ARAB REPUBLIC OF EGYPT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US335 MILLION TO THE ARAB REPUBLIC OF EGYPT FOR AN AIRPORTS DEVELOPMENT PROJECT MARCH 5,24 Middle East and North Africa Region Finance, Private Sector and Infrastructure Department Report No: 2719 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization

2 CURRENCY EQUIVALENTS (Exchange Rate Effective March 1,24) Currency Unit = Egyptian Pound (LE) Egyptian Pounds 6.15 = US$1.OO FISCAL, YEAR July 1 to June 3 AC Law ADP ASA AVIT BOT CAI CAC CAO CAS COMESA EA EAC EEAA EIA EHCAAN EMP EnA ERR FDSCA FMR GACA GOE HCPS IAS IATA ICAO LE MCA MOF NANSC NIB NPV PC PD PIP PMU PM SA SoA SOE SSH TB3 UNDB ABBREVIATIONS AND ACRONYMS Airport Concession Law Airports Development Project Air Service Agreement Aviation Information Technology Company Build-Operate-Transfer Cairo Intemational Airport Cairo Airport Company Central Auditing Organization Country Assistance Strategy Common Market for Eastern and Southem Africa Egypt Air Egyptian Airport Company Egyptian Environmental Affairs Agency Environment Impact Assessment Egyptian Holding Company for Airports and Air Navigation Environmental Management Plan Environmental Assessment Economic Rate of Return Fund for the Development and Support of Civil Aviation Financial Management Report General Authority for Civil Aviation Government of Egypt Higher Council for the Pricing of Services Intemational Accounting Standards International Air Transport Association Intemational Civil Aviation Organization Egyptian Pound Ministry of Civil Aviation Ministry of Finance National Air Navigation Services Company National Investment Bank Net Present Value Procurement Coordinator Project Director Project Implementation Plan Project Management Unit Project Manager Special Account Social Assessment Statements of Expenditure Sham El Sheikh Airport Third Terminal Building (at Cairo International Airport) United Nations Development Business Vice President: Country ManagerJDirector: Sector Manager: Task Team Leader: Christiaan J. Poortman Mahmood Ayub Hedi Larbi Michel Bellier

3 FOR OF'FICIAL USE ONLY EGYPT. ARAB REPUBLIC OF EG-AIRPORT DEVELOPMENT PROJECT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE Country and Sector Issues... 7 Rationale for Bank Involvement... 8 Higher Level Objectives to Which the Project Contributes... 9 B. PROJECT DESCRIPTION Lending Instrument... 1 Project Development Objective and Key Indicators... 1 Project Components Lessons Learned and Reflected in Project Design Alternatives Considered and Reasons for Rejection C. IMPLEMENTATION Partnership Arrangements Institutional and Implementation Arrangements Monitoring and Evaluation of OutcomesResults Sustainability Critical Risks and Possible Controversial Aspects Loan Conditions and Covenants D. APPRAISAL SUMMARY Economic and Financial Analysis Technical Fiduciary Social Environment Safeguard Policies Policy Exceptions and Readiness This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 Annex 1: Country. Sector and Program Background Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements. 41 Annex 7: Financial Management and Disbursement Arrangements. 42 Annex 8: Procurement Annex 9: Economic and Financial Analysis Annex 1: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance... 99

5 EGYPT, ARAB REPUBLIC OF AIRPORTS DEVELOPMENT PROJECT APPRAISAL DOCUMENT Middle East and North Africa Department Finance, Private Sector and Infrastructure Date: March 3, 24 Country Director: Mahmood A. Ayub Sector Mangermirector: Hedi Larbi Project ID: PO82914 Lending Instrument: Specific Investment Loan Team Leader: Michel Bellier Sectors: Aviation (1%) Themes: Corporate governance (P); Infkastructure services for private sector development (P); Regulation and competition policy (P) Environmental screening category: Full Assessment Safeguard screening category: Significant imdact [XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ ] Other: For Loandcreditdothers: Total Bank financing (US$m.): 335. Proposed terms: FSL Financing Plan (US%m) Source Local Foreign Total BORROWER IBRD Financing Gap Total: Borrower: Government of Egypt Egypt, Arab Republic of Responsible Agency: EHCAAN, Egypt, Arab Republic of Estimated disbursements (Bank FY/US$m) 2Y hual Zumulative Project implementation period: Start: FY5 End: FY8 Expected effectiveness date: 6/15/24 Exnected closing date: 6/3/29

6 Does the project depart from the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 [ ]Yes [XINO [ ]Yes [XINO [ ]Yes [XINO [ ]Yes [XINO [XIYes [ ]No [XlYes [ ]No Project development objective Re$ PAD B.2, Technical Annex 3 The proposed Loan will support the Borrower s ongoing efforts to eliminate capacity bottlenecks to growth in airport traffic, raise the quality of services to international best practice standards at Cairo International and Sharm El Sheikh Airports, and promote private sector participation in airport management and service delivery. The proposed Project would: (a) construct new terminals at Cairo International Airport and Sharm El Sheikh Airport; and (b) support gradual liberalization of the sector. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 The proposed Loan would help support the development of a third terminal at Cairo International Airport, a new terminal at Sham El Sheikh Airport, and technical assistance to gradually liberalize the sector. The proposed Project seeks to improve quality and service levels at Cairo International and Sharm El Sheikh Airports to intemational best practice standards, and to promote operational efficiency and cost-effective delivery of airport services. Which safeguard policies are triggered, if any? Re$ PAD.6, Technical Annex 1 Environmental Assessment Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: None

7 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues In the early 199Os, Egypt began moving away from central planning and downsizing its massive public sector. Between 1995 and 1999, the economy responded to the new market-oriented environment and growth increased to around five percent per annum (p.a.). In most recent years, however, both internal and external shocks have combined to slow growth to around three percent p.a. To promote development and curb unemployment, faster growth is needed. To that end, the Government of Egypt (GOE) policy is focused on promoting private sector development, attracting more foreign direct investment and maximizing foreign exchange earnings from tourism and exportable commodities. Air transport sector has a key role to play in increased growth, but this role is currently undermined by four factors. Airport Capacity Bottlenecks. Close to 5 percent of Egypt s passenger traffic is handled at Cairo International Airport (CAI). In 2, passenger traffic peaked at 8.9 million and has since remained around 8.4 million. With a maximum rated capacity of nine million passengers, CAI cannot absorb additional traffic without a rapid deterioration of service standards. This is especially critical since 76 percent of passengers are international. Cargo traffic, which is almost entirely concentrated at CAI, stagnated at around 2, tons p.a. since For both traffic, terminal and apron capacity constraints did influence growth in addition to extemal factors (e.g., foreign charter flights are no longer permitted to fly to CAI due to capacity constraints). In contrast, the country s other international airports, which primarily serve tourism, experienced average growth rates of nearly 13 percent p.a. between 1993 and 22, processing a total of 8.9 million passengers in 22. Of these airports, Sham El Sheikh (SSH) grew the fastest, now handling the second largest tourist traffic in Egypt. Airport capacity nationwide is increasingly short of needs and the GOE is giving a high priority to the airport extension program. A Legal and Institutional Framework in development. Sweeping sector reforms in the civil aviation sector began in 21 and are ongoing. The Ministry of Civil Aviation (MCA) was created in 22 and entrusted with overall responsibility for the country s airports and civil aviation matters. MCA is overseeing Egypt Air and its subsidiaries, as well as the Egyptian Holding Company for Airports and Air Navigation (EHCAAN), which owns four affiliate companies, including the: (i) Cairo Airport Company (CAC) created in 22; (ii) Egyptian Airport Company (EAC) created in 21 to manage and develop other public airports; (iii) National Air Navigation Services Company (NANSC); and (iv) Aviation Information Technology Company (AVIT). The GOE s stated policy is to commercialize the public enterprises operating in the sector through the EHCAAN as a first step toward privatization. Law No. 3 of 1997 made private airport concessions possible, and Law No. 93 of 23 granted MCA substantial pricing freedom subject to prior consultation with a Higher Council for the Pricing of Services (HCPS). The thrust of reforms is sound and implementation issues are being addressed. Institution and capacity building in airport regulation is needed to attract more private investments in airport infrastructure. Tendering, asset ownership, and assignment of rights to lenders are among constraints that only allowed signing of two small concession contracts to date (Marsa Alem; El Alamin). The Organizational, Legal, 7

8 Technical, Financial and Economic Regulations of National and Local BOOT, BOT and BOO Projects issued in July 23 address these constraints. As the largest user, service provider and concession holder (from ground-handling services to duty-free shops and hotels), Egypt Air (EA) can influence the aiport policy and compromise the level-playing field objective private competitors need and prevent CAC and EAC to earn a fair return on assets at its disposal. Management information systems do not generate enough of the financial and operational data that would make the airport sector easier to assess thereby enouraging private sector investments in new facilities. Narrow Revenue Base. Except for CAI, airports were not profitable in the 199s, and untargeted cross-subsidization was the norm. Even CAI s positive financial picture partly stemmed from deferment of capital investments. Airport tariffs in Egypt were, and remain, low by international standards, and there was no pricing freedom until Law No. 93 of 23. Action is still pending on tariff alignment with regional market levels that would make the project financially viable. CAC will still need to strengthen marketing of airport-based services and facilities in order to make commercial revenues commensurate with its large airport domain. Regulated Air Transport Market. If liberalization is making progress for international flights between Egypt, Africa and the Arab countries, constraining Air Service Agreements (ASA) still regulate air transport relations with Europe and other major markets. Should Egypt Air become more competitive, liberalization of these key routes would also be possible, and prospects o f CAI becoming a regional hub would brighten. 2. Rationale for Bank Involvement In a deteriorating business climate for infrastructure concessions worldwide, private financing for airport development in Egypt is unlikely in the near future. Airport investments are overdue, and public financing for the proposed new terminals is a valid alternative provided steps are taken to remove obstacles to private participation in airport infrastructure. Bank involvement will help ensure that necessary actions are taken, including those designed to develop competition within and between airports through signing of management contracts with private firms. In addition, the Bank will: a provide experience in financing large and complex transport infrastructure projects, and knowledge of associated development issues; ensure proper consideration of environmental and social issues; enhance chances of attracting high quality bids for private management contracts through transparent and predictable tendering, something highly valued by the GOE; provide specific technical expertise when needed, as exemplified by the Bank s assistance already extended in relation to managing air cargo facilities at CAI. 8

9 3. Higher Level Objectives to Which the Project Contributes Beyond transport, airports are effective engines of economic growth with significant multiplier effects. The Intemational Civil Aviation Organization (ICAO) estimates that every US$lOO of output from air transport generated demand three times as high, and that 1 air transport jobs induced 61 jobs in other industries. Developing countries growth may depend even more on efficient air transport, which cames up to forty percent of their exports in value and (for some) sustains tourism, now the world s largest industry (3 percent of GNP and ten percent of jobs). The project should, therefore, contribute to three higher level objectives: Employment generation Although direct employment is not expected to rise given the current excess staffing (around 2,26 passengers per staff for CAC), indirect employment opportunities would be created with the project through expanding airport traffic. A study in 1999 estimated indirect employment generated within CAI s area of influence at 185,Ojobs, rising to nearly 35, by 22. Increasing foreign exchange earnings Tourism is one of Egypt s largest sources of foreign exchange. Intemational tourism injected the equivalent of US$4.3 billion into the economy in 2, or an average of US$78 per tourist up from US$3. billion in Airports are the primary points of entry for international tourists. Developing agricultural exports Two-thirds of cargo traffic is export, most of which is perishable and concentrated in CAI. Since 8 percent of air cargo is carried by passenger planes, the project would have a direct impact. The project will also finance a strategic study on air cargo development. Removing capacity bottlenecks to air cargo expansion should give a boost to agriculture production and employment. As such, the project is expected to support higher and sustained economic growth, a key objective in the June 21 Country Assistance Strategy (CAS) for Egypt. It is consistent with criteria set out in the CAS for Bank financing: (i) strong govemment commitment and support for a project; and (ii) the Bank s adding value to an operation through its involvement. Both criteria are met by the proposed project. The CAS was reviewed by the Board prior to the events of 9/11, when concessions were still the favored option for developing infrastructure. Since then, investment flows to Egypt have declined, while the need for expanding transport facilities has continued to rise. Finally, the project meshes well with the Bank s emerging Infrastructure Action Plan, which calls for more responsiveness to client demands for infrastructure in light of the private sector s declining ability and interest in financing public-purpose infrastructure. 9

10 B. PROJECT DESCRIPTION 1. Lending Instrument The Borrower selected a Fixed Spread Loan (FSL) with level repayments. The Loan has a 17 year maturity, including a five-year grace period. The Loan will be denominated in US Dollars. 2. Project Development Objective and Key Indicators The development objectives of the Airports Development Project, closely interrelated, are to: eliminate capacity bottlenecks to traffic growth, particularly for tourism and associated foreign exchange earnings; raise CAI and SSH service quality to international best practice standards; promote efficient private participation in airport management and airport service delivery in a more competitive market. Key performance indicators are provided below (target values for 28), and described more fully in Annex 3. Economic Development: o traffic at CAI: 1.3 million domestic and international passengers (of which the new terminal at CAI (TB3) accounts for more than 8. mil.) o traffic at SSH: 4.3 million domestic and international passengers o foreign exchange earnings from tourism CAI: US$1,48 1 million SSH: US$1,36 million Airport Operational Performance: o certification (ICAO standards) obtained from Civil Aviation Authorities before commissioning of terminals o occupancy rate at peak hour: TB3: 1.O / 1.O (actual traffic / rated capacity) SSH:.38 /.8 (actual traffic / rated capacity) o passenger processing times (arrivals/departures): CAI: 35 minutes / 45 minutes SSH: 35 minutes / 4 minutes Private Participation in Infrastructure: o cumulative private investment in airport infrastructure more than US$8 million o average commercial revenue earned per passenger CAI: at least US$2.9 SSH: at least US$5.6 o increased private sector service jobs (Egypt Air / other firms): CAI : 12,7 / 8,275 SSH: 416 / 488 1

11 3. Project Components The proposed Airports Development Project (ADP) has three components.. Component 1 : Construction of a third terminal at Cairo International Airport (TB3) and enabling works (US$485 million); Component 2: Construction of a new terminal at Sharm El Sheikh Airport and enabling works (US$63 million); Component 3 : Strengthening sector operations and environmental management (US$26.2 million). For Cairo, the project covers the construction o f a multi-level terminal (TB3) that comprises a concourse building, two finger piers and a link to the existing Terminal Building 2 (TB2). Aircraft parking aprons with airbridge equipped stands plus remote stands, access roads from the existing highway system to the terminal and ancillary facilities are also included. When integrated with TB2, the new terminal will have a capacity o f 14 million passenger p.a. (11 million for TB3 alone), of which nine million will be international traffic. An enabling works contract has been signed to prepare the work site. The construction of TB3 will be carried out under what is called the Main Contract. The construction is expected to span 3 months. The CAC also intends to construct a 4-km runway (US$66 million), which the Bank will not finance. For Sham El Sheikh, an enabling works contract is also under execution for site preparation. The project covers construction and equipment o f a new terminal designed to accommodate 4.5 million passengers p.a. The Bank will only finance the terminal. Upon completion, the new terminals will be privately managed. The technical assistance is comprised of two components: (a) The Government financed component (US$17.9 million) covers contracts with engineering and legal consultants to advise the airport companies throughout project implementation, plus a contract with a French investment bank to prepare tendering for the private airport management contract and assist in the selection of firms; and (b) The Bank financed component (US$8.3 million, including $3.5 million on equipment) will finance studies, advisory services and equipment to: (i) prepare a national airport master plan; (ii) prepare an action plan for gradual air transport liberalization; (iii) define a strategy for reorganization and development of air cargo; (iv) deploy air quality and noise monitoring equipment and establish the environmental units in CAI and SSH; and (v) build management capacities (including provision of IT equipment) at EHCAAN, CAC and EAC related to commercial, financial, regulatory and monitoring functions. 4. Lessons Learned and Reflected in Project Design A strong commitment from counterpart authorities is key to consistent project implementation and achievement of project development objectives; it is verified here. 11

