Egyptian President Abdel Fattah al-Sisi stands on a boat on the Suez Canal as he attends the celebration of an extension of the Suez Canal in Ismailia, Egypt, in this August 6, 2015 handout photo supplied by the Egyptian Presidency. REUTERS/The Egyptian Presidency/Handout via Reuters

Neither a Gift to the World nor a Money Pit

08/07/2015 . By Timothy E. Kaldas

After weeks of hype, Egypt officially opened the “New Suez Canal” yesterday. Most discussions of the project—more accurately described as an expansion than a new canal—have taken one of two positions. Either the tone has been decidedly critical, suggesting that the expansion was an unnecessary waste of money that will bring little if any perceptible benefit to Egypt, or unabashedly favorable, arguing the expansion will be transformative for the Egyptian economy and, according to the government, deliver more than double the canal’s current revenue by 2023.

Both positions are inaccurate. Many critics looking at the potential for increased revenue seem to assume that the only variable affecting canal revenue is increased global shipping traffic. There are other variables, such as rising toll fees (though the Suez Canal Authority said they will not raise rates) and market share.

The Suez Canal competes directly with the Panama Canal on several trade routes. One of the most important competitive routes is that between East Asia and the East Coast of the United States. While the route from China to the East Coast is roughly 8% shorter via Panama than through Egypt, the Suez Canal can support larger ships. This led the world’s largest shipping company, Maersk, to direct all of its China-East Coast shipping through the Suez Canal rather than through Panama in 2013.

Panama is currently in the midst of its own expansion; though running behind schedule, when complete in April 2016, the improvements will increase substantially the size of ships that can pass through the canal. This may weaken the Suez Canal’s competitiveness and market share on certain shipping routes.

The canal expansion in Suez is thus more significant in protecting market share and preventing the loss of revenues than it is in substantially increasing revenues at the moment. Currently, the Suez Canal does not even operate at capacity, and canal traffic has yet to recover to its highs from 2008.

That said, the government is not selling this project as regular maintenance. It is claiming that the economic returns will be enormous, and will come quickly. This is implausible and unlikely. Virtually no economist is prepared to defend the numbers posted by the Egyptian government. As Neil Davidson, a senior analyst at Drewry Maritime Advisors explained to the Wall Street Journal, “It’s not really clear how the government has arrived at their projections.”

Several shipping companies and alliances have spoken out in favor of the expansion. The fact that cargo lines are pleased is good for business, but it does not automatically make this decision economically sound for the Egyptian government. It is quite understandable that shipping companies would be happy to have improved infrastructure that accelerates their shipping times at their disposal. In an interview with Bloomberg, the CEO of Maersk Drilling Claus Hemmingsen, repeatedly praised the expansion, but when asked about the economic effects of the expansion—such as lowering the per-container rate of shipping— he cautioned against such expectations, insisting this was more about making shipping more efficient and reliable. For Maersk, then, the expansion under the current economic circumstances appears to be nice but not necessary.

In the long term, the expansion likely would have needed to be undertaken, but at the moment Egypt faces bigger priorities, both throughout the country and in the Canal Zone. A planned new Mediterranean access channel, which has been delayed for years, is really what Maersk is waiting for. Klaus Laursen, CEO of the Maersk-invested Suez Canal Container Terminal, has warned that, unlike the canal overall, this section is nearing capacity. He explained, “We currently only have a few hours each day when vessels can come in and out of the container terminal.  On a yearly basis this gives us the ability to handle 2,500 vessels.  We currently do 2,300 vessels so this is a potential bottleneck and capacity issue for the canal.”

As has been suggested by Ahmed Kamaly, professor of economics at the American University of Cairo, the main variable in planning and pursuing this project was likely more political than economic. Egyptian President Abdel-Fattah El Sisi likely chose to focus on the expansion because of the ability to present it as a grand national project on par with the original canal or its 1956 nationalization from foreign ownership.  However, the prioritization of politics over tangible economic benefits is dangerous in a country running massive deficits and urgently requires some very expensive reforms. Egypt’s public education system is ranked as one of the worst in the world. Many public hospitals are in a state of dilapidation and inadequately equipped. The rail infrastructure is in such a state of disrepair that news of train-related deaths has become somewhat routine in Egypt. Over ten thousand people have been sickened—and five children died—from expired medicine dispensed at state hospitals in late July.

So the issue is less whether this canal expansion could eventually be useful, but rather whether this was the right project right now. Could the country have made better use of over $8 billion? The answer to that question is clearly yes. A less costly new Mediterranean channel would have adequately protected the canal’s capacity in the short term. More expensive expansions could have been delayed until the country’s finances were in better shape and following more careful study.

This is not simply a problem of badly organized scheduling for infrastructure investments; it’s also an issue of cost. Despite the opacity of accounting for the project, it appears Egypt had to borrow some $850 million above initial projections in order to meet the grueling schedule set by Sisi for strictly political reasons. The billions borrowed from citizens and from banks simply could have been put to better use.

Egypt faces a number of challenges, and generating investment in the country is one of them. To that end, improving the country’s trade infrastructure—including the Suez Canal—is a worthwhile idea. But the money spent to complete the “New Suez Canal” in a year could have been better spent on other canal improvements, rail infrastructure, or human development. The cost of repairing and reforming Egypt is high enough. Racing against costly, self-imposed deadlines for political ends is unsustainable and unjustifiable.