Despite considerable development in the Sinai over the past 30 years, there is a widespread belief that the economic potential of the peninsula remains unfulfilled. Amid dire financial conditions, there has been an uptick in government interest in the Sinai.
While the idea of developing the Sinai Peninsula had been germinating since the 1960s, it was not until 1986 that the vision took root, with the Ministry of Agriculture & Land Reclamation identifying 250,000 feddans that could be reclaimed for agriculture by diverting water from the Damietta branch of the Nile.
By 1990, the projected reclamation area had grown to 400,000 feddans.
The Al-Salam Canal was at the core of this projection, built from the Damietta Lock to the Suez Canal, reclaiming 220,000 feddans of land along the way. The Al-Sheikh Gaber Al-Sabah Canal extension in 1997 began to deliver irrigation water to the parched North Sinai, and the North Sinai Development Project took its place alongside the High Dam as one of Egypt's showcase mega-projects.
For all the project has accomplished, most experts in the public and private sectors agree that Sinai has not fulfilled its potential - mainly because most investments are touristic and cluster along the Red Sea without a strong infrastructure to support comfortable living. This could change as the peninsula has recently returned to the spotlight as the government embraces mega-projects, dubbed "nationalistic projects," as one of Egypt's best hopes for economic recovery.
However, many wonder whether now is the time to dedicate political attention and scarce resources to the area. Primary concerns include whether financing would be public or private and whether an agreement can be reached on what direction further development should take.
Incomplete plan
Since regaining possession of the Sinai in 1981, the Egyptian government has sought a balanced approach to the development of the peninsula, including infrastructure, industrial and agriculture projects. Still, it is the coast that became the centerpiece of Sinai's development. Today, there are nearly 300 hotels, and the peninsula is Egypt's biggest generator of tourism revenue and a significant source of foreign currency.
Broader and more robust growth was hampered by a lack of good roads, modern housing, residential and commercial services, and transportation options. One such example is the unfinished airport at Ras Sidr, on the west coast of North Sinai about 100 kilometers south of Suez governorate. "It is vital to the area," says Adel Rady, former head of the Tourism Development Authority. "It would act as a launch pad for commercial flights directly from this region." South Sinai is served by Sharm El Shiekh International Airport.
The planned 225-kilometer railroad, linking the cities of Ismailia, El Arish and Rafah, amounted to no more that 80 kilometers of track laid 20 years ago. "Now all the equipment and tracks have been stolen," says Abdallah Kandil, head of the Chamber of Commerce in North Sinai.
Economic development in Sinai also was stunted by a national legal system that played a significant role in diverting investments away from the peninsula. Individuals and corporations are prohibited from owning land, limited to right-to-use contracts of up to 99 years. Not being able to own land is a major problem when applying for credit from banks, which typically consider property as collateral when approving loans. Further, the land ownership issue effectively prohibited Sinai companies from being listed on the stock exchange.
Government policy toward the native Bedouins also was an obstacle to development. El Arish in North Sinai was largely neglected because the government never took into account the unique culture of the indigenous people, who reject forced change, says Rady.
Such inflexibility served to further isolate a land where 80 percent of the area is uninhabited and to exacerbate a longstanding security problem that appears to have worsened since the revolution. Within the past year, the natural gas pipeline to Jordan and Israel has been attacked 12 times and tourists and police have been abducted. There have been no casualties, but investors shun Sinai because they are afraid, says Mahmoud El Refaie, head of the North Sinai Businessmen Association in El Arish.
Promising start
In the wake of the January 25 Revolution, however, there have been signs that a "New Sinai" may be on the horizon. In February, the Ministry of Justice announced the creation of the National Authority for the Development of the Sinai Peninsula (SDA). In the People's Assembly, draft legislation was introduced to allow land ownership and to govern the listing of Sinai-based companies on the stock exchange.
According to Omar El Sherif, legislation affairs aide to the minister of justice, the quasi-governmental SDA would replace the Industrial Development Authority (IDA) in managing investments. It would include representatives from 30 ministries, government agencies and the two Sinai governorates. It would have the power to set policy and project priorities, as well as regulate land allocation. In Sinai, "the authority will have precedence over nationwide government agencies with rights to issue licenses, as well as the right to seek assistance from the General Authority for Investment & Free Zones to promote investment opportunities abroad," says El Sherif. And it would supervise aid money to NGOs.
According to the document creating the SDA, the agency will receive some financing from the government as well as fees on contracts ranging from 0.5 to 1 percent and proceeds from its investments.
