Public and private initiatives boost efficiency of Egypt's transport network

While the impact of Egypt’s economic reform programme is being felt acutely in the transport industry, the sector has become a particular focus of investment attention. From urban transit to seaports and airports, the country’s transport network is poised for a significant upgrade. Although demand is unpredictable and subdued in certain segments, the emphasis on developing strong transport infrastructure should provide opportunities to investors and operators alike.

General Environment

Egypt’s transport sector is being buffeted by a mix of positive and negative influences. In the third quarter of FY 2016/17 the transport and storage sector grew at a rate of 4.4%, just above that of the overall economy, which expanded by 4.3%. Compared to the communications (10.7%) and the construction sector (7.9%), the growth was modest. However, given that the economy is facing a variety of headwinds from the flotation of the Egyptian pound, the performance is relatively impressive.

The decision to de-peg the Egyptian pound from the US dollar in November 2016 has had a dramatic impact on the economic environment and has significantly affected the sector. Within a matter of days of the decision, the pound fell from its pegged rate of 8.8 to 17 to the dollar, the biggest depreciation in more than 15 years. As a result, the cost of imports increased, while exports became more competitive. The sector has also been impacted by other elements of the IMF-backed reform programme, such as the government decision to cut back the country’s fuel subsidy system.

While these decisions could do much to improve the macroeconomic environment in the medium term and beyond, they are producing an immediate effect on the transport sector. Many companies are facing significant inflationary pressures, and costs have increased for logistics firms. Nada Rezk, marketing manager at DHL Egypt, estimates that foreign currency costs have doubled, while costs in Egyptian pounds have gone up by 20% to 30%. Given these trends, it is perhaps unsurprising that imports to the country have slowed. While there has been some recent stabilisation, the inward flow of goods and services fell from $6.2bn in August 2016 to $4.6bn in May 2017, according to the Central Agency for Public Mobilisation and Statistics. Luxury imports have been badly affected, with a drop in imported vehicles, for example. In this segment, the value of imports has dropped by as much as 60%, according to some estimates.

However, the currency flotation has also made Egyptian exports much more competitive. The reduction in goods coming into the country has therefore been somewhat offset by a jump in the volume of exports. Across the Egyptian market as a whole, exports climbed from $1.75bn in July 2016 to $2.28bn in May 2017. “We’ve seen some good traction with exports out of the country,” Ashraf Hamid, head of customer service at Maersk Line Egypt, told OBG. “We’re talking about almost double the volumes we recorded in 2016.”

Logistics companies are benefitting from this new environment. “Imports are going down, but we are being compensated by exports. We are definitely shipping more, and seeing growth in revenue, shipments and volumes,” Rezk told OBG. With the exchange rate and imports stabilising, volumes are expected to continue to grow. Maersk, for example, is targeting volume growth of up to 6% in 2017.

Road & Trucking

The current market dynamics are felt most strongly in the trucking and road transport industry, as trucking rates in and out of the country’s ports have increased markedly on the back of the government’s subsidy reduction. Rates in and out of Sokhna Port went up by 70%, while for Alexandria and Port Said the increases were 50% and 30-40%, respectively. These issues have compounded a constrained operating environment. The country suffers from significant congestion problems, particularly in terms of the logistical last mile in Egypt’s major urban centres. Congestion in Greater Cairo costs the country more than LE40bn ($2.6bn) each year, or approximately 5% of GDP, according to a recent study by Ahmed Mosa, co-founder of Masarat, a transport planning consultancy firm, and former advisor to the Ministry of Transport. This also has other detrimental impacts, including a heavy environmental burden as a result of pollution.

The government has sought to address the issue and expanded the road network by over 23%, or more than 5000 km, between 2015 and 2017. This is likely to have a dramatic impact on the efficacy of cargo transport. According to Mosa, this new capacity will reduce travel times by as much as 25%, and lead to savings of between LE800m ($52.7m) and LE1bn ($65.9m).

Given that more than 50% of the country’s freight is transported by road, this will be welcome news. The biggest challenge, however, is trucking capacity rather than hard infrastructure. Trucking capacity stands at around 400,000 vehicles, which is insufficient to meet the annual 500m-tonne cargo demand. This has led to overloading of trucks, which presents difficulties in terms of safety and road degradation. The government is hoping to address this issue through stronger regulations and monitoring, according to Mosa.

