MAY 2016 PPP TO THE RESCUE OF THE FINANCING OF PORT INFRASTRUCTURE

For several years public-private partnerships (PPP) have been used as an alternative to public financing of major infrastructure projects. They have been applied to several areas, notably health, transportation, technology, information and the environment. PPP are still very popular throughout the world, particularly in  developing countries.

PPP in the maritime sector are not as well documented as those in other sectors. However, several major port infrastructure projects were funded according to this embodiment. Their popularity can be explained in several ways. It is largely related to  movements of privatization and liberalization around the world. These movements began in the 1970s, until the 1990s and early 2000s. Parallel to this situation, the opening of the port authorities have given opportunities for private companies.

The level competition between port sites and large international carriers has created a need for more capacity of transport (Gigantism) and treatment of their goods. To satisfy these requirements, port authorities must increase their capacity so that  infrastructure projects in the maritime sector are more and more  intensive in capital.

However, this adaptation to new standards has become a critical source of competitiveness and this can be translated into economic gains, income and added value. The increase of investment needed to remain competitive.  There is therefore need to better  funding, while governments are not necessary willing to offer such funding.

So far, the private sector has shown itself able to assume these new mandates and generate the required financing. It has demonstrated that it could  meet the needs of the industry and is a valid solution to the problems of the public sector. The challenge remains to know if participation of private sector has become a necessity to ensure the competitiveness of the port sites.

What is a PPP?

A PPP is a contractual arrangement between public bodies and consortium of companies in the private sector (partner). This agreement aims to ensure the construction of infrastructure and/or the operation of a public service (examples: hospitals, toll road). It establishes a sharing of responsibilities, investment, risks and benefits.

In a PPP, several types of risk are evaluated, including construction, operating, financing, environmental. The partnership agreement determines which of the parties, be it  public or private, is the most able to assume these risks. The diagram below provides a typology of PPPs by establishing a relationship between the duration of contracts and the transfer of risk to the private sector.

This diagram illustrates a multitude of contracts or variants that can be performed in a PPP. They are categorised in a continuum according to the risk transferred to the private partner. For example, the conventional mode involves no transfer of risk. In the latter case, asset generally belongs to Governments, who also maintain responsibility for funding. At the other extreme, the total privatization implies that the assets of the infrastructure, including the capital of the land, is entirely owned by private enterprises. In the latter, private companies would fully assume the exploitation of the infrastructures and their financing.

Distinction between the various modes of public projects

LB - ppp

Source: MTQ. PPMs, Centre of research and expertise in evaluation, Centre of expertise of the National School of public administration

In an intermediate situation such as a DBFO (Design, Built, Finance, Operate design, construction, financing, maintenance/operation), the ownership of the infrastructure is generally transferred to the Government at the end of the contract (cf. Annex port of Vancouver, Amsterdam locks). This means that such a contract forsees that private enterprise will take the responsibility for the  design and construction of infrastructure,  the exploitation (including maintenance), and fund the investment. The term of the contract is usually of several years (most of the time more than 20 years)

Governments can offer concession to private companies who will assume the exploitation of such an infrastructure if it has been already built. In this case, the company would assume  maintenance and upgrading of infrastructure, but not the funding and construction (cf Annex port of Melbourne, Australia). As included in the agreement, fees could be charged to the Government following  usage of the infrastructure.

The different possible combinations of public-private partnership are almost unlimited.

The landlord model

The most commun partnership in the maritime sector is the landlord model. In this model, management and operational responsibilities are delegated to private companies while the security and investment in infrastructures remain under the responsibility of the Government.

In the landlord model, the public sector is liable to adopt regulation and its application. The Government remains the land owner. Some basic facilities are leased to private companies or industries such as refineries, terminals or chemical industries. The private sector owns its own infrastructure and equipment on the ground and is responsible for terminal operations.

