The Callao Port Concession

A Case Study

 

By

 

James W. Fox

 

November, 2007

 

 

            This case study seeks to address three questions:

 

·                                 What were the economic benefits to Peru of increased efficiency in the port of Callao made possible by the concession?

 

·                                 Why did 35 years of effort by multilateral agencies and by the Peruvian government to build a container port with modern technology fail to produce substantial benefits to the Peruvian economy?

 

·                                 How was USAID, through its contractors, able to move the concession of a container port at Callao from idea to reality?

 

            Without providing unambiguous answers to these three questions (indeed, there is much about this case that is simply not susceptible to easy answer), several observations are appropriate. 

 

            First, the calculations by economists of the “benefits” of improvement in infrastructure often pale in the face of obstacles to such improvements.  In the case of ports, opposition by government entities managing the port, by oligopolistic private port operators comfortable with high rents enjoyed from low investments, and by the numerous workers in the port area, are all factors that may dissuade any government without a very strong commitment to change the status quo.

 

            More broadly, economic calculations seldom dissuade politicians from serving immediate concerns of their constituents, even where longer-term concerns are ignored.  This occurs even in advanced countries.  The refusal to award a U.S. port contract to Dubai/P&O (the winner of the Callao concession) was a triumph of short-term political calculus over the greater good.

 

            Second, the Peru case demonstrates that the grasp of multilateral agencies (indeed, of all donors) usually far exceeds their reach.  Donors want to achieve much.  But they often over-reach, with much in the way of elaborate matrices of commitments, but with far less with respect to ultimate results.

 

            Third, USAID has both the strength and the weakness that come from an organization that is far more decentralized than most other donor organizations, notably the larger ones.  USAID Mission directors typically enjoy far more autonomy to decide on allocation of funding for the country than their multilateral counterparts.  This has the benefit that an astute mission director might achieve much.  The risk, though, is that a less-astute counterpart in the next country may produce only “small patches of green” without catalyzing systemic changes or producing any permanent institutional improvements. 

 

            Much of USAID’s strength comes from its use of grants rather than loans as its primary assistance modality.  Loan agreements, the main modality of the World Bank and the IDB, typically require legislative approval.  This is proper, as such agreements commit future governments to repay a loan undertaken by the current government.  In practice, the requirement of legislative approval may lead to delays of months or years between the decision to make a loan for a specific purpose and the availability of funding to carry it out.  Thus, MDB loans are often signed by one government and implemented by another with different priorities.  And in Latin America, this may mean that the loan is implemented in a way quite different from whatever the previous government planned.

 

 

Necessary Background

 

            This is one of four case studies of USAID support for government concessioning of infrastructure to the private sector.  The most relevant for this case study is “Peru Concessions:  The Overall Approach.”  It contains considerable information that provides context and backdrop to the Callao concession.  Callao is the “crown jewel” of USAID assistance for concessioning in Peru.  But it was the result of a longer-term effort by USAID to promote the concept. 

 

            The “Peru Concessions: The Overall Approach” case study describes how USAID unilaterally sought to promote concessions and other public-private partnerships based on the Mission Director’s experience elsewhere with this tool.  Drawing from this previous experience, the implementing contractor was to be rewarded for actual outcomes, rather than for inputs.  There was little initial interest by the Peruvian government in pursuing this activity.  Within six months of the onset of the USAID effort, however, the government became an enthusiastic supporter of concessions.  Three factors seem to have been important.  Though it is impossible to allocate the share due to each individual factor, all were important, and there appears to have been a strong interaction among them. 

 

·                                 First, the Toledo government sought concrete achievements from its period in power, after difficulties during the early period in producing transforming results. 

 

·                                 Second, it faced severe limitations on government investment spending in Peru (a consequence of overspending by prior governments) if it wished to return to a stable macroeconomy with low inflation. 

 

·                                 Third, USAID’s efforts to proselytize for this low (or no) cost solution to Peru’s infrastructure shortcomings may have provided the right product at the right time.  

 

I.  Why this case matters:  the Importance of the Port of Callao and the history of previous efforts to improve it

 

The Port of Callao

 

            The port of Callao accounted for more than 75% of Peru’s maritime trade in 2005.  Originally located a few miles from Lima, urban expansion has now made it a part of the Lima metropolitan area. 

