

Some of the biggest changes happening, and those that give some hope to the future of Egypt, are in energy and infrastructure

The country's economic situation

Egyptians are now facing 35 percent inflation. The unemployment rate for younger people in the 15-30 range bracket is about 25-30 percent. Underemployment is vast. Many of the hopes for the younger people were dashed by the political events of the past few years, but most power through in whatever way they can find. Government jobs are getting scarcer. Foreign investment could be a lot more. Tourism has been hammered by the violence that is happening in pockets in the country in the Sinai, in Upper Egypt, the Fayoum and other places. For a good part of my recent trip I did not see a single westerner on some of the streets, and the hotels that used to be packed with westerners had very few. Tourism was once one of the most important sources of income and investments for Egypt. Now there are only small pockets of tourism success. Terrorism is hardly happening all over the country. Yet, if you were reading the western press the place is on fire with it all the time. It is not. I was there for a month and traveled to many places: Cairo, Alexandria, the delta countryside, The Fayoum, Wadi al Hitan (where there are ancient whale skeletons in the desert from when the desert was an ocean), Al Gouna, Hurghada and many other places.  I was also there last December in Luxor. I felt no sense of risk, and I have about 40 years of international travel experience in some rather dicey parts of the world to build up the intuition for risk. Egypt has some of the most amazing tourism offerings on the planet, yet people stay away. I keep going, and enjoy the fruits of lower prices and warm welcomes. Egypt’s currency dropped nearly 50 percent (in real terms) in value over the last year. That has made things cheaper for visitors, but many things more expensive for Egyptians. It has brought in some investors to scoop up some businesses and properties and much lower prices than previous to the devaluation of the Egyptian pound. The devaluation has also prompted some expat Egyptians and others to send some money back and invest in their own future in Egypt. But these investments and some others are hardly enough to get Egypt fully back on track and moving forward, but they are still a boost.

Changes on the energy front

Some of the biggest changes happening, and those that give some hope to the future of Egypt, are in energy and infrastructure. Eni has been in Egypt since 1954, yet its biggest investments are happening now with the Nooros and especially with the Zohr natural gas fields. Zohr is the biggest natural gas find in the eastern Mediterranean. This field with its connected investments could allow Egypt to transform its economy. It could also help Egypt be a large net exporter of natural gas in the future. Eni is also involved in electricity and other energy developments, but it’s most important investments and developments look to be in natural gas in the future. Interestingly, the Italians are also involved in wind power developments on the Red Sea coast, as I saw driving along that beautiful coastline. Italy is also involved in tourism developments, antiquities preservation and in some significant environmental programs. The German firm Siemens is working on its largest ever contract to develop a massive electricity system upgrade and expansion in Egypt. They are doing this behind schedule. This project will double Egypt’s generation capacity.  Most of the investments are in natural gas generation, but there is a significant wind component to this. I saw the new gas generation plants near the to-be-completed new capital of Egypt, which is about 45 km to the east of Cairo. The Egyptians are being smart to develop the electricity and other systems for the new capital prior to actually finishing the buildings. They are also setting up water transport and other systems to make sure this new capital will develop as best as can be expected. This massive Siemens project also develops and improves the electricity systems with substations and more in the delta are in the north all the way down to Asyut and Mina in the south. Electricity is the life’s blood of industry, agriculture and more for an economy. Historically, the more developed the electricity system and more electricity used per capita (efficiently) the greater the development of the country and its people. Egypt and Siemens get this. This Siemens project and the Eni projects are hallmarks and an indication for where Egypt may be heading in the future. And it is looking good. There are many energy companies involved in old and new Egyptian energy developments, but the ones that stand out to me right now are the Eni and Siemens projects.

