In 2022, Egypt’s President Abdel Fattah El Sisi ratified amendments to the Contractors Compensation Act, which allows builders who incurred losses on state projects due to macroeconomic headwinds to receive compensation from the government.
Although industry insiders have spoken favorably of the bill that is expected to help draw in some much-needed liquidity into the sector, it’s still unclear whether the bill will be a panacea for contractors struggling to keep up with rising costs.
By the end of December 2022, the cabinet assigned the Ministry of Housing to study the items of the urgent memorandum submitted by the Federation of Construction and Building Contractors, in which it calls for providing support and assistance to the sector companies after their business was affected by the high costs of building materials as a result of the liberalization of the exchange rate.
Builders asked for extending project implementation periods, as well as disbursing dues of some companies to enhance their financial solvency.
The memorandum included four main demands, the most important of which is granting an additional period of four months to contracting companies to adhere to the implementation timetable, so that they can avoid the consequences of the recent flotation decision. The federation also called for an urgent payment to be made from the contractors’ dues with the outsourcing authorities. However, most of the parties did not respond to this demand due to the lack of sufficient liquidity.
The memorandum also requested the Ministry of Housing to activate the preference law for local products, to reduce dependence on imported counterparts.
This is considered a multi-pronged crisis. Mohamed Sami Saad, Head of the Federation of Construction and Building Contractors, points out that the high cost of raw materials, previous import restrictions, EGP devaluation, and limited financing options have hammered the industry in recent months.
Some EGP 40 bn in Compensation
Saad says that given that the current headwinds are larger than those faced back in 2017, when the government first introduced the act, which ultimately disbursed some EGP 20 bn in compensation, the upcoming round of compensation is expected to be double that figure.
The bigger volume of government-led infrastructure projects in recent years, and their larger price tags, is one of the main factors that is expected to drive up how much compensation will be dished out this time around.
In this regard, the committee, affiliated to the Ministry of Housing, processing compensation claims needs to calculate compensation based on real average market prices of building materials.
Daker Abdellah, a federation board member, explains that the committee will conduct the calculations, ignoring the prices cited in statistics agency CAPMAS’ monthly bulletin, which tends to underestimate these materials’ prices.
In the same vein, Mohamed Abdel Raouf, a federation board member, states that issuing payments companies as soon as possible should be the committee’s primary objective, as these timelines are a major sticking point for many contractors who have begun work on their contracts yet are reeling under the pressure of delayed payments.
Would Amendments Ease Concerns?
The required amendments could bring some guarantees to companies working on projects that take less than six months to implement. In addition, they will ensure that these firms receive financial compensation.
Further, the updated law will ensure that projects affected by fluctuating building material prices during construction will be appropriately compensated for the increase in cost.
In this regard, Tarek Youssef, Founder & CEO of Concrete Plus, says that the issuance of the new Contractors Compensation Law, which is currently being discussed in the House of Representatives, will contribute to solving a major problem that the contracting sector is facing. Youssef adds that the sector is facing a number of challenges, including pricing differences resulting from the sharp change in raw material prices.
Contractors are willing to introduce a clause to the new law stipulating that only companies with active contracts are eligible for compensation.
Abdellah clarifies that the problem is that a large number of companies, for whom work has long been suspended due to late payments and FX shortages, have not seen their contracts renewed and could be at risk of being excluded from the compensation scheme.
In addition, moratorium on late fees could also offer a big hand, as the government should put late fees on pause for contractors working on national projects.
Abdellah points out that many projects require imported building materials that are not locally available, but the recent FX shortage meant there’s not much these companies can do to speed up their construction timelines, adding that the new law, in its current form, will not be enough to cover contractors’ losses.
Builders suggest that bringing a new authority tasked with setting rules and regulations for the construction of government buildings could be formed, instead of existing government agencies relying on big budget consulting firms.
There is a need for a new pricing scheme for existing projects under construction. The astronomical increase in construction costs in recent years requires projects still under construction to be re-priced. Projects need to be entirely reevaluated to find local alternatives for construction materials instead of relying on foreign models.
As regards e-payments, extending the cycle for electronic payments to run on a 50-day cycle, instead of the current 30-day cycle, could also give contractors a major break.
Companies are on a monthly cycle for repaying loans, paying salaries and keeping up with operating expenses, so making e-payments fall out of sync with these commitments would make matters easier for companies.