An operator managing a site under a concession or lease agreement usually obtains the right to reconstruct the site, to erect buildings, and introduce new equipment. When the site is constructed or reconstructed under a BOT arrangement, the operator also has the right to build new quay walls, to dredge channels, and create new port land. In undertaking these activities, the operator assumes some duties previously undertaken by the port authority.
Every concession agreement contains lease conditions when ownership of the site formally remains with the port authority. When ownership is temporary or definitively transferred to the operator (under BOOT or BOO arrangements), the concession agreement may include a variety of clauses pertaining to the use of the site, although such clauses may be based solely on a public license, a port bylaw, or other enabling authority.
BOT arrangements in a concession agreement are spelled out in detailed provisions covering construction, quality control, time schedules, milestones, and similar issues. One important provision deals with the granting of exclusivity rights, guaranteeing that the port authority does not promote or permit any other competing facility in the concessionaire’s port area for a certain time period (sometimes incorporated into a sponsors direct agreement) (see Box 55).
BOT and BTO arrangements are frequently integral parts of concession agreements. The difference between these models is the time at which the operator transfers the newly constructed assets to the port authority. BTOs are employed when relevant legislation does not allow for the private ownership of port assets. Transfer is conducted immediately upon the completion of construction and the operator receives the equivalent of a management contract.
The distinguishing feature of the BOT arrangement is the legal form of user rights. The concession agreement always sets out clauses that clearly define such rights. The concession entitles the operator to a right to use and exploit port infrastructure and, in the case of an existing terminal, also to use the superstructure and available port equipment.
The scope of the concession agreement appears in its preamble. The preamble typically consists of three main elements:
Most concessions have a term of 30 years or more. Extension of the concession can usually be renegotiated at any time during its lifetime in case the operator plans a major investment in the port’s infrastructure in return for an adjusted tariff rate reflecting changes that may have been introduced pursuant to the extension. In case no agreement for extension is reached by the end of the 30-year term, the concession ends and the right to use and exploit the port’s infrastructure and other assets reverts to the port authority (or another government agency), preferably under a fixed-price formula.
Under a BOOT scheme, sometimes an operator is allowed to own the site on which improvements are to be constructed until the end of the concession period. Usually, the concession agreement specifies the value of the assets under a predefined formula (including an agreed-on depreciation table). At the time of transfer to the port authority at the end of the concession period, the port authority pays the operator in accordance with the residual value, calculated on the basis of the established formula.
Generally, a port authority presents functional specifications for the facility to be constructed under a BOT arrangement. When the authority specifies detailed construction works, it becomes vulnerable to delays, construction errors, and, perhaps, the application of wrong technology or processes relative to expected port functions. Many ports simply lack the required expertise to prepare detailed technical specifications for modern port construction works.
Since new facilities are to be transferred to the port authority in due time, it is useful to engage a technical consultant who represents the port authority and reports on the progress of the work. The technical consultant can also observe the way in which the project is being constructed to meet the functional specifications and the requirement to use best practices for design, materials, and workmanship. The consultant may also assist in evaluating alternative technical solutions and advise on the best technical and cost-effective solutions.
A crucial point in the design phase is obtaining agreement on a timetable for completion of the detailed technical design. The design should include an interface element to integrate the terminal into an existing port area. The interface element takes into consideration paving levels, drainage, fencing, design and routing of underground facilities, reconstruction of existing infrastructure within the concession area, and access through neighboring port areas and terminals.
Finally, the operator is obliged to provide the port authority with sufficient detailed benchmark data to allow for evaluating and monitoring the development of the concession area as part of the approved DPR and the agreed-on construction program (see Box 57).
During every major construction job, design and technical problems will inevitably occur. Some of these issues can be easily resolved, but others might influence the construction timetable or quality of the work. It is important that design and construction flaws be resolved in good faith consultation with the operator and its construction firm. The port authority should be ready to demonstrate flexibility without compromising the requirement that work be performed at a predetermined quality level. In some instances, part of the work may have to be redesigned. The effects on construction time and cost of any redesigned element(s) should be ascertained by the port authority, which should also ensure that the operator adheres to overall functional specifications (see Box 58 and Box 59).
