By Jeff Neumann Cover Story Customs Unraveled Almost everyone has welcomed new government reforms that slash tariff rates, simplify customs procedures and prepare the country for wider integration into the global economy. While on paper the reforms will cost the government LE 3 billion, analysts predict the new rates could actually be a boon to the government by unbinding business. Looming Concerns If the textile sector is any indication, the new government will have to prove its customs reforms look as good in practice as they do on paper CUSTOMS UNRAVELED Almost everyone has welcomed new government reforms that slash tariff rates, simplify customs procedures and prepare the country for wider integration into the global economy. While on paper the reforms will cost the government LE 3 billion, analysts predict the new rates could actually be a boon to the government by unbinding business. By Jeff Neumann By Jeff Neumann By Jeff Neumann Hajj Ahmed El-Battah is concerned his brick factory will be shut down by the Ministry of State for Environmental Affairs. By Jeff Neumann By Jeff Neumann By Jeff Neumann By Jeff Neumann By Jeff Neumann By Jeff Neumann By Khaled Habib Richard Szudy,President of IDEA Egypt.

By  Andrew Schurgott

It seemed like a good idea, setting up a company to convert outer Cairo’s brick factories to natural gas. The gas was plentiful, and cheap. The Kyoto Protocol was about to be ratified, and all the talk was of a new carbon market that would net Egypt millions of dollars in exchange for something the country was already giving away for free: dirty air.

The company’s founders had a successful pilot under their belts, having already converted 50 factories from firing with heavy oil to cleaner-burning gas, and everyone stood to benefit: Brick factory owners would reduce their energy bills, the cost of conversion would be offset by revenue from selling carbon credits, and a highly polluting industry within Cairo’s air shed would get a lot cleaner.

It started off well, too. The brick factories were on board, as was a contractor that would link the factories up to the gas network. Canada, the Netherlands and Egypt all signed off on the project and it breezed through the United Nations review process.

But then one of the parties got greedy, triggering a chain of events that made everything fall apart — all under the watchful gaze of Egypt’s environmental regulator.

An hour south of Cairo along a decaying Nile-side road are the towns of El-Saff and Arab Abou Saed, both hidden within the permanent cloud of smoke that billows from several hundred brick factories struggling to feed the nation’s ravenous construction sector.

Off the main street, roads quickly turn to sand. Trucks loaded with the towns’ fortunes kick up clouds of dust, and brick walls cut off the view of everything except towering chimneys, tops blackened by the constant flow of smoke.

Hajj Ahmad El-Battah looks out the window of his brick factory’s second-floor office across the moonscape of sand and chimneys. Even with the economic downturn, he says, business is good: Demand is growing and local entrepreneurs are opening new factories.

By some estimates there are 2,000 brick factories in Egypt, although whether this refers to factories themselves or the number of kilns used to produce bricks is unclear. Where other primary industries face accusations of monopoly and price collusion, that is not the case here. “Competition is very fierce,” says El-Battah. Most brick factory owners have only one or two factories in a sector that, despite its crucial role feeding the economy, operates on the border of the nation’s informal economy. It is a situation that independent owners, who are cynical about government intervention, generally prefer.

El-Battah says that a single factory produces between 45 and 60 million bricks annually. Punching some figures into a calculator, he works out that he brings in around LE 450,000 per year, which, after taxes and other costs puts about LE 120,000 in his pocket.

Below the office, tanned workers with ready smiles are taking a break from the midday sun, swimming in an open pool, the cleanliness of which causes El-Battah to simply shrug and raise his eyes skyward. Around them, the basic machines upon which cities are built hum in constant business.

Bricks start their life as local black clay, mixed and molded in machines that shape and cut the wet mass into brick-shaped objects. These wet bricks are carried by donkey to stacking areas in the sun and covered with fiber to aid the drying process. Once dry, the ‘green’ bricks, now beige in color, are stacked in 60–80-meter-long open kilns, based on a design developed a century and a half ago in Europe. This is the most crucial stage of the production process, as the bricks must be placed in an intricate pattern that seals the kiln, but also ensures airflow for proper cooking.

