Israel’s insurance policy

Can Israel offer an overland rival to the Suez Canal? Published in Lloyd's List, 6 March 2012

Prompted by the tumultuous political events in the Middle East over the past year, Israel is now pressing ahead with a plan to connect its ports on the Red Sea and the Mediterranean with a freight and passenger rail line.

The project has been talked about for years and involves a 350 km line from Eilat on the Red Sea coast to Tel Aviv on the Mediterranean, also linking up with the ports at Haifa and Ashdod. In theory, this could open up a new route for goods coming from Asia and East Africa to Europe and North America, bypassing the Suez Canal.

When he formally presented it to his cabinet in late January, Prime Minister Benjamin Netanyahu described the project as “a line for moving freight from Asia to Europe, which will create a very great interest on the part of Asia’s rising powers, China and India”.

However, there are some doubts about whether it can be anything more than a route to move goods to Israel’s major cities in the centre and north of the country, given the geographic and environmental issues at Eilat port.

Israel’s Red Sea coast is just 11 km long and the local ecosystem is both delicate and the basis of an important tourist industry. All these factors militate against large-scale development of the port.

“Eilat cannot accommodate many container vessels,” says Avi Weitzman, chief operating officer of the local Ofer Shipping Group. “As a transhipment port I don’t think it will work. The port cannot handle big number of teu. It only makes sense as an import route into Israel.”

Currently, Eilat port handles 6% of Israeli cargo traffic and is the country’s main gateway for phosphate and potash exports to the Far East and for vehicle imports from Asia, according to the Israel Ports Co. The port has a capacity of 200,000 teu a year, says Israel Ports Co, but container volumes have dried up since peaking at 59,000 teu in 1991.

The new rail line, which was approved by the Israeli cabinet on February 5, could reinvigorate the port but there are many hurdles to overcome before it is completed, not least the issue of funding.

A team chaired by Harel Locker, director general in the Prime Minister’s Office, has been appointed to consider three financing options, including bringing in another government to help pay for the project, attracting private sector finance, or paying for it directly out of the state budget.

Mr Locker’s team is expected to make a recommendation in May, which will be followed by a design phase. At that point it will become clear whether the rail route will offer a realistic alternative to the Suez Canal as the capacity of the railway will become known.

According to the Ministry of Transport, the statutory planning process should be completed by the end of 2012 and construction work is expected to take five years. Israel Katz, Minister of Transportation, National Infrastructure & Road Safety, has said that his preferred option is to contract out the work to Chinese firms.

”Experience has shown that the ability of Chinese companies specialised in building systems and rail transportation networks is one of the best in the world,” Mr Katz said in a statement on January 25, ahead of the cabinet discussions.

Even if the constraints at Eilat port mean that the rail project only creates an alternative import route into Israel, rather than an new transhipment point, it will still be welcome by local shipping companies. Mr Weitzman says that avoiding the Suez Canal could significantly cut the cost of imports from Asia.

However, politics rather than economics appears to be the driving force for the government. Mr Netanyahu appeared to acknowledge as much when he said on February 5, after the cabinet had approved the scheme, that “we have the ability to create an alternative transportation route that bypasses the Suez Canal – this is an insurance policy”.