Be er the ‘Devil’ You Know

BETTER THE ‘DEVIL’ YOU KNOW

WAPPP(1) engages in a Q&A addressing key areas of challenge in the concession renewal process. Six key questions are addressed

The November 2021 issue of PS featured an article from Geneva-based WAPPP(1) that refl ected on the often challenging subject of concession renewals. The article prompted signifi cant discussion and feedback to the extent that together with WAPPP PS came up with the idea of a follow-up Q&A-based discussion responding to key questions that fl owed from the original article. These questions with responses from WAPPP, led by Erik Wehl and Neil Davidson, are featured below.

In formulating responses to what are identified as six key questions relating to concession renewal the authors drew upon a sample of 20+ European terminals – mainly container terminals – that had recently approached concession renewal. By far the lion’s share of this sample saw renewal with the incumbent operator, 14 were renewed on average five years before concession expiry and the average concession period was just under 19 years. Further, the renewed concession arrangements typically included requirements for additional investments seen as necessary over the extended lifetime of the concession, e.g. to accommodate past and anticipated market, regulatory, and other structural changes, per example to accommodate bigger vessels etc.

According to PS’s understanding, this situation is reflected around the world – i.e. with concession award favouring renewal at the end of the initial term as opposed to running an entirely new public tender. Indeed, the latter is seen to be more the exception than the rule.

The following six key questions and answers are intended

1WAPPP is a global non-governmental organisation. It sets as key objectives helping its members to achieve their professional goals and the promotion of best practices in Public Private Partnerships (PPP). to promote positive dialogue and learning between host port authorities, other government agencies and private sector organisations involved with concession renewal. Ultimately the goal is best practice in PPP arrangements – the stated aim of WAPPP which includes incubating new approaches and debunking myths.

CONCESSION RENEWAL – SIX KEY QUESTIONS 1. Does it always have to be a renegotiation rather than a straight renewal?

For any concession of significant length (10 years plus) it is almost inevitable that circumstances will have changed in some material way as it nears its end, be that micro level factors such as the nature of the traffic being handled, technological developments and operational requirements or more macro level factors such as market demand and government policy. These factors usually affect both the port authority and terminal operator sides of the equation.

In addition, the concession award process is increasingly seeking to achieve a broader environmental compliance for port activities and the sustainable development of the port.

A well-designed concession (especially one reflecting the development of best practices over time) may be able to cope with these issues and simply be renewed as is, but much more likely the changes (and the rate of change) are such that both parties find it in their interest to reset the goalposts. This is particularly the case given that if it is a renewal rather than a short extension of the concession, the stage needs to be set for the next 15-25 years. Significant investment will be involved and hence renegotiation immediately comes onto the table, especially as factors such as volume commitments and incorporation of new regulations go hand in hand with this.

8 It is important

for port authorities to have clear visibility regarding their goals when approaching the concession renewal task

2. How long before the end of a concession should the issue of renewal be addressed?

Clearly the actual renewal process is likely to require some time for both parties to assess their respective positions and go through the discussion, negotiation and agreement steps. The World Bank recommends two years as a minimum requirement. Allowing a longer period of time for this may reduce the pressure, but if the period is too long, the incentive to act immediately may be less (kick the can down the road).

However, the issues raised by renewal may become apparent well before the end of a concession, particularly in terms of equipment. The concessionaire will not wish to replace ageing equipment when there is less than five years to run, and with major items such as gantry cranes having useful lives of up to 20-25 years, the question is even more moot. Most concessions will have a provision to purchase such items from the concessionaire at market value, or another method, if the concession is not renewed, but it is better to have the concessionaire behave and invest as if he’s there for the long term.

In this respect, it’s not uncommon for renewal discussions to be opened up well before the end of the concession if the parties recognise a need to make substantial changes to the agreement. For example, if throughput has grown much faster than expected, and major expenditure in the form of new berths is required, then renewal or extension discussions need to be undertaken straightaway.

