$8 Billion Suez Canal Expansion That the Shipping World May Not Need

Egypt opens an $8.2 billion expansion to the Suez Canal today, the first of a series mega projects promised by the government to transform the country after years of political and often violent turmoil.

Exactly one year after construction began on an expansion of the Suez canal, authoritarian-minded Egyptian President Abdel-Fattah Al-Sisi is about to throw a party celebrating its completion, Bloomberg reports.

Despite the festivities, and the speed at which the project was completed, many experts are questioning whether the $8 billion undertaking will really bring any of its promised economic benefits.

And it might be politics, rather than economic necessity, that’s driving the biggest expansion to the canal since its opening in 1869.

Sisi is a former Army general whose promises of political stability won him enough support to lead the overthrow of an elected Muslim Brotherhood-led government in July of 2013.

But an ISIS-affiliated jihadist insurgency in the Sinai and other frequent security incidents throughout the country undermine his major claim for leading the country.

Sisi he might believe an impressive but possibly unnecessary infrastructure project is the surest way of securing his rule during an uncertain time.

Simon Kitchen  Strategist at EFG-Hermes

“‘Build it and they will come’ is not enough”Simon Kitchen Strategist at EFG-Hermes

Amr Adly, a scholar with the Carnegie Middle East Center in Beirut, told Bloomberg that the expansion of the canal is being used as a tool to prop Sisi’s regime.

“Al-Sisi is trying to gain legitimacy through his government’s achievements,” Adly told Bloomberg. “[The new canal] shows the government can deliver, it can commit to something and get it done.”

The Egyptian Army supervised construction of the expansion. For one year, 400 private companies and 25,000 workers were mobilized. They extracted over 260 million tons of sand, built a new 35-kilometer channel, and widened and deepened 37 kilometers of the original canal.

The upgrades will allow two-way traffic and reduce transit time from 18 hours to 11, Bloomberg reports.

But one expert told Bloomberg that there was little apparent economic necessity for this huge of an undertaking.

“From a shipping industry point of view, this initiative to expand the Suez canal was a bit of a surprise,” Ralph Leszczynski, the Singapore-based head of research at Genoese shipbroker Banchero Costa & Co, told Bloomberg. “There was no pressing need or requests for this as far as I’m aware.”

The project may still have some economic benefit for Egypt. The Suez upgrade is partly aimed at keeping pace with another major canal: French newspaper Le Monde notes that expansion work on the Panama Canal is set to finish next year.

Source: Reuters, The Loadstar UK

According to Bloomberg, the investment bank Pharos Holding reported that Egypt’s economy grew at over four percent in the nine months before March 2015. According to the bank this expansion is mainly due to infrastructure spending related to the canal upgrade.

Egyptians also seem to be support the project, whatever its merits.

It only took 10 days for the state to raise over $8 billion to fund the canal upgrade. More than 80% of that total came from the Egyptian public’s purchase of state-issued bonds.

But it’s still unclear whether the opening of the canal expansion will produce any actual economic benefits. The government certainly seems to think it will, since it expects canal revenues to more than double from the current annual $5.5 billion to $13 billion by 2023.

But there’s reason to doubt this projection. The expansion won’t actually allow larger vessels to use the route. And if anything, gridlock along the canal has actually lessened in recent years: The number of ships using the Suez is 20% lower than before 2008.

There would have to be a 9% increase in traffic for the canal to deliver on its economic benefits, but according to a report by Capital Economics, it’s “unlikely” the canal will be able to deliver.

There could always be a huge bump in global shipping that could radically increase canal traffic: According to the Suez Canal Authority, around 8% of the world’s cargo currently passes through the canal.But such an increase doesn’t appear to be imminent. And even then, greater infrastructure would need to be built around the canal to absorb additional shipping traffic.

“‘Build it and they will come’ is not enough,” Simon Kitchen, a strategist with Cairo-Based investment bank EFG-Hermes told Bloomberg.

Source: Business Insider

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