AFRICAN DEVELOPMENT BANK ADB/BD/WP/2015/37 3 April 2015 Prepared by: OITC Original: English

Probable Date of Board Presentation FOR CONSIDERATION 15 April 2015

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

SCCD : K.M AFRICAN DEVELOPMENT BANK

PROJECT: SHARM EL-SHEIKH AIRPORT DEVELOPMENT PROJECT

COUNTRY: EGYPT

PROJECT APPRAISAL REPORT

April 2015

Appraisal Team Team Leader: Mr. A. Osman Ali, Chief Transport Engineer, OITC.2

Team Members: 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

Mr. A. Karanga, Chief Transport Economist, OITC.1 Mr. T. Harada, Principal Transport Engineer, OITC.2 Peer Reviewers 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

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 30th

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

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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

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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) Bank lending margin in relation to the 6- Funding margin 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

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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.

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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

PERFORMANCE INDICATORS RESULTS CHAIN MEANS OF RISKS/MITIGATION Indicator Baseline Target VERIFICATION MEASURES (including CSI)

Impact 1

Estimated figure of 20% by Share of tourism industry in 2029. Figure will be revised - Economic risk: Instability and Contributing to economic Government reports, including Government not implementing other growth by supporting the foreign currency receipts of 13% in 2010 following the issuing of the th Central Bank statistics measures/ projects necessary for the services sector, including the Egypt Country’s 7 National tourism industry Development Plan (NDP) development of the tourism sector. Likelihood: Low, considering the impact of the industry on economy Impact 2 -Additional 240,000 direct and indirect jobs in tourism and employment.

Employment generation, as a and aviation by 2029 (direct: - Risk: Supporting infrastructure and result of increased tourism 700 permanently employed activities in the new terminal, and 1500 utilities supplies not available at the employed in construction time of project completion. during implementation). It is Mitigation: Proper coordination -2.4 million in tourism. -Number of persons estimated that 20-30% of adopted at early stages of project

employed in tourism and in these will be held by women. design, between Executing Agency (Women employment at Sharm

IMPACT construction industries Central Statistics Reports and concerned utilities companies. El-Sheikh airport and at the (tourism),

EAC’s other airports will be - Risk: Low passenger traffic. This enhanced by Sensitisation and Project data by Egyptian Training on Gender risk is assumed to be relatively low, -Number of annual Airports Company (EAC) -3.25 million visitors to Mainstreaming, provided by the taking into consideration the recent passengers arriving at Sharm Sharm El-Sheikh in 2014 Airport Centre of Excellence – forecast studies. Sensitivity analysis El-Sheikh (6.5 mpax) indicators TBD during study) concludes that the project is viable

even with a 20% reduction in -Nine (9) million visitors to passenger traffic.

Sharm El-Sheikh by 2029 (18 mpax), and five (5) million

(10 mpax) by 2019 .

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Outcome Capacity of 18.0 mpax, by Capacity of 8.0 mpax - EAC reports in conjunction - Risk: Cost Overrun. The likelihood Increasing Egypt’s airport Operational capacity of air 2016 with IATA and ICAO of cost overrun occurring is capacities and removal of transport facilities in Sharm Capacity of 34 considered moderate. EAC’s infrastructure bottlenecks in El-Sheikh* Capacity of 68 operations/ standards operations/ hour Sharm El-Sheikh hour financial position can support such

overrun. Also, the sensitivity OUTCOMES analysis shows that with a 20%

rd increase in cost the project remains New Terminal building, a new Terminal building, runway - 2 Terminal buildings - 3 Terminal building - Bank supervision reports runway , and a new control airfield, control tower, handling up to 8.0 capable of handling a viable. tower and supporting associated facilities and mpax at actual level of minimum of 10 mpax at infrastructure at the Sharm El- supporting infrastructure IATA level B service, service equivalent to - Project Completion Report Sheikh International Airport, constructed to design constructed and operational IATA level C/D**, with a capacity of 10 mpax, and standards by 2016 and 34 operations/ hour, and - Handing over certificates - 1 runway with a - third runway (3600m), to

