Improving networks: A renewed awareness of the importance of the sector is driving the push for investment and development

Egypt has long served one of the world’s oldest transport hubs. For millennia, its position, straddling major trade routes between Asia, Africa and Europe, has made the country a commercial and cultural crossroads, and since 1879 it has been home to the Suez Canal, through which 10% of the world’s total trade volume passes.

Admittedly, the country has been forced to grapple with the challenges of recent history, and the upheaval through summer 2013 has done little to reduce political risk, policy uncertainty or the broader economic challenges of dwindling foreign exchange reserves and a depreciating pound. However, the country’s transport sector has helped buffer the economy from the worst-case scenarios, with the Suez Canal contributing $3.8bn in foreign exchange over the first three quarters of 2012, or some 8% of the total over the same period.

GROWTH FACTORS: In light of the large domestic market and the sizeable number of key trans-shipment and transit connections, the transport sector is likely to continue to play a central role in the medium to long term, even if large-scale public financing is likely to slow. A need for improved road and rail infrastructure, combined with upgrades in the maritime and aviation sectors, offer significant opportunities for investment.

According to figures from the Central Agency for Public Mobilisation and Statistics (CAPMAS), in 2012 the transport and storage sector accounted for 6.8% of total employment in the country. Figures from the Central Bank of Egypt showed that in early 2013, total investment in the sector totalled $647m, down 35% on $989m during the same period in 2012.

REGULATORS: Ultimately, responsibility for all transport segments lies with the Ministry of Transportation (MoT), with the exception of civil aviation, which has its own dedicated ministry (MCA). A number of agencies fall under the MoT’s remit, including the port authorities for individual ports; the River Transport Authority, which deals with riparian transport on the Nile; a number of Urban Transport Authorities, which regulate road and public transport within urban zones; and the National Institute for Transport (NIT), which trains sector professionals to degree level.

Under the MCA, the Egyptian Airports Company owns 19 international and seven regional airports, while the Cairo International Airport is managed by the Cairo Airport Company, and the Egyptian Civil Aviation Authority is responsible for regulation and safety. A number of state-owned enterprises also operate in the sector. Of these, perhaps the biggest are the Egyptian State Railways (ESR) and Egypt Air, the national carrier.

Prior to the revolution in 2011, the NIT was in the process of drawing up a master plan for the Egyptian transport sector, with assistance from the Japanese International Cooperation Agency (JICA). After the change in the political regime in 2011, however, uncertainty over the assumptions on which this master plan was predicated led to implementation of the plan being put aside, although the NIT is attempting to keep it up to date so that a new strategy can be produced relatively quickly once things settle down.

Although transport officials have produced plenty of technical studies, even prior to 2011 there was a lack of an overarching strategy and common guidelines for all sub-departments in the transport field, which has, at times, resulted in confused lines of responsibility and a certain lack of inter-bureau communication and coordination. This situation may change once the political situation becomes clearer.

SUEZ CANAL: The single largest transport-related operation in the country remains the Suez Canal, one of the primary corridors for the large volumes of trade between Europe and Asia. Unsurprisingly, traffic through the canal has been largely buffered from any of Egypt’s political uncertainty due to its importance. In 2012, net tonnage passing through the canal was 928.5m tonnes, down only slightly on 928.8m tonnes in 2011. Though, the minor dip does not worry Marwan El Sammak, general manager of shipping agent MedLevant. “European demand will rise in 2013 and even if that increased demand is soft, it will help Egypt’s exports,” he said.

Revenue from tolls on the canal amounted to $5.13bn in 2012, compared to $5.22bn in 2011. In May 2013, the Suez Canal Authority (SCA) increased tolls by 5% for oil tankers, 2% for container craft and 3% for other types of vessels. This follows on from a 3% general increase in March 2012. Although the toll hike prompted shipping lines to voice concerns, especially given the lack of an economic recovery in Europe, most analysts agree that the rise in fees is not so large as to put shipping firms off using the canal, especially since the alternative route around the Cape of Good Hope involves longer journey times and higher fuel costs. “The key factor that will determine Egypt’s competitiveness in the global maritime transport sector will be the quality of its service and productivity along with the tariff,” Rear Admiral Alaa El-din Nada, chairman of the Alexandria Container and Cargo Handling Company, told OBG.