The kilns are fired with mazot, a heavy fuel left over after more valuable products are extracted from crude oil, which is directly responsible for the dirty air hanging over the town. Delivered by truck to the factories, mazot is stored in pits near the kiln before being pumped to tanks on top and then dripped inside for firing.

It is this last simple step upon which an international controversy is now brewing.

The idea is simple: replace mazot with natural gas. The latter is not only cheaper and produced domestically in Egypt, but far less polluting. (Egypt is a net importer of oil, but a top-10 global producer of natural gas.)

This was the premise behind a project run by the Egyptian Environmental Affairs Agency (EEAA) — the country’s environmental regulator — and supported by the Canadian International Development Agency (CIDA) that converted three brick factories to natural gas.

On the back of this project, CIDA agreed to fund a broader initiative, launched in 2001, that saw the conversion of 50 of Arab Abou Saed’s brick factories to natural gas. This so-called Climate Change Initiative replaced the brick factories’ heavy oil burners with gas burners, installing the necessary gas networks, gas pressure reduction systems and upgrades to the factories’ electrical systems to support the new burners.

The project also entailed connection of the factories to the national gas network, a job that was carried out by the local concession holder, Town Gas, a subsidiary of state-owned EGAS.

The success of the conversion — measured by energy savings, reduced pollution and the positive response of factory owners — got project leader Richard Szudy thinking. “We saw the opportunity,” he says. “Kyoto hadn’t yet been fully ratified, but we believed that it would be. So we thought: ‘Why not put this experience to bear and design a proper private-sector climate change project with the other brick factories in the Arab Abou Saed cluster, as well as the factories in El-Saff cluster’.”

And so IDEA Egypt was born — a Canadian-backed Egyptian company that would convert 311 brick factories across the two towns from mazot to gas and sell the carbon credits generated by the reduction in carbon dioxide emissions on the global carbon market (see sidebar Kyoto and Carbon).

The project, billed at $46 million, would remove an estimated 4.5 million tons of carbon dioxide equivalent (CO2e) from Egypt’s air over 10 years. And while the price of carbon emissions reduction credits (CERs, one credit equivalent to one ton of CO2e) fluctuates, potential revenue from the project was anticipated to reach $90 million over the life of the project.

“The very first thing we did was to establish a contract, an agreement with [] Town Gas,” says Szudy, now president of IDEA. “It was really on the strength of that, that the investors came on board. It was an agreement by which the local gas company would supply the external gas system — the pressure-reduction station to take it from a high pressure to a reasonably low pressure — and then the network of piping to each individual factory.”

In return for funding the external network, says Szudy, Town Gas would collect 30% of the revenue from the credits. “Given that the expected revenue ranged from 50% to 150% of the cost, it was an attractive deal for them,” he says. In turn IDEA would take 70% of the CER revenue for managing the project, with a small percentage of this going to the EEAA, the United Nations and social programs for the local community.

As was the case in the pilot project, the factory owners would be responsible for covering the cost of the internal gas network and technical upgrades, estimated at LE 300,000 per factory. The overall cost for each factory, including project management (LE 59,412) and the external network (LE 294,118), would reach LE 653,530.

For the brick factory owners, the project had a clear benefit in energy costs saved, but for El-Battah, reduced pollution was also a primary benefit. In the studies done for the pilot project, 70% of Arab Abou Saed’s adults were found to have respiratory problems, a direct result of the 52 different chemicals — eight considered high-risk to human and livestock health —emitted by burning mazot.

And then there was the fact that the Ministry of State for Environmental Affairs had threatened to shut down any factory that did not convert to gas.

Registering a project to sell carbon Credits is not so simple. Projects that wish to generate CERs are referred to as Clean Development Mechanism (CDM) projects. To be able to sell CERs, the project must be registered with — and approved by — the United Nations CDM Executive Board, which supervises the implementation of CDM under the 1997 Kyoto Protocol.