Urban Transport

The administration also has significant plans to deal with the problem of congestion in the major urban centres in terms of passenger movement. As part of Egypt’s Vision 2030, the country’s long-term economic development programme, there are plans to develop urban transport infrastructure, including metros, light rail and river transport. UN Habitat also conducted studies in 2015 for a bus rapid transit (BRT) system in Cairo. The first phase of this plan would see 50.2 km of BRT routes built in Giza and New Cairo, with 240 articulated buses running the routes. The implementation would cost at least $250m, according to the global NGO Institute for Transportation and Development Policy. The government hopes to attract private capital for the initiatives and is likely to roll out the scheme on a public-private partnership basis. If the terms of the agreement are attractive, there could be plenty of interest. Cairo alone sees 24m trips a day, with heavy demand for services. “The return on investment is pretty much guaranteed because of the huge demand,” Mosa told OBG.

While BRT systems are often 10 times cheaper than light rail systems, and up to 100 times cheaper than elevated or underground rail systems, the focus appears to be on urban rail projects. In July 2017 President Abdel Fattah El Sisi and Hesham Arafat, the minister of transport, met with China’s AVIC International and China Railway Group about the construction of a light rail system in the Greater Cairo area. The plan is for a 66-km network with 11 stops that will connect the new administrative capital with several outer suburbs of Cairo. The network will be linked to the capital’s third metro line at Al Salam City. The parties have reached an initial agreement for the project.

The government is also looking at other means of mitigating the environmental impact of Egypt’s road-led transport system. For example, in January 2018 Egypt’s Passenger Transportation Authority announced it had signed a deal with Chinese manufacturer BYD for 15 electric buses, which will be part of Alexandria’s bus fleet, marking the city as the first in the country to embrace electric vehicles for public transport.

River

The government’s commitment to subsidy reform is also likely to have implications in other segments. The gradual withdrawal of fuel subsidies could boost the prospect of more energy-efficient forms of transport. Indeed, with road transport becoming increasingly expensive, river and rail transport will become more competitive. The cost to transport a tonne of grain by road in 2012 stood at LEP37 ($2.44); by mid-2017, following the latest subsidy reduction, it had reached LE80 ($5.27) per tonne. “In reality, the removal of the fuel subsidy has been reflected in a totally elastic way with passenger and transport costs,” Mosa told OBG. “The fuel subsidy reduction will give a greater opportunity for the rail sector to transport more cargo.” Indeed, even in a period of lower oil prices, the Egyptian market is becoming less conducive to modes of transport with high energy consumption. This is not only because of subsidy removal, but also because the depreciation of the local currency has cancelled out any potential savings from a lower global oil price.

Perhaps the most likely beneficiary of this environment is railways, a segment of the market that the government is keen to develop. However, the country is bisected by the Nile River, which also has the potential to be developed as a main transport artery. “The main distribution channel of Egypt is along the Nile,” Mohamed Mashhour, COO of the National Holding Company for Multimodal Transport, told OBG.

River transport is currently a small component of the transport network, accounting for less than 1% of cargo carried. Still, it has the potential to be competitive with other forms of transport. Mashhour estimates that the cost of river cargo transport is usually about 20% below that of the trucking industry. With a further reduction in the fuel subsidy to LE4 ($0.26) or LE4.50 ($0.30), river freight would be as much as 35% cheaper than trucked cargo, he added.

Egypt has some inland port infrastructure, and the Nile has a draft of 2.2 metres, allowing for the passage of small barges. However, for river transport to become competitive, there is a need to upgrade the lock system and dredge the navigation channel, as well as add more barges and improve inland port infrastructure.

Ports

Some of Egypt’s seaports are also suffering from bottlenecks and inefficiencies. The country has 40 ports, 12 of which are commercial. In 2016 they handled 98.6m tonnes of imports and 42m tonnes of exports. In 2017 Egypt’s container capacity was 11m twenty-foot equivalent units (TEUs), according to the Ministry of Transport. Alexandria is the biggest port, handling 50% of European traffic and 40-60% of Egypt’s foreign trade, and yet wait times at the port were as high as 21 days in 2017. “Alexandria has not developed to meet demand,” Mashhour told OBG. “The berthing capacity is very limited.” The port has a cargo capacity of 37.9m tonnes and a container capacity of 1m TEUs. However, in 2015 the port handled just over 50m tonnes of cargo and 1.66m TEUs of containers.

