PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE. EG-Second Airports Development

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE EG-Second Airports Development Report No.: AB5146 Region MIDDLE EAST AND NORTH AFRICA Sector Aviation (100%) Project ID P Borrower(s) GOVERNMENT OF EGYPT Implementing Agency Egyptian Holding Company for Airports and Air Navigation Airport Road Cairo Egypt, Arab Republic of Tel: (20-2) Fax: (20-2) Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared November 12, 2009 Date of Appraisal November 12, 2009 Authorization Date of Board Approval February 23, Country and Sector Background The global economic crisis that began in 2008 had an adverse impact on Egypt during FY09, as it reversed the favorable international environment which supported Egypt s growth in the last three years. This environment, namely favorable terms of trade, rapid growth of external demand and abundant international liquidity, together with domestic economic reforms and prudent macro management, helped Egypt s economy grow at a yearly average of 7% between FY05 and FY08, a record over the last twenty years. Due to the crisis, real GDP growth was reduced to 4.7% in FY09 and unemployment increased to 9.4% from 8.4% a year earlier. Declining export earnings led to a current account deficit (of 2.3% of GDP) for the first time since FY01 and declining capital inflows, especially FDI (down by 39%), led to an overall balance of payments deficit of 1.8% of GDP compared with a 3.3% surplus a year earlier. has decelerated from a peak of 24% last August but continues to be high at around 10% currently. There are signs that the worst is over. Some export numbers are picking up. Suez Canal traffic is recovering. The stock exchange has been on the upswing since March And, after depreciating by 7.7% between August 2008 and March 2009, the Egyptian pound has been stable or appreciating in response to renewed capital inflows. Moody s, the prominent international rating agency, has changed its outlook for Egypt from negative to stable. The crisis is an incentive for the Government of Egypt (GOE) to press ahead with economic reform. The economic outlook for the future is cautiously optimistic, since GDP growth is forecast at 5% for FY10. Nevertheless, this is not grounds for complacency. The GOE needs to accelerate selected reforms to increase productivity and get on a much higher growth track, as the post-crisis world is likely to present a globally tougher business climate and it will be

2 difficult to continue attracting foreign investors. A GDP growth of 5%, while respectable, will feel similar to a recession, given the strong pace of growth over the last three years, and there probably will be losses of employment in some sectors. The air transport sector is highly strategic for Egypt s economic development. First, this sector is key to Egypt s economic growth and the country s integration in the region and with the rest of the world by supporting economic exchanges and movement of people. Through air transport, Egypt can take advantage of its strategic geographic position of crossroads between Europe, Asia and Africa. Cairo International Airport (CAI) is the second largest airport in Africa, after Johannesburg in South Africa. Second, the air transport sector generates significant employment. This is illustrated by the installation of an increasing number of companies near the CAI platform. 1 Third, the air transport sector support tourism and carries most of the foreign tourists visiting Egypt. Tourism accounts for 3.5% of Egypt s GDP, with 12.4 million of tourists and a total revenue of US$10.5 billion in FY09. Around 80% of tourist traffic comes through Egypt s airports and tourism counts for half of the passenger international traffic at CAI. The reform of the civil aviation sector has separated the sector from other transport activities. Sweeping reforms began in the sector in 2002 with the creation of the Ministry of Civil Aviation (MCA), which took over the responsibility for air transport and airports from the Ministry of Transport. The MCA s main objectives are to develop air transport services both for international and domestic traffic, and to improve their efficiency. Accordingly, the Egyptian Civil Aviation Authority (ECAA), which reports to the MCA, regulates air transport. The MCA also controls airports, air traffic control, and air navigation services through a public company, the Egyptian Holding Company for Airports and Air Navigation (EHCAAN) which in turns owns four the Cairo Airport Company (CAC) in charge of CAI, and (ii) the Egyptian Airport Company (EAC) in charge of all the other commercial Egyptian airports. Air transport is progressively being liberalized. Twenty years ago, the GOE realized the growing importance of air transport as a driver of growth in its own right. Air transport was undergoing spectacular changes worldwide in the wake of the deregulation that had taken place in the US as well as the liberalization in several other markets. The experience of these countries revealed that liberalization of the aviation industry significantly increases airport traffic and ancillary businesses. The GOE s objective therefore became to ensure that the liberalization of the industry would contribute positively to the development of the Egyptian aviation sector. Consequently, Egypt has embarked in gradual liberalization of international air services on a bilateral basis with several countries in the Middle East, Africa, and Europe. Since 2004 the move towards liberalization has firmed up. Requirements for establishing an airline have been simplified and altogether 13 licenses have been awarded to private investors for both international and domestic flights; in addition, seven licenses have been awarded for air taxis. Restrictions on the landing of charter flights at CAI were lifted in 2008 on the occasion of the opening of the new Terminal Building 3 (TB3). Since the early 2000s, Egypt has significantly improved airport services through a range of capacity investments and the strengthening of airport operations. EHCAAN has launched a 1 A study in 1999 estimated indirect employment generated within CAI s area of influence at 185,000 jobs, rising to nearly 350,000 by 2020.

