Declining Oil Production Forces Focus on Timber
By Ope Onibokun and Robert Masumbuko
The growing importance of the non-crude sector in Gabon has been highlighted in the government’s introduction of the 2025 Gabon Emergent program, which is tagged to transform and diversify its economy and set it on a path to be a world leader in tropical timber.
Historically Gabon has been dependent on oil since 1956, with production peaking in 1997 at 370,000 barrels per day, or bpd. However, with current production at 198,000 bpd, coupled with the ongoing aftereffects of the 2014 oil crash, the benefits of a relatively comfortable GDP per capita of US$8,000, is no longer reflected in the human development indices, such as life expectancy, education, infrastructure, health care delivery and income inequality.
Constraining economic growth is rising bond yields, which have pushed Gabon’s borrowing costs significantly since 2014. It also experiences high debt service for local and external loans, and difficulties in meeting its wage bills with 51 percent of the workforce employed in the public sector, resulting in mounting pressure on government and international sources for private-sector financing.
Timber Becomes Essential
With some 23.7 million hectares of forestry, and an existing healthy export of raw timber, Gabon now views the timber sector as an essential pillar to the country’s development, ambitiously aiming to be a world leader in tropical timber.
To do this it introduced two key catalysts. First was the banning, in 2010, of log exports, which saw local timber processing increase to some 75 percent two years later. The second was the creation of the Gabon Special Economic Zone of Nkok (GSEZ NKOK SEZ), which is mainly dedicated to wood processing, and which has become the engine driving the development of the Gabonese timber industry.
Of the 105 industrial units within NKOK SEZ, 78 are working in raw log processes, developing those into veneer, sawn, plywood and furniture for export. The advantages of working within an ecosystem such as this, is that the entire value supply chain – logistics, timber supply, customs and export services, marketing, infrastructure etc. – is contained within the 1,093-hectare industrial park.
However, despite these benefits one of the key challenges with NKOK SEZ is a logistics bottleneck unable to efficiently transport the processed timber to Owendo Port 30 kilometers away.
Maritime transport is critical to the Gabonese economy, with almost 90 percent of its foreign trade carried out by sea. Since 2000, trade flows in Gabon have shown a strong growth rate. Total goods and services imports grew from US$1.8 billion in 2000 to US$4 billion in 2015 (a compound annual growth rate, or CAGR, of 5.5 percent), and total goods and services exports grew from US$2.8 billion to US$ 6.6 billion over the same period (a CAGR of 5.9%). With this increase in imports and in output of processed goods, especially timber and minerals such as manganese, there has been a major shortfall in the port handling capacity at the Owendo Port.
The port, built 40 years ago, reached its maximum container terminal capacity of 120,000 TEUs in 2014 and general cargo capacity of 2.9 million tons in 2015. Due to capacity constraints, the port experienced severe congestions and backlogs. In addition, tariffs charged at the Owendo Port were high compared to neighboring ports.
Expansion Financing
To address these logistics challenges, the port needed an expansion upgrade, which required long-term funding. Such funding is not available from Gabonese commercial banks with maximum tenors limited to seven years. So, in 2015, the government awarded a long-term concession to GSEZ Cargo Ports to develop a new port facility adjacent to the existing Owendo Port.
GSEZ Ports was developed in two phases in a joint venture between Olam International (a major food and agri-business enterprise), the Gabon government, and Africa Finance Corp., or AFC, as major shareholders.
Phase one saw the construction of a container terminal with a capacity of up to 310,000 TEUs. Phase two involved the development of the general cargo and bulk terminal with a capacity of 4 million tons, inclusive of auxiliary storage facilities for palm oil and grains. The estimated project cost was €300 million, of which the shareholders were looking to raise €80 million in long-term debt from development financial institutions, or DFIs.
To raise the debt, the shareholders appointed the Emerging Africa Infrastructure Fund, or EAIF, a US$1 billion debt fund, managed by Ninety One (formerly Investec Asset Management) as Mandate Lead Arranger, or MLA. The initial challenge faced by the MLA was attracting other long-term DFIs as co-lenders due to Gabon risk, which was rated by Moody’s as Caa1 in 2018.
Yet another challenge is that the mandate of most DFIs is to lend mainly to countries considered the least developed. Gabon, given its GDP per capita of US$8,000, is considered an upper middle-income country, hence typically not eligible for “official development assistance,” a criteria used by several DFIs when allocating investments. However, in 2018, Gabon’s economy and fiscals had severely deteriorated, with commercial lending options from international lenders for long-term debt closed. The only available option was DFIs.
AFDB to the Rescue
The African Development Bank, or AFDB, as the only lender to indicate interest, joined with the EAIF, offering a loan to GSEZ Cargo Ports, of €80 million, split equally over a 15-year period at a very attractive interest rate. The transaction achieved financial close in July 2019, enabling GSEZ Ports to complete construction of the project. The successful financing highlighted the significant impact of African-focused DFIs, such as EAIF and AFDB, in providing the required financing to promote sustainable development in Africa.
The AFDB’s loan to GSEZ was key for the commercial viability of the Owendo Port. The bank played a major structuring role for the provision of the entire debt package by leveraging its ample experience, inclusive of key due diligence work streams (including E&S work stream, key project risk identification and allocation to parties best positioned to provide mitigation measures, etc.), which led to project derisking. By association to the AFDB, there is also a degree of political risk mitigation and its credibility gives comfort to the other lender and, of course, the borrower.
The GSEZ Cargo Ports is expected to generate an estimated €800 million in government revenues, such as tax, VAT, levies and concession fees, over the project life. In addition, the economic benefits span across numerous stakeholders, including the local employment opportunities, especially at GSEZ NKOK SEZ.
By unlocking the logistic bottleneck, GSEZ NKOK SEZ-led timber transformation measures have had a significant positive impact on the national economy via:
• Contribution of the timber sector to GDP quadrupled between 2010 and 2019, reaching US$842 million.
• Gabon's timber exports tripled in that time, reaching US$1 billion in value.
• Employment in the wood sector tripled between 2010 and 2019 to 26,000 jobs.
In addition, the increase in port transport capacity has boosted traffic flux for general cargo, containers and fuel, which has unlocked the trading potential in Gabon. The development also reduced the congestion of the existing Owendo Port (average dwell time reduced from seven to two days), provided lower handling costs due to the better infrastructure and higher productivity than existing ports, and bulk handling costs are estimated to be more than 30 percent lower than that of the old port.
Not only has the new Owendo Port impacted positively on Gabon’s balance of payment by bringing added hard currency, but it has also increased Gabon’s attractiveness as an efficient and effective option for strategic economic access into West Africa. One of the early wins is the recent investment by A.P Moller Capital, as majority shareholder in the port project.
Ope Onibokun is head of project finance for Arise, focusing on raising and structuring finance for various projects in Africa. He can be reached at [email protected]. Robert Masumbuko is country manager for the African Development Bank. He can be reached at [email protected].
