SCCD : K.M

AFRICAN DEVELOPMENT BANK ADB/BD/WP/2015/37 3 April 2015

Prepared by: OITC Original: English

Probable Date of Board Presentation

15 April 2015 FOR CONSIDERATION

MEMORANDUM TO : THE BOARD OF DIRECTORS FROM : Cecilia AKINTOMIDE Secretary General SUBJECT : EGYPT– SHARM EL-SHEIKH AIRPORT DEVELOPMENT PROJECT *

ADB LOAN OF USD 140 MILLION TSF- MIC GRANT OF UA 1.2 MILLION

Please find attached the Appraisal Report relating to the above-mentioned project.

The Technical Annexes will be distributed separately. The Outcome of Negotiations and the draft Resolutions will be submitted to you as addendum.

Attach: Cc : The President

* Questions on this document should be referred to:

Mr. J. KOSLTER Regional Director ORNA Extension 2065 Mr. A. OUMAROU Sector Director OITC Extension 3075 Mr. A. BABALOLA Manager OITC.2 Extension 2525 Mr. A. OSMAN Team Leader OITC.2 Extension 2625

AFRICAN DEVELOPMENT BANK

PROJECT: SHARM EL-SHEIKH AIRPORT DEVELOPMENT PROJECT

COUNTRY: EGYPT

PROJECT APPRAISAL REPORT

April 2015

Appraisal Team Team Leader:

Team Members:

Mr. A. Osman Ali, Chief Transport Engineer, OITC.2 Mr. A. Algindy, Procurement Officer, EGFO/ ORPF.1 Ms. K. P. Ntoampe, Principal Environment Specialist, ONEC.3 Mr. A. Hilal, Economist, Consultant M. S. Ennaifer, Chief Financial Management Specialist, ORNA Ms. M. N. Tutt, Senior Transport Engineer, OITC.2 Mr. J. Nyirubutama, Chief Transport Economist, OITC.2 Mr. N. Kulemeka, Chief Socio-Economist, ONEC.3

Sector Director: Mr. A. Oumarou, Director, OITC Regional Director: Mr. J. Kolster, Director, ORNA Sector Manager: Mr. A. Babalola, Manager, OITC.2

Peer Reviewers

Mr. A. Karanga, Chief Transport Economist, OITC.1 Mr. T. Harada, Principal Transport Engineer, OITC.2 Mr. U. Duru, Principal Safeguards and Compliance Officer, ORQR.3 Mr. B. Aleobua, Principal Sanitation Engineer, OWAS.2

AFRICAN DEVELOPMENT BANK

EGYPT

SHARM EL-SHEIKH AIRPORT DEVELOPMENT PROJECT

APPRAISAL REPORT

OITC DEPARTMENT April 2015

TABLE OF CONTENTS

Acronyms and Abbreviations ii

Loan Information iii

Project Summary iv

Results-Based Logical Framework v

Project Implementation Schedule vii

1 – STRATEGIC THRUST & RATIONALE 1

1.1. PROJECT LINKAGES WITH COUNTRY STRATEGY & OBJECTIVES 1

1.2. RATIONALE FOR BANK’S INVOLVEMENT 2

1.3. DONOR COORDINATION 2

2 – PROJECT DESCRIPTION 3

2.1. PROJECT COMPONENTS 3

2.2. TECHNICAL SOLUTION RETAINED AND ALTERNATIVES 3

2.3. PROJECT TYPE 5

2.4. PROJECT COST AND FINANCING ARRANGEMENTS 5

2.5. PROJECT’S TARGET AREA AND POPULATION 6

2.6. PARTICIPATORY PROCESS 7

2.7. BANK GROUP EXPERIENCE, & LESSONS LEARNT 7

2.8. KEY PERFORMANCE INDICATORS 7

3 – PROJECT FEASIBILITY 8

3.1. ECONOMIC AND FINANCIAL PERFORMANCE 8

3.2. ENVIRONMENTAL AND SOCIAL IMPACTS 9

4 – IMPLEMENTATION 11

4.1. IMPLEMENTATION ARRANGEMENTS 11

4.2. MONITORING 13

4.3. GOVERNANCE 14

4.4. SUSTAINABILITY 14

4.5. RISK MANAGEMENT 15

4.6. KNOWLEDGE BUILDING 15

5 – LEGAL INSTRUMENTS AND AUTHORITY 15

5.1. LEGAL INSTRUMENT 15

5.2. CONDITIONS ASSOCIATED WITH BANK’S INTERVENTION 15

5.3. COMPLIANCE WITH BANK POLICIES 16

6 – RECOMMENDATION 16

Appendix I: Egypt’s Socio-Economic Indicators

Appendix II: ADB’s Portfolio in Egypt

Appendix III: Related Projects Financed By Donors

Appendix IV: Map of Project Area Appendix V: Project Procurement Plan

i

Currency Equivalents As of March 2015

UA 1.00 = 1.41 USD

UA 1.00 = 10.72 EGP

USD 1.00 = 7.62 EGP

Fiscal Year

July 1st – June 30

th

Weights and Measures

1 metric tonne = 2204 pounds (lbs)

1 metre (m) = 3.28 feet (ft)

1 millimetre (mm) = 0.03937 inch (“)

1 kilometre (km) = 0.62 mile

ii

Acronyms and Abbreviations

AfDB/ ADB African Development Bank

AFESD Arab Fund for Economic and Social Development

CAO Central Audition Organisation (Egypt)

CSP Country Strategy Paper

DPG Development Partners Group

EAC Egyptian Airports Company

ECAA Egyptian Civil Aviation Authority

EHCAAN Egyptian Holding Company for Airports & Air Navigation

EIB European Investment Bank

EIRR Economic Internal Rate of Return

ESIA Environmental and Social Impact Assessment

ESMP Environmental and Social Management Plan

FDI Foreign Direct Investment

FIRR Financial Internal Rate of Return

GOE Government of Egypt

ICB International Competitive Bidding

IATA International Air Transport Association

ICAO International Civil Aviation Organization

ICAA International Civil Aviation Authority

JICA Japan International Cooperation Agency

MoCA Ministry of Civil Aviation

MoIC Ministry of International Cooperation

mpax Million Passengers per Annum

NANSC National Air Navigation Services Company

NDP National Development Plan

PIT Project Implementation Team

PPP Public-Private Partnership

UA Unit of Account

USD United States Dollar

iii

LOAN INFORMATION

Client’s information

BORROWER/ RECIPIENT: The Arab Republic of Egypt

EXECUTING AGENCY: Egyptian Airports Company (EAC)

Financing Plan

Sources of financing

Amount (USD)

Instrument

ADB 140.00 million Loan

MIC Grant 1.90 million Grant

IsDB 457.56 million Loan

Government of Egypt (GOE)* 71.87 million Self-financing

Total cost* 671.33 million

* Excluding taxes.

ADB’s key financing information

Loan currency

US Dollar (USD)

Interest type Floating base rate with option to fix

Base Rate (floating) 6-month LIBOR

Contractual spread 60 base points (bps)

Funding margin

Bank lending margin in relation to the 6-

month LIBOR. This margin is revised

every year on 1 January and 1 July.

Fees None

Tenor 20 Years

Grace period 5 Years

FIRR, NPV (base case) 17.7%, USD 542 million at 8.2%

EIRR, NPV (base case) 25.82%, USD 785 million at 12%

Timeframe - Main Milestones

Concept Note approval

February 2015

Project approval April, 2015

Effectiveness June, 2015

Completion Date June 2019

Closing Date December 2019

Last repayment December 2035

iv

Project Summary

Project overview

1. Sharm El-Sheikh Airport Development project consists of the development of a new terminal

building, a new runway, a new control tower and associated airfield, ancillary and electrical works,

within the current boundaries of Sharm El-Sheikh Airport in Egypt. The project will increase capacity

of the airport by an additional 10 million passengers per year (mpax) and 34 operations/hour, giving a

total capacity of 18 mpax and 68 operations/hour. The project will be implemented over 44 months,

and is estimated to cost around USD 671.3 million (excluding tax).

2. The direct beneficiaries of the project are the Egyptian economy, the Egyptian Airports Company

(EAC), the private sector in the tourism, aviation and services industries, travellers using the airport,

airline operators, Egypt’s labor force, and the Egyptian economy at large.

3. The project will remove a potential bottleneck in the movement of travellers, including tourists

into and out of Sharm El-Sheikh city, which yields large foreign currency revenues for the country. It

will therefore support economic growth by facilitating increase in tourist numbers, and will generate

additional direct and indirect job opportunities in the tourism sector, and the aviation sector. It will

also help increase the competitiveness of Egypt overall and provide large investment opportunities for

the private sector who will benefit from increased passenger flows and increased tourism activities.

The project will also pave the way for wider economic development of the Sharm El-Sheikh as well

as the surrounding areas and regions.

Needs assessment

4. Sharm El-Sheikh airport has been Egypt’s fastest growing airport, and is Africa’s third busiest, with

an average of 10% annual growth rate in traffic over the past 10 years (excluding year of revolution).

The total number of passengers using the airport has reached 8.2 million in 2010, which is above the

design capacity of the airport. These levels were much higher than the original forecasts, which

predicted that operation levels in the current airport facilities will utilise the full capacity of the airport

in 2015. Revised traffic growth forecasts and studies show that, even with the impact of the revolution

in early 2011, passenger traffic in Sharm El-Sheikh airport would reach 18.0 mpax by 2029.