The importance of infrastructure improvements

What is also noticeable is how Egypt is improving other infrastructure, most particularly road networks, communications and IT. The military is heavily involved in building and improving transportation infrastructure. I remember what the roads were like in the earlier days. One road heading to the north from Cairo now looks and feels better than many roads in the US. In my earliest rides on a road that this one replaced I felt it best to carry a shovel and road emergency kits. Some of the countryside roads are also vastly improved. There are still safety issues on the roads of Egypt, but that is mostly due to the drivers, not the quality of the roads. Egypt has a long way to go with this, but the major point here is that they have made more improvements and in faster times than most people would have expected. Improved transport and IT infrastructures help with economic development and also with the development of energy systems. These other infrastructure investments magnify the benefits from energy improvements in many ways. Egypt is also responding to the logic of energy incentives, and also the agreements with the IMF in order to get a $12 billion loan to help move the country even more forward. While I was there this summer prices for petrol, diesel, LPG and electricity went up – and went up in large percentages. The prices are still cheap compared to US and Italian prices, but these are big leaps in costs for Egyptians. For many years one of the biggest parts of the Egyptian central budget was for energy subsidies. This not only drained the budget and caused increases in debts, both domestic and international, for Egypt, but also led to energy overuse and waste. Very low petrol prices led to even worse traffic and pollution, and actually led to more accidents on the roads. Very low diesel prices led to overuse of diesel water pumps and overuse of aquifers for farming, which sometimes led to the salinization of soils in Egypt. Over pumping of aquifers led to the Mediterranean encroaching into the fresh was aquifers of the north of Egypt. Energy subsidies cause budget upset, but also distortions in an economy that need to be carefully corrected. Many Egyptian companies would not be competitive internationally without the energy subsidies. So some care has to be taken to remove these properly with the right corrective counter incentives to develop new and different industries. The development of feed-in-tariffs (FITs) for renewables is also helping Egypt to head in the right direction in the medium run, but these FITs will have to be taken off once the renewable capacity is built up enough to allow that part of the industry to prosper on its own. Egypt is also looking into building its own solar panel and wind vane industry. We will have to see how that works out. Egyptian wants 20 percent renewables by 2020, whereas they only have about 4 percent now. That is a big leap and likely will not happen, but seeing this sort of idea floated in Egypt is a good sign even in itself. Engie, Gamesa, GE, Marubeni and others are and will be involved. So these changes could bring in some significant foreign investment over the next few years. These developments could not only improve the energy and environmental aspects of Egypt, but could also train and employ lots of Egyptians.

The possibility of a nuclear power station

Egypt is considering the development of a nuclear facility, with Russian help, in El Dabaa on the north coast. There are some significant security, financial and other questions on this, but Egypt has been looking into nuclear power for decades. Part of the push towards nuclear power is to increase base load generation. The Egyptians also have some serious present and future water security issues to deal with. Using a nuclear station to desalinate water could be part of the solution to that, but solar, wind and other sources, including geothermal and more efficient desalination techniques could also help resolve those water security issues without the risks attached to a nuclear facility. The potential water security issues from the GERD project in Ethiopia also need to be faced. The potential slowdown of the water flow of the Nile from this project and potential natural events could not only effect water security and food security, but could affect energy security in Egypt due to the importance of hydropower based on the Nile in Egypt. Egypt has a problem with the rule of law and having speedy trials. But it seems like the government is working hard to help resolve some of those issues that keep some investors away. Arbitration clauses have been added in to help resolve contract disputes. Taxes have been dropped on some energy investments. The Egyptian government is trying to make things better for investors, but the political and other environments in Egypt sometimes militate against quick changes.
In the most recent years legal and regulation changes for the energy industry have been moving at relative lightning speed in Egyptian terms. There are attempts to de-monopolize the natural gas markets and to open other energy markets and energy investment markets through such legal changes as Law 87 of 2015. There are also attempts and strategizing being developed to rationalize energy prices without causing political and social disruption. Electricity generation and other energy sources are often sold to certain groups are well below cost of production or import. This has to change in order to make the energy and other economic systems in Egypt more sustainable and viable. However, the social and cultural forces that can militate against this also have to be considered.

The future success of Egypt depends on energy, but also a plethora of other things. These efforts would be best directed towards its economic development, and, more importantly, towards the human development of its people

A real opportunity to emerge

The future success of Egypt depends on energy, but also a plethora of other things. These efforts would be best directed towards its economic development, and, more importantly, towards the human development of its people. There is hope. I have more hope after this most recent trip than ever before. Egypt has a chance to rise up, but it will not be easy. But a lot of hard, smart, creative work and strategic thinking are needed. If it does not rise up, then Egypt and the region could be facing more political and social storms. Where Egypt goes so goes much of the region. It could be a positive role model, or a model of frittered potential. The time for moving forward is now. And Egypt is really trying --- with some help from others who want to see Egypt succeed.

 

*All opinions are Dr. Sullivan’s alone.