Gordon Feller reports
The lack of state vision meant that legal and regulatory frameworks did not develop as fast as logistics and transportation providers would have liked. “Our major problem is licensing. The market is over-regulated in that respect,” says Hussam Leheta, Chairman and Executive Director of Egytrans Holding, a transportation and logistics conglomerate. “Each activity we perform needs approvals from different government entities, and some need approvals from more than one entity.” According to Leheta, the licensing process became more difficult during the past 10 years for no obvious reasons. Mohamed A Hashish, Vice Chairman of Egyptian International Shipping, notes that there were security concerns and anyone seeking to expand or enter the business needs to go through a “pinhole,” meaning “facilitation payments.” “This is a major reason why foreign investors shied away,” he says. Aside from such under-the-table transactions, the bureaucracy was a serious impediment, according to Sherif Helmy, CI-Capital Senior Vice President. Projects would take twice as much time to get done in Egypt as they would anywhere else, he says. George Wadie is Managing Director of Damco Egypt, the logistics arm of AP-Moller Group with 280 offices globally, which operates a cargo terminal in East Port Said. He sees an important role for the new government. “We need better legislation to govern inland transport, especially land transport, as well as to address the quality of service and training of people,” he says. Gihan Rashad, line shipping manager for Gulf Agency Company, a Swedish shipping firm, says part of the problem is the erratic implementation of regulations. “I had a client who would always use Alexandria seaport because the shipment is processed faster than other seaports in Egypt,” she says. “We have sufficient regulations. We just need to implement them properly.”
Logistics in Egypt can be divided into three main categories: seaports and related services such as scheduling, docking, cargo storage and maintenance; inland transport, which is divided to land (93 percent), rail (6 percent) and river (1 percent); and the Suez Canal, which brought in LE 25.3 billion in FY2009/10, or about 3.2 percent of GDP. The rest of the transportation industry generated LE 35.3 billion in goods and services, or 4.1 percent of GDP, according to the Central Bank. Logistics and transportation represent 11.3 percent of total Egyptian investments, and government companies comprise 48 percent of the logistics and transportation industry. Large scale foreign investments are still new to a sector that in many ways is still in its infancy. “Companies have entered the market only in the past 10 years with the opening up of the Egyptian economy, globalisation and an increase of trade traffic,” says Wadie. “Actual investment in the necessary infrastructure began 15 years ago.” This open market has allowed investments by Dubai World in the Port of El-Sokhna, Hong Kong-based Hutchison in Alexandria and AP Moller Maersk in East Port Said, and smaller Italian investments in Damietta’s seaport. Several domestic companies have also grown as a result of this economic openness. Egytrans Holding is unique in Egypt in that it provides complete supply chain services from freight management and packaging through distribution. Egyptian International Shipping, which operates vessels between Asia – primarily Japan – and Egypt, diversified to provide shipping agency services when the market opened up in 1998. By nature, the logistics and transportation market structure is fragmented. “I can’t talk about the transport and logistics sector without separating it into industries. Some are consolidated, such as container storage, others are highly fragmented like shipping agencies,” says Helmy, of CI-Capital. Looking at the logistics and transportation sector as a whole, there are less than 20 large-scale providers per service and hundreds of niche providers, which are difficult to count. “Someone can own a warehouse and rent it,” says Rashad. “There is no operational structure, process or procedure.” Such fragmentation makes it difficult to determine and compare loading and discharging rates. “It is also causing services to be very basic,” says Rashad. “The more consolidated the market, the easier it will be for large-scale companies to offer better services, expand services and standardise them across the country,” says Wadie. lf market consolidation is to occur, it will require foreign investment. “There is a large investment potential because the existing level of services is very basic, whether it is port services or inland transportation,” says Rashad. The government would have to be the main facilitator because of security considerations and the huge expense involved. “Shipping is a massive industry all over the world. But these investments are not seen. Container ships could cost $500 million, bulk ships $70 million,” says Hashish. “These ships are like mobile cities, their needs are endless.” Public-private partnerships (PPPs) are seen as a good investment promotion tool, and many logistics experts say investors would be comfortable with having the government commit to a project by being a partner. However, Hashish believes that having a special mechanism for PPP is not necessary. “Let everyone work alone, then if the circumstances dictate that the government needs to work with the private sector, then it should be under standard laws of partnership, it doesn’t need special legislation,” he says. Leheta has reservations, “This [PPP success] will really depend on the policies of the permanent government. The key is to let investors work and not intervene all the time. Overall, the PPP program is designed for large investments like logistics and transportation,” he says.
