The West African port landscape has evolved rapidly since the turn of the century despite a slow start in adjusting to the requirements of modern liner shipping and containerized trade.

Ports have always played an essential role in this highly trade-dependent region and have long suffered decrepit infrastructure and poor management. While there are still wide disparities in terms of throughput volumes and capacity, traffic has been growing rapidly in most countries over the last decade. Overall, total throughput in West Africa has grown from around 105 million tons in 2006 to 165 million tons in 2012. Likewise, containerized traffic remains comparatively limited in West Africa but has grown faster than in any other region in the world over the last five years. The combined throughput of container terminals in the region reached almost 5 million twenty-foot equivalent units (TEUs) in 2013, twice as much as a decade ago, and is expected to keep growing fairly rapidly.

Throughput at West African ports comprises containerized trade generated by coastal and landlocked countries, plus the additional port movements created by transshipment at regional hub(s). Trade-related demand is forecast based on the historical elasticity of container trade with respect to GDP in the region and projections for GDP growth, with assumptions on the allocation of coastal and landlocked countries to various maritime ports (domestic ports handling domestic traffic for coastal countries, and for landlocked countries, allocation is based on current corridor efficiency). Transshipment is more difficult to predict, as it ultimately depends on the global strategies of the shipping lines and the organization of their liner networks, i.e. whether they rely on a transshipment hub outside of the region (e.g. Algeciras/Tangier Med/Valencia in the Mediterranean for the north option, or the South African ports for the southern option) or decide in favor of a West Africa hub.

The spread of container terminal concessions over the last decade has arguably been the most transformative change for West African ports. By the early 2000s, ports had become obstacles to the integration of trade in their respective countries with degraded infrastructure, inadequate facilities and equipment, inefficient operations and prohibitive tariffs. Despite comparatively low traffic, most ports were reaching saturation and shipping lines were levying congestion surcharges. Given the absence of sufficient public resources to invest in container terminal upgrades and improve productivity, concessions to specialized Terminal Operating Companies (TOCs) were seen as “silver bullets” to modernize West African ports, notably through better equipment and management. This followed a global trend started in the 1990s towards increased private sector participation in port operations and investment, and the transition from the public service port to a landlord port model. Between 2003 and 2010, concessions for container terminals were signed for all major West African ports. This has been followed in recent years by a new wave of concessions for large green field projects in several countries in the region.

Concessions have brought about major positive changes. The West African port landscape has changed substantially since the first concessions came into effect, and real container terminals now exist in most West African ports. TOCs have invested in modern handling equipment and revamped facilities, resulting in productivity gains and reducing congestion. Concessions have also provided Governments with millions of dollars in revenue through entry tickets, annual fees and royalty payments on traffic handled by concessionaires. Greenfield projects which are now being contracted are expected to further increase capacity at the regional level to meet future demand.

At the same time, results of port concessions are diluted by a combination of factors. Former public monopolies at the national level have to a large extent been replaced by a region-wide quasi-duopoly of two TOCs, which compete or cooperate in different ports and together control around 80 percent of West African container throughput. This raises fundamental questions in terms of intra- and inter-port competition and market power, especially given the weak governance framework and regulatory capacity across the region. The productivity gains realized by the TOCs pale in comparison to the results achieved by concessionaires in, for example, Latin American countries. The latter concessions have also been accompanied by contractually agreed tariff reductions which ensure that benefits from private participation are shared with end-users of port services. Unfortunately, no such benefit sharing is currently seen in the concessions in West Africa.

The natural monopoly features of the port industry are exacerbated by the market conditions prevailing in West Africa. Ports are “naturally” monopolistic industries where large sunk investments in infrastructure facilities or unique locational advantages constitute a barrier to the entry of competitors. The thin markets of the individual countries in this region further challenge profitable operation by more than one firm in the provision of container terminal services. The monopoly position of service providers, whether public or private, can lead to a variety of economic performance problems such as excessive prices, production inefficiencies, and poor service quality. Creating competition for the market (of container terminals), via a competitive process, could address the need for regulation and government intervention but only if the process meets certain requirements for transparency and equal opportunity for bidders. While some governments have attempted to award concessions on a competitive basis, the processes followed put into question the competitiveness of the outcomes. The continuance of the very high tariffs seen prior to the advent of the concessions cause further doubts on the reliability of the process to mimic competitive outcomes and benefit the endusers of the ports.