OUTPUTS Strategy and action plan for the Actual reports for the Action supporting services ICAO’s code 4E constructed development of the Airports Plan for centre development runway **** and operational by 2016. Centre of Excellence, and & recommendations on recommendations for EAC institutional development. -New control tower with all institutional progression. *** associated facilities COMPONENTS INPUTS

(USD million) 1. Construction of new terminal building of 5 levels and 125,181 m² built-up area, with all associated equipment, Terminal building ………………………………..…397.88 Airfield Works ……………………………………..110.91 installations and all surrounding aprons and buildings Control tower and facilities …………...……………28.26 2. Construction of airfield works, including new (third) runway to ICAO’s code 4E, taxiways, and aprons Navigation systems ………………………..…….....14.78 3. Construction of a control tower, administrative buildings and electrical installations and visual aids Supporting infrastructure …………………..……..…7.37 4. Installation of air navigation systems. Project Management & Supervision………...…...... 22.61 5. Development of supporting infrastructure, including fire stations, fire-fighting vehicles, depots and others Airports Centre of Excellence ………………....……2.25 6. Project Management and Supervision (including financial audit) Contingencies ……………………….……...…… 87.27 7. Establishment of Airports Centre of Excellence Total 671.33

KEYACTIVITIES 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).

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Project Implementation Schedule

ID Task Name Start Finish 2014 2015 2016 2017 2018 2019 2020 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 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

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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.

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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.

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Table 1.1: Development Partners Involvement

Sector or Size subsector 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) WB 40.2% Government Donors EIB 10.3% AFESD 13.5% USD 1,33 m USD 1,73 m IsDB 22% JICA 4.0% [77.1%] [56.5%] Level of Donor Coordination Existence of Thematic Working Groups Yes Existence of SWAPs or Integrated Sector No Approaches 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.

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Table 2.1 Project components

Estimated cost N° Components Description of component (USD mill) 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 Terminal 397.88 counters, 80 passport-control counters, 26 security-check points, 16 pre- Building (No. 3) 1 boarding jet bridges, 15 passenger boarding bridges, 39 departure gates, 12 baggage carousel, 15,000 m2 of commercial space, 2,950 car park positions. 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 Airfield works 110.91 contact stands, and 25 remote stands. Lighting will be standard CAT-I 2 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. This includes the construction of a control tower with all associated navigation control systems and equipment, electrical substations, Control Tower administrative buildings and a maintenance centre. Airfield Lighting and associated 3 28.26 Control and Monitoring System (AFLCMS) shall be installed in the new facilities/ Air Traffic Control Tower and shall also cover all airfield lighting systems substations, namely CCRPS-1 and CCRPS-2 and the Airfield Station, namely ASEP. This includes the installation of all air navigation systems, including Navigation 4 14.78 communication system, systems for coordination with ground operation systems and other associated equipment. This component consists of all various supporting infrastructure and Supporting systems such as fire stations and fire engines, security installations, 5 7.37 infrastructure electrical and utility connections, upgrade of environmental systems, erecting depots and storage areas. This covers supervision and management of project activities and Project includes consulting services for supervision of works, control activities, 6 supervision & 22.61 expenses associated with the Project Implementation Team, as well as management technical and financial audit. 7 Airports Centre Includes the development of a strategy and implementation action plan of Excellence for the establishment of a centre that will serve EAC immediate and 2.25 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 Re-arrangement of the airports interior The magnitude of increase in traffic and hence required Changes to set-up and improving facilities to expand increase capacities is much more than to be interiors capacity. accommodated by this type of arrangement. Expansion of Extending and expanding existing Architectural & structural designs of existing terminals terminal structures have limitations and do not enable such alternative. Not economic as current airport area is safely adequate New airport Developing a new airport in new location 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 FC LC Total FC LC Total expenditure 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 7

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. 8

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). 9

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 10

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, 11

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

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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.

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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. 14

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.

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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.

