Egypt addresses major transport infrastructure projects

As the Arab world’s most populous country, and one of its largest economies, Egypt has always had to work overtime to ensure that infrastructure capacity keeps up with demand. While the past few years of political and economic uncertainty have slowed capital spending on infrastructure, 2015 has seen that trend reversed in dramatic fashion, with the President Abdel Fattah El Sisi aggressively prioritising the completion of major infrastructure projects as part of his policy agenda.

Across The Board

The most visible evidence of this is the expansion of the Suez Canal, a project that was completed in record time and was almost entirely financed by the local market.

However, a number of other projects are in the pipeline, targeting everything from roads to rail to logistics zones, which should help Egypt address some of its more prominent transport bottlenecks which have driven up the cost of trading and distribution, and reduced mobility.

The country is doing more than just fixing problems. It is working to overhaul its transportation platform and establish itself as major transit corridor for both air and sea transportation. “Egypt is already the door to Africa, with ships from the Mediterranean choosing the Suez Canal to reach Eastern Africa and the Gulf countries,” Mohamed Mouselhy, chairman of Finmar Shipping, told OBG.

The boldness of the administration’s agenda, in conjunction with the Ministry of Finance, has attracted increasing interest from investors, especially those from China, Europe and the MENA region, who have expressed an interest in supporting the enormous transportation programme that is being undertaken. Foreign investment will complement the work already being done to improve Egypt’s growing infrastructure THE CANAL: Canals have been built in Egypt for millennia. The first one linking the Nile with the Red Sea may have been constructed as early as 2400 BC. These canals repeatedly silted over, only to be reclaimed a number of times. The first attempt at a modern canal between the Red Sea and the Mediterranean in 1799, made by the French, was abandoned, but a canal was finally completed in 1869 after a number of delays.

The most important recent work in the country in terms of transportation has been the expansion of the Suez Canal, which was finished in August 2015. It was completed in just one year — having been expected to take at least three — and demonstrated that Egypt, and more importantly the government, could get big jobs done quickly.

The project cost approximately $8.2bn, and was funded almost entirely from domestic savings certificates sold on the local market. The expansion increases daily capacity from 78 ships to 97 by allowing for two-way traffic. In addition, it has reduced wait times for ships and allows for the passage of larger vessels.

Increased Revenues

As a result, the scope for an increase in revenues from the canal – one of Egypt’s chief foreign currency earners – is sizeable, though it will be contingent on an improvement in the Baltic Dry Index, an economic indicator issued daily by the London-based Baltic Exchange providing an assessment of the price of moving major raw materials by sea, as well as stronger growth in terms of global maritime traffic.

The canal will also have to balance fee rises with ensuring broader competitiveness, given the expansion of the Panama canal and the decision by some operators to use larger, slower ships along the longer horn of Africa route. However, regardless of traffic levels, the improvements in performance and efficiency should yield tangible benefits. The total number of vessels sailing will be the same, as it is not expected that the canal will attract new shipping volume, but increased efficiency will create additional revenue.

Additional benefits will be seen in the linkages the canal will have with a spate of new industrial and logistics zones that are being built near the canal (see analysis). These will encourage more of the goods and commodities passing through to be processed, packaged, trans-shipped or consumed within Egypt, meaning that more value added will be left in the country. “Egypt has the potential to become a significant shipping and logistics hub similar to Singapore,” Marwan El Sammak, CEO of Ship & C.R.E.W., told OBG.

Connecting different parts of the world has been a good earner of hard currency for Egypt, but participating more in global value and supply chains will allow it to get more out of the asset, so the associated logistics, housing and industrial projects are essential to the success of the canal.

“The Suez Canal project has been a success so far, so it is important to keep those investments coming in. We must provide support and incentives to those interested in investing, with a clear draft of the rules and regulations,” said Alaa Eldin Nada, chairman and managing director of Alexandria Container and Cargo Handling.

In 2015 Suez Canal toll revenues were down on those in 2014, with tolls in every month from February to November declining compared to the previous year. Toll revenues through to November 2015 totalled $4.75bn, while in the same period a year earlier toll revenue was $5.02bn. Transit duties, however, were unchanged in 2015 from 2014. Despite the shorter wait times as a result of the expanded canal, analysts see the market as already too competitive – and prices already too high – to increase rates.

Tripling Capacity

The government is also planning major expansion of Egypt’s ports. It is hoping to triple capacity from 120m tonnes to 370m tonnes by 2030, with the Red Sea Port Authority building new facilities, including dry bulk and container, at the nine ports it manages.

Port Said, the busiest port in Egypt and the 43rd-busiest in the world, is one area of significant activity. The Port Said Master Plan includes a comprehensive transformation, complete with industrial zones, administrative zones, a tourism zone and an agricultural zone.