 

            The port has a long history, dating back to the colonial period.  When Spain ruled, it was the port through which all goods shipped to and from Peru, Bolivia and Argentina passed.  Argentine and Bolivian products were carried by mule over the Andes, by sea from Callao to Panama, and then again by mule across the Isthmus to ships bound for Spain.  Products of Spain, along with imperial decrees, followed the same tortuous road back to the remote corners of the empire.

 

            The modern history of the port of Callao began in 1874, when a British company, Thomas Brassey & Company, built the first modern pier.  In exchange, the company was awarded a 60-year concession, after which time ownership of the port would revert to the government of Peru.  It was an early Build-Operate-Transfer (BOT) agreement long before the term was invented.

 

            The port reverted to Peruvian government control in 1934, in the midst of the great depression.  Little was done to improve it until the 1950s, when two World Bank loans financed investment in additional facilities.  Specifics of these and other donor assistance for the port are discussed below. 

 

            These investments did not prepare Callao for the emerging container revolution.  By 1973, there was recognition that the port was inadequate to efficiently serve Peru’s maritime trade.  The steady increase in the share of trade being transported in containers increased the value of dockside cranes to handle containers (“gantrys” [see: Picture 1]).  Shipside cranes could move containers, but at the cost of reducing the cargo carrying capacity of the ship because of their weight.  There was usually also a substantial cost in slower unloading and loading times compared to landside gantrys.  A Japanese study in 1973 documented the need for establishment of a container facility in Callao that could permit rapid loading/unloading of container ships.

 

            Subsequent Peruvian governments waxed and waned in their interest in improving the port at Callao.   Meanwhile, containers steadily increased their dominance of world trade in everything except in bulk products.  Ports almost everywhere made investments in response to the container revolution.

 

                           Picture 1

               Portside Gantry Cranes

        Peru’s economic collapse in the 1980s obviated the need for additional port capacity – though dockside gantrys became, year-by-year, a steadily more advantageous investment because of their capacity to speed up the process of loading and unloading.  With economic recovery in the 1990s, the issue of inadequate capacity reemerged.  Interest in concessioning the port of Callao blossomed.  The Fujimori administration sought to privatize or concession the port during the late 1990s, but the date for action steadily slid.  One CEPAL study noted that the concessioning of Callao had been postponed from 1998 and 1999, but was expected in 2000.  A later CEPAL reported that 2002 had passed without the expected concessioning of the port of Callao, but expressed the hope that this would occur in 2003.

        Year by year, this impasse continued, with the port of Callao falling steadily further behind other countries in container-handling infrastructure.  Nevertheless, in 2003, it handled more containers than all but two South American ports, and was eighth in all of Latin America and the Caribbean in total  number of containers handled. Peru’s economic dynamism caused rapid growth in port traffic despite the excess costs incurred by exporters, importers, and maritime operators.

 

           Yet Callao was alone among the ten largest ports in not having shore-based gantrys to unload containers from ships.  Instead, it relied on ship-based cranes to transfer containers – always a much slower operation.  And for ships in port, time is money.

 

            The 2003 Global Competitiveness Report rated Peru as having the second-worst port infrastructure in South America.  The IDB reported that costs for container services exceeded world averages by 30-70%.  A study by the Corporación Andina de Fomento (CAF) concluded that Callao in was the second least-efficient port in South America, eking out only a small advantage over Puerto Cabello in Venezuela. 

 

            Despite its efficiency problems, the volume of trade through the port of Callao continued to increase rapidly.  Between 2001 and 2007, Peru’s economy grew by an average of more than 5% per year.  Containerization grew even faster, with the number of container units (TEUs, or 20-foot equivalents) passing through the port of Callao growing at 16% per year since 2000 – and more than doubling between 2000 and 2005. 

 

            A separate dock completely dedicated to containers has become, year by year, a more pressing need if Peruvian exporters are ever to be able to compete on a level playing field with other countries.  Even without such a dedicated dock, the need for land-side gantrys to unload containers grew from an evident need to a glaring deficiency in the port.  The consequence was that Peruvian consumers suffered because port congestion and inefficiency reduced their buying power, while Peruvian producers suffered because the port inefficiency raised the margin between the price of their goods in foreign markets and the amount they received in payment.

 

            International Organizations, Donors, and the Port of Callao

 

            Donor organizations came onto the stage in 1952, when Peru obtained a $2.5 million loan from the World Bank for a $4 million investment to modernize the port.  World Bank conditionality has a long history.  In exchange for its funds, the World Bank required that the Peruvian government establish an “autonomous port authority to be placed under the direction of a qualified and experienced port administrator.”  This led to the establishment of the Port of Callao Authority in 1952.