3 long-term investment plan to upgrade airport facilities and improve airport services throughout the country to state-of-the-art international standards. In particular, EHCAAN has spent more than US$575 million under ADP I in 2004 (US$335 million of Bank financing) to double the capacity of CAI and Sharm-El-Sheikh Airport (SSH), the fastest growing Egyptian airport in the last years and the second in the country in terms of tourist traffic. Moreover, in 2005, EHCAAN contracted out the management of major airports (Cairo and main country airports) to international private operators for a period of eight years with a possible extension of three years. Currently, EHCAAN continues expanding the capacity of the country main airports to meet the rapidly increasing traffic, among other due to the attractiveness of Egypt for tourists, especially in Cairo. EHCAAN is also developing infrastructure serving the Cairo platform to facilitate the development of economic activities in CAI and therefore leverage airport investments into a significant number of new jobs. However, Egypt needs to continue expanding airport infrastructure and improve airport services to meet the growing demand, especially at CAI the main gate to Egypt. The current capacity of CAI would be saturated in 2017, according to most recent traffic trends and forecasts. Passenger traffic at CAI grew by about 7% per year in 2005 and 2006, and then skyrocketed by 16.7% in 2007 and by 14.2% in As a result of the economic crisis, traffic started to stagnate at the end of 2008, and dropped by 5% in the first quarter of However, traffic returned to equilibrium from April to August 2009 in comparison with the same period in In line with the industry estimates 2, the GOE now estimates that at CAI would remain quasistable in the near future traffic, whereas traffic growth would resume by mid-2010 as a consequence of the expected worldwide economic recovery, however at a slower pace than in the last four years ( ). 3 These forecasts take into account the expected progressive development of CAI as a regional hub operated by Egypt Air, with an increasing number of flights between Europe, the Middle East, the Maghreb and sub-saharan Africa. Further liberalization of air transport is predicated on the signature of air traffic multilateral agreements. As seen above, until now, Egypt has embarked in gradual liberalization of air services on a bilateral basis with several countries in the Middle East, Africa, and Europe. However, there are three multilateral agreements serving these regions, which remain pending, or which have not yet been established: the Arab League Open-Skies Agreement, the Yamoussoukro Decision, and an open skies agreement with the European Union. These agreements are opportunities to catalyze international air services, both for direct traffic to and from Egypt and for transit traffic at CAI. Egypt has also to continue strengthening air traffic control (ATC) infrastructure and air traffic management (ATM). Egypt has greatly enhanced and modernized air traffic control infrastructure and provides adequate surveillance and management services. But with expected growth, further investments and expansion of services will become necessary to achieve safety objectives of air transport. 2 Boeing Current Market Outlook for , and Airports Council International (ACI) Global Traffic Forecast for % per year in and +3.3% per year in

