PORTS AND TERMINALS:

PRESENT AND FUTURE CHALLENGES

19 SEPTEMBER 2016

Alex Kyriakoulis

Partner, Corporate & Projects

T: +44 207 264 8782

ayk@hfw.com

1. Background

2. Present and future challenges

Structural changes

Investment requirements

Inter- and Intra-port competition

Port user bargaining power

Port regulation/green policies

3. Addressing the challenges

Port reform

Outside capital

Exclusivity

(Un)equal treatment

Consolidation / JVs

Operational efficiency/green initiatives

Background

Majority of global trade moved through sea ports

Most ports traditionally:

State owned

Subject to minimal inter- or intra-port competition

Not particularly “green”

Advent of modern globalisation era significantly increased trade

between countries/economic blocks; users expect:

Competitive tariffs

More efficient services (waiting times, etc.)

Growing cruise sector requiring better facilities for luxury holidays

Many ports inefficient or incapable of adapting:

Undevolved planning and control

Lack of investment or misdirected investment

Restrictive employment practices/laws

Structural changes

> 50% of global cargo carried in

containers

Containerization recent

development

Dramatic effects on ports

Continuning increase in number

and size of container ships

SS Ideal X: 58 containers, 160m

length, 9.1m beam,

MSC Oscar: 19,000 TEUs, 400m

length, 59m beam 16m draft

Max vessels for (expanded)

Panama canal: 13,000 TEU

24,000 TEU ships in 2020

Source: http://new.abb.com/turbocharging/maritime-cargo-vessels---is-bigger-better

Investment requirements

Capex:

Dredging deeper drafts and larger turning circles

Berth pockets

Use of tides

Larger/more STS cranes (+ stronger quay structures)

Larger capacity container yards

Replacements / heightening of bridges

Sophisticated port operating systems

Hinterland connections – expanded access roads / rail spur capacity

Workforce

Can account for >50% of terminal opex

Mega ships result in peaks and 24h operations – more flexible labour

needed

Who bears all these costs?

Inter- and intra-port competition

Rapid growth in development of new ports/terminals globally:

China: >20 of the 50 busiest container ports (and largest - Shanghai)

India allocated $8bn in 2016/2017 alone for port development

Many other ports & terminals developed/expanded globally

Emergence of “transhipment” terminals:

Not dependent on import/export trade

Driven by increasing vessel sizes and distribution patterns

Specific geographic location less significant

Adopting aggressive pricing models

Port operators facing significant competition:

From ports in the same country

From terminals within same port & from ports in neighbouring countries

Port user bargaining power

Shipping/cruise lines bargaining power vis-a-vis ports/terminals:

Demanding better services (see previous)

Lower charges

Strengthened by consolidation (CMA CGM + APL, Hapag + CSAV,

etc.) and alliances:

2M (Maersk, MSC), Ocean Three (CMA CGM, UASC, COSCO Shipping)

G6 (NYK, OOCL, APL, MOL, Hapag-Lloyd, HMM), CKYHE (K Line,

COSCO, HANJIN*, Evergreen, Yan Ming)

Concentration of market share by cruise operators

Affiliated port operator and shipping line links weakening:

Port operators run as independent profit centres

Shipping lines will not (officially) commit to use of affiliated terminal

Port regulation/green policies (1/2)

Proposed 2013 EU Ports Regulation:

“Level playing field”: publicly funded ports to have transparent

accounting systems evidencing effective/appropriate use of state funds

Transparent, open procedures for selecting port services providers

Supervision by independent authority of port service charges levied

Limits on providers of PSO (public service obligations) services must be

clearly defined, transparent, non-discriminatory and verifiable

Port users’ advisory committee: cargo owners, vessel owners and other

port users - to be consulted on level and structure of port charges

Port operators also required to consult stakeholders on broader issues -

coordination of services, hinterland connections, admin. procedures

Aim of regulation is to address structural performance gaps,

increased size of vessels, new trends in logistics and distribution

systems and need to improve environmental performance

Port regulation/green policies (2/2)

EU ownership models vary - fully public to fully private (see later)

Ports regulation criticised, particularly from UK (privatised) ports:

Obligatory internal competition will affect small ports’ economies of scale

Bureaucracy and port supervision will deter investment

COP21: inevitable CO2 legislation

Proactive improvements:

Obligation to provide cold ironing / shore power

Zero emissions technology for port equipment and vehicles

Effective dust suppression systems for dry bulk cargoes

Recycled concrete and other green construction materials

Included in spec. for new port concessions even if not yet law

Cost of port development/operation increases cannot always be

passed on to users due to severe competition

Port reform

Port reform: corporatisation, PPPs / privatisation

Has been shown to make ports more innovative, competitive, etc.

