Seeing the bigger picture in concession bids

SPCT, Sudan, presents the case for wider competition issues to figure larger in the assessment of bids

Sudan’s terminal tender serves as a reminder to mind the gaps in the assessment of concession bids. John Burgoyne investigates

The bids are in for South Port Container Terminal (SPCT) in Port Sudan, comprising a technical and financial submission with points awarded for the components of the technical element and the financial bid.

SPCT, now unfettered by sanctions, represents an interesting opportunity. To date, under public sector operation, it has largely played the role of a traditional gateway container terminal serving the national marketplace.

Recent times have seen a trickle of transit cargo from Ethiopia but with Sudan and Ethiopia now building much stronger economic ties there are clear signs that Ethiopian transit cargo - with a private sector operator in place that will modernise the terminal - can grow at a strong rate. Chad also generates some transit cargo and other transit cargo markets of South Sudan and The Central African Republic promise to come on-line as internal conflicts in South Sudan are resolved.

Land-locked Ethiopia is currently by far the most interesting transit cargo market with this backed by sustained double-digit economic growth and government plans to become a middle-income economy by 2025.

 

Logistics costs

A key element in achieving this latter target, however, is a strong focus on maintaining growth via increasing manufacturing activity and export diversification. In particular, the objective is to make Ethiopia a manufacturing hub in Africa – primarily through the expansion of light manufacturing including textile and apparel, leather goods and processed agricultural products. Realising these objectives, however, is highly dependent on achieving competitive logistic costs including gateway container terminal costs.

There is also the issue of securing adequate port capacity – the Ethiopia-Djibouti corridor linking Ethiopia to the Port of Djibouti is now the dominant gateway for the country with over 95% of Ethiopia’s exports and imports using this route.

Recent studies have indicated that while factory floor costs in Ethiopia for products such as garments, footwear, leather products and so on are lower than those in China and India, logistic costs are significantly higher, representing a barrier to export activity. For example, it has been calculated that for a 20-foot container of garment exports to Germany, Ethiopia’s logistics costs are 247% higher than those of Vietnam and 72% higher than Bangladesh.

Against this background, it is hardly surprising that Ethiopia is seeking other port gateways than just Djibouti where DP World operates the Doraleh Container Terminal (DCT) and China Merchants operates the recently opened Doraleh Multipurpose Port. DCT has an annual capacity of 1.6m teu and an annual throughput of approaching 1m teu.

The Government of Ethiopia recognises the port of Berbera in Somaliland as a source of new capacity, offering an alternative transport corridor. However, with DP World winning the 30-year contract in 2016 for a multipurpose facility, with major container capacity, this question is whether the tariff regime of this facility will make a meaningful contribution to the desired reduction in logistics costs? Even though DP World has reportedly donated 19% of its shareholding to the Government of Ethiopia out of its 65% equity stake it is logical to assume that near parity between DCT’s tariffs and Berbera’s would be seen to be desirable.

Construction of the new Berbera port facilities is scheduled to start this year.

In turn, this does seem to present an opportunity to SPCT given that the operator to be appointed presents a competitive, cost efficient, profile developed with an understanding of the wider market circumstances.

 

Competitive considerations

The bidders for SPCT are Bolloré, DP World, ICTSI and a new contender in the international marketplace, Red Sea Gateway Terminal (RSGT), the newest of three container terminals in Jeddah, Saudi Arabia where DP World also operates a container facility.

They will be assessed against the bid criteria specified in the technical and financial submissions where doubtless all parties will possess various strengths and weaknesses. As Port Strategy has noted on previous occasions, however, these sorts of bids do not always take proper account of the wider competitive considerations which can significantly impact key considerations such as the business plan and marketing plan, particularly where there is direct intervention in markets of interest.

SPCT is not yet active in the transhipment sector but with an upgrade it certainly has the potential to be – it is 211 nautical miles across the Red Sea from Jeddah which is a major transhipment hub and so, geographically speaking, it has the right credentials. Logic suggests that this too should be a competitive consideration. How much does transhipment figure in the bidders’ plans? If it doesn’t figure, why doesn’t it; is there a good reason for that? Supply far exceeds demand in the Red Sea transhipment market, so it is unlikely that a new competitor like SPCT would be welcomed enthusiastically into this fold.

DP World is active in transhipment in two nearby locations at Jeddah at the South Container Terminal and Djibouti at the DCT. RSGT, operator of the newest facility in Jeddah has recently boosted capacity to 2.5m teu per year and is a keen participant in that sector.

DP World has further involvement in the Red Sea at the Egyptian port of Sokhna, where it is about to embark on an expansion programme, although this facility is largely oriented towards providing a gateway for Cairo cargo.

The above issues raise an important question asked previously by PS, namely, why is it that more consideration is not given to such influential competitive matters in the assessment of bids for port concessions? It may be decided that they are of no consequence but certainly they at least appear worthy of some assessment.

There have been concessions awarded that place restrictions on the appointed operator taking up another similar operation with a given radius. So, to effectively reverse this approach and consider who is already active nearby and in what market sectors again appears a logical step. In the final analysis it may not influence the result, but it does seem indisputable that it is a necessary consideration for an emerging business in a highly competitive marketplace.

 

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