PORTS: Excluding smaller fishing harbours, the country has 15 commercial ports in total. The ports along the northern coast are split between private and government-operated terminals. The port at Alexandria is operated by the Alexandria Ports Authority and has 20 terminals and 67 berths, while further west, the port of Dekheila is run by private group Hutchinson Port Holdings (HPH), and has six terminals and 14 berths. Damietta, at the mouth of one of the two major branches of the Nile, also has two terminals, one operated by HPH, and another operated by the government’s Damietta Port Authority. Port Said is divided between Port Said West, a terminal operated by the Egyptian government, and Port Said East, operated by AP Moller Group, under the name Suez Canal Container Terminal.

On the Red Sea coast, the Port of Ain Sokhna, is operated by UAE-based DP World, while further south, the government is developing the Port of Safaga, currently a mining harbour. The city of Suez, the city of Rosetta, and the mouth of the other major branch of the Nile, all developed as maritime cities, but are no longer first-rank ports in the country.

Around 70% of throughput is trans-shipment, which is concentrated in the ports of the Suez Canal Zone. Ain Sokhna, which is linked to Cairo by a 120-km motorway, acts as an import-export terminal for the capital’s trade with the Gulf States and Asia, while the ports on the Mediterranean are hubs for trans-shipment and import-export trade with Europe and North America.

SHIPPING LINES: Given the canal’s importance, most international shipping groups are represented in Egypt. In 1998, the country allowed overseas firms to enter the market on the condition that they partner with a local firm. In 2008, this was changed to allow shipping lines to open their own agencies, and the market is now split roughly 50:50 between these two types of firms. Of the foreign-local partnerships, major players include Hapag-Lloyd, Hanjin, Orient Overseas Container Line, United Arab Shipping Company and Evergreen Marine Corporation. In the latter category, Maersk, CMA-CGM, Asia Pacific Marine Container Lines, China Ocean Shipping Company, China Shipping Group and Pacific International Lines are among the biggest foreign agencies.

UPGRADES NEEDED: One issue facing Egypt’s ports is the low draft in a number of them. Currently, most of the northern ports have a draft of just 13 metres, (or around 15 metres at Port Suez East), which is too shallow to accommodate the largest ships currently afloat, limiting the ports to receiving feeder ships. Ain Sokhna has a draft of 17 metres, but is located on the wrong side of the Suez Canal to work as an effective trans-shipment centre. As such, investment is necessary to deepen the draft at most of the northern ports.

Another improvement in the pipeline is the introduction of an electronic data interchange system (EDIS) to track and document goods coming through the ports. An EDIS is already in operation at Port Suez East and Damietta, and will soon be introduced in the rest of the country as one of the conditions of EU budgetary and technical support granted to the MoT in 2011.

RAIL: The Egyptian rail network is the oldest in Africa, dating back to 1854, and is run by the ESR, which operates 9570 km of track and over 700 stations. However, rolling stock is in poor condition, less than 30% of lines are double track and the railway system is not fully integrated with ports, industrial areas and dry docks. Although the network was built primarily to carry freight, these days the railway mostly transports passengers: roughly 500m passengers and 6m tonnes of freight are carried annually, according to the company.

Decades of underinvestment have resulted in dilapidated engines and carriages, particularly away from the main Cairo-Alexandria express line. Public concern over safety on the network has increased over the past decade, as the network witnessed a number of large-scale accidents as recently as 2012, with perhaps the worst occurring in 2002, when over 300 passengers lost their lives in a fire on a train between Cairo and Aswan. These concerns over safety, as well as comfort, have prompted the network to invest in new rolling stock, with plans to assemble some 200 new carriages in Egypt. Another 330 short-distance carriages have been ordered from other manufacturers overseas.

Over the long term, sector players have floated the possibility of a separation of the ESR into two arms: one for regulation and the other for service delivery, but even if this happens, it remains a far off option. Over the medium term, the development needs of the Egyptian economy mean that the ESR is looking to develop its freight business to improve the country’s connectivity, which in turn will require substantial investment in track, rolling stock and possibly new lines altogether. The ESR holds a large land portfolio of around 91m sq metres, which, if commercialised properly, could go some way to providing the necessary funds.

ROADS: As with most large emerging markets, road traffic serves as the dominant form of transport for both people and goods. According to CAPMAS, Egypt had 121,390 km of roads in 2012, 108,000 km of which, or 89%, are paved. The road network carries 95% of goods transported within the country, as well as a substantial majority of all passenger journeys. Partly, this is explained by the neglect of alternative modes such as the railways. “The country's infrastructure is out-dated and needs urgent upgrades, such as enhancing railroad safety,” said Ahmed Karam Kordy, vice-chairman and founder of Mashaweer, a local personal assistance company. But subsidies to petrol and diesel play also a large part in road transport’s popularity.