 

            The World Bank made a second loan of $6.6 million for expansion of the port in 1958, to include additional berths, a petroleum-handling facility, passenger accommodations, and a minerals pier.  (The latter in recent years has been identified as a significant health problem, with children living near the port diagnosed with high levels of lead in their blood, probably associated with lead exports from the port.)

 

            During the 1960s, the creation of UNCTAD led to a large increase in analysis of international trade as it related to developing countries.  However, the UNCTAD studies tended to ignore efficiency issues in the ports and to concentrate on shippers, particularly the diagnosed deleterious effects of monopolistic rate-setting by shipping conferences.  The result was substantial attention to shippers as the source of high costs for exports from developing countries, with a consequent disregard for cost issues in the ports themselves.  No systematic effort seems to have been made to address the issue of port efficiency by comparing costs among ports in developing countries. 

 

            Instead, many developing countries, including Peru, adopted the UNCTAD-proposed remedy (acquiesced in by most of the rest of the donor community) of reserving 50% of the trade of each country to national-flag ships.  This was expected to eliminate the monopoly power of the shipping conferences.  Instead it created a new set of high-cost shippers more interested in rent-seeking than in reducing transactions costs for trade.  Only in 1991 did Peru conclude that shipping reservations for national companies raised costs and lowered efficiency.  It eliminated the requirement for national-flag ships, and declared its ports open to shippers from around the world.

 

            Donor agencies have long been aware that ports are a crucial link between any country and the rest of the world, but devoted few resources until the late 1990s to understanding the importance of improvements in the port of Callao as a vehicle for Peruvian economic development.  No donor project focused on increased efficiency in Callao.  This suggests donor myopia.  With 75% of Peru’s international trade, the port of Callao was a single bottleneck significantly raising transactions costs between Peruvian producers and external markets, and between foreign producers and Peruvian consumers.  But progress was slow-to-nonexistent during the 35 years from the first study of the problems of the port of Callao to the actual awarding of a concession to a world-class firm.

 

            In the early years of the new millennium, as donors began to give increased attention to transaction costs, both the World Bank and the IDB became interested in promoting greater efficiency in the port of Callao.  Both made loans in 2003 intended to promote “competitiveness.”  An IDB loan in late 2003 for $300 million to promote competitiveness included the problem of Callao’s inefficiency as one of many issues to be addressed by the operation.  The only specific commitment required in this area was clarification of the “rules of the game” for port concessions, and for separation between the role of the regulator, OSITRAN, and the role of the port authority.

 

            The World Bank made a $20 million loan for trade facilitation and productivity improvement in June 2003, and a structural adjustment loan (SAL) of $150 million for “programmatic decentralization and competitiveness” in December of the same year.  Both operations dealt with many issues, but both identified the country’s main port as a significant issue in the country’s competitiveness.  Neither operation specified any concrete actions to address the problems of the port of Callao.  Nevertheless, the implementation completion report for the SAL identified the 2003 port law as one of the achievements of the operation – despite the fact that the law had been approved more than six months before the SAL was signed.  

 

            There are doubtless earlier efforts by the World Bank and IDB to improve the port of Callao, not susceptible to easy discovery through the Internet, or even in the memory of any individuals currently working on Peru.  But there is a clear bottom line:  Donors provided billions to Peru in the three decades after the need for a container port was first identified, and nothing happened – not even a single landside gantry. 

 

 

II.  Peru’s Previous Experience with Port Concessions: the Port of Matarani

 

            Prior to Callao, only one Peruvian port had been concessioned to a private operator.  This was the port of Matarani, which serves the Southern part of the country around Arequipa, and also serves as a transshipment point for maritime trade to and from Bolivia.  Matarani is Peru’s second-largest port, though it only accounted for about 8% of Peru’s maritime trade, or about 1 million metric tons of cargo per year in 2000.  Of this total, nearly two-thirds is typically composed of bulk agricultural commodities and minerals.  (A second port, at Ilo, was also offered for concession at the same time as Matarani, but was vacated for insufficiency of qualified bids.)

