MAPUTO PORT BRINGS COMPETITION...AND CORRUPTION

UNCLAS SECTION 01 OF 04 MAPUTO 000983 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ETRD KCOR EINV EWWT PGOV MZ SF SUBJECT: MAPUTO PORT BRINGS COMPETITION...AND CORRUPTION REF: A. MAPUTO 980 ¶B. MAPUTO 896 This cable is a collaboration between Embassy Maputo and Embassy Pretoria and is part of a series of reporting on regional transport infrastructure developments. ¶1. (SBU) Summary: The Government of Mozambique (GRM) entered into partnership with private investors to revitalize and increase port and rail infrastructure capacity, which was long-neglected during the civil war. Econoffs met with GRM and private sector representatives to discuss progress with port and rail rehabilitation and challenges with further capacity expansions. Cargo volumes at the Port of Maputo are slowly rising and some auto manufacturers in the region are beginning to shift traffic from the Port of Durban to the Port of Maputo. Unfortunately, despite high technology scanning equipment (ref A),the Port of Maputo is hampered by corruption. According to a joint Harvard University-IFC study comparing Durban and Maputo, the probability of paying a bribe at the Port of Maputo is 53 percent compared to 35 percent in Durban, and the amount of bribes paid in Maputo are four times higher than in Durban. Bribe payments in Maputo represent a 130 percent increase in total port costs per 20 foot container and are equivalent to 14 percent of total shipping costs. Besides this increased economic cost to shippers, the Port of Maputo is also hindered by a limited supply of rail capacity and a dependence on South African rail capacity. Private investors are considering partnering with the GRM to revitalize additional rail rolling stock, but will need incentives to do so. The Port of Maputo cannot meet its ambitious expansion plans without an ability to guarantee independent rail service within the region. End Summary. ¶2. (SBU) Econoffs met with representatives of Mozambique National Railways and Ports Authority (CFM),South African state-controlled Transnet Freight Rail, South African-based private shipping and logistics company Grindrod, and Maputo Port Development Company (MPDC) recently to discuss progress with rehabilitation of Mozambique's port and rail infrastructure capacity. -------------- Privatization Leads to Port Rehabilitation -------------- ¶3. (SBU) The Port of Maputo handled about 15 million tons of cargo per year before independence and the outbreak of the civil war in 1977, when the port fell into disrepair. The GRM signed a 15-year concession deal with a group of private European investors in 2003 to create the MPDC to rehabilitate the port. The MPDC manages the port and its rehabilitation, but the physical assets remain the property of the state. The private consortium controls 51 percent of the MPDC and the Government of Mozambique (GRM) and CFM hold the remaining 49 percent. ¶4. (SBU) CFM had a falling-out with the European investors due to poor management and Grindrod bought their shares in late 2007. Grindrod then sold half of its shares to Dubai Ports World (now DP World),which has extensive international experience with operating container terminals (Note: In the first half of 2009, DP World began restructuring MPDC, firing a significant number of the executive staff to include the CEO, and MPDC sources suggest that the current financial situation of the port is poor. End Note). Grindrod's expertise lies in operating bulk cargo facilities. The MPDC is currently expanding the port to accommodate greater demand and new-generation, extended-range vessels. The port handled 7.8 million tons of cargo in 2007, its best performance in 25 years. Projects launched by the public-private Maputo Corridor Logistics Initiative (with stakeholders from Mozambique, South Africa, and Swaziland) to support trade facilitation are also credited with the ports recent success. ¶5. (SBU) Grindrod representatives believe the port will have the capacity to handle 30 million tons of cargo per year once the expansions are completed. Major commodities exported via Maputo include refined sugar, ferrous metals, and stainless steel products. A special type of coal preferred in the Turkish market for indoor heating purposes is exported in large quantities (approximately 200-250 thousand tons per month). Ports in Southern Africa have also received a boost in demand due to the rise of piracy in the Gulf of Aden. MAPUTO 00000983 002 OF 004 Container and bulk cargo are the biggest target for pirates and major shipping lines have diverted traffic to Southern African ports as a result. -------------- Corruption at the Port of Maputo -------------- ¶6. (SBU) The Port of Maputo is hampered by corruption according to a joint Harvard University-IFC study comparing Durban and Maputo. The study finds that the probability of paying a bribe at the Port of Maputo is 53 percent compared to 35 percent in Durban, and the amount of bribes paid in Maputo are four times higher than in Durban. Bribe payments in Maputo represent a 130 percent increase in total port costs per 20 foot container and are equivalent to 14 percent of total shipping costs. ¶7. (SBU) The study indicates that port operators in Maputo have greater discretion to extract bribes due to close interactions between clearing agents and customs officials, which represent a 600 percent increase in the average salary of a Customs official who is the bribe recipient 80 percent of the time in Maputo. The median bribe in Maputo is equivalent to 24 percent of the monthly salary of a customs official, according to Sequeira and Djankov, who note that despite having one of the highest salaries in Mozambican public administration, it appears that Customs officials are motivated to extract bribes because they work, with high extractive powers in an environment of virtual impunity. The report also notes that due to the access to information through the port's scanning initiative (septel),customs officials wield a &broader toolkit8 of authority to extract bribes. As a result, shippers in the region have negative incentives to use the Port of Maputo. -------------- Maputo an Alternative to South African Ports -------------- ¶8. (SBU) Despite higher levels of corruption, industry analysts believe the partial privatization of the Port of Maputo has delivered significant efficiencies that allow it to compete with South African ports operated by Transnet. Grindrod officials do not describe it as a direct competitor to Transnet-operated ports, but note that it can serve instead as a complementary port within a larger network that serves Sub-Saharan Africa. Transport logistics costs in Southern Africa can be up to 60 percent of a product's final cost and Maputo is well-positioned to service Mozambique, Zimbabwe, and Swaziland