However, the interest that governments have to PPPs is not only relinquishing port management responsibilities but obtaining funding for certain infrastructure projects. In this situation, the contract must provide mechanism of payment or compensation for the investments made in infrastructure. In such a case, the role of the private sector is more elaborate and revenues must enable it to assume the operations of a terminal and the financing of its investment in infrastructure, including their depreciation over several decades.

The development of a PPP process

The development of a PPP process is laborious. Application requires generally better planning than for the conventional method.

This process requires an initial business plan which includes the development of a public benchmark, or an assessment of the costs of the project if it was made in conventional mode. This public benchmark serves as a basis for comparison with the other embodiments in PPP.

This business plan will also include an analysis of the project’s value to determine the optimal means of realisation. Since it is a long term contract, an economic value analysis is done taking in to account  the flows of income and expenditure over time. It determines the internal rate of return and the profitability of the project. It also involves the use of a actualisation rate representing depreciation of money in a time frame period (the rate is not equivalent to an interest rate found in the financial markets).

Finally, the business plan includes an analysis of the risks and timelines. The risk analysis is usually performed in workshop with experts who are able to identify and qualify the occurrence of certain events. They are in fact principles related to a best possible management of the project.

If the solution in PPP is selected, a tender of interest and qualification will be carried out to identify potential bidders. At this stage, financial guarantees (bank letters) are often required to ensure the financial soundness of the tenderers. These tenders are usually international. Bidding fees are often assumed by Governments.

Once a final partner is selected, a final business plan is developed. It typically involves the plans and specifications of the project as well as a precise evaluation of costs, a breakdown of the different sources of funding and the sharing of responsibilities. This project could be subject to a diligence review on the part of Governments.

A contract is subsequently developed and concluded between the partners of the project.

PPPS IN THE MARITIME WORLD

More than 70 billion $ PPP shipping around the world

PPP as an alternative of financing has increased. Investment in PPP projects for a decade stands at some 70 billion $US. The allocation of this sum follows according to sectors: containers: 38.2 billion $ with 184 PPP projects; ports ident with 24.3 billion $ and 131 projects, solid bulk and liquids with 9 billion $ and 94 projects.

Geographically, the  countries leading in terms of generated total investments are the Republic of China with 14 billion US $, the Brazil with 11.1 billion $US, the India with 7.6 billion $US and Nigeria with 7.1 billion $US. Countries in Asia and North Africa began developing PPP later but have shown a sustained development trend. South Asia  started PPPs in mid-1990’s. Finally, Latin America and the Caribbean have shown a high level of activities, providing several PPP opportunities for ports.

In the United States, a report commissioned by Department of transportation (USDOT-2004) shows that there has been  a substantial increase of PPP projects in recent years. This increase is especially noted for granting long-term and DBFO concession. The United States is looking for new innovative and creative avenues to fund PPP projects. Several of these PPP’s concern the maritime sector.

Pros and cons of PPP in the maritime sector

One of the main recognized benefits of PPPs is to address the lack of financing from the public sector. In this regard, several Governments have,  in recent years, to encourage the implementation of PPPs to control their public debts.

In addition to funding issues, another equally important advantage is the performance gains associated with the involvement of private enterprise. The competitiveness of a port site is related to its level of integration to the supply chain. The presence of a private corporation as an infrastructure project financial partner can ensure an increased level of integration of site based on elements that are more directly related to competitiveness. This is consistent to the theory of contingency which calls for the adaptation of the internal structure of the organization to its external environment. It could be assumed that the participation of a private port operating partner would contribute to the structures and services needs of private companies and thus increase the performance of the port.

The role of the partner in supply chain system is decisive. For decades, the supply chains had vertically integrated and globalized under the influence of the multinationals. According to the OECD, the selection of ports is commonly based now on the efficiency of those supply chains. They have become the reference relevant to analyze port competitiveness, which now depends on increasing coordination and control exercised by the external actors including the private companies.

