Document of

The World Bank CFILE Cop

FOR OFFICIAL USE ONLY

Report No. 4721-EGT

STAFF APPRAISAL REPORT

ARAB REPUBLIC OF EGYPT

CONSTRUCTION INDUSTRY PROJBC T

May 24, 1984

Industrial Development and Finance DivisionProjects DepartmentEurope, Middle East and North Africa Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Egyptian Pound (LE)US $ 1.19 = LE 1.00

US $ 1.00 = LE 0.70 (Central Bank Pool Rate)

'US $ 1.00 = LE 0.84 (Commercial Bank Pool Rate)

ACRONYMS AND ABBREVIATIONS

AfDB African Development BankBM Bank MisrCBE Central Bank of EgyptCCIS Construction Contracting Industry StudyDIB Development Industrial BankEB Executive BureauEEC European Economic CommunityEFC Egyptian Federation of ContractorsEIB European Investment Bank

GOE Government of EgyptGOHBPR General Organization of Housing, Building and

Planning ResearchILO International Labor OrganizationJCDCI Joint Committee for Development of Construction Industry

KFW Kreditanstalt fur WiederaufbauLIBOR London Inter-Bank Offer RateMDHLR Ministry of Development, Housing and Land Reclamation

OPEC Organization of Petroleum Exporting Countries

TOMOHAR Training Organization of the Ministry of Housing

USAID U.S. Agency for International Development

ARAB REPUBLIC OF EGYPT

FISCAL YEARJuly 1 to June 30

FOR OFFICIAL USE ONLY(i)

EGYPT

CONSTRUCTION INDUSTRY PROJECTSTAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page

Loan and Project Summary ......................................... (iii)

I. PROJECT BACKGROUND ............................................... 1

A. Project History ...................................... . IB. Role of Construction in Development .......................... 1C. The Egyptian Construction Industry ..... .............. 2D. Strategy for Further Development ..... .............. 9

II. THE BANKING SECTOR ......................................... 14

A. Financial Institutions and Construction Industry Lending 14

B. Interest Rates and Exchange Rates ..... ....................... 16C. Participating Banks ....... ............... , ....... 17

Development Industrial Bank .............. .. ................ 18Bank Misr ........................................ 21

III. THE PROJECT .................................................. 24

A. Objectives and Scope ...... ................................... 24B. Project Description .......................................... 24

Financial Assistance ....................................... 24Technical Assistance ....................................... 26

Management Development Program .................. . . .... 26Joint Committee for Development ofConstruction Industry . . . 34

Participating Banks ...... ............................ 36

C. Project Implementation ...................................... 36

Lending Arrangements ...... ............. ................... 36The Credit Component ................. .. ............. 36Subproject Appraisals ............................... 37Free Limits ....................... ........................ 37Interest Rates and Foreign Exchange Risk ................. . 37Procurement and Disbursement ............. .. ......... 38Technical Assistance for Management Development . .39Technical Assistance to the Joint Committee forDevelopment of Construction Industry .................... 39

Technical Assistance to Participating Banks ............... 39Accounts and Audits ................. .. .................... 39

D. Project Benefits and Risks ....... ............................ 40

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

(ii)

Page

IV. AGREEMNTS REACHED AND RECOMENDATIONS ...................... 42

ANNEXES

1. Demand for Construction, 1981/82-1986/87

2. Building Materials Supply and Demand, 1981/82-1986/87

3. DIB: Income Statements, 1980-1983

4. DIB: Balance Sheets, 1980-1983

5. DIB: Projected Income Statements, 1984-1987

6. DIB: Projected Balance Sheets, 1984-1987

7. BM: Income Statements, 1980-1983

8. BM: Balance Sheets, 1980-1983

9. BM: Financial Projections, 1984-1988

10. Condensed Guidelines for Appraisal of Sub-Projects

11. Estimated Schedule of Disbursements

12. Budget for the JCDCI Two-Year Work Program

13. Selected Documents and Data Available in Project File

This Staff Appraisal Report is based on two missions which visited Egypt inNovember 1982 and May/June 1983. The first mission comprised Messrs. S.Malik (Chief), A. Deshpande, G. Hadjicostas, H. Kaden, A.S. Kinawy, Ms. A.MacNamara and Mr. A. Austen (Consultant). The second mission comprisedMessrs. S. Malik (Chief), J. Coudol, A. Deshpande, G. Hadjicostas, R.Zaborski, A. Austen (Consultant) and M. Gates (Consultant).

