Choppy waters for Egypt’s Suez Canal expansion

Billboards on the streets of Cairo carried the message “We are changing the map of the world”, and visitors arriving at the airport received a stamp in their passports with an image of two ships sailing past each other and the legend “Egypt’s gift to the world”.

In August, in the presence of visiting dignitaries and amid a blaze of nationalist fervour fanned by the media, Egypt inaugurated its newly-expanded Suez Canal to allow two-way traffic and reduce waiting times for ships.

But there is still no certainty about the economic feasibility of the project in which Abdel Fattah al-Sisi, the country’s president, appears to have invested as much nationalist prestige as economic hope.

Since the project’s launch, the canal’s receipts have dipped from $462m in August to $449m in October, reflecting factors that have had an impact on world trade, such as the slowdown in China and weak commodity and oil prices. The project planners have said the expansion will more than double the canal’s annual revenues from an average of about $5bn to at least $13bn by 2023.

The execution of the $8.6bn plan, funded entirely by public subscription, was compressed to one year from the three initially foreseen in a bid to signal Sisi’s resolve as his country struggles with political uncertainty, international criticism of its human rights record and a slow economy unable to produce enough jobs to meet the needs of a growing population.

Thousands of people worked around the clock using the biggest dredgers in the world to excavate more than 250m cu m of sand for the expansion. The work, which involved widening and deepening the waterway as well as digging a parallel 34km channel, has reduced navigation time for ships from about 18 hours to 11 hours. The waterway is already the fastest route between Asia and Europe.

Shipping experts say the improvements to the infrastructure of the canal should attract some additional traffic, but ultimately the number of ships will depend on global trade. Moody’s, the rating agency, says the canal will help increase revenues for the Egyptian government in the medium term but the benefits “will take time” to materialise and will rely on trends in world trade.

Projections that Suez Canal income will reach $13bn by 2023, says Moody’s, rest “on the assumption of an unlikely sharp recovery in global trade growth, and a doubling in the number of ships using the canal to 97 a day from about 50 currently. Historically, Suez Canal receipts have shown a very strong correlation with global trade, [which] would have to grow by around 10 per cent a year between 2016 and 2023 to achieve the projected $13bn in annual revenues.”

Mohab Mamish, the retired vice-admiral who heads the Suez Canal Authority, has predicted the number of ships sailing through the canal will have doubled by 2023, meaning the expansion to end or minimise waiting times was imperative if the waterway was to retain its competitive advantage. He also wants to increase revenue by offering maritime services to passing ships.

“[Global] trade is increasing and sizes of ships are increasing. If I can’t handle this and turn it into revenue for the Egyptian treasury, alternative routes will emerge to benefit from this growth,” he says.

In September, the World Trade Organisation forecast global trade growth of 2.8 per cent for 2015, slashing an earlier prediction of 3.3 per cent. It warned that the forecast remained vulnerable to a cloudy outlook for the world economy.

“The reduction of journey time makes the canal more attractive relatively speaking, depending on the tolls charged,” says Neil Davidson, senior analyst at Drewry, a maritime research consultancy. “If you assume the tolls are the same or lower, this will increase attractiveness, but time is only one factor of a multitude influencing the outcome.” Egypt has not announced any toll increases yet.

With the Panama Canal due to complete its own set of bigger locks by April 2016 to enable it to accommodate larger container ships, Davidson says Suez is likely to face more competition for shipping between Asia and the eastern seaboard of the US.

Egyptian officials argue that the Suez project should be seen in the context of a wider multibillion-dollar plan to build an industry and transport hub centred around the canal and involving the development of six existing Mediterranean and Red Sea ports in its vicinity. The government says it will lead to the creation of 1m new jobs.

The Suez Canal Economic Zone project is still at an early stage but its success will hinge on Egypt’s ability to attract high levels of investment in a range of light to heavy industries, in addition to services such as vessel bunkering, transhipping, ship building and ship repair.

The reduction of journey time makes the canal more attractive relatively speaking, depending on the tolls charged

“The doubling of the lanes in the canal will make the region more attractive to shipping and will have a positive impact on these [industrial and transport] projects,” says Yehia Zaki, director of the Cairo office of Dar Al-Handasah, the engineering company that developed the master plan for SCZone, the General Authority for the Suez Canal Economic Zone.

He says the infrastructure requirements for the first phase until 2030 should cost $15bn to cover energy, sewage and water desalination; another $20bn-$25bn will be needed to develop the ports and some $15bn for industries. The priority, according to Zaki, is to develop east Port Said deepwater port as a transshipment hub and to expand the water and power infrastructure.

“We have a genius location, but it does not translate immediately into added value,” says Zaki. “Egypt also has regional trade agreements, which help its attractiveness. There is a good workforce, good communications such as roads and there are ports which can be developed. What is needed are economic and customs measures, and investment incentives.”