The East Port Said initiative is one of the country’s largest planned capital expenditures. The port will be developed in stages between 2015 and 2030. In each stage, the size of the terminals will be increased, more liquid terminals will be added and shipyards will be introduced.

A new residential area will be built that will accommodate an estimated 1.5m people, and space will be included for businesses, academic institutions and tourism sites. The industrial zone will be the largest in Egypt, with an expected investment of LE120bn ($16.4bn) in a wide range of industries, from light to heavy, and space for research and logistics. Alexandria Port is also being redeveloped, at a cost of LE120bn ($16.4bn). The plan is expected to make the port the largest in the region. An industrial area and a logistics area will be included in the final development.

According to Nada, when it comes to developing Egypt’s existing ports, better use of IT systems will play a huge role. “Improving IT usage will change not only transport efficiency, in terms of equipment activity and information exchange, but it will improve relationships with clients since communication will be easier,” Nada told OBG.

Port Traffic

In the first quarter of 2013 a total of 1127 ships visited Alexandria Port, and this rose to 1162 in the first quarter of 2014, Alexandria Port Authority figures show. However, in the first quarter of 2015 the number fell to 1055. In the second quarter the number of ships totalled 1149, down from 1171 in the same period in 2014.

At Damietta Port business has been more stable recently. In the third quarter of 2015 the port reported about the same traffic as a year earlier (584 ships versus 583 in Q3 2014). In October traffic was down year-on-year (y-o-y), with 190 ships in 2015 versus 201 in 2014. In the past few years traffic at Damietta has been on the downtrend. Full-year visits dropped from 3246 in 2009 to 2301 in 2013, according to Damietta Port Authority.

On The Road

Despite the importance of the canal in terms of attracting shipping traffic and bringing in foreign exchange, the most vital mode of transport in Egypt is road, which accounts for an estimated 94% of all cargo transport throughout the country. As congestion has worsened and overall conditions have deteriorated, improving the road system has become ever more urgent. As a result, the government has placed an especially high priority on completing improvements to – and an expansion of – the network. This work is also expected to help the country to leverage growth in associated areas, such as export-oriented manufacturing and tourism.

In the near term, the government has targeted 15 new roads and a total 1200 km to be completed by the end of fiscal year 2014/15, at an expected cost of LE17bn ($2.3bn). The National Road Project calls for the construction of 3200 km of roads, at a total estimated cost of LE36bn ($4.9bn), while news reports in late 2015 indicated that the country would be adding 4000 km of roads in 2016.

Several key links are currently being built, such as the 180-km route from Safaga to El Quseir to Marsa Alam, costing $85m, the Ras Sudr to Sharm El Sheikh road ($71m) and the Alexandria to Abu Simbel road ($46m). Top priorities include the improvements being made on the 100-km Cairo-Ismailia Desert Road, which is being widened and developed with the addition of bridges for u-turns. The Cairo Ring Road is being connected with the Cairo-Ismailia Desert Road by the 5-km Lieutenant General Saad Eldeen Elshazly Road. In addition, in December 2014 the government signed an agreement with China National Aero-Technology Import and Export Corporation to help reconstruct and expand 24,000 km of Egypt’s roads.

On The Right Track

To help alleviate pressure on the road network, and reduce both delays and costs for domestic supply chains, there is also a push to improve the country’s rail network.

The rail sector has a long and storied legacy in the country: under Muhammed Ali, a railway was started in 1834 to connect Cairo with the Suez. It was stopped on fears that the British would seek to intervene in the affairs of Egypt. The first rail line in Egypt and in Africa — and the second in the world — was inaugurated in 1856. It covered the 209 km from Cairo to Alexandria.

The network has expanded significantly since then. The total length in 2014 was 5195 km, according to the World Bank, and 5530 km according to Egypt’s General Authority for Investment and Free Zones. The system has a total of 705 stations and 800 locomotives. However, the rail system is old and in need of an upgrade. An estimated 85% of the signals in the system are mechanical.

Passenger Numbers

The rail network has also suffered a great deal in recent years in terms of its overall business, with traffic dropping dramatically. Some services were suspended as a result of security concerns. In March 2014 Egypt’s railways carried 2.7m passengers, down from 20.7m a year earlier. To help reverse this trend, the government is looking at a handful of projects to expand capacity and improve performance.

“Unlike the road network, rail has seen little progress in recent years. As the world’s lowest-cost mode of transportation – it is cheaper than trucking, for instance – the private sector should get involved in its development,” Magdi Kassabgui, chairman of Reliance Egypt, told OBG.

The cargo transport segment would also benefit from an improved railway network. “Despite upgrades in road infrastructure, better development of railways is crucial to improving cargo transport, especially for distances of 200 km to 300 km,” El Sammak told OBG.

