We are sceptical that Egypt’s plans for a new electric railway linking Cairo with the planned New Administrative Capital (NAC) will materialise over our long-term forecast period (to 2028).
Although the funding for the railway has reportedly been agreed with a USD1.2bn loan from Exim Bank of China, the project faces numerous obstacles including its questionable feasibility, high costs and complexity, which make lengthy delays likely.
More broadly, recent announcements of negotiation breakdowns and financing difficulties related to the development of the NAC support our view that the new city will not be fully completed over the next decade.
We hold a cautious view on the prospects for Egypt’s planned electric railway linking Cairo with the NAC. In January 2019, an agreement was signed between the Egyptian government and Exim Bank of China for a USD1.2bn loan to finance the construction of the new electric railway, bringing it a step closer to realisation. This would represent one of the highest-value rail projects undertaken in Egypt, reflecting the ambitious nature of the government’s plans for the NAC and its supporting infrastructure. Nevertheless, we believe that there are serious obstacles standing in the way of the railway’s completion over the next decade.
The most prominent of these is the unclear economic viability of the project. While Egypt’s rapidly growing population and the development of new urban areas will drive demand for investment in public transport, the business case for expensive new railway developments is not strong in the medium term. The government has claimed that the project will serve 350,000 people, but given the lack of permanent residents in the NAC at present, the demand case remains weak. Indeed, previous attempts to establish new cities in Egypt outside Cairo have failed to attract anywhere close to the numbers of new residents expected. We believe that this will also be the case for the NAC, with an initial lack of services and facilities as well as high housing costs likely to deter a large influx of new residents, resulting in limited demand for new public transport.
The unclear feasibility of the new railway will likely deter potential private sector construction firms and operators.As a result, while no contractor has yet been announced for the construction of the railway, we expect a Chinese firm to be awarded the project in due course. Chinese firms do not currently have a significant presence in the Egyptian rail sector, but a global pattern of Chinese investment suggests that the provision of loans for infrastructure projects by Chinese banks is usually followed by the selection of a Chinese construction company to carry out the work. Nevertheless, while state-backed Chinese companies have the ability to absorb cost overruns and operating losses better than private firms, China’s previous experiences of running railways in Africa should act as a warning. In both Kenya and Ethiopia, Chinese-backed railway projects have struggled with profitability, leading to concerns over the ability to repay loans for the projects.
We do not expect similar issues with loan repayments to affect Egypt’s electric railway, as the terms offered on the loan are generous and Egypt’s debt to GDP ratio, while high, is manageable. Nevertheless, the weak business case may make it difficult to attract an operator for the railway, as even state-owned Chinese firms will be reluctant to take on a loss-making project, potentially leading to delays to construction. Further delays are likely due to the complexity of the project, as this will be Egypt’s first electric-powered railway. While we believe that the country has the necessary power capacity to support an electric railway, it will likely require a dedicated power supply to ensure uninterrupted operations, necessitating further investment and heightening risks of delays to the project.
The likely obstacles to the development of the electric railway are mirrored by the difficulties facing the construction of the NAC itself. As noted above, Egypt has a history of grand new city projects failing to meet potential or attract the number of residents required to make them viable. The NAC is slightly different, as the government intends to move all its ministries and official functions to the city, which will include the relocation of thousands of civil servants, creating a more solid demand base. Nevertheless, the ambitious nature of the plans for the new city, the lack of a clear budget and the high costs involved lead us to adopt a cautious view towards its full realisation over the next decade. This has been reinforced by recent announcements of negotiation breakdowns with potential contractors and partners, including China Fortune Land Development, which planned to invest USD20bn in the city, and UAE-based Emaar. Further negotiation and financing difficulties are likely, and ultimately we do not believe that the NAC will be completed per the government’s vision over the next decade.