Bank’s Added Value

5. The Bank’s involvement will assist the country in securing the required resources for the

development of its nationwide program for development of air transport capacities. The Bank added

value is in leveraging on its niche area and experience in delivering large infrastructure projects to

support the effective and smooth implementation of the project. It is also to be noted that this

operation will represent the first publicly-financed transport sector operation for the Bank in Egypt.

Once actively engaged in the sector, the Bank will be able to leverage on its position to engage more

in areas such as institutional capacity building, knowledge transfer and south-south cooperation in this

important sector.

Knowledge Management

7. The project includes a MIC Grant for establishing a regional Airports Centre of Excellence that

will capture all the knowledge and know-how delivered through this project and other ongoing airport

projects, in addition to providing airport planning and management skills.

v

Results Based Logical Framework

Country and project name: EGYPT- Sharm El-Sheikh Airport Development Project

Purpose of the project : Develop a new terminal, runway and control tower at Sharm El-Sheikh International Airport

RESULTS CHAIN PERFORMANCE INDICATORS

MEANS OF VERIFICATION

RISKS/MITIGATION MEASURES Indicator

(including CSI) Baseline Target

IMP

AC

T

Impact 1

Contributing to economic

growth by supporting the

services sector, including the

tourism industry

Share of tourism industry in

foreign currency receipts of

Egypt

13% in 2010

Estimated figure of 20% by

2029. Figure will be revised

following the issuing of the

Country’s 7th National

Development Plan (NDP)

Government reports, including

Central Bank statistics

- Economic risk: Instability and

Government not implementing other

measures/ projects necessary for the

development of the tourism sector.

Likelihood: Low, considering the

impact of the industry on economy

and employment.

- Risk: Supporting infrastructure and

utilities supplies not available at the

time of project completion.

Mitigation: Proper coordination

adopted at early stages of project

design, between Executing Agency

and concerned utilities companies.

- Risk: Low passenger traffic. This

risk is assumed to be relatively low,

taking into consideration the recent

forecast studies. Sensitivity analysis

concludes that the project is viable

even with a 20% reduction in

passenger traffic.

Impact 2

Employment generation, as a

result of increased tourism

activities

-Number of persons

employed in tourism and in

construction industries

-Number of annual

passengers arriving at Sharm

El-Sheikh

-2.4 million in tourism.

-3.25 million visitors to

Sharm El-Sheikh in 2014

(6.5 mpax)

-Additional 240,000 direct

and indirect jobs in tourism

and aviation by 2029 (direct:

700 permanently employed

in the new terminal, and 1500

employed in construction

during implementation). It is

estimated that 20-30% of

these will be held by women.

(Women employment at Sharm

El-Sheikh airport and at the

EAC’s other airports will be

enhanced by Sensitisation and Training on Gender

Mainstreaming, provided by the

Airport Centre of Excellence –

indicators TBD during study)

-Nine (9) million visitors to

Sharm El-Sheikh by 2029 (18

mpax), and five (5) million

(10 mpax) by 2019 .

Central Statistics Reports

(tourism),

Project data by Egyptian

Airports Company (EAC)

vi

OU

TC

OM

ES

Outcome

Increasing Egypt’s airport

capacities and removal of

infrastructure bottlenecks in

Sharm El-Sheikh

Operational capacity of air

transport facilities in Sharm

El-Sheikh*

Capacity of 8.0 mpax

Capacity of 34

operations/ hour

Capacity of 18.0 mpax, by

2016

Capacity of 68 operations/

hour

- EAC reports in conjunction

with IATA and ICAO

standards

- Risk: Cost Overrun. The likelihood

of cost overrun occurring is

considered moderate. EAC’s

financial position can support such

overrun. Also, the sensitivity

analysis shows that with a 20%

increase in cost the project remains

viable.

OU

TP

UT

S

New Terminal building, a new

runway , and a new control

tower and supporting

infrastructure at the Sharm El-

Sheikh International Airport,

with a capacity of 10 mpax, and

34 operations/ hour,

Strategy and action plan for the

development of the Airports

Centre of Excellence, and

recommendations for EAC

institutional progression.

Terminal building, runway

airfield, control tower,

associated facilities and

supporting infrastructure

constructed to design

standards

Actual reports for the Action

Plan for centre development

& recommendations on

institutional development.

***

- 2 Terminal buildings

handling up to 8.0

mpax at actual level of

service equivalent to

IATA level C/D**,

and

- 1 runway with a

supporting services

runway ****

- 3rd Terminal building

capable of handling a

minimum of 10 mpax at

IATA level B service,

constructed and operational

by 2016 and

- third runway (3600m), to

ICAO’s code 4E constructed

and operational by 2016.

-New control tower with all

associated facilities

- Bank supervision reports

- Project Completion Report

- Handing over certificates

KE

Y A

CT

IVIT

IES

COMPONENTS INPUTS

1. Construction of new terminal building of 5 levels and 125,181 m² built-up area, with all associated equipment,

installations and all surrounding aprons and buildings

2. Construction of airfield works, including new (third) runway to ICAO’s code 4E, taxiways, and aprons

3. Construction of a control tower, administrative buildings and electrical installations and visual aids

4. Installation of air navigation systems.

5. Development of supporting infrastructure, including fire stations, fire-fighting vehicles, depots and others

6. Project Management and Supervision (including financial audit)

7. Establishment of Airports Centre of Excellence

(USD million)

Terminal building ………………………………..…397.88

Airfield Works ……………………………………..110.91

Control tower and facilities …………...……………28.26

Navigation systems ………………………..…….....14.78

Supporting infrastructure …………………..……..…7.37

Project Management & Supervision………...…...... 22.61

Airports Centre of Excellence ………………....……2.25

Contingencies ……………………….……...…… 87.27

Total 671.33

AfDB financing: USD 140 million Loan + USD 1.9 million Grant

IsDB financing: USD 457.56 million

GOE financing: USD 172.24 million (include tax payments)

* Other indicators related to increased airport revenues, and aeronautical benefits (such as time saving), were not considered as these are not prime objectives of the project.

** IATA levels of service, define specific parameters for airport operations. These include waiting and circulation areas per passenger, lengths of checking in queues, inspection

Room areas and level of comfort. Level A offers the maximum dimensions, and least delays, while level D offers the minimum with longer delays.

*** Indicators for the Centre and its success will be determined as part of the planned study

**** Parallel runways that cannot handle simultaneous operations due to short spacing (400 m).

vii

Project Implementation Schedule

ID Task Name Start Finish

1 . Fri 19/08/11 Fri 19/08/11

2 AfDB internal processing and approval Mon 01/12/14 Wed 15/04/15

3 Loan Entry into Force Fri 15/05/15 Thu 13/08/15

4

5 Procurment of contractors Sun 01/11/15 Mon 30/11/15

6

7 Terminal Building Wed 04/11/15 Sat 01/06/19

8

9 Airfield Tue 01/12/15 Thu 30/05/19

10 Mobilisation Tue 01/12/15 Thu 31/12/15

11 Urbanisation and access works Mon 04/01/16 Wed 04/05/16

12 Installation of electrical systems Thu 05/05/16 Wed 28/06/17

13 Construction of tunnel Thu 05/05/16 Wed 11/01/17

14 Construction of stand aprons and taxiways Thu 05/05/16 Wed 19/04/17

15 Construction of new tolls and security stations Thu 20/04/17 Wed 15/11/17

16 Construction of airside control points & fencing Fri 01/01/16 Thu 20/04/17

17 Construction of new parking areas Thu 20/04/17 Wed 15/11/17

18 Construction of new sewage treatment plant Fri 17/11/17 Thu 01/11/18

19 Construction of runway Thu 20/04/17 Wed 13/06/18

20

21 Construction of control tower complex Fri 19/08/11 Fri 19/08/11

22 Mobilisation Tue 01/12/15 Thu 31/12/15

23 Structural works Mon 04/01/16 Mon 04/07/16

24 Architecural works Tue 05/07/16 Mon 28/08/17

25 Development of structural facilities Mon 09/05/16 Fri 12/01/18

26 Installation of systems and electronics Mon 06/02/17 Fri 19/01/18

27 Testing period Mon 22/01/18 Fri 17/08/18

28

29 Supporting Infrastructure and services Mon 04/05/15 Fri 17/08/18

30

31 Testing and comissioning Mon 03/06/19 Fri 12/07/19

Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2

2014 2015 2016 2017 2018 2019 2020

1

REPORT AND RECOMMENDATION OF ADB GROUP MANAGEMENT TO THE BOARD OF

DIRECTORS ON PROPOSED LOAN AND A GRANT TO THE REPUBLIC OF EGYPT TO

FINANCE THE SHARM-EL SHEIKH AIRPORT DEVELOPMENT PROJECT

Management submits the present report and its recommendations on a proposed ADB loan of USD 140.0

million (equivalent to UA 99.3 million), and a MIC Technical Assistance Fund Grant of UA 1.2 million

(equivalent to USD 1.9 million) to the Arab Republic of Egypt for the financing of the Sharm El-Sheikh

Airport Development Project in Egypt.