Competition alone cannot be relied on for effective regulation of container terminal services, although the two types of port users – shipping lines and shippers – are not exposed to risks to the same degree. Without effective public policies and regulation, port authorities and terminal operating companies (TOCs) may not have adequate incentives to provide high levels of service, adequate facilities, or guarantee the lowest price. While global terminal operators and major shipping lines have more or less equal market power, leading to negotiated outcomes (when TOCs are not part of the same group as the shipping lines they serve), shippers have far less service options and far less bargaining power. Unless governments step in to safeguard their interests, shippers face extraction of monopoly rents through arbitrarily high tariffs.

The experience to date suggests that West Africa countries may not have obtained the best deals possible for their port concessions. For brownfield terminals, concession have sometimes been attributed on a negotiated rather than competitive basis, often to the advantage of operators who were already present as licensed stevedores prior to the concessions. Likewise, recent greenfield projects were for the most part negotiated directly with the TOCs which originated the projects. Concerns about the transparency of the process and legitimacy of the outcome have been raised for a number of ports, sometimes in court. Bids have tended to be assessed, explicitly or implicitly, on the basis of their promise to maximize the direct financial benefits for Governments, rather than the economic benefits for the countries. Concession agreements tend to emphasize concessionaires’ commitments in terms of investment level, more rarely in terms of performance, and have arguably excessive durations.

The weaknesses of negotiated concessions have resulted in mixed outcomes in terms of prices and quality of services. Generally speaking, productivity has not improved as much as could have been expected. Given the high capital intensity and level of fixed costs in the terminal operating business, efficiency gains and continuously growing traffic volumes would have been expected to create margins for tariff reductions. However, prices for end users have not gone down and have increased significantly in some cases, generating substantial profits for TOCs. While shipping lines have countervailing power or vertical links with TOCs, West African shippers are in most cases much more exposed to the risk of market power abuses. In the absence of strong competition in and for the market, regulatory and oversight mechanisms have been insufficiently equipped to mitigate this risk to date. Regarding productivity, the available data suggests that the undeniable gains realized under concessions were primarily linked to the investments in modern container handling equipment and to increasing returns to scale, rather than to an intrinsic superiority of private over public management as far as operational efficiency is concerned.

Despite the recent dampening of economic growth in the region, projected growth of container throughput in West Africa indicates that activity at port terminals will likely be up fourfold by 2025, compared to 2011 levels. Such growth in container trade is expected to strain existing capacities and even though productivity is low by international standards, capacity reserves that could be unlocked by improved performances would be insufficient to accommodate growth of this magnitude. Accommodating future demand will not only require expanding terminal capacity in existing ports but also the development of new ports, thus justifying the pipeline of port projects already announced by port authorities and terminal operating companies.

Despite clear benefits, the transformation of the West African ports remains incomplete. The bulk of the benefits have been realized from relatively easy modifications implemented by operators while governments have skirted the structural reforms necessary for deeper and longer lasting change. Operators have relied on scale efficiencies or technological progress (e.g. increase in capacity and upgrades or purchase of new equipment) for productivity improvements with few advances in organizational and operational efficiency at the terminal level. Importantly, TOCs have seen a reduction in unit costs linked to the combination of growth in traffic and a high proportion of fixed costs in their cost structures. These reductions have not, however, been passed on to the final customers, the shippers, of the container terminals and sparingly shared with the conceding authorities. Cargo handling tariffs in West Africa remain amongst the highest in the world.

The arrested transformation of the ports sector can be traced to the West African institutional and governance framework as well as the economic characteristics of the CT industry. There is a double asymmetry between (i) the countries of West Africa which lack deep experience, tools and frameworks for managing and regulating private sector firms and international TOCs, and (ii) atomistic shippers and TOCs in an industry which is naturally monopolistic. The poor governance frameworks and inadequate regulation exacerbate the concentration of market power and help explain the situation in West Africa.

