KIN Journal: Engaging the Private Sector | April 2015
Unlocking a Regional Trade Bottleneck in Benin
Benin has a 121-kilometer coastline along the Gulf of Guinea and a population of about 10 million. The Port of Cotonou is the country’s only port. It is a pillar of Benin’s economic growth and drives the national economy. It employs 50,000 people and is responsible for 42 percent of the government’s total revenues. The Port of Cotonou’s contribution to West African economic growth extends far beyond the borders of Benin. The port also serves as the gateway to international trade for the landlocked countries of Burkina Faso (population 17.8 million), Mali (population 15.9 million) and Niger (population 16.9 million) and is a central pathway for international trade with Nigeria (population 174 million). The port has a direct influence on the efficiency of trade for an extended area and has the power to contribute to or constrain economic growth in a region with a population many times more than Benin itself. It is critical that the port be an efficient and competitive gateway for trade. Benin is on the path to achieving this objective through its first Millennium Challenge Corporation compact, which was implemented from 2006 to 2011 and included improvements in port operations and infrastructure and a new partnership with a private port operator. While the demand to expand the Port of Cotonou has been increasing, MCC’s involvement is the catalyst for the private sector participation and investment that is vital to the long-term success and impact of the expansion, locally and regionally.
Challenges at the port
For years, the Government of Benin wanted to expand capacity and improve operations at the port in order to increase government revenues long before signing the five-year, $307 million MCC compact in 2006.
Capacity issues related to port infrastructure created a freight bottleneck that impacted the port’s operating performance, placed it at a disadvantage in the region and reduced opportunities to develop external markets and industry for Benin and for the greater region. Addressing these issues was a primary objective of the Benin Compact.
Early in compact development, it became apparent that improving port infrastructure alone would not improve its ability to perform efficiently and meet the demand for services at the port. While port personnel had indicated interest in improving performance, changes to operations have proven difficult because of the strong, yet often conflicting, influences of government officials and local business leaders. Addressing these issues was the other primary objective of the Benin Compact.
The growth in freight traffic at the port in recent years resulted in congestion, with storage yards, wharves and roads saturated with freight traffic. Capacity issues included:
- Limited berth capacity: Vessels routinely anchored for days outside of the port, waiting for a berth to become available to service them.
- Limited storage and operational surface area: The demand for more operational surface areas resulted in scattered container storage areas far from the berths and making for inefficient operations.
- Limited loading and unloading space: Available handling space on the berth caused inefficiency in loading and unloading operations.
- Limited parking: Lack of parking space for trucks transiting to and from inland countries resulted in trucks parked randomly all over the port and roadways, impeding the movement of cargo.
While the port authority believed that new infrastructure was required to increase capacity, MCC recognized that capacity could also be increased by improving operating procedures. The port had two private and one government-owned stevedoring companies that handled all goods at the port. Over the years, various parcels of land were allocated to each company; as a result, the stevedores had to manage multiple parcels of land that were all over the port. This made it difficult to organize the storage areas efficiently. A condition precedent of the compact required that the parcels be rationalized such that each stevedoring company could operate within one area of the port.
MCC also required that the port engage an outside expert to help improve operating efficiency during the compact implementation period. This allowed the port to increase capacity prior to building new infrastructure.
MCC’s infrastructure investments and resulting improvements
The compact’s $169.5 million Access to Markets Project aimed to:
- Increase the port’s capacity to receive ships and freight throughput
- Improve the port’s operating efficiencies
- Update customs procedures
- Update security systems
- Improve the port’s capacity to protect the environment
Millennium Challenge Account-Benin, the local organization implementing the compact, used a portion of the funds to construct infrastructure and acquire equipment to meet the objectives of the project. Infrastructure and equipment improvements included construction of a new wharf on the south side of the inner harbor and creating two new berths and backlands to accommodate larger vessels and increase capacity.
The two new berths and ancillary roads, power and water supply provided the basic platform for a completely new South Wharf Container Terminal. MCC’s investment in the two berths, including vehicular and rail access to the new terminal and miscellaneous utilities for it, cost about $68 million.
The new container terminal more than doubles the capacity of the port to import and export cargo in containers. Because ship length, beam and draft have steadily increased in size over the years, the two new berths were designed and built to accommodate larger vessels up to WAFMAX class 1 , which can carry twice the number of containers than could previously enter the port.
These larger vessels provide economies of scale for freight transportation to the region, which in itself is beneficial. However, of equal or greater importance is that the port’s ability to receive larger vessels improves connectivity to maritime transport. Low cost and easy access by sea to suppliers and export markets has been shown to have an additive effect in terms of trade and growth. A 10 percent increase in maritime transport costs is associated with a 6 to 8 percent decrease in trade, other things being equal. 2
MCC’s compact conditions changed the status quo
Benin’s MCC compact came with a number of conditions precedent (CPs) that forced the government and the port authority to make hard decisions and break free from the status quo. MCC’s decision to invest $68 million in the South Wharf Container Terminal was contingent on satisfying the CPs that required the port to reorganize storage and other landside areas and privatize the operations of the new South Wharf Container Terminal.