4 2. Objectives The objectives of the proposed Second Airport Development Project (ADP II) are to assist the GOE to (i) enhance the quality of airport services through an increase in the capacity of CAI, and (ii) strengthen air transport in Egypt. The principal target beneficiaries include: (i) business and tourism passengers, who will benefit from better airport infrastructure and services, (ii) businesses, which will benefit from extended air transport services and a more attractive CAI s area, and (iii) workers, who will benefit from job creation during construction, which would contribute to Egypt s stimulus package in response to the economic crisis, and after construction through airport activities as well as activities of industries and services attracted to the CAI area. 3. Rationale for Bank Involvement The GOE has clearly expressed interest in borrowing from the Bank for this project. On May 7, 2009 the Minister of the International Cooperation requested an US$280 million Bank loan to finance the construction of a new terminal on the site of the existing Terminal Building 2 (TB2) at CAI. This follows upon the successful completion of the first Airport Development Project (ADP I). The development objectives of ADP I were to: (i) eliminate capacity bottlenecks to traffic growth, particularly for tourism and associated foreign exchange earnings, (ii) raise CAI and Sharm El Sheikh Airport (SSH) service quality to international best practice standards, and (iii) promote efficient private participation in airport management and airport service delivery in a more competitive market. The loan was approved by the Board in March 2004 and closed in June 2009 as planned. The last Implementation Status and Results report rated the project as highly satisfactory, thanks to the successful completion and satisfactory operations of new facilities at CAI and SSH before the loan closing date, and thanks to the effective implementation in several instances of recommendations made under the capacity strengthening component. Actually, the US$375 million loan of ADP I supported the construction of the new Terminal Building 3 (TB3) at CAI and of a new terminal building at SSH. In addition, ADP I financed a comprehensive technical assistance that had a deep impact on the Egyptian air transport and airport sectors in terms of strategic orientations and institutional development. Through this capacity strengthening component, the Bank has become a key partner in the air transport sector of Egypt and contributed to: (i) the preparation of a national airport master plan for Egypt which is guiding current capacity development and modernization programs, (ii) the development of a plan for gradual liberalization of air transport, (iii) the development of a national strategy for development of air cargo which paved the way for an investment program in Cairo, and (iv) a management capacity building strategy which outlined priorities for streamlining CAC and EAC organization. Finally, ADP I was instrumental in mainstreaming environmental practices in the airport sector, through the establishment of environmental units in CAC and EAC and the installation of pollution monitoring systems, in strengthening the procurement capacity of airport companies, and in transferring efficient project management

5 practices. As a general matter, the Bank is at the forefront of the air transport sector challenges and has access to the specialized policy and technical expertise required to advise developing countries on airport infrastructure and air transport services. This expertise is evidenced on one hand by our involvement in a range of projects addressing policy, strategic, development, investment, and operational issues, and on the other hand by the active participation of the Bank in high level discussions within the industry s bodies 4. Description The project comprises two components for a total cost of US$434 million, including contingencies, of which (i) US$280 million are financed by an IBRD loan, and (ii) US$154 million are financed by direct funding from CAC and a domestic loan. Component 1: Construction of a new Terminal Building on the site of TB2 at Cairo International Airport (US$426 million including contingencies - IRBD financing of US$277 million, counterpart financing of US$149 million) The investment component is the construction of a new terminal building on the site of TB2 at CAI. The investment will entail the reconstruction of a new terminal on the site of TB2 with a capacity up to 7.5 mppa, thereby bringing the overall capacity of CAI to 25 mppa. The new TB2 and TB3 will be operated jointly as one integrated terminal, which will be mostly dedicated to Egypt Air (domestic and international flights), its Star Alliance partners, and Gulf airlines, thus fostering the integration of Egypt within the Middle-East and with Europe, and reinforcing the role of CAI as a regional hub. Component 2: Institutional and Capacity Strengthening (US$2.3 million) This component will support policy initiatives and the enhancement of air transport services in Egypt. It will be divided into five sub-components, as follows: Sub-Component 2.1: Review of the Air Transport Policy of Egypt and Strategic Options This sub-component aims at assisting the MCA refine a roadmap for developing international air services, both for direct traffic to and from Egypt, as well as for transit traffic through the hub at CAI. Sub-Component 2.2: Development Strategy of Air Traffic Control and Air Traffic Management This sub-component will consist in a specialized and independent review of the pending technology and policy choices for Air Traffic Control (ATC) and Air Traffic Management (ATM), as well as to recommend priorities for implementation. Egypt has greatly enhanced and modernized ATC infrastructure and provides adequate surveillance and management services.