12 Completion of key steps early on improves quality at entry and reduces uncertainty (the legal framework is in place for the most part; advance contracting for works is ongoing). Smaller, but practical steps with a good probability of success are more effective in bringing market liberalization to fruition than would aggressive and riskier actions that could only stir up opposition (the loan conditionality derives from such principles). Complex operations require close interaction between the Bank and a strong project team on the Borrower s side. The international technical and legal advisors hired by the airport companies and effective Project Management Unit (PMU) arrangements will allow for it. The quality of monitoring and reporting systems is always essential, and the work already carried out by EHCAAN in this area, plus their commitment to set up dedicated task forces, should produce good and timely reporting. The PMU arrangements improve prospects for good implementation. 5. Alternatives Considered and Reasons for Rejection Combining Government financing o f the new terminals at CAI and SSH with private operation of the new facilities is the preferred option. Other alternatives considered were: Tendering a management contract that would require private financing of the terminal s equipment in order to strengthen performance incentives by asking the investor to put its capital at risk. The added complication of structuring a contract that should guarantee a fair return on capital invested and the possibility of having effective incentives put in a private management contract led to reject this option. A Build-Operate-Transfer (BOT) scheme was also considered, but this, too, was rejected given the adverse infrastructure concession market climate in the world and in the region as verified by Algeria which failed to sign a contract for completion and operation of the Algiers airport terminal. The incomplete legal framework and gaps in the available financial and operational data also justified dropping this approach. Financing the reorganization and development of CAI s Cargo Village in the operation might have strengthened the project s economics. This component however was not ready for implementation and the project will only help in strategy definition. C. IMPLEMENTATION 1. Partnership Arrangements The GOE has not indicated an interest in seeking partnership arrangements with other donors on the project. However, the airports at Hurghada, Luxor, Aswan and Abu Simbel are also slated for development and to be privately-operated under management contracts. Should these plans go forward, substantial investment would be needed, and it is likely that other donors, including the European Investment Bank, would partner with the GOE. Should donors become actively involved, coordination mechanisms would need to be established not only to harmonize views on the sector, but to organize investments and develop complementary assistance packages for modernizing affected institutions and the sector s management. The International Finance Corporation has also discussed potential partnerships with the GOE. 12

13 2. Institutional and Implementation Arrangements The Project will be implemented between July 24 and December 28, and June 3,29 is the Loan s scheduled closing date. EHCAAN will be the implementing agency. EHCAAN through its affiliates, CAC and EAC, will be responsible for implementing this Project. There is a Loan Agreement between the Bank and the Government of Egypt (Ministry of Foreign Affairs), and a Project Agreement between the Bank and EHCAAN. By virtue of a Subsidiary Loan Agreement (SLA) between the GOE and the EHCAAN, the GOE will on-lend the Bank loan proceeds funds to EHCAAN. Only technical assistance and part of goods, will be financed out o f the Special Account, as direct payment procedures will apply to the civil works. To clarify the respective roles of CAC and EAC in project implementation, Contractual Agreementss (IA) should be in place between EHCAAN and each of the affiliates, before the deadline for the submission of bids for the two main works contracts. The IAs, to be reviewed and found acceptable by the Bank, will detail procurement and payment processes and other responsibilities for implementing the different activities as well as key staffing requirements. These IAs will also specify financial arrangements between EHCAAN and CAC and EAC, respectively, to help EHCAAN service its debt under the SLA. These IAs will be signed no later than June 3,24. A Project Management Unit (PMU) will be established within the EHCAAN. Its chief functions will be to program, collect information and data, monitor and evaluate progress, coordinate and advise on all fiduciary matters, maintain project financial accounts, manage the Special Account, submit replenishment requests and Requests for Direct Payment to the Bank, and prepare reports, including financial monitoring reports (FMRs). In accordance with the aforementioned IAs with CAC and EAC, the PMU will coordinate and supervise project implementation, verify compliance with agreed procedures. Payments due to contrators, suppliers and consultants will come from funds held by the EHCAAN, upon receiving appropriate instructions from CAC and EAC. EHCAAN will be responsible for the procurement o f the seven TA packages. A Project Steering Committee, to be chaired by EHCAAN, will be set up to oversee the work of the PMU. Representatives will include key stakeholders in the project, such as from the Ministry of Civil Aviation, the Ministry of Finance, and EHCAAN s affiliates. A comprehensive Project Implementation Plan (PIP), including the format of monthly and quarterly progress reports, has been finalized by EHCAAN. The Steering Committee will be established no later than June 1, 24. The Head of the PMU will be appointed no later than May 31, 24 whereas the full PMU organization will be operational before Effectiveness.. Two financial officers will be appointed by CAC and EAC no later than September 3,

14 Environmental Units will be established at CAC no later than July 1, 24 and at EAC no later than August 1, 24 to monitor implementation of the Environmental Management Plan (EMP). Needed capacity building will be achieved through Bank-financed TA. 3. Monitoring and Evaluation of Outcomes/Results Data and statistics for monitoring performance and updating indicators will be gathered by EHCAAN, CAC and EAC. EHCAAN has committed to establish a task force to develop methodologies, instruments, and report to the PMU. Evaluation of the outcomes will be supported by the taskforces, or outside technical expertise, if needed. Monthly reports on the progress of works, quarterly progress reports will be submitted to the Bank, and a mid-term review will be undertaken in 26. An Implementation Completion Report will be completed within six months of project closing. 4. Sustainability The Borrower s commitment to project objectives is strong and evidenced by written statements and actions, including the hiring o f renowned international consulting firms to serve as Project Manager and Financial Advisor to the Borrower, ensuring that a cost-effective and timely project delivery. While not perfect, legislation has already been passed and offers a suitable foundation for effective development in the sector. Other conditions for sustainability include:. Good airport preventive and corrective maintenance: it will be provided for in the private management contracts. CAC and EAC will build their own capacities to ensure that private management companies perform well. High standards of airport security: they will be detailed in the management contracts. Cost and Market-based airport pricing : the pricing freedom introduced by Law No.. =. 93 will allow for it once the Higher Council for Pricing of Services is established. Competition in and for the airport service market. Technical assistance and capacity building under the project will broaden its scope and strengthen the airport companies monitoring of performance by private operators and lessees. For groundhandling, new companies will be licensed. The private airport management contracts will allow for yardstick competition between the hired firms. Air transport ZiberaZization - Through an Open Skies policy, CAI might become an international hub and the GOE Statement of Sector Policy (SSP) supports its gradual implementation. The sooner it happens, the faster airport traffic will develop. 14

15 5. Critical Risks and Possible Controversial Aspects Nature of Risks A. Institutional 1. Private management contracts not signed. Rating N Mitigation Measures 1. Good preparation of tenders by the investment bank hired by Government. Assurances Sought by the Bank 1. GOE comitted to sign management contracts as per in SSP. 2. Management contracts signed but ineffective. M 2. Good contract design by same investment bank and contract management by CAC and EAC. 2. Tendering strategy and contract design has been checked by the Bank. 3.Monopolistic ASAs slowing traffic growth H 3. Project financed TA will define a strategy for gradual liberalization of ASAs. 3. GOE statement on air transport liberalization in the SSP. 4. Mediocre and costly airport services for lack of competition. H 4. Private management contracts to reorganize the operations, monitor performance of service firms; capacity buidling at EHCAAN, CAC, EAC 4. SSP statement on more competition in the market. B.Economic 1. Project costs higher than expected due to weak procurement or contract management 2.Late payment of contractor leads to claims and delays. M M N M 1. A well staffed and structured PMU supported by PM, an effective FMS, clear hierarchy for contract approval, and the use of Bank procurement procedures. 2. An efficient FMS with the backing of the PM will minimize this risk. Direct payment procedure will be used to pay for project works. A clear PIP. 1. Bank procurement guidelines to apply as per legal documents. Head of the PMU appointed by May 3 1,24 and PMU fully established by the effectiveness date of the Loan with organization, staffing and terms of reference acceptable to the Bank. Procurement officers to be hired by CAC and EAC by June 3, Finalized PIP has been submitted to the Bank; FMS specialists in PMU by May 24 and in CAC and EAC by September Traffic lower than expected at CAI. M 3. The project TA will strategize development of CAI as a regional hub for cargo and passengers. 3. SSP affirms commitment to timely implement the action plans. 4. Airport charges remain too low. 4. Establishment of the HCPS will allow for MCA approval of pending request for tariff increase. 4. Dated covenant for establishment of the HCPS. 5. CAC and EAC not profitable enough to finance development. Rating of risks: H for hie M for M 5. The private management contracts and the capacity building under the TA will maximize revenue and eliminate current excess costs. lerate; N for negligible 5. Financial covenants in contractual agreement signed by EHCAAN and CAC and EAC respectively. Financial management risks are high, EHCAAN, CAC and EAC having no prior experience in implementing Bank projects. Mitigation measures are discussed in Part D and shown in Annex 7. As with all A rated projects, there is the potential for environmental andor social controversy as a result of the project. Possible issues associated with the new facility at CAI (TB3) include: (i) site selection; (ii) noise and air pollution; (iii) management of solid and liquid waste; and (iv) the capacity of local institutions to monitor and enforce environmental covenants. To lessen the potential for negative impact, Environmental Management Plans (EMP) describe mitigating measures to be taken during project construction and operation of the new terminals. In addition, training is provided under the project to build local capacity in these matters. 15

16 6. Loan Conditions and Covenants Condition of Effectiveness The Subsidiary Loan Agreement executed on behalf of the Borrower and EHCAAN EHCAAN has established a project financial management system. EHCAAN has established the PMU. Standard Covenants Standard annual auditing requirements. Dated Covenants Appointment of the head of the PMU no later than May 31,24. Establishment of the Steering Committee no later than June 1,24. Contractual Agreements between EHCAAN and CAC, and EHCAAN and EAC signed no later than June 3,24. Establish Environmental management units within CAC no later than July 1, 24 and within EAC no later than August 1,24. Appointment of two Finance Officers at CAC and EAC by September 3,24. Establishment of the HCPS no later than December 31,24. Mid-term review to take place by June 3,26. Upgrading of their corporate FMS by CAC and EAC no later than March 31,27. Others.An understanding - was reached between the Bank and the Borrower that CAC and EAC shall enter into contract management with the private firms to operate the two airports. D. APPRAISAL SUMMARY 1. Economic and Financial Analysis A. Economic Analysis Cairo International Airport (TB3). As detailed in Annex 9, the economic analysis hinges on the following major assumptions: Without the project, overall traffic would stagnate, and the minimal growth of domestic traffic would be at the expense of tourist traffic. In contrast, traffic would grow annually by 3.5 percent when TB3 is completed. With the project, the ten million passengers would be handled under much improved conditions; the analysis accounts for time savings in relation to business trips. For the incremental traffic made possible by the project, benefits are included and calculated at the market-based airport tariff. With the project, commercial revenue is expected to increase to US$5 per passenger from development of facilities and better management by the private firms Tourist traffic would expand with the project, as foreign charters would again be allowed to land in Cairo, and Egypt would increase its net foreign exchange earnings. -.- Based on the above assumptions, the economic rate of return (ERR) is 16.2 percent, and the net present value (NPV), discounted at ten percent, is US$252 million. The sensitivity analysis based on switching values confirmed that the project economics were robust (Annex 9). 16

17 Sham El Sheikh Airport. SSH has become a thriving seaside resort on the Sinai Peninsula. Traffic exploded from less than half a million passengers in 1994 to nearly three million in 22. Current capacity constraints are severe and the growth in traffic can only resume at trend pace once the new terminal is built. The economic analysis follows a similar pattern to that of CAI, with some variation in capturing traffic specificities (SSH is mostly used by tourists). Traffic growth is expected to be faster than in Cairo (5 percent p.a. for international traffic and 2.5 percent p.a. for domestic traffic) and traffic creation is expected after the terminal is commissioned. Without the project, traffic would stagnate. No time savings are assumed on the without project traffic, since tourism is the main motive for trips to SSH. Benefits are calculated on incremental traffic, as for Cairo. Benefits from tourism are also included but account for traffic specificities. The commercial revenue base would also increase, but to a more modest level. The ERR computed on this basis is 28 percent and the NPV, discounted at ten percent, is US$122 million. Given the high rate of return, a sensitivity analysis was not deemed necessary. B. Financial Analysis Past and Current Financial Performance of CAC. Through the 199s, CAI was the only profitable airport. Financial statements for FY21 thru FY23 were reviewed showing that: After-tax income rose from LE59 million in FY21 to LE68 million in FY23; Airport tariffs are low by regional standards, especially for passenger departure fees; Commercial revenues amounted to less than US$2 per passenger; Despite overstaffing, labor costs as a percentage of operating expenses decreased slightly from 25 percent to 24 percent close to the world average of some 25 percent; CAC s profitability was enhanced by deferring maintenance and investment (many assets are fully depreciated and the company s indebtedness is limited). Future Financial Performance of CAC. The capacity of CAC to generate cash will more than double in FY24, as international and domestic passenger departure fees are expected to rise to US$15 (LE92) and US$3 (LE18) respectively. A new fee will also be introduced for use of weighing counters. The new tariff is expected to be implemented starting in the first semester of 24. Since two-thirds of revenues are from US$ denominated charges, revenues in LE will rise in relation to the expected depreciation of the local currency, and further tariff increases would not likely be needed until project completion. Detailed assumptions used in the financial projection and financial tables are found in Annex 9. Since it will provide EHCAAN with hnds to repay its portion of the Bank Loan, CAC should maintain its healthy financial status which two financial ratios will help monitor from FY7 onward: a debt service coverage of no less than 1.3, beginning in 27; and a current ratio of no less than 1.O, beginning in 27. Past and Current Financial Performance of EAC. EAC was established in 21 and has had difficulties collecting and consolidating financial data from all airports it owns. Therefore, the financial analysis is limited to EAC s FY23 financial statements, the first ones deemed reliable. As shown in Annex 9, EAC earned an after-tax income of LE12 million in

18 Future Financial Performance of EAC. Beginning in January 24, EAC s future financial performance will be enhanced by the increase in tariffs. Unlike CAC, however, EAC will face rapidly rising development costs in relation to expansion investments at Luxor, Borg El Arab, Hurghada and Sharm El Sheikh Airports. Operating at lower costs, the company will be able to generate cash flows commensurate with its financial charges from operations and borrowings. Annex 9 provides the summary financial statements supporting this conclusion. The financial analysis was extended to show how the proposed investment at Sharm El Sheikh Airport would affect EAC s financial position showing that Sham El Sheikh should generate enough cash to pay for the investment and further contribute sizeable funds to EAC. Since it will provide EHCAAN with funds to repay its portion of the Bank Loan, EAC should maintain its healthy financial status which two financial ratios will help monitor from FY7 onward: a debt service coverage of no less than 1.3, beginning in 27; and a current ratio of no less than 1.O, beginning in 27. Future financial performance of EHCAAN. It will hinge on the performance of its four affiliates which contribute a portion of their revenues and their income toward coverage of EHCAAN s management costs. CAC and EAC are the largest contributors and their good financial prospects give assurance that they will sustain that role in the future. NANSC is also expected to remain highly profitable. AVIT results will also make positive contributions albeit of small size. Annex 9 shows EHCAAN s projected cash flow statement over Technical The detailed engineering design for the new terminal in Cairo (TB3) is based on a concept common to modem airports and includes state-of-the-art equipment and electromechanical systems. It was completed by a reputable engineering firm with prior experience in airport design. A Bank financed consultant reviewed the bidding documents and found them to form a good basis for tendering. The review also recommended to verify that ICAO standards are met. For SSH, the same engineering firm was hired to prepare the preliminary design which was reviewed by a Bank-financed consultant whose recommendation was conveyed to the Borrower for appropriate and timely action. The detailed design is in progress. 3. Fiduciary Procurement. An international consultant well versed in Bank-financed projects worldwide and familiar with Bank procurement procedures, was hired as Project Manager by CAC and EAC to assist them through the procurement process and to supervise construction under their respective project investments. The contractual agreements between EHCAAN-CAC and EHCAAN-EAC will detail procurement and payment processes and other responsibilities for implementing the different activities. This will allow CAC and EAC to sign contracts with the two winning contractors. Also, these agreements will allow EHCAAN to issue withdrawal applications to the Bank to make direct payments to the contractors on behalf of CAC and EAC. CAC and EAC will sign contracts for their respective project investments, while EHCAAN will sign all contracts under the technical assistance components. The decision-making process, 18

