Hope and hype around 'New Suez Canal'

Last Updated 07 August 2015, 18:25 IST

“Egypt Rejoices,” the television networks and newspapers declared, announcing “Egypt’s gift to the world.” Businesses were closed, the streets of Cairo were empty and the airwaves were full of patriotic songs and music videos – all featuring adoring images of President Abdel-Fattah el-Sissi interspersed with footage of cargo sailing toward the sea.
With an hours-long pageant of soaring jets and singing schoolgirls, el-Sissi on Thursday inaugurated what he called “the new Suez Canal” and portrayed it as the cornerstone of his plans for an economic turnaround. “Egyptians needed to confirm to themselves and the world that they still can,” el-Sissi declared to an audience of dignitaries assembled near the Suez Canal city of Ismailia for the opening.

He called it “an additional artery of prosperity for the world.” On Friday, every imam in Egypt was preaching about its benefits to the economy and cite the example of a trench dug by the Prophet Muhammad that led to a battlefield victory, as per instructions from the religious authorities.

The “new canal,” however, is in reality a parallel side channel running about one-third the length of the existing waterway. And el-Sissi’s promises about its rewards, economists and businessmen say, will depend on the resolution of the same problems that are already holding back the rest of Egypt’s economy, including poor governance and a lack of transparency, dependability and public security. The hype about the canal, some analysts say, does little to ease the doubts of investors.

El-Sissi’s other signature development project – the construction of a new capital to partly replace Cairo – has fallen apart just months after its grand unveiling, in March. Moves to close the government’s yawning deficit and to stabilise the currency appear to have stalled. And energy shortages, foreign exchange restrictions and the growing threat of anti-government violence are significant impediments to the kind of investments the government is forecasting, economists say.

The real advantage of the new channel is that it is expected to lower the average transit time for ships, possibly by several hours. But el-Sissi’s government has told Egyptians that the canal’s expansion aims to add $100 million a year to the economy and create a million jobs, and “those numbers are just totally impossible,” said Reem Abdel Halim, an Egyptian economist.

The president set a one-year deadline for digging the new channel, greatly increasing the cost, which came in at more than $8 billion, according to Egyptian officials. But the rush provided only symbolism and no tangible payoff, economists said. The existing canal is operating well below maximum capacity, in part because shipping volumes remain below their peak eight years ago. Transport volumes are sagging again this year because of the economic downturn in China and reduced Western demand for Persian Gulf oil.

“Three years would have been just as sound,” said Ragui Assaad, a fellow at the Economic Research Forum in Cairo and a professor at the University of Minnesota. The ups and downs make any projections of future canal tolls highly speculative at best, said Peter Hinchliffe, secretary general of the International Shipping Federation. His organisation estimates that the total shipping volume will grow by more than 30 per cent over 10 years, but el-Sissi’s government projects that the added channel will more than double the canal’s toll revenue by 2023, to $13.2 billion a year from about $5.3 billion.
Hinchliffe recalled an old saying, “Predictions are great, until you start talking about the future.” Completed in 1869, the original canal revolutionised international trade by connecting the Red Sea to the Mediterranean, a shortcut between East and West that spared ships the long journey around the southern tip of Africa. The canal stretched 100 miles, and 20,000 conscripts a year worked 10 years digging it, according to the official history.

Parts of the canal are too narrow for two-way traffic. Canal authorities arrange for ships to take turns passing in convoys heading in alternate directions, and Egypt has been trying for decades to reduce the bottlenecks. The authorities added three side channels in 1955 and another three in 1980. The government has also worked in recent decades on dredging projects to deepen the canal for ever-larger ships.

The new side channel adds 30 miles in an attempt to allow two-way traffic for more of the passage. Although the new channel will not yet allow two-way traffic for the full length of the canal, it will expedite passage by allowing longer or more frequent convoys to pass. That can help attract traffic. For shipping companies deciding between the Suez Canal and other routes, “It is all about time, and how much time can I save,” said Willy C Shih, a professor at Harvard Business School who studies manufacturing and transportation.
The creation of jobs, however, will depend on attracting investors to build factories or logistics facilities in planned industrial zones around the canal. And experts said there was little reason to think shorter transit time would attract investors put off by the other challenges of doing business in Egypt. “Sure, Egypt needs that kind of infrastructure to produce jobs, but, oh man, have they got a long way to go,” Shih said.

Investors scared
Militant attacks in Cairo and North Sinai have scared away investors, economists said, and el-Sissi appears to be forgoing economic changes for short-term political stability. His government spent billions of dollars in aid from Persian Gulf monarchies to upgrade Egypt’s energy infrastructure and avoid recurring blackouts. But economists and business groups say the government has deprived industries of power to placate consumers.
While blackouts have all but ceased for homes in Cairo, “the improvement in homes this year came partly at the expense of factories,” said Mohamed Hanafy, the executive director of the metal industries section of Egypt’s quasi-governmental industrial federation. “The halts and interruptions for factories have increased compared to last year.” El-Sissi last year began cutting Egypt’s unaffordable food and energy subsidies.
But complementary plans to raise taxes stalled in the face of opposition from the business elite. Rather than increasing taxes, the government this spring lowered the top income tax rate by seven percentage points, to 23 per cent. The government said it would put off for at least two years a proposed tax on capital gains, and many analysts say they now expect that the government will also postpone the start of a value-added tax, just as it did in the current fiscal year.

“The politicians are getting in the way,” said Assaad of the Economic Research Forum. At an investment conference in March, El-Sissi announced with great fanfare that an Emirati developer would build a new and modern metropolis near Cairo. But a tentative agreement with the builder quickly fell apart, and the financing has grown increasingly uncertain.
Some Egyptians have described the capital city and canal projects with a term borrowed from a popular comedy film: “Fankoosh,” a nonexistent product hyped by a marketing wizard. In the film, he fills the demand he has created by selling narcotic-laced candies. “No. 1, and the most important thing, is that it’s not Fankoosh,” Ashraf Salman, the minister of investment, said in a recent television interview during which he was pressed about whether the capital city plan was similar hokum. “It’s a project that the government has launched,” Salman said. “As such, it’s a target.”

(Published 07 August 2015, 18:25 IST)

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