Suez Canal expansion informs investors about Egypt’s other mega-projects
The brand-new expansion of Egypt’s Suez Canal was meant to be a symbol of the country’s return to stability. But Egypt’s questionable history with mega-projects, and the persistence of more fundamental economic and political problems, should make investors wary.
Last week, Egyptian President Abdel Fatah al-Sisi inaugurated an expansion of the 146-year-old Suez Canal. The one-year, $8.5 billion project added a 35-kilometer bypass lane to the canal, allowing for two-way traffic and reducing transit times. The project was financed through the sale of special investment certificates, which Egyptians bought up in just eight days the year before.
The improvements are projected to increase canal revenues from about $5 billion today to over $13 billion in 2023, a compounded annual growth rate of 12%. The estimates are based on a doubling in canal traffic by 2023—from 47 vessels per day to 97. Another major benefit would be an influx of foreign currency after years of instability nearly drained Egypt’s reserves.
The opening ceremony was marked by both praise and skepticism about the project’s viability. Bloomberg writer Ahmed Feteha questioned the need for the bypass, arguing that the number of vessels using the canal is still 20% lower than before the global financial crisis, and only 2% higher than a decade ago. And demand for oil and petroleum products in Europe and North America, which constituted about a fifth of the freight that traversed the canal in 2014, is in decline.
Wael Kaddour, a former member of the Suez Canal Authority, told al-Monitor that the shortened construction schedule meant doubling the construction costs. And Egyptian economist Reem Abdel Halim told The New York Times that President Sisi’s promises about the canal adding $100 million a year and creating a million jobs “are just totally impossible.”
The government hopes that the Suez expansion will be the anchor for a new, $55 billion economic development zone planned for 2030. But Cairo-based investment analyst Angus Blair told Forbes that, at a time when the government is having trouble delivering basic services, the $8 billion “could have been used on upgrading Egypt’s infrastructure, power stations, mass public transport in the cities, new trams, and new housing.”
Not all of the economic commentary on the Suez Canal expansion was skeptical. Economist William Jackson told the BBC World Service that the project was “undoubtedly” beneficial for the economy and could yield additional benefits if Egypt can develop logistics and manufacturing around the canal. The expansion also came at a time when Moody’s raised its growth forecast for Egypt to 4.5% in 2015 and 5% in 2016.
The project may have other, intangible benefits. Writing in Fortune, Cyrus Sanati argued that “such a grand project is meant to inspire and instill confidence, as much as—or possibly more than—it’s supposed to be instantly accretive to the bottom line.” And the fact that the project was self-financed indicates that Egypt’s people are desperate for some stability.
White elephants of the desert
What does the Suez Canal project portend for Egypt’s other megaprojects?
At a conference held in the Sinai resort town of Sharm al-Sheikh earlier this year, President Sisi announced plans to build a new, purpose-built capital city. The ambitious Gulf-style megalopolis of 5 million people would cost an estimated $45 billion and house all of the government ministries, parliament, and foreign embassies.
But unlike the concrete progress on the Suez expansion, plans for the new capital remain unclear. New York Times Cairo correspondent David Kirkpatrick reported that plans for the city’s financing fell through just months after the announcement.
But even if Egypt’s leaders do find the money to build their capital city, there is reason to doubt that it will achieve the intended economic goals. For evidence, one can simply look to the country’s long history of building cities in the desert.
In his 2015 book Egypt’s Desert Dreams, economist David Sims argues that the government’s network of satellite cities built over the last 50 years failed to relieve population pressures in Cairo. Sims argues that the projects were largely driven by politically-connected businessmen who sought to develop land granted to them as part of Egypt’s extensive patronage network.
But poor transportation between city centers and strict regulations on small businesses are just some of the reasons that these cities failed to attract anywhere near the number of residents that planners expected.
Sims concludes: “Desert schemes have consumed massive public funds and private investments and continue to do so … yet the Egyptian desert is virtually littered with still-born, anemic, and failed projects.” There is no reason to expect that President Sisi’s new capital city would be any different.
Egypt won’t build its way to prosperity
The failure of purposed cities to live up to expectations is not unique to Egypt. In his research on the efficacy of megaprojects, Bent Flyvbjerg argues that cost overruns occur in nine out of ten of these projects and overruns of up to 50% are common (construction of the original Suez Canal in Egypt, Flyvbjerg notes, was 1900% over-budget). Similarly, benefit shortfalls of up to 50% are also common.
But while their economic benefits may be dubious, these mega-projects may reassure investors about the reliability of Egypt’s economy under President Sisi. The successful completion of the Suez Canal expansion, much like efforts to reform the country’s unsustainable food and energy subsidies, demonstrates Sisi’s commitment to boosting investors’ confidence — by brute force if necessary.
Investors should be concerned that President Sisi’s methods may be doing just as much harm as good. His push for stability included a harsh crackdown on internal dissent, fueling an insurgency in the Sinai that is boiling over into Cairo.
Systemic corruption, burdensome regulations, and few checks on executive authority remain the major barriers to Egypt’s economic growth. Without reforms to these fundamental issues, such mega-projects will not improve the plight of ordinary Egyptians.