News / Can Egypt afford Suez route canal work? Industry and logistics may pay the bills

05/08/2015

With Egyptian president Abdel Fattah el-Sisi set to open the new Suez Canal expansion tomorrow, there have been questions on whether the country can actually afford the project.

The Egyptian government publicly announced that the two-phase project cost E£60bn (US$7.66bn), with the dredge of the second channel of the canal accounting for half of that and a project to build six tunnels under the canal connecting the Sinai peninsula with mainland Egypt representing the remainder.

Financing the project has not been without controversy; Egypt’s public finances have taken a battering from the beginning of the Arab Spring in 2011, the subsequent uprising against former president Mohamed Morsi and the social instability which has sucked out tourist revenues and foreign direct investment at the same time as public expenditure soared.

The country has effectively been in “a deep recession for three years”, said Ahmed Kamaly, associate professor at the department of economics at the American University of Cairo, leading to a government deficit of 134% of GDP last year, which “crowded out investment”.

In order to raise funds for the E£30bn expansion of the canal, the Suez Canal Authority (SCA) issued five-year non-transferable bonds at 12% interest, which Professor Kamaly said was around 1.5% higher than it should have been, and he has raised concerns that the SCA will have difficulty with repayments – in fact, it has already had to borrow further funds to pay off early interest payments.

In its defence, the SCA has argued that current annual revenues of just over $5bn – with an average of 47 ships transiting the waterway each day – will increase to $13bn by 2023 when it forecasts 97 vessels will be transiting the canal daily.

“However, the viability of the project was not checked – no known cost-benefit analysis of the project has ever been conducted,” said Professor Kamaly.

He added that the SCA’s original funding proposal had been to float the organisation on the Cairo stock exchange, but this had been abandoned.

“In a well-functioning country, the big infrastructure projects ought to be discussed in its parliament, but this isn’t going to happen in Egypt,” he said.

However, he added, the second phase to build six bridges under the canal, which would be the keystone of the proposed enormous Suez Canal Zone, providing area for a host of industrial and supporting logistics activities, could be the answer to re-energising the economy.

“The expansion of logistics services in the Suez Canal Zone will be good for the viability of the canal expansion project,” he said.

Klaus Holm Laursen, chief executive of the APM Terminals-operated Suez Canal Container Terminal, said the creation of the Suez Canal Zone would transform the SCA: “The SCA will most likely undergo a metamorphosis because it will become the authority of the Suez Canal Zone.”