Egyptian transport investments prioritise infrastructure expansion and easing network pressures

With concerted efforts aiming to put the country’s economy on a long-term growth path, Egypt has been progressively focusing on improving its transport infrastructure. Better transport networks are not only key to fulfilling the country’s ambitions to raise trade volumes with international markets; they will also be useful to properly manage the ongoing urban development taking place across many parts of the country. Improvements to existing infrastructure are necessary for Egypt to leverage its geographical advantages.

With a strategic position as a passageway between the Mediterranean Sea and the Indian Ocean, Egypt is a critical commerce point between Africa, Europe, Asia and the Middle East. However, excessive bureaucracy, inadequate infrastructure and a lack of linkage between different transportation modes have at times blunted the country’s potential for international transport operations.

Performance Gaps

On the World Bank’s “Doing Business 2019” report, Egypt was ranked 171st out of 190 countries in the trading across borders index. The report underlines some of the country’s most competitive areas for international commerce, as well as some of the biggest bottlenecks. Accounting for border compliance requirements, it costs $258 to export a container from Egypt, compared to an average of $442.40 in MENA countries. The cost to import a container is much less competitive at $554; slightly higher than the MENA average of $536. More importantly, the documentary compliance necessary to import a container into the country can add up to as much as $1000 in Egypt, compared to an average of $269 across all MENA countries.

In order to take full advantage of the country’s geographical position, these processes and the costs of transportation will have to be streamlined. Making domestic and international trading more accessible to Egyptian firms will be critical not only for high-volume industrial exporters, but also for the country’s small and medium-sized enterprises (SMEs). This, however, will depend on diversifying sources of investment for transport projects, which have long relied on public works projects financed, in most cases, by international lending institutions. In its “2018 African Economic Outlook” report on Egypt the African Development Bank (AfDB) stated, “Infrastructure finance mainly depends on public expenditure in Egypt. Although the government has focused on encouraging private sector funding and foreign direct investments, this remains a challenge requiring sustained reforms.” Public-private partnerships (PPPs) have attracted private investment for infrastructure projects, including toll roads, ports, airports and urban transportation systems.

However, improvements in the human resource capacity of the country are required to take full advantage of the benefits offered by the PPP framework. “It will be necessary to train public officials and strengthen the capacity of PPP units to develop PPP financing schemes and prepare complex projects,” the AfDB report went on to say.

Sector Oversight

Over recent years the weight of transportation activities within Egypt’s economy has remained relatively stable. According to figures by the AfDB, transportation, storage and communications activities accounted for 9.1% of GDP in 2017, a slight reduction from 9.4% in 2011. At large, the sector is overseen by the Ministry of Transport (MoT), in charge of overall policy, although specific functions are taken care of by different governmental bodies. The General Authority for Roads, Bridges and Land Transport is included within the MoT, and is tasked with the expansion and renovation of the country’s national road network. Also under the MoT is the Egyptian Railway Authority, which regulates the railway sector as well as the Egyptian National Railways, the state firm that operates the country’s network. Another body within the ministry, the Maritime Transport Sector, is in charge of overseeing sea traffic and the commerce sector. The Suez Canal Authority (SCA) oversees transit and the operation of the Suez Canal, Egypt’s most valuable and strategic maritime transportation asset. The SCA was established in 1956 as a separate public entity that reports directly to the country’s prime minister, and is responsible for the maintenance and development of activities of the Suez Canal, as well as for the setting and oversight of navigation regulations on the canal. The Ministry of Civil Aviation is in charge of overseeing the country’s aviation sector.

In 2013 the Egyptian government launched a new investment programme with a strong focus on infrastructure expansion and renovation. The Ministry of Finance has reported that an estimated $55bn was spent on infrastructure development throughout the 2013-17 period. However, the transport sector has had to compete with several key areas. Transport and storage infrastructure captured 13.9% of the total investment during that period, compared to the energy sector, which accounted for 43.9%, and real estate and construction, which represented 18.4%. According to information by the Ministry of Planning, LE77bn ($4.3bn) will be allocated to the transport sector for FY 2018/19.

Road Network

Egypt’s road network spans 65,050 km, with 48,000 km covered by paved roads as of 2018. Road transportation accounts for roughly 94% of all cargo movement within the country. However, parts of the network have deteriorated because of lack of investment over the years.