 

            The concession was won in May 1999 by a Peruvian firm, Santa Sofía Puertos, SA, with the port to be managed by a subsidiary, Terminal Internacional del Sur (TISUR).  The winning bidder committed to pay the Peruvian government $9.7 million for the concession.  There had been 10 firms offering bids, of which three were accepted as qualified bidders.  The award was to be to the firm making the highest bid, with a floor of $9.5 million – lower than the suggested reservation price of $11 million recommended by the government’s investment banker, Salomon Smith Barney.  The winner was required to invest $4.5 million (later raised to $9.5 million) during the first five years of operation, and to pay 5% of gross receipts to the government of Peru and 1% to OSITRAN, the government regulatory agency that oversaw the concession.  The concession was for 30 years, with contractually-specified maximum rates for services during the first five years of operation. 

 

            Prior to the concessioning, the previous operator, ENAPU, the government-owned port enterprise, had made physical improvements in the port and had cut staff from 315 to 60 to make it a more attractive investment. 

 

            After the concession was awarded, numerous questions were raised about the process.  A (possibly politically-motivated) congressional committee investigating the transaction concluded that politics had been involved in the concession award decision .  It also noted that numerous changes had been made in the concession contract after the award had been made. 

 

            Concern about the manner of concessioning also led the legislature to pass a law prohibiting additional port concessions until a new national ports law had been approved by Congress.  This did not occur until 2003. 

 

            An evaluation of the concession drawing on the first three years of operation, by Alcazar and Lovaton (2003), concluded that the concession had been an economic success for the country, contributing an estimated net value to the country of $15 million.  They concluded that the government had been the largest gainer, due to the fact that the concessionaire made annual payments to the government, rather than the government having to make expenditures to operate the port.  Major users of the port also benefited from lower rates and better service.  Some smaller users were disadvantaged by the changes, as they benefitted less from declining rates.  Finally, workers were deemed to have become worse off, despite the increase in employment, because average salaries and benefits fell below what the government had provided as manager of the port.  Ship waiting times decreased, and other measures of efficiency suggested improved operation. 

 

 

The Concession Process

 

            Officially, the Callao port concession process began in April 2005, when the national ports authority requested that the government’s investment promotion office, Proinversón, undertake an effort to find a concessionaire to build a new dock immediately south of the existing port of Callao.  (Table 1 shows a timeline for the entire port concessioning process.)  Nevertheless, USAID, though its contract with Chemonics for alternative development had been working for more than a year to prepare the way for the concession.   

 

 

Table 1

Timeline: The Callao Port Concession

 

1973                            A Japanese study identifies the need for a separate port in Callao dedicated to container shipments.

 

August 17, 1999           The Port of Matarani, serving Arequipa, is concessioned to TISUR for 30 years.  Concessioning of the port of Ilo is vacated for lack of qualified bidders.

 

February 2000             ECLAC reports that the concessioning of the port of Callao, previously expected in 1998 or 1999, will happen in 2000.

 

2000?                          Labor union concern about the Matarani concession leads the national congress to pass a law prohibiting further port concessions until a national ports law is in place.

 

February 2003             ECLAC reports that 2002 was another year when concessioning of the port of Callao was expected, but when nothing happened.

 

March, 2003                A national ports law is approved by the congress.  Concessions are permitted only for “greenfield” ports.

 

February, 2004            Implementing regulations for the national ports law are promulgated, providing clear separation among the national ports authority, ENAPU and OSITRAN.

 

April 14, 2005              The national port authority asks Proinversión to undertake the studies and promotion necessary to promote private investment in the new container terminal at Callao.

 

October 26, 2005        Terms of Reference for the port concession are approved by the directorate of the national ports authority.

 

November 3, 2005       Terms of reference approved by the board of directors of Proinversión.

 

February 9, 2006         Original version of the concession contract published.

 

May 31, 2006              Final version of the concession contract published.

 

June 16, 2006              Four proposals for concession received.

 

June 19, 2006              Concession is awarded to the P&O/Dubai group.

 

July 24, 2006               The Callao Port concession contract is signed granting a 30 year concession, committing the concessionaire to invest $617 million in improvements to the port, of which $473 million is to be provided for the container port (the “muelle sur”), while another $144 million will be invested to improve the entire port of Callao.

 

July 24, 2009               Date by which the port must be in operation.

