More elaborately discussed in Module 3, concession agreements are a relatively new development in ports. Business opinions differ about the legal nature of a concession agreement—as well as its configuration. Some concession agreements have more in common with a privatization model, while others resemble a leasehold contract. Because comprehensive privatization constitutes an unrestricted and irrevocable transfer of port land from the public to the private sector, a concession agreement, with or without BOT types of arrangements, cannot be conceived as being comprehensive port privatization, but only partial port privatization. During the last decades, application of concession agreements have gradually become the preferred method to develop public-private partnerships and are most successfully applied within the landlord port structure.
Concession agreements were originally developed for service ports. Landlord ports usually did not need concession agreements, but used leasehold agreements instead. Both types of agreements have much in common and some consider a leasehold contract to be a variant of a concession. To avoid misunderstanding, the term “full concession agreement” will be used to describe a concession in its broadest form; that is, a series of contracts that define the relationship between the government and the private sector regarding the right to exploit port land and facilities as well as the obligation to construct port infrastructure and provide superstructure.
In some aspects, a leasehold might be considered a long-term rent contract. But contrary to a rent contract, a leasehold conveys a possessory interest. Therefore, a leasehold can be transferred or sold to another private party under the conditions stipulated by the port authority. This is a very important feature for advancing the business plan of a private investor in a port terminal.
What differentiates a concession agreement from a leasehold? When would one instrument be preferable over another? Box 23 summarizes the formal differences and similarities.
The main reason to apply a full concession contract is fiscal. In the 1980s, many ports (especially service ports) were in dire financial straits: government-controlled, overmanned, badly maintained, without market orientation, and often not able to provide even essential port services. This situation did not occur solely in developing countries, but also in many developed countries. In developing countries, however, the financial resources necessary to modernize port facilities and to provide for redundancy payments for excess personnel were usually lacking. Concession agreements provided a timely solution: private investors provided the money to modernize port facilities and often were willing to take over some port personnel liabilities. This freed up government resources for use in other parts of the economy. For all their advantages, concession agreements do have a price, most particularly the surrender by the government of full and complete control over port development.
If the concessionaire obtains the right to construct significant parts of the operational facilities as well as the operational port infrastructure (mainly quays and land reclamation works), a concession could be combined with a BOT arrangement. In the case of legislation designating part of the infrastructure to be of a public character, the concession may be considered a public license. However, the part of the concession constituting a public license is generally not negotiable. The government authority granting the license usually reserves the right to unilaterally modify license conditions. The most important BOT arrangements combine many variations of long-term leasing with preagreed investment commitments. In port reform, the most commonly used models are BOT, BOOT (build-own-operate-transfer), BTO (build-transfer-operate), and WBOT (wraparound BOT). These variations are described in more detail below, and also later in this module in “BOTs and Construction.”
BOT. Legal title to the newly constructed port infrastructure, and sometimes other assets, remains with the government or port authority until the end of the concession period. The concessionaire concludes a long-term leasehold agreement, which conveys rights similar to holding title over the land. This agreement is usually attached as an annex to the concession.
BOOT. It is also possible that legal title for the land is acquired directly by the concessionaire. Under a BOOT model, the parties agree to have title over all assets that are passed to the government at the end of the concession. For many large terminal operators, the BOOT model is a preferred option.
BTO. This arrangement addresses instances in which legislation forbids ownership by private parties for what is considered public infrastructure or part of the maritime domain. Ownership may be directly transferred to the government after construction (for example, Costa Rica, and Croatia). The investor in the terminal facility will construct the terminal on privately owned land and subsequently transfers title to the government or port authority. Generally, this form of publicprivate partnership is considered more complicated than the more common BOT scheme, especially with respect to liability and increased government involvement. Under the BTO model, ownership of port facilities becomes an issue for lenders and investors, particularly when fixed assets are required as collateral for financing. In such cases, lenders may require some form of government guarantee regarding adherence to the terms of the concession agreement.
WBOT. Finally, the WBOT concept packages a BOT with a privatization of the public infrastructure. Under a WBOT structure, existing government-owned port facilities are expanded by the private sector, which holds title only to the additional infrastructure. Under this model, a private operating company would then:
While the principal framework for the relationship between the port authority and the concessionaire is specified in the main concession agreement, there are a number of other documents that form part of the concession. The concession agreement and related documents can be used in a number of circumstances, including when:
Box 24 presents a short list of the important topics usually treated in a concession agreement and related documents, whereas Annex I presents a comprehensive potential list of concession and BOT agreement provisions.
Often, either pursuant to the terms of an award, or for purposes of securing financing commitments, the parties execute various preconcession documents that either outline the fundamental terms of the concession or become incorporated into the concession itself. Among these documents are:
Every concession agreement includes a list of definitions to delineate precisely both the subject matter and the concepts used throughout the agreement. These definitions will vary from country to country and legal system to legal system. Outlined below are examples of the most commonly used definitions. The capitalization of a word within agreements often indicates the word is specifically defined within the definitions section of the agreement.
Agreement: The concession agreement, entered into between the Port Authority of [port or country] and the Operator, of which this schedule is a part, including all the schedules thereto, and as it may be amended, varied, or modified from time to time.
