Cash flow

“Recreating an entire industry” is almost certainly among the more ambitious aims ever to have been voiced by an investor in infrastructure. These, nonetheless, are the words chosen by Hisham El-Khazindar, managing director at Egyptian private equity firm Citadel Capital, to capture the firm’s sense of purpose as it continues to build out Nile Logistics, the river transport platform company launched as a greenfield investment by Citadel in September 2006.

While the River Nile has been a vital means of transport almost since time immemorial – for example, the stone blocks used to construct the Pyramids were shipped down the Nile from Upper Egypt – this all changed around the 1960s to 1970s. From then until around the time of Citadel’s investment, the river was neglected and polluted; investment in infrastructure was sparse; vessels grew old and obsolete; and there were allegations that river transport companies lacked professionalism. And this was the point at which Citadel spotted an opportunity.

El-Khazindar reflects on two anomalies that the company was seeking to exploit. Firstly, although Egypt boasted a large freight transport market, it was “very fragmented and there were few professional and reliable service providers for large local and multinational businesses. We saw the chance to offer a cost-effective, door-to-door logistics service in a market growing significantly.”

Secondly: “In developed economies, a majority of bulk cargo and container transport is by rail, and by river in countries blessed with waterways, especially over long distances. Trucks only have an advantage for short-haul transport of goods with a short shelf life.” In Egypt, he says, the make-up of the transport sector is very different: an overwhelming 95 percent of the market is accounted for by trucking, 4 percent by rail and less than 1 percent by river.

Citadel believed that this dominance of trucking could be challenged. On the one hand, trucking offers speed of delivery which barges cannot match – with a maximum speed of around 15 kilometres per hour, a typical barge may take days to complete a journey that would take a truck a matter of hours.

However, a barge can transport around 40 to 50 times the amount of goods as a truck and also has lower relative fuelling costs. The cost of maintaining a river for transportation purposes is also cheaper than maintaining roads – roads which, in Egypt’s case, take a pummelling from the estimated 1 million trucks currently rumbling along them (more than half of which are estimated to weigh more than 30 tons).

Together with the difficulty of meeting environmental targets with such a strong bias towards road transport, no surprise that the Egyptian government has been looking to reduce trucking subsidies at the same time as encouraging a renaissance in river transport.             

This, of course, played nicely into Citadel’s hands. Says El-Khazindar: “We saw the opportunity to address the imbalance…and build a logistics business using river transport as a backbone due to its cost-effectiveness and positive environmental impact.”

Diluting the risk 

Backing its conviction, Citadel initially invested $80 million of equity in Nile Logistics. It has since added a further $30 million to reach $110 million of spending, with another $40 million of equity set aside for future use. Together with $300 million of debt, the project has a total valuation of some $450 million.

This, El-Khazindar says, makes Nile Logistics a large project by Egyptian and African standards. It is also one where, he believes, the returns are potentially much higher than for a typical infrastructure project and also one where the risks can be diluted. “It’s not a typical PPP-type, low-risk, low-return deal. It’s one where there is a regulatory framework, but it’s essentially about a private equity firm taking the lead in building a company.”

In fact, government involvement – while not in the form of a PPP or any kind of formal partnership – was nonetheless crucial. A statement on the website of Egypt’s ruling National Democratic Party makes clear why assistance was forthcoming: “An upgrade of Nile River transport would achieve a national goal and that is reducing the pressure on roads, which would of course reduce maintenance costs”.    

The Nile Logistics deal was effectively made possible by the government’s investment of $150 million over the last five years in a programme to refurbish the Nile’s locks, dredge parts of the river and install irrigation aids. Despite there being some remaining dredging issues, El-Khazindar says the government’s intervention was an “important prerequisite” to Citadel’s ability to start operations.

He adds that a new regulatory framework for river transport operators was also significant. “On the regulatory side, two years ago new regulations were introduced which empowered the River Transport Authority to licence barges and ports. That framework was important in terms of setting the right standards. It was also enlightened in that it provided an open door to private sector players.”

One step at a time

As well as the importance of government investment and regulation, the incremental nature of the project also offers a way of mitigating risk. “Unlike a power plant or a road, which all gets built at once, you can start with a relatively small number of barges and a minimum number of ports,” says El-Khazindar. “Then you can build additional barges and develop the river terminals’ network incrementally as the model is proven and the demand increases. This approach has allowed us to manage risk.”     

Nile Logistics has grown from a concept to the largest river transport business in Egypt in less than four years. The firm comprises three divisions: Nile Cargo, which owns and operates 31 goods-transporting barges, with a further 62 barges being built; Nile Ports, which builds and operates river ports and logistics hubs along the Nile; and Keer Marine, an owner and operator of 20 barges in Sudan that was acquired in January 2009 and will serve as Nile Logistics’ platform in the under-served Sudanese market.

Nile Ports has been the recipient of two major contracts. In 2008, it was awarded a contract to transport 750,000 tons of coal and coke between Alexandria and Tebbin for the Al-Nasr Company for Coke & Chemicals, one of the largest producers of metallurgic coke in the Middle East.

Then, in March 2010 – almost a year after having appointed former Hutchison Ports head of business development Michael Power as chief executive – it commenced a five-year contract to transport up to 2 million tons of wheat annually along the Nile for Egypt’s General Company for Silos and Storage.

Citadel says the rollout of Nile Logistics’ river transport network will create 500 new direct jobs and 1,500 indirect jobs in 2010. Part of the plan is the current development of four additional ports at Tebbin, Alexandria, Beni Suef and Minya and planned development of a further two ports at Assuit and Aswan.

The recreation of an entire industry? Perhaps Citadel still has its work cut out to achieve this lofty aim – but no one should doubt the ambition or progress made to date.