Egypt's government and private sector work to expand transport infrastructure capacity and boost capacity

Transport infrastructure is one of the current priority areas for development for the Egyptian government, which is looking to roll out an era of mega-projects. Roads are congested, with 91m people competing for space with trucks and trailers, as almost all commercial goods in the country are moved via roads. The process of refurbishing ports and rail lines is under way, but in need of further investment, and private sector partners are involved.

State Of Affairs

The government is hoping to attract private investment in a high-speed rail line that would service most of the country. The public sector’s efforts are highlighted by the New Suez Canal, which was finished in late 2015, two years ahead of schedule, and is planned to allow for a doubling in traffic and a substantial increase in revenue. The focus on quick action also comes with the prospect of increased job creation in the form of temporary construction positions, but also long-term roles needed to maintain the assets.

“Leadership wants to get the country back on track as fast as possible,’’ Mahmoud Allam, Egypt’s former ambassador to China and an advisor to the Ministry of Transport (MoT), told OBG. “The new canal will provide confidence and ignite the economy, and setting up a better infrastructure base will prepare the country for the global market.’’ However, the government is also planning carefully, to avoid being burdened with white elephant projects, which have weighed down productivity and spending in advanced economies like Spain and Japan. “Without in-depth assessment of the return on investments, all of these mega-projects carry economic risks as well as potential fiscal risks from contingent liabilities,’’ the World Bank reported in a recent study. There is a great deal of debate in the Egyptian media that projections for increased traffic and enhanced revenue for the canal are excessively optimistic (see analysis). Therefore, the government is working to reassure its stakeholders and citizens that it can meet these expectations.

Government Strategy

The government’s current strategy is encapsulated in the Transport Master Plan, a document commonly called MINTS, which outlines action through to 2027. It was developed in cooperation with the Japan International Cooperation Agency, and focuses on creating linkages between transportation modes, in order to achieve a multi-modal future with seamless connections.

The plan includes the development of fast and efficient links between Cairo International Airport and the Suez Canal, where free zones are in the planning stages. Egypt would also like to further develop the Nile River as an economic artery, and in doing so create an economic corridor leading upriver to Sudan, Kenya and the Horn of Africa. Egypt is already a natural stopping point between Europe and Asia, but these plans would position the country as a highly connected manufacturing centre, with easy access to European markets, the Arabian Peninsula, East Africa and beyond.

With a young and growing population, the opportunities for job creation are another significant benefit, and leveraging those job seekers into the manufacturing sector would create myriad opportunities for transport and logistics specialists. “There are a lot of challenges but we see a good future,’’ Ahmed Elfangary, Egypt manager for DHL, told OBG. “For logistics, Egypt is a prime location.”

Size & Scope

Transport and logistics activity accounted for 3.1% of GDP in 2014-15, according to the General Authority for Investment and Free Zones (GAFI). The Suez Canal is the best known and most geopolitically crucial infrastructure asset in the country, but Egypt also boasts more than 108,000 km of paved roads, 9570 km of railways, 20 airports, 15 seaports and a network of inland ports as well. Egypt’s infrastructure was ranked 118th out of 148 countries in a World Bank report from 2015, with the country’s road networked ranked 122nd. Long commuter journeys in and around Cairo affects productivity and leaves workers in transit for a greater share of their day. Transporting goods to markets over long distances is also a challenge, with produce sent from Upper Egypt to Cairo losing 40% of its value over the course of the journey.

Roads

Egypt has 108,784 km of roads. A negligible amount of commercial goods move over any other mode, as estimates of trucking’s share of the freight segment range from between 93% and 98%.

Building new roads is a cornerstone policy for the government’s infrastructure strategy. Roads are managed by the MoT, through the General Authority for Roads, Bridges and Land Transport. Recently completed projects include a renovation of the Cairo-Alexandria highway; an expansion of the highway from Cairo to Ismailia; a coastal route east from Port Said, through Alexandria, and west to the Libyan border; and a highway from Cairo to Aswan in Upper Egypt. The current national construction plan also includes spending LE34bn (equivalent to $1.8bn as of December 2016) on 3400 km of new roads, with a focus on linking remote areas to the national network, including Upper Egypt, the Sinai Peninsula and Western Sahara.

