Not many Egyptians had paid much attention to Ras Al-Hekma before early February, when news leaked of an impending multi-billion dollar deal to sell the prime coastal area to the United Arab Emirates. For most, Ras Al-Hekma was merely one of Egypt’s few remaining unscathed heavens on the Mediterranean, boasting pristine turquoise water and white sandy beaches, foregrounded by lush olive and fig groves. Very few thought the area could be exploited to bail Egypt out of one of its worst economic crises in recent history.
By the end of February, both governments in Cairo and Abu Dhabi signed a $35 billion partnership agreement to develop the 40,600 acre area, located 350 km northwest of Cairo. The deal helped alleviate a portion of Egypt’s foreign currency liabilities, and paved the way for a fresh agreement with the International Monetary Fund (IMF) after it provided officials with a cushion to devalue the currency by nearly 40 percent against the US dollar, a key IMF condition.
Authorities in Cairo hailed the deal, the biggest single foreign direct investment in the nation’s history, as a “model for future investment partnerships that can bring substantial revenues,” and a turning point for the Egyptian economy. Prime Minister Mostafa Madbouly said the project is expected to attract “a minimum of $150 billion” during the implementation phases, according to state media.
The deal itself is a complicated arrangement that would see the government of Abu Dhabi, through its sovereign wealth fund ADQ, paying Egypt’s main state-run urban developer, the New Urban Communities Authority (NUCA), $24 billion over about two months for “development rights” of the land. NUCA will provide the land and keep a 35 percent share in the project. Additionally, an $11 billion UAE deposit at the Central Bank of Egypt will be released for investment in prime projects across Egypt.
The official statements from both the Egyptian and Emirati sides left out key details pertaining to the deal and its actual impact on the economy
The official statements from both the Egyptian and Emirati sides left out key details pertaining to the deal and its actual impact on the economy. This article will attempt to break down, explain, and contextualize the agreement’s urban development aspects, which are crucial to understanding its economic impact.
How big is the project?
According to Prime Minister Madbouly, the land in question is the largest ever to be offered by the government for development. To put this into perspective, the size of New Ras Al-Hekma is almost equal to all urban development land held by the top 10 real estate developers in Cairo—land they accumulated in well over a quarter of a century. It is also equal to the New Administrative Capital’s first development phase that includes the government district, and has taken nine years to build.
The land is also five times the largest single urban land sale in Egypt’s history, when NUCA sold 8,000 acres to the Egyptian-Saudi Talaat Moustafa Group in an infamous transaction under deposed President Hosni Mubarak back in 2008 to build the Madinaty project. Only land hungry agriculture desert development parcels are the same size or larger. The Saudi Al-Rajhi Investment group owns 100,000 acres in Toshka, near Egypt’s southern border, and the Emirati Al-Dahra owns 40,000 acres in Toshka and nearby Oweinat.
Partnership mechanism
Prime Minister Madbouly said the deal followed standard NUCA practice of co-development: the state assigns the land to the developer and “receives a cash advance and a share of the project’s profits to maximize [the value of] its assets.” Madbouly later emphasized how this “does not represent a sale of assets, but rather a partnership,” one where the Egyptian government is the junior partner.
Co-development deals help developers kickstart their projects by deferring land costs’ payments, while NUCA ensures its revenues are inflation-proof as in-kind payments could be sold at market prices at the time of receipt. Co-development also means that the government is a partner in the risks involved, and very well stands to lose if the project fails. Of course, NUCA, as the main city developer and regulator in Egypt, is also in a position to aid the project should it face trouble.
Co-development also means that the government is a partner in the risks involved, and very well stands to lose if the project fails
The co-development system started with Talaat Moustafa group in 2008 on the Madinaty project mentioned above, where NUCA received a 7 percent share in the project’s units. That figure, however, was suspiciously low and led to an infamous litigation case that saw the original deal annulled. When similar deals were offered during the 2015’s Economic Conference in Sharm El-Sheikh, NUCA had learnt its lesson raising revenue share portions over fourfold.
So in the case of New Ras Al-Hekma, how will the billions of dollars involved in the project be utilized?
Two deals in one
The Egyptian cabinet’s statement clearly stated that the $35 billion figure is the dollar amount set to “enter the Egyptian economy,” and not necessarily the government’s coffers. The money will be divided into two tranches: $15 billion upon signing and $20 billion two months later. Of the $15 billion paid upon signing, only $10 billion is a fresh injection of cash. The remaining $5 billion is an existing UAE deposit in Egypt’s central bank that will be exchanged for Egyptian pounds to go toward ADQ’s (Abu Dhabi’s wealth fund) capital to invest into the project.
The $5 billion part is merely a virtual money deal; these funds are already inside the central bank as a deposit, counting toward Egypt’s foreign reserves as well as foreign debt. This amount will be reclassified from a debt position to a pure cash position that has no debt burden. Two months later the UAE is due to transfer a further $14 billion toward the down payment, as well as release another $6 billion deposit in the same manner as the first, completing the $35 billion total deal amount.
In a significant departure from recent co-development deals, NUCA will be receiving money upfront, in addition to a share of sales down the line. And given that current co-development deals typically value NUCA’s share at around 30 percent, this would mean that the $24 billion that will be paid before the project starts would count toward the government’s 35 percent share of the potential profits the project is set to generate.