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ARAB REPUBLIC OF EGYPT

CONSTRUCTION INDUSTRY PROJECT

Loan and Project Summary

Borrower: Arab Republic of Egypt.

Beneficiaries: Development Industrial Bank (DIB) and Bank Misr.

Amount: US100 million equivalent, including capitalized front endfee.

Termns Repayable in 20 vears, including 5 years of grace, at the

standard variable interest rate.

Relending Terms: US$96.7 million and US$200,000 would be onlent to DIB andBank Misr, the participating banks (PBs), for the credit

component and technical assistance, respectively, at aninterest rate equal to the Bank rate plus 1.5 percentage

points. The PBs would onlend the credit component tosubborrowers at a minimum interest rate of 14%.Amortization of the credit component would conformsubstantially to the aggregate of the amortizationschedules applicable to specific investment projectsfinanced out of the proceeds of the proposed loan. TheGovernment would retain US$2.8 million for the technicalassistance components for the Joint Committee for theDevelopment of the Construction Industry (JCDCI) andmanagement development program. The technical assistancecomponents would be repavable in 20 years, including 5years of grace. The exchange risk between the Egyptianpound and the US dollar would be borne by the subborrowers;the exchange risk with other currencies would be borne bvthe Government.

Project The project is designed to help initiate policy reforms

Description: that can improve the performance of the constructionindustry by the provision of financial and technicalassistance. Specifically, under the project JCDCI wouldundertake an agreed two-year action program, which wouldaccord priority to strengthening contractual and biddingpractices in the sector. The project would provide a lineof credit to the PBs for onlending for constructionequipment and machinery for the manufacture of buildingmaterials and small items of construction equipment; atechnical assistance program for management development ofcontracting companies; a technical assistance program forthe JCDCI; and staff training and technical assistance forthe PBs to help them improve their capacity to evaluate andsupervise loans in the sector. The major risks associatedwith the project are the present limited capability of thePBs to evaluate subprojects in the sector and delays in

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project execution due to risks inherent in theconstruction industry given strong fluctuations indemand, current management deficiencies in contractingcompanies and delays in payments from clients forcompleted work. Strong, pent up demand in the sectorand the technical assistance components of the projectshould minimize these risks.

Estimated Project Costs: 1/ Foreign Local Total--------US Million------

Line of Credit 96.7 30.0 2/ 126.7Technical AssistanceManagement Development (2.0) (1.2) (3.2)JCDCI (0.2) (0.3) (0.5)PBs (0.2) ( - ) (0.2)Subtotal (2.4) (1.5) (3.9)

Contingencies (0.6) (0.7) (1.3)Total Technical Assistance 3.0 2.2 5.2

Front-End Fee 0.3 - 0.3Total Financing Required 100.0 32.2 132.2

Financing Plan: Foreign Local Total-- US $ Million------

Bank 100.0 - 100.0Government - 2.2 2.2Manufacturing Enterprises - 30.0 30.0Total 100.0 32.2 132.2

Estimated Bank Fiscal Year 85 86 87 88 89Disbursements: ---------US $ Millions----------

Annual 6 35 36 17 6Cumulative 6 41 77 94 100

Economic Rateof Return: N.A.

1/ Net of taxes and duties.2/ Representing the estimated local costs associated with the line of credit

for manufacturers of construction materials and equipment.

ARAB REPUBLIC OF EGYPTCONSTRUCTION INDUSTRY PROJECT *1

I. BACKGROUND

A. Project History

1.01 In 1979 the Bank, recognizing deficiencies and delays in the execu-tion of its own projects in Egypt, agreed to finance a study of the construc-tion/contracting industry (CCIS) from the proceeds of the Second Imports Loan(1456-EGT) 1/. The study, undertaken by a team of Egyptian and foreignconsultants under the guidance and supervision of a Steering Committee of theMinistry of Development, Housing and Land Reclamation (MDHLR), did a detailedanalysis of the sector and prepared comprehensive recommendations for improv-ing the efficiency and for developing the capacity of the industry. Thestudy, completed in July 1981, provided an assessment of the essentialproblems and constraints associated with the need for fostering growth andefficiency. The study's recommendations were discussed in a three-daysymposium in January-February 1982 in Cairo chaired by the Minister ofDevelopment, Housing and Land Reclamation. A Bank mission visited Egypt inJune 1982 to discuss a program for implementation of the recommendations ofthe study and the appropriate type and scope of Bank assistance.