According to estimates by government authorities, the country’s road network will require roughly $8bn in investment for necessary upgrades over a 5-to-10-year period. Critical projects have been concluded recently, such as the overhaul of a highway linking Cairo to Alexandria, on the Mediterranean, as well as the expansion of the road link between Cairo and Ismailia. Because of the beneficial impact of road networks on regional development, authorities have been aiming to improve major links in the southern part of the country.

As of 2019 a $712.6m programme is under way which is targeting the renovation of 29 road links in Upper Egypt. The same programme includes the building of seven new bridges to link road axes in the western and eastern banks of the Nile, in the governorates of Sohag, Qena, Minya, Assiut, Aswan and Beni Suef, in order to improve cross-river traffic. Also under consideration is a project to establish a 32-km bridge linking Saudi Arabia to Egypt, which could cost as much as $4bn. Although leaders of both countries have discussed the plan, no definitive plan had been announced as of early April 2019.

Ports

Alongside plans to expand the road network to better serve domestic trade, maritime commerce has long been important to connect the Egyptian economy to foreign markets. According to figures by the World Trade Organisation (WTO), commercial exchanges going through the country’s ports expanded from $33.7bn in 2007, to as much as $73bn, before decreasing to $66bn in 2016. The country operates 15 commercial ports, spread out across its Mediterranean coast, the Suez Canal and the Red Sea. The Port of Alexandria, on the north coast, remains the biggest facility in the country, handling about 60% of Egypt’s international maritime cargo and serving as the main commercial connection to European markets.

In the short term, several projects are expected to increase the competitiveness of the port sector. A joint venture established in 2018 between the Alexandria Port Authority and the Suez Canal Authority will develop and manage a new multipurpose platform at the Port of Alexandria. Construction is budgeted at $450m, according to local media reports. Meanwhile on the north shore, construction commenced on a $73.6m multipurpose terminal project at the Damietta Port in mid-2018. The facility is expected to reduce waiting times, and handle liquid and solid bulk and general cargo ships, with construction projected to be completed in 2020.

Strategic Expansion

The port extensions are expected to strengthen Egypt’s position along one of the world’s busiest trade routes and further enhance the strategic advantage of the Suez Canal, the country’s strongest asset for international commerce. The waterway has long been a boon for Egypt’s transport sector, allowing for an average of 17,000 ships to cross between the Red Sea and the Mediterranean every year. Besides the trade advantages, the waterway has brought significant income. Government revenues from the Suez Canal have increased from $3.6bn in FY 2005/06 to $5bn for FY 2010/11, according to figures by the WTO. However, income from the canal has remained mostly stable, ranging between an annual windfall of $5bn and $5.3 over the 2011-16 period. Much is resting on the country’s ability to further monetise the crossing, after Egyptian authorities completed an $8.6bn extension of the waterway in 2015. The project has allowed for traffic to move both ways simultaneously, helping to decrease transit times. According to the SCA, the augmented canal will provide an additional $13.2bn in revenue for the Egyptian state by 2023, international media reported. However, achieving such a high turnover will depend, to a large extent, on worldwide trade patterns outside of Egypt’s control. The current environment which sees a more protectionist approach to international trade by the US is likely to impact sea exports from China, for instance. “At the moment there are mixed views of whether or not the new canal expansion will live up to its expectations, considering the risk of a potential slowdown in global trade,” Ahmed Hazem Maher, vice-president for research at EFG Hermes, told OBG. “But it is a wait-and-see game. Obviously trade wars do not help to increase traffic, but we will have to see what happens over the medium term.” Besides infrastructure, other elements might have a hand in improving the competitiveness level of the port sector. In April 2018 international media reported that transport authorities had extended the daily operating hours of Egyptian ports from 16 to 24 hours in a bid to reduce waiting times.

Air

Along with road and sea transport, Egypt’s air segment has expanded over the years, led both by the country’s geographic position as a regional air transfer point and by its fast-growing population. Business and especially leisure tourism have also supported the rise in passenger traffic over the years, but the volume of foreign visitors using Egypt’s air transport has been more volatile since the 2011 revolution. This was further exacerbated in October 2015 by the bombing of a Russian plane which killed 224 people near Sharm El Sheikh. Following the downing of the plane, the number of tourists arriving in Egypt decreased from 9.3m to 5.3m in 2016. Signs of a possible turnaround for the country’s tourism sector began to manifest itself in 2017, with the number of visitors arriving in the country climbing 54% over the first seven months of the year to 4.3m. Cairo International Airport, which currently has three terminals, is the continent’s second-busiest airport after Johannesburg. The $436m expansion of Terminal 2 was completed in 2015. Construction on this project began in 2012, after being delayed in the aftermath of the 2011 uprising. The new terminal allowed for the expansion of the airport’s annual handling capacity from 18m to 26m passengers, according to figures by the World Bank, which supported the project with a $280m loan. In 2018 the Ministry of Civil Aviation set up a joint venture between the public sector and private operators to focus on airport projects.