In addition to the level of efficiency, the perceived benefits of PPPs are to facilitate trade, generation of revenue for the Government, a greater access to the capital markets, a reduction of restrictions on investment, new practices of industrial relations, a better business approach to management and promoting more competition among the various harbour sites. All of these factors combined increase global performance.

Among the disadvantages, there may be a perception of loss of control, ambiguities of political and commercial, difficulties to choose operators, as well as the long process of concluding partnerships.

Some marine examples of PPP in the Canada and elsewhere in the world

In the appendix of this article are four examples of PPP developed around the world. A comprehensive list of databases of PPP projects describes various contracts in PPPs.

Inter alia, the World Bank brings together one hundred projects (http://infrapppworld.com/pipeline-html/database-of-ppp-projects) linked to the financing of PPP projects in developing countries. InfraPPP-excellent knowledge and other specialized sites also include a Bank of projects around the world categorized by sector, by country and by region and level of advancement.

In the examples in the appendix, we have selected PPP’s of industrialized countries were selected to best illustrate the fact that private financing needs are not a problemrelated to the developing countries. These projects illustrate  the extent of financing needs and are justified by need for more capacity and by competition issues.

A PPP for the port of Vancouver is being developed and provides a schedule of investments of more than 2 billion $CAN. The investments will be financed entirely by the port of Vancouver and private partners without government contribution.

Lock in Amsterdam involves an upgrade of the system of locks in order to adapt to new standards for the size of the ships. It is a project of 840 M$ US.

The Miami tunnel is not a port infrastructure as such. It is an alternative to accomodate downtown Miami’s heavy trucks seeking access to the port.

The port of Melbourne (Australia) project approximates a model of concession for a period of 50 years.

Louis Bellemare
New World Maritime

ANNEXES

EXAMPLE 1: TERMINAL 2 OF ROBERT BANKS IN VANCOUVER PROJECT

DESCRIPTION OF THE PROJECT

The project “of the terminal 2 of Robert Banks has three berth to terminals at Roberts Bank, Delta in British Columbia. It will receive  containers with a total capacity of 2.4 million in equivalent twenty-foot (units TEUS). It aims to meet the future demand for the treatment of containers. According to the growth forecasts  for western Canada, containers traffic for the year 2025 should reach at 6 million TEUS and 7 million TEUS in 2 030.

In 2015, Western Canada (Vancouver and Prince Rupert) container terminal handled more than 3.8 million containers in TEU including 3.1 million TEUS by the administration of the port of Vancouver. By comparison, the port of Montreal dealt with 1.5 million TEUS by 2015.

EDE EQUIVALENTS TWENTY CONTAINER TRAFFIC GROWTH FORECASTS FEET

Source : Vancouver Fraser Port Authority, http://www.robertsbankterminal2.com/about-the-project/port-metro-vancouver/, Container Traffic Forecast Study, Ocean Shipping Consultant, juin 2014

The project consists of three major components:

  1. three berths for container vessels
  2. enlargement of a Causeway to accommodate a larger road and rail capacity
  3. a basin tug widened to accommodate a second contractor’s towing operations.

CONSTRACTUALS ELEMENTS

Vancouver Fraser port authority is in the process of bidding for two contracts. One for the terminal operator and another for the development of infrastructures:

  1. The operator of the terminal will operate for a period of 40 years the facilities and equipment as well as container handling operations;
  2. Following the selection of an operator, the developer of the infrastructure will charge of  the design,  construction,  financing and maintenance of the terminal.

ENVIRONMENT

The project is being reviewed by an independent Committee under the Canadian Assessment Act environmental (2012) (S.C. 2012, c. 19, art. (52) and the Act on the environmental assessment of British Colombia (British Columbia Environmental Assessment Act). These assessments will enable to acquire all the permits and permissions.
Construction is scheduled to begin in 2018 and will take approximately 5 years to be completed. Operations will start in 2020,  once the capacity of the port  be met . The project will be funded by the Vancouver Fraser Port authorities and a private partnership. It would not require any contribution from Government.

