Egypt: A New Capital Bogged Down by Speculation

While the erection of the New Administrative Capital (NAC) goes on its way and the government propaganda on the social networks, gathers pace with the hashtag #عام_ا (inauguration year) the US NGO Project on Middle East Democracy (POMED) published last June a report on the financing methods of this urban meta-project. Titled Al-Sissi’s Bubble in the Desert and signed pseudonymously Sarah Taweel¹, this report is accompanied by a series of recommendations meant for Washington. The author advocates reducing the amount of US aid to Egypt by deducting for the annual military aid the cost of the transfer of the US embassy to the NAC as well as that of the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD), since the army is so deeply involved in the Egyptian economy.

Thus, POMED appears to align itself with the Democratic Party, advocating the democratisation of the regimes of the Middle East. Most of its studies deal with Egypt although its field of expertise is meant to extend to the entire region if we go by its title. But it is reasonable to assume that many of its collaborators are recruited among the Egyptian opposition.

It was in 2015 that President Al-Sisi announced the construction ex nihilo of a new capital city, 45 km to the East of central Cairo. As soon as the announcement was made and to this very day, the issue of its financing has been the subject of contradictory declarations. While the President has repeated on several occasions that the project would cost the State nothing, this report shows that on the contrary, most of the funding comes from State agencies, causing them to go into debt with public banks and the national treasury. The author tries to determine exactly where the money comes from and who profits from it, but the government deliberately blurs all the trails indicating its financial implication.

Debt-funding

When the project was first announced, it was an Emirati businessman, Mohamed Alabbar who was given the task of raising the money by creating an investment fund, Capital City Partneers (CCP). But Alabbar having withdrawn from the project several months later, it was China that was solicited until the negotiations collapsed again. In the end the Egyptian government decided to handle the financing itself by creating a company for that purpose, the Administrative Capital for Union Development (ACUD). Fifty-one percent is held by two agencies placed under the supervision of the Defence Ministry, the Armed Forces Land Projects Agency (AFLPA) and the National Service Projects Organization (NSPO), the remaining 49% by the New Urban Communities Authority (NUCA) which depends on the Housing Ministry.

But while the government finances the construction costs from the sale of land to private promoters, in fact, the money goes straight into the pockets of the military, while the State goes still deeper into debt. It is the NUCA that is injecting billions of dollars into the ACUD and going into debt (with a loan of 2.36 billion euros from China), whereas the military often benefit from the payments, collected in the form of servicing fees and proceeds from the sale of land. According to the report, the State had already invested between 25 and 39 billion dollars by March 2021 while the ACUD had spent only six billion by the beginning of 2022.

These figures reflect the debt overhang of civilian public bodies and the under-invoicing of the army. In other words, a redistribution of public resources in favour of the generals.

Patronage networks and omnipresence of the army

The construction contracts are granted to companies close to the regime through procedures which are non-competitive and perfectly opaque. The Egyptian construction giants (ORASCOM and Hassan Allam Holding) share a great many contracts, the government having become their biggest client since Al-Sisi took power. For the other companies, contract-awarding is determined by cronyism. The report mentions several companies, originally small or medium-sized, held by retired generals or by members of the security apparatus, that have known meteoric ascension under Al-Sisi. Such is the case with Concord for Engineering and Contracting, Gama Construction or Samcrete. A great many companies in the ‘private sector’ which have won contracts for the construction of the NAC are owned by ex-army personnel or their families.

We find the same dynamic at work among property developers. Of the approximately four hundred developers active in the NAC, some have a long history of connections with the regime but there are other brand new companies with rather opaque structures. Many housing developers are important backers of the regime. Take the case of Hany Al-Assal for example, at the head of the Misr Italia Group which was among the first and largest purchaser of land in the NAC, or Andel Hadi, director of the Plaza Gardens Development Company, a member of parliament and secretary of the pro-Sisi party Hama Al-Watan, founded by a group of retired military and police officers.

Abdel Hadi appears regularly in Egyptian television talk shows promoting the chief of State’s mega-projects. The Gates Development Company, headed by a police general, was created especially in 2018 to handle building projects in the NAC. Other developers like La Vista, Pyramids and Remco even put together joint enterprises with the Army by way of the AFLPA. Instead of paying for the land on which they have built, these companies will pay yearly rents to the army on their future revenues.

If we take a closer look at the actors, we see how deeply the country’s security personnel are implicated in the companies and the circles of profit involved in the construction of the NAC, as shareholders, supervisors, or suppliers. The problem is that these former military officers appointed to the heads of many government agencies and companies often prove incompetent to carry out the missions entrusted to them.

Worries about human rights

The contracts with European and North American companies are also often signed with entities controlled by the military which makes these companies complicit with the State’s procedures of indebtedness and the Army’s enrichment schemes. Their largest Western partner is the German transnational Siemens. Contracts have also been signed with French companies, Schneider Electric, Orange, and Electricité de France. The report also stresses the fact that the partnership with the US technology and defence specialist Honeywell is especially worrying as concerns respects for human rights and the report’s author invites Washington to demand guarantees on this issue. Indeed, Honeywell is tasked with setting up a surveillance system and control centre enabling the Egyptian security forces to supervise activities in the ‘new capital.’

Is the bubble about to burst?

Besides the issues raised by the public debt and the Army’s rent-grabbing practices, the report sheds light on several weaknesses that might lead to the collapse of the whole project. The first problem is the plethoric offer of unaffordable apartments that is taking shape when the official governmental statistics agency had already numbered in 2017 13 million housing units under construction or completed and still vacant (for 22 million inhabited units). While in other new cities, these luxury units were the object of speculative investments, to add many similar housing projects might well saturate the market. More so as there are no figures available concerning the numbers of units sold in construction or planned in the NAC. So, it seems difficult, even for the banks which finance these projects, to estimate with any accuracy the financial risks incurred by the developers.

A second problem pointed out by the author of the report: the methods used by the developers belong to a category of fraudulent financial packaging known as the ‘Ponzi pyramid.’ The buyers make a down payment, the developers use it to start the construction, but if they fail to find more investors, they will not be able to finish the work or deliver their homes to the original buyers. In fact, these procedures bear some resemblance to what is known as ‘off plan purchase’ which does involve degree of risk but allows purchasers to stagger their instalments over several years with a delayed delivery date. In the case of the NAC, the main risk seems to be tied in with the advent of a huge number of new developers with no cash reserves and who could easily go bankrupt and be incapable of reimbursing their investors.

Finally, the report speculates that if the money ran out, Al-Sissi might no longer keep the support of the military. This possibility has begun to be considered these past months in the context of the very serious financial crisis which the country is now going through. If the chief of State decided to clean up the economy by confining the military to their defence-related activities, he would be endangering his political base and possibly his re-election at the beginning of next year.