19 especially with regard to contract awards, will be defined in the EHCAAN-CAC and EHCAAN- EAC contractual agreements and will be reviewed closely by the Bank as part of its due diligence responsibilities, in order to ensure efficient implementation and fiduciary soundness. Fiduciary responsibilities held by each company will be specified in the Agreements they will sign with EHCAAN by no later than June 3,24. Procurement of works and goods financed under the Loan will be carried out in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995, revised January and August 1996, September 1997, and January 1999). The Bank s Standard Bidding Documents for Prequalification for Works, Procurement o f Works, Procurement of Goods and the Standard Bid Evaluation Forms will be used in the procurement of works and goods. Procurement of goods and works will be carried out using International Competitive Bidding (ICB) for the two contracts for works and the contracts for goods. The following procurement methods for selection of consultants will be used: (i) Quality-and Cost-Based Selection (QCBS) will be used for selection of consultant services with value of contracts estimated at more than US$lOO,OOO equivalent under the TA component. (ii) Individual Consultants will be selected in accordance with paragraphs 5.1 to 5.3 of the Guidelines. The PMU staff will include a Procurement Coordinator (PC) whose responsibilities will deal primarily with the guidance and monitoring functions of EHCAAN vis-a-vis its two affiliates in the context of this Project. CAC and EAC shall each appoint a Procurement Officer with qualifications experience and terms of reference acceptable to the Bank, for the duration of the Project, to coordinate with the PMU at EHCAAN and to ensure that the procurement of works under Parts A and B and goods under Part C of the Project is conducted as per the Bank s Procurement Guidelines. Financial Management. An assessment of the financial management arrangements for EHCAAN, CAC, and EAC was carried out to determine whether the financial management arrangements for the Project are acceptable to the Bank. The assessment examined the three entities financial management systems (FMS) to ensure that they possess a sound system that is capable of capturing, summarizing, recording, and reporting its transactions in an accurate and timely manner. Certain weaknesses were noted, such as manual accounting and reporting systems, lack of experience in implementing Bank financed projects, and reliance on the Central Auditing Organization (CAO) in performing annual audits. The assessment concluded that the financial management systems did not meet the Bank s minimum requirements. As such, the establishment of a fully functional project FMS, including the installation of accounting hardware and software capable of recording the project s financial transactions and generating financial management reports (FMRs) and annual financial statements, and the appointment of a qualified Finance Officer familiar with Bank guidelines, is a Condition of Effectiveness. Because the first two components will be implemented by CAC and EAC, the reliability of the reports generated from the PMU will depend on the control environment in both companies, and as such, qualified finance officers will be hired by CAC and EAC no later than September 3,24. To provide assurance that the issues identified above will be mitigated, the following measures, which will be the responsibility of the PMU, have been incorporated into the project s design: (i) 19

20 establishing a PMU and staffing it with qualified individuals; (ii) creating a competent, qualified, and adequately staffed financial management unit(s); (iii) setting up automated accounting and reporting systems; (iv) issuing quarterly FMRs; (v) contracting private external auditors; and (vi) close monitoring by Bank staff, especially during the first year of implementation. The EHCAAN has also recruited an international firm to upgrade its overall financial management capabilities as well as CAC s and EAC s. It will ultimately enhance the Project s overall control environment and March 31, 27 is the target date for completion of this upgrading. A Special Account will be established at a commercial bank. 4. Social Three Land Acquisition Assessments were prepared for the project (two for TB3 and one for SSH). The results show that the sites designated for the construction of a third terminal and an additional runway at CAI are state owned, have been fenced for the last twenty years, and legally transferred to CAC. The hture site of the third terminal is presently used for public parking, and construction of an alternative parking site is underway. The new runway site is free of any economic activity. Both sites are located within CAC s overall property and are free of claims. As for the new terminal at Sham El Sheikh, the land is state property legally transferred to EAC. It is fenced, adjacent to the existing terminal, and surrounded by more land belonging to the EAC. Presently, the land is not used for any economic activity and there are no claims on it. OPBP 4.12 related to Involuntary Resettlement will not be triggered for both proposed sites. OP 4.1 related to indigenous peoples and cultural property is not applicable. Within the framework of the Environmental Assessments, independent Social Assessments (SoA) were conducted for both TB3 and SSH. The results of the SoAs show that overall, respondents have a positive opinion of the project, and acknowledge the value added, particularly from increased business and improved infrastructure and services. However, some concems were registered over increased noise and the potential for job losses. Mitigation measures to address elevated noise levels, which include the deployment of noise monitoring equipment, the adoption of ICAO standards for landing and takeoff procedures, and managing landings and take offs between runways to minimize noise at night have been included in the EMPs. Proper implementation of these measures will significantly lessen the impacts. The new runway will be located further away from built-up urban areas, and its impact is expected to be limited. In terms of job losses, most existing jobs will be transferred to the new terminals once operational and it is expected that traffic growth induced by the Project will create new jobs. 5. Environment The Project has been classified as Category A, as project works and the new runway in CAI will produce noise, and air pollution impact from that could be significant for residential areas around the airports. Other potential impacts include road traffic congestion. The project will also generate a few benefits (e.g. improved waste management and implementation of noise and air quality monitoring programs). The EA reports were prepared in accordance with OP

21 The EIAs examined project alternatives and the new runway, and identified the main impacts resulting from the socio-economic, biological and physical environment. Scoping sessions and public consultations were also conducted during the different phases of the EA preparations. Expected impacts, mitigating measures and related implementation costs (US$3.2 million overall), responsibility for financing and implementing those measures, and for monitoring arrangements during the pre-construction, construction, and operational phases are defined in detailed EMPs (Annex 1). Final Environmental Impact Assessments (EIA) for CAI and SSH were disclosed in Egypt and at the World Bank s InfoShop on November 26, 23. A comprehensive executive summary covering the two components and third runway was prepared and disclosed in Egypt (in Arabic) and at the InfoShop (in English) on November 26, 23. The final EIAs, which were reviewed and approved by the Egyptian Environmental Affairs Agency (EEAA) on December 9,23 and December 2 1,23, also satisfied the requirement of Egypt s Environmental Law No. 4/1994. TA is provided under the Project to implement the environmental and social mitigation measures in the EMPs, including capacity building at CAC and SSH to help monitor their implementation. Environmental units will be established at CAC and EAC no later than July 1, 24 and August 1, 24 respectively to ensure smooth and complete implementation of the EMPs. 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4. 1) X Natural Habitats (OP/BP 4.4) X Pest Management (OP 4.9) X Cultural Property (OPN 11.3, being revised as OP 4.1 1) Involuntary Resettlement (OP/BP 4.12) X X Indigenous Peoples (OD 4.2, being revised as OP 4.1) Forests (OP/BP 4.36) X X Safety of Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.6) Projects on International Waterways (OP/BP/GP 7.5) X X X 7. Policy Exceptions and Readiness The project will filly comply with the Bank policies. The project meets regional criteria for implementation. Country Director 21

22 Annex 1: Country, Sector and Program Background EG-AIRPORT DEVELOPMENT PROJECT Traffic Cairo International Airport (CAI) anchors a national system comprised of 24 airports, ten of them open to international traffic. Close to 5 percent of the country s airport traffic is handled there, with a large proportion of tourists. Since 2, passenger traffic at CAI has remained at around 8.5 million passengers p.a. As its overall capacity is only about 9 million passenger annually, hrther traffic growth can only accelerate deterioration of already mediocre service standards. Traffic at other international airports soared from 3.3 million passengers in 1993 to 9.8 million in 22, an average growth of 13 percent p.a. Of 22 s total, around 9.5 million passengers (over 95 percent), were handled at Sharm El Sheikh, Hurghada, Luxor, Aswan, Alexandria and Abu Simbel Airports. Tourism has been the principal driver behind the rapid growth, and new airport facilities are required to efficiently manage this increase. With close to three million passengers in 22, Sham El Sheikh (SSH) has largely exceeded its maximum capacity of 1.8 million passenger p.a. The GOE is giving its airport expansion program a justifyably high priority and, because of the substantial financing needs that will be required, the authorities are seeking funding, including from the private sector when available to finance and operate other airports. Legal and Regulatory Framework The civil aviation sector has been undergoing a reorganization since 21. Commercialization of public enterprises and private sector participation in airport infrastructure are key objectives of the reform. A review of the main relevant laws and decrees follows. Private Sector Participation (PSP) in Airport Infrastructure Law No. 3 of 1997, also known as the Airport Concession Law (AC Law), is comprised of only six Articles exempting airports from old laws governing infrastructure concessions (Laws No. 129 of 1947 and No. 61 of 1958), which were restrictive to the point of deterring private concessions. Since 1997, several airpofi concessions have been tendered, but only two were signed and implemented for development of Marsa Alam and El Alamin Airports. Law No. 3 of 1997 is silent on some aspects important to the rights of parties to a concession contract. The AC Law does not address land ownership issues, and public domain rules apply to airport concessions. A concession holder cannot normally own airport assets, including land development and buildings erected on it, which deprives lenders of collateral rights and results in less favorable financing terms. There are ways around this problem (e.g. an usuhct agreement) to give the developer quasi-ownership of land acquired, as well as full ownership of airport buildings by the concession holder who can then mortgage them. Interpretation of concession agreements is based on the Civil Code, and other basic laws which creates some uncertainty, especially as the established doctrine of the Administrative Court seems at odds with provisions of the AC law. Issues not addressed by the AC Law could cause lengthy and complex debates and negotiations among 22

23 u investors, lenders and the Airport Authority, thereby increasing transaction costs. For investors to benefit from a transparent contracting environment, detailed regulations for application of the AC law were therefore needed. Conditions for tendering airport concessions are not specified in the AC Law except for its call for competition and transparency. The general practice has been to comply with Law No. 89 of 1998 (the Tender Law ) even though commercial companies like CAC and EAC are exempted from it. Law No. 89 is not adapted to concessions for which different rules should be considered. Meant to correct above-described gaps in the PSP legal framework for airports, a Decree on the Organizational, Legal, Technical, Financial and Economic Regulations of National and Local BOOT, BOT and BOO Projects were issued in July 23. Furthermore, the Sector Policy Statement reaffirms that EHCAAN and its subsidiaries are not bound by Law 89/1998 but can instead have their own procurement Bylaws. Nonetheless, the July 23 Decree needs further review and clarification before the conclusion that it addresses all issues can be reached. These aspects will be an important part of the Bank s dialogue with the GOE during project implementation. Sector and Corporate Governance. Law No. 28 of 1981, as amended, provides the general framework governing civil aviation. Presidential Decree No. 56 of 22 established the Ministry of Civil Aviation (MCA), entrusting it with all responsibilities pertaining to air transport and airports, including those previously held by the General Authority for Civil Aviation, which was abrogated a few months later. The reform reflects the higher priority given to the sector by the GOE and the need to raise performance levels and accelerate infrastructure. development. Law No. 23 of 1991 set the stage for corporatizing public sector entities, two of which are overseen by MCA: (i) the Egypt Air Holding Company, created by Presidential Decree in 22, owns six affiliate firms (Egypt Air and its former five subsidiaries dealing with air cargo, charters, ground-handling and maintenance); and (ii) Egyptian Holding Company for Airports and Air Navigation (EHCAAN), which was created by Presidential Decree in 21 with four affiliates: (a) the Cairo Airport Company (CAC), created in 22 to manage and operate Cairo International Airport; (b) the Egyptian Airport Company (EAC), which manages and operates all airports except Cairo, Marsa Alem and A1 Alamin (two recent Build-Operate-Transfer schemes); (c) the National Air Navigation Services Company (NANSC), created in 21 to manage and operate air traffic control and related functions; and (d) the Aviation Information Technology Company (AVIT), created in 22, oversees and operates information technology, including its supporting facilities and equipment. 23

24 Meteorological Authority (MA), Egyptian Holding Company for Airports and Air Navigation (EHCAAN) Organization of the Egyptian Aviation Sector - Ministry of Civil Aviation (MCA) - National Civil Aviation Training (NCAT) Egypt Air Holding Company (EAHC) Cairo Airport co. (CAC) Egyptian Airport co. (EAC) National Air Navigation Services Co. ("SC) Aviation Information Technology Co. (AVIT) Egypt Air EA for EA for EA for Carrier Maintenance Ground Air Cargo (EA) and Tech Works Works EA for EA for EA Tourism Aviation Hospital Services Company 24

25 specialized private operators. Restaurants, catering services, hotels and duty free shops are also run by EA which, overall limits CAC s potential to generate revenue. EA S public ownership and its importance as an airport user raise real or perceived risks that it will receive preferential treatment and distort competition in the market. Levelling the playing field for all airport users is a key condition for balanced PSP development in airports and optimization of financial returns on airport assets. Pricing and Funding Law No. 93 of June 23 replacing Law No. 119 of 1983 introduced a new tariff structure and pricing freedom consistent with the objective of corporatizing the airport sector (in the past, budgets and tariff had to be approved by the Parliament) and reorganized airport crosssubsidization. Articles 16 and 21 of the new law give the M CA authority to set airport charges. Article 17 empowers the Minister to grant partial or full exemption of fees under conditions yet to be specified. Article 36 gives the Minister freedom to increase tariff rates within a 5 percent limit. Airport pricing decisions are subject to prior consultation with a new body, the Higher Council for the Pricing of Services (HCPS), which will be created by Presidential decree. Potential issues include: 9 HCPS should be established under transparent conditions ensuring that advice is competent, evenhanded and independent from the ministry; 9 Any exemption must be given under conditions that would provide equal treatment to all users, foreign and local; and Article 19 calls for payment of compensation by a foreign airline when authorized to carry passengers that an entitled airline (namely Egypt Air) cannot carry for lack of spare capacity. Airport tariffs in Egypt are low by international comparison, a fact documented by many studies. A 1999 study2 compared Egypt with Tunis, Dakar, Abidjan and Nairobi, and established that passenger fees, as well as landing fees, in Egypt were the lowest of those airports included in the survey. The economic analysis of the TB3 project contains another set of recent comparisons with airports in the Middle East that led to the same conclusion. A Dutch study carried out in 213 stated that with the exception of Cairo International Airport, Egyptian airports at the end of the 199s were loss-making. Cross-subsidization balanced national airport finances, with revenues collected by the Government and redistributed according to priority needs. The project s financial viability hinges on a substantial tariff increase, and the Minister of Civil Aviation is reviewing a request to boost the average revenue per passenger in Cairo from See Technical Annex 11, attachment 11.1 in : Ellis Juan. Airport Infrastructure: the Emerging Role of the Private Sector. November 1995 (The World Bank. CFS Discussion Paper Series. Number 11 5) By Sofreavia (1999) as quoted in: NEDECO/NEI Increasing private sector participation in Egyptian airports and airport services (Rotterdam, July 21). NEDECO/NEI (op. cit.) 25

26 about US$4 at present to close to US$18. The tariff increase is expected to be effective soon after establishment of the HCPS. Revenue from commercial sources and rentals is underdeveloped. Typically, concession fees are based on a percent of turnover beyond a minimum with a minimum lump sum due if it is not reached. In many cases, CAC only collects the guaranteed lump sum and, overall, the total commercial revenue amounted to less than US$2 per passenger in 23. This has to do with the limited space currently available in Cairo, and with the fact that EA, the largest occupant of commercial space, pays too little. Construction of TB3 would address the lack of space issue, while awarding concessions through competitive bidding and including performance incentives in contracts would address the other issue. Part I11 of Law No. 93 creates a Fund for the Development and Support of Civil Aviation (FDSCA) as a legal entity reporting to the Minister of Civil Aviation (Article 24). FDSCA collects a fixed share of proceeds generated by fees, as stated in Law No. 93. In particular, 3 percent of airport charges on passengers and aircrafts and.3 percent of the revenue earned by EHCAAN accrue to FDSCA. Subsidization of air transport (e.g. it may apply to domestic air transport maintained for reasons of public interest), assistance to companies under the MCA in exceptional cases, payment incentives to enhance staff performance, funding of social activities benefiting the sector staff and funding of airport upgrading are among many possible applications of funds. Board members will be appointed by the Prime Minister. FDSCA is expected to contribute 55 percent of its total revenue from CAC to the Project (namely, CAC will only transfer a net 16.5 percent of collected user fees). This arrangement will last at least through 228. Air Transport Market Regime The GOE s international aviation policy is reflected in Air Service Agreements (ASA s), which are signed with other countries. The GOE has concluded some 117 ASA s, of which Egypt Air effectively operates around 5 1. Typically, ASA s deal with international scheduled services between two contracting states and contain provisions regarding carrier designation, traffic rights, including points of entry, frequency, capacity and tariffs. They have been used in the past to protect national flag carriers against foreign competition by restraining supply. Air transport deregulation spearheaded by the United States in the 198s produced an explosion in demand for air transport, and led an increasing number of countries to promote Open Skies policies. Egypt s stated policy is to gradually liberalize air transport. This started in 1988 with the signing of the Yamoussoukro Decision (later amended in 1994), which technically liberalized air transport to the 5th Freedom in all 52 African States and is being implemented, albeit at a relatively slow pace. Signing of the COMESA Treaty (Common Market for Eastern and Southern Africa) in 2 provided for 3rd, 4th and 5th freedom rights4 among 21 East and South The 5 freedom right is the right to carry passengers between two countries by an airline of a third country on a route with OiD in its home country. 26

