Crowdfunding the canal?
 
 
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After deciding that the financing needs of the Suez Canal development project will be pooled from investment certificates made available to the public, authorities have announced that Egyptian pound-denominated certificates will be available locally and abroad.

Dollar-denominated certificates are still under discussion, while restricting the purchase of the Suez Canal Investment Certificates to Egyptian individuals and legal entities reflects the government’s strong desire to create and preserve a national identity for the mega-scale project.

A specific date has not been set, but the certificates will be available to the public after a presidential decree is passed to ratify a law drafted by the Cabinet, which allows the Suez Canal Authority to issue certificates.

The Central Bank has already printed six million certificates, according to Central Bank Governor Hesham Ramez, who spoke about the details of the financing scheme at a press conference on Sunday. Egyptians living abroad will be able to buy certificates from corresponding local banks once they are announced on the CBE’s website.

Guaranteed by the Ministry of Finance, the values of the non-tradable certificates range from LE10 to LE100 to LE1,000 and carry an interest rate of 12 percent. For certificates of LE1,000 and above, the interest will be distributed every three months, while for the lower brackets, the accrued interest will be distributed cumulatively at the end of a predetermined 5-year maturity period, according to the Aswat Masriya news portal.

After promising that he had a “surprise” for the Egyptian people, President Abdel Fattah al-Sisi unveiled a plan to expand the Suez Canal during a televised speech on August 5.

The opening phase in a larger plan to develop the canal region into a hub for global trade, industry and logistics, the canal extension is to involve dry digging a new waterway 35 kilometers long, as well as 37 kilometers of expanding and deepening the existing canal, for a total of 72 kilometers.

In line with public fundraising efforts such as the Tahya Masr fund, officials announced that the digging, with an estimated cost of around LE60 billion, would be funded by public contributions. The canal expansion will allow two-way traffic and ease bottlenecks along the canal, cutting transit time and allowing larger ships to traverse the waterway.

Ramez said that the lower priced certificates are meant to “encourage every segment of society to contribute to the project,” adding that banks will send representatives to schools in a bid to attract students. He added that authorities are expecting a lot of demand that should easily cover the total costs of the project. If not, participating banks will come together and grant a collective loan to the government.

Overall, the expansion and development plans are expected to increase canal revenues to US$13.5 billion by 2023, compared to $5.3 billion last year, Ramez said on Sunday.

The project was lauded as a national achievement, on par with the construction of Aswan’s High Dam. In an essay typical of the genre, Ahmed al-Naggar, head of government think tank the Al-Ahram Center, described the canal expansion as a “giant national project that is a main gateway for Egypt’s economic boom to summon the savings capacity of the great people of Egypt, at home and abroad, to build the future, destiny and path for their country with the money, brains and achievements of the people.”

At first, officials said the canal would be financed through an initial public offering, floating shares on the Egyptian Stock Exchange. Then, on August 14, Prime Minister Ibrahim Mehleb announced the canal would be funded by five-year investment certificates through the four main state-owned banks: Banque Misr, the National Bank of Egypt, Banque du Caire and Suez Canal Bank.

Banks will issue ATM cards so eligible investors can withdraw the accrued amount every three months, and private banks can request certificates from participating banks on behalf of their customers, Aswat Masriya quoted Ramez as saying. Certificate holders are eligible to apply for loans from issuant banks for up to 90 percent of their certificate value.

But questions surround the viability of this new method of financing a national project on this scale, as well as the feasibility of the expected dramatic rise in canal revenue.

Ahmed al-Zahar, director of investment banking and corporate finance at Cairo Financial Holding, attributes the delay in issuing certificates to administrative issues from both banks and the government. “This is a totally new vehicle,” he says. “Even if it’s delayed for one week or so, it will not take as much time as releasing new stocks.”

Shifting from selling shares to issuing investment certificates was a good move, says Hany Tawfik, chairman of the Egyptian Private Equity Association. “It’s a sovereign decision that was right, in my opinion,” he says.

Under the IPO scheme first proposed, investors would have been able to buy and trade shares in the project itself. If the investment proved profitable, shareholders stood to benefit from large returns, but if the canal lost money or was delayed, investors could have lost money without any recourse to the government.

