China Merchants Group exporting its Shekou Model of port – industrial development to Africa

by Mandira Bagwandeen
original post on gga.org
June 30, 2022

As the final frontier for trade growth, Africa is the only region where exponential economic and cargo growth is still possible. The continent is home to some of the world’s fastest-growing economies. However, many existing African ports do not have the capacity to accommodate a growing demand for imported goods from a burgeoning African middle class. Significant investment in developing Africa’s maritime sector is needed if the region is to handle a predicted port throughput of more than 2 billion tonnes by 2040. Although Africa has more than 100 ports, just over 50 can handle cargo and containers but have a low terminal capacity. Port Said, the largest port in Africa, can handle just under 3 million twenty-foot equivalent units (TEUs), and most of the region’s small ports (of which there are many) have a handling capacity of less than 1 million TEUs.

Africa’s ports, especially along the West, East, and Central African coasts, are struggling to cope with increasing traffic, highlighting the limits of Africa’s maritime freight infrastructure. Many ports in these regions are operationally inefficient, lack specialist terminal operators, modern port technology, and adequate inland transportation linkages. As a result, high berth occupancies are common, resulting in ships experiencing long waiting times, and port congestion both on the land and maritime side is normal. As a result, long dwell times (that is, how long cargo is held in a port) are experienced at most African ports. On average, the dwell time at most African ports is about 20 days compared with 3 to 4 days at other international ports. The modernisation of port infrastructure is necessary if Africa wants to be integrated into global value chains and achieve its industrial aspirations. However, although African governments and regional economic communities have ambitious port-industrial complex plans, they lack the necessary capital to fund such developments.

Over the last decade, African governments, regional economic communities (RECs), and the African Union began to demonstrate the political will necessary to improve the continent’s maritime infrastructure. Several regional and national economic development plans (such as Kenya’s Vision 2030 and the East African Community’s Vision 2050) include grandiose declarations to improve port operations and modernise maritime transport infrastructure. Although most of these plans are impressive, many African countries lack the funds to upgrade and modernise existing ports and develop greenfield projects independently.

As the largest financer of African infrastructure, several African countries have turned to China (and its state-owned construction and engineering companies) to fund and develop their ports or improve existing maritime infrastructure. China is the preferred lender because it is the only foreign partner willing to fund massive infrastructure developments. Unlike Western lenders and Western-led institutions such as the International Monetary Fund (IMF) and World Bank, which have stricter requirements, Chinese lending banks have fewer stringent requirements and laborious processes, and Chinese credit is often available on more attractive terms. Not only are the interest rates more favourable, but the tenors of the loans are often more preferable for struggling African economies.

Chinese state-owned companies (SOEs) have invested vast amounts of resources and expertise into developing African ports. In 2017, the cumulative Chinese investment in African ports totalled US$25.549 billion, covering 24 ports in 20 African countries. Before the turn of the century, the Chinese had invested in only two African ports – the Nouakchott Port (in Mauritania) and Port Sudan, both in North Africa. By 2009, they were financing and building three more port projects: the Port Said Container Terminal (Egypt), the expansion of the Nouakchott Port (Mauritania), and the reconstruction and expansion of Bata Port (Equatorial Guinea). Since then, Chinese investment and construction in African ports have grown rapidly under the impetus of China’s Belt & Road Initiative (BRI). Investments in African ports are key to the BRI, especially its US$40 billion “Maritime Silk Road”, as they link China with Europe, South Asia, and Southeast Asia. For China, African ports serve as entry points for Chinese exporters into growing African markets; they also provide China with political leverage on the continent and are important entities in Beijing’s geostrategic calculations.

China’s SOEs are well-positioned to take up port development opportunities in Africa. Unlike their Western competitors, Chinese state-owned engineering and construction companies have a competitive edge – the support of their deep-pocketed government; this enables them to out-compete foreign bidders for African infrastructure contracts. Although there are international and African suspicions of the true intentions of Chinese investments, African governments are left with very few alternatives. China is the only foreign lender willing to supply gargantuan amounts of capital necessary to develop and modernise African ports. In 2019, the Center for Strategic and International Studies (CSIS) identified 46 existing or planned port projects in Sub-Saharan Africa alone that were funded, built, or operated[1] by Chinese companies.[2]

Under the BRI banner, Chinese SOEs, especially China Merchants Group (CMG), have been attempting to replicate elements of its “port in front-(industrial) park in the middle-city behind” or Port-Park-City (PPC) model in Africa. The model is based on the Shekou Industrial Park in Shenzhen city in China’s Guangdong Province, established in 1979. It was the country’s first special economic zone, and it sparked Shenzhen’s growth as a commercial and industrial hub. CMG’s efforts to build the village of Shekou into a world-class industrial zone resulted in an area without basic infrastructure being transformed into a modern metropolitan centre. The Shekou Model “entails developing adjacent industrial parks, commercial buildings, highways, free trade zones, residential areas, and power plants.” With the focus on the port, the model does not aim only to facilitate the transportation of goods but to “develop a larger, integrated system that helps sustain the port and is sustained by it in turn”. In 2017, Li Xiaopeng, president of CMG, mentioned that his company is using the Shekou Model as a template or a concept that can be applied and tweaked to adjust to its port projects worldwide.