6 Sub-Component 2.3: Regulatory Oversight of Safety and Security This sub-component will review the compliance of the current safety and security level of air transport in Egypt, including airports, with ICAO standards and recommended practices. Although Egypt successfully passed an ICAO Safety (2005) and Security Audit (2009), and Egypt Air is IATA IOSA certified, further growth of the air transport sector and the upcoming ICAO safety audit justify this review. Sub-Component 2.4: Analysis of the Fee and Tax Structure of the Airport Sector This sub-component will review and compare the current fee and tax structure of the aviation sector with ICAO guidelines, assess how several new charges, such as the European Union Emission Trading System, and other environmental fees could be considered. Sub-Component 2.5: Spatial Planning of Cairo Airport s Area This sub-component will develop a spatial planning focusing on long-term optimization of the existing land surface of the airport to facilitate the installation of activities and services and to integrate them into the surrounding urban areas. Sub-Component 2.6: Audit of project accounts 5. Financing Source ($m.) Borrower 154 International Bank for Reconstruction and Development 280 Total Implementation The project starting date is April 1, 2010 and all activities should be completed by December 31, 2014, with the Loan closing date scheduled on September 30, There will be a Loan Agreement between the Bank and the GOE (Ministry of International Cooperation) and a Project Agreement between the Bank and EHCAAN. The GOE will on-lend the Bank Loan proceeds to EHCAAN under a Subsidiary Loan Agreement (SLA) between the GOE and EHCAAN. Implementation arrangements retained for ADP I, which have proven to be very effective, will be replicated as follows: EHCAAN will book the Loan on its books, while the new TB2 will be an asset of CAC, meaning that back-to-back arrangements will address on-lending and accounting issues. CAC will procure the construction contract and will manage construction. Disbursements under the works contract will be made directly by the Bank to the contractor on the basis of payment applications sent by CAC through EHCAAN.

7 The PMU established with EHCAAN for ADP I in agreement with the Bank requirements will remain in place with the same responsibilities and the same organization, including a financial management unit, a procurement coordinator, and a reporting specialist. The PMU has actively participated into the preparation of the project and will be maintained throughout the implementation phase. EHCAAN will finance the PMU costs from its own budget. The Project Steering Committee, chaired by EHCAAN and established under ADP I, will remain in place with a renewed mandate to oversee the implementation of the project and the work of the PMU. Representatives include key stakeholders in the project, such as from the Ministry of Civil Aviation, the Ministry of Finance, the Ministry of International Cooperation, and CAC. The composition and mandate of the steering committee will be updated no later than May 1, The environmental unit established with CAC under APD I will monitor the implementation of the Environment Management Plan (EMP). 7. Sustainability The borrower s commitment to the investment component is strong and evidenced by the inscription of the project in CAC s investment plan, the successful implementation of ADP I with a full support of the Minister of Civil Aviation, the completion of the detailed design of the new TB2 by an engineering consortium including a renowned international firm by the end of The new terminal will also provide additional capacity at CAI needed to meet the expected traffic in the near term, as a consequence among others of the hub function for Egypt Air. In addition, the institutional component will address critical issues for the development and liberalization of air services to and from Egypt, the safety of air transport and airports in Egypt, and the creation of jobs in the Cairo airport area. The project sustainability will also be buoyed by the following: the management contract signed with a private airport operator, which is among the leading group of companies in the international business. the compliance of the new terminal with safety requirements. the progress of air transport liberalization resulting from the GOE s policy. 8. Lessons Learned from Past Operations in the Country/Sector The following lessons have been drawn from the preparation and implementation of ADP I and from the broader experience of the Bank in Egypt: The Bank attention and responsiveness during preparation and its strong support all along the project implementation have been instrumental in restoring the GOE s confidence in our ability to address critical development issues. The sector reform can only be progressive and the Bank s support through a large scale investment lending operation can make a difference, if provided through an early dialogue and during implementation, and focused on strategic aspects, high policy advice, and game changing issues.

