Labor Toolkit

Legal Tools for Port Reform

ANNEX I:
CHECKLIST OF CONCESSION/BOT AGREEMENT PROVISIONS

(Related to a concession for the management and operation of an existing terminal and possible extension)

  1. Introduction and recitals: Parties to the agreement, general considerations.
  2. Definitions: Definitions are important and should be thorough. Usually they are included in a schedule to the agreement.
  3. Conditions precedent: Those conditions that have to be fulfilled by the concessionaire and the port authority before the main provisions of the concession take effect.
  4. Grant of concession: This provision sets out the exclusive right of the concessionaire to enter upon, occupy, possess, enjoy the benefits of, and use of the terminal.
  5. Term of the agreement: The term of the concession is usually between 30 and 35 years for a BOT agreement. In case of a concession without BOT, the term may be in the order of 10 to 15 years.
  6. Employment: Provisions regulating the position of employees of the port authority who will be taken over by the new terminal operator, especially with respect to salaries, pension rights, and retrenchment (if any). This provision obviously only applies to a situation where an existing port authority owned terminal is being concessioned.
  7. Transfer of assets: This applies to the transfer of full rights and ownership, as well as leasehold or license interests (if any) in all the movable assets and facilities in the case of the concessioning of an existing terminal.
  8. Hand-over of the terminal: The port authority shall hand-over the concession area, the operational port infrastructure and movable assets and facilities, and books and records in relation to the operations of the terminal (if any) by giving the sole, exclusive, and vacant possession thereof to the concessionaire.
  9. Exclusivity: After the completion of the construction of a new terminal under a BOT, the new operator may be granted exclusivity rights for a limited period, usually three to five years. These rights allow the concessionaire to build up business without being directly confronted by a competing facility.
  10. Project: This provision gives a general description of the project. This might be the management and operation of an existing terminal as well as a possible extension.
  11. Project document compliance: The concessionaire is not allowed to materially vary the project documents. Project documents are the concession agreement, the site lease, the port services agreement, the financing documents, the design contract, and the building contract. The concessionaire may vary the building contract under certain conditions.
  12. Project finance: The government or port authority acknowledge the necessary financing of the project by lenders such as commercial banks or the IFC. The government or port authority usually conclude with the lenders a lenders direct agreement. This agreement regulates the rights and obligation between the government or port authority and the lenders in the event that the concession is terminated by the government or the lenders exercise their rights under the security documents.
  13. Lenders security: The concessionaire is allowed to create forms of security over any movable assets or facilities owned or leased by the concessionaire, or other property rights forming part of its interest in the project in favor of any lender for the duration of the debt financing.
  14. Functional requirements: The functional requirements of the extension works comprise main characteristics of the terminal (transshipment/domestic, multiuser/dedicated), and the main construction elements such as quay lengths, types of gantries, depth alongside, and so forth.
  15. Design solution: Comprises design and construction methods.
  16. Design development: The port authority shall receive all calculations, designs, design information, specifications, plans, programs, drawings, graphs, and so forth in relation to the extension works and the operations and has the right of control of such documents.
  17. Design flaws: Procedures to be followed when the concessionaire becomes aware of any failure of the design solution or the design data.
  18. Applicable permits: The provision includes the willingness of the government or port authority to assist the concessionaire in obtaining the permits, licenses, and so forth to operate or build the terminal or terminal extension.
  19. Concession area conditions: Before starting the construction, the concessionaire is deemed to have inspected the concession area. The government or port authority shall reject all liability for claims.
  20. Archaeological items or geological items: All fossils, minerals, antiquities, wrecks, or structures of particular geological or archaeological interest on or under the concession area shall be deemed to be the absolute property of the government or port authority.
  21. Building contract: The concessionaire shall have the right to and responsibility for selecting the designer and the builder and agreeing on the provisions of the design contract and building contract, without the approval of the port authority.
  22. Construction program: The construction program is an important part of the concession. A detailed construction program, including milestones and milestone achievement dates, is included with one of the schedules. Every relevant part of a construction program has a milestone sunset date, which is defined as the latest date to achieve a milestone that is part of a construction program under a concession agreement. Nonachievement of a milestone sunset date constitutes a termination event for the port authority (see number 25 below).
  23. Progress reviews: A provision with respect to monthly progress reports.
  24. Extension events: An extension event prevents or delays the concessionaire from complying with the obligations of the concession during the design and construction period of the terminal. If an extension event occurs, the construction time will be extended.