1 STRATEGIC THRUST & RATIONALE

1.1. Project linkages with country strategy and objectives

1.1.1. Egypt’s large geographical area and its reliance on economic sectors such as tourism, agriculture,

industry and services make it crucial to establish well-developed transport links, and systems. It was,

therefore, no surprise that the Government of Egypt’s (GOE) development plans have focused over the

decades on, amongst others, the development of transport infrastructure, as a mean to accelerate economic

growth. These objectives have been reflected in the previous National Devolvement Plans (NDP), which

ended in 2012, Egypt’s Vision 2022, and the 5-year macro-economic policy framework (2014/2015 to

2018/2019). At the Egypt Economic Development Conference, Sharm El-Sheikh in March 2015, GOE

launched the Strategic Development Strategy (SDS) entitled Egypt’s Vision 2030, which cites tourism

sector as a key strategic sector for investment and growth for medium term investment, as well as

investments in transport, logistics, and large scale infrastructure.

1.1.2. The air transport sub-sector is highly strategic for Egypt’s economic development and growth. It is

key for the country’s integration in the region and with the rest of the world. The sub-sector is

exceptionally important for the tourism industry, where around 80% of Egypt’s tourist traffics, (averaged

about 10.0 million visitors per year over the last 10 years), arrive through the country’s airports. Tourism

accounts for over 5% of Egypt’s GDP; with total revenues of over USD10.0 billion. The industry

employs about 12.6% of the labor force in Egypt. More importantly, the industry is an important source

of foreign currency receipts for the Egyptian economy. Within Egypt’s tourism scene, Sharm El-Sheikh

plays a major role, where over 30% of the country’s tourists, arrive and stay in the city. The Government

of Egypt is, accordingly, exerting efforts to develop further the tourism activities in Sharm El-Sheikh,

encouraged by current patterns of increase in tourist arrivals. The current airport capacity was identified

as one of the main obstacles to the sector development plans.

1.1.3. Sharm El-Sheikh airport has been Egypt’s fastest growing airport, with an average of 10% annual

growth rate in traffic over the past ten years (excluding the year of revolution) and 18% over the ten years

preceding the revolution, compared to an average of around 7% in Cairo International Airport. The airport

is the third busiest in Africa, up one position from 2009. The total number of passengers using the airport

has reached 8.2 million in 2010, which is above the design capacity of the airport. Figures were affected

by the revolution but witnessed a fast rebound of 21% growth in the year that followed revolution. The

subject project aims at providing the additionally required capacity to enable the airport handle the

forecasted growth in traffic, which are expected to reach 18 million passengers annually (mpax) by 2029.

1.1.4. The project is in perfect harmony with the country’s developmental objectives, as it will lead

ultimately to promotion of private sector development and improving the country’s competitiveness. The

airport will play a major role in assisting the country to achieve its ambitious tourism targets of 25 million

tourists by 2020 (likely to be revised). The Government is working through different channels to achieve

these targets with a clearly defined plan targeting all the various aspects, such as development of new

hotels, development of supporting infrastructure, and promoting an increased private sector engagement

in the tourism services sector.

2

1.2. Rationale for Bank’s involvement

1.2.1. The Sharm El-Sheikh airport development project is part of an initiative targeting the development

of air transport capacities nationwide. This initiative requires large investments, with a large portion of

these being in foreign exchange. In light of this, the Bank involvement will assist the country in securing

the required resources for the development of its nationwide program. On the project level, the Bank

added value is in leveraging on the Bank’s niche area and experience in delivering large infrastructure

projects, which would enable the Bank to support the effective and smooth implementation of the project,

and relay international practices in areas such as project, environmental, procurement, and financial

management monitoring.

1.2.2. It is also to be noted that this operation will represent the first publicly-financed transport sector

operation for the Bank in Egypt, which will offer the Bank a good opportunity for further engagement in

this sector that is vital for the economic growth and development of Egypt. Once actively engaged in the

sector, the Bank will be able to leverage on its expertise and its position to coordinate with other donors,

to positively impact the development of the sector (including the air transport sub-sector), particularly in

areas such as institutional capacity building, knowledge transfer and south-south cooperation.

1.2.3. Strategically, the project is in line with the Bank’s Long Term Strategy, which calls for

investments into infrastructure, including transport, in an inclusive manner. The project is also in line

with the Bank’s 2012-2015 Interim Country Strategy Paper (CSP) for Egypt, which includes the

promotion of private sector development as a strategic pillar, with a sub objective of developing

infrastructure, including transport infrastructure. The interim CSP also makes specific reference to the

subject project.

1.3. Development partners coordination

1.3.1. Various development partners are active in Egypt with operations covering a wide range of

sectors. In the transport sector these include the Arab Fund for Economic and Social Development

(AFESD), the World Bank (WB), the Islamic Development Bank (IsDB), the Japan International

Cooperation Agency (JICA), the European Union (EU), the Agence Française de Développement (AFD),

and the European Investment Bank (EIB). WB, AFESD, IsDB, EIB and JICA are particularly active in

the air transport sub-sector, where they financed and are currently financing the Cairo International

Airport Development project, the Hurghada International Airport expansion, the Sharm El-Sheikh airport

(subject) project, Egyptair fleet expansion and the Borj Al-Arab airport project, respectively.

1.3.2. At the Government level, the Ministry of International Cooperation (MoIC) coordinates between

the various sectors in terms of cooperation with international organization. At the technical level, the

various respective Ministries coordinate with the different donors and agencies through what is referred to

as the Development Partners Group (DPG), which is currently the main aid coordination and

harmonization instrument in Egypt. The DPG has different thematic sub-groups covering the different

sectors. The Transport DPG was established recently and held so far 3 meetings and the Bank has joined

the Group as a member. Table 1.1 shows the summary of donors’ involvement.

3

Table 1.1: Development Partners Involvement

Sector or

subsector

Size

GDP (13/14) Exports Labor Force ('14)

Transport sector 4.0%(e) N/A 6.0%(e)

Players - Public Annual Expenditure (average) 2004-2014

in Air-Transport Subsector (donor-financed)

Government Donors

USD 1,33 m USD 1,73 m

[77.1%] [56.5%]

Level of Donor Coordination

Existence of Thematic Working Groups Yes

Existence of SWAPs or Integrated Sector

Approaches No

ADB's Involvement in donors coordination Member

2 PROJECT DESCRIPTION

2.1 Project components

2.1.1 The project will contribute towards increasing Egypt’s airport capacities, and removing an

infrastructure bottleneck at Sharm El-Sheikh airport by providing additional capacity there. At the sector

level, it aims at improving the competitiveness of air transport in the country. The estimated cost of the

project is USD 671.33 million, which covers the following components (table 2.1):

i- Construction of a new terminal building, with all its associated facilities. This will be the third

terminal building in Sharm El-Sheikh Airport.

ii- Construction of airfield works, including a new 3,600 m runway, taxiway system, aprons, service

roads, and ancillary buildings.

iii- Construction of a control tower with all associated facilities and systems.

iv- Installation of electrical and navigation systems

v- Developing supporting infrastructure;

vi- Project Supervision and management, including consulting services.

vii- Establishing an Airports Centre of Excellence

2.2 Technical solution retained and other alternatives explored

2.2.1 The subject project aims at expanding the capacity of existing airport facilities in Sharm El-

Sheikh. Various technical solutions were considered and analysed. These included either i) changes to the

interior set up of the existing terminals, ii) expansion of the terminals, iii) developing a new terminal or

iv) developing a new airport. The existing facilities have physical constraints that do not allow for neither

of the first two options to be considered, to provide a suitable capacity that can handle the anticipated

increase in passenger traffic (more than 100% increase). Regarding the option of developing a new

airport, this was not considered as the existing airport facilities are safely situated away from the city, and

the airport zone has adequate space for developing a new terminal building. Accordingly, the adopted

option was the development of a new terminal building with additional supporting navigation systems and

airfield works.

WB 40.2% EIB 10.3% AFESD 13.5% IsDB 22% JICA 4.0%

4

Table 2.1 Project components

N° Components Estimated cost

(USD mill) Description of component

1

Terminal

Building (No. 3) 397.88

Construction of one building with 5 levels, and a capacity of 10 mpax.

The total built-up surface of the terminal is 125,181 m² (total area

206,000 m2). The facilities will include 92 go-through check-in

counters, 80 passport-control counters, 26 security-check points, 16 pre-

boarding jet bridges, 15 passenger boarding bridges, 39 departure gates,

12 baggage carousel, 15,000 m2 of commercial space, 2,950 car park

positions.

2

Airfield works 110.91

Construction of new runway according to ICAO’s code 4E parameters,

with features upgradable to code F. It will have a length of 3,600 m, and

a width of 60 m. The new airfield will have one taxiway parallel to

runway, two taxiways connecting the new airfield to the existing, 15

contact stands, and 25 remote stands. Lighting will be standard CAT-I

and the foreseen instrumental approach will be CAT-I. The new apron

capacity will be set at around 34 operations per hour, pushing that of the

entire airport to a total of 68.

3

Control Tower

and associated

facilities/

systems

28.26

This includes the construction of a control tower with all associated

navigation control systems and equipment, electrical substations,

administrative buildings and a maintenance centre. Airfield Lighting

Control and Monitoring System (AFLCMS) shall be installed in the new

Air Traffic Control Tower and shall also cover all airfield lighting

substations, namely CCRPS-1 and CCRPS-2 and the Airfield Station,

namely ASEP.