Applicable permits: Any and all permissions, clearances, licenses, authorizations, consents, no-objections, and approvals of or from any governmental authority of whatsoever nature required from time to time in connection with the ownership, development, financing, construction, operation, and management of the terminal at the Port of [name], concessioned to the Concessionaire, and for undertaking, performing, or discharging the obligations contemplated by this Agreement or the Port Services Agreement and the Site Lease Agreement, as set out in Schedule [number] hereto.
Approved DPR: The DPR approved by the Port Authority for the development of the various phases of the site, the approved form of which shall be signed for identification by the parties to this Agreement and shall include any amendments to the DPR approved by the Port Authority in accordance with this Agreement.
Bank: Every shore structure (excluding a quay wall), measured in each case from the crest line of the ground to the bed line, and including related artificial structures.
Basic port infrastructure: Immovable assets destined for general use of the port area, such as:
Basic structures: All immovable property, with the exception of such property that is subject to the right to lease. Basic structures include all pieces of stone, foundation remains, poles, pipes, cables, scaffolding, pavements, demarcations, and structures on or at the grounds that were founded, placed, or built by the port authority or by the former users before the commencement of the right of lease as part of a concession.
Building contract: The contract or contracts entered, or to be entered, into between the Builder and the Operator for the construction of the works with respect to the [Name] Container Terminal or (port) facility, in a form that contains provisions approved by the Port Authority concerning its assignment to the Port Authority or enabling the exercise of other stepin rights of the Port Authority.
Business plan: In respect of a financial year, a plan for the business of the Operator consisting of:
(a) The strategic and marketing objectives of the Operator for that financial year.
(b) The operating and financial targets of the Operator including monthly income, balance sheet, and cash-flow statement.
(c) Business and financial forecasts of the Operator for the 4 (four) financial years following that financial year.
Change in law: The occurrence of any of the following subsequent to the date of signing this Agreement:
(a) The modification, amendment, variation, alteration, or repeal of any existing Law or Decree of any government authority.
(b) The enactment of any new Law or the imposition or issuance of any new Decree by any governmental authority.
(c) The commencement of any Law or Directive or Decree that has not yet entered into effect at the date of signing this Agreement.
(d) Changes in the interpretation, application, or enforcement of any law or judgment by any court within the [country] having jurisdiction over the government.
(e) Any Applicable Permit previously granted, ceasing to remain in full force and effect for reasons other than breach or violation by or the negligence of the Operator, or if granted for a limited period, being renewed on terms different from those previously stipulated.
Conditions precedent: Shall mean the obligations to be fulfilled by the Parties prior to the Effective Date in accordance with Article [number] read with Schedule [number].
Credit agreements: The loan agreement(s) entered into, or to be entered into, between the Lenders and the Operator to provide finance to the Operator in order that the Operator may fulfill its obligations under this Agreement.
Cargo handling services: Cargo terminal management and operations including cargo handling services for stevedoring; landing; transporting; cargo consolidation; warehousing of general, liquid, or dry bulk cargoes.
Concession area: The port areas within the port of [name], known as [name], as more fully described and delineated in Annex [number] to this Agreement.
Concession fee: The monthly price per meter for the use of leased property and, in addition to such amount, a Throughput Royalty to be paid in recognition of the port authority’s ownership (user) rights as specified in Section [number].
Container services: Container terminal management and operations, including container handling services for stevedoring, landing, transporting, and warehousing; stuffing and stripping; consolidation of containerized cargoes.
Debt: Any indebtedness of the Operator for the purposes of financing the investment in and enhancement, development, design, construction, commissioning, and operation of the Terminals and the Extension Works, or any other costs or expenses in relation to the obligations of the Operator under this Agreement, related thereto.
Depreciated replacement value: Shall have the meaning assigned to it in accordance with the [reference to appropriate document, accounting practice, or method of depreciation].
Effective date: The date of fulfillment of all the Conditions Precedent.
Financial closing: The fulfillment of all conditions precedent to the initial availability of funds under the Financing Documents and receipt of commitments for the equity required for (Phase 1 of) the project and immediate access to funds.
Financing documents: All loan agreements, notes indentures, security agreements, letters of credit, share subscription agreements, subordinated debt agreements, and other documents relating to the financing of the Project, as the same may be amended, supplemented, or modified from time to time.
Force Majeure: An event or circumstance or a combination of events or circumstances beyond the reasonable control of either party, which materially and adversely affects the performance by that party of its obligations under this Agreement and that cannot reasonably be foreseen or prevented (such as civil disturbance, armed conflict or act of foreign enemy, wars, blockades, insurrections, uprisings, sabotage, embargo, revolution or riot, action or inaction of public officials, expropriation, nationalization or confiscation of facilities, earthquakes, mudslides, lightning, typhoon, fires, storms, floods, epidemics or plagues, acts of God, and other natural disasters).
Good industry practice: As applicable to the Operator, its contractors, subcontractors, operators, subconcessionaires, sublessees, and all other third-party agents of the Operator, practices, methods, techniques, and standards, as changed from time to time, that are generally accepted for use in international port construction, development, management, operations, and maintenance, taking into account conditions in [country].