By offering shares, the government would have been able to shift risk to investors, but it would also have given up full ownership of the project. This, says Tawfik, would have been unsuitable for a project of this scale and importance. “It should be owned by the country and not by the investors,” he says. 

Investment certificates function more like municipal bonds: essentially, members of the public loan money, for a set term at set interest rates, for a specific public project. However, they do not acquire ownership of the project itself. Selling investment certificates instead of shares means the government keeps full control of the project and that it has to pay back the money with interest.

The Suez Canal certificates will be guaranteed by the Ministry of Finance, with money for interest payments to come from canal revenues, explains Zahar. Even without any expansion, the Suez Canal reliably brings in $4-5 billion per year, or more than LE28 billion, more than enough to cover interest payments. Therefore, as Zahar says, “The risk is minimal.” 

However, issuing investment certificates backed by Suez Canal revenue is not necessarily a move without costs for the treasury. The Suez Canal has been one of the few reliable sources of revenue for Egypt’s government, which anticipates a deficit of 10 percent of GDP this year. Investment certificates also have a bonus for consumers that isn’t necessarily a benefit for the state. “Investment certificates are tax free, while bonds are subject to tax,” says Zahar.

The investment certificates, which offer a higher rate of return than comparable bank deposit schemes, could also put a dent in Egypt’s bond market, another key source of treasury funds — though Ramez assured the media on Sunday that this would not happen.

On August 25, a planned Central Bank auction of bonds LE2 billion worth of five and 10-year treasury notes was canceled. Bloomberg attributed the CBE’s decision to cancel the sale to high yield demand from bankers, who fear their funding costs will go up as the certificates enter the market. Comparable five-year certificates of deposit at local banks generally yield less than 10 percent interest.

Tawfik also questions edict to bar foreigners from purchasing certificates, especially since investing funds in the project will not confer ownership. The government should seek to bring in new money, instead of chasing after the same old deposits. “Not allowing foreigners to participate does not make sense anymore,” he says.

Zahar, however, is confident that demand for long-term investments is robust enough to fund both bonds and the new certificates, pointing out that the loan-to-deposit ratio for local banks is a low 50 percent.

The key long-term question, however, is whether the canal expansion will indeed bring in enough new funds to justify its expense, particularly at a time when the budget is so tightly squeezed. “I’m worried more about the [expected] increased revenue,” says Tawfik.

Neil Davidson, an analyst at London-based maritime advisory firm Drewry explains that waiting time is just one of the many factors that affects shipping volume through the Suez. “The level of use of the canal is primarily driven by macroeconomic trade factors on a global basis, i.e. well beyond Egypt. The canal is a gateway and shortcut for world trade and the level of vessel transits are driven by world factors first and foremost,” he told Mada Masr by email.

To increase revenue, the canal would have to either have more ships pass through or charge more money per ship. Traffic, dependent largely on patterns of global trade, is not under Egypt’s control.

“While the reduced transit times should encourage more transits, it is just one of many factors which have an influence on activity levels,” said Davidson.

Egypt can unilaterally set canal fees, but increased costs at Suez could tip the balance in favor of alternate trade routes. “Shipping lines are already sensitive to the current level of tolls and clearly there is an elasticity of demand for canal usage,” says Davidson.

“People are worried about the feasibility and viability of the project,” says Tawfik. In addition to questioning the likelihood of a jump in revenue due to shorter waiting times, Tawfik says he is also concerned about the way the digging is being carried out.

Normally, he notes, massive public works projects begin only after technical feasibility studies have been carried out and financing secured. “They did it the other way around. They started digging, then they did the financing and technical feasibility studies,” he says.

“I’m not very happy about the way he announced the decision,” Tawfik adds, commenting on Sisi’s speech.

In the course of his televised address, Sisi asked Suez Canal Authority Chairman Mohab Mamish, whether the project timeline could be shortened from a planned three years to just one year. On the spot, Mamish agreed, without consulting managers or technical experts.

“It’s not the army, you have to go back to the assistants,” says Tawfik. “I’m not very happy with the way it is handled, but I hope it succeeds because we can’t afford to fail. It’s a lot of money.”

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Amira Salah-Ahmed 
Isabel Esterman