Corporatisation = port authority transformed into corporation:

Government retains ownership but port legally (and financially)

independent / management free from bureaucratic meddling

Transformation introduces commercial principles into functioning of port

enabling efficiency and commercial agility

Ports free to set own tariffs, establish own procurement / employment

policies, able to take on debt from commercial banks / issue bonds

PERFORMANCE MEASURE COLPUERTOS PORT

(BEFORE PORT REFORM)

SPRC (AFTER PORT

REFORM)

Waiting time 10 days Less than 2 hours

Turnaround time 72 hours 7 hours

Cost per move US$984 US$224

Cargo dwell time 30+ days 2 days

Degrees of privatisation

Project

Tender

Award of

Concessions

Operations

and

Management"Suitcase"Stevedores

State -

owned

ModelLeased

TerminalConcession

Agreement

BOT

Concession

Fully

Privatised

Port

Regulations

Land Area

Port

Operations

Terminal

Infrastructure

Terminal

Superstructure

State

State

State

State

State

State

State

Private

stevedores

State

State

State

State

Terminal

Operator

State

Rented from

Port Authority

State

State

Terminal

Operator

State

Terminal

Operator

State

State

Terminal

Operator

Terminal

Operator

Terminal

Operator

Private

Private

Private

Private

Private

Landlord Ports

Outside capital

Public-private partnerships (PPPs) / privatisations

Full v partial privatisation:

Very few full privatisations (in Europe only UK)

Some 'privatised' port authorities (e.g. Piraeus) may have commitments

to state through master concession or be subject to regulatory oversight

PPPs are the preferred method for port development:

Port authority and private operator enter into concession agreement

Concessionaire mobilises private funding to construct / operate port but

port authority retains ultimate ownership of port land

Port authority typically retains responsibility for various ‘critical’ matters

(incl. access channel, pilotage / towage, emergency response, etc.)

Concession agreements are a form of lease agreement with “add-

ons” lasting anything between 20 and 99 years

Exclusivity (1/2)

Port operators argue they cannot commit billions without protection

from competition:

“During the Concession Term the Authority agrees not to grant to any

person any concession or other rights (including leases) for the

construction, development, expansion and/or operation of any

container terminal”

Very contentious issue with governments: want the benefits of

multiple ports via royalties, local workforce employment, etc.

Also, governments may not be able to offer exclusivity due to

existing MFN provisions:

“If in future any person is afforded more favourable treatment in the

context of a new investment in [x] than that afforded to the

Concessionaire pursuant to this Agreement the parties shall

negotiate in good faith to procure that such more favourable

treatment is afforded to the Concessionaire.”

Exclusivity (2/2)

May also conflict with BITs:

“Each Contracting Party shall ensure fair and equitable treatment of

the investments of nationals of the other Contracting Party and shall

not impair, by unreasonable or discriminatory measures, the

operation, management, maintenance, use, enjoyment or disposal

thereof by those nationals. Each Contracting Party shall accord to

such investments full physical security and protection.”

Grant of exclusivity may be problematic under anti-trust law if

distorts competition

Possible compromises if exclusivity can be granted:

Carve-outs for particular ports / types of ports

Limitation in time

Geographic limitation

Expiry when terminal reaches [x]% of capacity

(Un)equal treatment

States see ports as serving public interests

Concession agreements include obligation for terminals to be open

to all users on the same terms i.e. "common user terminals“

Creates tensions with operators in context of increased competition

for market share:

Concessions won through competitive processes and high minimum

volume commitments guaranteed to port authorities

Port projects increasingly financed through third party debt and these

need to be “bankable“

Concessionaires require exceptions:

“Provide selective tariff discounting or rebating in order to optimise

long term profitability in accordance with Good Industry Practice“

Port access may require regulation where existing (captive) port

operators have too much bargaining power

Consolidation

Port terminal operators seeking to grow market share :

APMT acquisition of Grup TCB portfolio (Spain, Colombia, Brazil, etc.)

CMA CGM acquisition of APL (ports in the US, Japan, Taiwan, etc.)

Yilport acquisition of Tertir (ports in Portugal, Spain, Peru)

Investing in phase 2 developments: Badagry, Tema, etc.

NB: bidder universe becoming more diverse:

Port operators (individually or in consortia)

Infrastructure funds

IFIs (EBRD, IFC, ADB, etc.) – debt and equity

Private equity / funds starting to show interest as well

Increased number of bidders in tenders leading to more competitive

tension in auctions: are bidders overpaying/overleveraging

Joint Ventures

Major port operators partnering up

Driven by strategic considerations:

Foothold in China - PSA (Singapore)

with Beibu Gulf Port Group & Pacific

Intl. Lines: Qinzhou port

Foothold in Europe - China Shipping

with APMT: Zeebrugge,

MoU for further European investments

Driven by need to share risk or costs:

Increased Phase 2 developments /

expansion requirements

Tema Port, Ghana – investments in

port and access roads

NB: global merger control regimes

(P3 alliance failure)

Operational efficiency/green initiatives

Where tariffs cannot be increased due to competition, port

operators cutting costs through efficiency measures

Proximity: grain terminals being developed closer to farms, reducing

need for intermediate storage (Inkoo, Finland)

Terminal design: for higher productivity - train access at Vancouver

grain terminal will handle 3x as many train cars

Port automation: less handling time, decrease raw material wastage

/ infestation (Global T, Bayonne; Orient Overseas, Long Beach, etc.)

Co-operation: NY Port Authority Port Performance Task Force with

industry representatives to recommend congestion management

Go Green initiative: APMT, HPH, DPW, SIPG and PSA

Port tariffs linked to environmental friendliness of user/vessel

(Busan, Singapore Rotterdam)

Thank you for listening!

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