Grounds: The grounds given out in lease to the Operator under this Agreement.
Hand-over: The process of providing peaceful and vacant possession of and access to the Concession Area and all cargo handling equipment as well as infrastructure and superstructure by the Ports Authority for the conduct of the business of the Terminal as contemplated by this Agreement, together with such access rights as are described in the Site Lease Agreement.
Joint development agreement: The Agreement dated [date] between the Sponsors and, among other things, allocating project responsibilities between the Sponsors as per Annex [number].
Law: Any applicable [country] law, statute, proclamation, bylaw, decree, directive, decision, regulation, rule, order, notice, judicial order, judgment, or delegated or subordinated legislation, including directions or guidance, issued pursuant to any legislation.
Lead sponsor: [Name] having a major Equity Share as per the Joint Development Agreement.
Lenders: Local or foreign financial institution(s), corporations, companies, or banks providing secured and unsecured credit facilities to the Operator, including lease and hire or purchase facilities to the Operator pursuant to the Financing Documents.
Lenders direct agreement: The agreement between the Lenders (represented by [Name] Bank acting as Security Agent), the Concessionaire, the government and/or Port Authority, including the rights of the Lenders under the Concession Agreement, the Port Services Agreement, the Management Agreement, and the Site Lease Agreement, assigned to the Security Agent under the Assignment of Project Documents and charged under [the Commercial Mortgage] as well as the procedures and obligations of the parties in the event that the concession is terminated prior to expiry.
Material adverse effect: Circumstances that adversely affect: (a) the ability of the Operator to observe and perform in a timely manner its obligations under this Agreement; (b) the ability of the Operator to avail the benefits of the Concession Agreement in accordance with the terms of this Agreement; (c) as a result of which the Operator is unable to or is prevented from carrying on the Operations of the Terminal; or (d) its exclusive right to build, own, operate, and transfer the Extension Works at the Concession Area is diminished or impaired.
Operational port infrastructure: Infrastructure essential to port operations, to include any or all of the following items:
Port equipment: Equipment (nonfixed assets) essential to the operation of the port, to include any or all of the following items:
Port services agreement: The agreement entered, or to be entered, into between the Port Authority and the Operator for the provision of marine services by the Port Authority in relation to the Terminals to be operated by the Operator pursuant to this Agreement in agreed terms.
Project: The development, financing, design, construction, operation, and maintenance of the site in accordance to the provisions of services to the users.
Regulatory authority: Any authority (referred to in Article [number]) constituted by law in [country].
Site: The wharves, piers or quays, buildings, and other infrastructure and superstructure leased or given in concession to the Operator under this Agreement.
Sponsors: The Consortium selected (through a process of competitive bidding in [month], [year]), led by the Lead Sponsor.
Terminal: The terminal facility proposed to be developed in accordance with the terms of this Concession Agreement by the Operator.
Transport infrastructure linkages: The road, rail, or water infrastructure linkages agreed to in the Approved DPR, identified as material transport infrastructure required for the development or operations of the [terminal, port].
Quay wall: A vertical or almost vertical shore structure, including related support structures.
This list may be augmented with other items or the definitions may be expanded depending on the specific objectives of the concession and considerations of the national concession law.
Below are two sample conditions precedent, one applicable to the operator, and one applicable to a port authority.
Part 1—Conditions Precedent to be Fulfilled by the Operator. Delivery by the Operator to the Port Authority, in form and substance satisfactory to the government (acting reasonably), of the following documents:
Part 2—Conditions Precedent to be Fulfilled by the Port Authority. Delivery by the Port Authority to the Operator, in form and substance satisfactory to the Operator (acting reasonably), of the following documents:
The term of the agreement is a strategic issue. It mainly depends on the respective amounts of investment the port authority and the concessionaire have made or will make. In a landlord port, standard lease contracts that involve limited investment on behalf of the concessionaire are typically 10–15 years. BOT-type agreements are usually concluded for a period of 25–35 years, with options to renew. Investments of lessors in superstructure and equipment often exceed those of a port authority by a large margin; whether this is the case or not, both parties have an interest in a mutually beneficial longterm relationship. This is especially true when concluding a full concession agreement with a BOT arrangement. Shorter term arrangements (10 years or less) are suitable for tool ports or management contracts, but in general do not provide much security or stability for the port authority and offer no major incentives to the concessionaire to improve performance or to introduce innovative operations.
Concession documents must also indicate precisely when the concession period actually starts, which can be a complicated issue. Some of the provisions come into force on signature, such as warranties, confidentiality provisions, and clauses relating to applicable law and dispute resolution. In the event of the transfer of assets or construction of infrastructure under a BOT arrangement, relevant conditions come into force upon satisfaction of waiver of preexisting conditions. Conditions precedent deal largely with delivery and proper execution of certain documents required to give effect to or support obligations under the concession agreement.
The effectiveness of a full concession agreement is dependent upon the fulfillment of specified conditions precedent and evidence that no circumstances exist that may result in the early termination of the agreed terms (see Box 25).