27 ~~ African countries5. In November 1998, the Council of Arab Transport Ministers adopted a program for gradual liberalization of their common air transport market, and according to the MCA, Arab carriers will be granted 5th freedom rights from 26 onward. With regard to European countries and the United States, liberalization still has a long way to go in that ASAs contain restrictive assignments of rights between designated carriers, and Egypt Air is the sole beneficiary on the Egyptian side. For charters, liberalization is more advanced as foreign charters can fly freely to Hurghada, Sham El Sheikh and Saint Catherine. However, they are not allowed to land at Cairo, a restriction imposed by the current saturation of this airport s capacity. Once TB3 is commissioned to traffic, general access rights to Cairo will be reinstated. For domestic traffic and notwithstanding the fact that private airlines exist in Egypt and that several of them were issued licenses for provision of regular air transport services, EA enjoys a defacto monopoly on scheduled services. The private sector airlines confine their activity to charter and air taxi services. It appears that market constraints are the main reason why they do not operate scheduled flights. A low load-factor combined with low tariff make them unprofitable. EA is indeed losing money on its domestic network and cancelled most lossmaking services in the recent past. In short, the lack of competition on the domestic air transport market is less a problem of restrictive regulations (except for those on pricing that are not discriminatory) than one of market size and affordability of fares. The GOE s international aviation policy toward the West partly insulates EA from competition, as it faces the challenge of a deteriorating intemational air transport market. The ongoing commercialization of EA should make it capable of coping with more competition. Promoting Cairo as an international hub entails developing its role for all traffic to and from Egypt. The project s outcome would be enhanced if liberalization of the air sector continues. 5 Angola, Burundi, Comoros, Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe. 27

28 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies EG-AIRPORT DEVELOPMENT PROJECT There are currently 17 ongoing Bank-financed projects in Egypt, none of which are related to the Airport Development Project. The Private Sector Tourism Infrastructure and Environment Project, which closed on December 17, 22, sought to support the Government in improving the policy environment for the tourism sector through investment, deregulation and privatization of the tourism portfolio. The Operations Evaluation Department s (OED) rating of the development objective was unsatisfactory. The following transport infrastructure and policy reform projects, which are financed by other development agencies, are ongoing or recently completed. SectorDssue In fias truc ture Urban Transport Transport Telecom Project Project to construct a bridge across the Suez Canal. Introducing the light rail principle on an existing tramway line in Alexandria (Ramleh Line). Construction of a container transport on the Nile between the Port of Alexandria and the future Ather El Nabi container terminal in Cairo. Transform Telecom Egypt into an autonomous telecommunications utility capable o f operating on a commercially sound, self-sustaining basis by increasing private sector participation. Agency Japanese Government (JICA) Dutch Government (Senter) Dutch Government (Senter) Unites States Government (USAID) 28

29 Annex 3: Results Framework and Monitoring EG-AIRPORT DEVELOPMENT PROJECT Arrangements for Results Monitoring Results Framework A. Remove bottlenecks to: (a) traffic growth at CAI and SSH (b) growth in tourism (c) growth in exports from CAI B. Raise CAI and SSH performance to international best-practice norms. C. Promote airport investment by: (a) boosting airport commercial revenues (b) developing private sector service jobs (c) increasing private sector role in the aviation industry Component One: CAI Percentage of project completed (TB3) Component Two: SHS Percentage of project completed (new terminal) Component Three: Sector Operations & Env. Mg t.: 1) Draft and validate National Airport Master Plan. 2) Plan to liberalize domestic air transport, landside services at CAI. 3) Feasibility of expanding the CAI Cargo Village. 4) Install air and noise monitoring equipment at CAI and SSH. 5) Strengthen airport management capacity. (a) increased traffic growth at CAIiSSH (b) increased foreign earnings from tourism (c) increased exports at CAI For both CAI and SSH: (a) passenger processing times (b) certification (ICAO standards) obtained from Civil Aviation Authorities before commissionning of terminals (a) average commercial revenue raised in CAUSSH (US$ per passenger) (b) private sector jobs created at CAI/SSH (c) growth of PSP in airport activities nationwide Component One: Disbursement rates (actual vs. planned) Component Two: Disbursement rates (actual vs. planned) Component Three: 1) Master Plan adopted by MCA (26). 2) CAI opened to foreign charters, private domestic air services (27); licensing of new operators for ground handling. 3) Feasibility study for Cargo Village approved (24). 4) Consultant hired to implement EMPs (24); Equipment installed by 26 5) Training completed, systems installed at EHCAAN and affiliates (27). Most of these indicators will be used for early detection of deviations from the projected path of project outcomes, leading to timely corrective action by the Borrower. Use of Results Monitoring Component One: Detect implementation delavs. then tinnoint causes. Component Two: Detect implementation delays, then pinpoint causes. Component Three: Detect implementation delays, then pinpoint causes and take corrective actions. 29

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32 z 4: 4: u 3 n m a fdc u 5 &7 h m s E: X X X X X s m - s X n N h m n m

33 Annex 4: Detailed Project Description EG-AIRPORT DEVELOPMENT PROJECT Project Component 1 - US$4S5 million 3 CONSTRUCTION OF THIRD TERMINAL AT CAIRO (TB3) When completed, TB3 will have a total capacity of 11. million passengers (5. million domestic and 6. million international passengers), compared to the current 9.5 million for Terminals 1 and 2. At completion, TB3 will be integrated with Terminal 2, which is presently used primarily by foreign airlines. Terminal 1, which has EgyptAir as its main user, will continue to receive domestic and regional flights. The TB3 will consist of: one new terminal building; one concourse; two fingers; three skyways - two connecting the concourse with each finger, and one connecting Terminal 2 with TB3; and electromechanical systems and equipment. The new terminal will consist of three levels and have a built-up area of 164, square meters. The halls, which will measure 32 meters by 15 meters, will be used for processing arriving and departing passengers, baggage handling, and commercial activities. TB3 s two fingers will have extendable capacity, but will initially have fifteen swing gates. The gates will be provided with fifteen contact stands that can be increased to twenty for small aircraft and 47 remote stands. Ancillary facilities will include an apron control tower, power plant for HVAC and electrical equipment, two water pumping stations, and an 18,4 square meter water reservoir. To better accommodate an aggressive construction schedule, two packages of works have been planned. The first is an enabling package, which will proceed in advance of the main contract and involve a local contractor to prepare the site by putting up fences, moving utility networks providing temporary access roads and parking facilities, and preparing a laydown area for equipment and supplies. The enabling package is estimated to have a duration of between eight and nine months, will cost about USS9 million, will be tendered locally, and financed by the National Investment Bank of Egypt. The second package, or main contract for works and equipment, will be completed in 3 to 32 months. The main contract will be co-financed by the GOE and the Bank. It is estimated that the composition of project expenses will be 7 percent in foreign currency and 3 percent in local currency. While existing runway capacity has been deemed sufficient to handle additional traffic generated as a result of TB3 through much of this decade, design work for a third runway at CAI is currently being undertaken by Akroports de Paris. The runway will be four kilometers in length, l3 Including contingencies. 33

34 65 meters wide, and will accommodate the future generation of wide body aircraft that will carry between 6 and 8 passengers. The estimated cost to build the new runway is US$66 million, and while it will not be financed under the Loan, it will be constructed and made operational by the time TB3 is completed (around January 27). A private firm will be hired to operate CAI s existing terminals plus TB3 when it is commissioned to traffic. The selection will be made upstream, and the EHCAAN has hired a French investment bank to assist in the selection process by finalizing the scope of the investment and preparing appropriate tender documents with a view to awarding a management contract by end 25. The work by the investment bank is an integral part of project s development and has been closely coordinated with the Bank team. Slippages are possible, and project conditionalities have been designed to minimize risks of failure to select a private firm to manage the new terminals. Project Component 2 - US$6.5 million CONSTRUCTION OF NEW TERMINAL AT SHARM EL SHIEKH Sham El Shiekh is the third largest airport in Egypt in terms of passenger volumes. International traffic accounts for more than 7 percent of all traffic at the airport, which is currently operating at its designed capacity of two million passengers per annum. When completed, the new terminal will have the capacity to accommodate 4.5 million passengers annually. The new terminal will consist of: one new terminal building; and electromechanical systems and equipment. As for TB3 in Cairo, two packages of works have been planned for Sharm s new terminal - an enabling package (some US$2.5 million) and the main design-build contract. The construction period, which is scheduled to be 18 months, is set to begin in October 24, with the goal of making the new terminal operational by April 26. The composition of project expenses is estimated to be 7 percent in foreign currency and 3 percent in local currency. The GOE intends to hire a private firm to manage the airport and assigned the same French investment bank to help in its selection. Project Component 3 - US$26.2 million STRENGTHENING SECTOR OPERATIONS AND ENVIRONMENTAL MANAGEMENT Services of a Project Manager and of a Legal Advisor were hired by CAC and EAC to assist them throughout preparation and implementation of their civil works contracts. These services are not financed by the Bank and neither are those of the Engineering firm which preparedhpdated the bidding documents for project civil works in Cairo and Shm El Sheikh. 34

35 The Bank financed TA (some US$5 million), all of which will be implemented by the EHCAAN, is comprised of the following: Sub-Component I Preparation of a National Airport Master Plan for Egypt. Development of a master plan is needed to coordinate investment plans for Egypt s airports and airport extension with growth of tourism. A national master plan will help clarify an overall country strategy for the development of airport infrastructure, sequence and optimize investments, guide future development of private concessions, define how supporting infrastructure will be financed and identify responsibility for its maintenance, and address issues faced by small airports, like tailoring subsidies to real socio-economic functions. Sub-Component 2 Plan for Gradual Air Transport Liberalization. This study will define a realistic path for liberalization of air transport consistent with promotion of one or several airports as international hubs and the timeframe for strengthening the national airline industry, without which the full potential of these hubs will never materialize. Full liberalization of air transport is likely to exceed five years, and the development o f a detailed action plan for the next four years must be realistic and beneficial to the country. Sub-Component 3 National Strategy for Development of Air Cargo. The objective here is to enhance and support the implementation of strategic plan including creation of an international cargo hub at CAI. Advice will be provided on the feasibility of expanding the cargo village at Cairo Airport. The assessment will include a review of cargo traffic and forecasts at CAI, existing laws and regulations, ownership and operating scenarios, operational and logistical requirements for air cargo facilities. Sub-component 4: Support to Environmental Units. Funding will be provided to install air and noise quality monitoring equipment and to establish environmental units at CAC and EAC. Financing will also be available for the services of an independent long-term contractor to oversee implementation o f the environmental management plans (EMP) for CAC and EAC, and to train local staff to implement associated mitigation measures described in the EMP during project construction and new terminal operations. Sub-component 5: Airport Management Capacity Building. The main objective of this assistance will be to build management capacity at EHCAAN, CAC, EAC and AVIT, including provision of IT equipment. Upgrading human resource management, revamping commercial functions and establishing effective monitoring and control systems are the main objectives. Training will be provided for staff to operate under the new systems, as well as to strengthen counterparts abilities to regulate and monitor airport users and the performance of private airport management firms. Sub-Component 6: Auditing of the project-related accounts. An auditor will be hired to audit the Project Accounts for each Fiscal Year throughout project implementation. Sub-component 7: Technical support to the PMU. Experts will be hired and financed out of the Bank loan proceeds to ensure efficient operation of the PMU in the field of procurement and financial management. 35

36 Sub-component 8. Equipment. The equipment procured by EHCAAN under the project will include air quality and noise monitoring equipment needed by the CAC and EAC environmental management units to implement the Environment Management Plans of the Cairo and Sham El-Sheikh terminals, and Information Technology equipment aiming to strengthen EHCAAN management capacities. 36

37

38 Annex 6: Implementation Arrangements EG-AIRPORT DEVELOPMENT PROJECT The Project will be implemented between July 24 and December 28, and June 3, 29 is the Loan s scheduled closing date. EHCAAN and its affiliates, particularly, CAC and EAC will be responsible for implementing this Project. In terms of lending arrangements and flow of funds, there will be a Loan Agreement between the Bank and the Government of Egypt (Ministry of Foreign Affairs), and a Project Agreement between the Bank and EHCAAN. By virtue o f a Subsidiary Loan Agreement (SLA) between the GOE and the EHCAAN, the GOE will on-lend the Bank Loan proceeds funds to EHCAAN. To clarify the respective roles of CAC and EAC in project implementation, Contractual Agreements (CAS) should be in place between EHCAAN and each of the affiliates, before the deadline for the submission of bids for the two main works contracts. These CAS, which should be reviewed and accepted by the Bank, will detail procurement and payment processes and other responsibilities for implementing the Project s different activities. This will allow CAC and EAC to sign contracts with the two winning contractors. Also, these CAS will allow EHCANN to issue withdrawal applications to the Bank to make direct payments to the contractors on behalf of CAC and EAC. These legal instruments will also specify financial arrangements between EHCAAN and CAC and EAC, respectively, under which the latter will service their share of the debt incurred by EHCAAN. Signing of these CAS should take place no later than June 3,24. A Project Management Unit (PMU) will be established within the EHCAAN by effectiveness to supervise, coordinate and monitor overall implementation of the Project. Its chief functions will be to program, collect information and data, monitor and evaluate progress, coordinate and advise on all fiduciary matters, maintain project financial accounts, manage the Special Account, submit replenishment requests and Requests for Direct Payment to the Bank, and prepare reports, including financial monitoring reports (FMRs). In accordance with the aforementioned contractual agreements with CAC and EAC, the PMU will coordinate and supervise project implementation, and authorize and work with its affiliates and the Ministry of Civil Aviation to carry out each of the project s components. Payments due contrators, suppliers and consultants will come from hnda held by the EHCAAN, upon receiving appropriate instructions from the CAC and EAC. EHCAAN will be responsible for the procurement of the five packages under the Technical Assistance component of the Project. The composition of PMU staffing will include inter alia a qualified Project Director (PD) who will head the unit, a Finance Officer, a Procurement Coordinator, and a Statistician, and may include Project Coordinators from CAC, EAC and AVIT to facilitate communications between with the PMU. In addition, CAC and EAC will assign a Senior Engineer to interact with the PMU s PD on matters of contract management related to construction of their respective terminals. To be effective, the PMU will need to: (i) interact with two Senior Project Coordinators appointed at CAC and EAC, who will facilitate collection from relevant departments of the operational, financial and procurement information it needs to process FMRs; and (ii) have direct access to the Project Manager and the 38

39 Legal Advisors hired by the airport entities for checking and completing the data communicated by CAC and EAC. A Project Steering Committee, to be chaired by EHCAAN, will have responsibility for project oversight and coordination. Representatives will include key stakeholders in the project, such as from the Ministry of Civil Aviation, the Ministry of Finance, and EHCAA s affiliates. A comprehensive Project Implementation Plan (PIP), including the format of monthly and quarterly progress reports and covering the tasks for which the PMU, CAC and EAC will be responsible respectively has been finalized by EHCAAN and was submitted to the Bank. For the third terminal at Cairo Intemational Airport, the Cairo Airport Company has contracted an international engineering firm to serve as Project Manager (PM) to assist in the procurement process and during the contract management phase. CAC has also signed contracts with another engineering firm to designlupdate and supervise construction of project investments. Both recruitments were found acceptable to the Bank. For the new terminal at Sharm El Sheikh Airport, EAC has contracted the same intemational engineering firm to develop engineering designs and to supervise construction of the new terminal. Contract management will be mainly carried by EAC with the support from the international engineering firm in their role as the Engineer under the construction contract, with some extended technical assistance to EAC. Both CAC and EAC will be supported by the PMU to provide the required knowledge in Bank procurement and complementing the roles of the recruited consultants in providing the necessary expertise and resources to CAC and EAC in the procurement and management of theses two large contracts. The PM contract with CAC was signed on July 23, for a period of 41 months with an estimated effort of 45 person-months. The PM contract with EAC is from December 23 until February 26. Both CAC and EAC will appoint a procurement officer and be supported by the Procurement Coordinator in the PMU to provide the required knowledge in Bank procurement and complementing the PM role in providing the necessary expertise and resources to CAC and EAC in the procurement and management of theses two large contracts. The PM has prepared the pre-qualification documents, the bidding documents and assisted CAC and EAC in the preparation of the pre-qualification reports for these two packages. EHCAAN will sign all contracts under the Technical Assistance Component. The decisionmaking process, especially with regard to contract awards, will be defined in the EHCAAN-CAC and EHCAAN-EAC Contractual Agreements and will be reviewed closely by the Bank as part of its due diligence responsibilities, in order to ensure efficient implementation and fiduciary soundness. It has already been agreed with EHCAAN, that for the works contracts, the payment approval cycle will be carried out in the following manner: 1. The contractor will submit invoices to the supervising engineer or PM. 2. The PM will verify the quantities and prices and transmit the invoices to CAC for TB3 and EAC for SSH. 3. CAC and EAC will review and approve the invoices prior to forwarding them to the PMU. 4. The PMU then reviews, approves payments, then processes requests to the World Bank for direct payments to contractors. 39

