To mark the opening of t Abdel Fattah el-Sisi's LE 60-billion renovation and expansion of the Suez Canal last August, the president cruised down the canal in a 150-year-old yacht with other heads of state, who were treated to an airshow and a performance of Verdi's "Aida." A massive ad campaign featuring billboards, museum exhibitions and even a commemorative stamp trumpeted "Egypt's gift to the world." 

The widening of the country's second-most famous waterway was supposed to double its annual earnings in less than a decade, pump life into Egypt's lagging economy and create more than a million new jobs. But nearly a year later, canal revenues are in the doldrums, thanks to a slowing global economy and rock bottom oil prices, which have made longer cargo routes cheaper.  Meanwhile, an ambitious plan to develop the area around the canal into a global maritime center has yet to attract investors, remain skeptical about Egypt's cumbersome bureaucracy and an unstable currency.

The new, 35-kilometer shipping lane greatly reduced transit time through the Suez Canal. The bump in shipping traffic that was supposed to result from this improved level of efficiency was projected to more than double canal earnings to $13.5 billion by 2023. But last year, Suez Canal revenues declined more than 5 percent to total $5.1 billion, down from $5.5 billion in 2014. Monthly income in 2015 was down year-on-year during every month except January--and it continued to drop during the first three months of 2016, according to figures from the Suez Canal Authority. Nor are conditions likely to change any time soon. Last month's newly inaugurated expansion of the Panama Canal could translate into even more competition for the Suez Canal, offering an alternative route for larger ships carrying cargo from Asia to economic hubs on the U.S. East Coast.

With Suez Canal revenues a key source of foreign currency for Egypt, particularly in the wake of declining tourism and foreign investment, analysts have raised concerns about the long-term implications of the slowdown, particularly with the Canal Authority on the hook to repay the billions it borrowed to complete the expansion project in just one year. "The drop in revenue seems to be reaching critical levels. This will hurt the core of the economy at least in terms of foreign currency inflows," says Mamdouh el Waly, an economics professor at Ain Shams University. The canal is currently Egypt's fourth-largest source of foreign currency (after remittances, exports and tourism, in that order) which it needs to import crucial commodities like oil and wheat. As of the end of 2015, the canal was contributing some 10 percent of the nation's hard currency, according to the Central Bank.

The Suez Canal has been important to Egypt, both in economic and symbolic terms, since it opened in 1869, drastically reducing the shipping time between Europe and Asia. President Gamal Abdel Nasser famously nationalized it in 1956 to help pay for the building of the High Dam in Aswan. Sisi likewise has hoped to capitalize on the canal's economic potential as well as its importance as a proud symbol of a nation rising from backwardness and dependency toward openness and development.

But a slowing global economy means that fewer goods are moving across the seas. According to a February report by SeaIntel Maritime Analysis, world shipping was down 20 percent last year. The International Monetary Fund forecasts that the world economy will expand by just 3.2 percent in 2016, down from 3.4 percent in 2014. China, which has enjoyed double-digit annual growth since 2002, is slowing down; economists predict that the world's second-largest economy will grow by just 6.5 percent this year. Meanwhile, oil plunged to below $30 a barrel in early 2016, down from around $100 two years ago. The low price of petroleum now means that it's often cheaper for ships to sail all the way around the Cape of Good Hope rather than take the Suez Canal, which shaves about 6,500 kilometers and 12 days off journeys between Europe and Asia.

Indeed, more and more ships are taking the long way, like they did centuries ago, before the canal was built. According to a February report by SeaIntel, between October of 2015 and December, 115 Asia-bound ships opted to steam around the southern tip of Africa rather than shell out steep Suez Canal tolls, which can easily reach $500,000 for freighters from Asia, according to the report. In a March article for the BBC, a representative of Dutch shipping firm Maersk estimated that it cost around $350,000 per ship to traverse the canal, while there were also stories of ships being required to hire local crews to facilitate their Suez crossing. "On each voyage, Suez costs a ship about £400 ($560) of cigarettes, as well as dozens of chocolate bars from the bond locker," said Rose George, the author of "Deep Sea and Foreign Going." Even without such "taxes," it's no wonder a critical mass of ships decided to make the longer journey based on calculations that could have saved them more than $200,000 per trip in 2015. "It is very rare to see this volume going around the Cape," shipping analyst Michelle Wiese Bockmann told the BBC.

In its February report, SeaIntel estimated that the canal would have to cut its transit fees by 50 percent to remain cost competitive for freighters. Oil prices have recovered slightly since then from around $30 to around $50 a barrel. Still, in early March, the Suez Canal Authority took the unprecedented step of offering a 30-percent discount to certain kinds of freighters on long-haul journeys, good for a 90-day period ending early June. Another deal was announced last month, featuring 45 percent to 65 percent off tolls through early September for certain kinds of ships heading to and from Asia and the Americas. Ahmed Shawky, head of logistics and shipping at the Canal Authority, called the discounts part of the "marketing strategy that the authority is undertaking to attract more freighters."