Parties under a full concession agreement usually consist of a port authority and a sole sponsor or a consortium of sponsors (often called a special vehicle company or special purpose company [SPC]). The consortium may not necessarily be identical to the operator, but may include the operator as a consortium member.
The amount of share capital provided for a new venture is one indication of the consortium’s confidence regarding the port’s prospects and future development. In developing countries, the International Finance Corporation (IFC) may be a source of share capital for the venture. Whether the port authority itself may take shares is debatable, but preferably the port authority should not be a shareholder because it could create conflicts of interest due to its role as a landlord port manager and regulator and compromise its position with respect to other port users. Based on the estimated income expected during the concession period and the infrastructure and superstructure to be constructed during the concession period, the consortium should be expected to leverage its investment with borrowed money from various sources, usually from a syndicate of commercial banks or through the issuance of bonds or other capital market instrument under an indenture.
Finally, the consortium may conclude a management contract with a professional operating company. Both the financing arrangements and the management contract form part of the concession documents (see Box 26).
The operator generally acquires leasehold rights and obligations when assuming the control of an existing facility under a concession agreement. The concession agreement generally limits use of the leased premises exclusively for port purposes and for handling certain cargoes. Within these limits, an operator is free to develop the business. Detailed restrictions for cargo handling on the terminal should be avoided, with the exception of dangerous and polluting cargoes.
There are many other critical subjects to be included in a concession agreement. Two issues of main importance are:
Full Concession Agreements (including BOT arrangements) and lease agreements usually stipulate that the fixed assets revert to the port authority at the end of the lease. Transfer may be effected with or without compensation, depending mainly on the duration of the contract and the investment value of the fixed assets. It is not unusual for a port authority to pay the concessionaire or lessee the depreciated value of the assets at the end of the concession period.
Finally, a concession agreement may contain an exclusivity clause designed to prevent the concessionaire or operator and any of their subsidiaries from competing with other terminal operators for the particular traffic for which the concession was granted, within defined geographical areas and for stated time periods, as the market situation and the scope of the investments may reasonably require. In any case, this time period must remain short enough compared to the length of the concession agreement, and not exceed a period of preferably five years after completion of the building program in the case of a BOT arrangement.
Generally, port infrastructure constructed by a concessionaire through a BOT arrangement remains the property of the port authority. With respect to movable assets placed on the concession area by the concessionaire, ownership rights over these assets generally remain with the concessionaire (with the right to pledge these assets as collateral to financiers) throughout the concession period and may, depending on the concession agreement’s terms, be transferred to the port authority when the concession terminates. Some legal systems allow a concessionaire or lessee to own buildings, installations, and other immovable property located on port authority owned land (for example, in the Netherlands). Therefore, operators may use these assets as collateral for bank or shareholder financing. In countries where the port area constitutes part of the Maritime Domain, private ownership of immovable property will be considered fixtures that cannot be owned independently from the Maritime Domain (for example, in Croatia). In such cases, user rights (in some instances including the right to mortgage— but not own outright—the asset) may be allowed under the concession. Whichever is the case, the port authority should include in the concession detailed provisions pertaining to ownership or user rights over those assets that are erected by the concessionaire in the concession area (see Box 27).
During the concession period, the port authority often assumes dual roles. On the one hand, the port authority serves the public interest as a regulator monitoring performance under the concession agreement. On the other hand, the port authority may possess a stake in the port enterprise as a participant in a public-private relationship with a private sector port user. There is an increasing trend for port authorities to become commercial actors, interacting with private terminal operators as economic partners, rather than acting as regulators. This trend is born of necessity—the port authorities and terminal operators need each other. Therefore, it is a major challenge to find the proper balance between the regulatory relationship and the commercial interests of both parties. In this context, rights and obligations of the port authority have been modeled within the framework of a landlord port model.
Investments and capacity calculations are primarily based on traffic and throughput forecasts. In the case of a BOT arrangement requiring significant outlays by a concessionaire, the port authority (or the national government) might obligate itself not to concession, promote, or commence another competing terminal (or a terminal aggregating more than a certain capacity) in a nearby port area. If, unexpectedly, new capacity were to be created, the feasibility of a project might well be in jeopardy. There is often, especially in smaller ports, room only for one or two terminals handling a specific commodity. If the port authority is too preoccupied with intraport competition, terminal operators might end up in cutthroat competition, resulting in the bankruptcy of some of them at a time when the government’s goal is to encourage sound private sector participation in the port sector (see Box 28).
In many concession agreements, the port authority constructs a list of activities that are permitted to be performed at the site. These activities should be construed as broadly as possible so the operator has maximum flexibility to develop the business and generate revenue (see Box 29).
When an operator acquires an existing (former public) port facility, rights and obligations of the public sector owner transfer, along with the use (but not ownership) of the assets, to the private sector operator. When a new facility is constructed under a BOT arrangement, the new operator commissions the facility after successful commissioning tests or surveys have been conducted by an independent expert, usually a test certifier, who issues a commissioning certificate (see Box 30).
When taking over an existing facility, the following rights and obligations of the operator are usually included in the concession agreement.