Originally introduced as a welfare measure at a time when Egypt had a fairly large petroleum export surplus, the cost of fuel subsidies ballooned as the population grew. Demand has galloped ahead and Egypt now spends LE96bn ($13.66bn) on fuel subsidies, more than the cost of its health and education expenditure combined and a major contributor to the nation’s budget deficit, which hit 14% of GDP in the 2012/13 fiscal year, according to initial figures released in September 2013. As subsidies are removed, this will transform the economics of transport modes in Egypt.

The country’s road network is of variable quality, though no precise breakdown on motorway versus single carriageway roads was available at the time of writing. While multi-lane highways linking Cairo, Alexandria and the Canal Zone exist, the surface quality is patchy, and beyond this the quality of rural roads is generally low. The routine overloading of lorries, puts more strain on the roads and endangers public safety.

The quality of driving is also poor, with figures from the World Health Organisation showing the fatal accident rate on Egyptian roads at 42 deaths per 100,000 people, compared to 5.2 per 100,000 people in Sweden and 7.2 per 100,000 in Finland. The government has plans to upgrade a number of arteries or build new ones using private investment. In early 2013 a spokesman for the Directorate of Roads and Bridges in Cairo told local press that the costs for road upkeep were around LE2.2bn ($313.06m) a year.

A still more ambitious project for the network is the proposed Egypt-Saudi Arabia causeway in Sinai, which would span the Straits of Tiran and stretch 32 km, at an estimated cost of $3bn. In August 2012, regional press reported that the MoT was due to form a technical committee to look into the project, although no firm date had been set at the time of writing.

PUBLIC TRANSPORT: By some estimates, the population over Cairo now stands well over 20m people, and as such, upgrading the public transport network is a major priority. The urban transport authorities for the three governorates that encompass greater Cairo (Cairo, Giza and Qaloubiya), which were subject to the provincial governor, have now been brought together into one authority under the MoT, which has gone some way to tackle administrative and operational fragmentation.

The Cairo Urban Transport Authority (CUTA) operates a network of buses, but many of these are old and the level of comfort leaves something to be desired. This is one factor that has led to the rise in car ownership and usage in the capital, which has grown to the point where the city is on the verge of permanent gridlock – it can take a couple of hours to travel just a few kilometres at peak times. Cairo is home to the first metro system in Africa, which opened in 1996. In 2011/12, the metro carried over 1bn passengers for the first time ever, up from 837m passengers in 2010/11. The metro has two lines stretching 65 km. Line 3, which was started in 2011, remains under construction, and runs between Midan Ataba in downtown Cairo and Abbasiya, home to the Coptic Patriarchate. The most recent stretch of the line opened in February 2013. Upon completion in 2014, the line will cover 40 km and link central Cairo to the airport. A fourth metro line is due to open in 2017, adding another 70 km to the system. Currently, the metro is managed by the National Authority for Tunnels, which is under the remit of the MoT.

Inter-urban public transport is undertaken either by private minibuses or else by a number of state-owned coach companies. The Holding Company for Maritime and Land Transport, an affiliate of the Ministry of Investment, owns three major coach companies: Upper Egypt Buses, East Delta Buses and West and Middle Delta Buses, which between them provide intercity travel between Egypt’s major cities and provincial capitals.

PUBLIC-PRIVATE PARTNERSHIPS: Given the condition of transport infrastructure, the state, stretching back several years, has been keen to encourage private investment. Since 2006, a unit at the Ministry of Finance has been dedicated to public-private partnerships (PPPs), and Law 67 was issued in 2010 to provide clarity over the tender process. A number of sectors, such as ports where the model is essentially self-financing, benefit from their own PPP laws, since the government does not have to agree remuneration terms with the investor. Law 67 aims to provide greater transparency over the terms of a tender, specifying the stages of a tender and what potential investors can expect at each step. It also extends the permissible lifetime of a contract to a length of 15-30 years, which allows investors more time to recoup their money, especially in build-operate-transfer contracts. Mahmoud Gamal El Din, an advisor at the MoT, told OBG, “Hitherto, Egypt has had good potential projects, but has not always packaged them well for investors. That said, there is a big prime mover advantage to be had.” Notable projects in the transport sector, which are likely to be tendered under the PPP system, include the 40-km Shoubra-Banha road, providing a new highway between central Cairo and the central Delta. The road is due for tender by the end of 2013 with the contract to be awarded in early 2014, although the value of the contract had not been released at the time of writing. Other PPPs in transport due for tender are the Asyut-Sohag-Qena-Port Safaga road, a 400-km motorway linking cities in Upper Egypt to the new Port of Safaga, creating import and export routes that bypass Cairo; and the Ain Shams10th of Ramadan railway, a 72-km passenger and freight line in the north-east Cairo suburbs.

