In the zone: Developing the Suez Canal Zone as a major logistics centre is part of the country’s future vision

Ever since it was opened in 1879, the Suez Canal has been the most important transport artery in Egypt and a lynchpin of the global economic system – some 10% of world trade passes through the canal each year. As such, the canal is a major revenue earner for the government, with toll fees totalling $5.1bn in 2012, roughly a 10th of the country’s foreign exchange earnings. Moreover, the canal, given its strategic location, is also an important enabler for the Egyptian economy, locking the country into a global system of trade routes.

RECENT HISTORY: In 1956 the Suez Canal was nationalised and has since been operated by the Suez Canal Authority (SCA), which answers to the prime minister. The main ports on the canal are located at Port Said on the Mediterranean coast. Port Said East is operated by the Suez Canal Container Terminal Company, which is a partnership between APM Terminals (55%), COSCO Pacific (20%), the Suez Canal Authority (10.3%) and the National Bank of Egypt (5%) with the remainder held by Egyptian private interests. The Port Said Container and Cargo Handling Company (PSCCHC), an affiliate of the state-owned Maritime Land Transport Holding Company, operates its own terminal at Port Said West. Although Egypt’s domestic economy has ridden choppy waters since the unrest in 2011, these ports have been largely unaffected as they operate more transshipment than import-export business.

The SCA has raised canal transit fees twice since the revolution, to help boost state revenues. The first increase, which was implemented in March 2012, raised fees by 3% across the board, while in May 2013, the SCA increased fees for oil tankers by 5%, for car and container ships by 2% and for other vessels by 3%. While a number of international shipping firms have expressed disquiet about the rise, overall the increase is unlikely to dissuade most ships from using the canal, particularly given the extremely high price of bunker fuel, which makes the alternative route around the Cape of Good Hope prohibitively expensive for most vessels travelling between Asia and the North Atlantic.

BOLSTERING PORTS’ PURPOSE: However, local unrest, including riots in Port Said, means that ships are less willing than before to make a stop at the Canal Zone ports. To help address this, and to make better use of the canal, the government is reviving a project from the 1990s to develop the Canal Zone as a logistics centre. There are also plans to expand Port Said’s capacity.

“The next extension of Port Said and the new container terminal are very important for enhancing Egypt’s role as a trans-shipment hub in the region,” Mohamed Mouselhy, the chairman of shipping agency Finmar, told OBG. All the major shipping lines are already present at the canal, and Egypt’s strategic location and large internal market of around 85m consumers offer other strong potential selling points. Although there is not yet an official master plan or strategy as such, the idea is slowly taking shape among the authorities.

In March 2013 the government completed the draft of a law to set up a General Authority for the Suez Canal Corridor, which would coordinate and regulate the dedicated logistics centre or centres in the Canal Zone, although the law is unlikely to be passed until after elections for a new parliament. Some industry insiders say the corridor project has a good deal of potential. “The Suez Canal Corridor project has the potential to generate significant revenues, if the broader national political issues are resolved,” Ahmed Karam Kordy, vice-chairman and founder of Mashaweer, a personal assistance company, told OBG.

Such an agency will be necessary to overcome existing administrative fragmentation. For instance, there are currently a number of different types of special economic zones in Egypt. An economic zone (which offers a 50% reduction in tax and social insurance, and 0% import duties on equipment) already exists in the form of the Suez Economic Zone at the canal, but there are other types of zones that offer different incentives.

Furthermore, the Canal Zone itself spans three governorates. Ultimately the new authority is likely to feature a merger of several of these agencies to provide investors with clarity, as well as to oversee a coherent master plan to coordinate the different projects such a scheme would entail, such as manufacturing parks and new housing districts. However, a number of projects in the Canal Zone, such as a second and third tunnel under the canal at Port Said and Ismailia are ready to move ahead, with requests for proposals from international consultants already tendered.

LOGISTICS CENTRE: Although the authorities are thinking over the medium-term, meaning a Suez logistics centre is likely to grow over the next 10 to 20 years, the most likely option for more immediate developments is the use of public-private partnerships, for which there is already a dedicated law and a special unit within the Ministry of Finance. Given the fiscal constraints the Egyptian government finds itself under, most observers agree that the build-operate-transfer (BOT) model is the most probable means to pursue the project. BOT projects avoid the need for the state make large upfront payments or pay regular fees over several years, and Egypt has negotiated quite a few successful BOT projects over the past few years.

However, if Egypt is to become a logistics centre, the country’s internal transport system needs much upgrading. For instance, while the Egyptian State Railways operate some 9500 km of track, their services are primarily geared to passengers rather than freight. Moreover, the network requires an overhaul of track and rolling stock. Rail connections from the canal towns to Cairo and Alexandria are thus slower. The road haulage sector suffers from a high incidence of informal firms, making it difficult to impose standards on lorries. According to Mahmoud Gamal al Din, advisor at the Ministry of Transport, another obstacle is that there is still no overarching strategy to inform sub-departments and agencies of common objectives. Mohammed Taha, sales manager at container transport firm APL Egypt, told OBG, “Although the country has a good location, increasingly location is less important when it comes to offering value, and logistics groups will not invest in Egypt unless they see a value proposition.”

LOOKING AHEAD: The country is signatory to a number of foreign trade deals that have gradually opened up access to overseas markets. For instance the COMESA agreement, a South and East African trade deal, opens a tariff-free market of over 400m people for Egyptian manufacturers. A number of foreign companies have also invested in assembly plants in Egypt with a view to using the country as a base from which to export to the rest of Africa; for example Samsung started production at its new electronics plant in Beni Suef in Upper Egypt in early September 2013. Provided the right structures are put in place, growth in Africa can act as a locomotive for the development of the Canal Zone. With the World Bank predicting that GDP growth in Africa will outstrip the global average over the next three years, there are strong prospects for an Africafocused logistics and manufacturing centre at Suez.