4 Navigation

systems 14.78

This includes the installation of all air navigation systems, including

communication system, systems for coordination with ground operation

and other associated equipment.

5 Supporting

infrastructure 7.37

This component consists of all various supporting infrastructure and

systems such as fire stations and fire engines, security installations,

electrical and utility connections, upgrade of environmental systems,

erecting depots and storage areas.

6

Project

supervision &

management

22.61

This covers supervision and management of project activities and

includes consulting services for supervision of works, control activities,

expenses associated with the Project Implementation Team, as well as

technical and financial audit.

7 Airports Centre

of Excellence

2.25

Includes the development of a strategy and implementation action plan

for the establishment of a centre that will serve EAC immediate and

long-term development needs, as well as developing its capacity to

become a centre for promoting and developing the field of airports

management at the national and regional levels.

8 Contingencies 87.27 Represents physical and price contingencies at 15% collectively

Total 671.33

2.2.2 Regarding site location, the new terminal building was designed to be connected to the existing

facilities. This arrangement provides numerous economic advantages, such as savings associated with

using existing utilities supply networks serving the existing terminals. As for the size of the building this

is based on passenger traffic forecast, and is in accordance with the specifications and levels of service set

by the International Civil Aviation Organization (ICAO) and the International Air Transport Association

(IATA). The location of the new runway that will handle the additional passenger traffic was governed by

air safety, air navigation and social considerations, as well as by engineering aspects relating to ease of

access of landing planes to the new terminal building.

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Table 2.2: Technical alternatives considered

Alternative Brief description Reasons for rejection

Changes to

interiors

Re-arrangement of the airports interior

set-up and improving facilities to expand

capacity.

The magnitude of increase in traffic and hence required

increase capacities is much more than to be

accommodated by this type of arrangement.

Expansion of

terminal Extending and expanding existing

structures Architectural & structural designs of existing terminals

have limitations and do not enable such alternative.

New airport Developing a new airport in new location Not economic as current airport area is safely adequate

to accommodate the proposed development.

2.3 Project type

2.3.1 The project is a standalone operation, which represents the optimal approach for delivering a

project of this size and complexity.

2.4 Project cost and financing arrangements

2.4.1 The total cost of the project, including contingencies but excluding taxes, is estimated at USD

671.33 million (USD 771.70 million including tax). This cost is based on detailed analysis and

benchmarking against global unit prices and also prices obtained during recent competitive bidding for

similar works in Egypt. Physical contingencies have been estimated at 5% of the base cost. Provisions for

price escalation are estimated at 10%, and are based on the implementation schedule, taking into account

the rate of inflation of the sector. Table 2.2 below provides a summary of the project cost estimates.

Table 2.3: Project Cost Estimates by Components (excluding tax)

Components F/C L/C Total % foreign Terminal Building 294.72 103.16 397.88 74 Airfield Works 45.51 65.40 110.91 41 Control Tower & facilities 18.37 9.89 28.26 65 Navigation systems 9.61 5.17 14.78 65 Supporting infrastructure. 0.00 7.37 7.37 0 Project Supervision 22.61 0.00 22.61 100 Base cost 390.82 199.69 581.81 67 Physical contingencies 20.36 8.73 29.09 70 Price escalation 40.73 17.45 58.18 70 Airports Centre 1.90 0.35 2.25 84

Total 451.91 225.87 671.33 67

2.4.2 The Bank’s financing will cover the cost of the airfield and control tower components, for a total

of USD 140 million (equivalent to UA 99.3 million), excluding taxes, but including physical

contingencies and price escalation. The Bank will also finance, through a MIC TAF Grant UA 1.2 million

(equivalent to USD 1.9 million), part of the cost of establishing the Airports Centre of Excellence and the

financial audit services. The Islamic Development Bank has already approved two loans totalling US$

457.56 to cover the costs of the terminal building. The ADB/ GOE co-financing ratio is set tentatively at

95%-5% for the Airfield contract and 57.9%-42.1% for the control tower contract.

2.4.3 The remaining amounts will be borne by the Government of Egypt. The estimated amount of

taxation is USD 104.0 million and this will be borne by EAC. Table 2.3 and Table 2.4 provide a summary

of the financing plan by source and by component. Table 2.5 presents the disbursement schedule of the

project by category.

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Table 2.4: Source of Financing (in USD million)

Components Category AfDB GOE* IsDB Total

Terminal building Works - 0.00 457.56 457.56

Airfield works Works 121.17 6.38 - 127.55

Control tower & associated systems Works 18.83 13.67 - 32.50

Navigation systems Goods - 17.00 - 17.00

Supporting infrastructure Works - 8.48 - 8.48

Project Management & Supervision Services - 26.00 - 26.00

Development of Airports Centre Services 1.91 0.35 - 2.25

Total without tax 141.91 71.87 457.56 671.33

Taxation - 100.36 - 100.36

Total 141.91 172.24 457.56 771.70

* Includes resources through both EAC and NANSC.

Table 2.5: Project Cost by Category of Expenditure (including contingencies)

USD million UA million % Foreign

Categories of

expenditure FC LC Total FC LC Total

Civil Works 412.39 209.69 622.08 294.56 149.78 444.34 66.3

Consulting services 28.25 0.00 28.25 20.18 0.00 20.18 100.0

Goods 21.00 0.00 21.00 15.00 0.00 15.00 100.0

Total 461.64 209.69 671.33 329.74 149.78 479.52 68.8

Table 2.6: Tentative expenditure schedule (including contingencies)

USD million

Item Source 2016 2017 2018 2019 Total

Civil Works ADB 26.7 57.8 41.4 14.1 140.0

Civil Works GOE 11.2 9.1 6.3 2.0 28.6

Civil Works IsDB 77.3 105.1 163.9 111.3 457.6

Consulting services GOE 7.4 7.4 7.4 3.8 26.0

Consulting services MIC TAF 0.5 1.0 0.4 0.0 1.9

Goods GOE 0.2 1.0 0.0 16.0 17.2

Total cost 123.3 181.4 219.4 147.2 671.3

% 18% 27% 33% 22% 100%

2.5 Project’s target area and population

2.5.1 Sharm El-Sheikh is situated on the southern tip of the Sinai Peninsula, along the coast of the Gulf of

Aqaba on the Red Sea. The city’s main industry is tourism, with main attractions including a wide diversity

of coral reefs and long sandy beaches. The city also houses international forums and meetings. The

population of Sharm El-Sheikh is made up mainly of the tourism labor force. Its mainland geology is made

up of arid desert land, with some chains of mountains.

2.5.2 The major beneficiaries of the project are: (i) the Egyptian Holding Company for Airports and Air

Navigation (EHCAAN), a public establishment in charge of airports and air navigation system, and its

affiliates, namely EAC and National Air Navigation Services Company (NANSC), who will all benefit

from increased aeronautical (plane and passenger fees) and commercial revenues; (ii) airlines and users of

airports, who will benefit high levels of comfort, safety and security on both airside and landside due to

higher design standards; (iii) commercial and service companies for which new opportunities will be

provided within the airports; (iv) the tourism industry and handicraft sector who will benefit from

increased number of tourists and hence tourism activities; and (v) the local and national population who

will be the primary beneficiaries of the jobs created, notably those in the tourism, handicraft sector, retail

business, maintenance of public places, etc.

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2.6 Participatory process for project identification, design, implementation

2.6.1 The identification of the Sharm El-Sheikh project was based on the strategic plan for the sub-

sector. This was presented through a Masterplan, which took into account various aspects including

traffic studies. The detailed design of the project had incorporated, at the early stages, the input of

different Ministries and stakeholders, such as Ministry of Tourism, Ministry of Civil Aviation, Ministry

of Defence, and Ministry of Economic Development.

2.6.2 The design of the project is mainly guided by international standards and specifications (namely

ICAO and IATA standards). In addition, EAC holds regular meetings attended by the various airports

users, including operators, airlines companies, passengers’ representatives, etc. During these meetings

different concerns are raised regarding the use of existing airports. The feedback from these meetings is

integrated into the design of all new airport projects. At the locality level, two major public consultations

were held in Sharm El-Sheikh for the subject project, and these were attended by representatives of local

communities, civil society, private sector and Government entities.

2.6.3 All participants showed support to the new project, due to the large developmental impact it is

expected to generate for all segments of the society in Sham El-Sheikh. It was concluded in these

consultations that the project will result in a number of positive impacts on the natural and socio-

economic setting of the area. It was also established in these consultations that most of the components of

the project would pose only insignificant environmental risk. It is to be noted that runway and terminal

locations were carefully designed to ensure that future generated noise is minimal on the area adjacent to

the airport, most of which are tourist resorts.

2.7 Bank Group experience, and lessons learnt

2.7.1 To date, the Bank had approved only 3 operations in Egypt’s transport sector; a study on two

canals linking Cairo to the Mediterranean, a loan for the development of the Damietta Port (private sector

operation), and a Grant for the development of the Navigation Satellite project. The former two

operations have been cancelled (the port project could not reach financial close) and the latter was

completed.