8 Airport platforms can attract significant economic activities and contribute to job creation when a critical mass is achieved. Full support and attention of management within the implementing entity and a strong Project Management Unit (PMU) are critical. The quality, completeness, and relevance of the design, as well as a strong engineer during construction, can significantly contribute to controlling final costs. It is recommended to have a single contractor for construction works and equipment. Airport terminals are integrated facilities with a large number of equipment and an integrating IT system. Under ADP I, EHCAAN and CAC had a bad experience with two separate contracts for the building including equipment and the IT system. This setup raised very difficult to manage issues regarding the coordination of works, the hand over process, and the identification of the responsible party in case of delays or equipment dysfunctions. 9. Safeguard Policies (including public consultation) Environment According to the World Bank s Operational Policy OP 4.01 on Environmental Assessment, the proposed project is classified as category B project, requiring an environmental assessment in the form of an Environmental and Social Impact Assessment (ESIA) report. The ESIA was carried out by an independent third party (an Egyptian consulting firm hired by CAC), focused on the impacts and mitigation measures during the construction phase of the project as well as the operation phase of the terminal building of the airport. The ESIA report was completed according to the terms of reference prepared by CAC and cleared by the Bank. The ESIA includes an environmental management plan (EMP), detailing institutional settings, mitigation measures, and monitoring plan for the potential impacts expected from the project during the construction and operation phases. No other safeguard policies are triggered by the project. The project does not entail any land acquisition or resettlement as all new TB2 constructionrelated activities will take place inside the existing boundaries of the airport. Therefore, the operational policy OP 4.12 on Involuntary Resettlement is not triggered. Legal and Institutional Aspects The Egyptian law requires that any new project should comply with all relevant articles pertinent to environmental attributes which could be impacted by project activities. Law 4/1994 and its executive regulations set the overall framework for environmental protection. According to this law, an environmental impact assessment should be prepared with the application for the license of a project. The law divides the types of projects into three lists, A, B, and C list projects. The development project of TB2 at CAI is a C list project. According to the Egyptian Environmental Agency (EEAA), the EIA of the project should be submitted for approval by the competent administrative authority, the ministry of Civil Aviation in this case.

9 Public Consultations Stakeholder consultations were carried out during the ESIA preparation. The first public consultation meeting was held on September 8, 2009 at Horus Hall in the existing Terminal Building 2 of Cairo Airport. The meeting was publically announced in the most widely distributed newspaper (Al-Ahram). Invitations were also passed to NGOs and syndicates. The meeting was attended by 55 participants (with almost equal gender representation) from the airport employees, research and academia,, airlines and business community. A second public consultation meeting was held on September 29, 2009 at the same place after the consultant finished the draft ESIA and posted the findings on his website. The meeting was attended by 60 participants from both genders. A radio interview with the manager of the environmental unit at CAC was broadcast live and repeated that same day on Cairo radio. Local stakeholders include employees at the airport, owners of nearby businesses and services, and residents in areas surrounding the airport. As proposed by participants during the first public consultation, a more systematic social assessment/survey has been carried out to involve the above local stakeholders more systematically and to get their perspectives on the proposed project. The issues raised by the participants in both meeting addressed the possible impacts of the development on the noise and air quality in the airport and surrounding communities. The consultant addressed their concerns and relayed information to their satisfaction as documented in the ESIA. Initial interviews with local stakeholders seem to indicate that the current knowledge of the project is limited, and a media campaign will be initiated to raise awareness about the project. This should build on the experience of previous campaigns carried out in Egypt. Seminars will also be arranged for airport employees prior to project implementation, in order to ensure timely dissemination of information about the project as well as associated employment opportunities. Potential Environmental Impacts Different potential environmental impacts are expected during the construction and the operation phase. No significant impacts of the project are expected on the surface or water resources, natural habitats, or physical and cultural resources. The project site is a developed area owned by the airport company which encloses the existing terminal building and part of the parking lot adjacent to it. During the construction phase, it is likely that noise and dust will originate from the construction site. It is also expected that those activities will create large amounts of construction waste and debris. Transporting construction materials to the site and construction waste away from the airport will increase the demand on the road system connected to the airport during the construction phase, and will alter the traffic composition with a larger portion of heavy trucks and equipment. In the operation phase of the terminal building, the effects of the project on air quality and noise levels in the airport and neighboring communities have been studied by employing noise and air quality models, and utilizing data from the existing monitoring stations that are distributed in the

