On hold: Infrastructure improvements may gather momentum when the political and economic pictures are clearer

Given its pivotal location at the nexus of Africa and Asia, Egypt’s past is inextricably bound with transport. At this historical moment of transition in Egypt, all eyes are on the future and efforts are afoot to enhance transport’s role as a vital sector of the economy.

PROSPECTS: As in any industry, transport is not immune to the country’s current political uncertainty, but the sector has positive long-term prospects. It is also tied heavily to trade, in which growth is poised to outpace overall expansion over the coming decade. As the economy rebounds from a challenging 2011, some press reports have forecast trade will expand by 8.4% in 2012.

There is plenty of room for transport improvement over the medium term. According to the General Authority for Investment, the transportation and logistics industry accounts for just 4% of national GDP. This compares with 10-12% in Turkey, a country with a similar geographic and demographic size, albeit with a larger economy and better infrastructure.

In this sense, Turkey serves as a measuring stick for Egypt’s transportation planners. Realising that potential, however, requires modern, interconnected infrastructure that takes advantage of the area’s natural gifts. By reinvesting in existing infrastructure and developing Egypt’s railways, metro lines and the Nile River as an alternative to the overburdened roads, the next government can pave the way toward a more diverse and effective transport sector.

INFRASTRUCTURE: The issue with Egypt’s transport infrastructure is one of quality, not quantity. With nearly 100,000 km of roads, 6700 km of railways, and 15 seaports, Egypt would appear well appointed. But a closer look reveals a state of dilapidation that will take years to rectify. While the economy posted relatively strong growth rates during stretches of the Mubarak regime, this expansion was fuelled largely by oil and gas, Suez Canal receipts, and tourism.

These sectors have garnered the lion’s share of investment over the past 30 years. According to the World Bank, public spending on transport infrastructure fell from 7% of GDP to just 2% between 1987 and 2007. However, renewed investment has considerable spillover benefits for the wider economy.

In order to better target that investment, the Egyptian government has invited the Japan International Cooperation Agency to develop a new master plan for the country’s transport sector. The study underscores the scale of the challenge, but identifies urban transport (buses, roads and metros), railways and inland waterways as priority areas.

ROADS: The road network has expanded rapidly and currently consists of more than 91,000 km of roadways, 70% of which are classified as main roads. The vast majority of these, however, are dilapidated, overburdened and unsafe – qualities that similarly apply to the lorries plying these busy routes.

Despite these problems, Egypt’s roads carry an astounding 95% of goods moved within the country. This stems, in part, from the underused rail network and the underdeveloped infrastructure along the Nile River for barge transport. The biggest reasons behind the issue are fuel subsidies and the dangerous practice of overloading lorries, which make an otherwise inefficient mode of transport relatively cost-effective.

Egypt’s principal road stretches 220 km between the country’s two largest cities, Cairo and Alexandria. The desert road is currently being upgraded to become a full-scale multi-lane highway on a par with international standards, a process that has slowed since the revolution. Another well-paved road links Cairo with Sokhna, near Suez. Apart from these and a few roads linking coastal cities in the Sinai Peninsula, the country’s roads are narrow and of poor quality.

Even if Egypt can realise the vision of a more diversified transport sector, roads will continue to carry the bulk of goods in the country. Given this, investment in roads remains a high priority. One area in need of greater funding and attention is safety, which continues to be a major concern along the roads, which are some of the deadliest in the world. According to the World Health Organisation (WHO), 12,000 lives are lost in traffic accidents every year. That is 33 every day, with one in five deaths befalling pedestrians. The biggest reason for these fatalities include poorly constructed and overburdened roads, overloaded trucks, inadequate signage, and lax enforcement of speed limits and seat-belt laws. During the next five years, the WHO will conduct a study of road safety in Egypt aimed at gathering valuable data on traffic, controlling speed and educating the public on the use of seat belts.

RAILWAYS: Egypt has the world’s second-oldest national railway, after the UK. The national railway service was established in 1851 and the first section of track was completed in 1854, connecting Alexandria with Kafr El Zayyat on the north-western Rosetta branch of the Nile. Today, the country’s 6700-km rail network is still concentrated along the Nile River and its delta, where the vast majority of Egyptians live.

