17 September 2014       Download

The key word that defines opportunities across various sectors of the Egyptian economy today is “efficiency,” said El-Khazindar at Euromoney Egypt Conference 

Hisham El-Khazindar, Co-Founder and Managing Director of Qalaa Holdings (CCAP.CA on the Egyptian Exchange, formerly Citadel Capital), a leading African investor in infrastructure and industry, joined key policymakers and business leaders to discuss Egypt’s new economic landscape amidst a mood of optimism at the Euromoney Egypt conference.

“The Egyptian government has implemented a courageous set of fiscal reforms this year which were a necessary step to rebalance the country’s finances,” said El-Khazindar. “The greatest impact of these measures from our perspective has come from energy reform. The gradual removal of subsidies on petroleum products resulted in pricing that is more inline with international norms. In parallel, the government has also opened the door for the importation of natural gas, coal and coal-like products.”

 “These reforms are essentially a validation of our investment thesis. Many of the investments that we made 7 years ago when we were first established as a private equity firm were geared towards the view that Egypt was in the process of becoming a net energy importer rather than a net energy exporter and that this shift would necessitate a re-pricing of energy and the opening up of the energy sector in general,” added El-Khazindar.

 As one of the largest investors in Egypt’s crucial energy sector Qalaa Holdings, in partnership with the Egyptian government, is in the process of building the Egyptian Refining Company (ERC), a US$ 3.7 billion greenfield refinery which will come on stream in 2017 to meet Egypt’s deficit in petroleum products particularly diesel. The strategic national project, which is to date the largest project finance deal in Africa, has enjoyed the unwavering support of successive Egyptian administrations since it was merely an idea on the drawing board in 2006.

 Qalaa Holdings has undergone a transformation process that has seen it develop from a private equity model to an investment holding company with a focus on the core industries of energy, cement, agrifoods, transportation & logistics, and mining. The new structure gives the company the leeway to hold investments longer and thus create more value for both shareholders and the regional economies in which it invests.

 “Earlier this year, as part of our transformation, we increased our capital to EGP 8 billion, expanded our balance sheet and began disposing of non-core assets and investing the proceeds into our core assets,” said El-Khazindar. “Now we are consolidating our subsidiaries in refining, gas distribution, power generation and distribution, dairy farming and cement production. With the larger balance sheet, the cash flows from divestitures and the majority ownership in our core assets, we are able to grow faster in the areas that we had bet on a few years ago.”

 Commenting on new investment opportunities in Egypt, El-Khazindar said that utilizing existing capacity in a more efficient manner would be key.

 “People sometimes think that Egypt has a resource problem but it’s actually much less an issue of available resources and more of an efficiency challenge. We have under-utilized assets in a number of sectors ranging from real estate to industry and power generation. Businesses that invest in optimizing, upgrading and using the assets that we have more efficiently have a tremendous range of opportunities,” said El-Khazindar.

 Qalaa Holdings recently submitted a bid to convert a power plant in Egypt’s Sixth of October City from an antiquated simple cycle power station into a vastly more efficient combined cycle plant. Through its investments in agrifoods and transportation & logistics, Qalaa Holdings is also seeking to maximize efficiencies by optimizing water usage and moving freight via energy efficient river barges.

 According to Mohamed Shoeib, Managing Director of Qalaa Holdings’ Energy Division and an industry veteran with over 30 years experience in Egypt’s upstream and downstream oil and gas sector, “the decline in gas production is due to inefficiency in production mechanisms and the fact that the government has been unable to pay fees to the international companies. As a result these international players have stopped investing which has led to the shortages that we are experiencing today,” said Shoeib at Euromoney’s energy investment workshop.

 “Reforming the energy sector is now more crucial than ever and time is of the essence,” said Khaled Abubakr, Co-Founder and Chairman of TAQA Arabia, Qalaa Holdings’ energy distribution subsidiary.

 When asked about the regulatory framework required to make Egypt’s power sector more efficient, Abubakr stated that, “we need to have a strong and independent regulator as we transition from an industry that has been tightly controlled by a state monopoly to a more liberal environment. We believe that today the government is starting to take positive steps to develop the role of the regulator with the involvement of non-governmental stakeholders such as bankers, economists and lawyers.”

 “We are seeing promising signs on the presidential and cabinet levels which indicate that the government is willing to provide the legislative support necessary to encourage private sector investments energy,” added Abubakr.

 “I’m quite optimistic that we will start to see the economy rebound with strong GDP growth during the next 2-3 years on the back of reforms that have already taken place and by simply making use of underutilized capacity but the challenge will be moving beyond that. In order to drive the long-term growth that this economy needs we must have the ability to attract significant amounts of FDI in the range of US$15-25 billion per annum,” said El-Khazindar.

According to El-Khazindar, the appetite for investing is out there but the government has to start tackling some of the harder bureaucratic hurdles that can facilitate matters for local, regional and international investors whether they are small entrepreneurs or large corporates.