10 airport and the surroundings. The rehabilitation and expansion of the terminal building will reduce noise levels inside the departure and arrival halls due to the modernization. The development of the terminal building TB2 is not expected to increase the noise levels inside and outside the airport significantly when compared to baseline noise levels originating from other noise sources. The monitoring results of the gaseous concentrations of nitrogen and carbon emissions around the airport indicated that the contribution from Cairo Airport on local and regional air quality is very small. For peak hour cases and specific locations around the airport, the concentrations of these emissions approached adverse levels. The increase in airport vehicular traffic as a result of TB2 expansion will have impacts on the three access roads to the airport, with Orouba and the Autostrad-El Nassr roads being the most affected. Traffic volumes on these two roads will increase and will translate to more congestions and expected delays. Environmental Management Plan, Mitigation, and Monitoring The environmental management plan employed different mitigation measures to suppress the negative impacts of the construction activities in the airport especially noise, air quality, and traffic flow to the airport and to continue monitoring the noise and gas emissions in the airport and surrounding communities during the operation phase. The EMP employed measures to minimize the dust and noise originating from the construction site during construction. Heavy trucks transporting materials and waste from the site will be restricted to off-peak hours to minimize traffic congestions. CAC has already taken measures to improve public transport services, dispatching shuttle bus services, enforcement of short-term parking to reduce idling time of vehicles. Those measures are expected to reduce the air pollution from other sources associated to the airport operations. The ESIA recommended traffic measures that will help distribute the traffic from/to the airport to the most efficient use of the roads leading to the airport. It also recommended measures to encourage use of car pools and public transport to reduce congestions. Institutional Strengthening and Capacity Building for Implementation EHCAAN/CAI has a well-established environmental management unit in place, with dedicated staff, and with continuous monitoring of air quality and noise from the monitors installed for TB3. This capacity should allow CAC a smooth implementation of the EMP. In addition, the EMP requires special capacity development in pollution abatement for CAC Environmental Department, and Air Traffic Control staff. Environmental training will be conducted to the target staff as well as public awareness campaign to the public and airport employees. Details on the training and capacity strengthening of CAC are included in Table (2). The total combined cost for capacity building and other aspects for EMP implementation is estimated at $ 421,000 USD.

11 Social The project does not entail any land acquisition or resettlement as all new TB2 constructionrelated activities will take place inside the existing boundaries of the airport. Therefore, the operational policy OP 4.12 on Involuntary Resettlement is not triggered. Local stakeholders include employees at the airport, owners of nearby businesses and services, and residents in areas surrounding the airport. According to the social assessment there are currently 185 people working in shops and businesses in TB of these are temporary workers with annual contracts. Most of the workers are expected to be relocated to TB1 and TB2 and in a few cases to other branches outside the airport The Environmental Unit of the CAC will be responsible for monitoring and documenting the relocation process and any necessary follow-up for each individual worker. These steps will be reported to the PMU. The forthcoming social survey will provide the necessary background information to facilitate this process. The survey will be concerned with the question of how job relocation during construction will be handled and how the work of the affected people will change as a result of the relocation. Different types of retraining opportunities/capacity building programs should be proposed and a practical plan presented on how to handle challenges associated with job relocation to ensure that employees are well equipped to handle new/additional tasks during the construction phase. Such capacity building programs/training will require detailed knowledge about the jobs to be filled during construction. CAC intends to only hire 150 to 200 new staff to operate the new TB2. This relatively low impact of TB2 in terms of direct job creation stems from the way the new TB2 and the existing TB3 will be operated as a single terminal with a unique control room. Altogether CAC staff currently at 5,317, after taking into account the 977 staff hired for TB3 and about 400 technical staff hired in addition (about 150 retired at that time), should continue increasing. An additional 100 staff should be hired for TB3 but in the long run, total staff may fluctuate due the high number of staff above 50 years who will retire and efficiency gains. But there will be significant opportunities to hire a new generation of staff. In coming years, CAC will also continue heavily investing in the training of its staff. 10. List of Factual Technical Documents 11. Contact point Contact: Michel Bellier Title: Lead Transport Specialist Tel: (202) Fax: mbellier@worldbank.org 12. For more information contact: The InfoShop The World Bank

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