Subject: Egypt’s National Railway is now open for business with the Private Sector

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                                         l  S H A R K A W Y   &   S A R H A N   L A W   F I R M

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                                                                                                                                                                                      Issue 105, 20 May 2018

Egypt’s National Railway is now open for business with the Private Sector
What is new?

The Egyptian Parliament has recently approved Law No. 20 of 2018, which amends certain articles of Law No. 152 of 1980, establishing the Egyptian National Railway (ENR). The effect of this recent amendment is to abolish State monopoly over the national railway system projects. The amendments give the private sector the legal pretext to be able to participate in railway projects. Other sectors that have recently undergone significant reforms are electricity (see here our newsletter) and gas (see here our newsletter).
What is the problem Law No. 20 of 2018 is meant to tackle?

Egypt’s railway system is among the oldest in the World. It was the second national railway to be developed after England’s, back in the 1800s. According to ENR, the railway system that was designed back in the 1950s to transport 10 to 12 million passengers annually is now used to cater for approximately 500 million passengers annually, without much change. It became a constant source of national frustration, with repeated deadly train collisions and constant complaints by passengers from its dwindling quality of service.
What are the figures?

Following the latest fatal train collision last February, the Government stated that it will commence implementing a comprehensive plan to revamp the national railway system. According to press statements by the Minister of Transportation last March, the Government allocated EGP 55 Billion for developing the railway infrastructure over a five years plan. Also, a new high-speed line connecting Red Sea Port Ain Sokhna with Mediterranean Alexandria Port is reportedly underway with a USD 4 billion.
Signaling the existence of political will to tackle the railway problem, President El Sissy stated that the railway system overhaul plan requires considerable investments of amounts between EGP 200 to 250 billion (app. USD 11 to 14 billion), which the Government does not have. The idea of allowing the private sector to participate in railway projects resurfaced and national debate about the need for a legislative amendment started.

What do you need to know about the amendments introduced by Law No. 20 of 2018?

ENR is a public entity competent to manage the national railway, which represents a public utility, in the eyes of the Egyptian administrative law.
Under Law No. 152 of 1980, the national railway system was entrusted exclusively to the ENR. This meant that ENR enjoyed statutory monopoly over the establishment, management, operation and maintenance of the railway system across Egypt. Even though Law No. 152 of 1980 provided ENR with the option to incorporate joint stock companies with third parties, ENR maintained its monopoly over the national railway system. There was also no legal pretext for granting concessions for private parties to build, manage, operate or maintain the railway system. 

In the new amendments introduced by Law No. 20 of 2018, ENR remains responsible for establishing, managing, operating, maintaining and developing the national railway system but is no longer exclusively entrusted with this mission. 

Under Law No. 20 of 2018, the ENR has the discretion, subject to the approval of the Minister of Transportation, to choose to incorporate joint stock companies by itself or in partnership with others to fulfill its purpose. The stocks of such company could be traded at the Stock Exchange, following incorporation. The FRA employees will however, have priority to own 10% of its shares. 

Most significantly, Law No. 20 of 2018 introduces a concession-based mechanism, allowing ENR to seek direct participation by private investors in developing the railway system. According to Article (4) ENR could grant aconcession to a private investor (individuals or a corporate entities) to participate in projects concerning the railway system. 

It is important to note the following about the concession route:
  • The private sector will be able for the first time to get granted a concession to build, manage, operate or maintain “railway utilities”. So, private sector participation is no longer limited to participating in establishing and operating new railway lines or systems only, as was the case with the amendment previously introduced by Law No. 149 of 2006. 
  • With the aim of making investment in the railway system attractive to private investors, Law No. 20 of 2018 provides ENR a considerable level of freedom when negotiating and selecting the concessionaire. In this context, Law No. 20 of 2018 provides that the process of granting the concession shall not be subject to the Public Enterprise Law No. 129 of 1947, and Law No. 61 of 1985 Concerning Concessions for the Exploitation of National Resources (these are the laws normally governing granting concessions for public utilities). It also excludes the concession process from the scope of application of the Tenders Law No. 89 of 1998, albeit being the primary law governing public procurement. However, the process of selecting a concessionaire must be carried out in a transparent and public manner. 
  • The concession will be issued by the Prime Minister following the approval of the Cabinet of Ministers and upon the suggestion of the Minister of transportation. 
  • The maximum term of a concession is 15 years only. 
  • The concession will set out appropriate technical and financial supervision mechanism, as well as Government’s participating interest, and basis for service charge. 
  • Assignment of the concession will require prior approval from the Cabinet of Ministers by the assigning concessionaire. 

What are the opportunities and challenges?

Opening the national railway system for direct participation by the private sector no doubt represents potentially attractive investment opportunities to private investors. The Government has taken practical steps to show that it is keen on having the private sector play a significant role for the first time in this vital sector. It has also made it clear that a significant upgrade and expansion of the entire railway system is a top priority. Given the number of passengers the railway system currently serves, the increasing need for reliable public transportation networks especially given the size of the population in Egypt, the rapid rate of population increases, and the plethora of upgrades needed to bring the railway system to shape, there could be some commercially attractive opportunities to invest in that sector. 

However, the challenge would be for the Government and the private investors to agree to a formula that would make the investment opportunities in the railway sector profitable to the investors, while preserving public interest considerations. A particularly significant issue would be striking the balance for pricing railway services provided by the private sector to make it affordable to the citizens using these services but also profitable to the investors.

What to watch out for in the public transportation sector?

It is reported that the Parliament approved a draft law amending several provisions of Law No. 113 of 1983 Establishing the National Authority for Tunnels (NAT). However, such amendment is not published yet at the Official Gazette. 

The proposed amendments are meant to allow NAT to enter into partnership with the private sector to operate and manage metro lines as well as to undertake ancillary activities such as advertisements. The draft law also proposes giving NAT exclusive competency over metro affairs, which are currently indirectly managed by ENR through its subsidiary the Egyptian Company For Metro Management & Operation. It is reported that following the passing of the amendments, a NAT will establish a new company with a private party to manage and operate the third or the fourth Cairo metro lines. 

In 2006, Jim Wright, Ahmed El Sharkawy and Karim Sarhan established Sharkawy & Sarhan. Their extensie experience and different backgrounds combined to create a firm set up to provide high quality business law services. The Firm extended rapidly to become one of the leading firms in Egypt... read more about who we are ››
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