Astride the Nile Delta

KGL Ports International has taken aim at the Mediterranean with its Damietta, Egypt, takeover. Nicholas Noe reports from Cairo.


Over the summer, KGL Ports International (PI), a subsidiary of Kuwaiti transport giant KGL, announced that it had successfully completed a US$1bn, 40-year concession agreement to build a major container terminal at Damietta,Egypt. The deal comes on the heels of news that the company is involved at different levels of negotiation for control over no fewer than 12 ports across almost as many countries.

Whether or not these projects come to fruition, however, as it currently stands the company’s portfolio is already impressive: KGL PI managesKuwait’s Shuaiba port with a capacity of 300,000 TEUs a year but plans to invest US$60mn in the next year to increase the capacity to 1mn TEUs.

The company also manages the northern terminal at Saudi Jeddah Islamic Port with an annual capacity of 1.5mn TEU, is building Sager Port in Ras Al-Khaima in the United Arab Emirates – a project slated to begin operations in January 2007 with 350,000 TEUs annually – and was recently awarded a 30-year concession contract to build a container port in Iraq’s southern port of Umm Qasr with a capacity for 1mn TEUs annually.

Damietta, though, represents the company’s first definitive foray outside of its immediate home base area near toKuwait. Thus, while executives expect an internal rate of return of more than 15% annually throughout the duration of the contract, the deal itself is being sold more as an indicator of how far, and how quickly, KGL can take its apparent plans for what increasingly seems like a global expansion.

GTR sat down recently with Fadhel Al Baghli, vice-chairman and chief operation officer at KGL PI, to learn more about the deal and what it means for the company.


GTR: The Damietta project represents KGL PI’s farthest venture yet in terms of port operation and management. Are you viewing its success or failure as a sort of tipping point?

FB: Well, yes. It is a milestone for KGL’s growth path. This port is first of all located in the Mediterranean – that is at the spearhead of our footprint map. For the last 25 years of so our operations were really limited between the Arabian Gulf and the Red Sea – which are the Kuwaiti ports and the Emirates and the port at Jeddah.

With the introduction of the Damietta new container terminal it means KGL PI’s radar screen has expanded to cover the Mediterranean region now.

Volume-wise, this addition to our capacity is going to produce 4mn TEU per year. Up to last year the cap was around 1.5mn TEU overall. So this is a turning point, certainly.


GTR: How will the port itself operate vis-í -vis shipping companies?

FB: We are introducing a new concept for the common user port. Usually such a port is run by an operator to serve everybody, every shipping line. Or if it is a dedicated port it is dedicated to one shipping line. This port will be a sort of hybrid concept where we are joining both components of a dedicated port and a common user port.

We are going to continue our policy by operating a common user port but we are also putting the interest of China Shipping line forward because we are introducing them as an equity partner.

So that is a new port operation model introduced into the region.


GTR: You are referring to your recently announced deal with China Shipping Container Development Corporation, which gives them a 20% equity stake in Damietta?

FB: Yes, and also we have other shipping lines that are interested in going into an equity partnership with us, such as MATGN, the United Arab Shipping Company and so forth that should be finalised by the end of the year.


GTR: What is the advantage of bringing in these other equity stakeholders?

FB: Well the capital is not a problem because, frankly, we do not have a problem with collecting capital for these projects. We have enough money at our disposal as KGL group to go in 100%.

What we are looking for is a volume constituency; it is the quality of the money.

When we bring a shipping line to be our partner that is an assurance that we are going to have solid container growth – because they are going to treat this port as their dedicated facility. So, it’s more in terms of enhancing the commercial attractiveness of the port.


GTR: Why China Shipping? Can we consider the deal a strategic move ‘towards the east’s – and thus somehow away from the US and EU – as is often suggested in Middle East-East partnerships?

FB:China Shipping is not the major Chinese traffic carrier; there are others, of course. Actually China Shipping would probably come in as the third or fourth carrier, but it is nevertheless a very important one because it is a national shipping line forChina.

They also have very good import/export volume coming through Damietta now as we speak. So that is our rationale.


GTR: Why Damietta? What competitive advantages did KGL PI see in what was basically a secondary facility and location? 

FB: When it comes toEgypt, there are the southern ports and there are the northern ports. The southern ports are not in competition because they serve different regions.

As for the northern ports – Alexandria, Port Said East and West for examples Damietta holds a competitive advantage. When it comes to the distance, for example, the deviation [from international routing which shipping usually takes] at Port Said it is 0km, Damietta is 8km and Alexandria is 12km.

The best when it comes to deviation is Port Said, but still the location there is complicated by the issue of the Suez Canal convoy windows. Any ship that wants to go into those ports need to wait for the convoy, while at Damietta, they don’t have to wait.

As soon as they arrive they can berth, whereas at Port Said they have to synchronise their arrival and their departure with the Suez convoy system.

When it comes to capacity, the available capacity can only cater to 2.5mn TEU – for all northern ports. The new terminal at Damietta will give us a better competitive edge because the other ports simply don’t have expansion or development plans to go after the total capacity growth we see in the coming years.

