The expansion of the Suez Canal will boost Egypt’s economy and heighten Egypt’s importance in world trade, writes Rebecca Spong.
The Suez Canal is not only an integral part of the Egyptian economy; it is also a significant part of the country’s sense of identity and pride.
Ever since President Gamal Abdel Nasser nationalised the canal in 1956 taking it away from the colonial control of the British, the waterway has had special significance in the lives of Egyptians.
Economically it is also important, handling 7% of sea-borne trade globally and providing a significant source of foreign currency for the country.
It is not surprising then that the current President Abdul Fattah Al-Sisi has made the expansion of the canal and the development of the surrounding ports and economic zones a focus of his efforts to reboot the country’s economy and reassert the importance
of Egypt on the political and economic stage.
Since 2011, Egypt has gone through a period of severe political turmoil including the ousting of two presidents. The economy has also nose-dived, with the country recording an annual growth rate of just 2% in recent years.
Al-Sisi is now banking on the Suez Canal projects helping reverse this era of economic stagnation by reasserting the country’s position as a major trade hub.
Despite the Suez Canal’s strategically important position linking European, Middle East and Asian markets, the volume of traffic passing through the canal has been slowing, and in turn has had a detrimental effect on Egypt’s much-needed source
The World Bank said in a 2013 report that the canal was producing “meagre returns”. The number of vessels dropped by 4% in 2013 compared to the previous year, falling to 16,596 ships. The decline in volumes can be put down to a number of factors.
The nature of international trade is evolving, with south-south trade flows between Asia, Africa and the Americas becoming increasingly more dominant than traditional East-West flows.
Poor levels of investment in the Suez region have also been blamed for low traffic volumes. Inadequate ports and port facilities could potentially put off ships from using the route.
Compared to the new and more modern ports in the Gulf, such as Dubai’s Jebel Ali port or Abu Dhabi’s Khalifa Port, Egypt’s ports have been found lacking.
Shipping companies are increasingly weighing up their options, with some deciding that even going round the Cape of Good Hope may be a cheaper and faster way of transiting goods rather than going via the canal.
Egypt cannot rest on past glories and the country needs to ensure the canal retains a competitive edge.
Details of canal expansion and benefits
Against this backdrop, plans to expand the canal were announced by Al-Sisi in mid-2014. The objective is to increase the capacity of the canal to allow bigger and wider ships to transit the waterway at the quicker pace, therefore boosting revenues for the Suez Canal Authority.
In an increasingly competitive market, shipping companies are bringing out bigger ‘mega-ships’ designed to maximise the economies of scale and more efficiently transport goods. Ports and waterways are required to keep up with such developments and ensure they have adequate infrastructure in place.
Construction is now fully underway on the canal project with digging and dredging companies building a 35-km-long channel that will run parallel with the existing waterway. The canal will also be deepened to accommodate larger ships.
Al-Sisi is demanding that the canal expansion be completed within just one year, with the first ship due to transit the canal in August 2015.
The project is being overseen by the Egyptian army, and Al-Sisi, himself the ex-head of the army, will be making sure the project hits its deadlines. The success of the Suez expansion will inevitably form a central part of his presidential legacy.
Chairman and managing director of the Suez Canal Authority, Admiral Mohab Mohamed Hussein Mameesh, said on the sidelines of the Egypt Economic Development Conference (EEDC) held in mid-March: “We are doing very well. We are working day and night with no second to rest to finish the work by August 5.”
He spoke with pride about the project, saying the success of the expansion shows that Egypt is “capable of meeting challenges” and that the “real Egypt” is returning.
Once complete, the parallel channel will address one of the major problems that has been eroding the competitive edge of the canal.
Currently ships travelling north to south must berth for a number of hours to allow vessels travelling from the south to the north to pass. This substantially eats into the transit time for goods and increases the appeal of other routes. However, the expansion will allow ships to travel uninterrupted from north to south, helping boost the capacity of the waterway and increase revenues for the Egyptian government.
The Suez Canal Authority estimates that the expansion will reduce the southbound transit journey from 18 hours to 11 hours. The daily capacity will rise from 49 ships per day to 97 ships.