In terms of long-term plans, an estimated $8bn in improvements are planned over the next five to 10 years, but it remains unclear if this is a sufficient level of investment. According to a 2015 MoT presentation, the actual investment level could be as high as $8bn per year over that period. The construction focus includes tunnels and bridges as well as roads. For example, tunnels are currently in the works under the Suez Canal to better connect the Sinai Peninsula to the rest of the country. A bridge over the Red Sea to Saudi Arabia is expected to have a significant impact on transport. Currently known as the King Salman Bridge Project, it was most recently discussed in April 2016, when the Saudi monarch visited Egypt. Planning is under way between a group of ministries and agencies from both countries, led by the Engineering Authority of the Armed Forces. Specifics are expected to come with a fully formulated plan, but some basic working parameters include a 32-km span costing $4bn and requiring three years to build.

Safety

In addition to building new roads, safety has emerged as a prime objective for the government’s infrastructure strategy in 2017. The Central Agency for Public Mobilisation and Statistics reported 6916 crashes for the first half of 2015, a 3.5% increase from the same period in 2014, but also a reduction in the amount of fatalities involved. That figure dropped 2.7% to 2808. While local media often report Egypt’s rate of accidents as relatively or exceptionally high on a global basis, data from the World Bank show that, at a rate of 13 fatalities per 100,000 people as of 2013 — the most recent year for which country-to-country comparisons are available — road safety statistics are actually above the regional average in Egypt and well below neighbouring Libya, at 63 deaths per 100,000.

The government remains keen to reduce this danger even further, and foresees some risks from the road improvements programme under way, especially as more existing routes are paved. “Unpaved roads force drivers to reduce speeds and thus the rate of accidents decreases,” Adel Al Turk, head of the General Authority for Roads, Bridges and Land Transport, told OBG. A lack of compliance with traffic rules is also an issue.

Maritime

About 90% of foreign trade is shipped through Egypt’s ports. Egypt has 15 commercial seaports, six of which are on the Mediterranean Sea, and nine on the Red Sea. There are 44 more special-purpose facilities serving the tourism, petroleum, mining and fishing industries. The Port of Alexandria is the main commercial port, handling 60% of foreign trade. “Alexandria by nature is an attractive gateway for importers because it is the port closest to the Nile Delta and its customers, but also because it offers a more efficient process,’’ Mohamed Mashhour, managing director of the National Holding Company for Multimodal Transport, a unit of the Cairo-based private-equity firm Qalaa Holdings, told OBG.

Other major ports include those at East Port Said and Damietta, the two largest container ports. The Suez Canal Container Terminal at East Port Said is the only one in Egypt that can service ships carrying 15,500 twenty-foot equivalent (TEUs) units or more. “The Egyptian transport sector has faced challenging times but the future looks bright — at least for exporting,” Marwan El Sammak, CEO of Ships & C.R.E.W., a leading Egyptian port operator, told OBG. “When compared to its neighbours, Egyptian exports are not doing that bad.”

Upgrades

The National Ports Development Plan, which includes increasing the total tonnage handled from 120m tonnes per year to 600m tonnes within 35 years, encompasses the government’s strategy and goals. This will require $12.4bn in improvements. The plan is based on the premise that Egypt is blessed with a geographic advantage it has yet to fully capitalise upon. Those advantages include proximity to Europe and Africa, its stewardship of the Suez Canal and its own domestic market of 91m consumers, making Egypt the 15th-most populous country in the world.

As part of this development, a $497m expansion is under way at East Port Said, where commercial container capacity will rise from 4m to 7m. The government expects this number to reach 11m over the course of the next four years. At Safaga, an industrial port located on the Red Sea about 60 km south of Hurghada, new facilities will be developed to add to capacity in phosphate ore and liquids, livestock, meat and grain processing. There are also plans to turn Safaga into a logistics hub, with the government announcing that a series of pilot projects will be rolled out over the next few years.