Furthermore, the operations and capacity of the port are constrained by a limited draft of 12.5 metres. International shipping lines would likely serve the port with bigger ships if the draft was increased.

The current administration plans to more than triple national port capacity from 120m tonnes to 370 tonnes by 2030. The envisioned projects include development of the country’s nine Red Sea ports and a LE120bn ($7.9bn) plan to upgrade the Port of Alexandria.

On the private investment side, the Dubai-based owner and operator DP World announced plans to expand the 14m-tonne-capacity Ain Sokhna port. An entryway for cargo coming from the east, and the closest port to Cairo, Ain Sokhna is becoming increasingly important. DP World plans to establish a general cargo terminal and an integrated logistics area in the next phase of development. In March 2016 Maersk launched a new line into the port, with Hamid telling OBG that Ain Sokhna is price competitive because it is classified as a Red Sea port and is cheaper than Mediterranean ports.

In addition, there are plans to build a second terminal at Port Said on the Mediterranean end of the Suez Canal. In November 2015 the Suez Canal Authority signed a memorandum of understanding with PSA International of Singapore to study the feasibility of a new container terminal. In March 2017 local media reported that plans with PSA for a new terminal are on track, and that the authorities are awaiting a final master plan from the company. The existing container terminal, the Suez Canal Container Terminal in East Port Said, can handle 5.5m TEUs and was recently dredged to allow for drafts of 18.5 metres. As a result, it can now handle ultra-large container ships. While such expansion plans represent an improvement to the country’s shipping lines, costs may also increase. There is also likely to be a rise in terminal fees across Egyptian ports in the near future, given that they have largely been moving in line with the fuel price. According to Khaled Nageib, chairman and CEO of Global Project Services, Egypt has made big strides in improving port logistics. “Now there is the need to complement this with execution, connection and overall integration of the role of ports in energy hubs,” he told OBG. “Once further integration has been fostered, we can move towards interconnectivity among different transport networks, especially within the river system.”

Work continues with regard to improving logistics. “Egypt is heavily focused on upgrading its infrastructural capacity through various mega-projects, including the transition of the Burullus small fishing port into a transportation hub for a mega-power station,” Khaled Morsy, CEO of DB Schenker Egypt, a local division of the German rail operator Deutsche Bahn, told OBG.

Aviation

In 2016 traffic at Egypt’s airports fell by 22.9%. The performance was not uniform. Cairo International Airport saw modest traffic growth of 3.5%, while Sharm El Sheikh saw a decline of 69.5%. The country is still struggling from perceptions of risk and security. The aviation industry was affected by the suspension of Russian flights to the country following the downing of a Russian commercial aeroplane by Islamic militants in the Sinai in 2015. The government has since invested £20m in airport security, and in January 2018 Russia resumed flights to the country. “After a few years of challenging business conditions for the aviation industry, the outlook now appears much brighter thanks to the enhanced security situation, an increase in assets from local companies and renewed interest by international investors,” Ahmed Aly, CEO of Nile Air, told OBG.

The government is moving ahead with plans to develop Sharm El Sheikh airport, announcing in 2016 that it would be opening a tender for the expansion of its second terminal, bringing capacity to 9.5m passengers per year. The government has also received funds from the Islamic Development Bank and the African Development Bank for a new passenger terminal and runway, which would boost capacity to 18m passengers per year. “Egypt has the potential to become a regional hub for the aviation industry, thanks to its unique strategic location that links three different continents, and its high-quality airport infrastructure,” Aly added.

Outlook

While the transport industry is seeing lower volumes and a challenging operating environment, the government is moving ahead with long-term infrastructure plans to strengthen capacity and improve efficiency. Indeed, while a slowdown in imports and passenger numbers is constraining growth, the potential in the market is significant, particularly given the country’s geographic advantages. As economic growth picks up, there should be plenty of opportunities for development in areas such as operations and services, and authorities are looking to ensure that there is the necessary infrastructure to meet heightened demand.