Backing Egypt’s Private Sector

CAIRO - 20 August 2018: With a total of $1.2 billion invested and mobilized in the fiscal year 2017/18 by the International Finance Corporation’s (IFC), and an additional $1 billion to be injected in 14 projects this fiscal year, the IFC’s Country Manager in Egypt, Libya and Yemen Walid Labadi tells Egypt Today that his institution is adamant on supporting the local economy.

“Economic reform needs to continue and private sector involvement needs to increase for Egypt to stay on the right track,” Labadi says.

Labadi, who was assumed this position in July 2017, affirms that the IFC sees great opportunities in infrastructure projects in Egypt as well as renewable energy, especially in the wind sector. He flags agribusiness, manufacturing, services and tourism as top-priority fields.

The IFC has already invested $653 million to build 13 solar power plants in Upper Egypt’s Benban solar complex, providing 752 megawatts to 350,000 residents.

The $1-billion worth of investments this fiscal year will go toward roughly 15 projects, according to Labadi. The IFC provided Egypt with a total of $2.9 billion in investments between 2006 and 2017.

Before assuming his position, he was the chief counsel for the IFC in Washington, DC and was involved in more than 300 transactions. Labadi was part of the IFC’s teams that financed power plants in Turkey and Egypt, along with airports in Jordan, Tunisia and Jamaica and oil and gas investments in Egypt and other countries in Africa. He has been with the IFC since 2005, and was a senior counsel for the European Bank for Reconstruction and Development before that.

He received a bachelor’s degree in political science and economics from the University of Illinois at Urbana-Champaign in 1983 and a Doctor of Law (JD) from the University of Michigan Law School in 1986.

Can you give us a general overview of the IFC’s activities in Egypt ?

IFC is the private sector side of the WBG (World Bank Group); We are focused on supporting the private sector. In terms of portfolio, in the last 12 years between fiscal years 2006 and 2018 we invested $4 billion in Egypt, including financing mobilized from other investors. Our portfolio is diversified and includes investments in financial markets, infrastructure, oil and gas, agribusiness, manufacturing and health care.

How much did you invest in Egypt in the last fiscal year (2017/18)?

We invested and mobilized over $1.2 billion. We also made several high-profile investments in pioneering projects in the country. For example, IFC made a landmark investment of $653 million to support the development of 13 solar power plants in Upper Egypt. The project will be the largest solar installation in the world and will provide 752 megawatts of cost-effective and eco-friendly electricity to 350,000 residents. It will also create 6,000 jobs during construction.

IFC made its first investment in Egyptian Pounds to support the country’s construction sector, which accounts for more than 4 percent of Egypt’s gross domestic product and employs 12 percent of Egyptian workers. Local currency financing enables companies to make long-term capital investments.

We also extended an Islamic financing package of $150 million to Almarai, a regional dairy and juice producer, to enhance food safety and create jobs along the agricultural supply chain.

In addition, we are keeping an eye on opportunities in other key sectors like education, which can have a significant impact on reducing the skill mismatch between university graduates and the labor market’s needs, and increase the employability of Egyptian youth.

What are the sectors flagged as top IFC priority? How is your portfolio structured?

We see great growth potentially in infrastructure, especially in the Benban solar project that we financed. At $650 million, it is one of our biggest investments. And that’s quite an important project, because we were able to bring in a lot of new money to Egypt.

We see some growth areas in infrastructure as well. We hope to see some water projects come online, some port projects, and more renewable energy projects.

Our portfolio is divided into three categories. One is infrastructure, which I just talked about, and the other is financial institutions, so we are working with a number of local banks and non-bank financial institutions to provide loans and financing facilities. There is demand for Tier-2 capital financing, which builds (a company’s) capital base. And when we provide loans to banks, we also use this as an opportunity to provide advisory services to help them lend more to women or SMEs.

And the last area is broader; it includes agribusiness, manufacturing, services, tourism, health and education. I see it as the biggest possible growth area for us.

Can you highlight the IFC objectives and expected portfolio for Egypt in FY2018/19?

We see great opportunities in infrastructure. There is also potential in renewable energy, especially in the wind sector. I also think our biggest growth areas will be in agribusiness, manufacturing, services and tourism. We think that there are great opportunities there.

We were fortunate last year because we were able to mobilize a lot of investments. We might invest in about the same number of projects as last year (about 15). In terms of total investments, we are aiming to invest another $1 billion.
 
How does the IFC assess Egypt’s economic reform program so far?

Egypt’s bold economic reforms have played a vital role in stabilizing the economy. The liberalization of the exchange rate has helped eliminate foreign currency shortages and made Egypt’s economy more competitive and attractive for investors.

On the fiscal side, the government has implemented key reforms like introducing a value-added tax and gradually phasing out energy subsidies, which helped reduce primary budget deficit by 1 percent, to 4.4 percent, during the first half of this year.