The transfer of assets to the new operator under a concession agreement requires thorough inspection and the determination of what repairs or backlog maintenance, if any, are expected to be carried out by the port authority prior to the transfer. Existing assets forming part of the operator’s leasehold and their attendant condition and quality will be reflected in the concession fee. The highest concession fee (relative to value of assets transferred) is usually accorded in jurisdictions allowing for the ownership of superstructures to be transferred to the operator.
When building terminal facilities under a BOT arrangement, the operator has to design and construct the terminal, including quay walls and other infrastructure works. The design has to be carried out in accordance with functional requirements and design solutions set out in the approved DPR as well as under the construction program included in the agreement. Major aspects of the construction process will have been identified for completion by stated times, and if these milestones are not met the port authority usually has the right to assess penalties or terminate the concession. In practice, technical problems should be expected to arise. Although the operator may not alter the construction program without approval of the authority, reasonable requests for changes to the program are usually approved. The port authority customarily reserves the right to appoint a construction observer, usually an engineer. Commission or transfer of the new assets is concluded on the basis of a commissioning certificate issued by an independent test certifier, according to the relevant provisions of the concession agreement.
The construction program included in the concession agreement is in principle binding. The completion of relevant parts of the program is indicated by the milestone achievement date. The construction, however, cannot extend beyond the milestone sunset date, unless waived or extended as a result of a force majeure event. Such date constitutes a termination event for the port authority; in other words, the port authority may terminate the concession when the operator is not able to finish the construction within the agreed-on time (see Box 31).
Concession agreements often include performance parameters to measure the success of the operator in managing the port or terminal. A port authority may want to highlight performance indicators and incorporate certain ones into the concession. These parameters can relate to:
Generally, from the port authority perspective, there may be a tendency to overregulate performance by imposing very detailed and strict parameters. This tendency appears to be more of a problem in the case of new terminals or terminals with a low level of current throughput. Detailed parameters require extensive control and limit an operator’s flexibility. Also, the port authority must devote resources to their administration. Performance parameters that are most likely to succeed are those set at a level that a port authority believes will result in the agreed-on concession fee being paid. When required levels are exceeded, a positive financial incentive should be given to the operator, because extra traffic and throughput results in extra revenue for the port authority. Performance parameters have produced the best results when they were established with the idea of not controlling the operator but creating a win-win situation for both parties.
There are no standard performance criteria for handling various commodities. Situations differ widely from country to country and from terminal to terminal. Much depends on labor conditions, the attitudes of labor unions, and factors such as the size and age of vessels, consignment size, and timely availability of information. Therefore, performance criteria ordinarily reflect local conditions and take into account the reality of all relevant local factors influencing a port.
A vast majority of concession agreements relate to container terminals. In this field, many items are standardized, resulting in the development of internationally accepted, detailed performance criteria.
Productivity targets are usually designed in a phased manner, taking into consideration the emerging problems that a container terminal will face during the first years of its operation. For the purpose of the concession or lease agreement, two phases are usually defined. Phase 1 constitutes the start-up period, from the date operations commence to a later point one to two years later. During this time, the new management and the workforce have an opportunity to structure operations, develop commercial policies, and engage in training various categories of personnel. Phase 2 is when the terminal is expected to work at peak efficiency, with professional management and a well-trained workforce in place. The following types of productivity targets can be included in the concession agreement’s performance provisions.
Crane productivity: Crane productivity measures the number of equivalent container movements per crane working hour. It is calculated by dividing the number of equivalent container movements handled by a crane by the number of hours the crane operated. Crane productivity is usually expressed as either the equivalent container moves per gross crane working hour or the equivalent container moves per net crane working hour (deducting all nonoperational and idle time experienced by each crane). Equivalent container moves are usually calculated as the sum of:
Ship productivity: Ship productivity is the output achieved per ship working hour and is used to measure the efficiency of ship operations. It is the most important indicator to ship operators and a valuable means for measuring yearround terminal performance. It is recorded and expressed in four categories:
Two other categories are nonoperational time, the period when the berth is not scheduled to be worked (for example, meal breaks) and idle time, the period when work has stopped for unexpected and unscheduled reasons (for example, equipment breakdown).
Quay productivity: Quay productivity measures the throughput in equivalent container moves per unit of time per meter of quay length. This criterion is included to encourage the operator to successfully promote and market the terminal facilities and to increase traffic. The targets may be different for each applicable phase of the project.
Terminal productivity: Terminal productivity expresses activity in terms of the number of containers handled per square meter or hectare of terminal area per time unit. It is calculated by dividing terminal traffic, measured in TEUs, by the total terminal area in square meters or hectares. The targets may be different for each applicable phase of a project.
Dwell time: Dwell time is a measure of the time spent by containers in the terminal. It is a major indicator of the efficient use of the terminal area. It measures the period from the time a container is lifted off the ship to the time it departs the container yard. An appropriate indicator of quality of service is also the truck turnaround time from entry to exit in the terminal area when delivering or picking up a box, with 15–20 minutes being the common efficiency benchmark.
Labor productivity: Labor productivity figures relate traffic and terminal throughput to the total number of people employed by the terminal operator. This indicator is included to enable the operator and the port authority to monitor labor productivity and, indirectly, terminal operating costs. Labor productivity indicators may be based on the total number of hours worked by the total number of or certain categories of employees in the terminal.