At the same time, projects have to meet the requirements of the ‘Designated National Authority’ (DNA) — the host country organization responsible for local approvals of the project. In Egypt, this is the Ministry of State for Environmental Affairs.

“The CDM process is a very long one,” says Ahmed Zahran, CDM business development manager at Egypt’s TriOcean Energy, which manages other CDM projects in Egypt. “They have to get approvals from the host country, the owners of the project themselves, the owners of the entity where the improvement project is taking place and the consent of people living in the area. When all this information is gathered and goes to the UN, it starts looking at all these aspects to see if there is a base for the project.”

It is this long and costly process through which IDEA navigated. “We had to get approval from prospective governments to be able to participate in the CDM project,” says Szudy, pointing to letters from the Dutch and Canadian governments on the walls of his Downtown Cairo office.

“What we ended up doing is establishing an investment company in Canada called PEI and then we had an operating company based out of Malta, that’s PEI Europe, and ultimately IDEA Egypt here in Egypt as the local executing company. We had to get CDM project approval for all these companies. That would enable us to market the ultimate credits either in North America, or in Canada, or in Europe.”

From international approvals IDEA then moved on to the local process, the first step of which was submission of an initial project outline. “That was accepted,” says Szudy. “From there we had to move to the very detailed and complicated project design document.” As part of the process, Szudy says, IDEA also signed contracts with the factories. “It has to be that way for how we’re counting the carbon credits. So we had 311 of these brick factories that were participating [] and we executed individual contracts with them all.”

The project then had to pass a local environmental assessment and external validation by a UN-recognized organization.

“Eventually we got this thing here,” says Szudy, holding up another piece of paper. “Egyptian DNA letter of approval and letter of authorization, signed by the minister, January 25, 2007.”

The project was submitted to the CDM Executive Board, where it was accepted without any modifications and placed online for public comment, the last step in the approval process.

With all the hard work done, the staff at IDEA got ready to celebrate. “At about noon — we’re all glued to the thing, you know, watching this online — up pops a notice saying that the Egyptian DNA has requested the UN to withhold issuing the registration because of ‘minor issues’ that are to be resolved locally,” says Szudy, visibly emotional.

The notice submitted by the EEAA simply states: “The contracts between the project developer and the brick factory owners as well as the contract with Egyptian Town Gas (for gas connections) have not been finalized yet.”

“Those reasons are absolutely lies,” Szudy claims. “We had all of our contracts with the brick factory owners properly executed and we had a properly executed agreement with Town Gas, even co-signed by EGAS, the holding company.”

And this is where things begin to get confusing, each party with differing versions of events.

Dr. El-Sayed Sabry Mansour, head of the climate change unit at the EEAA, which supervises Egypt’s CDM projects, was responsible for putting the project on hold.

Mansour says that after the ministry gave IDEA initial approval for the project; “We asked IDEA to meet three criteria: a contract with the gas company, individual contracts with the BFOs [brick factory owners] and a contract or MoU with a company for maintenance.”

This latter point, while not central to the issue, appears to contradict what Mansour presented to a People’s Assembly Health & Environment Committee investigation of the project earlier this year. At the review, chaired by MP Dr Hamdy El-Sayed, Mansour said that the third component was ensuring percentage of local content in the technology transfer aspect of the project.

Mansour says that the EEAA was in “constant communication with IDEA, telling them to get the contracts.” A day before the UN deadline, he says he was contacted by IDEA, which he says told him that the required contracts had been secured. In Germany at the time for a climate change conference, he says that he consulted with his office and on being informed “that this was not the case,” requested the hold.

Mansour claims IDEA did not have contracts with the BFOs and was unable to provide a contract with Town Gas. This first point was later contested by the factory owners themselves during sittings of the parliamentary committee, when they said that contracts existed between themselves and IDEA. Instead, the factory owners claimed, the problem revolved around the agreement between IDEA and Town Gas.