While arguably sufficient in length, the rail network suffers from significant infrastructural shortfalls. The country’s 820 railroad stations are in need of modernisation, and though first-class seats and sleeper cabins receive fine service, lower-class accommodation and service leaves much to be desired.

The rails are used primarily to transport passengers rather than goods. While revenue from cargo amounted to LE123m ($20.59m) during the first half of 2011, passenger revenues were LE406m ($67.95m). Passenger and cargo numbers were down during 2011 from 2010, with the state-run Egyptian Railways Authority reporting losses of LE70m ($11.72m) for the year.

It is 40% cheaper to move goods by rail than by road, according to the European Federation on Inland Ports, but Egypt's existing trains have a limited cargo capacity of just 12m tonnes. That is less than 3% of an estimated 500m tonnes transported annually within the country. Rail can and should play a larger role in cargo transport, but realising the potential requires considerable investment. Less than 30% of existing railways are double-track. There are few direct links to dry ports and factories, which pushes industrial players to rely on the overburdened road network.

IMPROVEMENTS: Efforts are under way to improve rail infrastructure. The Egypt National Railways Restructuring Project is a broad-based effort to modernise the rail system with a focus on management, operations and infrastructure. In late 2010 the World Bank announced a $330m loan to support the project with an eye towards improving the safety, efficiency and reliability of the country’s rail services. “Railways in Egypt have been neglected for many years and 2011 has been the worst, as there has been near-zero construction or maintenance to them all year,” said Mohamed El Tawil, the chairman of Triangle Group, a transport support services company.

A proposal has been made to construct a rail line between the Red Sea port of Sokhna near the mouth of the Suez Canal and the Mediterranean port of El Dekheila west of Alexandria. The line would pass through a logistics centre outside of Cairo and would require new data systems and communications networks.

Such an east-west link in Egypt is nothing new. As early as the 13th century BCE, the ancient Egyptians dredged a canal linking the Nile River to the Red Sea. The aim then, as now, was to expand trade between the Mediterranean and Asia. If realised, the proposed line could help Egypt emerge as an alternative entry point for land-based freight companies focusing on East Africa and the Arabian Peninsula.

URBAN: Egypt’s cities, particularly Cairo, are notoriously congested. The World Bank has identified issues, including insufficient funding, underdeveloped public transit systems and high levels of vehicle traffic congestion. For most of the past three decades, the growth of vehicle ownership has outstripped that of road length. Rising congestion has reduced average trip speed in Cairo to 19 km/hour. Should the problem not be addressed, that figure could fall to 12 km/hour by 2030. Ahmed Kordy, the vice-chairman in charge of business development at Mashaweer, a courier service operating in Alexandria and Cairo, told OBG, “During certain times of the day, it can take two or three hours to run an errand in Cairo.” Mashaweer, which means “errands” in Arabic, appeals to those who place a premium on time by running their errands for them.

Congestion not only damages the roads and air quality, but the time lost in traffic reduces labour productivity, quality of life and GDP. This has also grown more pronounced since the revolution, as the number of police directing traffic has dwindled. Even some tour companies have curtailed sightseeing in downtown Cairo in order to avoid losing time in traffic.

A significant effort is under way to take pressure off the city’s roads. Cairo’s Metro continues to expand. Lines 1 and 2, already in operation, total 65 km. A third line is currently under construction and when complete will span 40 km and extend to Cairo International Airport. Phases one and two of Line 3, which include adding nine new underground stations, were suspended during the political unrest of early 2011, but have since resumed. Tenders for the third phase of Line 3 are likely to be issued later in 2012. A fourth line, which will stretch 70 km, should be complete in 2017.

MARITIME: Egypt has one of the most important maritime arteries in the world: the Suez Canal. When it opened to great fanfare in 1869, the canal revolutionised global trade, bringing Europe some 7000 km closer to the markets of South Asia. Today, an average of about 20,000 ships or roughly 10% of global maritime trade passes through the Suez Canal each year.