Utilization measures: This category of indicators measures the intensity of the use of terminal resources by the operator. It includes two important indicators, the berth working index and the yard utilization index. The berth working index compares the total time vessels were worked at the quay with the total time that such vessels were berthed. The yard utilization index compares the number of storage slots occupied to the total number of available slots, and is typically calculated daily.
Performance parameters are best included in an annex to the concession agreement, with a section in the agreement referring to the detailed annex (see Box 32).
When concluding a concession agreement for an existing terminal, it is common practice to engage all or part of the employees already working in the terminal or to extend an offer to join the new venture. This area is highly sensitive and should be handled with great care even before the concession is awarded. Module 7 deals with labor issues in greater detail. Another useful resource on this topic is the World Bank’s Labor Issues in Infrastructure Reform: A Toolkit.
Often, as a result of years of neglect, unfavorable working conditions, and outdated equipment, workers lack the motivation to perform at an acceptable level. Often, they were members of unions that fought aggressively for the preservation of their jobs, sometimes resisting any change that they feared could have endangered the continued employment of the workforce. New operators taking over an existing terminal must therefore anticipate a start-up period for motivation of new workers as well as for retraining. Otherwise they may face the inefficiencies of an underemployed workforce. The reference clauses should be considered only as an indication of how to approach the issue. Whether existing employees should transfer into a new operator’s service on terms and conditions no less favorable than those enjoyed by them immediately prior to their transfer is a matter of negotiations among labor, the new operator, and the government (see Box 33).
An operator cannot be held responsible for fully achieving performance goals when unforeseen and uncontrollable events intervene (force majeure). However, such events should not automatically excuse the concessionaire from its financial obligations payable under a concession agreement. The operator should be encouraged to obtain insurance to cover the risks of such events as much as possible (see Box 34).
A force majeure event is any event or circumstance or combination of events that:
In most concessions, the main force majeure events are the following:
The occurrence of a force majeure event may result in the extension of the term of the concession or the extension of the construction period after the force majeure event has subsisted.
At many ports (for example, Antwerp, Rotterdam, and Hamburg) the operator may be best able to perform under a straightforward lease contract. In a concession, with or without a BOT arrangement, lease conditions form part of the overall concession. The reference clauses contained in Box 35 and Box 36a,b can therefore be used under both types of contracts. Lease arrangements present a number of strategic issues for consideration, the most important of which are:
The specific content of any lease is very dependent on the site conditions and local factors. The lease usually presents in detail the responsibilities and liabilities allocated to each party. When an existing site is leased or concessioned, conditions should be enumerated clearly to give lenders certainty of outcomes under particular “what if” scenarios.
Clauses should be included in the concession agreement to fence off the site, while still allowing sufficient, unimpeded access to the site to enable the port authority to perform inspections (see Box 37). The port authority usually takes responsibility for all common areas, including road connections and pedestrian areas. An operator will seek to hold the port authority liable for all undue delays in road traffic destined for the terminal.
Most often, the governing law of the concession agreement is the national law of the country where the terminal is located. Some foreign lenders, however, require that documentation be governed by U.K.[BCJ7] or U.S. law. Issues relating to governing law, submission to jurisdiction, and dispute resolution should be addressed at an early stage of the negotiation between the port authority and the operator, particularly in the case of a concession involving a BOT agreement (see Box 38).
To respond to market competition, operators should have the freedom to set their own prices. The operator should be expected to negotiate periodically with its customers and may provide quantum rebates in return for increased throughput. Only in a situation when the operator is in a monopoly position might there be a reason for government interference in tariff setting. To avoid conflicts of interest with the port authority, an independent port regulator is usually given authority to oversee tariff regulation (see Module 6 for a full discussion on economic regulation). The mere fact that competing ports in the country offer lower tariffs may not be a reason for regulation of tariffs. When it can be proven that competing ports offer lower prices as a result of distorting government subsidies, the competent authorities should take measures to eliminate such subsidies, such as through a complaint to a competition authority. Thus, prices should only be regulated in case of abuse of a monopolistic position by an operator, such as in predatory pricing (see Box 39).
National or local taxes for the leased site(s) are usually paid by the operator. At times, to encourage port development, certain promotional rates or tax holidays are extended to the operator during the initial phases of operation. Such incentives are a function of national fiscal policy (see Box 40).
There is no generally accepted standard for a concession fee. This fee is usually determined as the sum of a fixed fee for the use of the areas under administration of the authority and or a variable fee in the form of a throughput royalty for the right to perform cargo handling services. The fee amount is a function of local circumstances. The fixed portion may represent the infrastructure costs (and superstructure costs, if applicable) of the terminal, including financing costs. The structure and level of the concession fee is a primary element for analysis by project lenders. The variable fee is often a function of the market position of the port overall (that is, what the market can bear) and other considerations, such as the creation of a fund for excess port workers. An important issue is the indexation of the concession fee (TEU fee). This fee is usually expressed in U.S. dollars, euros, or other hard currency. Since the term of the concession might well be more than 30 years, it is evident that there is a serious inflation risk. A concession agreement should therefore include a specific clause on indexation. Indexation should be applied to both fixed and variable fees. The easiest option is adjusting the fee periodically on the basis of a basket of currencies, such as a combination of the U.S. dollar, the euro, and the yen; the example in Box 41 is somewhat more complicated. Sponsors and operators are often not willing to provide for total compensation of inflation and try to put the risks as much as possible on the port authority.