At Port Tawfik, at the south end of the canal, a new 250,000-sq-metre cargo terminal will boost capacity to 1.5m tonnes and create 2000 long-term jobs in the process. “The country can certainly position itself as a global hub for shipping-industry services,” Nabil Samy, managing director of Maersk Egypt, told OBG. Ship maintenance facilities could be situated in the country, as well as container-repair, warehousing and other services required by the logistics industry. “The customer should be the shipping sector,’’ Samy told OBG. “Geographically Egypt makes much more sense than [Dubai’s] Jebel Ali.’’ WATER TRANSIT: The Suez Canal is a primary source of income, and is crucial to the overall performance of its transport sector. Some 17,000 vessels transited the canal in 2014, including 6129 container ships carrying more than 42m TEUs. The canal handled 7% of global waterborne trade prior to the New Suez Canal project (see analysis). The canal, located on one of the prime shipping routes between Europe and Asia, has also helped increase Egypt’s profile as a trans-shipment platform.

The Nile represents 1850 km of navigable waterway, and existing infrastructure includes 39 private ports and five publicly owned ones. It accounts for less than 1% of inland transport now. Policy decisions have left the Nile’s transport potential untapped; specifically the long-debated subsidies that keep prices for consumer fuels low. Diesel costs LE1.8 ($0.10) per litre in Egypt, far below the global average of $0.88 as of June 2016.

That makes trucking the most attractive option for commercial freight, unlike in many other countries in which it is a more expensive option because it is more fuel intensive. The government has reduced subsidies in the past and is committed to doing so again. Plans are under way to reduce spending on subsidies by 43% in the 2016-17 budget. However, the price of diesel would need to exceed roughly LE3 ($0.16) before investors would be incentivised to compete with the trucking industry.

One example of such an investor is the National Holding Company for Multimodal Transport, a subsidiary of Qalaa Holdings. One of the firm’s subsidiaries, Nile Cargo, owns a fleet of barges designed for Nile transport, which were purchased in the 2000s on expectations that the subsidy would be lifted. It owns eight ports on the river, through another subsidiary called National River Port Management Company. The Egyptian military also owns and operates a number of barges on the river.

Rail

Service between Cairo and Alexandria was inaugurated in September 1856, and the network now includes 9570 km of tracks and 705 stations. Of that total, 30.6% is double-tracked. Whereas commercial freight is almost exclusively shipped by road, rail is important for passenger transport, with a volume of roughly 500m passengers annually. About 6m tons of goods are moved by train each year. The national network is managed by Egyptian National Railways (ENR). According to the World Bank, ENR’s financial viability had been improving but suffered a setback with the political instability of recent years. The World Bank has worked with Egypt to reorganise the railway, focusing largely on improving the safety and reliability of services.

Capital investments under way include an overhaul of the signalling system, which currently is 85% mechanical and 15% electrical. Much of current expenditure is focused on the Cairo-Alexandria line. In May 2013 the World Bank financed more than 90% of the €109m contract awarded to Thales Group, of France, to renovate the signalling on the 208-km route. As a result the annual service capacity was expected to jump from 25m passengers to 32m, thanks to the ability to run the trains at 160 km per hour (km/h) instead of 140 km/h, therefore allowing more trains to use the route.

Siemens, the German conglomerate, has been contracted to deliver similar upgrades to 260 km of track including on the Port Said and Benha route and between Zagazig and Abu Kebir. In April 2015 the government signed a $600m deal with China Railway Construction Corporation to renovate tracks in necessary areas. Rolling stock includes 820 locomotives and 3500 passenger coaches, although ENR took new delivery of 100 locomotives in May 2016 from General Electric, and has also secured a $125m loan from the European Bank for Reconstruction and Development to hire a private company to procure more rolling stock and for maintenance of its fleet.

High Speed

In the long term the government is seeking to transform the system through high-speed rail. A proposed 1087-km line from Alexandria, through Cairo, and on to Aswan, would top out at speeds of 360 km/h, according to Minister of Transport Hany Dahy. However, specific plans have not been finalised, and talks with investors are ongoing. The project is estimated to cost $10bn, with the majority of this coming from the private sector. The government is considering a public fundraising exercise in order to raise finance for the project. This approach is similar to the financing mechanism used for the $8bn Suez Canal expansion, which was done by offering investment certificates to the public.