In Town Gas’s version of events, however, the contract was not at issue, and it was in fact the EEAA that pushed for the hold. “The EEAA asked the chairman of Town Gas at the time to put some points that could support them in withdrawing the project from the UN Executive Committee,” claims Hatem Bassiony, general manager at Town Gas. “Based on this, the chairman of Town Gas made a summary report with all the violations [allegedly] made by IDEA and he submitted this to Dr. Sayed Sabry at the EEAA.”

Mansour later appears to contradict his claim that no contract existed between IDEA and Town Gas, stating: “There was an agreement, but at the first negotiation meeting [after the project was put on hold by the EEAA] Mr. Szudy said he considered that this agreement was no longer existent.”

IDEA counters that they were pushed to cancel the initial contract with Town Gas to be able to proceed with negotiations. IDEA — along with the BFOs the only party to maintain a consistent position — argues that regardless of which party’s position is correct, it shouldn’t matter anyway, as CDM projects do not need to have contracts as a condition of registration.

A quick look at the UN’s CDM Modalities and Procedures document, which outlines CDM project procedures, supports this argument. The document states that parties involved in a project can request a review “related to issues associated with the validation requirements.”

These validation requirements — which were assessed and approved by an external validator prior to Minister of State for Environmental Affairs Maged George’s approval — are limited to ensuring the project was opened for public comments, that an environmental impact assessment was carried out if required by Egyptian authorities, that all parties are involved voluntarily and that the project is “additional” —that is, it removes gas emissions that would not otherwise have been removed. No mention of contracts whatsoever.

However, Zahran of TriOcean Energy says that things are not so clear-cut. “There is no good understanding yet of the CDM procedures among people working in the area. So things go wrong a lot,” he says, pointing to the fact that while Egypt has a long pipeline of CDM projects, only a handful have been carried out.

“The reason for approval or not varies from country to country depending on the priorities of the government. That’s why you find different projects have different approval criteria from one country to another,” he continues. “Even if [the DNA] grants approval, if they realize something is happening they didn’t know about or they missed, they can ask for a review. That’s what they did — [asking] to review all the procedures of the project.”

Despite the questionable grounds for the EEAA’s hold request, Town Gas took advantage of the situation to ‘cancel’ the initial agreement with IDEA. Szudy claims that Town Gas forced renegotiation of their contract, using as leverage the EEAA’s stipulation that IDEA must contract with Town Gas before the hold was removed and the company’s monopoly on gas in the region.

“After the Egyptian DNA withheld our registration [] it was made very clear that Town Gas was not going to honor its agreement and we had to negotiate a new agreement with Town Gas or else the DNA would withdraw its host country approval,” Szudy alleges. “If they did that then our submission at the UN would collapse.

“The reason given to us as to why Town Gas could not honor its original agreement is that changes at the Ministry of Petroleum, with the creation of new holding companies, had frozen all operating companies’ money lines, so they could no longer afford to [] install the external gas delivery system without payment up-front,” he continues.

In the parliamentary committee hearings, Town Gas said that it cancelled the original agreement because it learned IDEA was negotiating with BFOs to finance the internal conversion. Bassiony says that IDEA “was trying to by-pass Town Gas talking to the brick factories.”

From the EEAA’s side, Mansour has a different view: “The gas company re-evaluated its pricing and costs as these had changed.” Either way, the EEAA’s position was clear: It was IDEA that would have to meet Town Gas’ new terms to resolve the dispute, standing contract or not.

“From that point [], we were locked in a series of negotiations, and the closer we got to year-end [2007], the stupider those negotiations became,” says Szudy. “Not only were they constantly ramping up and sometimes coming back down and then coming to a different number two weeks later — it was ridiculous — but the tone just started to become more and more aggressive and hostile,” he claims.

“When Town Gas reneged on their agreement, they said we now had to pay for the EPN [external piping network] — the cost of which then went up from the $10 million they initially estimated to $15 million. We agreed to provide this, which would have meant that we were now paying for two-thirds of the total project costs [the BFOs still paying one-third and Town Gas now paying nothing] and would retain 100% of the carbon-credits,” says Szudy.