B. Role of Construction in Development

1.02 Construction industries produce essential facilities for all other

sectors of the economy, and draw about one-half of their inputs from severalof those sectors. And yet, its special characteristics set it apart fromother industries; the construction activity shifts with the location of itsproduct ("job shop" nature against the "flow shop" of industrial manufacture);it is performed by a wide variety of enterprises, organizations and indivi-duals and faces a considerable array of special risks, particularly thepronounced cyclical fluctuation of demand. The construction sector hasstrong backward linkages with industries producing building materials, suchas cement, reinforcing iron, wood, glass, etc. The forward linkages appearin the clear role of the sector in the capital formation process. Most formsof fixed capital formation have an element of construction. As in otheradvanced developing countries, construction in Egypt accounts for 45-50percent of total annual gross fixed investment; it also consitutes about 5percent of GDP. In Egypt, the contracting part of the construction industryemploys about 700 thousand persons or about 4.5 percent of the national laborforce.

*/ Construction Industry is defined to embrace the whole of the constructionprocess including, construction contracting, construction materials andother resources, and construction related services.

1/ Arab Republic of Egypt - Construction/Contracting Industry Study, FinalReport, July 1981.

1.03 Given its importance in the process of development, the construction

industry can also create a significant bottleneck when it cannot respondquickly and efficiently to demands. The Egyptian construction industry hascome under considerable strain since the opening up of the economy andGovernment efforts to accelerate the rate of investment and economic growthin the country. The performance of the construction sector in the seventieswith an annual average growth rate in gross construction output of 2.9percent has been disappointing and has considerably lagged behind the growthin GDP (7.2 percent) . In contrast, during the 1960-70 period constructionoutput averaged an annual growth rate of 6.7 percent compared to a GDP growthrate of 5.3 percent. Production of essential building materials like cementand reinforcing bars also performed poorly during the seventies leading tofrequent shortages and necessitating higher imports. Growing imbalancebetween supply and demand for building materials resulted in significantincreases in the construction price index which averaged 23 percent per annumduring 1972-7 9. Large scale migration of construction workers to the Gulfcountries and the Government's excessive reliance on public sectorcontractors all contributed to making the construction industry to be a majorbottleneck in the implementation of the Government's investment plans in theseventies. The cost to the economy due to low quality of workmanship,significant delays in completing work and excessively high prices has beenenormous.

1.04 The Government's new Five-Year Plan covering the period 1982/83 -

1986/87 foresees total investment expenditures of about LE 35 billion, out ofwhich construction accounts for over LE 16 billion or 47 percent (Annex 1).The Plan targets represent a near doubling of the LE 8 billion in investmentin construction during the last Plan and pose a formidable challenge to theindustry. The Plan also gives priority to increasing the production ofbuilding materials, especially cement and reinforc ing bars, in order toalleviate shortages encountered in the past (Annex 2). The Government ofEgypt (GOE), based on the priorities established in the CCIS, has set inmotion the policies and reforms required to improve the capacity andefficiency of the domestic construction industry in Egypt. The proposedproject would assist GOE in these efforts.

C. The Egyptian Construction Industry

1. Background

1.05 The structure of the construction/contracting industry in Egypt hasundergone a series of changes over the last three decades. At the time ofthe 1952 Revolution, the contracting industry was entirely in the hands ofthe private sector. After the Revolution the Government began investing inheavy industry, but the economy continued to be based mainly on private enter-prise. Between 1961 and 1964 contracting companies and companies mainlyproducing essential building materials were first partly and later fullyconverted into state owned enterprises. A limit of LE 30,000 (laterincreased in stages to LE 50,000, LE 100,000, LE 500,000 and LE I million in1974) was put on Government contracts let to private firms. The newlynationalized firms were formed into 35, and later 41, companies. During

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1964-67 the organization of public sector firms within the Governmentstructure was changed several times and the companies themselves regrouped.

Consumers were given immediate advantages from nationalization in the form ofsignificant price reductions on essential goods. Workers were given newprivileges and there was a massive employment drive with hundreds ofthousands of workers absorbed in the public sector, without much regard forthe implications in tenns of productivity or profitability. The old class ofmanagers and owners was invited to remain with the enterprise. During1961-1973 the role of the private sector in construction diminishedconsiderably as its operations were limited by the contract ceiling. Itsprimary activities were housing for the private sector and subcontracting tothe public sector.