The construction company carrying out the work on behalf of the operator should be required in most cases to inspect the building site and the adjacent water area thoroughly before starting construction. Any obstacles in the subsoil affecting the construction should be reported and taken into consideration when executing the technical designs and obtaining permits. It is customary for the port authority to agree to provide its cooperation in obtaining construction permits and approvals from governmental authorities, including environmental oversight authorities.
Construction is based on a construction program that outlines completion dates for the various construction phases (milestones) as part of the approved DPR. This DPR is almost always incorporated into the concession agreement. The port authority ordinarily requires that it be notified promptly of every delay that occurs at the construction site, as well as the resulting contingency plan devised to remedy the delay (see Box 60 and Box 61).
The zero date is an important event that marks the start of construction work. By this date, all conditions precedent are fulfilled by both the port authority and the operator. Generally, the port authority fulfills all conditions necessary for the operator to commence work, while the operator concludes all financial arrangements and engages a construction firm to begin construction (see Box 62).
During the preparation phase, events may occur that result in delays or even cancellation of a project. The port authority as well as the operator may include provisions for termination of the concession agreement once it becomes clear that the project will fail. Therefore, a drop dead date is included in the agreement. In drafting such a clause, it is important to specify if any performance guarantees will be drawn or canceled as a result of the drop dead date (see Box 63).
In practice, construction of a major work rarely proceeds according to the original plan. In case a delay is caused by action (or inaction) of the port authority itself, the operator is usually entitled to claim liquidated damages. A force majeure might also occur, causing delays in the construction process. Such possibilities are acknowledged in the concession agreement and procedures included to change the milestone dates and compensation paid by the operator when an extension event occurs (see Box 64).
BOT schemes are mainly employed for the construction of new port infrastructure and superstructure. When newly built facilities are completed, completion tests are carried out and a take-over certificate issued by a competent expert or authority on the port authority’s behalf. While verification of the civil works is required throughout the production process, it will not be possible to verify solely at the conclusion whether all work was completed in a professional manner and that proper materials were used during the process. The port authority should use its expert to inspect all work at completion and to prepare a punch list of deficiencies. The construction company then has a certain period to rectify all deficiencies. The final take-over is based on a test certificate issued by the certifier. After this, there is still a defect liability period during which the operator has the obligation to repair all deficiencies.
Take-overs of mechanical and electrical installations are more complicated and require a variety of tests including operational, safety, reliability, interoperability, and endurance tests (see Box 65).
Under a BOT arrangement, the facilities are transferred to the port authority at the end of the concession period, usually with (under a BOOT arrangement) or without (under a common BOT arrangement) compensation. The hand-back is concluded after a joint inspection and assessment of any renovation works (if applicable). Hand-back requirements and procedures depend on local practices. The most sensitive issue is in the level of compensation to be paid by the port authority (see Box 66).
The success of BOT arrangements is highly dependent on the ability of the operator to attract financing for the construction work. This issue is reviewed in greater detail in Module 3 and Module 5. In many cases, lenders have recourse only to certain assets or income streams to secure repayment of their loans. Sometimes there are legal considerations that should be addressed, particularly with respect to the creation and enforcement of security interests in the host country that limit or even prohibit the granting of a lien over port assets. Such limitations present a significant stumbling block for attracting private capital to port development.
As described in Box 67, legislation restrictions may also impede investors and lenders because of a lack of definition of property rights. The situation on St. Maarten is very different. As noted in Box 68, care has been taken to maximize the lender’s security.
In a concession contract with BOT arrangements, it is generally necessary to explicitly establish the lender’s rights with respect to the affected assets. Providing for the lender’s rights entirely in the concession agreement is difficult because of the variety of financial structure options available to operators. Most BOT arrangements require debt financing by lenders (commercial banks). To facilitate the lending process, the port authority may enter into a direct agreement with the lenders; however, only one direct agreement shall be effective at any time. In such a case, the concession includes a clause obliging the port authority to negotiate in good faith during the period commencing on the date of concession and the effective date regarding the terms of the direct agreement as may be reasonably required by the lenders in connection with the debt financing, including terms to enable the lenders to exercise their rights and remedies under the financing documents (see Box 69).
Operators under a BOT arrangement run a considerable risk of applicable legislation changing during the concession period. Such change may affect operating profits and alter or negate the original exploitation conditions. Therefore, it should be expected that detailed provisions in the concession agreement will be negotiated to minimize the effects of such changes (see Box 70).
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