2.7.2 Overall, Egypt enjoys relatively adequate planning, implementation and technical capacities in the

different sectors in which the Bank is currently engaged. These capacities have, to a great extent, been a

source of assurance to the international donors. While the Bank has not been active in the transport sector,

lessons learnt could be sought through the engagement of other donors in the sub-sector. These

demonstrated the existence of high capacities in the air transport sub-sector, with a high level of

commitment by the Government towards the development of the field and the realization of the

investment plans. These investments have in most cases been delivered in timely manner, and led to high

developmental impacts. Also, some of the lessons learnt from other donor’s participation in the transport

sector in Egypt include the need for a stronger and long-term dialogue engagement with the entities in the

sector to maximise development impacts.

2.7.3 At the technical level, traffic forecast in Sharm El-Sheikh grew at a rate higher than previously

anticipated, which led to the recently implemented terminal building reaching utilization of its maximum

capacity within three years. To prevent such scenario from re-occurring, EAC chose to have additional

capacity (above forecasts) in the new terminal to accommodate any additional traffic. Furthermore, the

design of the project, unlike the case of terminal 1, allows for future expansion. Further details are

included in Annex B.1.

2.8 Key performance indicators

2.8.1 The main performance indicators of the project are those associated with its operational level of

service. These indicators measure the quality and efficiency of various criteria as set up by ICAO and

IATA. Table 2.7 shows the existing measurements of these indicators and the targeted values. The table

also shows impact-level indicators, namely number of passengers and number of direct jobs created. The

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measurement of these indicators is conducted on regular basis by EAC, who have full database of the

historical and current trends. The updating of these is conducted by a special unit within the Commercial-

Operation department of EAC. Some of these indicators will be reviewed at the opening of the airport

(the airport operation-related indicators) and the rest will be reviewed 5 and 10 years later, dates by which

the terminal building will operate at 50% and 100% capacity, respectively. During implementation, the

usual construction indicators (works completed) will be measured and assessed, through progress reports,

and in line with the civil works contract to be signed.

Table 2.7: Key Performance Indicators

No. Indicators Current: 2014 Target Target year

Output 1 Level of service according to IATA C/D A/B 2019

2 Operational capacity of runway (ops/hr) 43 68 2019

Impact 1 Number of passengers per year (mpax) 6.5 18.0 2029

2 Direct jobs generated (persons) 500 (TB1&2)* 700 (TB3)* 2029 *500 are employed in the current terminals and additional 700 will be employed in the new terminal and airfield.

3 PROJECT FEASIBILITY 3

3.1 Economic and financial performance

3.1.1 The project is financially and economically viable, as indicated by the Project’s Economic Internal

Rate of Return (EIRR), and Financial Internal Rate of Return (FIRR); see table 3.1 below. The economic

and financial evaluations of airport projects were carried out through the cost-benefit approach. The cost

elements arising from the project are: (i) investment costs & maintenance that correspond mainly to the

construction costs of the new terminal, the airfield works and other related areas, as well as those of the

control tower and installation of navigation equipment, (ii) the benefits of the project are defined as

economic gains to Egypt from tourism and especially those related to tourism spending in the country and

the direct and indirect jobs created during the construction phase and after the commissioning of the new

terminal.

Table 3.1: Key economic and financial figures

EIRR (base case) 25.82% NPV 785 USD million at 12 %

FIRR (base case)17.7% NPV 542 USD million at 8.2%

3.1.2 The project will also generate other benefits typically associated with airport projects, such as

savings in passenger processing time and plane waiting time, particularly for the share of passengers who

currently use the existing facilities at lower levels of service, and who will be using the new terminal once

commissioned. However, as the main purpose of using the airport is tourism, these benefits were not

included in the analysis as they do not represent an objective of the project.

3.1.3 Some of the indirect economic and social benefits of the project include the positive impact on

private sector and Egypt’s competitiveness. These benefits were not quantified. The financial benefits of

the project from EAC’s perspective consist of incremental revenues from passenger charges, aircraft

services and commercial rents and concessions.

3.1.4 The assumptions that serve as the basis for the calculations of the FIRR and the EIRR are

provided in Annex B.7. The main assumptions are related to traffic forecast and the cost streams which

include investment cost; operations and maintenance (O&M) and reinvestment cost during the lifetime of

the project. The project is assumed to become operational in 2019 after the completion of the entire

works, with an economic life of 25 years and a 20% salvage value. By the time the new terminal attains

full capacity, it will be handling 10 million passengers per year (mpax).

3.1.5 Sensitivity analyses were conducted to test variations in several parameters. The analyses, which

are presented in Annex 7 show that despite the variations considered (i.e. despite tested reduction in

passenger traffic, and increase in project cost), the project remains economically and financially viable.

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3.2 Environmental and Social impacts

Environment

3.2.1 The project is a large airport construction project and is accordingly categorized as environmental

category 1 as per the Bank procedures. The project’s Environmental and Social Impact Assessment

(ESIA) was completed in 2010 and its summary has been posted on the Bank’s website on the 3rd

August

2011, with an update carried out in 2014 and posted on 23rd

February 2015, after being reviewed by the

Bank.

3.2.2 The environmental risks resulting from the execution of the project are grouped into two

categories; a) those occurring during construction, and b) those occurring during the operation of the

project. Risks in the first category include (i) safety risk to the public at or near construction sites (ii)

noise and emissions; (iii) soil removal, modification, mixing, compaction, loss, or contamination due to

construction activities and (iv) generation of dust and emissions due to construction activities. These

impacts will be short term, and will be managed by the contractor as per the mitigation measures

contained within the Environmental and Social Management Plan (ESMP) to ensure that the activities

meet the legal requirements of the Bank, in addition to those of the Government best practices. There is

also a risk of injury to the population working near the project site at the time of construction. This risk

can be mitigated by closing construction sites close to the public during the execution of the project.

3.2.3 Risks resulting from the operation of the airport include significant increase in noise levels

generated from the airport due to increase in air traffic. However, there is little possibility that the new

terminal and runway will generate noise to levels that would adversely affect the surrounding areas. This

risk can be mitigated by adopting and applying the ICAO standards for landing and takeoff procedures,

proper management of landing and take off at off-peak hours to minimize noise; and installation of new

permanent automatic noise monitoring system. Also, large amounts of solid waste will be generated from

the incoming flights and day-to-day operation of new building. Any temporary storage of waste on site

will be in bins that are fitted with lids to ensure no rainwater can enter, that no waste material will be

blown away by wind, and also so no vermin can access the waste. Waste receptacles will be made secure

to stop any opportunists from gaining access to the refuse. These will then be handled through set

procedures.

3.2.4 Collision between aircraft and birds present a main concern to airport operations. The subject

airport will adopt measures and have equipment to avoid bird collision, including requesting the planes to

fly at appropriate altitude and speed during landing and taking off, installation of proper equipment for

bird detection, optical scan of the runways before taking off and landing, monitoring bird numbers and

movements, and installation of air guns, and water channels net covers. The costs of all of the above

mitigation measures are built-in within the various components of the projects. When excluded these are

estimated to cost about USD 3.0 million. In terms of water and power consumption, the airport will be

supplied through existing water and energy networks.

3.2.5 If the suggested mitigation measures in the ESMP are closely followed, the project will result in

only some unavoidable environmental risks that are considered to be within the acceptable limits as set by

the Egyptian laws and regulations.

Climate change

3.2.6 Mitigation: The aviation industry does contribute to greenhouse gas emissions. However the

contribution of the industry is estimated globally to be around 2% of human-produced CO2 emissions.

Modern technologies incorporated by airplane manufacturers are helping to reduce unit emissions by

planes. The International Civil Aviation Authority (ICAA) is guiding international efforts on reducing

emissions by planes. In terms of airport facilities, the measures usually adopted to help reduce impact on

climate change include more use of low emission vehicles and equipment within the airport. They also

include more recycling of construction materials and waste and the production of green energy. This is in

addition to introducing charges to polluting aircrafts and participating in emission trade (Carbon Credit).

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3.2.7 In Egypt, these measures are being piloted through the Ministry of Civil Aviation (MoCA). The

Ministry is working on a pilot project for the recycling of airport waste to subsequently produce clean

energy in Cairo International Airport. The EAC has a waste management plan that is geared towards

waste recycling at Sharm El-Sheik airport and this will go a long way in reducing the carbon footprint of

the airport. To further reduce the carbon foot print, the airport already has a finalised study regarding

20MW solar plant however it is awaiting funding and it is a long term goal. Also, the increase of airport

capacity will enhance the efficiency of airplane movement. It is especially expected to decrease the

waiting-time (circulation) in the sky around the airport for arrival, which has a big impact on the local air

quality.

3.2.8 Adaptation: Climate change in the area is expected to result in increased flooding and the

proposed project has been designed using maximum expected flooding in the area. The airfield will have

mechanisms such as quick infiltration system and other climate change adaptation measures. GHG

emissions are currently within international aviation limits and in 2016 the airport will introduce specific

emission monitoring per flight, machine and vehicle used at the airport. In addition, EAC has high

capabilities in asset maintenance, supported by healthy financial revenues, strong technical and institutional

capabilities. Assets that may be affected by extreme events such as excessive heating and drought, e.g.

drainage systems, pavements, and equipment will be subjected to regular maintenance.