40 An assessment of EHCAAN s financial management system has been carried out in order to ensure that the PMU will be capable of accurately capturing, summarizing, recording, and reporting transactions in a timely manner. Certain weaknesses were noted. To provide assurance that identified weaknesses will be properly mitigated, the following measures have been incorporated into the project s design: (i) staffing the PMU with a competent and qualified Finance Officer; (ii) setting up automated accounting and reporting system at the PMU; (iii) issuing quarterly FMRs; (iv) contracting a private external auditor; and (v) close supervision by Bank staff, especially during the first year of implementation. Because most of the contracts for civil works and goods are for large amounts, the direct payment method will be used primarily to finance these project-related activities, while a small Special Account (SA), to be established at a commercial bank, will be used to pay for consulting services. The SA will be established and managed by the PMU. The financial management systems of CAC and EAC may be assessed by the Bank separately, depending on the actual arrangements reflected in the EHCAAN-CAC and EHCAAN-EAC contractual agreements to be signed no later than June 3, 24. The establishment of a comprehensive financial management system for the Project related accounts is a Condition of Effectiveness. Environmental Units will also be established at CAC and EAC no later than July 1, 24 and August 1, 24 respectively to monitor implementation of the Environmental Management Plan and maintain corresponding indicators. Technical assistance will be financed under the project to start up each unit, perform necessary tasks, and train staff to take over at the project s closing. Private airport operators will be hired under management contracts let by EHCAAN to manage the new and existing terminals at CAI, and the new, and possibly, existing terminal at SSH. An intemationally recognized investment bank was hired to: (a) provide advise to the EHCAAN on a strategy to attract private management firms; (b) prepare the tender documents, including contract design, and market the transactions; and (c) assist in the tendering process and selection of management companies. Much of project success will hinge on the performance of the management companies, which are expected to modernize management systems, adequately maintain airport facilities, ensure a high standard of airport security, and build in-house capacities to assume responsibility once their contracts, which are expected to have a six to eight year duration (they could be extended by a year), expire. At the same time, it will be important that the Egyptian authorities exert effective control to ensure the performance of the private operators. t. 4

41 Organization Chart of Project Implementation Ministry of Foreign Affairs Signs Loan and authorizes proceeds to be on lent to EHCAAN under commercial terms. Egyptian Holding Co. for Airports & Air Navigation Responsible for project implementation (all components). Designates PMU, CAC and EAC to undertake work. < 3 Project Steering Committee Chair: EHCAAN Members: Representatives from the MCA, MOF, MOFA and EHCAAN s four affiliates. Function: Oversees work of Project Management Unit (PMU) Responsible for payment processes, financial management, and authorizes and coordinates work. I Cairo Airport Company Egypt Airport Company Procure and sign contracts associated with, and implement, Component 1. Procure and sign contracts associated with, and implement, Component 2. Environmental Unit (CAC) Ensures implementation of EMP, maintains corresponding indicators, manages quality control systems. Environmental Unit (EAC) Ensures implementation of EMP, maintains corresponding indicators, manages quality control systems. I 41

42 Annex 7: Financial Management and Disbursement Arrangements EG-AIRPORT DEVELOPMENT PROJECT Executive Summary and Conclusion. An assessment of the financial management arrangements for EHCAAN, CAC, and EAC was undertaken in October 23, and completed during appraisal to determine whether the financial management arrangements for the Project are acceptable to the Bank. A financial management questionnaire is included in the Project files. The assessment looked at the three entities financial management systems to ensure that they possess a sound system that is capable o f capturing, summarizing, recording, and reporting its transactions on an accurate and timely manner. Certain weaknesses were noted during the assessment, such as manual accounting and reporting systems, lack of experience in implementing Bank financed projects, and reliance on the Central Auditing Organization (CAO) in performing annual audits. The assessment concluded that the financial management systems did not meet the Bank s minimum requirements. As such, the establishment of a fully functional financial management system, including the installation of accounting hardware and software capable of recording the project s financial transactions and generating FMRs and annual financial statements, and which is staffed by a qualified Finance Officer familiar with Bank guidelines, is a Condition of Effectiveness. Also, as the first two components will be implemented by CAC and EAC the reliability of the reports generated from the PMU in EHCAAN will depend on the control environment in both companies, and as such, each company will recruit a qualified finance officer no later than September 3, Hire Finance Officers in EHCAAN, CAC, and EAC. Procure Accounting software. The software to be used by the three FOs in the three companies. Finalize the installation, implementation, testing, and training of the FOs on the accounting software. Develop an FM policies and procedures manual that takes in consideration the various contracts and agreements terms. Launch the recruitment urocess of an indeuendent and aualified urivate auditor. Countrv Financial Management Risks. The 23 ROSC Report, the on going CFAA Report (23), and the CPPR Report (22) identified major weaknesses in Egyptian financial accountability in both the public and the private sectors. Two areas in the 21 CAS that also give indications of these inherent risks, which are found in the context of country economic development and public sector administration capacity. Another issue that could affect the residual risk is transparency within Egypt. According to some indices, the perception of nontransparency in Egypt worsened in Proiect Financial Management Risk. EHCAAN, CAC and EAC have no experience in implementing Bank projects, which is a significant risk. Also, reliance on full manual systems to record and report financial transactions and a lack of experience with International Accounting l4 In the Transparency International s Corruption Perceived Index for 22, Egypt scored 3.6 out of 1, while in 23, the perception dropped to 3.3 (more risk). 42

43 Standards (IAS) leads to a high fiduciary risk that needs to be mitigated through specific measures and arrangements. In addition to the mitigating measures listed below, EHCAAN has contracted KPMG to assess the overall financial management systems at EHCAAN, CAC and EAC, develop an action plan for upgrading the system, and finally support in the implementation of their recommendations. This would ultimately contribute to a more reliable system for the project implementation. Upgrading of the company s FMS must be completed no later than March 3 1,27. ITEM Implementing Entity Funds Flow Staffing ~~ ~ Accounting Policies and Procedures Internal Audit External Audit Reporting and Monitoring Information Systems RISK High Moderate Moderate Moderate High High High High COMMENTS No experience with Bank projects. Involvement in similar project to develop Terminal 2 in EHCAAN is a new entity and most staff only have public sector experience. Because the project will have a limited number of contracts, direct payments will be used. However, a SA will be opened at a commercial bank in Egypt for the TA component. As for the counterpart funds, NIB is committed to make local funds available in a timely manner at the request of CAC and EAC. Competent and experienced staff are available on government systems and MOF regulations. Risk lies in lack of experience with Bank policies, IAS, and automated accounting systems. Also, the number of staff in EHCAAN s finance department is limited. Detailed, formal, and approved policies and procedures are available, however, they are government oriented with a focus on unified accounting systems. Although it can be argued that CAO fulfills an internal audit function, an Internal Audit Department does not exist. Annual audits are conducted by CAO, however, the Bank does not accept CAO reports for new projects. Also, CAO does not give odinions on EHCAAN s consolidated FS. Most financial reports, including FS, are produced manually. It is worth noting that the 22 audit has not yet been completed due to problems in determining opening balances. Manual systems are used. EHCAAN launched a process to computerize its MIS, but this is not yet under implementation. It is fair to say that most staff are not familiar with commters or their amlications. Overall Risk: High Risk Mitigatinn Measures. To compensate for the above-mentioned shortcomings, and to lower the overall risk rating to moderate, a combination of the following actions is proposed: 43

44 ring-fencing the project, and reliance on Direct Payments; creating a competent, qualified, and adequately staffed FM unit(s); implementing an automated accounting and reporting system; producing quarterly Financial Monitoring Reports (FMR); hiring KPMG to upgrade the FM systems in the three companies; contracting private external auditors to review quarterly FMRs and audit annual financial statements (FS) for the project in accordance with International Standards on Auditing; and close monitoring by the Bank to help reduce risk. To establish a sound financial management and reporting system within the EHCAAN, the core PMU staff will include a qualified Finance Officer familiar with the Bank s principles and guidelines on financial management, can issue Financial Monitoring Reports, and prepare timely withdrawal applications and Statements of Expenditure (SOE). To ensure that the information received from CAC and EAC is accurate and timely, two finance officers will be recruited and physically located in both companies. The Finance Officer will liaise with EAC s Finance Officer, CAC s Finance Officer, the PD, and the Bank on issues associated with financial management and disbursement. The PM will submit monthly FMRs to the Finance Officer covering the project s first and second components. The Finance Officer will be responsible for preparing consolidated FMRs for the project, including the activities of the third component. Financial Monitoring Reports (FMR). The project should have an adequate management information system that is capable of generating necessary financial reports, including sources and uses of funds, cash withdrawals, cash forecasts, and Special Account reconciliation. The format, content, and frequency of these reports have been drafted and were finalized during negotiations. While the PMU s Finance Officer will prepare the FMRs, the PMU s PD will be responsible for ensuring that they are submitted to the Bank in a timely manner. Procurement Reports. These reports should provide information on the procurement of works, goods, and related services, as well as the selection of consultants and compliance with Bank procurement guidelines and methods. In addition to the procurement progress, the reports should include information on all authorized contract variations. Information on complaints from bidders, unsatisfactory performance of contractors, and other major contractual disputes should also be included. The PMU s Procurement Coordinator will prepare relevant procurement reports, and the PMU s Project Manager will be responsible for ensuring that they are submitted to the Bank in a timely manner. Physical Reports. These reports should include narrative information and output indicators linking financial information with physical progress, and highlight issues that require attention to ensure that project costs are well managed. The PMU s Project Manager will be responsible for organizing the production of these reports and for submitting them to the Bank in a timely manner. Flow of Funds. Because most of the contracts for civil works and goods are for large amounts, the direct payment method will be used primarily to finance these project-related activities, while 44

45 a small Special Account will be used to pay for consulting services. To ensure that hnds are readily available for project implementation, and to separate and avoid commingling of funds from various sources, a Special Account for IBRD funds (denominated in US Dollars) will be opened at a commercial bank in Cairo, and managed by the PMU. Deposits into, and payments from, the SA will be made in accordance with provisions in the Loan Agreement. As for the local currency contribution, National Investment Bank (NIB) will cover that part at the request o f CAC and EAC, which will be transferred to the Project s Local Currency Account on quarterly basis based on the expected implementation. Flow of Funds and Payments National Investment Bank request NIB to EHCAAN (Documents for Payment) Mechanism for Making Construction Pavments. The appointed PM will follow the prescribed mechanism for making payments to contractors, determining amounts due and payable within the powers granted them. The PM will prepare monthly financial reports (cash forecasts), procurements reports, and physical progress reports. The payment mechanism is outlined below. Contractors will provide the PM with monthly statements showing amounts due at the end of each month. Statements will show the proportions of local Ad foreign currencies required. Within 14 days of receipt of monthly statements, PM determines amounts due and payable in respective currencies, and delivers an interim payment certificate to the CAC or EAC for review and approval CAC or EAC will approve the interim payment certificate and deliver it to the PMU for payment. The PMU then reviews and approves payments. Upon execution of the Form of Agreement and provision of bank guarantee, PM certifies a ten (1) percent advance. Upon issuance o f Taking-Over Certificates, one half of retention money is certified by PM for payment to Contractor. Upon expiration of Defects Liability Period, the other half of retention money shall be similarly certified by PM. Within forty-two (42) days after receipt of monthly statements from the PM, the PMU pays the amount certified as due the Contractor. 45

46 Within twenty-eight (28) days of Letter of Acceptance, Contractor shall provide the P M with a quarterly cash flow statement. Also, revised cash flow estimates shall be provided to the PM. Both will be shared with the PMU. A local currency account for counterpart contributions will be opened at a commercial bank in Egypt. External Audit. A private, qualified, and independent auditor will handle annual audits for the project, which will include a review of quarterly FMRs. Terms of reference for the audits will clearly reflect the nature of the project and its exact needs. The cost of the audit will be financed from Loan proceeds. The audit report and opinion, accompanied by a management letter, will cover the project s financial statements (prepared in accordance to US), reconciliation and use of the Special Account, use of direct payments, and withdrawals based on SOEs. The report should be submitted to the Bank no later than six months following the closing of the fiscal year, or by December 3 1 st. The external audit report should encompass all project components and activities as a whole under the Loan Agreement. The audit should be in accordance with the Bank s auditing requirements and conducted according to International Standards on Auditing. Bank Supervision. Close supervision by the Bank through the resident mission office in Egypt is recommended. This will entail quarterly missions, at least during the first year of implementation, to review work done by the PMU and to ensure that the developed system is maintained in a consistent manner. Also, identified financial management risks will be continually evaluated and appropriate remedial measures taken during the supervision missions. Allocation of Loan Proceeds. The World Bank Loan of US$335 million will be disbursed during project implementation according to table 8. The Loan is expected to be disbursed over a period of just over four years, beginning in July 24. All project activities are expected to be completed by December 31, 28, and the Loan is expected to close on June 3, 29. Preparation and submission of disbursement applications will be the responsibility of the PMU. All expenditures are net of taxes and duties. Expenditure Category Loan Amounts in US$ million Works Part A Works Part B 39.3 Goods 3.5 Services Unallocated Total Project Costs: Financing Percentage 1% foreign cost 1% foreign cost 1% foreign cost; 1% ex-factory & 85% of other items procured locally %

47 DISBURSEMENT ARRANGEMENTS Loan proceeds, which will be disbursed in accordance with the Bank s disbursement guidelines as outlined in the Disbursement Handbook, will be used to finance project activities through the disbursement procedures currently in use. As projected by the Bank s standard disbursement profiles, disbursements would be completed four months after project closure. Disbursements would be made against standard Bank documentation. Special Account. Because the procurement of works and goods are expected to be dominated by a couple of large contracts, the preferred disbursement method will be direct payment for such civil works and associated goods, as well as appropriate use of special commitments for goods, when warranted or requested by the Borrower. However, to facilitate disbursement of eligible expenditures under smaller contracts for goods and consultant services, the PMU will open a Special Account (SA) in US dollars at a commercial bank in Egypt to cover part of the Loan s share of eligible expenditures. The SA will be managed and administered by the PMU, which will prepare Withdrawal Applications for replenishing the SA. Withdrawal Applications will be signed by two authorized representatives, and authorized signatories names and corresponding specimens of signature will be submitted to the Bank. The authorized allocation of the SA will be the equivalent of US$5, covering an estimated four months of eligible expenditures financed by the Loan. The PMU will be responsible for submitting monthly replenishment applications with appropriate supporting documentation for expenditures incurred, and will retain and make the documents available for review by Bank supervision missions and project auditors. The Special Account will be replenished through the submission o f Withdrawal Applications, which should be made on a monthly basis and will include reconciled bank statements and other documents, as may be required by Bank procedures. Use of Statement of Expenditure (SOEs). All applications to withdraw proceeds from the Loan will be fully documented, except for: (i) expenditures of contracts with an estimated value of US$lOO,OOO equivalent or less for civil works; (ii) US$lOO,OOO equivalent or less for goods contracts; (iii) US$lOO,OOO equivalent or less for consulting firms; and (iv) US$5, or less for individual consultants and training, which may be claimed on the basis of certified Statements of Expenditures (SOEs). Documentation supporting expenditures claimed against SOEs will be retained by the Project and will be available for review when requested by Bank supervision missions and project auditors. All disbursements will be subject to the conditions of the Loan Agreement and the procedures defined in the Disbursement Letter. 47