  25. Sanctions for late completion: The project elements should be completed by the relevant milestone achievement dates. Nonachievement of a milestone sunset date constitutes a termination event for the port authority.
  26. Commissioning of the project phases: An appointed test certifier conducts commissioning tests during project phases that must be passed to allow the project to continue.
  27. Operatorís operational functions and activities: All the operational functions and activities allowed under the concession are listed in detail.
  28. Port authorityís port services: The port services of the port authority such as pilotage, towage, vessel traffic management, mooring and unmooring, provisions of water, and so forth are listed. Details of these services are usually included in a separate port services agreement with the port authority.
  29. Berthing priorities: These priorities might be agreed upon between the port authority (harbormaster) and the concessionaire, but must be nondiscriminatory and subject always to such rules and regulations as may be made from time to time under applicable laws.
  30. Security: Provision with respect to the tasks and obligations of both the concessionaire and the port authority, within the framework of the ISPS code.
  31. Use of the terminals: The operator has the sole right to carry out the port operations and construction activities within the concession area. Also in this article, the issue of multiuser versus dedicated use of the terminals should be regulated.
  32. Operatorís operational performance standards: A port authority may set performance standards such as a minimum number of crane moves per hour, a minimum berth hour productivity, or a maximum vessel turn around time, and so forth.
  33. Maintenance of movable assets, facilities, and infrastructure: In view of the fact that the terminal will be handed over to the port authority after termination or expiry of the concession, maintenance standards both for equipment and infrastructure maintenance should be included.
  34. Operational subcontracting: The concessionaire or sponsor is usually given the right to conclude a management contract with a qualified operator, subject to approval of the port authority.
  35. Tariff regulation: The provision may be necessary in case of the requirement to regulate the changes to tariffs for handling of domestic cargoes in the event of a dominant position of the concessionaire in a certain port or a series of competing ports.
  36. Tariff setting: The concessionaire has the right to freely set tariffs without interference of the government or port authority, subject to possible competition regulation
  37. Site lease: Main characteristics of the site lease are included in this article, such as price and number of square meters of the area. The site lease itself is a separate document that is part of the concession. The lease rent should be indexed for inflation.
  38. TEU fee: The fee is usually expressed in dollars or other hard currency for each TEU (other than restows) handled over the shipís rail. This article establishes the (variable) price per TEU per annum the concessionaire pays to the port authority during the term of the concession. The TEU fee should be indexed for inflation. The structure of TEU fee payments might include (number of) minimum guaranteed throughput levels.
  39. Bank guarantee: The port authority may require a bank guarantee of the concessionaire with respect to the minimum guaranteed throughput levels.
  40. Refinancing: The port authority may require approval in case of refinancing of the project. Instead of a bank guarantee, the port authority may require a performance bond for the throughput guaranteed and the overall obligations within the concession by the concessionaire, which is often based on the business plan submitted by the concessionaire in the bid proposal.
  41. Release from rents, taxes, levies, and other obligations and dues: Sometimes the government or port authority grants the concessionaire release from taxes during a certain period. The terminal may also get a free zone status, which implies considerable tax advantages.
  42. Payments to the government: Any payment made by the concessionaire to the port authority shall be considered as a valid settlement of the operatorís obligations under the concession.
  43. Information supply: The concessionaire shall supply specific information to the port authority on throughput or vessels on a monthly and annual basis.
  44. Legal compliance: The concessionaire shall at all times during the term of the concession comply with all applicable laws, directives, and the conditions of all applicable permits.
  45. Change in law: This article is necessary to mitigate the effect of a change in law that materially affects the operations and financial position of the concessionaire. It sets out detailed provisions describing which changes in law apply, such as changes in taxation, institutional conditions, nationalization, and so forth. Under certain conditions the government or port authority compensates losses sustained by the concessionaire as result of a change in law event.
  46. Force majeure: Any event or circumstance or combination of events, whenever occurring, that is outside the control of the affected party, could not be avoided, prevented, overcome, or mitigated with reasonable foresight and materially prevents, hinders, or delays performance of a partyís obligations under the concession. Typical force majeure events are tsunamis, earthquakes, or other acts of God; nuclear explosions; radioactive, biological, or chemical contamination; war, invasion, embargo, military coup, or revolution; and so forth.
  47. Insurance: Insurance covers required by the port authority to be taken out by the concessionaire both for operations and for construction of new terminal facilities.
  48. Ownership of assets: This relates to the right of the concessionaire to own mobile assets and (sometimes) buildings in the concession area.
  49. Option to continue: The port authority may grant an option to continue or a right of first refusal after the expiry of the concession.