Gender

3.2.9 The Sharm El-Sheikh airport development project will lead to increased tourism activities

nationwide, which in turn will provide increased nationwide job opportunities for women. In Egypt 60% of

employed women are working in the general services and commercial assistance field, a sizable share of

which is supported by, or relies on, the tourism industry. In the aviation industry, participation rates for

women are lower. However, the sub-sector is showing notable growth in female employment, particularly in

the EAC. This project includes the establishment of an Airport Centre of Excellence, which will target

increased participation of women in the industry, through dedicated courses on gender mainstreaming in the

sector.

3.2.10 The demographic patterns of Sharm El-Sheikh is largely that of a migrant work force, from other

parts of Egypt resulting in a relatively lower participation by women in tourism in Sharm El-Sheikh, where

more than two thirds of inhabitants (15 years old and over) are male. Possible changes to the zoning laws

in Sharm El-Sheikh and the planned establishment of a university in Sinai, will lead to a growth of social

facilities and services in the city, and consequently, to a more balanced available work force. The impact

of the airport extends to other parts in Egypt, where visitors arriving through the Sharm El-Sheikh airport,

also visit other parts of the country such as Luxor and Cairo. Women participation in the tourism sector in

these parts of the country is higher, and accordingly, the project will contribute to increase in women job

opportunities there too. It is estimated that women will fill 20-30% of the direct and indirect job opportunities

that will be created as a result of the project.

Social

3.2.11 Sharm El-Sheikh, as a growing city with all its natural assets, attracted new labors from all over

the country. Most of the population is working in the tourism, construction, health and education sectors.

The total number of inhabitants of Sharm El-Sheikh is about 35,000. The population has increased rapidly

with 16.9% annual increase over the past 20 years, mainly because of the fast growth of tourism sector.

Many Bedouin indigenous residents are employed in several tourism activities, such as desert tour

guiding, ranging of the National Parks of Nabq and Ras Mohamed, and hosting of Bedouin tents and

nights.

3.2.12 Sharm El-Sheikh is the biggest city in South Sinai Governorate. The unemployment rate in South

Sinai was 4.85% in 2006 according to the 2006/07 Census. This is much smaller than the national figure

for Egypt of 9.72% (in 2006), thanks to the tourism sector development. The project will have a major

11

positive impact in terms of job creation. Over 1500 persons will be employed during construction, mostly

Egyptians, and over 700 staff will operate the airport once completed. The most significant impact, however,

is the creation of indirect jobs, which are estimated at around 240,000 jobs, including in areas as far as Cairo,

Luxor and Aswan; destinations that will be visited by the Sharm El-Sheikh tourists.

3.2.13 Initiatives aimed at economic and social development of the local communities already exist in the

region. These initiatives generally target the development of Sinai’s population, with various donors

having participated in the past, and anticipated to continue in the future. Example of these include the

Regional Development Program (SSRDP), which was an integrated regional development programme in

the Governorate of South Sinai and is funded by the European Union for the protection of cultural and

natural resources, and enhancing the living conditions of local communities, particularly Bedouins. Other

examples include the “Assessment of the Nutritional Status of Bedouins in Non-Urban Areas in South

Sinai” program.

3.2.14 The Bank has consulted and agreed with other donors such as EBRD and JICA on future

collaboration on initiatives in South Sinai, aiming at developing the local population skills in tourism,

women artisanal know-how’s promotion and improving their likelihood.

3.2.15 Involuntary resettlement: There will be no resettlement. The project will be developed within

EAC fenced land and boundaries.

4 IMPLEMENTATION 4

4.1 Implementation arrangements

Executing Agency

4.1.1 The Executing Agency of the project will be the Egyptian Airports Company (EAC). EAC is an

affiliate of the Egyptian Holding Company for Airports and Air Navigation (EHCAAN), which is under

MoCA. EAC is in charge of 21 airports, two of which are managed under BOT concessions. Annex 6

shows further details on the sector and its institutional set-up. It is to be noted that the navigation systems,

under the project, will be implemented by the National Air Navigation Services Company (NANSC),

under a separate contract. EAC has developed technical and managerial capabilities to successfully

execute large airport projects, with the most recent example being the Sharm El-Sheikh Terminal 1

project and Hurghada International airport. The proposed project will represent the first engagement for

the Bank with EAC. Nevertheless, the company has had successful experiences of implementing projects

that were financed by international and regional donors such as AFESD, WB, and JICA.

4.1.2 It is to be noted that the new projects at Hurghada airport and Sharm El-Sheikh airport will add

considerable increase to traffic being handled by EAC. This is anticipated to be met with adequate

development in EAC’s operational capacity. The Bank will work closely with EAC to formulate capacity

building activities, and identify suitable financing mechanism that will help in addressing this issue. This

will be delivered through a consulting assignment, to be delivered by a specialised firm selected through a

competitive process (refer to Annex A.2 on Technical Assistance).

4.1.3 The project is anticipated to be implemented over 44 months, starting late 2015. Implementation

will be closely followed and managed by EAC, which has set up a Project Implementation Team (PIT).

The PIT is staffed by EAC professionals, and is led by a Project Manager. The team will also include

procurement specialist, monitoring officer, accounting/disbursement officer, safety compliance officer,

environmentalist, social expert as well as other technical staff. Reporting to the PIT, a reputable

consulting firm was hired and will be responsible for the supervision and coordination of the construction

works being carried out by the different contractors. The PIT will be responsible for coordinating the

contracts administered by EAC (Terminal building and airfield works), and those administered by

NANSC (control tower and associated facilities).

4.1.4 The project is at advanced stage of readiness for implementation, with the draft bidding

documents ready, the PIT formed, and the consulting firm already deployed,

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4.1.5 The project will have a steering committee with direct and indirect representation from Ministries

and entities such as Civil Aviation, International Cooperation, Finance, Tourism, EHCAAN, EAC, and

the Egyptian Environmental Affairs Authority, etc. The committee will be chaired by EHCAAN (through

its CEO), and will meet on biannual basis, and when necessary. The main role of the committee is to

oversee the implementation of the project and the work of the PIT.

Provisions on procurement of goods, works and services

4.1.6 Acquisitions: All acquisitions of works, goods and consultant services, financed from the Bank

loan as part of this project will be conducted in accordance with the Rules and Procedures for

Procurement of Goods and Works (May 2008 Edition, updated in July 2012), Rules and Procedures for

the Use of Consultants (Edition May 2008, updated in July 2012) and the provisions of the loan

agreement.

4.1.7 The project will consist of 6 packages, the largest of which are as follows: First package, covers

“Contract A: Runway, and all other airfield works.” with an estimated cost of US$ 127.55 million will be

financed by the Bank and EAC. This package is in advance stage of progress, where the bidding

documents are prepared and will be sent to the bank for review soon after Bank loan approved. Second

Package, is “Contract B: Terminal building, surrounding aprons and accesses”, with a preliminary

estimated cost of US$ 457.56 million and anticipated to be financed by the Islamic Development Bank

(IsDB). Prequalification had already been completed and cleared by African Development bank (as part

of previous financing plan) and the Islamic development Bank has endorsed the results of evaluation. The

draft bidding documents were prepared based on the African Development Bank standard bidding

documents (International Competitive Bidding –ICB) for large works, latest version on the website. These

documents were also endorsed by IsDB. The third Package is “Contract C: Control tower and associated

facilities” with an estimated cost of US$ 32.5 million, which is proposed to be financed by the Bank and

EAC. Procurement of civil works will be carried out under International Competitive Bidding (ICB)

procedures, with post qualification. Preference for domestic contractors may be applied.

4.1.8 EAC is fully aware of the Bank rules and procedures. In particular, EAC is fully aware of the

International Competitive Bidding (ICB) procedures. The company, which has its own procurement

regulations, will follow procedures of the one envelope system for the procurement of the bids that will

be financed by the Bank. The Project Implementation Team (PIT) includes a qualified procurement

specialist fully acquainted with Bank procurement rules and procedures. In addition, The Egyptian

Airports Company (EAC) will be supported by the supervision consultant (Prointec, Bross Bob, & ACO),

which will assist, among other items, with the procurement activities.

4.1.9 The procurement risk of the project has been assessed and found Moderate. Considering the level

of procurement expertise of EAC and PM staff, previous procurement activities handled by EAC and the

organization and work environment of EAC. The following mitigation actions has been proposed: (i)

update during the launching mission the procurement knowledge of EAC team (as well as the PM

consultant) on Bank procurement specificities; (ii) Improvement of EAC filling system; (iii) impose a

Bank prior review to the package under its funds.

Financial Management

4.1.10 The financial management (FM) of the project will be based on the existing systems of the

Egyptian Airport Company (EAC). These systems were assessed in accordance with the Bank’s FM

policies and procedures and covered each FM component adequacy: budgeting, accounting, internal

control, treasury management/funds flow, financial reporting and external auditing. In assessing the FM

capacity of EAC, the team used the country fiduciary risk assessment conducted in 2013 based on the

most recent Public financial management diagnostics (such as the 2009 Public Expenditure and Financial

Accountability Assessment Report and the Observance of Standards and Codes (ROSC) report) and the

2014 audit report for EAC. The assessment concluded that the current applicable FM systems are well

13

developed and capable of managing the project resources with an overall “Moderate” risk level. Some

mitigating measures are required to enable these systems to meet the Bank requirements on project

reporting and auditing.