Air

Egypt has 20 airports, which in total moved just over 9m passengers in 2014, a figure that fell 10.8% from 2013’s 10.1m, according to the World Bank. Registered carrier departures dropped 9%, from 96,260 to 90,784. Egypt has struggled to cope with a drop in tourist arrivals, a consequence of the political instability of recent years and concerns over air safety, which were accentuated in October 2015, when a Russian charter flight departing from the Red Sea resort of Sharm El Sheikh crashed in the Sinai Desert. This incident led to a significant drop in traffic, which was down 65% at the end of 2015. Security procedures are in the process of being upgraded, and in December 2015 Egypt hired the UK-based security firm Control Risks to review procedures at the country’s airports.

In the meantime, multiple airport expansion programmes are under way. At Cairo International Airport, the country’s largest, a renovated Terminal 2 opened in October 2016, with 23 gates which doubled its capacity to 7.5m visitors a year. The expansion pushes overall airport capacity to 26m passengers a year. The project cost $436m, of which $280m came from World Bank financing.

At Sharm El Sheikh, $370m is being spent to boost capacity from 8m to 18m passengers. Despite the October 2015 incident, growth at this airport has averaged 10% annually in the past 10 years, making it Egypt’s third-busiest airport. Hurghada, another key holiday destination, has recently spent $335m on a new airfield, terminal, runway and taxiway, bringing capacity to 13m annually.

Aerotropolis

A long-term capital expenditure programme for Cairo International aims to turn the facility into an aerotropolis — a transit, logistics, services and manufacturing cluster, similar to those being developed in Côte d’Ivoire and Qatar. One step toward this vision is Cairo Cargo City, a new approach to cargo handling that will remodel the current offering, which is known as Cargo Village. Cargo City’s plan calls for three terminals: for export, for import, and for DHL express services. DHL has already relocated to its new facility. Cargo City’s planned total capacity of 290,000 tonnes per year exceeds the airport’s current capacity, so the project is meant to account for future airport expansions.

Soft Infrastructure

Along with capacity Egypt’s other widely cited problem is bureaucratic inefficiency, which in the transport sector is a primary concern for importers. Shippers report that they pick the port they wish to call at based on familiarity with the particular approach of Egyptian Customs Authority offices at the various options, rather than on factors such as which port offers the fastest, cheapest or most efficient route to consumers. Customs reform was a hot topic in mid-2016, and a legal reform was in the works as of June 2016 that would harmonise Customs policies with international trade agreements.

The Ministry of Finance announced that it was seeking consultations on new rules from trade groups and other commercial interests. A dedicated Customs regime is also expected for the free zones planned around the Suez Canal, to ensure that only goods destined for the domestic market are taxed.

Contracting

The government uses outside contractors to build roads. However, the process is not a standard one based on transparent tendering, as in many other countries. In September 2013 the 1998 law on public tenders and auctions was amended by decree in order to allow for an alternate process in cases deemed urgent. It allows the Egyptian government greater latitude to assign large-scale projects by direct order, and in large part this has been a method used to increase the Egyptian military’s role in building roads.

A division of it called the National Service Projects Organisation often serves as a builder or contractor, and typically awards subcontracts to private sector entities as part of this process. It has also partnered with major foreign investors in the process, including General Electric, Lockheed Martin and Mitsubishi. In the past, private sector contractors have reported multiple risks when working on government contracts. Some of the main concerns included protracted decision-making processes and land acquisition, and one of the perceived advantages of working with the military is its ability to better manage these issues reported.

As of May 2014 the director of the Armed Forces Engineering Authority said the military had worked on 473 strategic and service projects in the preceding 18 months. “The army has been instrumental in Egyptian society and is playing a leading role in infrastructure,’’ Allam told OBG. “Instead of tendering, they are calculating costs according to best practices, and then offering a price.’’ OUTLOOK: The focus on infrastructure mega-projects holds significant promise for investors, for which long-running frustrations are being addressed. Though concerns remain about whether the government is currently deploying its scarce resources in the best available spots, Egypt’s ability to attract aid and concessional financing helps the government to prioritise more projects than it otherwise could on its own, and the effectiveness of this approach will be assessed over the next several years, helping to further clarify the long-term vision.

 

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The Report: Egypt 2017

Transport chapter from The Report: Egypt 2017