The proposed land-ownership law would allow Egyptian citizens and corpoprations to own property, but not foreigners, "for security reasons," says El Sherif. The draft law clearing the way for Sinai companies to be listed on the stock exchange would require written approval from the SDA in addition to the standard permissions from the Egyptian Financial Supervisory Authority. The law also would restrict foreign ownership to no more than 45 percent of listed shares. Industries designated by the government as "strategic" would continue to require Ministry of Defense approval before going public.
Split response
While the legislation is pending in the People's Assembly, the government has not been standing still. Ismail El Nagdy, head of IDA, says the authority has been offering options to establish factories near cultivated land to encourage local processing of agricultural goods instead of exporting them. Also, El Nagdy announced at a press event during February that the United Kingdom plans to invest nearly $11 billion in renewable energy projects and to establish a university in Sinai, and that an Egyptian living in Saudi Arabia plans to invest nearly $4 billion in petroleum projects in Sinai.
Minister of Agriculture Mohamed Ismail said last month the ministry is offering 78,000 acres of land in Sinai for agro-business investment, adding that 50 percent is earmarked for individuals and small farmers, with a third of that reserved for Sinai residents and Bedouins. "We will also settle tribal land issues with residents and rectify their legal positions so they can be included in the system," he said.
Mohamed Gouda, a member of the economic committee in the Freedom and Justice Party, says the party's platform includes mega-projects to cultivate 35 million acres in frontier areas, and Sinai is priority. The aim is to cultivate 400,000 acres there, he says, adding that the party would actively support financially feasible projects and polices that encourage investment.
Investors, meanwhile, are anticipating the proposed legisilative changes and considering what opportunities might develop. "Saint Catherine's Monastery and central Sinai have huge potential for religious and eco-tourism," says Rady, of the Tourism Authority. Another investment option might be the production of biofuels from wheat, says Metwally, of the Agricultural Research Center. Mokhtar El-Sherif, professor of agriculture at Banha University offers a grander vision: "The entire peninsula could be converted to an eco-friendly [investment] hub."
Another good bet for prospective investors might be mineral extraction. "Almost 70 percent of the business opportunities [in Sinai] are related to mining," says Tamer El Shorbagy, head of the Youth Investor Association in North Sinai located in El Arish. He explains that most minerals are send abroad for processing. Blocks of granite, for example, are exported to countries like China or Turkey and then re-exported to Egypt as uniform slabs. "This is a tragedy because we import the finished product at a much higher price than if we processed these raw materials domestically," he says, adding that the cement, steel and ink industries hold potential for Sinai.
Accessible salt sediments also present an opportunity for investment. According to El Refaie, of the Businessmen Association, factories could be built nearby to refine sediments into table and cooking salt, and then export the finished product by air directly to target markets.
Red Sea fish production, both wild caught and farmed, is anther often-mentioned area of unrealized potential. "It's one of the best ways to develop Sinai," says Farag Abdel Fatah, an economics professor at Cairo University. However, fishing projects would require strict government supervision to preserve a Red Sea marine ecosystem that attracts snorkelers, divers and tourists from around the world.
Completing the remaining 50 percent of the Al-Salam Canal project at an estimated cost of LE 400 million could be considered a nationalistic project, in its own right, according to El Refaie. "With the new land ownership law, it will be the best time to start working on the project," says Nader Nour El Din, an agriculture professor at Cairo University. Finishing the Al-Salam Canal project could bring the total of reclaimed acres to 400,000, mainly in the Seir and Quarir regions of central Sinai, says El Refaie.
Al-Salam Canal would also attract non-agriculture investors who would see opportunities arise from an increasing population in Sinai. The constant supply of fresh water coupled with 200km of under-developed coastline in north Sinai could open opportunities to major hotel investments. "This region currently relies on domestic tourists, which is not very profitable," says El Refaie.
Potential problems
However great the potential for development in Sinai, the obstacles are substantial, including a small labor pool and a government in Cairo faced with a national economic emergency.
One solution to the labor issue, according to Mahmoud Eissa Mansour, former head of the Agricultural Research Center and member of the scientific committee at the Desert Research Center, is to offer jobs in government-backed agriculture projects to those with a farming background who have finished their obligatory military service. Such a plan could be applied to industrial, touristic and infrastructure projects, as well. As those "pioneers" settle down, service-based opportunities would gradually open up. For Ibrahim Soliman, a board member in the Specialized National Councils, which advise the president on public policy, the issue is not who works in such projects, but how to engage individual communities. This involvement will be critical to Prime Minister Kamal El Ganzoury's goal of relocating 4.5 million people to Sinai in the next few years, which would represent a nine-fold increase in population.
