Cablegate: Agrium Investment Dispute Could Undermine Egypt's Improved


DE RUEHEG #1352/01 1811431
R 291431Z JUN 08




E.O. 12958: N/A

Sensitive but Unclassified. Not for Internet distribution.

Summary and Introduction

1. (U) A campaign against construction of a urea fertilizer plant
in the Port of Damietta industrial zone threatens to derail much of
the GOE's success in improving Egypt's image as a safe, secure
destination for foreign investment. EAgrium, a consortium of
Canada's Agrium (60%), various GOE ministries and public companies
(33%), and a Saudi firm (7%) have so far invested approximately $400
million in the project, which was stopped in April after banks cut
off a $1 billion line of credit to the consortium when the GOE
agreed to calls for a halt to the project pending further assessment
of the environmental impact of the plant. This is one of the higher
profile investment disputes Egypt has seen in recent times and it
has been in the local press almost daily for weeks.

That's Urea, Not Uranium

2. (SBU) According to Greg McGlone, Managing Director of EAgrium,
public hearings on the project were held in Damietta in 2006, and
the Ministry of Environment gave the green light in early 2007 after
reviewing EAgrium's environmental impact assessment. Public
opposition to the project began only after EAgrium published an ad
in a local newspaper in January 2008, in response to various local
press reports that the plant would produce uranium and that it would
have a detrimental effect on the nearby tourist resort of Ras El
Bar. The ad explained the urea project, stating that the plant and
its activities would comply with all relevant environmental laws.
Despite this reassurance, public demonstrations began in front of
the plant's construction site and in the town of Damietta,
continuing until April when the People's Assembly (PA) intervened,
calling for a new environmental impact assessment by a GOE-appointed

Not In My Backyard

3. (SBU) In early June the committee produced its report, which
stated that EAgrium had complied with all relevant environmental
laws and that the plant would have no detrimental effect on Ras El
Bar. The report recommended, however, that because the concerns of
Damietta residents had reportedly not been adequately taken into
consideration, the project should be moved to another site either in
the Port of Damietta industrial zone, or another industrial zone
elsewhere in Egypt. On June 24 the PA recommended the project move
to either the Suez City industrial zone or the Port of Ain Sokhna
industrial zone, both on the Red Sea. The international banks
funding the project have given EAgrium until June 30 to decide how
it will proceed. Although Greg McGlone declined to comment on
EAgrium's plans, press reports indicate EAgrium will ask the GOE for
compensation if the plant moves to another location. The Canadian
DCM in Cairo told us he thought the company would stop the project
completely and pull all investment out of Egypt.

4. (SBU) Several contacts, including Ahmed Abul Zeid, former
Assistant Minister of Investment and current president of the
private investment company Tamweel, believe the Governor of
Damietta, Mohamed El Baradei (not the same person as the Director
General of the IAEA), is the driving force behind "public"
opposition to the plant. The site of the EAgrium project is on the
eastern side of a canal that cuts through the Port of Damietta
industrial zone, creating an island bordered on the west by the
canal, on the north by the Mediterranean, and on the south and east
by the Damietta branch of the Nile. The Ras El Bar resort area sits
on the eastern end of this island, and the industrial zone on the
western end, with approximately 5 kilometers of undeveloped land in
between the two areas. Abul Zeid believes El Baradei wants to use
the entire island, including the part now in the industrial zone,
for tourism development.

5. (SBU) McGlone shared Aboul Zeid's view that El Baradei is behind
the public outcry. According to McGlone, the Governor is backed by
"big money" interests and is riling public opinion against the plant
as a pretext for forcing the project off of land he wants to use for
other purposes. McGlone was vague about the "big money" interests
behind El Baradei, but when pressed, he mentioned Gamal Mubarak's
visit to Damietta prior to the local council elections last April.
During the visit, Gamal heard Damietta residents' complaints about
the project, and upon his return to Cairo, President Mubarak

reportedly summoned several ministers to a meeting to discuss the
issue. It was shortly after this meeting that the PA called for a
halt to construction. Prominent lawyer and advisor to EAgrium Mona
Zaki told us that Gamal Mubarak is eager to be seen as giving
residents of Damietta a voice in what happens in their community,
even at the expense of sending a negative message to international

Egypt Out of Gas

5. (SBU) Some contacts believe the real issue is not land use, but
the 25-year contract the GOE signed with EAgrium to provide natural
gas to the plant at concessionary prices. EAgrium will pay $7/MMBTU
for natural gas, higher than the $1.25/MMBTU paid by the GOE-owned
"MOBCO" urea plant (also located in the Port of Damietta industrial
zone), and triple what Egypt gets for its gas exports to Spain and
France, but lower than current international prices. Former AmCham
President and EAgrium lawyer Taher Helmy claims the GOE has neither
the natural gas resources, nor the political will to fulfill its end
of the contract to supply energy to the plant. With international
energy prices at an all time and high and still rising, the GOE
would rather export natural gas now and let the EAgrium investment
fail than be locked into a 25-year agreement for gas at a
below-market price.

Closely Watched Disputes

6. (SBU) Banking sector contacts have told us that international
investors are closely watching this dispute, as the EAgrium plant is
the first major FDI project to receive international financial
backing without GOE guarantees or letters of comfort. Essam Ragab,
the Head of the General Authority on Investment(GAFI), told us that
the PA's recommendation was sound, as it respected the local
community's opinion and reflected World Bank best practice, noting
that the local tourism industry could not afford to have a
fertilizer plant in its midst. He did admit, however, that GAFI and
the Ministry of Investment are concerned about the issue and
possible ramifications it could have on Egypt's broader investment
climate. He recently made a trip to Canada, possibly trying to
combat the negative international investor sentiment that this event
is generating.


7. (SBU) The real reasons behind the GOE's decision to recommend
EAgrium move its project, like so much in Egypt, may never be known.
However, the PA recommendation to move the EAgrium project, even
though it complied with all relevant laws, shows that FDI is still
at risk of injury from arbitrary decisions of the government made
for political reasons. Absent an offer of compensation from the GOE
for additional costs incurred by EAgrium should it decide to move
the plant, investors are, at a minimum, likely to change their risk
calculation before investing in Egypt without guarantees from the
GOE. Moreover, without concessionary energy prices, Egypt's
attractiveness as an investment destination would most likely be
outweighed by the risks of investing in a country with an investment
regime still more opaque than transparent.

© Scoop Media

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