“They insisted that in all probability the cost of the EPN would be more than that. [] And if so they would carry it and we could pay it back to them from carbon credit sales at twice the amount.

“By then we had invested a fair amount of money into this,” he continues. “This was the game: They knew how vested we were. We said ‘Okay, even that we can take.’ There’s only two conditions. Number one: If the cost of the EPN does in fact exceed $15 million, we have the right to independently verify that this is the true cost and we are not just being taken for a ride. Condition two: In the event of a dispute that we cannot resolve, the dispute resolution mechanism must be international,” standard practice for any international investor. “Town Gas said absolutely not,” claims Szudy.

“It was clear they were doing everything in their power to ensure no deal was reached. By the end of December 2007 they advised us in writing that since we were ‘not serious’ and failed to sign their contract, that everything was over,” says Szudy.

What Szudy didn’t know was that Town Gas used the negotiation period to find an alternative financing mechanism, willingly provided by the EEAA through its Egyptian Pollution Abatement Project (EPAP) — a World Bank, European Union and Japanese-sponsored environment fund.

Under the new EPAP financing, the factory owners in Arab Abou Saed would be provided a loan administered by the National Bank of Egypt at a rate of 14% to pay for both the internal and external costs of the gas conversion. This more than doubled their investment cost to LE 700,000 —and did so with no guarantee of any CER revenue to offset it.

Town Gas, instead of building just the external network at its own cost, would now carry out all technical work with cash payment provided up front by the BFOs. But the company hadn’t forgotten the CER revenue: With financing secured, Town Gas moved to bring on board another investor to carry out the CDM aspect of the project at more favorable terms than those contracted with IDEA.

In the parliamentary committee sessions, Town Gas said it had approached Emirates-based Masdar to do this. Today, however, Bassiony says it was the Emirati company that came to Town Gas.

“They came to Egypt talking to the holding company [EGAS], inspecting where they could develop a CDM project,” says Bassiony. “They had produced all the documents with the United Nations, the EEAA and EGAS and they came back okay now we are prepared to execute this project as a CDM.”

In fact, Masdar has not registered any Egypt-based projects with the UN.

Bassiony, meanwhile, says Masdar agreed to take 20% of the carbon sales and “that they will not be having any profits, this 20% will be covering expenses only. We, Town Gas, then wrote to the EEAA about the project and Masdar [saying] if you have a better offer please don’t hesitate to take it.”

Masdar was not quite so eager as Bassiony to promote its involvement: “Masdar is currently working with numerous stakeholders in Egypt and have a number of projects that are under evaluation. However, we have not yet finalized agreements to develop CDM projects in Egypt,” said a statement provided to Business Today Egypt by a spokesman for the company.

Next, IDEA and brick factory owners allege that Town Gas tried to get the factory owners to sign contracts transferring the rights to the CERs from the owners to Town Gas. When that attempt failed, the company inserted a provision in the contracts that were signed between itself, the National Bank, EPAP and the factory owners, regarding disbursement of the EPAP funds and connection of the factories to gas. This provision stated that a factory owner could enter into no agreement or discussion regarding CERs without Town Gas’s permission.

“CDM as a project is not my interest,” counters Mohamed Adel Abdel-Hamid, chairman and managing director of Town Gas. “Why? Because the CDM is concerned mainly with the owners of the factories, because the revenue will come to them, because they already paid the cost of installation. So they are free to sell it or contract with IDEA or another company.”

The catch, of course, is that they need Town Gas’ approval to do so. Asked about Town Gas’ insertion of this provision into their agreements with the BFOs, Mansour simply responds: “It’s a contract. I’m not a lawyer.”

“The Ministry of State for Environment is supposed to be the focal point for the Kyoto Treaty,” says El-Sayed, chairman of the parliamentary committee and the only independent voice in the dispute. “They are the ones responsible. But of course the petroleum people are very influential in this country; they are very strong people.”