We have no information that those ports have any expansion plans. Probably the only potential capacity developer is based on Port Said West terminal. But still the process of expansion will take a long time, at which point Damietta will be able to accommodate the projected growth. Our facility will be ready within two years.

If Port Said decided to develop their capacity, it will take them at least three and a half years. By that time Damietta will be in a better position to capture the growth.


GTR: How do you see Damietta positioning itself in the coming years towards competitor ports in Israel, Greece, Lebanon, and so on?

FB: Damietta is focused on the growth we see in this part of the region – the Eastern Mediterranean. We expect that there will be some organic growth and also some shifting, we believe, from other ports.

Right now, ships are moving to larger sizes and deeper drafts. The maximum available in the region is 15.5m and the new generation of ships are going up to 17m draft. So this will give Damietta a competitive advantage to the existing ports because we will be able to accommodate these new, larger vessels which only one port inGreece can even partially accommodate.

Domestically, I would also add, even for serving the inland part ofEgypt, Damietta is strategically located in the delta of the Nile that has access to Cairo, better than Alexandria and Port Said.

Trucking rates, for example, from Damietta are cheaper because the roads going out of Damietta are better and shorter going to Cairo. So all of those factors we think will give Damietta more of a competitive edge.


GTR: Describe the negotiating process with the Damietta Port Authority. Governmental entities have a generally poor reputation in Egypt when it comes to privatising or entering into deals with private concerns. Was this your experience?

FB: We went through with the Egyptian government a very transparent process because we also wanted to ensure 100% – since we deal with international organisations – that we were not jeopardising our standards. We were very careful to go through the legal process set by the Egyptian government. The Egyptian government requested a proposal to build a container terminal and there were several other companies who submitted proposals. In the end, we were selected.

But, yes, it was very tough. The government delegation was very keen to meet their interests. However, we presented it in a way that this project protects the Egyptian interests and our company’s interests. Now even the Damietta Port Authority is an equity partner now. So we went through the process, we submitted the proposal and we made sure that there were no problems or questions involved.


GTR: Explain the structure and the timetable of the deal.

FB: What we have now is a 40-year concession agreement where we are the port operator, with the company owning the concession called Damietta International Port. Under the terms of the agreement, KGL PI will design, build, finance and operate the new facility which will occupy approximately 130 hectares of land at the port and which will include the construction of new quay walls and container stacking areas in order to service large post Panamax ships.

The project includes the construction of a new U-shaped basin with a total of about 2,360m of new quay walls. These quay walls will be suitable for 10,500 TEU container vessels with a length of 400m and 53m wide.

In terms of timeframe, it is going to be developed in two phases. In the first phase the terminal will have throughput capacity of 2.5mn TEU per year by 2009. During phase 2, more stacking area will be created to increase the capacity to its full development of 4mn TEU per year.

The container equipment will consist predominantly of STS gantry cranes capable of handling vessels of 10,500 TEU and above. The yard handling will be done with RTG’s, terminal tractors and trailers and in its full development the terminal will be equipped with 22 STS cranes and 55 RTGs.


GTR: What arrangements are you planning for warehousing and security? For example are you planning to bring in partners like Cotecnas, SGS or others to handle this aspect of port operation?

FB: The security arrangement is done by KGL PI and is built mainly around the ISPI codes. So it is going to be done by us in cooperation with the Damietta Port Authority. KGL’s other entities are coming with us since we are going to use this port as a hub for our activity.


GTR: One opposition newspaper Al Wafd recently ran a story about what it said was widespread opposition to any form of privatisation at Egypt’s ports. In this charged atmosphere how concerned are you about the political risk in the coming years?

FB: Indeed, we are concerned. But we went through the process in order to mitigate the risk. We didn’t go solo through an unsolicited proposal. This was solicited by the Egyptian government. They selected us according to the merits according to their criteria. We went through a very lengthy negotiation process to make sure both parties’s interests are protected on such a project.

There is resistance to privatisation everywhere in this part of the world. Even here inKuwait we face criticism. People sometimes hate the unknown. They have to be educated to know what will be the benefits to privatising.

So when we go to a location, to a country, we implement a strategy to involve the local people on the project. We believe the best protection for a project is the local labour inducement into a project. We don’t go for a one-night stand. We go knowing we have to train the local people, to know what knowledge transfers we need to focus on. We think that it is cheaper actually for us to utilise the local resources rather than bringing in outside resources.

So on this project, our aim is to develop a good relationship with the local community by creating job opportunities, by creating private business opportunities for entrepreneurs. So we don’t go there only for the port, we go with other KGL companies, such as trucking, logistics, warehousing and so forth and aim to draw in others from the area.


GTR: Where are you going next? There are reports that you are currently negotiating on as many as 12 port deals, including two in Iran.

FB: I will say this: we have several projects that are ‘cooking now’s – potential port projects. And I would mention specificallyAlgeria,Sudan andIndia. That is what is next.