High-speed rail has been under discussion for some time — a technical study was conducted by the government in 2009 — and the subject has recently been taken up again. The plan is to run a line from the far north to the south of the country, first from Alexandria to Giza, then from Giza to Assiut and finally on to Luxor. The cost is estimated at $10bn. Trains on the line are expected to hit a maximum speed of 350 km per hour. In August 2015 news reports said that the Cabinet had approved the first high-speed line. Planned to be completed in two years, it will run from the centre of Cairo to the country’s planned administrative centre (a total of 67.8 km), feature 12 stations and feature 22 trains of six carriages each.

According to local press reports, the deal to establish the high-speed train was signed with the Chinese government and holding company Aviation Industry Corporation of China ahead of President Sisi’s visit to China in December 2014. The project will be financed by the Chinese firm through concessional conditions and repayment duration of up to 20 years.

Another train line also appears to be in the offing. After President Sisi visited China in December 2014, an agreement was signed with China Harbour Engineering Company for a line running from Alexandria to Aswan. It will cost $10bn and the total length of the track will be 900 km.

According to local press reports, the train will travel 350 km per hour, making the total trip in three to four hours. The trip currently takes 10 hours. Hani Dahy, the transport minister told media that the project will be the first in Egypt to employ an electric traction system.

The new line will be implemented in three sections; the first will run between Alexandria and Cairo, the second from Cairo to Asyut and the third from Asyut to Aswan. In early 2015 the Ministry of Transport was discussing technical and economic studies with the Chinese company.

Egyptian National Railways is also planning to improve rail services by acquiring modern energy-efficient rolling stock with a €126 loan granted by the European Bank for Reconstruction and Development. The proposed project will enable the procurement of new locomotives and carriages, as well as incidental services (supply and maintenance) for train services between Cairo and Alexandria and potentially also between Cairo and Aswan. As of late 2015 there had been no indication as to whether the funds had been disbursed.

Metro

The government is also investing large sums in urban transport as part of the attempt to reduce congestion. Line 3 of Cairo’s metro system is still being built, with Phase 3 taking the line in two directions, towards both Cairo University and Rod El Farag. Work on Phase 4, which will run to Cairo Airport, commenced in early 2015. In November 2014 LE9bn ($1.2bn) was allocated for the extension of Line 3 to the airport, with a three-year timeframe given for completion of the project. Another LE7bn ($954.1m) was allocated for the purchase of new trains for the line. Line 4 will run from the Haram District to the New Cairo District, and will be funded by the Japan International Cooperation Agency and the Egyptian government. Cairo will have six metro lines by 2020, with daily subway commuter traffic forecast to jump from the current 4m to 16m.

In addition, a consortium of Canada’s Bombardier and Egypt’s Orascom Construction and Arab Contractors is working to create Cairo’s first monorail, to be operational by 2018. It will run from 6th of October City to Sheikh Zayed, Giza and Cairo.

Airports

Efforts to improve aviation capacity are central to Egypt’s efforts to boost links – via its flag carrier EgyptAir – with fast-growing sub-Saharan markets. Cairo Airport is the second-busiest in Africa, after O R Tambo International Airport in South Africa. According to the state-run Egyptian Holding Company for Airports and Air Navigation, total passengers at the airport in 2014 reached 14.68m, up from 13.77m a year earlier. However, this was a decrease from the 14.73m passengers reported in 2012 and 16.15m in 2010.

For all airports in the country, the trend has been much the same. Passenger numbers peaked at 37.9m in 2012, dropped to 27.7m the next year and climbed back to 31.7m in 2014. In 2015 traffic seemed to be down y-o-y. On a typical day at the end of 2015 (December 14) overall passenger volumes were down 24.5% y-o-y, with Sharm El Sheik down 86.7% and Hurghada down 55.1%.

Boosting Capacity

As part of the efforts to boost the country’s airport capacity, Cairo International Airport is currently undergoing a major expansion that will have a significant impact on Egypt’s air transportation capabilities.

With the opening of Terminal 3 in 2009, total capacity increased from 11m to 22m, and a new runway was completed in 2010, bringing the total to three. The runway is 4000 metres in length and allows for 120 movements an hour at the airport.

Under a contract signed in August 2011, capacity at Terminal 2 is being increased from 2.5m passengers a year to 7.5m, bringing the total estimated capacity at the airport to 25m a year. Other work is being carried out that will further enhance the airport and allow for the better accommodation of large aircraft, such as the A380. The package of improvements includes the construction of new taxiways and related infrastructure, 230,000 sq metres of indoor space ( including a hotel) and a new airport terminal system.

Turkey’s Limak, the diversified conglomerate that is building Istanbul’s new international airport – currently the largest planned airport in the world – is undertaking the renovation and expansion of the second terminal building. The total cost is estimated at some $436m, with $280m being provided by the World Bank.

