In August 2014, when Egypt announced plans to build a second, 45 mile lane for the canal in under a year, it raised more than a few eyebrows. The government’s ability to fund a megaproject of this scale was questioned by critics and investors after the years of economic turmoil that followed on from the Arab Spring revolution of 2011 and subsequent political transitions.
By April 2014, Egypt found itself with half the reserves it held pre-2011, a 14 percent budget deficit and total debts outstripping GDP output.
However, Cairo’s highly successful domestic fundraising efforts for the expansion have shown that the current military-led government may have a greater knack for managing such projects than previous administrations. They have adeptly harnessed public support for the project via the sale of $8bn in investment certificates in September 2014.
Originally constructed under French leadership in the 1860s, the Suez canal has since become a pivotal axis of global shipping, with 962.7 million tons of cargo crossing through it in 2014. As for Egypt, the waterway brings in more than $5bn per year in transit fees, making it one of the country’s top sources of foreign currency, alongside tourism.
Egypt hopes the expanded canal will generate $13.5bn annually by 2023 – more than double its current rate. If these predictions prove correct, it will allow the government to pay off the certificates – and then some. But Egypt’s grand vision for the canal does not stop there.
Beyond the new lane, the government plans to capitalise on Suez’s strategic importance and the expected increase in traffic by improving five existing ports. It will also build a new city, commercial hub, industrial zone and technology valley, requiring tens of billions of investment.
With its populist approach to funding the current expansions, Egypt has shown Africa that people power can be channeled to finance major infrastructure projects with street-level appeal.
While domestic funding efforts proved successful in raising $8bn for the canal’s first phase, however, the wider Suez Canal development project will demand a considerably heftier $220bn investment over 15 years, according to the investment ministry.
However, the importance the government is placing on a March 2015 investment conference shows the balance of power still lies firmly in the hands of private infrastructure investors, in part because Egypt’s model is limited by consumer demand and supply of suitable projects.
A new set of investment rules aimed at incentivising international players is due before the crucial investment conference in the South Sinai city of Sharm El Sheikh. Here, the Suez development’s long-awaited master plan from consultants Dar Al-Handasah will be showcased, along with up to 30 other connected projects.
The importance of the summit is hard to overstate – not just economically, but politically. Egypt’s current leadership under President Abdel Fattah Al-Sisi is facing political dissent and continued economic struggles, and will be looking to the March economic summit as a potential turning point, with the canal’s development as the showpiece.
A point of patriotism
Apart from its economic value, the Suez canal represents an enormous point of national pride. The current military-led government is seeking any patriotic rallying point it can to bolster its own credibility, and funding the expansion internally is a popular move politically.
African Development Bank resident representative for Egypt, Leila Mokaddem, told This is Africa that the canal’s iconic status, and the appeal to the average citizen of owning a stake in it through a certificate purchase, played a unique role in mobilizing buyers.
Ms Mokaddem said other options such as infrastructure bonds would not have had the same “impact” as it would not give average Egyptians, who are not familiar with sophisticated financial instruments, the ownership they were looking for.
While stressing that the model is “quite specific” to Egypt’s circumstances, she added it is worth assessing as an infrastructure finance model in other African countries.
The closest African parallel to Egypt’s approach to Suez, according African Infrastructure Investment Managers regional director Vuyo Ntoi lies in the privatisations of power distribution companies Umeme and Copperbelt Energy Corporation, in Uganda and Zambia, respectively.
Like Suez, these projects struck a chord with local subscribers. “It has to be something that has resonance locally, and I think that’s what’s happened in both these companies,” Mr Ntoi, director of southern and central Africa for the primarily unlisted equity investor, says.
“But in both instances, the means of privatisation has been through a sale of equity rather than sale in a debt claim against the project.”
Both Mr Ntoi and Ms Mokkadem point to low level of financial literacy as a factor that often limits the impact of certain debt instruments in many African contexts.
“In truth, you do not really have a consumer investment culture in many jurisdictions,” Mr Ntoi explains.
“Having people either owning shares or certificates of deposits, other forms of investment products, depends on the extent to which… investing in companies or in debt instruments has permeated the society. And I think there are very few countries where you’ve got that level of sophistication.”