Finding an effective solution
A more effective solution with a huge impact might be a one-stop government shop to serve existing and new investors. Currently, the sector deals with ministries of Transport, and Trade and Industry, and sometimes security agencies and the military. “The majority of our problems are [related to] ministerial decrees, so it will only take the minister to decide to make it simpler for us,” says Leheta. He also suggests a central booking office for inland transportation. “A major problem we face, in land transportation in particular, is that the return trip is usually empty. This means double the cost,” he explains. Rashad hints that having all forms of transportation under a single ministry is a formidable task, and that it would be better to divide up responsibilities among several ministries.
To properly develop this sector, the government will have to do more than facilitate licenses and eradicate corruption. “There has to be an integrated master plan led by the Ministry of Transport and involving other related ministries,” says Leheta. This master plan would eliminate overlapping jurisdictions. “This was the reason why a master plan did not exist. There was a joint committee to facilitate transport and trade, but it was frozen in 2005,” he adds. Inland transportation will require serious investment in roads, railroad tracks, river depots and barges. “There haven’t been a lot of viable opportunities offered by the government,” says Wadie. And that has caused an imbalance. “Notice that land transport is the most expensive and risky in terms of delay, pollution and possibility of damage. Yet it is 93 percent of transportation flow,” explains Helmy. Wadie believes it is cheaper to invest in land transport because its infrastructure already exists, and that developing river and rail transport will require massive investments. “The key is to develop roads based on logistics and cargo needs [rather than for personal mobility]. So a highway between Borg El Arab industrial area and Alexandria Port would have priority over the highway connecting Shoubra with Sixth October City,” he says. “When the cost of trucking starts to increase beyond that of rail and river transport, then we wil
l start looking at these two alternatives.” However, everyone agrees there is a dire need for improvements in truck maintenance and the quality of drivers. For Hashish, river transport will have a significant impact. “Looking at Cairo, good river transportation could move a million people a day, and those boats could be solar powered like in Germany,” he says. The increasing flow of goods and omnipresent traffic jams will invariably lead logistics and transportation companies to consider rail or river investments, such as Citadel Capital’s investment in wheat barges and a river port 20km north of Cairo. According to Helmy, ideally river transport would account for 5 to 6 percent of inland transportation and railroads 10-20 percent.
Egypt as a port hub
Maritime transport will invariably see more activity as nearly 40 percent of global oil transfer and 15 percent of trade traffic pass through the Suez Canal, and Egypt’s seaports handle 90 percent of imports and exports. As much as 50 percent of international shipping is container shipping and that accounts for 60 to 70 of commercial cargo, says Hashish. He sees Egypt’s largely undeveloped 2,000km coastline as a huge asset. “The vision is Egypt as a port hub,” he says. “Foreign investors, in general, like mega-projects such as port management,” says Leheta, and only three of Egypt’s 40 ports have international operators. There are other less expensive investment opportunities in providing ship-related services such as food, laundry, supplies, cleaning and maintenance, and general and specialised warehouses. “The best place in the world to do a crew change, for example, is the Suez Canal, yet ships prefer to do it elsewhere because of rigid security and bureaucratic complications,” says Hashish. “The Suez Canal in general needs more investments. The government has been treating it as passage, not an investment magnet.” Rashad fails to understand why the plot of land east of East Port Said Port operated by AP Moller-Maersk is still not used as a logistics and transportation hub five years after the port was opened. “All logistics services and transportation to inside Egypt are currently done in old Port Said,” she says. “This is extremely inefficient and means that ships dock longer than necessary.” Hashish sees used coastline as a good opportunity for ship scrapping ventures. “It is quite cheap and extremely labour intensive and requires very little training. This scrap can then serve other industries like steel, aluminum and alloy producers, to name a few,” he says. A less prominent opportunity for investment is supplying crews for the ships. “The majority of ship crews come from Southeast Asia and Russia. We can’t export ours because of their poor education level,” says Hashish. “There are international schools for logistics management and maritime sciences, why not attract them to invest in Egypt?” asks Rashad. Logistics experts agree that what is needed is being included in the plans of a government that clearly communicates strategies and benchmarks. “In logistics and transportation, the problems are clear. The solutions are also clear. Short-term solutions like the one-stop-shop are simple. Long-term solutions are more difficult but doable,” says Leheta. Foremost among them is a government that facilitates development and then does not interfere.