To achieve the expected benefits from MCC funding, investment in the terminal required that the Port of Cotonou enter into a public-private partnership with a private terminal operator to provide the complementary investment and management services required to complete and operate the new facility. Previous attempts to improve operations and engage the private sector in revitalizing the port were unsuccessful due to the many parties, from government officials to local business leaders, who exercised undue influence on port operations.
The Government of Benin addressed this situation by contracting the International Finance Corporation (IFC) as its lead advisor to help competitively select the private operator to develop and operate the new container terminal.
Procurement process for public-private partnership
Private sector participation in the port’s operational processes, cargo handling equipment and complementary infrastructure were identified as critical to sustaining and maintaining competitiveness and ensuring that the port continues to add value to the region’s economy. However, previous attempts to engage the private sector in revitalizing the port had been unsuccessful—due primarily to a lack of understanding on how to structure private participation.
Publicly-owned and operated enterprises, with diffused ownership structures in the form of individual taxpayers or ratepayers, have little incentive to monitor performance and maintain operational efficiency. In contrast, private sector ownership is generally concentrated, resulting in clearer control and accountability. Private companies also face a fuller set of market disciplines requiring them to operate efficiently. The IFC’s involvement helped create an open and transparent process for awarding the concession, giving the private sector the necessary level of comfort to invest in the South Wharf Container Terminal.
The concession process started with a prequalification phase in March 2009, and was completed just six months later with the signing of the concession agreement. Six companies submitted prequalification documentation, four submitted the required information and three prequalified in May 2009.
The evaluation criteria focused on maximizing revenues for the Port of Cotonou. This was done by evaluating the fixed fees and variable fees applied to the traffic volumes guaranteed by the bidders. The winning bidder, Groupement Bolloré, is composed of Bolloré of France (the largest logistics provider in Africa) and Société de Manutention du Terminal à Conteneurs de Cotonou, a Bolloré affiliate in Benin.
The transaction structure is based on a 25-year concession agreement that spells out the concessionaire’s responsibilities, including a $30 million fixed fee payment to the port authority upon entry into force of the concession agreement (which began in 2009), commitment to begin terminal operations 18 months from the date of the concession’s beginning, payment of $256 million in concession fees during the first eight years of operations, and an investment of $256 million in operating equipment and civil works over the life of the agreement.
The concessionaire is required to install and maintain various critical physical infrastructure elements, including the container yard pavement, access gates and gate control system, roadways, power distribution, lighting, as well as potable and fire water distribution systems. In addition, the agreement called for the concessionaire to build and maintain a sewage collection and treatment system, container handling equipment, cranes, and administration and maintenance buildings.
The concessionaire completed all of the required initial investments by January 2013, and started operating the terminal on July 1, 2013, following an employee training program.
Under the concession agreement, the Port of Cotonou is required to provide and maintain an entrance channel suitable to accommodate vessels up to WAFMAX size. To accomplish this, the port will modify the breakwaters that protect the harbor entrance, dredge the entrance channel to a depth of 15 meters, upgrade the port’s electric power supply, and provide additional navigation aids, including channel markers and navigation lights.
This work is currently underway with a budget of $71 million. The source of financing for this work comes from the fixed fee ($30 million) paid by the concessionaire and a loan that will be paid using the concession fees.
Results of the compact
According to the IFC, the MCC investment in the South Wharf Container Terminal will have a range of positive effects on the local and regional economy. The project is projected to have an impact of as much as $300 million and create more than 450 jobs at the port alone. The project attracted $256 million in private investments in operating equipment and civil works, and it is expected to increase container traffic in the first eight years of operation from 400,000 twenty-foot equivalent units (TEUs), to more than 723,000 TEUs. Other benefits include reducing transportation costs, expanding export corridors to regional countries and increasing Benin’s opportunities to develop external markets.
Conditions precedent can be a powerful tool in motivating a country that receives donor funds to change the status quo, as is currently occurring in Benin. Donor investments in infrastructure projects can be effectively leveraged with private sector participation. However, not all roads should be toll roads and the health benefits of many water projects are more important than the profits that can be generated from them. Good candidates for leveraging donor investments with private sector participation are infrastructure projects that form a platform for commercial transactions where the private sector is already involved in providing services.
Structuring a public-private partnership requires technical, financial, legal, and commercial expertise that is typically inconsistent and often lacking in developing countries. Involving experienced, independent, third-party advisors is critical to ensuring that the public sector feels confident in the equity and sustainability of the arrangement. And the involvement of independent advisors provides the private sector with the assurance that their proposals will receive the unbiased, industry-appropriate and region-specific evaluation they require to enter into a partnership.