On the structural side, the government has adopted new laws to improve the country’s investment climate. These include new rules for allocating investment lands and regulations that allow investors to resolve disputes out of court, as well as amendments to the executive regulations of the Companies Law, which introduced new and simpler company types and improved corporate governance provisions.

Egypt’s sovereign credit rating has been upgraded to B from B- by Standard and Poor’s. Meanwhile, the country’s outlook has been upgraded to “positive” by Fitch. Economic activity is also picking up.

Egypt’s economy grew by 5.2 percent in the first half of 2017/18, compared to 3.7 percent the year before. So, on the macroeconomic level, we are seeing signs of improvement and this needs to continue for Egypt to stay on the right track.

Three years ago, when we were engaging in Egypt’s Feed-in Tariff program and were talking to investors about it; investors were worried they wouldn’t be able to get their investments out or get their dividends. We had to create several mechanisms to support lenders and investors, and to make that work, Egypt had to decrease subsidies, and make things cost what they are supposed to cost. There has to be sustainability in the macroeconomic environment.

What we are seeing with the macroeconomic improvements in Egypt, the devaluation of the local currency, and the regular, sustained growth, is an increase in foreign and local investments.

The impact of the reforms was a hard blow to a lot of Egyptians, what do you think will help them cope with these bold measures?

I know this is hard on lower-income people, but we believe that focusing subsidies for the lower-income bracket, rather than on the people who don’t need subsidies, is a better way to go. And it will take time to implement this.

What will really help Egyptians is job creation. What we need is growth, which this year in Egypt amounted to 5.2 percent in the first six months, compared to 3.7 percent last year. So when we have better macroeconomic conditions, people would want to invest, which will create opportunities for jobs. I think this is a very challenging time, but the government has done the right thing. These types of reforms are really hard on any type of economy.

What are the challenges hindering the private sector’s growth, and how does the IFC help address them?

Egypt’s private sector faces a host of challenges hindering growth. These include power shortages, burdensome regulations, gender inequality and difficulty in accessing financing.

To address those challenges, our work involves providing both investment and advisory services to help create a vibrant and dynamic private sector. IFC believes that the private sector can play a key role in driving economic growth and improving people’s lives by addressing long-standing social challenges, like unemployment and inequality.

On the investment side, we provide a range of financial services to help companies access fresh capital, grow, and create jobs. We also partner with other members of the WBG and mobilize investments from other financial institutions to support our program here in Egypt.

On the advisory side, the IFC helps companies improve governance, access capital and increase efficiency and competitiveness. For example, IFC is working with the Egyptian Institute of Directors to build their capacity, strengthen governance in private and family-owned businesses, and to promote female representation on boards and in corporate leadership.

We are also collaborating with the International Bank for Reconstruction and Development (IBRD) to help improve the corporate governance practices of state-owned enterprises in the Egyptian oil and gas sector, helping reform four state-owned companies in preparation for Initial Public Offerings.

In addition to working with the private sector, our advisory team is working with the government to ease burdensome regulations and create a business-friendly environment. For example, the Industrial Licenses Law issued in May 2017, which IFC worked on with the government, has significantly reduced the time needed to obtain an industrial license from 635 days to 30 days.

The IFC also advised the government on implementing effective reform of legislative, secured transactions and creating a movable collateral registry helping small businesses access capital using movable assets like equipment and inventory as collateral. The aim is to expand financial inclusion in Egypt and help small businesses access the financing they need to grow and create jobs.

Another important issue we are trying to address is gender inequality, which is a major impediment to economic growth. In Egypt, GDP growth could jump by 32 percent if women were given the same economic opportunities as men. The IFC is working with the Central Bank of Egypt to help local banks design banking products catered to female entrepreneurs. That’s key, because they often struggle to get the money they need to grow their businesses.

Laws have been issued or amended by the government to ease doing business. To what extent do you think this will improve the business environment in Egypt?

We think the new regulations are a great start, but these are just the beginning.

Implementation and follow-through are crucial. It takes time and a sustained effort to reform things in a big country like Egypt.

One of the challenges that the private sector faces in Egypt is that the process of implementing new laws and regulations takes time. We want to work with the government to make sure these regulations are implemented, help improve the business environment and boost international investor confidence in Egypt.

Microfinance is crucial for expanding financial inclusion, how is the IFC helping to boost it in Egypt?

The IFC has been providing advisory services to three of the largest microfinance players in the market: the Alexandria Businessmen Association, the Dakahliya Businessmen Association for Community Development (DBACD), and Al Tadamun Microfinance Foundation, which supports female micro-entrepreneurs.

Despite being the largest investor in microfinance globally, the IFC has not invested in a microfinance institution in Egypt because the sector is dominated by NGOs.

With new microfinance regulations now in place, a number of non-profit institutions are exploring the possibility of transformation into for-profit companies. New companies are also being established and entering the market. So, the IFC is keen to find the right partners to make its first investment in this sector, which is critica for boosting financial inclusion in Egypt.