_____________________________________________________________

 

            Chemonics subcontracted another firm, Nathan Associates, to lead the studies in this area because of its greater expertise on port issues.  Table 2 lists the studies carried out by Nathan in support of the port-concessioning effort.  As indicated by the Table, only one of the eight studies was completed after ProInversión officially became responsible for seeking a concessionaire.  Prior to the official date, Nathan consultants had written a strategy paper, along with background papers that addressed various issues about the port – container transshipments, the cruise market, handling of mineral concentrates, logistical issues, the legal and institutional framework -- that served as background information available to the Peruvian government in its design of the concession process, and later to bidders interested in bidding.  The penultimate report laid out an agenda for a study tour to visit three ports in Latin America (Buenos Aires, Argentina, Cartagena, Colombia, and Manzanillo, Panama) to observe various forms in which concessions had been managed in other countries.  It also provided an agenda for a two-day workshop for tour participants to discuss what they had seen.  The study recommended participation in the tour by people from the Ministry of Transport, the National Port Authority, the Ministry of Commerce and Tourism, ENAPU (the government port operator),  ProInversión, labor unions, OSITRAN (the government regulator), and members of Congress.

 

            In essence, the groundwork for the concession was laid well in advance of any formal decision to proceed.  Consequently, only 14 months passed between the official decision to seek the concession and the awarding of the contract.  And barely a month passed between the award and the signing of the concession contract. 

 

_______________________________________________________________________

 

Table 2

Studies Undertaken for the Port Concession

 

 

September 2004           Estrategia conceptual para el desarrollo de concessions [Conceptual Strategy for the Development of Concessions {for the port of Callao}] (18 pages)

 

October 2004              Options for Handling Concentrates in Puerto Callao (16 pages)

 

December 2004           Perspectives on the Potential for the Cruise Liner Market in Peru (40 pages)

 

February 2005             Container Shipping Service Patterns and Transshipment Potential for Port of Callao (96 pages)

 

March 2005                 Desarrollo de Zonas de Actividades Logísticas (ZAL) en el Perú  [Development of Logistic Activity Zones in Peru] (60 pages)

 

March 2005                 Análisis de Marco Institucional Portuario en el Perú [Analysis of the institutional framework for ports in Peru] (49 pages)

 

April 2005                    Study Tour Recommendations for Port Concession Programs (16 pages)

 

December 2005           Puerto Callao Facilities and Operations Review – Concession Configuration Report (45 pages)

____________________________________________________________________

 

            The Concession Contract.  In deciding on the terms of the concession, Proinversión made a number of strategic decisions: 

 

            First, it decided that the government would not receive revenue from the concessionaire.  This is in contrast to the Matarani port concession discussed earlier, where the government receives 6% of gross revenues.  It contrasts more starkly with the concession of Peru’s main airport, also in Callao.  The government had required the airport concessionaire to pay 46% of revenues to the government.  This cost factor forced the concessionaire to charge relatively high prices for airport services.

 

            Second, it set a very high hurdle for bidders.  To pre-qualify, bidders were required to have:

 

·                                 Managed a port with movement of at least 2.5 million TEU in container traffic,

 

·                                 Been sole manager of a port terminal with at least 500,000 TEU in annual movement, and

 

·                                 Been sole manager of a container terminal with at least 600 meters of berthing capacity.

 

            Reportedly, only eight port operators in the world met these stringent requirements.  Clearly, the Peruvian government was expressing a strong preference for a world-class port operator. 

 

            Third, the government did not specify a port design.  All aspects of the design and construction of the port were left to the qualified bidders, with the government specifying dimensions of the port in general terms:

 

·                                 A concession area of 228 thousand square meters,

 

·                                 Docking capacity for two ships, with at least 650 meters of length,

 

·                                 Capacity to transfer at least 750,000 TEUs per  year,

 

·                                 At least 14 meters of depth for docking ships, and

 

·                                 Provision of at least 6 port gantrys, 10 cranes for the storage area, and other specialized equipment.

 

            Fourth, the level of port charges for the first five years of operation were fixed.  This eliminated the risk of monopolistic behavior by the concessionaire, and provided a level playing field for all of the bidders.  The level set for the competition was 35% below that in effect at the time in the port of Callao.

 

            Fifth, the government specified general port improvements as the tie-breaking criterion.  Since the government did not wish to sell the concession to the highest bidder, it needed another financial test to select the winner.  It chose general improvements in the port that would benefit all users, including ENAPU.  These improvements included such items as deepening the channel into the port, providing navigational aids, improving the landside access to the port and development of computerized information systems for the entire port community.