The factory owners were less than impressed by Town Gas and the EEAA’s actions. “Town Gas started to say that they wanted a percentage of the carbon,” claims Abdel Aziz Azouz, a lawyer who is also chairman of the brick factory owners’ association. Azouz has been involved in the project since day one. “The society and owners did not approve this at all,” and as a result submitted the issue to the People’s Assembly.

El-Sayed is quite clear that Town Gas should have no involvement with the CDM aspect. “We think that they have nothing to do with the whole thing,” he says.

“They are the technical partner, they should go ahead and cover the cost of the maintenance and so on from the money made available from the National Bank,” the parliamentarian says. “Maybe they are hoping to take part of the share from the money, I don’t know why, they shouldn’t do so. They are the contractor for the project and they are the ones that are going to maintain the project and they are going to be paid for that. Why should they aim for anything more?” he asks. “Whatever they make it has to be from their own work, not taking money that belongs to the factory owners. IDEA is taking its share for making the CDM arrangements.”

The EEAA argues that it is trying to do what is best for Egypt and the factory owners by moving on with the gas conversion regardless of whether the CDM aspect happens or not. It also says that pushing for more carbon credit revenue to flow to BFOs is in the owners’ best interest.

That said, it is clear the initial deal with IDEA was reasonable by industry standards — and that the factory owners themselves never sought its revision. The first CDM project in Egypt between Abu Qir Fertilizer Company and Austrian-backed Carbon Egypt was done on almost identical terms: the first receiving 30% and the latter 70%, with a small percentage going to the EEAA, social programs and the UN.

So far, the delay is costing both the BFOs and the country. Each factory is now paying LE 700,000 plus interest instead of the original LE 300,000, and has missed out on energy savings. Workers and residents alike have suffered two years’ additional pollution due to the project’s delay.

“The 311 BFOs have collectively paid about LE 807 million more for fuel because of this two year delay,” estimates Szudy. Mazot prices doubled over the two-plus years the project has been delayed, feeding into the rising price of bricks and housing across Egypt.

By IDEA’s calculations, the residents of El Saff and Arab Abou Saed, along with all of us living in Cairo, “have also been exposed to about 631,500 additional tons of dangerous chemical pollutants than would have been the case,” says Szudy.

More than this, brick factories in El-Saff, who unlike their colleagues in Arab Abou Saed refused to sign contracts with Town Gas’s new provision, are being cut out of the project altogether: The EPAP financing covers only 200 factories in Arab Abou Saed.

“The El Saff factory owners handed Town Gas requests to supply them with natural gas. The only difference is that their requests did not include the point that enables Town Gas to take control of their carbon supply,” says Azouz. “To punish them for that, Town Gas has not supplied the factories with natural gas nor has Town Gas taken any steps to start preparing for that until this very day,” he claims.

“I will start to connect gas to something like 160 factories that have already signed contracts,” says Town Gas’s chairman Abdel-Hamid, confirming Azouz’s claim. As for the factories based in El Saff — they remain in limbo, either to remain on mazot and become uncompetitive or to be shutdown by the EEAA due to the pollution.

“We welcome any initiative — international, bilateral or multilateral — through serious investors who wish to enter the Egyptian market for clean development mechanism, promising to overcome all obstacles, providing an encouraging investment climate for the benefit of all parties at all levels,” said Minister George at the Egypt-hosted Middle Eastern and North African Carbon Forum this year.

That’s not the reality IDEA has lived.

Today, Egypt sits at the bottom of international carbon market analyst Point Carbon’s ranking of countries for CDM investment. And it’s quite easy to see why.

“It is going to further damage the reputation of this country for investors,” Szudy claims. “Our experience will provide a chill for subsequent investors and sure as hell it will cripple Egypt’s reputation as a host country for CDM projects. [] Already it’s not seen as a good bet. Countries like India have a thousand CDM projects, China has 600 or something. Egypt has four.”

