Militant attacks endanger Egyptian investor climate


08 Jul 2015

Militant attacks endanger Egyptian investor climate
A fresh wave of militant attacks targeting private companies and infrastructure is threatening to undermine Egypt’s economic recovery. Since March, there has been a surge in attacks on power infrastructure and multinational companies in what appears to be a deliberate attempt to weaken investor confidence. As yet, most incidents have had only localised consequences, but the growing sophistication of militant attacks highlight the potential for a major attack on critical infrastructure in Egypt’s economic heartland that could severely disrupt economic activity.
 
The escalation in militant activity since 2013 has coincided with a huge investment programme aimed at supporting the country’s economic recovery. In March, Gulf donors pledged USD 12.5 bn in aid and investment at the Egyptian Economic Development Conference, while private companies signed a further USD 60 mn in Memoranda of Understanding in the energy and property sectors. These investments came on the back of improving investor confidence after the IMF forecast in February that growth would accelerate to 3.8 percent by the end of 2015, up from 2.2 percent in 2014. The government has also introduced a series of reforms aimed at liberalising the energy and property sectors, including the easing of onerous land purchasing regulations.
 
These efforts, however, now risk being derailed by a fresh wave of violence in the past three months. The Cairo-based Tahrir Institute for Middle East Policy recorded 55 attacks on non-government targets in May, up from 26 in April. This is the highest recorded number of attacks on private interests since the military ousted the Islamist government of Mohamed Morsi in July 2013, and is consistent with PGI’s forecast in February that attacks would increase ahead of the March investor conference.
 
Of particular concern for foreign investors in Egypt is the increasing number of attacks on multinational companies. Despite the majority of attacks since 2013 centring on government targets, since January assailants have increasingly targeted foreign companies claiming the companies or their home-countries are supporters of President Abdel Fatah al-Sisi. Groups such as the Giza-based Popular Resistance Movement and Revolutionary Punishment Movement have carried out unsophisticated IED and arson attacks against commercial outlets, including foreign retail branches of Vodafone, Mobinil, Emirates NBD bank, KFC and the Commercial International Bank. The attacks have damaged building facades and caused temporary store closures but resulted in few casualties, nonetheless demonstrating a clear security threat to large multinational companies.
 
 
 
Militant attacks expose vulnerability of power grid
 
In addition to businesses, power and transport infrastructure have also been subjected to regular IED attacks since 2013. Pylon bombings have led to power outages which, alongside attacks on transmission towers, mobile operators, and transformers, have cost the Ministry of Electricity an estimated USD 63 mn in lost revenues, as of May 2015. In April the Revolutionary Punishment Movement group claimed responsibility for an IED attack on electricity towers in Cairo’s Media City that temporarily forced several major Egyptian satellite channels off air. Multiple localised power outages over 2015 may be an indication that militants are becoming increasingly successful at targeting electricity infrastructure.
 
Egypt’s power grid is already strained due to years of underinvestment, supply shortages and capacity constraints. There is a risk militant groups could attempt to exploit frustrations with the government over the summer months, when outages increase due to surging demand, by intensifying their attacks. In an attempt to deter this threat, the authorities have announced plans to deploy surveillance cameras and private security companies around power infrastructure. However, given the vast expanse and vulnerability of the power network, such efforts are only likely to have a marginal impact.
 
Continued attacks and disruption threaten to undermine government efforts to alleviate supply shortages and create jobs via investment in the energy sector. The government’s reform programme has already begun to yield results, including a USD 9 bn deal with Siemens for the construction of gas and wind power plants and a USD 2 bn agreement with ENI for onshore and offshore oil exploration. However, persistent supply challenges and a decline in investment since 2011 have forced the government to divert power and gas supplies for residential use, restricting supplies to private industry. According to a report from the Daily News Egypt in May, the Egyptian Natural Gas Holding Company stopped pumping gas to 60 percent of energy intensive factories, including steel plants and fertiliser factories, to prioritise gas power plants. In some cases, sustained power cuts have forced domestic industries, such as cement plants, to shut down altogether. Egypt has accelerated the development of infrastructure to allow it to import liquefied natural gas in an effort to resolve the fuel shortage, but militant attacks will continue to disrupt supply and remain a key risk to planned investment.
 
In the longer term, there is a real risk that the growing sophistication and ambition of the militant groups could result in an attack that has wide-ranging consequences for the economy. Indications of the expanding capabilities of militants in Egypt were clearly demonstrated on 2 July when Islamic State’s local affiliate, Wilayat Sinai, carried out a series of coordinated attacks involving more than 100 fighters, anti-aircraft guns and guided missiles. Were such an attack to be directed against a power station or other critical infrastructure, it could severely damage investor confidence, while also resulting in widespread disruption to economic activity. Although it is unlikely jihadist groups would be able to conduct such a major operation outside their strongholds in Sinai, the incident highlights the potential for the capabilities of militants in Cairo and other economic hubs to evolve. This raises the long-term risk of commando-style assaults and major bombings on critical infrastructure in Egypt’s economic heartlands, including Cairo, Alexandria, Suez and Luxor.
 
 

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