Hopes are rising that a $4bn project to widen the Suez Canal will provide Egypt with a boost in construction activity, while also significantly raising revenue in the longer term.
The Suez Canal brings in around $5bn in revenue annually and has evolved into one of the world’s most strategically important international trade conduits since it opened almost 150 years ago. Today, the waterway is still the quickest sea route between Europe and Asia.
Egypt’s challenging economic environment has led officials to refocus their efforts on expanding and upgrading the canal. Estimates suggest that revenue from the waterway could increase to $13.5bn once the work is completed, although some aspects of the project, including its location, have come under criticism.
Expansion to improve efficiency
Egypt’s army will coordinate the work on the initiative, known as the Suez Canal Corridor Development Project, which was launched on August 5 by President Abdel Fattah Al Sisi. The initiative will involve 35km of dry digging and 37km of “expansion and deepening”, according to Mohab Mamish, the head of the Suez Canal Authority. This will see the canal’s waterway widened, creating a much longer stretch of “dual carriageway” where ships can pass more easily.
The expansion should lead to increased efficiency as well as a reduction in the maximum waiting time from 11 to three hours. The number of passing ships that can be handled daily will almost double to 97.
Various press reports have said the forecast time scale for the expansion has been reduced from five years to three years and eventually to an unlikely 12 months. The project is being part funded by investment certificates issued by the authority and cash will also be raised from floating shares and loans from Egyptian banks. The president also called on all Egyptians to participate in funding the project, asking local residents to contribute EGP 100 ($14) and those living abroad to donate $100.
Local participation, national boost
While the public sector is coordinating the project, dozens of local companies are expected to participate in the expansion initiative, which officials see as an aid to strengthening the fragile recovery.
Egypt’s economy has struggled in recent years, weighed down by lower growth and a widening budget deficit. Foreign reserves have also come under severe pressure. GDP is expected to rise by just 2.3% in 2014, while the budget deficit has reached 14% of GDP.
The army has been set the target of digging 1m cu meters daily as part of the bid to complete the work within 11 months and introduce trial runs of vessels in the new stream within a year. A total of 12m cu meters were dug in the first fortnight, according to a statement from the military.
However, while work on the expansion is gaining momentum, aspects of the project have also elicited concerns. Haitham Awad, an engineering professor at Alexandria University, questioned the decision to put the new route so close to the existing canal, telling regional press that the presence of groundwater, which has already disrupted digging, would increase costs.
The extent to which the widening of the Suez will stimulate traffic volumes is also contingent on growth in international trade, which has been sluggish in recent years following the 2008 global financial crisis. As a result, it may take Egypt longer than anticipated to reach its revenue goals.
However, assuming trade recovers, the Suez Canal expansion could play a key role in kickstarting long-term growth, producing a knock-on effect across Egypt’s economy, especially in industry and logistics.
Plans to develop a 76,000-sq-km area around the canal into a global industrial and logistics center, which have long been in the making, are also moving forward. On August 19, the Suez Canal Authority announced that it had awarded the contract to construct an industrial and logistics “hub” – part of the Suez Canal Corridor Development project – by the canal to a consortium including Bahrain-registered consultancy firm Dar Al Handasah Shair and Partners, in partnership with the armed forces. Egypt already benefits from fairly competitive infrastructure networks for exporters, but the zone will ensure easy access to shipping facilities.
Details of the investment and a timeframe for the industrial and logistics zone have yet to be announced. However, there is a cautious optimism that Egypt could finally be moving forward with a development that will see it leverage its enviable strategic position to boost economic growth and generate new jobs.
Oxford Business Group