PROJECT COSTS
The project costs are estimated between 2 G$ and 2.5 G$

EXAMPLE 2: SYSTEM OF LOCKS AT THE PORT OF AMSTERDAM

EXISTING INFRASTRUCTURE

The system of locks at IJmuiden is an access point wich connects the North Sea and the port of Amsterdam. It is a focal point for ships intending to reach the city of Amsterdam. The system has four locks which are currently operating at full capacity in terms of number, size and tonnage of vessels. The current system of locks was built in 1929.

DESCRIPTION OF THE PROJECT

The Dutch Highways and Waterways Agency (Rijkswaterstaat) concluded a PPP contract for the construction of a new system of locks to replace the former.

OpenIJ is the consortium which will be responsible for the project. The members of the consortium are BAM PPP, PGGM Infrastructure Coöperatie, DIF Infra III and Volkerlnfra PPP.

This consortium will be responsible for the design, construction, financing and maintenance of infrastructure (DBFM) for a period of 26 years. The new lock system will ensure that new generations of ships of bulk, containers and cruises will continue to have access to the port of Amsterdam.

The system will be 500 meters long, 70 metres wide and 10 metres deep and will be operable at all tide levels. Work will began in 2016 and should be available in 2019.

PROJECT COST

Total investments of 640 million euros are planned (839.5 million $US). The financial framework of the project will involve the participation of six commercial banks as well as the investment of Europe (PIC) Bank.

EXAMPLE 3: THE PORT OF MIAMI TUNNEL

The PortMiami Tunnel (port of Miami tunnel) is a 1,300 meters long. It consists of two parallel lanes of opposite directions that cross the Byscayne Bay to join Watson island and the Port of Miami.
This tunnel was built with PPP and was funded by three entities: Florida  Department of transportation, Miami an City and private enterprise mast dealer LLC, witch designed, built, financed the tunnel and will operate for a period of 31 years.

The initial goal was to reduce traffic to the port of Miami. This traffic congested the streets of Miami with  heavyweights that had to go through downtown Miami to get to the port. Heavy truck traffic has hindered growth of downtown Miami.

The first month operation,  it numbered a movement of 7 000 vehicles per day. Currently, about 16 000 vehicles use the tunnel to get to the port during week days.

This project was approved in December 2007. Construction began in May 2010 and the tunnel was completed in may 2013. It was opened to traffic in August 2014

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EXAMPLE 4: PORT OF MELBOURNE (AUSTRALIA)

THE PORT OF MELBOURNE

Melbourne is the largest port in Australia. It deals with some 2.5 million TEUs and 35 million tons of goods in 2014. The total value of goods transported was 92 billion $(aud) the same year. The port accounts for 34 commercial mooring docks and approximately some 7 kilometres of terminal. It is also the largest port of Australia  (370 000 units) and is visited by approximately 3 000 ships each year.

PROJECT

The draft provides for the rental and increasing the capacity of the port for investments with a value of about 1.6 billion $(aud). It involves the construction of a third international container terminal, a motor terminal and a goods inspection center.

The new capacity will treat nearly one million TEUs more and one million motor vehicles. The project meets the expected growth of containers and vehicles in the medium term for the port of Melbourne.

THE CONTRACT

The contract provides a 50-year lease. The State remains owner of the port lands. The private partner will return the land at the end of the rental

The private partner will be responsible for planning, the realization of the investments inside and outside the port, development, financing and maintenance. This includes the use of the navigation channel and the management of the conditions relating to leases for some 500 hectares of land.

The transaction provides no rights for the private partner to build a new port.

The operator will be also responsible for the personnel and activities on the docks.

RESPGOVERNMENT RESPONSABILITY

The State remains responsible for the captaincy of the port’s security, the treatment of dangerous goods, emergency, management of pollution mitigation measures and the application of the rules on towing.
The price structure will be adjusted so that it corresponds to a commercial logic. Prices will be capped to inflation for a period of 15 years to protect the industries that use the port facilities.

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