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Construction and operation of a new hydro-cracking/coking facility and ancillary units for the Egyptian Refining Company (ERC) adjacent to the existing refining units of the Cairo Oil Refinery Company (CORC). ERC will use low quality Atmospheric Residue from CORC as feedstock and produce 4.8 million tons per year of refined products for the domestic market.
The Bank is considering a Senior Loan to ERC not exceeding USD 150 millions, representing 4% of the total costs of the project. In addition, the Bank will propose to the sponsor an additional USD 100 millions under the African Financing Partnership (AFP) scheme, and will facilitate contact with other DFIs, such as the Islamic Development Bank (IDB) and JBIC. Given the current difficulties in the international banking market, the Bank will provide much needed funding for the project to reach financial close initially planned for September 2008. The project's economics will be enhanced through longer tenors, which the commercial banks are not willing to provide. Direct lending will ease liquidity constraints prevalent under the current guarantee structures provided by EIB and KEXIM. The Bank will ensure that the most stringent environmental, health and social standards are applied.
Country and Regional Priorities: The project is in line with Egypt's development strategy that prioritizes the deepening and modernization of its domestic industries by focusing on high value production and environmental protection.This project aims at producing refined products from an atmospheric residue locally produced. The project is truly a value addition project, improving the value chain in the oil industry which is one of the natural endowments of Egypt. The project financing structure conforms to Egypt's strategy for "smart financing" of infrastructure through PPPs.
ADB Priorities: This project is in line with the Bank CSP for Egypt that focuses on supporting infrastructure development, trade and economic growth.
Private Sector Operations Priorities: The project fits with the Bank's private sector operations (PSO) strategy to create new infrastructure to support business development and to demonstrate the benefits of public-private partnerships as a viable project financing model. ERC will be the first private sector refinery upgrade project in Egypt. It is a demonstration of public private collaboration. The private sector is providing the capital and debt financing for a much needed expansion/upgrade and the Government is focusing on the regulation and incentives to support the development of oil and gas sector. It is also in line with the Bank's counter-cyclical role amid financial crisis and global recession, helping the sponsors to close the financing gap and ensure the project implementation.
Overall Assessment of Strategic Fit: ERC represents an opportunity for the Bank to support the private sector development which is at the center of the country's development strategy. ERC is well aligned with the three sets of national, institutional and departmental strategic priorities. In addition, the project confirms the model of PPP as an efficient recourse for Egypt to finance public infrastructure, thus releasing more public financial resources to carry out poverty-reduction programs.
Economic Performance Currently CORC does not have the adequate technology to produce refined products out of fuel oil. As a result, this fuel oil is wasted, being converted into low-grade petroleum products, whereas Egypt is a net importer of many highly-enriched products. The Project will introduce the best available technologies in the industry, which will allow utilizing the feedstock (fuel oil) to its fullest capacity, and producing high-grade oil products domestically. Given the natural endowments of Egypt in carbon resources, Egypt should never have imported refined products. The project will correct the long and irrational situation. In this context, the efficiency of the oil and gas sector will be improved and created more value added for the entire economy.
The project will have a variety of economic impacts on the local economy. The project will create a large number of jobs for Egyptians, including 8,000 direct employments during construction and 700 permanent positions during operations, as well as jobs generated by government revenues derived from the project. The project will also have a significant impact on local industries which will support the construction and operation activities. The estimated amount of outsourced goods and services will be determined during appraisal and upon further analysis of the financial model . To promote local access to Project employment in both the construction and the operations phases, ERC and its contractors (GS and Mitsui) will produce transparent and fair employment policies and work with community NGOs on a skills audit of local communities. ERC will identify the skills that it needs for its construction and operations phases that could be provided as part of a community skills development program providing basic training in the communities through its Community Development Centers.
Environmental Effects: The Bank received the project draft ESIA prepared by WorleyParsons in November 2008. It is further being reviewed by the lenders Environment and Social Advisors (ERM). The final version should be available in January 2009. The project will be classified as Category 1. The environmental assessment and review will be done in conjunction with other DFIs involved in the transaction, especially EIB. ESIA standards and guidelines currently include those of the Egyptian Environmental Affairs Agency (EEAA), the International Finance Corporation (IFC) and World Bank guidelines, the European Investment Bank guidelines; and Korean EX-IM Bank Procedures and guidelines.
Stakeholder engagement and consultation have been carried out since the initial Project planning (2006-2007), and are an integral part of the ESIA and will continue during the construction and operational phases of the Project. ERC has developed a Public Consultation and Disclosure Plan which describes plans to ensure that engagement with stakeholders is an ongoing process throughout the life of the Project.
The new project will be 100% gas fired (i.e. no fuel oil in the refinery mix). The new products produced by ERC will have a 99.9% sulfur recovery technology leading to a reduction in air pollution and greenhouse gases from vehicles. It is estimated that the project will remove close to 93 000 T/year of sulfur currently released into the environment through burning fuel oil sold by the existing CORC refinery.
A major part of the Project is the implementation of various environmental improvements to the existing refinery CORC, including considerable reduction in greenhouse gas (GHG) emissions, replacement of old burners, installation of facilities to allow a Leak Detection and Repair Program and environmental monitoring equipment. Finally, the Project will provide a tertiary water treatment plant to CORC to improve/support its existing facilities. The impacts of the project on the climate change will be assessed during the appraisal.
Gender and Social Effects ERC will take a number of specific mitigation and management measures to ensure that the Project minimizes or avoids any negative impacts and maximizes positive benefits to local communities. These measures are being formalized into an Environment, Social and Health Management Plan (ESMP).
Private Sector Development and Demonstration Effect: This private sector project is providing the capital and debt financing for a much-needed upgrade project for an existing government-owned refinery, CORC. The development of this project is therefore seen as a crucial springboard for promotion of public private partnership projects and increased private sector involvement in the country to modernize the industrial sector in Egypt. Furthermore, this project ESIA will abide with the highest environmental guidelines, and will include a health baseline study to assess the health impacts of the project, making it a unique reference for future industrial projects.
Effects on Governments: The project will represent a Foreign Direct Investment to Egypt of over USD 2 billion. The net impacts on the government revenues will be analyzed during the appraisal by comparing two scenarios: importations of refined products and local production. Further analysis of the policy on price for oil products will be made to assess the end users benefits from this project, aside from the usage of less polluting refined oil products. The government will indirectly benefit from the dividends that EGPC will receive from its 15% equity stake in ERC. In addition, the state company EGPC will benefit by approximately USD 100 millions/year in avoided transportation/shipping costs as it will purchase refined products at lower price in the heart of the consumption center. Finally, being an import substitution project it will enable the government to strengthen its balance of payment, and free resources to focus the attention on much needed poverty reduction programs.
Effects on Macroeconomic Resilience: ERC participates to the private-sector led growth and modernization in Egypt as well economic diversification. This includes a focus on high value production, the implementation of environmental best practices of the industrialization process and the reinforcement of the economy's competitive advantages. This efficient import substitution project will strengthen Egypt position by reducing its dependency on imports of refined products. Foreign exchange savings will be generated by the project and the amount will be estimated in the due course
M'PENG BAYOI Daniel Constant - PISD2