Egypt's expanison of New Suez Canal seeks long-term payoff

The expansion of the Suez Canal, completed in early August 2015, could be a significant step towards solidifying Egypt’s position as a logistics and trade centre, leveraging its location astride major East-West shipping routes. The goal of boosting traffic on the 163-km canal – a key source of government revenue and hard currency – is increasingly important as the country looks to reduce its budget deficit, bolster the Egyptian pound and maintain its import cover.

Grand Opening

On August 6, 2015, Egypt opened an $8bn extension of the canal. The “New Suez Canal” includes 35 km of new channels constructed in the desert, as well as a 37-km stretch where the existing canal was enlarged to accommodate larger ships.

“The Suez Canal enlargement is a massive project and will be beneficial for shipping lanes, generating more capacity,” Klaus Laursen, former managing director of the Suez Canal Container Terminal, told OBG. “Having a second parallel waterway will reduce overall transit times.”

The expansion is also expected to increase revenue from $5.3bn in 2014 to an anticipated $13.2bn by 2023. These projections are based on an average of 97 ships passing through the canal daily, up from 49 prior to the expansion. The improvements are due to the efficiencies achieved by the project; southbound navigation now takes 11 hours, down from 18.

Home-Grown

The new canal is a policy cornerstone of President Abdel Fattah El Sisi’s administration, which has highlighted domestic support for the project. The $8bn in funding was raised from local investors via donations and the sale of investment certificates, with shares starting from LE10 ($1.28). The Egyptian army oversaw the build-out with six foreign contractors carrying out much of the work.

Despite the accelerated pace of construction, it may take time before the canal sees the revenue boost authorities predict without significant increases in canal fees – which could impact the competitiveness of the Suez. Global trade growth has been sluggish in recent years, and revenues from the canal has not kept pace with increases in global trade seen since 2011. While global trade volumes rose by an average of 2.9% per annum in the three years to 2014, canal revenues grew just 2%.

Related Infrastructure

In March the government unveiled a new strategy to capitalise on added benefits of the expanded canal, identifying several strategic objectives, including better domestic connectivity and intermodality, and infrastructure upgrades with private sector participation. Priority has been given to transport infrastructure improvements in particular, ranging from roads and railways to dry ports and container terminals.

While roads account for 97% of freight transport in the country, Egypt is expanding rail capacity for cargo and passenger traffic, with $6.4bn of rail and dry port projects in the planning pipeline. Maritime upgrades also top the agenda, with the pipeline of port development projects reaching a combined $1.9bn, including new general cargo and container terminals in East Port Said ($990m), general cargo terminals in Damietta ($150m) and Safaga ($250m), and a universal port project in Ain Sokhna ($500m), to include terminals for liquid bulk, general cargo, dry port and containers.

Some 8-10% of global sea trade passes through the Suez Canal, but transit fees average just $150 and $200 per container, compared to $2000-3000 in European ports. The Suez Canal Zone development project, which is targeting $68bn-100bn in investments through to 2023, aims to promote the development of service industries in cities near the canal. In addition to logistics infrastructure, the third phase of zone involves a technology valley in Ismailia, with research and development clusters and ICT business parks. Saudi Arabia, Kuwait and the UAE are helping to finance the project, along with European companies.