Policies which harmonize regulatory oversight of monopolistic activities with fostering competition will do much to improve the economic outcome of private sector involvement in the port sector. In other parts of the world, the potential market power of TOCs is checked through a combination of inter and intra- port competition. Ex-post, inter-port competition in West Africa is currently hindered by barriers to inland transport and cross-country movement of traffic and goods which impact the availability of contestable hinterlands while ex-ante, intra-port competition is possible only in a few ports where traffic is high enough to support more than one operator.

These limitations may be overcome if there is, for example, sufficient competition for the market (by auctioning the right to operate a port or operate within a port) which allows transfer of any monopoly rents to the state through the tendering process. Equally, depending on the criteria for the award of the concession, the conceding authority could decide to limit tariffs rather than maximize revenue to the state again improving the outcome. Competition for the market occurs at discrete points in time while performance improvements can also be built into, and enforced via, good contract documents and management through the life of the concession. To obtain these results, the focus has to be on (i) improving the concession process, (ii) getting the competition framework right, and (iii) strengthening the concession contract documents. In addition, competitive outcomes can be achieved through an assessment of the relative and absolute performance of each port, that is, (iv) yardstick competition.

With the growth of port traffic and the upcoming renewal of existing concessions, it is critical to revisit now the concession process to better manage the next wave of concessions. Adequate resources need to be set aside to access the necessary expertise to supplement public capacity to negotiate concession agreements, to conduct transparent bidding processes which allow fair competition for the market and offer equal opportunities to new entrants, and to recalibrate the criteria for contract award towards economic impact as opposed to pure financial returns. In certain circumstances a negotiated process could be warranted notably when TOCs and shipping lines join forces to promote a transhipment terminal.

There has to be clarity in who is responsible for regulating the CT concessions. There are alternative options to dedicated competition authorities: at regional and national level several existing institutions have some form of mandate in transport and corridor performance (regional economic communities, corridor institutions, industry associations, facilitation committees etc.). Countries and RECs which established them should expand their mandate to include port terminal concession oversight and tariff regulation.

Irrespective of the process employed to contract a concessionaire, revision of current contracts documents – as part of the renegotiation clauses if and when they exist, is necessary to reduce port tariffs, improve competitiveness, and allow meaningful monitoring of performance. Such revisions should improve the distribution of benefits amongst stakeholders: reduction in tariffs could reduce government revenues but would benefit shippers and generate positive spill over effects into the local economy. Since there is an inherent asymmetry of power and negotiating capacity between the ultimate clients of the ports and the TOCs, systematically disclosing operational and cost information to the general public provides an opportunity to bring together the virtual constituency of regional port users. Generalizing the publication of tariffs and key performance indicators is the first step to improve transparency and facilitate policymaking. Then one could think of ways to formalize customer feedback loops by including specific provisions to this effect in concession agreements, complemented by mandatory disclosure provisions. The data collected through these systematic feedback processes at the local port level could then form the basis for a region-wide database that would allow meaningful comparisons between facilities and also hopefully nurture some emulation between them.

Currently productivity measures included in contract documents are ad hoc, partial and ill-defined and can often be misleading in their ranking of ports. Explicit and standardized measures of efficiency such as productivity (output versus time) and cost effectiveness (output versus cost) have to be developed. Collecting and publicizing data on these indicators over a period of time will permit benchmarking the relative and absolute performance of each concessionaire and further competition through comparison.

This report is an assessment of private sector engagement (concessions) in the container terminal and ports market of West Africa, lessons from this experience and recommendations for the way forward. The introductory chapter sets the scene for West African ports while Chapter 2 discusses the implications of the ‘natural monopoly’ features of the port and container terminal industry in the markets of West Africa. Chapter 3 presents the transformation of the port landscape under the trend of container terminal concessions, analyzing the main challenges related to the concession process, the contractual provisions, and the regulation of the concession contracts during the operational phase. The next two chapters focus on whether container terminal concessions have delivered on their goal to address capacity constraints resulting from poor performance and outdated terminal characteristics: Chapter 4 focuses on the short term perspective, assessing the impact of concessions on capacity, efficiency and prices, whereas Chapter 5 focuses on the longer term, assessing the adequacy between container traffic growth and terminal capacity development. The concluding chapter offers recommendations on how to address identified weaknesses of ongoing contracts and improve the outcomes of the next wave of container terminal concessions.