It was an extravaganza complete with a naval parade, roaring fighter jets and singing children. The Egyptian government formally announced the reopening this month of the new Suez Canal in front of dignitaries including King Abdullah of Jordan and French President François Hollande. The reported cost was $30 million.
A foreigner watching would no doubt be surprised by the festiveness of the day, given how little they have probably heard about this gift that the Egyptians have so ceremoniously bestowed upon them.
A little backstory is probably helpful. The New Suez Canal is the same old Suez Canal, with a huge part of its shipping lane expanded to allow two way shipping traffic in one of its bottle-neck areas. The expansion project spans 72 kilometers: a 35-kilometer-long second lane connecting older two-lane stretches to allow two-way traffic in 60 percent of the canal, and 37 kilometers of existing canal lanes, dredged to enable the passage of larger ships. Construction should have taken three years to complete, but the consortium working on it managed to finish it in one year.
The gift, in a nutshell: transit time for passing ships shortened by seven hours.
You are welcome.
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The expansion had a projected cost of 60 billion Egyptian pounds ($8.4 billion), and was financed by interest-bearing investment certificates that only Egyptian citizens could purchase. Those investment certificates were sold by government-owned banks, and provided a five-year yield of 12 percent annually, whose interest was to be paid quarterly and was not taxable.
Given that any other investment certificate from any other bank (government or privately owned) would pay 9 percent interest with a taxable yield, the Suez Canal investment certificates were sold out in eight working days, 88 percent of them bought by patriotic citizens, naturally, while the rest was bought by banks and other entities. The government has repeatedly stated that the high interest is justified by their financial projections of the project, which they claim will boost Suez canal receipts from the current $5.3 billion to $13.2 billion by 2023, due to increased shipping traffic caused by the canal’s expansion.
Such claims have invited skeptics and detractors, whose questions were never addressed by the government or the media.
The first question was in regards to how the government paid the first year’s 12 percent investment yield on a project that was still under construction.
Secondly, they wanted to know, why did the government pursue two additional loans of $850 million (an extra 10 percent of the projected cost of the project) to finish the project? And finally, why do they believe that reducing the transit time by mere seven hours will more than double the Canal’s receipts in eight years?
The first two questions invite speculations on the lack of proper financial study of the entire project, while the third question confirms it.
In order for Egypt to reach its revenue target from the new canal, global trade volume would need to rise by 9 percent a year, triple the current average over the past four years. In other words, the number of ships entering the canal daily will have to double to 97 from 48.
This is also highly unlikely, mainly because Asia-Europe trade carriers (approximately two-thirds of all Suez Canal traffic) prefer to invest in larger ships, which means that more cargo is consolidated into fewer ships.
It is also worth mentioning that the Suez Canal’s main competitor, the Panama Canal, is undergoing its own expansion project that aims to support even larger ships than the expanded Suez canal will be able to accommodate, and it will be done by next year.
Unless an unprecedented boom in shipping trade takes place within the next year, calling the government projections “implausibly optimistic” is an understatement.
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The real potential lies in the Suez Canal area development project, an industrial and logistical hub that Egypt plans to establish along the expanded canal and will cost an additional $15 billion. The megaproject aims to transform the canal from a shipping route to a trade hub, where ships can store or pick up any cargo it wishes. There is still very little detail on the project, but it should cover approximately 500 square kilometers of seaports, industrial zones, fish farms, storage facilities and new cities.
By focusing on becoming a global trade hub instead of a shipping route, the Egyptian government will develop a multitude of previously inaccessible revenue streams and will surely increase the Suez Canal’s receipts. This is a big deal, and given Egypt’s strategic location between Africa, Asia and Europe, if executed correctly it will have a transformative effect on global trade.
So why not sell that idea to the population instead? Why isn’t this Egypt’s gift to the world?
Here is a theory: The current regime of President Abdel Fattah el-Sisi presides over a temperamental population, with unenviable economic realities, and a history of recent violent social and political upheavals. A big segment of the country harbors an Islamist blood-feud against it, and the local ISIL offshoots are not only active but before the ceremony even abducted a Croatian engineer and executed him on video.
As far as this regime is concerned, garnering and maintaining internal support is a matter of life and death. Thus the need to present achievements, whether real or imaginary, to placate the population and show that progress is being made.
The list is impressive thus far: The military claims to have found a cure for AIDS and Hepatitis C; a visit from Russian President Vladimir Putin was portrayed as a geopolitical game-changer; an economic conference becomes the world’s most important economic event; the new canal is so amazing that it’s “a gift to the world.” Propaganda on steroids.
The natural implication of any regime taking this route is that they don’t care how the outside world sees them, as long as the local population views them favorably. Enter the photo-op era of Egyptian politics, where PR and promotion are king, and every event is milked for maximum impact, no matter how brazen the claims. President Sisi with Putin wearing sunglasses; Sisi tallying the billions of investments that Egypt has garnered at the economic conference yet never materialized; Sisi opening the new Suez Canal in ceremonial military uniform on board of El Mahroosa, the first boat to ever sail the Suez canal when it originally opened in the 19th century; showcasing Egypt’s “gift to the world.” The population’s faith rewarded.
Again, world, you are welcome.
Originally published in politico EU https://www.politico.eu/article/egypt-suez-canal-sisi-regime-cairo-government-trade/