In this context, the port authority should also take into consideration ongoing external developments facing it, including its own key strategic requirements and the benefits towards the local community which the port serves.

3. Do port concession agreements adequately set the rules for concession renewal?

The picture here is a mixed one. Most concession agreements have provision for one or more extension periods by mutual consent, but this is usually only for the short term (say five years). Plus of course this is just prolonging the status quo. It is unusual to have provision built in for a complete renewal for say 20-25 years. This is mainly because, as discussed earlier, a complete renegotiation is usually the order of the day and it is impossible to predict all the alterations that will be needed.

However, this does not preclude building into the original concession the inclusion of a provision and mechanism to at least facilitate the renewal/renegotiation process, even if it does not spell out a whole set of rules. This is particularly important if the existing concession contract either is lacking or is poorly designed regarding this aspect.

4. How is it possible to objectively determine whether an incumbent operator has performed to a satisfactory level?

This is a challenging task because satisfactory performance means different things to different parties, plus there are multiple facets to it. For the port authority, satisfactory performance means that the concessionaire has paid all bills on time, run the terminal in an efficient and responsible way and made the necessary and promised investments. But the port authority also has to take into account the views of the customers of the terminal, and they may have a different experience (believing tariffs are too high or service levels too low for example), plus some may have an axe to grind. Port user feedback mechanisms are commonly used but are not necessarily straightforward tools.

There are a number of objective operational performance figures that can be used though, such as berth moves per hour (adjusted according to ship size and type etc) and truck waiting times, although even then, extenuating circumstances must be borne in mind.

It is also important to be wary of expecting too much from the operator. Gaining volume through offering high service levels is one thing, but many factors are beyond his control such as the cost and quality of inland transport links. Plus, the market itself simply may not perform that well and the operator should not be punished for this.

5. How can port authorities overcome their weakened negotiating position if renewing with an incumbent operator?

The answer here for a port authority is to keep its options open. Sure, you can agree to discuss renewal with the incumbent, but you can also reserve the right to go to some form of tender if you are unable to reach a satisfactory agreement. Or you can invite a Swiss challenge by publishing the offer from the incumbent and inviting outsiders to better it.

In addition, port authorities can strengthen their position by benchmarking their concessions against others, and by utilising knowledge from external consultants.

6. What methodology should govern a proposed change in renewed terminal concession fees to deliver a fair result?

From the port authority point of view, it first needs to be clear about its fundamental policy and aims. Is it simply seeking to minimise risk and cover long term costs, or is it a profit maximizer and willing to live with the risks that go with this? The attitude (and indeed ownership) of the port authority may have changed markedly since the concession was originally put in place. It also needs to consider whether its costs have changed significantly, e.g. infrastructure maintenance and ongoing capital expenditure. The role and aims of port authorities varies considerably according to the nature of their ownership (fully state owned, corporatized, privatised etc) and the degree to which they are involved in cargo handling activities (from pure landlord to shareholder in terminals).

From the terminal operator’s point of view, the overall returns from the renewed concession will need to be modelled and assessed, to see if they are acceptable. Again, the ultimate ownership and financial targets of the concessionaire may have changed over say, a 25-year period (the target rate of return may well have changed for example). Also, market conditions will have altered – what is the prevailing cargo handling tariff now? How harsh is the competitive environment? What has happened to the customer base? Have there been changes that affect operating costs?

Ultimately it will be about investment requirements and acceptable risks and returns for each party – the same dance as was originally had at the very beginning of the concession.

The issues raised by renewal may become apparent well before the end ‘‘ of a concession

* The original article draws upon a lively webinar held by the WAPPP Port Chapter in June 2021, of which Erik Wehl and Neil Davidson are pro bono committee members. WAPPP (the World Association of PPP Units & PPP Professionals) brings together public-private partnership professionals from PPP units, infrastructure agencies, investors and PPP consultants to network and pursue best practices. WAPPP is registered as an NGO in Switzerland and has its seat in International Geneva (https://wappp.org).