Insurance for employees, equipment, and vessels covering injury and damage within the concession area is typically specified in a concession agreement. Moreover, the operator is expected to indemnify the port authority against a variety of incidents pertaining to port operations and other events (see Box 42).
A concession agreement usually contains clauses pertaining to security in the port area. Generally, these issues fall under a port authority’s jurisdiction, although a terminal operator also bears part of the responsibility. Since the ratification of the ISPS Code (International Ship and Port Facilities Security Code) by most maritime countries, security has improved considerably. The code applies to all commercial vessels undertaking international voyages as well as all port facilities. The concession should oblige the operator to apply the relevant provisions of the code and to cooperate with the port authority and the harbormaster within the framework of the required port security plan (see Box 43).
Often, cargo at the port is not claimed by the rightful owners. In cases of complex customs legislation or port bylaws, warehouses filled with unclaimed cargoes may burden the operator’s ability to manage the terminal and meet performance targets. Therefore, the operator will expect to set clear rules with respect to such cargoes and who bears removal responsibility and costs in conformity with custom’s regulations (see Box 44).
It is essential that a port authority is able to gain access to recent, relevant, and direct information on all aspects of port operations, including marine operations and cargo throughput. The port authority should be informed promptly about all incidents occurring in the port area so that it can undertake appropriate measures in response. The agreement includes a requirement for the operator to provide such information (see Box 45).
Termination clauses of a concession agreement are of prime importance for the relationship between the port authority and the operator, especially under a BOT arrangement. The concession agreement represents a negotiated balance between the interests of the port authority (an efficient and economic use of the port land) and the operator (provision of cargo handling services on a profitable basis). Both parties are tied together in a long-term symbiotic relationship where the fortunes of one directly bears upon the results obtained by the other. That contractual relation, therefore, should not be terminated without good cause.
The way termination clauses are conceived reflects the power balance between the two parties. An operator with alternative port locations available will not easily accept harsh termination clauses. On the other hand, a port authority should be aware that an operator might fail in the market, and valuable port land may lay unused for years if the right to terminate the concession is not clearly defined. Finally, lenders to the operator should be very careful in their analysis of these provisions to ensure their interests are protected (see Box 46 and Box 47).
In the event the operator fails to comply with its obligations, a port authority will ordinarily have the option to terminate the agreement. Termination for cause is very serious, especially for financing parties, and should be avoided as much as reasonably possible. The operator should be given a reasonable period to demonstrate compliance with the terms of the agreement and resolve noncompliance events. However, an operator may be in financial distress, for example, and unable to pay the concession fee. In this case, the port authority may not directly terminate the agreement, but consider the seriousness and likely duration of the problem. If it is determined to be temporary, the port authority, perhaps in concert with the operator’s lenders, may come to an understanding with the operator (for example, a deferred payment scheme) that avoids termination of the agreement (see Box 48).
As discussed above, every concession includes clauses on termination compensation, irrespective of the reason. The port authority or the operator may terminate the concession before expiration in the event that the other party is in material default of the agreement. Moreover, a concession may be terminated by mutual agreement after a force majeure event such as a tsunami or earthquake. In either case, the port authority is liable to pay a termination compensation to the operator since all fixed and movable assets of the terminal are transferred back to the authority. The main issue, however, is how to assess the value of the assets.
Many concession agreements provide an option to extend the term of the concession. This feature becomes more important in concessions with shorter terms. One may expect that concession agreements with a duration of 10 years or shorter will not generate significant investment. When there is an option to continue under balanced conditions, an operator might be tempted to take more investment risks. It is therefore in the interest of the port authority to include options to continue the agreement.
Generally, the port authority, when there is a mutually beneficial relationship between the parties, may favor extending an agreement under new conditions. Significant time and expertise may be lost if a new operator has to be found and terminal operations have to be restarted under new management. Judgments about agreement extensions depend on, among other things, the position of the port in the overall market and the alternatives available to the operator (see Box 49).
The port authority will usually insist on the right to terminate the agreement in case of the bankruptcy or insolvency of the operator. Sometimes an operator will be provided an opportunity to resolve such insolvency petitions within a limited period of time (see Box 50).
There are various methods, but in general the basic principle for assessing termination compensation is the fair value of all the assets brought into, created, or installed at the concession area, including:
The fair value is usually determined by an independent appraiser who acts as an expert, not as an arbitrator, and should have the power to obtain relevant information from the parties to make an independent assessment. In no circumstances shall the appraiser apply any earningsbased valuation methodology, or take into account any goodwill in the business of the operator for determining the fair value of the assets at the concession area. The fair value would normally be subject to addition or deduction depending on which party was in default.