As critical as the canal is to global trade, it is even more important to Egypt’s economy. Along with tourism and remittances, the Suez Canal is a principal source of income, generating more than $5bn in revenue for the treasury each year, making it Egypt’s third-largest source of revenue after tourism and remittances.

Traffic through the canal was largely unaffected by the political upheaval of 2011, but as a barometer of the global economy, the canal has endured a difficult few years, with traffic and revenues down due to the global economic crisis. Some shipping lines, including Grand Alliance, even re-routed some ships around the Cape of Good Hope – thereby adding five to seven days of travel time – to avoid paying transit fees. Passenger traffic has also seen a considerable decline with the rise of piracy in the Gulf of Aden. To encourage traffic, the Suez Canal Authority (SCA) had frozen transit fees for three years, beginning in April 2008.

That strategy appeared to work, as revenues for fiscal year 2010/11 bounced back, totalling $5.05bn, a record 11.3% increase on the previous year. With the global economy showing signs of recovery, the SCA announced in late 2011 that it would raise toll fees for all ships passing through the canal by 3% beginning in March 2012. Maersk Line is the largest container company in terms of remittances to the Suez Canal and thus is the SCA’s largest container shipping customer in terms of throughput and revenue.

Looking further ahead, the continued expansion of the economies of Asia, led by China and India, along with technological developments lowering the cost of sea-borne trade, bode well for the canal. On the other hand, slower growth in Europe will hurt overall revenue figures, in particular if the debt crisis persists and dampens growth over the medium term.

TRANS-SHIPMENT: Given the importance of the Suez Canal and its abundance of ports, Egypt should be a global leader in containerised trans-shipment, though Singapore, Dubai and even Panama outperform Egypt in this regard. Yet opportunities abound.

John Trenchard, a senior executive at the global container terminal firm APM, predicts a new generation of ultra-large container ships (vessels with a capacity of 12,000 to 18,000 twenty-foot equivalent units, or TEUs) will be used principally for trade between the Mediterranean basin and East Asia.

In order to keep pace with such developments in the international shipping industry, Egypt is busy expanding its existing ports. In addition to dredging harbours and building new port facilities, this modernisation process requires adjustments to port design and operation processes. There is work to be done, according to APM’s network and operations manager, Mohamed Abu Samra. “At present, there are just two ports with international standards and capacity,” he said. The port at Sokhna has a 16-metre draught, while that of Port Said East is 15 metres. The ports at Damietta and Alexandria, on the other hand, have draughts of just 13.5 and 11.5 metres, respectively.

Ports are a critical part of Egypt’s logistics infrastructure. At present, 90% of Egypt’s foreign trade passes through one of its 15 seaports (nine on the Red Sea and six on the Mediterranean). Alexandria Port handles more than 55% of Egypt’s foreign trade. Damietta Port, meanwhile, has a capacity of 1.15m TEUs. Port Said East is the leading container port and a regional trans-shipment centre, while Suez Port handles cargo.

NEW PORTS: In February 2012 the Qatari and Egyptian governments signed an agreement to build two new ports, one in Port Said and the other in Alexandria. The first is a 120-sq-km port and industrial complex to be located to the east of Port Said. Already an important harbour for exporting Egyptian commodities such as cotton and rice, Port Said thrives due to its location, status as a duty-free port and role as a fuelling station for ships passing through the Suez Canal. To facilitate traffic flows in and out of the canal, a side canal to the East Port Said harbour is being constructed. The 9-km-long, 18.5-metre-deep canal will cost roughly LE500m ($83.69m) and will be able to handle the larger fleet of ships expected in the coming years.

Egypt’s largest port in Alexandria is set to become even larger with planned infrastructure upgrades. The natural harbour thrives from its location in the Nile Delta and near Egypt’s industrial heart. The Dekheila section of the port, which lies 7 km to the west of the main port, will get the most attention. With natural draughts of up to 20 metres, Dekheila is well suited for the super-large vessels of the future. In addition to boosting Egypt’s maritime infrastructure, the foreseen port projects promise multiple benefits. According to Qatar’s minister of state for international cooperation, Khalid bin Mohammed Al Attiyah, the Port Said project could create as many as 1m jobs, with the port in Alexandria adding another 200,000.