 

            In effect, the bidding process required all bidders to accept a given level of port charges, and to make a commitment of more than $200 million to construct and equip a new port next to the existing one.  As all responsive bidders would agree to these conditions, the determining factor would be willingness to commit additional resources to general port improvements.

 

            Seven firms purchased the terms of reference for the concession, and four – all world-class port operators – submitted bids. 

 

            The Winning Bid.  The winning bid was submitted by P&O/Dubai, which committed to $144 million in general port improvements -- $100 million more than the next bidder.  As the winning bidder, it committed to invest in a second phase of port expansion once usage of the port reached 70% of capacity, for an additional $215 million.  Altogether, the winning bidder committed to investing more than $500 million in Peruvian port infrastructure.  This was incurred without even a monopoly on container traffic in the port of Callao, as ENAPU, the existing government corporation operating the rest of the port, is seeking to compete by investing in gantrys and other complementary equipment.

 

            Prospects for the Port.  Interviews with the concessionaire indicate that it intends to complete construction of the new container terminal far faster than the three years allotted to it for the investment.  It intends, if possible, to open one part of the terminal to container traffic even earlier.  (Since the concessionaire’s revenues only begin when traffic begins to flow through the port, this concern for speed is understandable.  For government-run infrastructure, on the other hand, there is often a lack of connection between spending and revenue.  Where revenue collected flows to the government treasury or a general fund, and where spending on investment flows from the government budget, the pressure for quick completion is attenuated.) 

 

            Thus, the port is likely to be constructed significantly more quickly than if the government of Peru (perhaps with a loan from a multilateral organization) had built it itself.  The process of transparency required by government procurement, especially if supported by international organizations, inevitably imposes delays in the bidding process, often exacerbated by appeals by losing bidders.  Among its other advantages, concessions provide the concessionaire with the appropriate incentive to choose the construction firm that best combines speed and cost minimization. 

 

 

III.  Economic Consequences of Improved Port Efficiency

 

            The principal analysis of the economic consequences of improvements in the efficiency of the port of Callao was done for USAID by Nathan Associates.  That study, based on 2003 data, concluded that the excess cost of container shipments through the port of Callao was $790 per TEU, or a total of $218 million annually.  Since container traffic in 2006 was 73% higher than in 2003, an adjusted annual benefit to Peruvian shippers for 2006 would be $377 million.  Given the rapid growth of Peru’s economy (another GDP growth rate of 6% is expected in 2007, and few clouds are on the horizon), the excess costs of the port of Callao could reach close to $500 million per year by 2010, when the new container port is required to be in full operation. 

 

            The Nathan study identifies several sources of excess costs.  The most obvious is port charges for importing or exporting one TEU.  In mid-2007, this cost was $100 per TEU, but the fee schedule required for the concessionaire will be limited to $69.  The direct cost of shipping a container will thus fall by 31%, with all else being equal.  For an annual flow of one million containers, that would provide in-pocket savings of $31 million. 

 

            The far larger cost for shipping lines, importers and exporters, is delays in moving goods through the port, though such costs are more difficult to estimate with precision.  The Nathan study simply calculated the additional cost for each party from the slowness of moving containers in and out of the port, and concluded that this represented more than 60% of the excess cost of the port at present.  This is likely to be an underestimate, for such delays surely reduce the amount of trade that takes place through the port. 

 

            In today’s globalized economy, the use of “just in time” shipments of goods is critical to efficient operation of outsourcing of intermediate goods.  Countries that cannot provide a reliable and timely flow of such products are simply unable to be players in modern manufacturing.  To the extent that the new port can provide reliably-short transit times through the port, the country’s capacity to continue to diversify its export base will benefit[1].  

 

            Whatever the specific numbers that ultimately will accrue to Peru when the new port goes into operation, there is no doubt but that they will be huge.  To summarize:

 

·                                 A foreign company will invest $600 million in improvements in the port of Callao, with $144 million in improvements also benefiting the government-controlled port.  The government had to incur no debt or other financial obligation to put this operation into effect. 

 

·                                 Peruvian exporters and importers will be benefited by hundreds of millions of dollars in reduced costs.  (The actual number is surely so large that further precision in estimating it is irrelevant.)

 

·                                 Peru’s opportunities as a transshipment port for all of the West Coast of South America will substantially increase.

 

            Altogether, this would represent an incredible return on USAID’s investment of a bit more than $2 million in promoting the concession… if USAID was indeed critical to the concession.  Was it?