more efficiently than South African ports. Maputo is Southern Africa's closest port to the rapidly developing mega-markets of Asia and is also the closest deep-water port to the main South African manufacturing and agricultural exporting provinces: Gauteng, Mpumalanga and Limpopo. Maputo provides an additional gateway for cargo movements and relieves congestion pressure at Transnet-operated ports. -------------- Car Terminal Attracting Business from Durban -------------- ¶9. (SBU) Grindrod is developing a car terminal in Maputo that will have the same capacity as the Port of Durban car terminal once it is completed. The Maputo car terminal can currently handle about 100-150 new vehicles per hour. Nissan South Africa has already agreed to utilize the Maputo car terminal as an alternative to Durban. After global economic conditions improve, Nissan would also like to export its auto components from Maputo. Talks have advanced with Ford South Africa and BMW to export some of their volumes through Maputo. It is cost-efficient for manufacturers such as Nissan, who do not have preferential access to the South African car terminals, to utilize Maputo instead. Nissan currently exports vehicles to East and West Coasts of Africa and hopes to export to Europe and North American markets once the economy improves. ¶10. (SBU) The new and used vehicle import market in Mozambique is strong. Ford is importing vehicles from Taiwan and East Asia for the local market. Heavy-vehicles (trucks and tractors) are imported from the U.S. for the markets in Mozambique, Zimbabwe, and Malawi. Zimbabwe used to have a strong market for vehicle imports before the political turmoil began. The market for construction equipment imports MAPUTO 00000983 003 OF 004 in the region is also likely to grow with large-scale coal mining expected to start in 2010 in Tete province, as well as a variety of MCC-funded public works programs over the next five years. Manufacturers such as Caterpillar currently ship their construction equipment to Durban and it is then transshipped to Maputo for distribution to the rest of the region. Caterpillar recently conducted a successful trial to test direct shipments to Maputo. -------------- Rail Capacity Major Impediment to Growth -------------- ¶11. (SBU) CFM is 30 years behind contemporary organizations such as Transnet due to a lack of infrastructure investments and the destruction caused by the 16-year long civil war. Existing rail lines have been rehabilitated since the end of the war, but they are insufficient to handle demand growth. The system is composed of 2,983 kilometers of rail and runs only east-to-west connecting Mozambique to its land-locked neighbors. Rail connections to facilitate trade within the country (i.e., north-south links) are still non-existent. Analysts emphasize that CFM must focus on improving interconnections between the existing lines to facilitate port expansions and economic growth throughout the country. The GRM is also looking at reviving international passenger rail service between South Africa and Mozambique. There is market demand for this service and there is an agreement with Transnet to use Transnet's rolling stock. A trial service was launched in June. ¶12. (SBU) The coal terminal at the Port of Maputo is 100 percent reliant on rail, but CFM does not have adequate rolling stock to handle coal cargo volumes and has to depend on Transnet's rolling stock. Export of commodities such as Benzonite from Mozambique to South Africa also depends on Transnet's rolling stock. (Note: Transnet does not have a lot of spare capacity due to underinvestment in South African rolling stock and it would not be in its commercial interest to provide too much of its limited supply to support CFM since it does not want the Port of Durban to lose business to the Port of Maputo during the economic downturn. End Note). Ferrochrome and other minerals from South Africa are currently transported by road to Maputo for export to Asia due to a lack of rail capacity. This increases transport costs and leads to the degradation of roads and local environment. -------------- -------------- Continued Private Investment Key to Future Growth -------------- -------------- ¶13. (SBU) Grindrod and DP World have submitted a new Master Port Development Plan for GRM approval. The plan calls for increasing capacity to accommodate 12-15 percent growth per year to eventually reach a capacity of 90 million TEUs per year by 2017. (Note: A TEU or twenty-foot equivalent unit is an inexact unit of cargo capacity often used to describe the capacity of container ships and container terminals. It is based on the volume of a 20-foot long intermodal container. End Note.) MPDC is also focusing on improving skills development among the local staff. Dubai Port World is planning on additional infrastructure investments including new mobile cranes. Support for the development of the 24-hour, one-stop border project with South Africa should also facilitate cargo movements required for continued expansions at the Port of Maputo (ref B). ¶14. (SBU) Grindrod told post that it was willing to partner with CFM on developing additional rolling stock capacity in Mozambique. There is out-of-service rolling stock in Mozambique that could be rehabilitated with private investments. Grindrod is waiting to see how the GRM reacts to the new Master Port Development Plan, with any new investment in rolling stock dependant on whether Grindrod is able to successfully extend its current concession by 10 years. Finally, Grindrod is cautious about alienating its relationship with Transnet, which is the biggest transport logistics player in the Southern African market, and views the Port of Maputo as both a complementary and competitor port. Unfortunately, Transnet has little incentive to partner with GRM to provide additional rail rolling stock when it is not in Transnet's commercial interest. -------------- COMMENT MAPUTO 00000983 004 OF 004 -------------- ¶15. (SBU) The GRM cannot attract additional international exporters or importers to meet its ambitious expansion plans without guarantees of greater transparency at the Port of Maputo as well as independent rail service within the region. Further improvements in the Port of Maputo and its associated rail infrastructure will inevitably reduce overall transport logistics costs and facilitate regional trade growth; however, the port's growth will continue to be hindered until the GRM finds the political will to prosecute corrupt Customs officials and limit opportunities for bribery. The GRM should first deal with corruption in Customs and then consider building on their partnerships with Grindrod and other private international investors to rehabilitate and develop additional rail infrastructure to reduce dependence on South African rail capacity. CHAPMAN