“A long-term game-changer for the container transportation sector is to connect a deep sea terminal such as Port Said East to the main industrial and consumer market of Cairo by rail,” Simon Brown, the managing director of Maersk Egypt Shipping Agency, told OBG.

NILE RIVER: In addition to the Suez Canal and its numerous harbours, Egypt is also home the world’s longest river, but has failed to make use of the Nile’s transport potential in recent decades. A principal transport artery for millennia, the river has fallen well behind other modes due to neglect. An estimated 25% of goods were moved along the Nile during the 1950s, and roughly 95% of Egypt’s current population of nearly 81m lives within 20 km of the Nile basin and delta. Approximately 1.3m tonnes of cargo is shipped by river, accounting for less than 1% of all inland transport.

Barges are an extremely cost-efficient way of moving large quantities of goods within Egypt. The CEO and managing director of Nile Cargo, Michael Power, listed a few reasons river transport makes sense: “It’s more efficient, costs less, and does less damage to the environment.” When fully loaded, a barge can move a tonne of cargo 550 km on just five litres of fuel. That is 50% more than by train and 500% more than by lorry. Such numbers are not lost on the government, which has invested approximately $2.6bn towards adding locks, targeted dredging, and navigational aids along the Nile during the past six years.

At present, the cost base for transporting goods by barge and by truck is comparable, but the cost-base of trucks is artificially low because of fuel subsidies and the widespread practice of overloading trucks. This has major downsides, damaging roads, posing serious safety risks, and contributing to air pollution. “The fuel subsidy issue is a big question mark for the future of river transport as it can’t compete with road transport on short distances. In Europe, for instance, inland waterway transport up to 70-80 km can compete with trucks but that is not the case in Egypt,” Hussam Leheta, the chairman and CEO of Egytrans, an integrated transport services company, told OBG.

Power of Nile Cargo agreed that fuel subsidies were hindering the potential for river transport, and said the Egyptian government spends more on fuel subsidies than it does on education and health combined. “The gamble of this venture is that fuel subsidies will have to go,” he told OBG. “There is no way the government can continue to afford the subsidy. It will have to end. It’s not a question of if, but when.” If he is right, then river transport companies will be well positioned to compete on a level pitch.

The previous government, recognising the river’s potential, coordinated a study on reinvigorating river transport along with the Japan International Cooperation Agency. That study pointed to the underutilised potential of the river. However, realising that potential requires a committed and sustainable effort.

The river’s infrastructure is in serious need of development. Only 39 private ports and five public ports line Egypt’s 1850 km of navigable waterways. In addition to the shortage of terminals, the river also needs a functioning navigational system and round-the-clock operation at locks. “At present, the locks on the Nile operate only between 9am and 6pm,” Power told OBG. “This needs to be a 24-hour operation.”

Many of the planned projects are awaiting decisions by the new government, and it remains unclear whether the Nile will be prioritised. Egypt will not become the Netherlands, but if the Nile could account for just 10% of internal transport, the burden on Egypt’s roads would be significantly reduced.

AIR: Given Egypt’s growing number of tourists over the past decade, the government has approved a $387m expansion of Cairo International Airport’s (CAI) second terminal. More than two-thirds of the cost will be met by a loan from the World Bank, first approved in February 2010. The World Bank has cited tourism as an important sector of the Egyptian economy with strong potential for continued growth.

The project will double the number of gates in terminal 2 to 14, with the new gates capable of accommodating the super-sized Airbus A380 aircraft. The project, which is scheduled for completion in 2015, would boost the second terminal’s capacity to 7.5m passengers per year, bringing CAI’s total annual capacity from 21m at present to 25m. CAI is already Africa’s second-largest airport after Johannesburg, South Africa.