There are many methodologies for determining fair value. Examples include the basis of book value of the assets minus depreciation or replacement value or using the going concern method of calculating lost future cash flow of the entity. Obviously, the contractual clauses on fair value are an important issue for negotiation between the port authority and the prospective operator when concluding a concession agreement. The methodology of determining fair market value should be agreed on and included in the concession agreement.
Upon expiration of the concession period, the facilities built on the site and any title that passed to the operator as part of a B(O)OT arrangement will be transferred back to the port authority. In some contracts, the site may have to be restored to its original state, which could mean that the operator must demolish structures and installations that were built on the site during the concession period. Equipment would be transferred or retained as a matter of contractual obligations; it may be compensated at book or market value, or it might be removed from the site by the operator for sale or for use elsewhere. An obligatory free transfer of equipment to the port authority is not recommended due to the maintenance requirements for such equipment. If an operator knows that it may have to transfer equipment at the end of the concession period, the operator may cut back on maintenance as much as possible to save money toward the end of the period.
The concession agreement should specify the condition of the basic and operational infrastructure at the time of transfer. The port authority should monitor thoroughly the infrastructure maintenance (life cycle maintenance, routine maintenance, and reactive maintenance), and, if applicable, the superstructure throughout the concession period. Any deficiencies found during the joint inspection prior to hand-back should be corrected by the operator.
The authority should expect to receive all construction documentation for installations, power and water lines, sewerage systems, and any other systems that have been constructed underground at the site during the concession period. The operator should also remove all remnants of piles, foundations, and similar civil works before leaving the site. When the site is to be handed over in its “original condition,” all later restoration costs should be borne by the operator (see Box 51).
Many concession agreements include a provision for arbitration. Sometimes, reference is made to International Chamber of Commerce (ICC) arbitration (which is the preference of most lenders) or to a local arbitration institute. Often, a specific procedure is presented in the agreement. Arbitration is often a preferred option in case of a conflict between parties. The reference clauses in Box 52 are meant for deciding on increases of the concession fee, if parties cannot come to an agreement. This type of arbitration can also be applied to other conflicts that may arise during the concession period.
Costs pertaining to the use of the concessioned site are usually paid by the operator, including the case in which the port authority holds legal title over the port land (see Box 53).
Under a concession, the long-term use and exploitation of port land and assets are transferred to private parties through tender. The process to achieve this transfer in an optimal manner has to be both effective and transparent. This requires taking a sequence of steps that are logically interrelated and lead to concessioning of terminal activities under the best possible conditions for the government and port authority. The steps are explained below.
Marketing strategy: The first step is to ensure that a company profile reaches a reasonable number of relevant bidders (“reasonable” referring to both creating sufficient competition and avoiding large costs). The company profile comprises the most relevant information on such issues as core activities of the offered prospect and future perspective of these activities. At the same time, the financial, operational, strategic, and other contributions expected from the bidders are specified (prequalification criteria). Further, the profile refers to the existence of an information memorandum that is available to parties that are interested in making a serious bid and are able to comply with selection criteria to qualify for negotiations. The information memorandum should include strategic, economic, and financial information on the relevant port or terminal, the main provisions of the concession agreement to give prospective bidders information on the institutional and legal background of the port sector, as well as the selection criteria.
Selection (prequalification): Reactions to the profile are screened in accordance with the prequalification criteria. The obtained “long list” will then be put to a further test and probably narrowed down to a “short list,” to ensure that only serious bidders submit proposals.
Interfacing: The short listing process, with its submission of concise information to a long list of bidders, and the need felt by the latter group to know more, will almost certainly invoke interactions between prospective bidders and stakeholders in the government or port authority. This may result in a bidders conference (pretender meeting), workshops, road shows, investor tours, one-on-one meetings, or similar events.
Managing the transaction to its conclusion (bidding stage): After short listing, the candidates are obliged to carefully review the information memorandum, which shall contain information on an array of issues. These issues are listed in the relevant task sheet. The information memorandum will then be sent to those requesting it and prequalifying. They are invited to respond to it in a prescribed standard manner. Standardizing the bids ensures rational comparison, scoring, and ranking, and also makes the whole process transparent and defendable.
After the bids have been submitted, comparing, scoring, and ranking sessions should be held under the advisory guidance of a professional port consultant. At this stage, bid standardization achieved by the identical information memoranda sent to the bidders will prove to be crucial to finalizing the selection process in a transparent and effective manner, leading to best results for the port authority. The selection process includes several phases:
Negotiations (political approval and contracting): Since concession agreements are usually very complicated, particularly when a BOT arrangement is included, the port authority’s negotiation team should be professional and fully authorized to conduct the negotiations and be assisted by an (external) international port lawyer. In the event that many government departments are involved, it is advised to agree on a mandate for the negotiation team (negotiation guidelines), including the (minimum) position on important issues that constitute the main part of the concession. These issues usually are:
In practice, negotiations may take a long time, ranging from one month to one year.
The concession agreement may contain provisions to cover a number of miscellaneous conditions and activities in the port, including environmental conditions, construction and maintenance of a fence around the site, advertisements, and dumping of liquids in port waters (see Box 54).