  50. (Interim) termination by the government: This article comprises detailed events that may lead to termination of the concession by the government, such as a material breach of the concessions, nonpayment of fees, and so forth.
  51. Termination by the operator: The concessionaire might terminate the concession when a material breach occurs by the government or port authority of their obligations under the concession.
  52. Termination procedure: In the event of termination either by the port authority or the concessionaire, a termination procedure is agreed on that sets out detailed provisions of the rights and obligations of the parties, such as notice to terminate, remedial program, and information to the lenders of the concessionaire.
  53. Rights cease: On termination or expiry of the concession, all future rights and obligations of the port authority and the concessionaire shall cease and the site lease and the port services agreement shall also be terminated automatically.
  54. Termination compensation: In case of termination by one of the parties to the concession, the ports authority shall pay termination compensation. Depending on which party terminates the agreement, the termination compensation consists of a percentage of the fair value, established by an independent expert. There are several methods to used to determine the fair value, which should be stipulated in advance in the concession agreement. Methods used include historical cost, inflation adjusted historical cost, depreciated replacement cost, optimized depreciated replacement cost or modern equivalent asset value, and optimized depreciable value. The expert shall never apply any earnings-based valuation methodology or any goodwill in the business of the concessionaire.
  55. Hand-back: After expiry of the concession, the concessionaire shall hand back the entire terminal to the port authority. This article includes detailed instructions and technical requirements and procedures on how the hand-back shall take place. This is to assure the proper state of the facilities when returned to the port authority.
  56. Asset transfers on expiry or termination: It is necessary to regulate the good cooperation between the port authority and the concessionaire regarding the hand-back of the facilities to the port authority.
  57. Information technology (IT) license: At the end of the concession, it might be necessary to transfer IT licenses to the port authority to guarantee uninterrupted operation on the terminal during transfer to a new operator.
  58. No share or liability acquisition: This article sets out the terms and conditions in case of participation of the port authority in the capital of the concessionaire or vehicle company.
  59. Employees: At the expiry of the concession, the position of the employees will have to be regulated. Usually they will be transferred to the new operator with certain conditions such as the continuation of earlier salaries and benefits as well as accrued pension rights.
  60. Conflict resolution: This article sets out detailed procedures for conflict resolution including international arbitration.
  61. Waiver of immunity: It will be necessary for the government and the port authority to waive most forms of sovereign immunity to create a level playing field with a private concessionaire.
  62. Recognition of lendersí rights: The port authority may include in the concession a special recognition of the lenders who will be deemed to be beneficiaries under the concession.
  63. Performance monitoring: A general provision in the event that a party fails in the performance of its obligations under the concession. When that failure is capable of remedy, the affected party may serve a notice on the other party requiring such other party (at its own cost) to remedy that failure.
  64. Transfer committee: The committee, consisting of representatives of both the port authority and the concessionaire, is responsible for the transfer process at the termination or expiry of the concession.
  65. Responsibilities: The port authority and the concessionaire shall be solely responsible for the performance of their functions and services and for all the acts, or failures to act, of itself and of its contractors, subcontractors, suppliers, and agents.
  66. Liabilities: Neither the government, the port authority, nor the concessionaire shall be liable to the other for any loss, cost, liability, or expense arising from any breach of the agreement other than for actual loss directly resulting from the breach.
  67. Confidentiality: The parties may agree to keep the details of the concession confidential during a certain period. 68. Disclosed data: Restriction by the government or port authority for the liability of disclosed data on the terminal or concession area.
  68. Change in institutional structures: During the term of the concession, the institutional structure of the government or the port authority may change. The concessionaire agrees with the variation of the concession, provided that such variation does not affect its rights, obligations, and liabilities under the agreement.
  69. Variations: Variations in the project documents shall only be valid if they are in writing and signed by or on behalf of each of the parties
  70. Applicable law: Establishment of the law applicable to the concession. This is usually the law of the country where the terminal is located.
  71. Notices: Elected domiciles for formal notices to be served under the concession.


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Overview

Framework for Port Reform

The Evolution of Ports in a Competitive World

Alternative Port Management Structures and Ownership Models

Legal Tools for Port Reform

Introduction and Overview

General Approach for Drafting a Ports Law

Port Authority and Terminal Operations

Port Regulations

Port Competition Modalities

Full Concession Agreements

BOTs and Construction

Annex I

Financial Implications of Port Reform

Port Regulation:
Overseeing the Economic Public Interest in Ports

Labor Reform and Related Social Issues

Implementing Port Reform

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