Cutting shipping tolls to boost traffic is not an uncommon practice worldwide and makes sense for the SCA under the circumstances, says Sherif el Demerdash, an economics professor at Cairo University. "The Suez Canal is operating in unfavorable conditions and has a lot of competition," he says, adding that the situation will get worse as summer wears on in the Northern Hemisphere and melting ice enables some ships to sail over the North Pole. In May, China announced via the state-owned press that its cargo freighters heading for the European market would go via the Arctic, docking in The Netherlands rather than at Mediterranean ports after crossing the Suez Canal, as they have in the past. Meanwhile, the June opening of the nine-year, $5.4-billion expansion of the Panama Canal to accomodate larger ships, shaves five days off the route between Asia and the Atlantic coast of North America.

Discounts are only a short-term Band-Aid on the situation, experts say. "I don't see that the solution lies in fees," says Hany Tawfik, an economist and director at the Egyptian Private Equity Association. But Tawfik does have high hopes for Egypt's plans to develop its maritime services industry: "The government, for once, had the right idea when it created the fully independent Suez Canal Special Economic Zone."

The authority, created last August, is headed by Ahmed Darwish, a former minister of administrative development under President Hosni Mubarak, who then oversaw the rollout of an e-government services program. The Suez Canal Economic Zone is slated to have six ports and a logistics facility. It aims to attract investment in a range of light to heavy industries, in addition to services like vessel bunkering, transhipping, shipbuilding and ship repair as well as in other sectors that could benefit from proximity to the canal, such as pharmaceuticals, food processing, electronics, textiles and petrochemicals. The infrastructure for the first phase of the project, which is scheduled to be finished in 2030, is estimated at $15 billion.

Darwish, who answers directly to the president, has the power to set regulations and procedures including licenses, land prices and taxes for the special zone. In June, he told reporters that the authority was considering giving away land free to "serious" investors. Seeking to assuage fears about Egypt's infamous red tape and unpredictable regulatory climate at an AmCham event last December, Darwish assured potential investors that "we are completely independent of the government decision-making process."
Despite all the hype, however, just one company has signed on, the state-owned Chinese-African TEDA Investment Group, which signed a contract with Egypt's General Authority for Investment back in 2013 to develop six square kilometers in the zone. TEDA recently finished laying the infrastructure for a 1.6-square-kilometer plot as part of its plans to build an industrial park there. "We are targeting seven manufacturing sectors, which are energy, transportation, the machine industry, the petrochemical industry, electronics, automotives, the light industry, and a section of the SMEs industries," CEO Wei Jianqing told The Middle East Observer last August. Darwish has also alluded to MoUs with firms including Japan's Toyota Tsusho Corp., which says it plans to build electricity and water desalination plants in the zone, and unnamed Spanish and Russian developers. But not a single new binding deal has been announced since the zone was established last August.

"We just seemed to stall after inaugurating it, despite there being an agency solely dedicated to continuing this development," says Hamdy Barghout, the business development director at Egytrans. In fact, speeding up canal crossings has also had an unintended chilling effect on local businesses that service cargo freighters. With waiting time at the canal now reduced from around 11 hours to just three, there is no longer time for loading food, refueling and other shipping maintenance services that have traditionally been performed by operators around the canal, says Gamal Morsy, deputy head of the ship servicing chamber at the Suez Chamber of Commerce, He reports a 50-percent drop in the freight servicing business since the expansion. "If a freight wants to be serviced, it needs to park, which means penalties for voluntarily stopping in addition to the docking fee," says Morsy. "As a result, the freight prefer to stop at another port where there are no penalties if they need supplies."

Darwish argues that developing the zone is a long-term process. "By 2020, the infrastructure we want will be up and running," he said confidently at a press event in March. The first phase of the project is supposed to be complete by 2030 and the second by 2050.

The Canal Authority may not be able to wait that long. The SCA is on the hook to pay back the LE 64 billion plus some LE 7.7 billion every year in interest it borrowed from the public via Suez Canal certificates to finance the canal expansion. The Central Bank promised when the certificates were sold back in 2014 that the repayment would come directly from canal revenues rather than from the national treasury. Payments on the certificates took 20 percent of the canal's 2015 revenues. Meanwhile, a number of reports have indicated that the SCA has borrowed from local banks over the past year in order to pay foreign contractors for their work on the canal project.

In the meantime, analysts and potential investors have raised concerns about whether the Suez Canal Zone is offering tangible incentives to the private sector. Specifically, they've objected to the 22.5-percent standard corporate tax rate set by the Ministry of Finance. Former minister and advisor for maritime transportation Ahmed Sultan told the Daily News Egypt in February that the steep tax was a "discouraging factor to any investor and is unsuitable for ports and free zones." Many raise the example of Jabel Ali, an industrial free port zone in Dubai that charges companies no tax for 50 years and offers other incentives such as guaranteed repatriation of their capital, freedom from import and re-export duties and currency restrictions and permission to hire a foreign workforce. The zone was established back in 1985 with 19 companies; currently it houses more than 7,100 firms from 100 different countries.

© Business Monthly 2016