1.06 After October 1973 there was a change in strategy, popularly knownas "Infitah" or the open door policy. The foundation of the open door policyis the Investment Law (Law 43 of 1974 as amended by Law 32 of 1977) whichencourages both foreign investment as well as indigenous private investment.These laws, coupled with elimination of the contract ceiling stimulatedprivate sector contracting. However, the controls on the economic systeminstituted over two decades are still largely intact.

2. Structure and Organization

1.07 The primary and overriding characteristic of the construction

industry in Egypt is Government dominance as employer, its control of and itsparticipation at almost every level of execution. Government is involved infinancing, organizing and managing construction enterprises as well as insupplying human, material and financial resources. It produces, allocatesand distributes key building materials; trains construction manpower; providesequipment; determines the technology to be used; and finances most construc-tion activity. Functional responsibilities for these various activities arenot generally separated. In some cases a single ministry serves as client,contractor and material distributor. This leads to a blurring of functionsencouraging delayed payments by the client, inadequate project supervision,and largely ignored contractual requirements on the part of the contractor.The industry has suffered from a preoccupation by the Government with gettingwork done by public sector contractors with very little control over costs.Between 1962 and 1978, the public sector companies received almost all theirwork by direct order, i.e. on a negotiated basis under which each company wasallocated work directly by a client ministry or public organization.

1.08 The Egyptian contracting industry consists of 5 separate productionunits: public sector companies, private sector companies, cooperatives,companies under Law 43, and the informal sector. There are 47 contractingcompanies in the public sector of which 29 are under the MDHLR and theremaining under the Ministries of Electricity and Power, Industry, Irrigationand Transport. There is a paucity of reliable data on the constructionsector in Egypt. It is therefore difficult to provide accurate estimates ofthe respective shares of the various contracting units or to provide data onthe type of work performed. The relative importance of the public sectorcompanies can, however, be gauged from the value of main contracts for newconstruction awarded during 1981/82. The public sector companies, operating

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under direct ministerial control, accounted for 72 percent (Ministry ofHousing 52 percent) of the LE 2,160 million in new contracts awarded in1981/82. There are between 20 and 25 thousand operating units in privatesector contracting, including about 75 contracting companies set up under Law43. Some of the companies under Law 43 are joint ventures with foreignfirms, while the other companies are solely Egyptian 1/. The main contractsreceived by private sector companies amount to less than 30 percent of thetotal but about half the actual amount of the work due to sub-contracts. Inaddition, the informal sector -- construction for own use and constructionnot conforning to all laws and regulations -- mostly involved in the field ofhousing is substantial and growing. The CCIS has estimated that the informalsector produces something of the order of 75 thousand urban units per annum-- three times as many as the formal sector. Cooperatives of small privatecontractors are set up in Governorates with strong local support.

Breakdown of Construction Output, 1980

Percent Share in Activity Percent Share of Activity in Total

Activity Public Private Total Public Private Total

Land 83.1 16.9 100.0 11.4 9.0 10.9

Industry 82.7 17.3 100.0 14.8 12.0 14.2

Transport 95.2 4.8 100.0 27.5 5.3 22.9

Utilities 99.6 0.4 100.0 23.4 0.3 18.7

Housing 31.4 68.6 100.0 8.6 72.7 21.7

Building 98.8 1.2 100.0 14.3 0.7 11.5

79.5 20.5 100.0 100.0 100.0 100.0

Source: Ministry of Planning

1/ All enterprises formed under Law 43 are legally private sector enter-prises and are exempt from guidelines applicable to public sectorenterprises. In particular, such enterprises have managerial authorityidentical to wholly owned private companies in all the critical areas ofprofit retention, investment decisions, hiring, termination andremuneration of staff and incentive policies.

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1.09 Most of the public sector companies have an annual gross turnover(before sub-contracts) of between LE 10 million and LE 40 million. Somepublic sector companies generate up to 10 percent of their turnover fromworks abroad, especially in the Gulf countries. The smallest public sector

company has an annual turnover of barely over LE 1 million, while the largesthas an annual turnover of over LE 550 million, equivalent to 26 percent ofthe turnover of the entire formal sector. Housing and general buildingconstitutes about one-third of the total turnover, followed bytransportation, including Suez Canal (23 percent), public utilities (19percent) , industrial construction (14 percent) and agriculture, includingirrigation, drainage and land reclamation (11 percent). Most of the largeprivate sector companies have been in operation only 4-5 years and only abouta dozen have an annual turnover of over LE 10 million. These companies aremostly involved in housing and only now are gradually diversifying into otherareas of construction.