CMG has increased investment in overseas port businesses, “especially in emerging markets, amid overcapacity in China’s port sector and sluggish global trade.” In Africa, CMG intends to turn Djibouti into the “Shekou of East Africa” – a hub for regional logistics and trade. Between 2012 and 2020, the Chinese provided approximately US$14 billion in infrastructure finance to Djibouti. Among this tiny nation’s Chinese-funded and built projects is the US$590 million Doraleh Multipurpose Port (DMP), an extension of the Port of Djibouti and the country’s first deepwater port. The DMP was developed to relieve congestion at the Port of Djibouti and spur the development of the Djibouti Business District in the city centre. The project cements Djibouti’s status as a major trading hub for Africa and showcases the country’s capacity to see through the development of mega infrastructure projects. The facility was built by China State Construction Engineering Corporation (CSCEC) and financed by China Merchants Port Holdings ([CMPH] is a subsidiary of CMG) through a US$294 million concessional loan from China Exim Bank. CMPH chose a 30-year build-operate-transfer (BOT) concession, and it acquired 23.5% of the shares in Port de Djibouti S.A. (PDSA)[3] in 2012; the remaining shares are owned by the Djibouti Ports and Free Zones Authority (DPFZA).The port has terminals for handling oil, bulk cargo, and containers. It also has 15 berths located along a 4 km-long quay. The port is managed by both DPFZA and CMG. Additionally, in January 2021, CMG agreed with Great Horn Investment Holding (GHIH) (an investment company owned by DPFZA) to a US$3 billion expansion to turn the Port of Djibouti into a regional hub, it is anticipated to serve as East Africa’s leading transshipment destination in China’s Maritime Silk Road (MSR) route.

Contractually, the DMP is separate from the US$3.5 billion Djibouti International Free Trade Zone (DIFTZ) project. Anticipated to be completed by 2028, the DIFTZ will be the largest free trade zone in Africa. Its development is led by DPFZA and a consortium of Chinese companies, including CMG, Dalian Port Authority, and IZP Group. The future expansion of the DIFTZ largely depends upon its Chinese stakeholders in terms of financing and attracting processing and manufacturing companies to set up in the free trade zone (FTZ) to create employment opportunities for locals. Businesses that establish operations in this FTZ will receive favourable concessions; they will operate without paying income tax, property tax, dividend taxes, or VAT.

The DIFTZ is part of the Chinese consortium’s plan to develop an industrial and financial zone to support Djibouti’s maritime facilities. Together with other developments in Djibouti’s transport and energy sectors, the DPFZA and CMG (which holds a 23.5% share in DPFZA through CMPH) aim to develop a mega port-industrial complex similar to China’s Shekou-Shenzhen Port complex in Guangdong Province. Once complete, the FTZ alone would add approximately US$4 billion to Djibouti’s GDP. CMG’s use of the Shekou Model in Djibouti is not unique; in fact, it is a “fairly standardised, one-size-fits-all approach” to port and free trade zone development along the MSR route. In Africa, CMG is developing other Shekou-like projects in Tangier (Morocco) and Lomé (Togo).

With the emergence of the African Continental Free Trade Area (AfCFTA), port development and modernisation is even more critical. The necessary efficient and reliable trade and transport infrastructure is needed if the AfCFTA is to propel economic growth and development across Africa. The continent’s maritime industry will play a key role in helping African dreams of economic prosperity become a reality as maritime transport offers the cheapest and fastest way of freighting large amounts of goods across long distances. As such, with not many development partners willing to invest millions of dollars into modernising African ports, Chinese investment in Africa’s ports will remain crucial for improving port operations and capacity to handle increasing seaborne freight volumes destined for the region.

[1] The CSIS defines “operation” as ports in which Chinese entities are contractually granted the right to operate facilities or ports in which Chinese entities own more than a 50% equity share (Devermont, 2021), “Assessing the Risks of Chinese Investments in Sub-Saharan African Ports,” Center for Strategic and International Studies, https://www.csis.org/analysis/assessing-risks-chinese-investments-sub-saharan-african-ports.

[2] Devermont, J. (2021).

[3] The Port de Djibouti S.A. is a nation-wide port authority and private company that is responsible for port developments across Djibouti.