Further south, the airport in Asyut has been expanded, with a new terminal for both domestic and international flights added. With the upgrade, Asyut can now handle 1.25m passengers per year. Along with Egypt Air, four low-cost carriers and a charter airline (Air Cairo) operate out of Asyut, with an international focus on destinations in the Gulf Cooperation Council.

LABOUR: The revolution gave rise to a more active labour movement, particularly in the industrial sector, where textiles firms have been hit especially hard by instances of industrial action.

This has also been an issue in the transport sector, which has seen a newly politicised labour force calling for improved working conditions, better pay and fewer hours. A three-day sit-in held in early 2012 by railway workers from the El Behaira Holding Company, for instance, cost the Egyptian Railway Authority a total of around LE3m ($502,000) as traffic was halted along an important section of track connecting Cairo and Alexandria. The protesting workers were demanding wage arrears to be paid and calling on the government to renationalise the company.

Strikes at the Dekheila and Sokhna ports broke out in September 2011 as workers protested wages, working conditions and reductions in profit-sharing. The port’s operator, the Dubai-based DP World, ended the three-day strike by agreeing to hardship payments. It remains unlikely that labour action would disrupt traffic passing through the Suez Canal.

As an economic lifeline not just for Egypt but the world, newly elected president Mohamed Morsy will have to address labour action when it occurs, and it remains a concern for the country’s ports and the transport sector as a whole. The revolution has politicised Egyptian social groups that were rarely heard previously and now feel empowered. Labour activism is part of the new political landscape and the transport sector will have to deal with this reality going forward.

LOGISTICS: Should future governments successfully modernise the country’s transport infrastructure, logistics service providers would benefit considerably. Over the past several years, Egypt has drawn the attention of logistics companies by liberalising what had been a highly restricted market. A decade ago international companies were required to contract with government agents. This evolved into local private agents, and now international agents can open their own representative offices in Egypt, whence they can manage the entire logistics chain. Revenues in the domestic logistics market topped $17bn in 2010.

And according to Frost & Sullivan, there is room to grow. The global research consultancy predicts a compound annual growth rate of 12.7% between 2011 and 2015, provided it can improve infrastructure as well as the regulatory environment – two factors that Srinath Manda, the transportation and logistics programme manager at Frost & Sullivan, describes as “prerequisites for the development of the logistics industry”.

At present, however, Egypt’s logistics providers suffer from inconsistent infrastructure development. Although road-based transport dominates the sector, the roads still lack needed services and facilities such as transit points and connection links.

Moreover, of the estimated 750,000 lorries plying Egypt’s roads, the vast majority are incapable of carrying containers – an essential part of developing intermodal transport and moving goods efficiently from ports on the coast to the hinterland.

“Since the revolution security has deteriorated, particularly on the roads. This has resulted in more pressure for storage at ports and warehouses creating supply chain bottlenecks. The supply chain industry in Egypt is relatively underdeveloped and has significant potential to develop with improved security and if the infrastructure investments are made in the coming years,” Maersk Egypt’s Brown told OBG.

OUTLOOK: Given the state of political flux in which Egypt currently finds itself, short-term projections for the transport sector are uncertain. Downside risks include a deteriorating fiscal and financial position, the depreciation of the Egyptian pound, and continued labour unrest. The European debt crisis also looms large. “Europe is important for transport in Egypt,” Khaled Hussein, the chief commercial and operations officer at Egytrans, told OBG. That may be an understatement: Europe is essential for Egyptian transport, consuming more than a third of Egypt’s exports and providing more than a quarter of its imports.

The revolution has delayed plans to modernise and expand Egypt’s transport infrastructure that were scheduled for 2011 and early 2012. Further down the road, however, the popularly elected government should enjoy a strong mandate to carry out public works. So despite the political uncertainty, transport could see considerable investment in the years ahead. Egypt’s new government will be eager to show that it is investing in the future and creating new employment. Transport projects address both objectives, as they tend to be visible and labour-intensive. And they can hire less-skilled workers, which will be welcomed by the country’s newly empowered lower and middle classes.

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The Report: Egypt 2012

Transport chapter from The Report: Egypt 2012

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