1.10 The organizations procuring or supervising construction work are

predominantly government agencies or under their control. These include: (1)the Supreme Councils for the Building Materials Industry, for the Construc-tion Industry, for Irrigation and Agriculture, and for Transport; (2) theTraining Organization of the Ministry of Housing (TOMOHAR); (3) the Chamberfor Building Materials and Contractors; (4) the General Organization ofHousing, Building and Planning Research (GOHBPR); and (5) the Ministry ofHousing and other ministries. Two professional non-governmental bodies - theSociety of Engineers and the Syndicate of Engineers - are also involved.These bodies also include architects, surveyors and other professionalsdirectly related to construction. Apart from maintaining registers of allgraduate engineers in Egypt, the Syndicate itself currently performs fewother functions. There is a comprehensive body of legislation dealing withconstruction in Egypt covering the responsibility for all phases such asdesign, execution, supervision, and the relationships between the partiesinvolved. There are also a variety of other controls affecting theconstruction industry including Egyptian standards, codes of practice andtendering procedures for Government works. The existing laws arecomprehensive but complicated; however, observance of laws and the machineryfor enforcing them is weak. Current institutional arrangements do notpromote sufficient coordination among the large number of parties involved.The contracting industry itself should play a more active role in preparing alegislative framework in which it could operate more efficiently.

3. Construction Resources

1.11 Management, personnel, equipment, building materials, technology andfinancial resources are the main factors of production of the constructionindustry. While all of them are in short supply, the lack of good managementis perhaps the most severe constraint to the development of the sector.

1.12 Management: Management has little incentive to improve productivity

of men and machines or economy in the use of materials. Many managers arewell educated, but lack experience in, or exposure to, good management

related to executing construction work. Until recently, few chairmen of con-tracting companies received the management training which they needed. Two

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decades of direct order work, cost plus contracts, non-competitive operations

with no predetermined total cost targets, and no real incentives forimproving performance have contributed to this situation in public sectorcompanies. In addition, public sector contractors had limited authority inthe areas of manpower and finance. Inadequate management training facilitieshas also not helped improve the standards of management, with the exceptionof some arrangements in a very few firms. However, special managementability is required when very scarce resources are to be employedeconomically, and the potential of the construction industry is to be fullyutilized and further developed.

1.13 Manpower: The construction industry in Egypt is constrained by theshortage of adequately trained and experienced technical personnel andskilled labor. According to the CCIS the value of output per worker hasabout halved in real terms between early 1960s and late 1970s. This declinein productivity partly reflects the lowering of the level of skills due toemigration and partly due to a decline in incentives which management ispermitted to provide. While lack of skills is a problem common to the wholeindustry, the public sector enterprises face specific problems such as fixedwage levels and inability to terminate workers not needed for plannedoperations. Consequently, the efficiency of public sector companies is muchlower. Training facilities are generally inadequate, and only the largestpublic sector company has established its own independent training system.The Training Organization of the Ministry of Housing (TOMOHAR), establishedin 1976, did not adequately respond to the industry's needs as its programfor establishing training centers moved very slowly and it had considerabledifficulty in recruiting trained instructors.

1.14 Equipment: Much of the construction equipment fleet in Egypt isobsolete or in need of repair. The CCIS estimated that at least one-half ofthe existing fleet needs to be replaced in the next few years in order tomaintain 1979 levels. The public sector companies own and operate aboutthree-fourth of the total equipment fleet. Until the open door policy, thecontracting companies were denied access to modern construction machinery andequipment due to the practice of bulk procurement by a central governmentagency. Within the public sector, the companies specializing on works foragriculture, such as land reclamation and irrigation are highly mechanizedand fairly well organized. Their utilization rates are relatively high, butthe majority of their equipment is old and in some cases long over due forreplacement. On the other hand, companies involved in building and othercivil works, which own and operate about one-half of the total equipmentfleet of the country, have a poor record of utilization of machinery. Thiscan be attributed to the great variety and number of projects undertaken,weaknesses in scheduling and planning, shortage of spares and improper equip-ment mix. Equipment maintenance facilities are generally inadequate as aretraining facilities for operators leading to less than satisfactory utiliza-tion rates. There are no well established equipment leasing companies andonly the two largest public sector companies have very recently establishedin-house leasing arrangements to improve capacity utilization. The privatesector companies have achieved fairly high utilization rates due to commercialpressures originating from competition. They also have a lower ratio offixed assets to turnover, indicating their preference for housing and otherbuilding work, which is less equipment intensive.