The new firm is made up of the publicly owned Egyptian Airports Company and the Cairo Airport Company, and private operators Orascom Construction and Archirodon, a Greek company. The Egyptian state will hold a 60% stake in the company, which will be in charge of the project for the modernisation of Terminal 1 at Cairo International Airport.

Railways

Despite the importance of the rail network for the movement of people between the country’s cities along the Nile Valley corridor, railway operations have long been marred by inadequate safety systems and hefty volumes of debt. A May 2018 amendment to the 1980 Railway Act, which allows for the participation of private operators, will help improve operations over the medium term.

The amendment will allow private firms to manage, build and operate railway infrastructure for periods of up to 15 years. Improving safety will also be essential to attracting investors and commuters alike, as the Egyptian National Railways (ENR) reports that up to 1000 incidents or collisions take place on the railway system every year. The government announced it would spend as much as $3.1bn in the railway sector for the 2018-23 period to, among other improvements, acquire 1000 new train carriages. Modernisation of safety equipment has also become an investment priority, and railway transport authorities have signed several contracts to improve this. An agreement with French contractor Thales will allocate €70.5m for the upgrading of signalling and telecommunications equipment along the railway link between Cairo and Alexandria.

Modernisation efforts will also need to address capacity. In October 2018 transport authorities were reportedly in discussions with international lenders such as the European Bank for Reconstruction and Development (EBRD) to secure $250m in financing to double-track specific railway links across the country. The ongoing modernisation of both rolling equipment as well as signalling systems is funded by a World Bank support loan for the restructuring of the country’s railway system, valued at LE56bn ($3.1bn) which is set to include a restructuring plan for the ENR. Another railway project that was reportedly being considered is the establishment of a high-speed train link between Luxor, in Upper Egypt, with Marsa Alam, located in the Red Sea. The project is seen as a way to encourage the development of tourism in both locations.

Logistics

A more secure and efficient railway system would do much to improve the operations of overall logistics, but an expansion of transit areas for cargo handling will also be necessary. In August 2018 the Ministry of Transport announced it would tender a $100m project to establish a dry port in Sixth of October City, on the outskirts of Cairo. The dry port will cover an area of 100 feddans (approximately an acre) under a PPP model. A more structured government approach will also help to develop new logistics capacity.

In September 2018 the MoT announced that a new company would be set up for the management of multipurpose platforms in the country. The firm, with a founding capital of LE500m ($28.1m), will be jointly owned by the Suez Port Authority, the Alexandria Port Authority and the Holding Company for Maritime and Land Transport.

River Transport

Despite the Nile’s importance for the country’s agricultural sector, the country’s key waterway remains underutilised as a goods transport vector. In order to stimulate and expand river transport, the government has planned to launch tenders for the construction of four river ports, in Assiut, Sohag, Qena and Mit Ghamr. The beginning of the construction of the first of these ports, in Sohag, was announced by local media outlets in June 2018 with the government also looking for a private operator to manage the facility. A tender for the construction of the Qena river port, set to cost between $50m and $100m, was also expected to have started before the end of 2018.

Outlook

The transport sector will likely continue to be a financing priority for the government over the coming years because of the critical role it can play in leveraging Egypt’s economic performance. Current efforts, however, will require an increase in private investment participation. This will depend on a number of factors, including economic incentives for foreign and domestic investors to participate in transport infrastructure projects. The large-scale investments taking place in the port sector will help match the recent expansion of the Suez Canal.

For Egypt to maintain its position as a global maritime transport hub, ongoing improvements in port capacity are key, as well as measures to improve the competitiveness of port operations. Government plans to expand cargo movement across the Nile River will open up opportunities for multimodal transport across the country, and a clear framework to attract more involvement of the private sector in the system should boost the construction and operation of river ports in the pipeline for construction.