Oct. 31 (Bloomberg) -- Egypt’s planned reduction of fuel subsidies to tackle the Middle East’s biggest budget deficit is sending more barges down the Nile, one of the world’s oldest trade arteries.
The share of cargo moved through the Nile was only 0.5 percent of Egyptian traffic in 2010, an Egyptian-Japanese study shows, as diesel costing less than half what it does in the U.S. tips the balance toward trucks and railroads. This advantage will erode once President Mohamed Mursi starts cutting subsidies to narrow a budget gap that’s 11 percent of economic output, according to Beltone Financial Holding, a Cairo investment bank.
Small-scale subsidy cuts for premium fuels may start before June, while the rest will be in the next budget, Fitch Ratings says. In anticipation, Cairo-based private equity firm Citadel Capital SAE has invested more than $200 million on barges, ports and storage facilities that are already handling shipments of wheat, cement and phosphate. Within five years, the share of cargo moved by river may jump to at least 15 percent, said Stephen Murphy, a managing director at the company.
“As soon as you see a rational subsidy program, or a removal of the irrational subsidy program, the Egyptian operation will turn profitable,” Murphy said in an interview in Dubai on Oct. 15. “We’ve got a range of barges that can take any cargo today. We’ve got the cranes, the handling equipment and we’ve got the storage capacity.”
The investment is part of Citadel’s plan to develop transport infrastructure in Nile basin countries. Founded in 2004 with headquarters overlooking the river, Citadel now has $9.5 billion in total investments.
Part of the transport program is carried out via Nile Logistics, which invests in Egypt, Sudan and South Sudan. The unit has refurbished 31 used barges and built four 100-meter barges, each capable of carrying 1,200 tons, and plans to develop two more ports in Egypt, Murphy said.
Mursi, an Islamist politician, won the country’s first free presidential election in June, marking another milestone in the transition to democracy after last year’s popular uprising ended Hosni Mubarak’s three-decade rule. The chaos that accompanied the revolt plunged the economy into the worst slowdown in almost two decades, prompting the government to approach the International Monetary Fund over a loan agreement to restore investor confidence and revive growth.
Investor optimism about the election and the talks have supported a 57 percent gain in Egypt’s benchmark EGX 30 Index so far this year. Citadel Capital shares, which fell 2.2 percent today, have soared 59 percent in the same period after the company “managed to narrow its losses” by 70 percent in the second quarter and raised $3.7 billion to build a refinery in Egypt, said Allen Sandeep, a researcher at Beltone Financial who has an add rating on the stock.
Rocks to Temples
Ancient Egyptians revered the Nile as a source of water and land fertility. They used the river for passenger transportation and to ferry rocks from quarries to the sites of pyramids and temples in Giza and Luxor. Until the 1952 military coup that overthrew Egypt’s monarchy, traders used the waterway to carry grain and food across the country, serving a population that mostly lived on the banks of the river.
River ports and locks were left to deteriorate after 1952, when military rulers introduced food and energy subsidies as they sought to turn Egypt into a socialist state.
Six decades later, rising domestic consumption has turned the most populous Arab country into a net fuel importer, forcing the government to increase spending on energy subsidies last year to 96 billion pounds ($15.7 billion), or almost twice the amount it spent on education, according to official data.
Mursi has vowed to overhaul the system, which he said was riddled with corruption and waste. A “successful reform of these subsidies is the single-biggest reform the government can make to improve Egypt’s fiscal position or free up revenue to spend elsewhere,” Fitch Ratings said in a statement on Oct. 9.
An eventual removal of subsidies is also on the wish list of the IMF, whose technical team arrived in Cairo yesterday to resume talks with the government for a $4.8 billion loan.
Citadel’s gains from the planned subsidy cuts are a “long-term positive beyond five or six years from now, especially given where they are in terms of developing the Nile Logistics infrastructure,” Sandeep said by phone on Oct. 18. “The company does have a point, though, as traders will likely look for alternatives for transport once subsidies are gradually phased out for diesel or gasoline.”
The concern that deterred Mursi’s successors from cutting subsidies may tie his hands until a new constitution is approved and parliamentary elections are held due to concern that an earlier move would stoke unrest, said Cairo-based Mona Mansour, co-head of research at investment bank CI Capital Holding.
“They’re moving so slowly in terms of implementing reform,” Mansour said in a telephone interview Oct. 18. “I refer back to the sensitivity of the issue, and that it might create social resentment.” The delay may leave the country’s budget deficit this year little changed at 10 percent of gross domestic product, she said.
Diesel prices at the pump averaged $0.32 in Egypt between 2007 and 2011, compared with $0.84 in the U.S., according to World Bank data. A doubling of the cost of diesel in Egypt will increase the costs of land shipments “significantly,” said Citadel’s Murphy. “If you think about trucks, 65 percent to 70 percent of their cost is fuel, versus our situation on a barge, which is 30 percent to 35 percent,” he said. “All of a sudden, the economies that you get from barges are huge.”
Citadel Capital plans to expand Nile Logistics’ fleet by almost a third to 58 vessels by mid-2014, the company said in an e-mailed statement Oct. 21.
Citadel’s cross-border transport project also includes a controlling stake in Rift Valley Railways Ltd., which operates a 2,000-kilometer rail link from Mombasa in Kenya to neighboring Uganda, dubbed the Lunatic Express during its construction in 1896 when many of its builders succumbed to tropical diseases and lion attacks.
Nile Cargo’s operation in South Sudan is offering a glimpse of the future. In the absence of subsidized fuel, the company is making a profit on a $20 million investment, Murphy said, moving cargoes of wheat and other goods to remote destinations.
The company signed a five-year contract in 2010 with Egypt’s government to transport as much as 2 million tons of grain a year.
“If you’re an importer of grain, today we can go up to your ship in Alexandria, get our floating crane, take it off into a 1,200 ton barge, float it into our warehouse and keep it there,” Murphy said. “That’s highly efficient compared with having 70 trucks lined up in a port that’s extremely busy.”
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