48 Annex 8: Procurement EG-AIRPORT DEVELOPMENT PROJECT General Public sector procurement in Egypt is governed by a legal framework anchored in Public Tender Law No. 89/1998 and further detailed in the Country Procurement Assessment Report (CPAR) of December 23. With regard to the proposed Airports Development Project, EHCAAN and its affiliates, CAC and EAC, have been authorized by GOE to operate under Egypt s commercial laws, as private sector enterprises. This has been confirmed by GOE and EHCAAN and is recorded accordingly in this PAD. Furthermore, with regard to procurement activities financed in whole or in part by the Bank Loan, the provisions of the Loan Agreement, including the Bank s procurement guidelines, will supercede any national procurement regulations or practices. Use of Bank Guidelines and Standard Documents Procurement of works and goods financed under the Loan will be carried out in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995, revised January and August 1996, September 1997, and January 1999). The Bank s Standard Bidding Documents for Prequalification for Works, Procurement of Works, Procurement of Goods and the Standard Bid Evaluation Forms will be used in the procurement o f works and goods. Procurement of consultant services will be carried out in accordance with the Guidelines for the Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997, January 1999 and May 22). The Bank s Standard Request for Proposals (RFP) for the Selection of Consultants (July 1997, revised April 1998, July 1999 and March 22), and the Sample Evaluation Forms will be used for assignments estimated to be above USD1,OOO equivalent. For assignments estimated to be less then USD1,OOO and for the recruitment of individual consultants, simplified forms that are acceptable to the Bank may be used. Advertising As part of Advance Contracting, as defined in the relevant provisions of the Bank s procurement guidelines, EHCAAN, with the concurrence and assistance of the Bank, advertised Specific Procurement Notices in the United Nations Development Business (UNDB) and Development Gateway for Prequalification of Contractors for Cairo International Airport, Terminal No. 3, and for Sham El Sheikh Airport, New Terminal, on August 15, 23 and September 28, 23, respectively. Advertisements were also published in two national newspapers, which have the largest circulation in Egypt (A1 Ahram and A1 Akhbar), on the same dates. Contractors have been prequalified for Cairo TB3, with the Bank s no objection, and contractors have submitted applications to be prequalified for the new terminal at Sham El Sheikh Airport. 48

49 A General Procurement Notice and Specific Procurement Notices to advertise for Consultant Services with an estimated value above USD2,OOO equivalent, will be advertised in UNDB and Development Gateway, and in at least one newspaper with national circulation. Invitations for Expressions of Interest for Consultant Services with an estimated value below USD2,OOO equivalent will be advertised locally. The consulting contracts for engineering design, supervision and contract management services have already been awarded by GOE, EHCAAN and CAC and EAC and will not be considered for retroactive financing under this Project. Procurement Plan A draft procurement plan is attached reflecting the dates for the main packages for the Technical Assistance component, the construction of Terminal 3 at Cairo Airport and the construction of a new terminal at Sharm-El-Sheikh Airport and Information Technology and Environmental Monitoring Units equipment. Two bar chart diagrams (attached to this Annex) for implementing the two terminals have been reviewed by the Bank and found to be acceptable. Component 3, Strengthening Sector Operations and Environmental Management, will consist of goods and the following seven subcomponents regarding consultant services: 3.1 Developing a National Airport Master Plan; 3.2 Formulating a plan to gradually liberalize air transport; 3.3 Providing guidance to support the transformation of CAI into a cargo hub; 3.4 Establishing Environmental Monitoring Units and implementing the EMPs; 3.5 Capacity building to strengthen airport management functions; 3.6 Services of independent auditor and: 3.7 Specialists to support PMU operations The programming for these packages was prepared by the EHCAAN and reviewed by the Bank during negotiations. Goods will be procured as shown in the Procurement Plan. The Project Implementation Plan, which includes the Project Procurement Plan, will be updated on a continual basis. Capacity Assessment EHCAAN has not conducted any large procurement process and in particular, large packages under international bidding or international donors guidelines. Currently it does not have capacity to do so. Under Egyptian Law, holding companies are not permitted to execute investment projects. However, the affiliates of holding companies may execute investment projects. Therefore, EHCAAN s affiliates, EAC and CAC will be responsible for the construction of the two airport terminals to be financed by this Project. The overall assessment of the procurement capacities in both EAC and CAC indicate that they have adequate measures to conduct procurement according to their needs. However, they both have no knowledge in Bank procurement. EAC has not dealt with a project of the size envisaged under the Project. For a project of this magnitude and complexity, it would require a dedicated professional 49

50 workforce with the corresponding technical capabilities. Although EAC has carried out some projects of nature and size similar to the Sharm El Sheikh new terminal, it still requires technical support in the procurement and management of their project. To address the same problem and to strengthen its capacity, CAC signed a contract with an international engineering firm to upgrade the Terminal 3 (TB3) design, and to supervise the construction works. CAC also signed a technical assistance contract with an internationally renowned Project Management firm, as of July 23, to provide project management support during the procurement and contract management phases. Similarly, EAC has signed a technical assistance contract with the same Project Management firm, starting from December 23 until February 26. This assistance covers the design phase, assistance in the procurement process and supervision during the construction phase. The firm will also support EAC in the project management. The PMU staff will include a Procurement Coordinator (PC) whose responsibilities will deal primarily with the guidance and monitoring fhctions of EHCAAN vis-a-vis its two affiliates in the context o f this Project. This PC would be expected to have solid experience in conducting procurement according to Bank Guidelines. In addition, the PC will deal with the procurement of packages under the Technical Assistance component. EHCAAN may be further supported by short-term individual consultants to prepare the TORS for the technical assistance packages and to assist in the proposal evaluation processes. EHCAAN has confirmed that the PC, a core staff of the PMU, will be recruited before effectiveness. CAC and EAC shall each appoint a Procurement Officer with qualifications experience and terms of reference acceptable to the Bank, for the duration o f the Project, to coordinate with the PMU at EHCAAN and to ensure that the procurement of works under Parts A and B and goods under Part C of the Project is conducted as per the Bank s Procurement Guidelines. A procurement training workshop for EHCAAN, EAC and CAC staff who will be involved in the procurement processes under this Project will be offered by the Bank, at or prior to project launch. The workshop will focus in particular, on Bank Procurement Guidelines for works and for the Selection of Consultants. Special attention will be devoted to the procedures for the evaluation o f bids and proposals, as well as contract administration. Procurement Implementation Arrangements The Project Implementation Arrangements are detailed in Annex 6. The four main procurement activities under this Project can be categorized into (1) Technical Assistance, (2) the construction of Terminal 3 at Cairo Airport, (3) the construction of a new terminal at Sharm-El-Sheikh Airport and (4) Information Technology and Environmental Monitoring Units equipment. EHCAAN will be responsible for the procurement of the seven packages under the Technical Assistance component of the Project. Furthermore, in its function as the Holding Company, EHCAAN will also provide guidance to and monitoring of CAC and EAC. CAC will be responsible for the construction o f Terminal 3 at Cairo Airport ; EAC will be responsible for the construction of the new terminal at Sharm-El-Sheikh Airport. Both will be supported in the procurement process by the PM and the PMU in EHCCAN. 5

51 Furthermore the procurement for the goods packages will be handled by each end user as appropriate, i.e. EHCAAN, CAC and EAC. All procurement activities will be coordinated by the PMU based on a comprehensive Project Procurement Plan which will be updated continuously. The procurement arrangements are as follows: Contract for Construction of Terminal 3 at Cairo Airport (estimated contract value: USD41 million). The pre-qualification process was launched in August 23. The prequalification report was presented to the Bank early December and was provided a noobjection by the Bank, under the relevant provisions of the Guidelines for Advance Contracting. The bidding documents were submitted to the Bank for review and revised in January 24. The bidding documents will be issued to the prequalified contractors by early February 24; with an expected award of contract in August 24. The estimated duration of works construction is 9 days. Contract for Construction of New Terminal at Sham-El-Sheikh Aimort (estimated contract value: USD 58 million). Again, as part of Advance Contracting, the prequalification process was launched in September 23. The pre-qualification report was presented to the Bank December and is currently under review. A first draft of the bidding documents has been submitted to the Bank. The bidding documents are being revised in accordance with the Bank comments on the first draft. The bidding documents will be issued to the prequalified contractors by April 24, with an expected award of contract in September 24. The estimated duration of works construction is 55 days. Technical Assistance Component. There are seven technical services packages under this component with estimated values ranging from USD2,OOO to USD 1. million. The programming of this components is to be finalized and submitted for Bank review prior to negotiations. The selection process will be according to the Quality and Cost based Selection Method (QCBS). Individual consultants will be also recruited to assist in the preparation of the TOR and evaluation o f proposals submitted for these assignments. Procurement of Goods. This relatively small component (USD3.5 million) is comprised of (i) Information Technology equipment and (ii) the equipment needed for implementation of the EMP. Reserved Procurement. Prior to the award o f the main works contracts, CAC and EAC expect to award separate contracts for the Enabling Works, using their own procurement methods. These Enabling Works are shown under the column " N.B.F." in Table A of this Annex as being part of this Project but are not to be considered for financing under the Bank Loan. Procurement Methods (Table A) Goods and Works. Procurement of goods and works will be carried out using International Competitive Bidding (ICB) for the two contracts for works, and for major contracts for goods. Contracts for goods estimated to cost less than US$5, equivalent per contract would be procured using national or international shopping procedures. 51

52 Consultant Services: The following procurement methods for selection of consultants will be used: (i) Quality-and Cost-Based Selection (QCBS) will be used for selection of consultant services for all of the six sub-components (3.1 through 3.6) under the technical assistance component;; and (ii) selection of individual consultants will be used in accordance with paragraphs 5.1 to 5.3 of the Guidelines for the seventh sub-component (3.7) under the technical assistance component. For assignments for consultant firms estimated at less than US$lOO,OOO equivalent, the short list may be comprised entirely of national firms, provided at least three qualified local firms are available and competition including foreign consultants is not justified. However, intemational firms will not be excluded from consideration, if they have expressed interest. Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method' Exenditure Category ICB NCB Othe? N.B.F. Total Cost 1. Works (327.9) () () () (327.9) 2. Goods (3.5) () () () (3.5) 3. Services () () (3.6) () (3.6) Total (331.4) () (3.6) () (335.) 'Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies. *Includes consulting services, services of contracted staff of the project management unit, training, and technical assistance services related to managing the project. Consultant Services Expenditure Category Table A1 : Consultant Selection Arrangements (US$ million equivalent) Selection Method QCBS QBS SFB LCS CQ Other N.B.F. A. Firms (3.1) () () () () () () (3.1) B. Individuals () () () () () (.5) () (.5) Total (3.1) () () () () (.5) () (3.6) Figures are rounded to the nearest decimal Total 52

53 Table B: Thresholds for Procurement Methods and Prior Review' Expenditure Category Contract Value Procurement Contracts Subject to Prior Review Threshold Method (US$ thousands) (US$ millions) 1. Works Works Contracts ICB All contracts subject to prior review. 2.Goods financed by the Bank under Component 1 and 2 of the Project Equal or >.5 ICB All contracts subject to prior review. <.5 Shopping All contracts subject to prior review 3. Services i-firms Consultant Services QCBS Contracts financed by the Bank under Component 3 of the Project ii-individual Consultant Services Section V Consultants Contracts financed by (selection of the Bank under individual Component 3 of the consultants) Proiect >1, >5, Total Value of Contracts Subject to Prior Review: US$475.7 million. Overall Procurement Risk Assessment: High. Frequency of Procurement Supervision Missions Proposed: Once every four (4) months during the life of the Project. All contracts below the prior review threseholds will be subject to postreview during supervision missions. 53

54 TABLE c: ALLOCATION OF LOAN PROCEEDS :YO4 CY5 CY6 CY7 Total I Civil works Cairo Sharm TB3 Runway sub-total Terminal Equipment su-total TOTAL IT equipment Environment equipment TOTAL Technical assistance TA during construction Cairo SSH sub-total Bank financed TA' Master Plan Air Liberalization Governance Environment Cargo Village Project auditing Experts in PMU sub-total o 1.o Total TA )TAL PROJECT LOAN * Figures are rounded to the nearest decimal Use of Statements of Expenditures (SOEs). Refer to Annex 7 Special Account. Refer to Annex 7. 54

55 T W 3 - d c3 u -i-- --t- Tf a 3 B % a L z.j +, '"" j d 2 Tf I& 8 s d B > z O B T? m d 3 E p d d & 4 B - m m G E a - m e E a 3 d 1 VI m 2 m 2

56 I WY m 8 v) m u $ 1 3 WY m u (A m u

57

58 1

59 Annex 9: Economic and Financial Analysis EG-AIRPORT DEVELOPMENT PROJECT A. Economic Evaluation of TB3 at Cairo International Airport Traffic Structure and Evolution Between 1997 and 22, total passenger volumes at Cairo International Airport (CAI) rose on average by three percent annually, in line with the world wide average annual passenger growth during these years,*' but slower than the historical growth rate for the Middle East region, which has been 4.7 percent. Table 1A provides basic details on the traffic structure and evolution. Table 1A. Traffic Development at CAI Between Year growth total transfer international domes tic scheduled non scheduled) scheduled non scheduled Scheduled international traffic accounts for three-fourths of total passenger movements at CAI, while just two percent of total passengers use CAI for connecting flights. Around half of international passengers are on leisure trips. The most important origin and destination (OD) markets are the Middle East (56 percent) and Europe (35 percent). As a result of the GOE's decision to ban foreign charter airlines from CAI, nonscheduled traffic has decreased significantly since On the other hand, foreign charters and scheduled services have been allowed to fly directly to the other Egyptian international airports, an opportunity on which Sham El Sheikh, Hurghada and even Luxor16 Airportswere able to capitalize. Passenger volumes at these airports have grown at a tremendous pace since Through 22, Luxor saw average yearly volumes increases of 58 percent,17 while volumes at Hurghada and Sham El Sheikh grew by 5 percent and 42 percent respectively. This evolution, however, cannot be construed as being only a consequence of charter restrictions at CAI, as all these airports serve thriving centers of tourism. 15 Source: LATA World Air Transport Statistics, June 23. l6 Although Luxor is not among the destinations that have been liberalized, non-scheduled permits for Luxor have apparently been relaxed. " The higher average growth rate of Luxor compared to Hurghada and Sham El Sheikh is a result of the correction in passenger traffic following the 1997 terrorist incident. 59

60 ~~ Statistics on the number of tourists at CAI are not maintained. ECG s 23 traffic study indicates that tourists account for about half of all intemational traffic, or about 2.2 million. Most of the tourist traffic is on scheduled flights. Current Airport Capacity The analysis done in February 2 by Schiphol Project Consult B.V. indicated that CAI s first terminal had a capacity of 5.4 million passengers, while the second terminal could accommodate 2.3 million passengers. The report noted that as more traffic is squeezed into the existing facilities, the level of sewice will decline more rapidly than the traffic increases. Modernization of TB1 has since taken place, and the current combined capacity of the two terminals is around 9 million passengers per annum. The stagnation in traffic since 1999 is principly caused by exogenous factors, but capacity constraints were also a factor (e.g. exclusion of foreign charter flights). Conditions offered to travelers have been, and continue to be, less than adequate, and act as a drag on traffic growth. Overcrowded airports generate economic losses due to the delays suffered by both passengers and planes. Traffic Forecasts The development of a third terminal at CAI has been discussed for more than a decade, and several feasibility studies, including traffic forecasts, have been carried out. Table 2A summarizes four of those forecasts respectively prepared by NACO/ECG (1994), Schiphol Project Consult (2), Parsons (2) and ECG (23). The latest forecast takes full account of the political context in the region, and the impacts September 1 lth and the 23 war in Iraq had on air transport worldwide. Table 2A. Traffic Forecasts for CAI, 25 and 22 (x 1, passengers). I Year I NACO/ECG I Schhhol I Parsons I ECG I L 25 9,181 11,626 11,91 9, ,251 14,62 14,7 11, ,446 18, ,725 The ECG/NACO was based mainly on professional judgement and empirical analysis in combination with trend analysis and market surveys. The Schiphol and Parsons forecast methodologies were based on combining historical trends with economic outlook and price elasticity, while the ECG forecast was based on trend analysis from 1985 to 22. The most important markets for CAI have been, and will continue to be, Europe and the Middle East. The demand for air travel will grow more strongly in the less developed markets of the Middle East, Asia and Africa. Over the past six months, overall passenger traffic in the region rose by 4.9 percent, fueled in part by infrastructure developments in the Gulf States. Traffic in the region will continue to recover to resume something close to its historical rate of growth. Demand for air travel will be driven primarily by economic growth, and the Middle East s sub-market is expected to grow by 4.3 percent annually through 22 (see table 3A). 6