1.15 Construction Materials: With the exception of timber which forconventional construction is all imported, Egypt has extensive resources ofraw materials for construction (natural stone, aggregates, gypsum, glasssands, iron and bauxite ores) in commercially exploitable quantities. Theproduction of essential building materials either stagnated or increased veryslowly in the seventies necessitating large imports. Import of cementincreased from 1 million tons in 1970 to 3.3 million tons in 1979 andconstituted over one-half of total consumption. Similarly, import ofreinforcing bars increased from 75 thousand tons (26 percent of totalconsumption) to 475 thousand tons (63 percent of total consumption) duringthe same period. Tight Government control, through public sector companiesand organizations, over key construction materials (cement, steel, timber,glass and certain pipes) extending from production and importation toallocation, distribution and pricing have resulted in inefficiencies, muchwaste and operation of a 'free' or 'black' market in controlled materials.Controlled materials are allocated on the basis of building permits and inmost cases these are distributed directly to the contractor undertaking thework. Advance payments, equivalent to 25 percent of the value of materials,are required and frequent delays in delivery are experienced. The privatesector is also involved in material production (bricks, aggregates, sanitaryfittings, paints and various other components) although generally on a smallscale. The Government's open door policy encourages private investment inconstruction material production; this policy also allows import of con-trolled materials, provided the contractor has access to foreign exchange.The Government's investment program for the 1982/83 - 1986/87 period in basicmaterials like cement, steel, etc. if implemented as planned, would alleviateto a large extent the scarcities experienced in the past. Private sectorparticipation in building materials is also likely to increase in the future.

1.16 Technology: Nationalization of the manufacturing of key buildingmaterials and the Government pricing, allocation and distribution of thesematerials have led to the preference, particularly in large buildingprojects, for technologies which make use of the resources under Governmentcontrol, even though these may not necessarily be appropriate for use inEgypt. Many of the technologies used in the construction industry are oftenout of date, rely on equipment which is obsolete or in poor repair, useimproper materials, and/or produce unsatisfactory work. While theseconditions are found in many activities, they are particularly seriousregarding concrete which is used in constructing virtually all buildings inEgypt. While concrete batching plants and truck mixers are now usedextensively, the poor quality of construction workmanship and materials isimmediately evident. Aggregates are generally badly graded and prepared andreinforcements for concrete work are poorly formed, positioned and tied.Designers, recognizing the inadequacies of current practice, have a tendencyto overdesign structures to compensate for bad workmanship resulting in asubsequent greater use of materials than necessary and added costs. Testingof certain materials and construction techniques are required by Egyptianstandards, codes of practice and contract documents, but testing laboratoriesare limited in number and enforcement is weak. The Government as the mainclient has the power to influence the choice of technologies used in projectsand to ensure that quality control standards are maintained through designand supervision of projects. Supervision procedures, if properly applied,

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could dramatically improve the quality and safety of construction works inEgypt. There is also a need for a national program of standardization anddimensional coordination of which there are but very few examples today.

1.17 Finance: Institutional finance for contracting enterprises in Egyptis minimal, given the array of special risks in contracting. There are nobanks specializing in construction industry financing, although in 1980 theNational Investment Bank was established to assist in the financing of publicsector projects included in the Five Year Plan. State-owned mortgage banksprovide long-term financing for housing. Private sector contractors regardlack of institutional finance as a major constraint to efficiency andexpansion of capacity. They have difficulty in securing bank financing andare required to make large deposits and provide guarantees requiring substan-tial real assets as collateral. Sources of institutional finance for thecontracting industry are detailed in the chapter on the banking sector.