LOGISTICS: Already the country is an important transshipment hub, and its location sandwiched between three continents should constitute a natural advantage. Therefore, logistics, as a labour-intensive business, is an area the government is keen to support. However, most observers agree that the country’s internal transport network, which is highly congested, will need significant upgrading if Egypt is to achieve this. While almost all large shipping companies have a presence in Egypt, the land transport sector lags behind in terms of quality and safety standards. Many lorry firms are part of the informal economy, which makes it harder to ensure compliance and diffuse best practice in the industry through formalised training programmes.

The government plans to develop the Suez Canal Zone as a trans-shipment-logistics-manufacturing zone. “Egypt is not benefitting from its competitive advantages,” MedLevant’s El Sammak, told OBG. “Port infrastructure is targeting trans-shipment, which is very volatile, but Egypt could make better use of the Suez Canal as a centre for manufacturing assembly, distribution and value addition.” Developing the Canal Zone is likely to be a 10- to 15-year project, with the Ministry of Investment currently finalising the master plan, which will include areas for light industry, logistics zones, housing and office parks. In March 2013, the government completed the draft of a bill to create a dedicated agency to develop the Suez Canal corridor, but it is unlikely to be passed until a new parliament is established in autumn 2013. Over the long term, growth in Africa is likely to spur interest among multinational firms for a logistics base in the region, and with the right investment, the Suez Canal Zone is a natural contender.

RIVER TRANSPORT: Before railways, the Nile was the quickest and safest way to carry goods and people. However, under President Gamal Abdel Nasser in the 1950s and 1960s, the sector suffered from neglect, and presently accounts for less than 1% of goods transported, while the only passengers these days tend to be tourists. However, there is a renewed interest in river transport (see analysis). Currently, two companies operate barges on the Nile: the National River Transport Company and Nile Cargo, a subsidiary of private equity group Citadel. But volumes are limited in part by a lack of ancillary infrastructure along the route.

AIR: The aviation sector has suffered from the drop in tourist numbers after the 2011 revolution, but remains reasonably healthy. State-owned Egyptian Holding Company for Airports and Air Navigation owns public airports. Egypt currently counts 10 international airports, mostly around the big cities and the resorts on the coast, and a further 11 domestic airports. CAPMAS figures show total passenger numbers at the international airports reached 32.9m in 2012, an improvement on the 2011 figure of 29.4m but still well below the 36.4m recorded in 2010. Purely domestic airports transported 800,000 passengers in 2012, down from 850,000 in 2011 and 1.1m in 2010. “The building of smaller airports has started to make domestic air travel more affordable for operators and passengers alike. Using smaller planes can reduce operating costs by over 30% due to fuel efficiency and cuts in maintenance costs,” said Radwan Sallam, the head of Smart Aviation.

Cairo International Airport is by far the country’s biggest, and is the second-busiest airport on the continent after Johannesburg in South Africa, although in March 2013, the airport decided to close down a runway in Terminal 3 in the early mornings due to the low flight volume. The airport can support 22m passengers a year, and a $387m expansion of the second terminal due for completion in 2015 should raise this figure. A project to expand further and increase capacity to 30m passengers a year has been estimated to cost LE2bn ($284.6m) but it remains unclear if the project will go ahead unless traffic recovers significantly.

In a positive sign, the MCA was reportedly in discussions with UK-based Icon in March 2013 to build a $20bn “Airport City” with hotels and restaurants on 2288 acres, to deal with an expected increase in passengers to 70m. “After the infrastructural build-up, the airport’s second challenge is the utilisation of human resources, specifically the qualification structure and therefore efficiency,” said Mahmoud Esmat, the chairman of Cairo International Airport. Elsewhere, Egyptian construction firm Orascom won the $87m contract to build a new airfield, complete with a 4-km runway, 4-km taxiway and related utilities at Hurghada International Airport in October 2012.

OUTLOOK: While the transport sector in Egypt continues to suffer from the cumulative effects of years of underinvestment, there is a new awareness of its importance to the rest of the economy and a keenness to incorporate more private investment to the sector’s development. While large-scale infrastructure investment looks unlikely until the country stabilises, the government is committed to the PPP model to finance what improvements it can make, and opportunities are likely to grow, especially if the government receives a support package from the international community.