61 Table 3A. Annual Growth Rates Middle East Sub-Markets to 22 I Market I Growth Rate (YO) I I Asia I 4.5 I Europe China Africa us 4.7 Middle East 4.9 The extent to which CAI, but also Egypt Air, will be able to capitalize on these markets will most certainly influence the long-term growth rate. CAI aspires to become a passenger and cargo hub for the Middle East with Egypt Air serving as hub carrier. However the implications a hub strategy may have for the GOE s civil aviation policy in general (deregulation, liberalization, fleet and network management), and for the other Egyptian international airports and airlines in particular, have not yet been properly assessed by CAC. Moreover, the main driver for air traffic growth has been, and most likely will continue to be, the tourisdleisure segment, both on international and regional scales. Egypt is a favorite destination for tourists and the negative impacts that followed international and local acts of terrorism (e.g. the events in Luxor in 1997 and September 1 1,th were of relatively short duration. Tourism in 23 soared by around 5 percent, notwithstanding the war in Iraq. Bearing in mind the above mentioned factors, a long-term traffic forecast through 22 of between 3. percent and 4.5 percent seems realistic. An increase fiom 8.4 million passengers in 22 to 16 million or 18 million by 22 is reachable. Should Egypt Air fulfill its ambition of becoming a hub carrier, traffic growth might well exceed 4.5 percent, but the economic analysis conservatively assumes no such development, given remaining uncertainties on the speed at which liberalization of the Egyptian air transport market will take place. Airport Tariffs The Cairo Airport Company generated gross operating revenues of around US$63 million equivalent in 22, or roughly US$7 per passenger. About 7 percent of revenue came from aeronautical charges (of which airside charges accounted for nearly two-third), and the balance from commercial charges and rentals. Notwithstanding an unusually large airport domain (around 8, acre), the latter two sources of revenue are underdeveloped (average revenue of US$1.8 per passenger). Concession contracts in particular include payments proportional to turnover beyond a minimum fee, which in many cases turns out to be the only payment made by occupants as they are unable to develop their business (an example of which is Egypt Air, which pays 54 percent of the concession s total revenues). The potential to develop commercial revenues is high. Aeronautical fees in Egypt are notoriously low. A Bank study of Moroccan air transport * ranked Egypt ninth out of ten countries in the region for landing charges applied to B747s and MD8s (the Egypt index was half the average). More recent data obtained in March 18 P. Guislain and al. La rtforme du transport atrien au Maroc. April 2. 61

62 23 and shown in Table 4A confirms that aeronautical tariffs are below the regional market for a representative aircraft class (A32 weighing 7 tons). There is room for a significant tariff adjustment, especially for the passenger fee. Table 4A. Comparison of Airport Fees for an A32 Plane (in US$ per plane or passenger) Docking Fee Landing Fee Passenger Fee Cairo Beirut Bahrain Kuwait Istanbul About About n.a. About 45 Around 4 34 to Investment Costs Net of tax project investment costs, including physical contingencies, are estimated at US$46 1 million (including construction of the third runway). The economic analysis covers twenty years of operation. A residual value of US$2 million is credited in 227, which corresponds to the infrastructure s assumed economic life of forty years. No renewal investment is accounted for, as the heavy duty equipment to be installed will have a twenty-year economic life. Main Assumptions Used Traffic. With the project, passenger traffic would grow at 3.5 percent per annum under the best case scenario, or from 8.4 million passenger in 22 to 2 million passenger in 227. The same rate applies to each of the four traffic components (domestic, charter, tourists on scheduled flights, and other passenger on scheduled flight). On top of expected growth in passenger traffic, charter traffic is expected to double in three years following the re-admittance of foreign charter flights to CAI in 27 (from about 16, passengers in 26 to 35, in 21). The sensitivity analysis tested lower (3 percent) and higher (4.5 percent) yearly rates.. Without the project, traffic would not be able to grow beyond ten million passengers p.a.. The one million passenger capacity additional to the current one (i.e. nine million) would come from better utilization of available terminal space through minor layout adjustments, although not without additional overcrowding and strains to passengers. This maximum traffic is reached in 28, and the model assumes redistribution of traffic among the four components to be consistent with the ten million passenger constraint. Under the model, domestic, charter and business related traffic was escalated at just one percent p.a. between 28 to 215, thereafter at.5 percent p.a. beyond 215, since assuming no growth for these traffic segments would be unrealistic. To be consistent with terminal capacities, tourists arriving on scheduled flights must be decreased to make room for domestic traffic. In 227, only 62

63 two million tourists would be received in Cairo without the project, compared with 4.4 million with the project. Tariffs The Cairo Airport Company requested that the new passenger departure fee be increased to US$15 per intemational passenger, and US$3 per local passenger. This increase is expected to be effective in early 24. Corresponding revenues would increase from about US$12 million in 23 to around US$53 million in 24. A new fee will be added to offset the costs of installing a security device at weighing counters (US$l per international passenger and US$.8 per local passenger). Because the private management company is expected to make better use of existing and planned commercial spaces, the economic projection assumes commercial revenue per passenger will grow from its current level of just below US$2 to US$5. Revenue from other sources will be based on unchanged rates. The planned tariff increases are substantial, but they remain market-based. Expenses Additional working expenses would be incurred as a result of TB3 operations. Operating and maintenance costs other than labor are assumed at two percent of the investment cost. Since TB1 and TB2 will lose traffic to TB3, another assumption is that their working expenses, other than labor, would drop by 2 percent in 28, then grow again by one-third of traffic growth. No incremental labor costs is assumed, as CAC is grossly overstaffed and opening TB3 would provide an opportunity to redeploy staff among facilities. Costs associated with the private management contract are also considered. The management contract is assumed to run for ten years beginning in 25, and the fee is calculated as eight percent of revenues, after deducting the Aviation Fund s share. It is hrther assumed that the management contract would respectively cover 4 percent and 66 percent of CAC activities before and after opening of TB3. Once the management contract expires, CAC would need to strengthen its own management team in order to assume operations, and related incremental costs are assumed at one-third of the private management fee. Benefits It is assumed that benefits would come from the following sources: Existing tmfjic. The ten million passenger that could be received in Cairo without the project would benefit from an improved level of service once TB3 is opened. The tariff increase will also apply to this traffic, but the incremental tariff cannot be construed as equivalent to the improvement in service levels as it is first and foremost a correction to a lower than market tariff. Direct measurement of benefits is a challenging task, given the paucity of information available. Aircraft will have faster turnaround times and lower costs, albeit to an extent that is difficult to ascertain, and 63

64 the economic analysis takes the view that only those airlines using Cairo as a hub would really benefit. Since Egypt Air is not foreseen to fulfill this function, no airline benefit is accounted for. Passengers would also spend less time waiting. A 3-minute gain by passengers and, conservatively assuming that saved time will be used for leisure by most, one-third of an average household revenue per hour of US$l would be saved. Acknowledging uncertainties surrounding such estimates, switching value of this parameter have been used to gauge its degree of realism. m Additional traffic. Traffic that would not come to Cairo because of current capacity bottlenecks would generate benefit based on the tariff that would apply to them (close to US$ 1 per passenger, excluding incremental revenue from commercial functions). This charge is consistent with consumers willingness to pay based on the regional market features, and can be used as a proxy of benefits generated by the project. m m Incremental commercial revenue base. More space would be created for use by commercial activities. The revenue base would also be expanded as a result of more commercially oriented management brought in under the management contract. The economic analysis assumes that the commercial and rental revenue earned by CAC would be raised to US$5 equivalent per in-and-out international passenger from an estimated revenue of US$1.8 under current conditions (incremental revenue of US$3.2 per in-and-out international passenger). Revenue netted by Egypt from tourism. Without the project, tourist traffic would be much less. Without the project, not all tourists lost to Cairo would be lost to Egypt, since visits to Cairo are often combined with visits to other places within the country. The assumption is that: (a) Egypt is netting five percent of total spending by tourists (estimated at US$8 per visit in 21, updated to US$l,OOO at present, then reduced to US$87 tax free amount); (b) two-thirds of lost tourists would still visit Egypt, meaning that only one-half of spending by tourists would be lost without the project; and (c) the net benefit to Egypt of tourist (namely US$22) is then applied to half of in-and-out tourist traffic. Results Based on the above assumptions, the economic rate of return (ERR) is 16.2 percent, and the net present value (NPV), discounted at ten percent, is US$252 million. 64

65 Table 5A. Economic Evaluation of TB3 in Cairo year Initial O&M Benefits on: Inv. Cost added existing traf Added traffi Tourism Commerce.o.o.o.o.o.9.o.o.o.o 6.o.o.o.o o.o.o.o o.o.o O IRR= Net Benefits O % Sensitivity Analysis A sensitivity analysis was carried out, testing key assumptions to verify by how much below the base case scenario they would have to fall to bring the ERR down to a lower limit of ten percent. Results are as follows: Annual traffic growth would have to fall to 1.75 percent; Investment costs would have to increase by some 7 percent; Not accounting for time savings would still produce an ERR of 12 percent; Not accounting for commercial revenue gains would still produce an ERR of 12 percent; and The two last benefits would have to be overestimated by a factor o f three for the ERR to drop to ten percent. In short, the proposed investment at CAI has a robust economic justification. The feasibility study submitted by EHCAAN is in fact a financial economic study. It finds a higher 2% financial rate o f return for CAI because it accounts for benefits what amounts to economic transfers. 65

66 ~~ 2 B. Economic Evaluation of the New Sharm El Sheikh Terminal Background Owing to its climate, beaches, coral reefs and reputation as one of the best diving destinations in the world, Sharm El Sheikh has become the major seaside resort in the Sinai peninsula. Development of tourism started in the mid-l98s, and the area now has, some forty hotels, including five star hotels, and has around 3, rooms available. The neighboring small harbor of Sharm El Moya is an active yachting center. Air transport is the most common transport mode used to access the resort. The first terminal building at SSH was commissioned to traffic in With 4,5m2 of space available, it was designed to handle 6 passengers per hour. This capacity was extended twice, once in 1998 and again in 22, to reach 9,m2 at present and a peak capacity of 1,6 passenger per hour, which roughly corresponds to maximum traffic of around 2.5 million passenger per year under current traffic patterns. The apron can receive up to 27 aircraft, and the airport is open to traffic around-the-clock. Traffic Structure and Evolution After CAI and Hurghada, SSH is the third biggest airport in Egypt in terms of passenger volumes. International traffic accounts for over 7 percent of all traffic. Passenger traffic grew from around 25, passengers in 1993 to 981, passengers in 1997, for an annual growth rate of 4.7 percent. From 1997 to 22, traffic continued to grow at a fast annual pace (24.5 percent), notwithstanding the pauses experienced in 1998 and 21. As shown in Table lb, traffic growth has been due mainly to the increase in international non-scheduled services. With upto four flights handled at the same time, the airport s terminal is chronically overcrowded and the level of service offered to passengers has much deteriorated in recent years,. There is an obvious need for additional capacity. Table 1B. Tr t - fir Development at SSH Between 1997 and 22 growth total intemational domestic scheduled non scheduled scheduled non scheduled % % % % % n.a A new terminal with capacity to accommodate 2,5 passenger per hour will be built to overcome existing constraints. It will bring the airport s overall capacity to some six million passenger per year at normal service standards. The existing runway has enough reserve capacity to handle this increased traffic. 66

67 Traffic Forecasts The traffic development potential was studied on an independent basis by several consultants in FY22, including Copenhagen, Airport/MISR, SONS/Dragados, ABB/Skanska/Samerete Egypt, and APDMNincilAlkadOrascom. Their estimates for 22 were in the 4.4 million to 5.3 million range. ECG revised those estimates upward in 23 and projected that traffic in 22 would be around 6.3 million passengers. Table 2B. Traffic Forecasts for SSH, 25 to 22 (x 1, passengers) Year Copenhagen & a ABB & al APDM & al ECG Source: EAC (23). ECG s forecast is consistent with the average growth of air traffic in the Middle East, as shown in Table 3A. Based on the fact that the Govemorate has plans that would make Sham El Sheikh the largest resort in the Sinai and lead to a 42 percent increase in the number of hotel rooms by 217,2 and acknowledging the recent growth in airport traffic, previous forecasts are too conservative, and the economic analysis has been based on annual growth rates in intemational and domestic traffic at five percent and 2.5 percent respectively. Unhindered by airport capacity, overall traffic would reach six million passengers by 216, which is an average annual growth rate o f 4.7 percent. Airport Tariffs SSH earned revenue of about LE36 million in 22, with the following breakdown: fl fl fl fl LE7. million in navigational fees (1 9 percent of total); LE12.5 million in passenger departure fees (35 percent of total); LE1 1.O million in landing and other airside fees (3 percent of total); and LE5.5 million in concession fees and rentals (16 percent o f total). Airport fees, excluding navigational fees, amounted to LE29 million, or US$1.3 per in-and-out passenger (including US$.7 from the departure fee, but excluding commercial revenues, which average no more than US$.3 per in-and-out passenger). The projection assumes that the passenger departure fee will be raised as in Cairo to an average of US$11.5 per outgoing passenger. As in the case of CAI, the additional space and commercial dynamism to be brought in by the private operator is expected to expand the commercial revenue base and raise an incremental US$.7 per in-and-out passenger. The same fee of for use of the weighing counter will be added (US$.95 on average). 2o See IBRD Report Nr.2159-EGT: Egypt. Gulf of Aqaba Environmental Action Plan November 2 (table 2.1, page 7). 67

68 Investment Costs The project investment package, excluding taxes (only applying to equipment), but including physical contingencies, amounts to US$54.5 million. Construction of the new terminal will span two years, and expenditures per year would be US$21. in 24, US$32.8 in 25 and US$.7 in 26. No renewal of equipment is foreseen within the project s analytical timeframe (ending in 225). A residual value equivalent to 4 percent of project investment costs corresponding to the infrastructure (consistent with a 4-year economic life) is credited in 225. Main Assumptions Used Traffic Expenses With the project, the intemational and local traffic would grow annually by five percent and two percent respectively. In addition, intemational traffic would grow by 33 percent within two years after commissioning of the new terminal to traffic. Based on these assumptions, the airport s new capacity o f six million passenger would be saturated by 215. Domestic traffic would grow from.6 million passengers in 25 to nearly.75 million in 215. Corresponding data for intemational passenger are 2.4 million and 5.25 million passengers. Once the new capacity is saturated, local traffic growth would fall to.5 percent per year, and intemational traffic would decrease slightly, which would be consistent with the overall capacity constraint. Without the project, existing capacities would be saturated in 24, and overall traffic would stagnate. Domestic traffic is still assumed to grow by one percent p.a. until 215, and by.5 percent thereafter. International traffic would decrease from close to 2.5 million in 24 to 2.2 million in 225. Costs are expressed in constant dollars. Working expenses, which are limited to operation and maintenance of the new terminal building, are estimated at 3.5 percent of investment costs, including labor (unlike Cairo, SSH is not overstaffed and will need to hire additional staff). Based on the assumption presented by EAC, the private management fee would add US$1.8 million to the first year s cost of operation, and would increase in relation to traffic through its ten-year duration. From 216, one-third of that cost is held constant, as SSH internalizes part of the costs to upgrade management. Additional traffic. Benefits are based on an average revenue of US$9 per passenger, excluding incremental commercial revenue. 68

69 m Expansion ofthe commercial revenue base. The without project intemational traffic would spend an incremental US$.7 per passenger, and the incremental intemational traffic would generate revenue of US$1 per passenger. Revenue netted by Egypt from tourism. Average spending by tourist is taken as 75 percent o f the one calculated for CAI, or some US$65 net of taxes. Revenue netted by Egypt is five percent of average spending, and only twenty percent is deemed lost without the project (meaning that 8 percent of tourists would go to another seaside resort anyway). Time savings. Most passengers come to vacation, and time lost in transit has no impact on economic production. Results Based on the above assumptions, the economic rate of return (ERR) is 27.6 percent, and the NPV, discounted at ten percent, is US$122 million. Table 3.B provides the flow of costs and benefits. Given the high ERR, which is not surprising for an airport project dealing with tourism, no sensitivity analysis is warranted. Table 3B. Economic evaluation of TB3 in Sharm El Sheikh rear Initial O&M benefits on: Net invest. Cost additional Existing traffic Added traffic Commerce Benefits ERR= 27.6% NPV 1%:

70 C. Financial Analysis of Cairo Airport Company (CAC) Past and Current CAC Performance Accounts produced for FY21 through FY23 show CAC as a profitable enterprise. The unified accounting system used in Egypt is close to standard international accounting, yet includes presentational specificities (e.g. calculation of virtual capital costs in relation to equity, and virtual rental costs based on land owned by the company) that required some retreatment of data. Changes in the distribution of gross revenues between CAC and the Civil Aviation Fund were brought about by Law No. 93 of June 23. Whereas sixty percent of the passenger departure fee and fifty percent of the parking fee would accrue to the latter, the new system provides CAC to pay thirty percent of its gross revenue from airside activities (except parking), and repayment by the Fund of 55 percent of what it collects in support of CAC s development program (the actual Fund s share of gross revenue is therefore limited to 9.4 percent). CAC applied for an increase in the passenger departure fee and the creation of a weighing counter fee, as mentioned in the economic analysis. Both fees are expected to be collected at abovementioned rates beginning in 24. CAC employs close to 4, staff, but only needs one-third of this amount. However, its compensation policy keep labor costs to stay at no more than onethird of working expenses. Annual depreciation is low reflecting the lack of large investments in recent years and the predominance of aged assets. In FY23, the outstanding long-term debt stood at LE1 18 million and represented no more than 14 percent of CAC s equity. Both the low depreciation and interest payments contributed to relatively large profits, which increased from LE59 million in FY21 to LE68 million in FY23. About 75 percent of after tax income is distributed. Of the remaining 25 percent, up to five percent goes to the legal reserve and up to twenty percent to other reserves. Taxation is normally calculated at 42.5 percent of benefits, but some items are exempt from taxes, and the actual taxation of benefits is around one-third. CAC does need to enlarge its cash generation, which the requested tariff increase would achieve. Main Assumptions Used in the Financial Projection A financial model, linked to the economic and the project cost models, was developed to project CAC s future financial performance. The revenues collected by CAC are generated from airside and landside activities. The former include aircraft landing fees, airport parking and waiting charges, passenger (departure) fees, disembarkation fees, loading bridges, handling charges (ground and ramp), cargo handling, and heling fees. The latter are generated from duty-free shops, restaurants, car parking, rental (counter) space for airlines and other commercial operations, and entrance fees from well-wishers. Main assumptions used are as follows:. Higher rates for passenger departure and weighing counter fees effective in 24. No other tariff increase is envisaged throughout the projection period. However, some 64 percent of revenues (airside) are payable in foreign currency. Based on the Bank s projection of local and foreign inflation, the Egyptian Pound is expected to depreciate against the US$. These exchange rates are used for conversion in Egyptian Pounds of foreign currency denominated tariff. 7

71 ~ ~ Revenues are based on traffic growth assumptions used in the economic analysis. Commercial revenue will rise for several reasons: (i) rental rates will increase by two percent annually to partly compensate for inflation; (ii) rates will be pushed up by 15 percent in FY28, when larger and better quality commercial spaces become available; and (iii) recent contracts signed for parking, as well as other contracts to be signed prior to completion of project investments will allow physical expansion of activities from an index of 1 in 23 to an index of 115 in 27. The activity will expand by 74 percent following commissioning of the new terminal. These assumptions entail that commercial revenues will increase from about LE1 million in FY23 to around LE25 million in FY29. Labor costs would increase by about ten percent p.a. Other working expenses will increase in relation to inflation and (in part) to growth in traffic. When TB3 is commissioned to traffic, operating and maintenance costs (net of labor) are added (two percent of the investment). 75 percent of benefits are distributed the year after they are earned. CAC would borrow the equivalent of LE1.9 billion from the Bank (2.5 percent interest, and 12 repayment annuities following a 5-year grace period). In addition CAC would pay a.75 percent commitment fee on the undisbursed loan amount. CAC will incur foreign exchange losses in relation to the Bank Loan. Provision for such losses are included in CAC's balance sheet. CAC plans to borrow from the National Investment Bank to finance local costs. Lending terms include a 2-year period of grace and 1 repayment annuities. Working capital management was relatively adequate in past and current years and the faster collection of invoices assumed here has minor financial impacts. Results of the financial project are shown hereafter Table 1 CAC Income statements: FYOl thru FY3 (actual) and FY4 thru FY9 (i (in EP million) actual actual likely forecast forecast forecast forecast forecast forecast Operating revenue Labor costs Fund's share Management fee Other expenses Depreciation Operating surplus Interest Net non operating Rev Pre-tax income Tax Income after far Ratios working ratio Labodworhg expense

72 Table 2 Total gross assets Accumulated depreciation Net fmed assets Work in progress Investments Total net fixed assets Current assets Cash in bank & hand Total assets Equity Annual net income Long & medium term debt Current liabilities Total liabilities Ratios current ratio Debt to equity Rem on net fixed assets CAC Balance sheet: FYOl thru FY3 (actual) and FY4 thru FY9 (forec: (in EP million) actual actual actual forecast forecast forecast forecast forecast forecast % 14% 15% 57% 58% 49% 24% 15% 13% Table3 CAC Funds flow: FYOl thru FY3 (actual) and FY4 thru FY9 (forecast)- in EP million actual actual actual forecast forecast forecast forecast forecast Gross cash flow Borrowings Others Total sources Investments Debt service Distribution Working capital increase Total applications , Variation of cash Cash beginning of year Cash end of year Debt service coverage ': The above statements indicate that CAC will maintain a healthy status throughout the projection period. Nonetheless, standard ratios were retained as project indicators which are (i) a current ratio of at least 1 and (ii) a debt service coverage ratio of no less than 1.3. These ratios will be calculated starting FY7 when the company's FMS development will start generating fully reliable data. 72

73 Performance of EAC Operating revenue Labor costs Other working expenses Depreciation Interest Funds share Total costs Net income Working ratio D. Financial Analysis of Egytian Airport Company (EAC) EAC owns the Sharm El Sheikh airport and its overall financial performance is bound to influence project implementation and sustainability in relation to this airport. Whereas CAC has been an ongoing business for many years, the EAC was recently created and has not yet completely sorted out its inventory of assets, complications arising from EAC s regrouping other Egyptian airports. The financial analysis of past and current data is limited to FY23, as this is the first year for which relatively reliable accounts are available. While airports under EAC s control handle a combined traffic similar to that of CAC, EAC staffing is much lower with around 1,3 employees at present. EAC also benefits from Law No. 93 of 23, which provides more freedom to set tariffs and, beginning in January 24, revenues are expected to double when departure fees for international passengers will increase from US$5 per passenger to US$15 per passenger (abou LE and LE respectively at present). On the one hand, EAC runs at lower costs as it mostly handles domestic and charter traffic. At the same time, EAC faces high development costs given that strong growth in traffic will necessitate faster construction of larger facilities. Although not yet finalized, EAC s income statement for FY23 shows a net income of LE1 1.9 million, which is quite satisfactory. The higher tariff that will soon apply will triple EAC s capacity to generate cash, and allow EAC to finance the costs of planned expansions. Table 1 shows the evolution of the income statement over FY4-FY8. EAC is expected to generate substantial benefits roughly equivalent to around 3 percent o f its yearly turnover. The working ratio would stay below.2 which is quite low. Table 1. EAC. Summary income statement (FY23 thru FY28) In LE million IFY23 FY24 FY25 FY26 FY27 F28 I Table 2 shows how the balance sheet would evolve over FY4-FY8 and that the indebtedness would remain at moderate level throughout the period despite increased resort to borrowings to finance the development of Sham El Sheikh and other airports (the debt to equity ratio would peak at 34:66 in FY27). 73

74 Table 2. EAC. Summary balance sheet (FY23 thru FY28) In EP million IFY23 FY24 FY25 FY26 FY27 F28 Net fixed assets Work in progress Investments Current assets Cash in hand & bank Total assets Capital Government subsidies Reserves Annual income LT commitments LT & MT borrowings Current liabilities Total liabilities Current rat io 1.I Finally, as shown in Table 3, EAC will be able to finance its sizeable investment program and still strengthen its cash position. The debt service coverage ratio would bottom out at 1.9 in FY25 then rise above 2 in subsequent years. Overall, EAC should be able to maintain a healthy financial status during and after implementaton of the investment in Shann El Sheikh. Table 3. EAC. Simplified cash flow statement (FY23 thru FY28 In LE million lfy23 FY24 FY25 FY26 FY27 F28 Cash from operations Other net sources Interest Borrowings Total inflow Investments Debt service interest repayment Increase in working capital Total outflow Increase (decrease) of cash Cash beginning of year Cash end of year Debt service coverage The above statements indicate that EAC will maintain a healthy status throughout the projection period. Nonetheless, standard ratios were retained as project indicators which are (i) a current ratio of at least 1 and (ii) a debt service coverage ratio of no less than 1.3. These ratios will be calculated starting FY7 when the company s FMS development will start generating fully reliable data which as stated earlier is more needed for EAC than for CAC. 74

75 Sharm El Sheikh Airport (SSH) Although SSH is part of the EAC, it is the site where the second project investment will be carried out, which raises the question of whether or not the airport would make a positive contribution to EAC. To address this question, a more cursory analysis was developed, which consisted of developing an income statement and simplified cash flow statement (the latter does not include increases in working capital). The main assumptions used in the financial analysis are as follows: Revenue will grow in relation to traffic growth (as assumed in the economic analysis) and the higher tariff (departure passenger fee,weighing counter fee). They will also increase as the main source of revenue is priced in US$ which is expected to appreciate against the Egyptian Pound. Revenue from commercial services will rise from tariff adjustments to compensate for inflation of around four percent p.a. and from a tripling of activity after the new terminal s opening in 26. Labor costs will increase by ten percent annually until the new terminal s opening. Staffing is then assumed to increase as a proportion of the new to the old capacity multiplied by a reduction coefficient of.6 (not all positions will need to be duplicated). Other working expenses will increase according to growth in traffic (one-third of traffic growth) and inflation until opening of the new terminal, when they will increase by 5 percent. The contribution to the Aviation Fund was stated by EHCAAN as seven percent of revenue. In 25, the aiport will pay a management fee to the private operator, calculated as seven percent of revenue. Project investment costs including contingencies are estimated at US$6.6 million (EP391 million). The portion of the Bank Loan to be used for SSH is around US$42 million (LE274 million). Foreign exchanges losses will be incurred and are recognized in the financial projection. Although the Bank Loan would be serviced by EAC, the assumptions on the grace period, rate of interest, commitment fee and repayment annuities are the same as for CAC. The following table presents the results of the financial projections, and confirms that SSH would be a net contributor to EAC. 75

76 Sharm El Sheikh. Notional financial st, ments (FYO3-FYOS) -in EP million - I YO3 FY4 FY5 FY6 FY7 FY8 A. Income statement Passenger departure fee Landing and Parking fees Weighing counter fees Commercial services Sub total Labor costs Other working expenses Aviation fund share Private management fee Sub total Depreciation Provision for f.e. losses Net operating revenue Interest Pre-tax income Tax Net income B. Fund flow statement Cash from operations Borrowings sub-total Investments Debt service : interest principal sub-total Excess of sources Debt service coverage O Projected Funds Flow Statement for EHCAAN EHCAAN is a holding and its financial status hinges on that of its affiliates. The above analyses cover two of them, CAC and EAC. The other two affiliates (NANSC and AVIT) have not been reviewed in detail as the main one (NANSC) is not involved in project implementation and the other (AVIT) is of marginal importance. The failure of one of these two affiliates would not affect the financial status of CAC and EAC which are independent. EHCAA s projected Source and application of funds statement is shown hereafter. 76

77 EHCAAN Source & Application of funds (23-28) In LE million Source of funds CAC EAC AVIT NANSC Other revenues Total sources Application of funds Working expenses Investment Total applications Net flow Cash beginning of year This statement shows that EHCAAN will generate substantial cash from its four affiliates over the period. The statement is incomplete as it does not show any inflow and outflow related to borrowings and debt servicing because EHCAAN will get from each of its affiliate the funds it needs to service the debt assigned under the Project Agreement. CAC and EAC were shown capable to service their respective debt and the positive contribution of AVIT to EHCAAN suggests that it will also be able to service its own debt which will be limited to the IT equipment. The large cash surpluses accumulated by EHCAAN will be enough to service the small AVIT, should AVIT fail to meet its commitments. Fiscal Impact Since the sector s restructuring in 23, both the CAC and the EAC have been corporatized. The assessments indicate that there is a strong likelihood that once completed, the revenues generated by both new terminals will be sufficient to cover the incremental operating costs and debt service requirements of the project. As such, financial support from the EHCAAN is not envisaged. On the other hand, once the terminals become operational, the EHCAAN stands to benefit from an increase in taxes that will be generated by the capacity to accommodate ever-increasing volumes of passenger traffic, and from better exploitation of commercial activities under the private management contracts. 77

78 Annex 1: Safeguard Policy Issues E G-AIRPORT DEVELOPMENT PROJECT Environmental Safeguard Issues. The Project has been classified as a Category A as terminal buildings and new run way will produce impacts from noise and air pollution that will potentially be significant for a number of people living in residential areas beside the airports. These populations may also be affected by induced impacts, such as an increase in traffic congestion. It should be noted that there will also be a number of nominal benefits resulting from these projects, including improved waste management, implementation of a noise and air quality monitoring programs. The major environmental issues that can be mitigated are: Air Pollution. The results of model calculations of emissions and concentrations of nitrogen oxides (Nox) carbon monoxide( CO), hydrocarbons (HC) and volatile organic compounds (VOC) around the two airports have indicated that the contribution from the airport on a local and regional scale is small. The emission rates for SO2 from aircraft operations is normally only five percent to ten percent of the NOx emission rates dependent upon the fuel quality. It has also been shown that the total emissions from aviation normally do not contribute much to national total emissions. Noise. Noise generated from the operation of TB3 itself will unlikely be a significant environmental and social impact for the surrounding residential areas, compared to other noise generating activities at Cairo Airport, i.e. aircraft movements. This is largely due to the fact that the TB3 facility itself will emit little noise and Noise Sensitive Receivers (NSRs) are some distance from the TB3 facility. The level of noise at some locations in SES, however, will exceed the limits as prescribed by Egyptian and International Laws. The Project will, therefore, establish a noise monitoring network and will enforce noise by regulating the traffic and landing and take off hours of aircraft. Traffic. The new Terminal Building 3 will increase the airport s capacity by some 11 million passengers per year. Subsequent growth in airport traffic will result in an increase in the airport s vehicular traffic, thus affecting the performance of both the airport itself, in terms of available parking spaces and entrance/exit gate capacities, and the main access roads. The future parking demand and entry/exit vehicular facilities fall broadly within the proposed capacity of the new terminal building and will be sufficient to accommodate the forecast future traffic. It is only around year 22 that additional booths would be required. During the operation phase of SES, a traffic conflict will occur at the airport gate. This will be a probable cause of congestion that can lead to delays and traffic congestion that could cause a delay of twenty minutes per day for the traffic volume. The delay value could reach of 52 minutes per day by the year 22. Two dimensions of mitigation measures are, therefore, proposed to solve the anticipated traffic congestion - short-term measures that aim at limiting the direct impacts o f airport traffic on the airport access roads, and long-term measures that would look at ways of minimizing the impacts of both airport and background traffic on the airports main entrances and access roads. The 78

79 project will finance a strategic environmental assessment as part of the TB3 master plan to propose mitigating measures to reduce traffic congestion. The main findings of the EAs, as well as the mitigating measures covering the main components of the project, are summarized in the Environment Management Plans on the following pages. Social Safeguard Issues. Within the context of the environmental assessments (EnA), two concise and distinct Social Assessments (SoA) were undertaken, as were stakeholder consultations, for the third terminal at CAI and the new terminal at SSH. Stakeholders included households of all socioeconomic conditions living in neighbourhoods surrounding the airport, businessmen, representatives of the private sector, particularly tourism, and airport employees and officials. Fifty-seven percent of the respondents welcomed the proposed extension because of the potential for employement opportunities, new sources of livelihood and the improved services it would bring to their businesses and in their neighbourhoods. The remaining fortythree percent, although recognizing the positive aspects of the extension, feared an increase in noise and air pollution. For the communities surrounding CAI, the issue of increased noise levels is their number one concern. Forty three percent of the respondents in Cairo do not believe that protective measures will be taken by the public authorities to protect the communities against the increased noise that the will be created as a result of the new terminal (in SSH, 16 percent of respondents voiced this concern). The matter of increased noise levels is addressed in the Environmental Management Plans. The SoA for conducted for'ssh revealed that 84 percent of the respondents welcomed the proposed new terminal, where the situation is different from that of CAI. The airport is much smaller and is not over-staffed. Airport workers are particularity supportive of the project and believe that the new terminal will create job opportunities. Furthermore, consultations with airport employees, officials and businessmen helped identify security and design issues, as well as previous mistakes. These lessons were taken into consideration in the preparation and design of the new terminal. In terms of social safeguards, OD 4.2 and OP respectively related to indigenous peoples and cultural property are not applicable, as both sites are public lands, are not inhabited, and are not known to have archeological or cultural values. Three Land Acquisition Assessments (LAA) were prepared for the project (two for TB3 and one for SSH). The results show that the sites designated for the construction of a third terminal and an additional runway at Cairo International Airport are state owned, have been fenced for the last twenty years, and legally transferred to the Cairo Airport Company. The future site of the third terminal is presently used for public parking, and provisions are being made to provide an alternative parking site. The site for an additional runway is not used or leased for any economic activity. Both sites are located within CAC's overall property and are free of claims. The LAA for the new terminal at Sharm El Sheikh Airport (SSH) revealed that the land is state property legally transferred to the Egyptian Airports Company (EAC). It is fenced, adjacent to 79