A boon for banking
The reach of Egypt’s financial sector remains limited, with banking penetration rates hovering at a relatively low 9 percent, according to Noaman Khalid, an economist at CI Capital Asset Management in Cairo. Across Africa, less than 25 percent of adults have bank accounts, and only 3 percent have credit cards.
Egypt’s certificates issuance, however, took the sector to “a whole new level”, he said, acting as a “massive-scale [draw] for people to banks”.
The certificates saw heavy demand, not only for patriotic and prestige value, but for their attractive 12 percent yield rates – higher than five-year treasury bonds during the same period, Mr Khalid points out – and were available for purchase at dozens of banks, which distributed them on behalf of four initial holding banks. Besides Egyptian citizenship, they had only one prerequisite for purchase: an active bank account.
In fact, Mr Khalid said, the government’s certificate fundraising was an effort, at least in part, to bring more Egyptians into the formal banking fold.
“Parallel to [the fundraising], there were ads on the radio and TV talking about the advantage of opening a bank account, what a credit facility is, etc. It was a parallel project trying to expand the 9 percent [banking penetration] to, say, 10 percent, then 13 or 20 percent of the population.”
For banks, the certificates were a success, Mr Khalid argues. The four banks dealing with the certificates received 800,000 transactions in eight days, bringing $3.47bn into the system.
Not only that, there were political bragging rights for the government.
“They wanted to achieve the $8bn in a short period. Analysts in general did not see the point of collecting the money so fast, [but] the point was the headlines – to say that Egypt collected this money in only eight days.”
After the Egyptian government’s public expectations for the investment certificates were exceeded, Minister of Planning and Administrative Development Ashraf Al-Araby suggested that the model could be replicated for other major projects in the country.
CI Capital’s Khalid, however, has doubts. He argues it this would be unhealthy for the Egyptian economy, which is in need of short-term relief. Projects like the Suez expansion are long term, and will take place over the next 20 to 30 years.
To fund a grand vision, go Dutch
Since the certificate sale in September, the Egyptian government’s focus has shifted towards big, international private investors as a means of rescuing the country’s embattled economy.
Achieving this level of funding required to complete the entire Suez development project – not just the canal lane expansion – will require a more collaborative approach between private investors and the government according to Peter Sand, chief shipping analyst at the Baltic and International Maritime Council (BIMCO), the world’s largest shipping association.
The recent examples of shipping hub upgrades that Egypt might be trying to emulate, Mr Sand said, are the developments in China and, closer to Egypt, the Jebel Ali port in Dubai. All of these came about through big government tax incentives and significant government commitments.
“If you look at the region as such, it is not obvious that [Dubai] would be successful,” he tells This is Africa. “But they have done so due to their own money and due to the creation of special economic zones where they attracted investments by giving them special benefits.”
The government has followed suit, outlining its own potential incentive structure for investors. In the lead up the March summit, minister for investment Ashraf Salman said the tax rate on the Suez hub would be 10 percent, as opposed to the 30 percent headline rate.
The project’s legal advisers recently assured Egyptian newspaper Masry Al Youm that an investment law for the Suez economic zone, set to be reviewed by the cabinet this week, is “the best that could be applied to the project”.
However, what remains unclear is where the government plans to acquire the significant sum it will likely need to earmark for the project in order to steady potential international investors. That sum is unlikely to come from the Suez Canal itself, even with an additional lane.
According to Mr Sand, the traffic through the Suez has been in steady decline since 2008 as the shipping industry has opted for larger ships as opposed to more ships. He also pointed out that the Suez Canal Authority has decided to keep tolls stable this year, unlike the previous three.
“They are realising that the shipping industry is not awash with money. Actually it is the opposite,” he argues.
Mr Sand acknowledges that the additional revenue could come from the planned improvements to the existing ports, but forecasting an increase to $13.5bn from shipping volume alone was “quite difficult”.
Mr Khalid called it “very optimistic.”
This article was originally published by This Is Africa, a sister publication to fDi (www.thisisafricaonline.com)