1.18 Although lack of institutional finance is a major problem, there areother important constraints on the contractor's finance. The most signifi-cant one relates to delays in contract payments by the Government. The CCISestimated that the Government owed public sector contractors under the MDHLRan estimated LE 364 million as of December 31, 1978, equivalent to overone-half of the total turnover of these companies. The Governmentconsistently failed to recognize its obligations and the contractors' needsfor timely payment of work performed. To ease their liquidity situations,the public sector contractors utilize their completion certificates to borrowfrom local commercial public sector banks at the prevailing interest rate.Since the contractors earned no interest on accounts receivable but paid theprevailing market interest rate on a large proportion of accounts payable,the net result was a squeeze on their profitability. Furthermore, in thecomputation of taxes on profits it is assumed that contractors have receivedpayments. Another constraint on the contractor relates to the amount offunds locked up in advance payments for building materials. An additionalproblem to contractors in maintaining adequate liquidity is caused by theabsence of cost escalation clauses in contracts. Another problem untilrecently and which primarily affected public sector companies involved theimpact of substantial advance payments to contractors for public sectorprojects which were repaid during the course of the work by deduction fromthe payments on each certificate. Public sector contractors were inclined totake on as many contracts as possible in order to bring in advance payments,and had little incentive to progress in the work underway since to do socould jeopardize a positive cash flow. The net result was substantial delaysin project completion and thus increases in construction costs.

1.19 The preceding sections highlight the serious inadequacies of theEgyptian construction industry and the major problems which must be resolvedif the industry is to play the critical role required of it in thedevelopment of the country. The primary reason for the unsatisfactoryperformance of the industry is the organization and administration of theindustry rather than the shortage of resources. While there are admittedshortcomings in resources, they are largely the result of a weak organizationand administration. The structure is heavily Government dominated,responsibilities are blurred, and coordination is seriously lacking. At

present the industry is poorly organized and lacks effective professionalinstitutions and active business associations. There is also a need tostrengthen institutions to unify and to make more effective the presentlyfragmented responsibility and inadequate capability of the constructionsector. There is a need for industry-wide agreement on tendering procedures,strengthened prequalification requirements and contract documentation;Government leadership in influencing the choice of technology through designand specifications; effective use of building permit system; the development

and use of standards and cost norms; increasing the stock of trainedmanpower; introduction of management courses as part of the obligatorycurriculum for professions likely to contribute managers for the constructionindustry; revamping the system of financing construction activity; redefiningthe relationship between the Government and the public sector companies;improvements in Government's planning and supervision of construction work;and, an updating of the body of legislation dealing with the industry and itsstrict enforcement.

D. Government's Strategy for Development of the Sector

1.20 The GOE recognizes the serious inadequacies of the Egyptian

construction industry. The high priority accorded to the sector is reflectedin the new Five Year Plan. The Government, based on the prioritiesestablished in the CCIS and in the context of discussions of the proposedloan, has also set in motion the policy reforms required to improve thecapacity and efficiency of the industry.

1.21 In order to improve coordination and the environment and thestructure of the industry, the Government has established a Joint Committeefor Development of Construction Industry (JCDCI) under the MDHLR. TheGovernment is also in the process of giving final approval to theestablishment of an Egyptian Federation of Contractors (EFC). The creationof the JCDCI is particularly necessary to improve the performance of theconstruction sector since this sector includes not only work execution butalso planning, designing, supervision and maintenance, in short, all projectcycle activities. The MDHLR plays a major role in the Egyptian construction

sector extending from manufacture of building materials, including cement, toconstruction manpower training (TOMOHAR) and constructon research andtechnology (GOHBPR). The 29 contracting companies under MDHLR account forabout three-fourths of the work executed by all public sector companies. TheEFC will represent the contractors in dialogue with the GOE and will also berepresented on the JCDCI.

1.22 The JCDCI has been entrusted with the task of developing andrecommending adoption of policies and reforms for the further development ofthe Egyptian construction industry. The JCDCI, with the first Under-secretary, MDHLR, as its Chairman, represents a balanced cross section

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of the industry. It consists of representatives of six other ministries(four representing Government contracting parties -- Electricity and Power,Industry, Irrigation and Transport -- and Planning and Manpower andTraining), the three new sector holding companies (for building materials,for civil engineering construction and for general building contractors),other organizations and associations concerned with the industry (EFC,GOHBPR, TOMOHAR, Society of Engineers, Syndicate of Engineers), arepresentative of the State Council, and four qualified and experiencedconstruction experts. An executive subcommittee of the JCDCI (called theExecutive Bureau) consisting of seven sector experts will serve as theProject Implementation Unit. The Executive Bureau (EB) will be supported bya Technical and Financial Secretariat which will be empowered to co-optadditional members and to hire consultants for specific tasks. The EB willbe headed by a representative of the private sector who will also serve asthe Deputy Chairman of the JCDCI, while the Secretariat will be headed by theUndersecretary for Construction in MDHLR.