How much these profits are going to be is anyone’s guess as official statements have not mentioned them
How much these profits are going to be is anyone’s guess as official statements have not mentioned them. The only figures mentioned by the prime minister and ADQ are how the project is set to “attract over $150 billion in investments” over its lifetime. This is a very fluid figure which only estimates the amount of money that investors will spend on developing Ras Al-Hekma into a tourist resort. And given the dearth of detail on the nature of the development itself, it is hard to estimate what this figure entails.
Judging by other roughly similar projects where private companies developed relatively large tracts of land such as the Red Sea projects of Gouna and Port Ghaleb, ADQ may act as what is called a master developer; in which the company will invest in planning and subdividing the entire area, building essential infrastructure, while developing some of the sub-plots itself into hotels and tourist resorts. The large size of the area, however, makes it likely that ADQ will also be allowed to sell or lease out a significant portion of the land to other companies to develop.
Thus, profits from the New Ras Al-Hekma project will come from selling beach houses, renting hotel rooms, and selling or leasing out land. All of which are complex to calculate, but more importantly, can go well and generate a profit, or, can fail and make a loss. Here, NUCA is a partner in the success as well as the failure of this project.
In addition to the up-front payment of $24 billion, the second part of the deal involves the UAE’s deposits in Egypt’s central bank. Here, $11 billion worth of deposits will be released and converted into Egyptian pounds for ADQ to invest in Egypt, most probably as capital to redevelop Ras Al-Hekma. This will mean that $11 billion will be erased from Egypt’s foreign debt books, which is a relief for its government, as its foreign debt currently sits at a record high of $165 billion.
These deposits, however, were also used to shore up Egypt’s foreign currency reserves, currently standing at $35 billion. Given that the UAE’s deposits made up roughly one third of these reserves, the money might very well remain held by the central bank as such, leaving ‘only’ the $24 billion up-front payments to be used for public financing, or make their way into the commercial banking system.
Net dollar gain?
One crucial aspect to consider is that revenues from the sale of Ras Al-Hekma land are not net profits for the government. As with most partnership agreements, NUCA is responsible for building the main infrastructure in the land plots it sells or co-develops. It has, along with other government bodies, spent billions, some of which are in US dollars, to make the land eligible for sale, and may spend more. These investments need to be recouped.
Ras Al-Hekma is also different from other projects given its extremely remote location. The area needs new drinking water and wastewater treatment plants, which would cost NUCA tens of millions of dollars if it builds them itself. Not only that, drinking water will have to either be pumped from the Nile over 300 kms away or an expensive seawater desalination plant would have to be built. Prime Minister Madbouly also stressed on how the newly redeveloped coastal highway was widened to cope with the future traffic that the new developments along the coast will see. The government has also expropriated the olive groves and homes of local residents, and more stand to be relocated. Their compensation must also be factored in.
Ras Al-Hekma is also different from other projects given its extremely remote location
While most similar projects do not usually carry a heavy foreign currency burden, power and high speed transport do. New Ras Al-Hekma is planned to be a green city, powered by sustainable sources of energy, and Madbouly stated how it will mostly rely on the new $30 billion nuclear power plant being built in nearby Dabaa. He also emphasized how the $4.5 billion Ain Sokhna – Matruh High Speed Rail line is being built to bring people to the coast, with Ras Al-Hekma being one of the stops. Thus, a certain portion of these projects’ dollar costs and debts would need to be deducted from Ras Al-Hekma’s dollar intake.
Additionally, NUCA already incurs expenses in US dollars that count toward Egypt’s foreign currency deficit and debt burden. It has borrowed almost $3 billion from China to build skyscrapers in the New Administrative Capital, and $1.9 billion to build more skyscrapers in New Alamein, a new city 100 kms east of New Ras Al-Hekma—which incidentally also makes it a direct competitor, possibly threatening the earlier project’s profitability. This has led NUCA to sell land in dollars to cover its repayments, further eroding the pound’s value, or what columnist Mohamed Gad recently called “a moral assassination of the [Egyptian] pound.”
How many Ras Al-Hekmas can Egypt sell?
The Ras Al-Hekma deal was timed to bring some short-term relief to Egypt’s current economic crisis, which is the result of excessive state spending leading to a foreign currency crunch. And that is exactly what it is going to offer.
Real estate is both notoriously an unstable sector, and one that does not function as a strategic investment. Compared to industrial production, on the long run, real estate will not contribute to Egypt’s foreign currency imbalance, whether by substituting imports or boosting exports. A good portion of the investments that will be made in Ras Al-Hekma will originate in Egypt in local currency. A significant part of the sales—whether of land, chalets, or hotel room nights—will also be to locals. While the coastal resort nature of the redevelopment has an advantage over projects in other areas, the projections of such sales may be over ambitious. In the end, how many Ras Al-Hekmas does Egypt have to sell to keep its economy afloat in the longer term?
Yahia Shawkat is the co-founder and research coordinator of the 10 Tooba research studio in Cairo. He authored Egypt’s Housing Crisis: The Shaping of Urban Space (AUC Press, 2020), and co-edited Nashtari kul shay’ (We Buy Everything), (Dar al-Maraya, 2022).