The improvements to Terminal 2 were supposed to be completed by November 2015, but in October 2015 the World Bank said that the project would probably be delayed. According to Mohamed Kamal, the vice-chairman of Egyptian Holding Company for Airports and Air Navigation, Terminal 2 will be operational by early 2016.

The recent upgrades are part of a broader vision to transform the airport into a transportation centre for the region in terms of both passenger and cargo flights. After the work at Terminal 2 is completed, more improvements are scheduled. There are plans to build a Terminal 4, which is set to be completed by 2025, according to Kamal. “This will give us a chance to restore Cairo as a hub,” he said.

The country is also working to expand other airports outside Cairo, not only to take the stress off its main international gateway but also to create other nodes near major tourist and industrial areas. It is hoped that improvements will increase cargo handling, boost the number of passengers carried and result in the building of related enterprises around the airports.

Airports of current focus include Borg El Arab and El Nouzha (both at Alexandria), Sharm El Sheikh, and Hurghada, and significant international support is being provided. In April 2015 the African Development Bank approved a $140m loan for the improvement of Sharm El Sheikh International Airport. The upgrade, including construction of a new terminal, runway and control tower, will take 44 months and cost LE450m ($61.3m).

The government’s aviation overhaul involves more than just terminals and runways. In 2015, an Airport City was announced for Cairo. According to senior government officials quoted in the press, the plan is to develop infrastructure, office space and industrial land around the airport, similar to the Aerotropolis project in South Africa, the planned Airport City in Manchester, the UK, and Düsseldorf’s Airport City Project in Germany. It is expected that the project will require LE80bn ($10.9bn) of investment but that it will generate returns of LE422bn ($57.5bn) by 2040. According to government projections, it has the potential to generate 30,000 jobs directly and 90,000 jobs indirectly. The plan is to offer investors parts of the project on a build-operate-transfer basis.

Another Ascent

Central to the government’s efforts to improve the aviation sector is a set of restructuring initiatives for the state-owned flag carrier, EgyptAir. While the airline has a large global network, and is a member of Star Alliance, it is under considerable financial strain.

The carrier has been struggling to make a profit since 2008 — losing an estimated $1bn since 2010 — facing first the global financial crisis and next the political turmoil of the Arab Spring. Volumes have stagnated in recent years.

As a result, EgyptAir is undertaking a 10-year restructuring that will include major fleet expansion and a significant addition of wide-body aircraft, along with more efficient usage of existing routes and equipment. The number of aircraft will be more than doubled to 127.

A Helping Hand

In late 2014 the carrier hired a consultant to assist with its restructuring process. US-based Sabre Airline Solutions will help EgyptAir undertake radical changes in its business, financial, operational and administrative structures, and it is hoped that the carrier will become profitable again in 2016. In May 2015 Airbus offered to help the airline in upgrading its fleet through to 2025, with assistance such as training to also be included. At present, half of the EgyptAir fleet is Boeing and the other half is Airbus.

So far, a number of adjustments have been made and it appears that the airline will be pulling back slightly before venturing out again to new destinations or in terms of increased frequencies. In early 2015, EgyptAir called for capacity cuts on unprofitable routes, doing away with the Jakarta connection, and reducing frequencies to some Asian and regional destinations. Capacity cuts are limited to 10% of total seats, as an upturn is expected and EgyptAir wants to build into the growth.

The airline also notes that it will not be reducing its fleet in the process, as it has already leased out two aircraft to Biman Bangladesh Airlines and five to other Egyptian carriers. Toward the end of 2014 the fleet consisted of 56 aircraft.

According to the Centre for Aviation, a provider of aviation intelligence, analysis and data services, EgyptAir will also begin to reduce services to European destinations, as it has seen a fall in inbound traffic from Europe. In 2014 the airline was serving 20 markets in Europe, and these accounted for around 20% of its international seat capacity.

African Expansion

EgyptAir has already expanded significantly in Africa, increasing weekly seats available from 26,000 in 2011 to 42,000 in 2014, and further growth in Africa has been put on hold as the carrier focuses on a recovery.

Africa is not expected to see any capacity reductions under the recovery plan, as the cuts will focus on Europe, the Middle East and Asia. A few destinations that were to be opened have been put on hold, including N’Djamena in Chad, Mogadishu in Somalia and Djibouti City.

Outlook

While exogenous pressures – including muted global shipping volumes and slow growth in major tourism source markets such as Europe – will have an impact on the volume of traffic through Egypt, the high level of domestic demand for both passenger and freight services across all transport modes will sustain growth for years to come. Massive infrastructure development is going to require both substantial capital and expertise, some of which will have to be imported. While infrastructure has not been able to keep up with demand in recent years, in turn impacting shipping and logistics costs, the past 12 months have seen a significant improvement in terms of new construction and maintenance.

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The Report: Egypt 2016

Transport chapter from The Report: Egypt 2016

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