1.23 The JCDCI will oversee the preparation of detailed action programsbased on the general recommendations of the GCIS. The Government and theBank have agreed on a two-year program for the JCDCI for the formulation ofdetailed reforms in key areas. The work program focussing on Governmentpolicies and procedures for procuring public works is detailed in Section IIIpara 3.20. The EB will undertake, with the assistance of the Secretariat andconsultants, the necessary technical work and then submit its proposals tothe full JCDCI. The JCDCI will review the proposals and recommend theiradoption to various ministries concerned with construction.

1.24 The draft legislation for the establishment of an EgyptianFederation of Contractors (EFC), a contractors association, is before thePeople's Assembly for final approval. The Association's present programconsists of a survey of existing construction companies to register themhorizontally (i.e. by categories of work), vertically (i.e. by capacityranges) and geographically (i.e. by regions); the preparation of standardgeneral conditions of contract to improve the contractual relationshipbetween owner and contractor; and, the preparation of standard specificationmeeting modern requirements suitable to local conditions. The Federationwill also assist small contractors and participate in meeting the trainingneeds of the industry.

1.25 The process of tendering in Egypt is in a state of change.Realizing that the direct order method is not conducive to developing anefficient contracting sector and the lack of effectiveness of the system interms of cost savings, quality or completion time, the Government has ceasedthis practice as a matter of normal routine. The Ministry of Finance hasrecently updated the procurement law. Competition has increased in recentyears through tenders for smaller works and a prequalification stage followedby a tender for larger works. No new contract is now awarded without freecompetitive bidding and Government commitment to continue with this practicewas secured during negotiations. Private sector companies are now free tobid and compete with public sector companies; for large contracts Egyptianprivate sector companies normally bid in joint venture with foreign partners.

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1.26 The transition from direct order to free competitive system hasalready fostered some increases in efficiency and reductions in constructioncosts. It is also acting as an incentive for contractors to adopt moreefficient management practices. Good procurement practice will be furtherstrengthened as the EFC completes the first phase of its operations andrequired changes are made in the current system of tendering procedures andcontract documents.

1.27 Along with the ceasing of the direct order method for public works,the Government has also begun to lessen the amount of control that it exer-cises over public sector firms in order to afford them opportunities todevelop on their own. Parliament passed a law (Law 97 published August 4,1983) reforming in certain ways the organization and management of publicsector companies. The major changes are: an attempt to introduce a greaterdegree of decentralization by creating holding companies to oversee theoperations of public sector companies, and greater control over hiring by themanagement of public sector companies. Until recently, engineering graduateswere allocated to public sector companies and Government departments to behired as permanent employees resulting in overstaffing. Strict guidelineslaid down by law regarding the wage rates in the public sector encouragedpersons of initiative and enterprise to leave the public sector for higherpaying jobs in the private sector or in other Arab countries. Consequently,labor productivity within public sector companies had been declining. As aresult the Government decided to discontinue the practice of guaranteedemployment to engineering graduates. Similarly, incentive payments are nolonger limited to 100 percent of the wage rate and payments in excess of thisare allowed. Companies can also make payments by piece work, production orcommission without any restriction on the pay defined for the job. Somecompanies have also introduced productivity bonuses. The relaxation of thesecontrols provide public sector companies with a means to improve theiroperations and efficiency.

1.28 Greater participation of the private sector is now encouraged and isa stated national policy. The removal of restrictions on turnover of privatesector contractors, the encouragement given by Law 43 of 1974 and the ceasingof direct order method have increased the activity of private sectorcontractors. A good example of this is the recent award of a new militarycity contract (at LE 260 million the largest contract ever awarded) to aprivate sector company. A consortium of public sector companies, headed bythe largest company in Egypt, finished a poor third behind another privatesector company. This trend is likely to continue in the future.

1.29 As a result of deficiencies in the quality and quantity of construc-tion resources the industry suffers from serious problems in construction andmanagement. To overcome the insufficient stock of trained manpower, theGovernment has instituted programs to train and upgrade the skills ofconstruction workers, although these programs need to be improved andexpanded. Similarly, a comprehensive program for management developmentspecifically geared to the construction industry must be established tosupplement the existing general management courses. Production and distri-bution of building materials can be facilitated by implementing plannedinvestments on schedule, phasing out controlled prices and a gradual