To reach that goal, the government will have to prove its commitment to the development of Sinai by initially leading investment. "That way there wouldn't be any question marks over the source of financing or the seriousness of these mega-projects," says Mansour. "We see Sinai as a viable investment opportunity," says Mohamed Ragab, founder of the Alexandria Businessmen Association, while acknowledging he is concerned about the lack of details surrounding the role of private investments under the new plans.
Providing this leadership might prove challenging as the government expects the budget deficit to reach LE 160 billion by the end of the current fiscal year on June 30, LE 26 billion greater than the forecast at the start of FY2011/12. In addition, Central Bank reserves declined $2 billion more than forecast in January to $16 billion. At least for the near term, such liquidity problems would likely complicate any government plans for large scale investments, such as in Sinai.
It is unlikely that traditional financing tools could raise the required cash. As it stands, the outstanding balance on T-bills increased by 35.1 percent between June 2010 and November 2011, while the outstanding balance of T-bonds increased 41 percent during the same period. T-bill yields increased steadily last year, from about 10 percent to more than 15 percent on the 92-day, 182-day and 365-day issues.
One option for raising capital would be to restructure the subsidies program to target support to the poor. Ragab suggests that the savings could be invested in Sinai, prioritizing ensuring a regular supply of fresh water to the peninsula.
On another front, the government is heading into uncharted territory by introducing legislation authorizing the issuance of Islamic bonds, called Sukuk, to finance infrastructure projects. The Ministry of Finance plans a first issue in excess of $2 billion. "The success of such tools would boost confidence in the domestic economy as a whole," says Hossam Kortam, head of investment at H.C. Securities.
Sukuk are bonds whose variable yields are linked to the profits made by projects in which the money is invested, which will require a new system to inform investors about how and where their money will be invested, the progress of projects and the amount of profit. This system will be the responsibility of the Egyptian Financial Supervisory Authority, which hopes to create a separate entity to handle Sukuk issues and integrate them into the domestic capital market.
Some experts think this tool could prove to be a winner when it comes to attracting foreign investment. The Abu Dhabi-based Arab Monetary Fund (AMF) has reported that Sukuk activity in Arab countries increased 33 percent in value during the third quarter of 2011, compared to the second quarter, with a 20 percent rise in the number of issues. "Political unrest in the region has largely not affected Sukuk, but it has put much pressure on foreign capital inflow and IPOs," said the AMF.
Promoting the Sinai development plan as a major benefactor of the first Sukuk issue could raise the interest of foreign investors who typically put capital in the established Gulf-based Sukuk market. However, to sustain interest in Sinai, the government will need a broad-ranging plan to attract and support infrastructure investments. "There is no comprehensive plan to develop Sinai, just plans relating to a certain aspect of investment," says Gamal Siam, an agriculture professor at Cairo University.
Making it work
The lack of a unified vision could encourage the involvement of Sinai residents and businesses in the planning phase to help determine what projects would most benefit society as a whole. "The government had large plans for agriculture [in the 1981 plan] but had no provisions for individuals, so corporations bid for it and won it," says Siam. These companies often either never cultivated the land or paid a fine to use it for tourism activities, he says.
Education might be one way to engage the local populace. Soliman, of the Specialized National Councils, suggests "long neglected" agricultural education as a case in point. "University years should increase [from four] to five. The last two years would see students cultivating plots of land, giving them a sense of accomplishment," he says. In addition to agriculture, Soliman stresses the need for post-graduate training in social sciences and technology to give students a comprehensive vision of how to develop a business beyond just cultivating land.
Current research has generated some debate about the feasibility and effectiveness of developing Sinai, including the scale of initial investments. Mansour believes that broad, unprioritized initiatives would be a huge - and ill-advised - burden on government finances at a critical time. "Infrastructure must be available first," says Abdel Fattah, of Cairo University. Siam proposes a strategy of simultaneous investment in several areas. And El Refaie says that whatever projects are undertaken should be labor intensive.
There has been some economic progress in the Sinai over the past 30 years mostly overlooking the Red Sea coast. And while the government is committed to continue its initiative to develop and diversify the economy in the peninsula, it remains to be seen whether and when private sector investors will follow.
© Business Monthly 2012