Despite nearly two and half years of frustration, IDEA still hasn’t given up. “The EEAA disregarded our agreement with the BFOs and forced us to accept a 25% ‘cap’ on the investor’s share of the potential profits,” says Szudy, bringing his company to a final deal that will see the factory owners getting 65% of profits from CER sales, with 5% going to social programs and 30% to IDEA.

Contracts have been redrawn with all of the factory owners, and IDEA recently sent a letter to the EEAA requesting removal of the hold on the CDM project.

“If we do not get the approval we are moving to arbitration because we have no other option left,” says Szudy. “We’re not that concerned about what the outcome will be. It will be favorable to us. But it’s a poor second best to what should have happened.”

Mansour, who says that he has received IDEA’s letter, along with a letter from representatives of the factory owners, is non-committal as to what action will be taken. “I will consult the head of the [EEAA’s] department of industry because he is responsible for the project now. And I will see what will be done. Maybe we will reach a conclusion to refer to His Excellency the Minister in order to have his advice how to proceed,” says Mansour.

“Our point of view as a regulatory office is that we have followed the procedure 100%, no deviation. The conditions of fulfilling this project as CDM were not fulfilled. There were no contracts. There are contracts between the BFOs and IDEA, but these are very recent. What about the other partner, the gas company?” he asks, leaving an open question as to the role Town Gas’s contracts with the factory owners will play in the CDM project if it ever gets off the ground. A further question remains as to whether the project will cover the 200 factories in Arab Abou Saed that are financed under EPAP, or the 132 factories in El-Saff (more than 20 new factories have been built there since the dispute began).

And even if the hold is removed on the project, nothing will happen fast. The gas conversion is likely to take a year or two, and then it would be a further year of operating on gas before the first CERs are generated.

“We’re still looking at three more years of hanging in here and carrying our fixed costs before the first revenue is possible,” says Szudy. “And what will the price of carbon be in three years time? Is there going to be a market even?” With Kyoto up for review in 2012, a cloud hangs over the future of the entire carbon market.

“We’ve done all the right things. We got all the approvals, all the permits. We spent money in good faith on the basis of those agreements and now [] an approval is being withheld and its cost us a lot of money,” says Szudy.

“If we have to go to arbitration to recover our investment it will severely damage Egypt’s reputation with the UN CDM Executive Board and with the international investment community, specifically those looking at CDM projects. And there are a lot of opportunities for CDM projects here.” bt

The 1997 Kyoto Protocol came into effect in 2005 when 37 developed nations and the European Union as a block committed to reducing emissions of six greenhouse gases from 1990 levels by a collective 5.2% by 2012. Developing countries have no reduction obligations under the agreement.

Under Kyoto these countries were given a set of allowances, which they could trade between themselves upon reducing their own emissions. Kyoto also allowed developing countries to sell carbon emissions reduction credits (CER) to developed countries, generated by foreign funded projects that reduced emissions in their own country. This is referred to as the Clean Development Mechanism (CDM).

The idea behind CDM is to reduce pollution in developing countries at the same time as attracting revenue and investment. CDM are private sector projects, carried out willingly by the stakeholders with approval from all countries involved.

The six greenhouse gases are carbon dioxide, nitrous oxide, methane, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. As each gas has a different effect on the atmosphere they are given an equivalency rating. For example one ton of nitrous oxide counts as 296 tons of carbon dioxide. One ton of carbon dioxide equivalent is equal to one carbon credit.

Negotiations are currently under way for second phase of Kyoto for 2012-2016.

CERs: Certified Emissions Reduction credits issued to registered CDM projects. 1 CER equals one ton of carbon dioxide equivalent.

CDM: Clean Development Mechanism. United Nations approved projects designed and operated under the Kyoto Protocol to generate CERs.

DNA: Designated National Authority. The host country administrative structure, required under Kyoto to provide local approvals for CDM projects. In Egypt this is headed by the Minister of State for Environmental Affairs. The DNA does not have a role in CDM projects beyond insuring compliance with local environmental and planning laws and that a CDM project ‘contributes to the sustainable development of Egypt.’

CDM Executive Board: The United Nations body established to register CDM projects and issue CERs.