Revenues from the canal are expected to triple in the next four years from US$5.5bn to US$13bn.
The speed at which this expansion project has moved is in part due to the way it has been funded.With international investors and banks still a little skeptical about the risk and reward of doing business in Egypt, the country turned to its own people to fund the developments.
The Egyptian government raised US$8.5bn-worth of funds via the issuance of investment certificates issued to the Egyptian people last September. Al-Sisi wanted to harness the Egyptian people’s sense of nationalist pride and offer them a chance to play a key role in supporting the Suez expansion. The government correctly judged the level of excitement in the project, with billions of Egyptian pounds raised in a matter of days.
“If you ask the Egyptian people to fund anything for the benefit of Egypt – you will fund it,” said Admiral Mameesh at EEDC.
The certificates were offered at various denominations and attracted a range of different investors, many of which were ordinary Egyptian people.
A significant chunk of money was even sourced from outside the conventional banking system, meaning that Egyptians were so keen to support the Suez project they dung out their savings from the back of the cupboard or under the mattress, in order to support a project of such national importance.
The Egyptian people were no doubt also motivated by the attractive interest rate of 12% offered on the certificates, a rate higher than if they kept their money in conventional savings accounts.
The Suez economic zone
Alongside the Suez Canal expansion, there are plans afoot to develop the areas around the waterway. The masterplan for the planned Suez Canal Zone (SCZone) was revealed to potential investors at the EEDC event. The Lebanese firm Dar El-Handasah developed the plans.
The conference was Al-Sisi’s attempt to showcase Egypt to the world’s leaders and investors, announcing details on major projects.
Investors watched promotional videos outlining the scale and importance of the SCZone project, while a Hollywood movie-esque soundtrack boomed throughout the darkened conference hall.
Delegates were then handed glossy brochures as they left, detailing the scope of the development and the opportunities to invest in a scheme designed to generate thousands of jobs and reignite Egypt’s stagnating economy.
The Suez Canal Zone (SCZone) covers 500 square kilometres of industrial facilities and six ports running along the canal. Specifically, the ports of Ain Sokhna and East Port Said are the focal points of the project.
Companies involved in a whole range of industries including shipping, logistics, information, textiles, and communications technology are being called to invest in the zone.
The Ain Sokhna Port and Industrial Zone is offering 4,000 hectares of land for light and medium manufacturing activities as well as land for mixed-use residential developments and heavy industries such as oil refining or petrochemicals.
The concept of building economic zones alongside the canal is far from new. Ideas were certainly bounced around during the regime of former president Hosni Mubarak, who was removed from power in 2011.
The idea emerged again under President Mohamed Mursi, who was toppled from power in July 2013. Both presidents were keen to champion the canal and return it to its former glory. Yet, lack of funds and political uncertainty were just some of the issues that derailed their plans. Under the leadership of Al-Sisi, there seems to be a greater sense of commitment and determination.
The project is already attracting the interest of major companies. International firms such as the express shipping company DHL have expressed interest in the project.
A representative from DHL said on the sidelines of the EEDC event in March that the company was keen to develop Egypt as a trade hub in which the logistics firm can expand further into Africa. He added that the firm was in very preliminary stages of discussions with the authorities on what kind of presence it could set up in the SCZone.
The Egyptian government has even improved the regulatory environment to encourage foreign investment into the Suez region. It is amending existing laws covering special economic zones, which were first past in 2002.
The Egyptian cabinet approved the amendments in the run-up to the March conference.
One of the major changes involves turning the SCZone into an economic authority, which will allow the zone to act as a single window, capable of dealing with investors directly. This will avoid having to redirect investors to various other government entities to seek approvals for setting up operations in the zone. It is a measure designed to substantially reduce time-consuming bureaucracy.
The funding of the SCZone is unlikely, however, to be raised in the same manner as the expansion project.
Given the scope of the project, it is anticipated that various forms of public-private partnership (PPP) models will be set up in order to attract private sources of investment into the zone.
Given the interest and enthusiasm in the Suez Canal developments to date, the waterway is still very much part of Egypt’s economy and national psyche.
It will be down to the Egyptian government to continue to harness this momentum and ensure the canal enhances its place as a major international trade route and regional trade hub.