4.1.11 The EAC has well experienced and qualified staff under the Financial Sector, which has the

overall responsibility on the financial management of the Company. The EAC has experience with similar

projects financed by other donors and good budgeting and treasury systems. Project expenses will be

included in EAC annual budget approved by the Board and monitored by the budgeting Committee. The

EAC has performing internal control systems with clear segregation of duties and monthly reconciliation

of bank accounts, stocks and fixed assets. All financial transactions of the project will benefit from ex-

ante controls performed by Internal Audit on the procurement process, and pre-payment controls before

contractors’ payments by the Financial Sector. The EAC will assign two competent and experienced

accountants to handle the day-to-day financial activities of the Project and ensure timely recording of all

project transactions. EAC has a semi-automated accounting system managing the General Ledger. The

financial reporting, stocks & fixed assets, Payables & Receivables are currently managed manually on

Excel, which might generate inefficiencies recording errors. Therefore, it was decided that the accounting

software which has been successfully used for the World Bank project is also used for the current project.

Using this software, EAC will prepare and submit to the Bank semi-annual project financial reports and

audited annual financial statements covering the entire project components and sources of funds.

4.1.12 Audit arrangement: EAC financial statements are audited by the Central Auditing Organisation,

which is the Egyptian supreme audit institution. The audits are submitted on time and conducted in

compliance with Egyptian Auditing Standards which are compliant with the international standards on

Auditing (ISA). As the independence of the auditor is not compliant with the INTOSAI standards on

independence, it has been agreed that an independent private-sector auditor acceptable to the Bank should

audit the project financial statements based on the Bank standard TOR for audit of pr oject. In

addition to the project audited financial statements, the EAC will provide the Bank with its annual

Company audit report performed by the CAO. The audit reports shall be submitted to the Bank within six

months after the end of each fiscal year.

4.1.13 Disbursement: As the Bank finances a limited number of contracts (two civil works contracts and

a consulting contract under the MIC grant), the direct payment method of disbursement will be used to

disburse funds in accordance with the Bank disbursement rules. Therefore, the Bank will directly transfer

money to contractors based on payment instructions received from the EAC. EAC will complete the

relevant forms and submit the duly authorized payment requests to the Bank by clearly indicating the

amount/currency, the name and bank details of the payee; and attaching all the relevant supporting

documents, including certified payment certificates and contracts.

4.2 Monitoring

4.2.1 The EAC will be responsible for monitoring and evaluation of the project. The international firm

Aéroports De Paris (ADP) was appointed by EAC in the past (contract completed) as a strategic advisor

to advise on various aspects including monitoring and evaluation. As a result, the EAC currently has

adequate monitoring capacities. During project implementation, EAC will provide to the Bank quarterly

progress reports monitoring the various aspects of implementation. During operation of the airport the

EAC specialized unit, under its Commercial Department will monitor all the various performance

indicators highlighted earlier.

4.2.2 The PIT will have a monitoring officer, who will undertake monitoring and evaluation activities.

An environmentalist will also be assigned as part of the PIT, to be responsible for the monitoring of the

implementation of the ESMP. Similarly, the team’s disbursement officer will monitor disbursements and

accounts of the project. Also, the Bank will provide close monitoring and evaluation of the project during

implementation through regular follow-up, review and supervision missions. The implementation

monitoring timeframe is shown in Table 4.1.

14

Table 4.1: Implementation Monitoring Timeframe

Timeframe Milestone Monitoring process /feedback

Q4 - 2015 Procurement of Civil Works Completed Procurement Plan

Q4 – 2015 Project Launching Progress Report

Q1 – 2017 50% of Civil Works completed mid-term review Midterm Review & Progress Report

Q4– 2017 Substantial completion of civil works Supervision and Progress Report

4.3 Governance

4.3.1 The institutional set-up of the aviation sub-sector is highlighted in Annex A.1. Law No. 28 of

1981, and its amendment, provides the general framework governing the civil aviation sector in Egypt.

The Ministry of Civil Aviation (MoCA) is entrusted with all responsibilities pertaining to air transport

and airports. The Ministry oversees, amongst others, EHCAAN, an affiliate of whom is the Egyptian

Airports Company (EAC). The sub-sector has gone through successful reforms that helped transform the

field in Egypt. The governance system has witnessed notable improvements, developing further its

transparency, planning and management capacities.

4.3.2 EAC manages and operates all airports in Egypt except Cairo, Marsa Alam and Al Alamein,

totalling 22 airports. The company has a ten-member Board of Directors (one member without voting

rights) who is responsible for the operational and financial management affairs of the company. Its

responsibilities include the setting up of strategic goals and policies for the company as well as

monitoring the performance in executing these policies and strategies.

4.3.3 The Board is composed of representatives from MoCA, the Ministry of Tourism, the Banking

sector, the air force, airport security, and ports security, two members from management, the company’s

labour union and the Chairman, who is also the Chief Executive Officer of the Company. This Board

composition reflects the commitment of the Government to the development of the sector and ensuring

transparency within it. EAC’s major investment plans have to be approved by EHCAAN Board. The

Egyptian Civil Aviation Authority (ECAA) which reports to the MoCA regulates air transport.

4.4 Sustainability

4.4.1 Upon project completion, Sharm El-Sheikh airport will become EAC’s largest airport and largest

source of revenue (through aeronautical and commercial fees), and hence the company’s most important

asset. Not only will this ensure high level of commitment to the maintenance, and hence sustainability, of

the airport, but it will also help in availing funds for the maintenance and expansion of other airports

operated by EAC. Several of EAC-managed airports have undergone major rehabilitation and

modernisation work over recent years, which will reduce maintenance financial burdens on the company

and enable larger growth of its profits over the years to come.

4.4.2 Overall, the resources devoted by EAC to the maintenance of installations are substantial. The

financial analysis of EAC accounts shows that these recurrent costs are effectively financed each year. It

also shows that the new maintenance requirements as a result of the development and modernization of

airports under the responsibility of EAC are systematically covered in EAC’s budget as part of the

operating expenses. In 2014, EAC spent US$ 38.0 million on maintenance (excluding upgrade

operations), with the planned figure for 2015 being US$ 54.0 million.

4.4.3 The issue of physical sustainability is also addressed through the technical documents of the

project, with special emphasis being put on the quality of aeronautical equipment to be procured, the

quality of the construction materials for the air terminal, as well as proven qualifications and experience

of the contractors, suppliers and consulting firms responsible for the control and supervision of works. It

is also to be noted that two other factors will further ensure the sustainability of the project and these are

the requirement to comply with ICAO safety standards, and the covenants of the operation and

maintenance contracts that will be put in place by EAC for private sector participation.

15

4.5 Risk management

4.5.1 The following have been identified as potential risks for the implementation of the project and the

attainment of its development objectives. Economic risk: Instability and Government not implementing

other measures/ projects necessary for the development of the tourism sector. The likelihood of this risk is

low, considering the impact of the industry on economy and employment (cited as strategic sector in

Government’s development plan).

4.5.2 Supporting infrastructure and systems: the risk that supporting infrastructure (e.g. access roads)

and water and power supplies may not be available at the time of project completion is very low. To

mitigate against this, EAC has begun early coordination and put in place arrangements with the concerned

authorities to ensure that the supporting infrastructure and the required supplies are ready well in advance

of project completion. These authorities have confirmed commencement of works at their end to meet

targets associated with the development of the project.

4.5.3 Traffic risk: There is a risk that fewer passengers will use the airport than anticipated, which

would affect the economic effectiveness of the project. This risk is assumed to be relatively low, taking

into consideration the recent traffic analyses. Also, sensitivity analyses concluded that the project is

viable even with a 20% reduction in passenger traffic.

4.5.4 Cost Overrun: the likelihood of cost overrun occurring is considered moderate. However, based on

the assessment of EAC’s financial position, the company can cover such overrun. In terms of economic

impact, the sensitivity analysis shows that with a 20% increase in cost the project remains viable. Also,

adequate contingencies have been incorporated in the estimated project cost.

4.6 Knowledge building

4.6.1 Most of the equipment to be procured are relatively sophisticated electronic equipment, requiring

adequate training by the suppliers of the users. The technical staff concerned will receive targeted training

that will enable them broaden their knowledge in the management and efficient use of the new equipment.

With regard to training and knowledge development, the establishment of the Airports Centre of

excellence, will play a major role in developing human resources on the national level in the areas of

airports planning and management. The centre will also act as a regional training center that will boost

south-south cooperation efforts that aim at utilizing the advancement Egypt has achieved in the area of air

transportation. In addition, the centre will act as a platform for exchange of knowledge and best practices

between EAC and its counterparts in the region.

5 LEGAL INSTRUMENTS AND AUTHORITY

5.1 Legal instrument

5.1.1 The legal instrument for the project used is an ADB loan which will be given to the Arab

Republic of Egypt and the proceeds of the loans will be on-lent to EAC. This is in line with the

Bank previous operations in Egypt (in Energy sector in particular), and as per the agreed

arrangement between the Bank and Egypt. There will also be a MIC Grant Agreement signed

with Egypt for the development of the Airports Development Centre.