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APPENDIX I: EGYPT SOCIO-ECONOMIC INDICATOR

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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% 996.39 60.3% Sub-Total – Power (8) 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% TFT 28-Jun-13 0.12 0.0% Social Audit to improve governance in social MENA TF 11-Jun-14 30-Sep-17 1.91 0.0% Support to Parliament: Building Capacity & 47.73 94.3% Sub-Total – Social (5) MSE Support Project Loan (2nd LOC to NBE) ADB-L 12-Oct-05 73 31-Dec-12 127.1 100.0%

127.1 100.0% Sub-Total - Finance (1) 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% MIC TAF 31-Oct-11 30-Jun-15 0.6 29.0% Helwan PPP 50.90 28.6% Sub-Total – Water & Sanitation (4) 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% MENA TF 20-Feb-13 30-Mar-16 1.29 12.4% Industrial Waste Management & SME MENA TF 20-Feb-13 30-Sep-16 1.29 20.2% Support to Micro, Small & Medium Enterprises IPPF 4-Mar-13 30-Jun-15 0.98 10.2% Transaction Advisory services for NAVISAT MENA TF 11-Jun-14 31-Aug-17 1.57 0.0% Effective & transparent delivery of justice Egypt International Economic Conference MIC TAF 19 Nov 14 30 Dec 15 0.39 0 31.72 21.8% Sub-Total – Multi Sector (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% 1.8 63.3% Sub-Total – Agriculture & Irrigation (2) Windsor Garden City Hotel, Hurghada ADB Priv 21-May-97 176 31-Dec-01 9.1 100.0% 9.1 100.0% Sub-Total – Industry (1) SUBTOTAL: 29 1,265.31 63.6%

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APPENDIX III: RELATED FINANCED BY DONORS Approval Closing Donor GOE Donor Project Description Date Date (m USD) (m USD) Objectives: (1) To improve the air transport service of passengers and freight through Hurghada Development of International Airport to meet the increasing demand. Components: (1) Construction of the Terminal, AFESD Hurghada International 2006 N/A 121.127 96.902 building and Parking. (2) Construction of runway, Taxi-way, Apron and Service Roads. (3) Consultancy Airport Services including preparation of technical studies, design, tender documents and project supervision. Development of AFESD Hurghada International 2006 N/A 50.00 --- Objectives:. To help financing the costs associated with cost overruns with the construction Airport EGYPTAIR: Objectives: To contribute to providing the airline with the capacity required to meet the expected growth EIB Modernisation of 19-Jul-97 N/A 84.750 --- in demand. Components: Acquisition of 4 Airbus A321-200 medium range aircraft, the necessary aircraft fleet ground equipment, initial spare parts provisioning, 3 spare engines and training. EGYPTAIR II: Objectives: To contribute to the modernisation of EgyptAir’s fleet, leading to lower operating costs and EIB Acquisition of Airbus 22-Dec-04 N/A 336.000 564.000 improved service quality. Components: Acquisition of 7 Airbus A330-200 with corresponding spare aircraft for fleet renewal engines as part of EgyptAir fleet renewal programme. Air Traffic Control € 50 EIB July 2012 Upgrading of Egyptian air traffic control facilities Upgrade Egypt million Sharm El-Sheikh Objectives: (1) To increase the capacity of the Sharm El-Sheikh airport from 8 mpax to 18 mpax. IsDB Feb-15 N/A 457.56 - project Components: civil works to construct the new terminal building of the airport.

Objectives: (1) To strengthen the air passenger and cargo handling capacity of the existing airport in Borg El Arab response to this growing demand for air transport; (2) and improve convenience and safety. JICA international Airport 30-Mar-05 N/A 52.109 56.512 Components: (1) Construction of an air terminal (2) Improvements in related facilities at this airport, Modernization Project including the apron and the taxiway

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 Airports development WB 30-Mar-04 30-Jun-09 335.000 239.000 airport management and service. Components: (1) Construction of a third terminal at Cairo International project 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. Airports Dev Objectives: To help financing the costs associated with cost overruns with the construction of the WB 24-Apr-08 N/A 40.000 27.300 Additional Financing Terminal 3 (TB3) at Cairo International Airport. Objectives: To assist the Government of Egypt to: (i) enhance the quality of airport services through an Cairo airport increase in the capacity of Cairo International Airport, and (ii) strengthen air transport in Egypt. WB development project- 23-Feb-10 30-Nov-15 280.000 156.000 Components: (1) Rehabilitation and expansion of the TB2 at Cairo International Airport. (2) Technical TB2 assistance and studies

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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

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