VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1352/01 1811431
ZNR UUUUU ZZH
R 291431Z JUN 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9692
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0418

UNCLAS CAIRO 001352 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EEB/IFD/OIA 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
TREASURY FOR MATHIASON AND DENNIS 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EINV SENV PGOV EG
SUBJECT:  AGRIUM INVESTMENT DISPUTE COULD UNDERMINE EGYPT'S IMPROVED 
IMAGE 
 
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 
committee. 
 
------------------ 
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 
investors. 
 
---------------- 
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. 
 
------- 
COMMENT 
------- 
 
¶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. 
SCOBEY