5.2 Conditions associated with Bank’s intervention

5.2.1 Conditions Precedent to Entry into Force of the Loan Agreements: The entry into force of

the Loan Agreements shall be subject to the fulfilment by the Borrower of the provisions of

Section 12.01 of the General Conditions Applicable to Loans and Guarantee Agreements of the

ADB.

5.2.2 Conditions Precedent to Entry into Force of the MIC Grant Letter of Agreement: The

Letter of Agreement shall enter into force upon signature by the parties thereto.

16

5.2.3 Conditions Precedent to First Disbursement of the Loan: The first disbursement of the loan

shall be subject to Borrower having submitted to the Bank, an on-lending and/ or subsidiary

agreement between the Borrower and the Executing Agency, in form and substance acceptable to

the Bank..

5.2.4 Conditions Precedent to First Disbursement of the MIC Grant: The obligation of the Bank to

make the first disbursement of the MIC Grant shall be conditional upon entry into force of the

Letter of Agreement in accordance with Section 5.2.2 above.

5.2.5 Other Conditions: The borrower shall cause the Executing Agency to a) implement the project

in compliance with national legislations and in accordance with the Environmental and Social

Management Plan (ESMP) and submit to the Bank Quarterly Progress Reports; b) notify the

Bank of the Project Implementation Team (PIT) with acceptable composition and qualifications.

The Borrower shall establish a Project Steering Committee, and shall notify the Bank of its

functions and composition.

5.3 Compliance with Bank Policies

5.3.1 This project complies with all applicable Bank policies.

6 RECOMMENDATION

Management recommends that the Board of Directors approve the proposed ADB loan of USD 140.0

million, and MIC Grant of UA 1.2 million, to the Arab Republic of Egypt to finance the project described

in this report subject to the conditions stipulated in this report.

I

APPENDIX I: EGYPT SOCIO-ECONOMIC INDICATOR

II

APPENDIX II: AFDB PORTFOLIO IN EGYPT (31 MARCH 2015)

Project Source Approval Age (mnth) Closing Date Amount Disbursed

Suez Thermal Power Plant ADB-L 15-Dec-10 26 31-Dec-16 349.6 32.9%

Ain Sokhuna Thermal Power ADB-L 22-Dec-08 63 30-Jun-15 286.1 70.6%

Abu Qir 1300 MW Steam Power ADB-L 14-Nov-07 75 30-June-15 212.8 93%

Study on Integration of Wind Energy MIC TAF 16-May-11 21 31-Dec-15 0.49 18.4%

Study on Improvement of Power Efficiency MIC TAF 16-May-11 19 31-Dec-15 0.49 8.2%

CTF Project Preparation Grant for Kom-Ombo CTF 29-Nov-11 20 31-Dec-14 0.65 33.8%

CTF Project Preparation Grant for Suez Gulf Wind CTF 29-Nov-11 27 31-Dec-14 0.64 34.4%

Egyptian Refining Company ADB Priv 17-Mar-10 30 15-May-16 129.44 53.3%

Egyptian Refining Company sub convention loan ADB Priv 17-Mar-10 30 15-May-16 16.18 100.0%

Sub-Total – Power (8)

996.39 60.3%

RIEEP-Rural Income and Economic Enhancement ADB-L 13-Jan-10 50 31-Dec-15 44.5 100%

RIEEP FAPA 5-Feb-10 47 31-Dec-15 0.6 52%

RIEEP MIC TAF 13-Jan-10 57 31-Dec-15 0.6 33.3%

Social Audit to improve governance in social TFT 28-Jun-13

0.12 0.0%

Support to Parliament: Building Capacity & MENA TF 11-Jun-14

30-Sep-17 1.91 0.0%

Sub-Total – Social (5)

47.73 94.3%

MSE Support Project Loan (2nd LOC to NBE) ADB-L 12-Oct-05 73 31-Dec-12 127.1 100.0%

Sub-Total - Finance (1)

127.1 100.0%

Gabel El-Asfar Wastewater Treatment Plant ADB-L 7-Oct-09 66 31-Dec-15 46.90 24.1%

Study Nubaria and Ismailia Canals Rehab AWF 18-Oct-07 73 31-Dec-14 1.70 82.4%

Monitoring of Water MDG in N. Africa AWF 27-Apr-10 46 31-Dec-14 1.70 100.0%

Helwan PPP MIC TAF 31-Oct-11

30-Jun-15 0.6 29.0%

Sub-Total – Water & Sanitation (4) 50.90 28.6%

Statistical Bldg Programme (SCB II) MIC TAF 20-May-11 24 30-Jun-15 0.6 100%

Franchising Sector Support Program ADB-L 25-Feb-09 54 31-Dec-15 25.4 20.9%

Franchising Sector Support Program FAPA 13-Apr-09 56 31-Dec-14 0.59 100.0%

Industrial Waste Management & SME MENA TF 20-Feb-13

30-Mar-16 1.29 12.4%

Support to Micro, Small & Medium Enterprises MENA TF 20-Feb-13

30-Sep-16 1.29 20.2%

Transaction Advisory services for NAVISAT IPPF 4-Mar-13

30-Jun-15 0.98 10.2%

Effective & transparent delivery of justice MENA TF 11-Jun-14

31-Aug-17 1.57 0.0%

Egypt International Economic Conference MIC TAF 19 Nov 14 30 Dec 15 0.39 0

Sub-Total – Multi Sector (8)

31.72 21.8%

Masterplan for Rehabil Struct Nile MIC TAF 10-Nov-09 42 31-Dec-15 0.6 50.0%

Masterplan for Rehabil Struct Nile AWF 3-Nov-09 42 31-Dec-15 1.2 70.0%

Sub-Total – Agriculture & Irrigation (2)

1.8 63.3%

Windsor Garden City Hotel, Hurghada ADB Priv 21-May-97 176 31-Dec-01 9.1 100.0%

Sub-Total – Industry (1) 9.1 100.0%

SUBTOTAL: 29

1,265.31 63.6%

III

APPENDIX III: RELATED FINANCED BY DONORS

Donor Project Approval

Date

Closing

Date

Donor

(m USD)

GOE

(m USD) Description

AFESD

Development of

Hurghada International

Airport

2006 N/A 121.127 96.902

Objectives: (1) To improve the air transport service of passengers and freight through Hurghada

International Airport to meet the increasing demand. Components: (1) Construction of the Terminal,

building and Parking. (2) Construction of runway, Taxi-way, Apron and Service Roads. (3) Consultancy

Services including preparation of technical studies, design, tender documents and project supervision.

AFESD

Development of

Hurghada International

Airport

2006 N/A 50.00 --- Objectives:. To help financing the costs associated with cost overruns with the construction

EIB

EGYPTAIR:

Modernisation of

aircraft fleet

19-Jul-97 N/A 84.750 ---

Objectives: To contribute to providing the airline with the capacity required to meet the expected growth

in demand. Components: Acquisition of 4 Airbus A321-200 medium range aircraft, the necessary

ground equipment, initial spare parts provisioning, 3 spare engines and training.

EIB

EGYPTAIR II:

Acquisition of Airbus

aircraft for fleet renewal

22-Dec-04 N/A 336.000 564.000

Objectives: To contribute to the modernisation of EgyptAir’s fleet, leading to lower operating costs and

improved service quality. Components: Acquisition of 7 Airbus A330-200 with corresponding spare

engines as part of EgyptAir fleet renewal programme.

EIB Air Traffic Control

Upgrade Egypt July 2012

€ 50

million Upgrading of Egyptian air traffic control facilities

IsDB Sharm El-Sheikh

project Feb-15 N/A 457.56 -

Objectives: (1) To increase the capacity of the Sharm El-Sheikh airport from 8 mpax to 18 mpax.

Components: civil works to construct the new terminal building of the airport.

JICA

Borg El Arab

international Airport

Modernization Project

30-Mar-05 N/A 52.109 56.512

Objectives: (1) To strengthen the air passenger and cargo handling capacity of the existing airport in

response to this growing demand for air transport; (2) and improve convenience and safety.

Components: (1) Construction of an air terminal (2) Improvements in related facilities at this airport,

including the apron and the taxiway

WB Airports development

project 30-Mar-04 30-Jun-09 335.000 239.000

Objectives: (1) To eliminate capacity bottlenecks to traffic growth; (2) raise the service quality of the

Cairo International Airport and Sham El-Sheikh Airport; (3) and promote efficient private participation in

airport management and service. Components: (1) Construction of a third terminal at Cairo International

Airport and enabling works. (2) Constructs a new terminal at Sharm El-Sheikh Airport and enabling

works. (3) Improvement of sector operations and environmental management.

WB Airports Dev

Additional Financing 24-Apr-08 N/A 40.000 27.300

Objectives: To help financing the costs associated with cost overruns with the construction of the

Terminal 3 (TB3) at Cairo International Airport.

WB

Cairo airport

development project-

TB2

23-Feb-10 30-Nov-15 280.000 156.000

Objectives: To assist the Government of Egypt to: (i) enhance the quality of airport services through an

increase in the capacity of Cairo International Airport, and (ii) strengthen air transport in Egypt.

Components: (1) Rehabilitation and expansion of the TB2 at Cairo International Airport. (2) Technical

assistance and studies

IV

APPENDIX IV: PROJECT MAP

Inset image: The new project is shown in dark lines. Existing facilities are shown in light color.

Computer generated image of the new terminal building, and airfield