 

 

IV.  Did USAID Do It? If so, How?

 

            Based on interviews in Peru, there is broad agreement by government officials and other observers that USAID played a helpful role in the concession of the new South Container Terminal at Callao.  Some considered the USAID role critical.  Others argued that the Toledo government was fully committed to the concession of the port, and that USAID’s role was only to smooth the process, and probably to accelerate something that was already guaranteed to happen. 

 

            No definitive answer to such differences of view can ever be given.  When governments make a decision to do something, they often succeed.  Where donor organizations have provided studies or other assistance, it is often impossible to determine the importance of such work.  At the same time, one should not overstate the importance of high-level decisions by a government to do something.  The Fujimori government “decided” to concession the port of Callao – but it did not happen.  Both Napoleon and Hitler “decided” to invade England, but neither did so. In all these cases, the technical issues involved in turning decision into action prevented the government leadership from achieving its goals.

 

            One cannot rewind history to replay the port concession without any USAID participation.  So the counterfactual is a matter of speculation.  Nevertheless, there seems to be general agreement among most interviewees on several facts:

 

·                                 USAID’s analyses were helpful in framing the approach to the concession, and in demonstrating its importance.

 

·                                 USAID resources enabled the government to acquire more external technical assistance than it would have otherwise used.

 

·                                 USAID funding of international travel to other countries to consider alternative approaches was helpful.

 

·                                 Without USAID, the process of concessioning would have taken more time. 

 

            The first three of these observations suggest that USAID assistance provided more depth of knowledge, and more confidence in the route chosen, than would otherwise have existed.  In effect, all of these factors reduced the risk to the Peruvian government of concessioning the port. 

 

            Such risk reduction would surely have accelerated the process of generating a consensus among senior government officials about how to concession the port.  Albert Hirschman observed long ago that the most critical problem in poor countries was in government decision-making.  Often, the variety of alternative choices available, the need to soothe a variety of vested interests, and difficulties in making government bureaucracies move forward with the appropriate approvals in a timely fashion, means that inaction is the ultimate outcome.  Surely, the port of Callao fits into this category.  The fact that onshore gantries for containers in the port have been absent into the 21st century can have no other explanation. 

 

            This leads to the last bullet, about speeding up the pace of action.  Sometimes, this makes all the difference.  President Fujimori intended to concession the port of Callao, but he failed.  Had he been able to act earlier, before the emergence of the Montesinos disaster, he might have achieved his goal.  But in politics, exogenous events happen all the time, with uncalculated consequences for a government’s agenda.  It is not difficult to imagine that a significant delay in the concessioning of the Callao terminal would have meant that the Toledo administration would not have been able to do so.  That would surely have delayed making the concession for a year until the new Garcia government gained confidence that this was the right step – if it ever did.  As noted earlier, the vagaries of government decisions go far beyond economic calculations.  Each year of delay, as suggested above, would have cost the Peruvian people hundreds of millions of dollars or more. 

 

 

V.  How USAID can Matter

 

            This case study does not prove that USAID was critical to the huge benefits that will accrue to the Peruvian economy from the concessioning of the Southern Terminal at Callao.  In development activity, there are too many actors acting independently and too many exogenous factors to be able to attribute outcomes to any single participant.  But not being able to prove that somebody caused something doesn’t mean they didn’t.

 

            With this caveat, one can make a reasonable case that USAID, with very modest resources, was able to achieve what the World Bank and IDB had not been able to do with far more money.  Several reasons suggest themselves:

 

1.                              USAID’s grant money provides much more speed and flexibility than loan money from the multilateral agencies.

 

2.                              USAID’s relative autonomy allows mission directors sometimes to find opportunities for activities with very high payoffs.  In the case of concessions, USAID may have helped convince the government to go in a new direction.

 

3.                              The capacity in the USAID mission to identify such opportunities depends on capable staff both in the mission and in the firms it contracts to analyze key development issues and to interact collegially with host country actors.

 

The quality of contractors is critical to achieving big outcomes.  Chemonics seems to have had the right people in the right place at the right time.  Its willingness to sub-contract the port studies to Nathan Associates – a much more experienced firm in this area – also contributed importantly to the successful outcome. 



[1] Apparently considering such factors, one Ministry of Transport official referred to a study by a researcher at Universidad del Pacifico, who estimated that the cost savings from the new port would amount to $1,000 per TEU – or $1 billion per year if all trade flowed through the new port.  Unfortunately, this study has so far not been located.)