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Introduction to PPP in the infrastructure sector 6
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Lecture1.1
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Lecture1.2
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Lecture1.3
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Lecture1.4
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Lecture1.5
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Lecture1.6
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Chapter 2: Structuring a PPP project 5
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Lecture2.1
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Lecture2.2
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Lecture2.3
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Lecture2.4
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Lecture2.5
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Chapter 3: Financing an infrastructure PPP project 6
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Lecture3.1
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Lecture3.2
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Lecture3.3
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Lecture3.4
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Lecture3.5
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Lecture3.6
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Chapter 4 :Documenting the transaction: anatomy of a PPP concession agreement and key risk allocation issues 11
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Lecture4.1
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Lecture4.2
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Lecture4.3
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Lecture4.4
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Lecture4.5
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Lecture4.6
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Lecture4.7
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Lecture4.8
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Lecture4.9
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Lecture4.10
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Lecture4.11
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Chapter 5: Documenting the transaction: finance documents 8
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Lecture5.1
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Lecture5.2
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Lecture5.3
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Lecture5.4
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Lecture5.5
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Lecture5.6
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Lecture5.7
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Lecture5.8
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Chapter 6:Documenting the transaction: other project documents 2
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Lecture6.1
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Lecture6.2
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Chapter 7:Procurement arrangements 2
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Lecture7.1
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Lecture7.2
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Chapter 8:Introduction to key sector issues 7
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Lecture8.1
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Lecture8.2
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Lecture8.3
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Lecture8.4
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Lecture8.5
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Lecture8.6
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Lecture8.7
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Port projects
(a) Demand based
Port projects can be either brownfield (transfer of business and upgrade of existing port infrastructure) or greenfield (creation of new terminal) but are invariably structured on a demand basis. Some port projects may serve anchor customers (e.g. mining companies or industrial users) through take-or-pay arrangements, or may have port users as shareholders to guarantee port usage indirectly, or may have an operating contractor guarantee a minimum throughput based on arrangements with shipping lines.
The global logistics industry is driven by competition for the cheapest cost of transporting goods from point to point. Port projects are to be seen a part of this landscape. The key factors in logistics costs include: (i) the cost of shipping (voyage cost), which in turn is driven by efficiency of the ships (with a trend to increasing size and draught); (ii) the location of the ports and the impact on hinterland delivery costs to the final destination; (iii) stevedoring charges and port dues – the cost of offloading and transferring to other modes; and (iv) transhipment opportunities, allowing transfer to smaller, regional ships.
As with the airport industry, there is a general trend of increasing port demand, particularly containerised traffic, driven by factors such as an increase in middle income households and a corresponding increased desire for consumer goods.
At the same time, the increased competition in the market has led to a reduction in shipping costs, which in turn has led to efficiency drives through larger ships and a consolidation of carriers. The same drive for lower costs has led to a desire for ports with a draught capable of handling the larger ships as well as new and efficient port handling equipment to minimise costly dwell time at the ports.
(b) Competing ports
Is it possible that the government will seek to create new competing ports during the term of the concession or allow others to be expanded? What exclusivity protection is fair and reasonable to protect against this risk to ensure that the concessionaire can repay the cost of the new infrastructure and any upfront purchase price for the concession?
Similar to airport projects, concessionaires may expect to have a minimum level of exclusivity over a certain distance and time period. The government may expect to have the right to revoke the exclusivity if the port is not able to handle increased demand and the concessionaire does not itself expand the port to meet this demand.
(c) Tariff setting regime
How are port charges regulated? How free is the concessionaire to adjust charges to meet inflation, unexpected costs or future developments? If there is a national tariff regime, does it properly account for the level of investment and increased service levels from the new port? Can the concessionaire offer differential pricing to different users, and different benefits (e.g. priority berthing)?
Some projects are structured with a very free tariff structure – the concessionaire will essentially be governed by market pressures (subject to local legislation on abuse of a dominant position), but equally in many jurisdictions there are existing regulations governing port tariffs. This may create difficulty if there is an expectation of a national set of standard tariffs, as it is usually inevitable that an increased charge may be required to support the additional debt required to construct new port facilities. It is common for ports to be structured on an open-access basis, to avoid a market distortion, but it may still be open for the port operator and shipping lines to agree some mutually beneficial terms between them, such as increased discounts for minimum throughput levels.
(d) Supporting infrastructure
How well connected is the proposed port to the rail and road network? To what extent is the concessionaire dependent on the provision of new or upgraded infrastructure or its maintenance over time? What happens if these activities do not take place and this affects the reputation of the port? Will the government invest in new supporting infrastructure before the new port works are completed?
A key issue for lenders, particularly with greenfield port developments, will be to ensure that the new or upgraded port is adequately connected to the road and rail network. These developments will typically be outside the control of the port operator, and there have been examples of projects which have materially suffered due to the government not making suitable supporting infrastructure connections to support the new inland traffic to and from the port. This can be critical, as chronic port congestion can affect the port’s reputation and may drive traffic elsewhere.
(e) Expansion rights and obligations
Is expansion of the port likely within the term of the concession? Will the concessionaire have the right to expand the port unilaterally to meet this demand or will government consent be required? If the concessionaire does not start expanding to meet demand, will it lose exclusivity?
As with the airport projects, there is a delicate balance between the government’s desire to impose an obligation to expand and the concessionaire’s ability to guarantee it can access finance at the relevant time. Conversely, the concessionaire itself will want to ensure that if it sees a suitable opportunity to expand the port (and this is contemplated by the concession), it can do so without requiring a fresh approval from the government (otherwise, the government may use its approval right to seek to renegotiate the commercial terms of the project).
(f) KPIs and performance regime
What kind of performance regime applies to the concessionaire? Key criteria for logistics companies will be the efficiency/speed of the port operations and responsiveness to vessel requests. How strict is the contractual regime if these criteria are not met?
A port concession will typically contain a performance regime, but, as with the airport projects, these are not usually very strict in terms of financial or default consequences. This reflects the fact that the concessionaire will already be taking demand risk and is fully incentivised to provide a service that turns ships round quickly and is seen as efficient by port users.
(g) Marine services/ government support
Which services are reserved to government suppliers? E.g. harbour master, pilotage, towage, dredging, customs, security. What contractual protection is available if service levels are not met? Is new investment required to supply the services? Can the concessionaire self-perform if necessary? Does the port benefit from any special economic zone status that would incentivise business growth?
As with airport projects, port projects may be subject to a range of reserved services, although practice differs from country to country as to which services may be reserved or not. Where the services are reserved to government, it will typically be able to recover the cost through port dues and may require the concessionaire to recover these on its behalf. In some case the government agencies may have the right to impound the ship if the dues are unpaid, so it will be in the concessionaire’s interest to ensure that its payment arrangements with the shipping lines manage this risk, as an impounded ship could block a profit-making berth.
In some cases it may be appropriate for the concessionaire to have the express right to self-perform reserved services, particularly if service becomes patchy or insufficient to meet growing demand.
(h) Existing infrastructure/ existing staff / existing contracts
What is the state of existing infrastructure? Can it be adequately surveyed? What happens if major defects are discovered that impact on performance? How many staff are employed and on what terms? Are they unionised? Are there any unpaid liabilities (back pay, pensions)? What contracts already exist and do they have to be taken over?
These are essentially due diligence issues, but in the case of employees may also be political issues. If the port is being privatised in order to increase its efficiency, it may be necessary for the concessionaire to have the right to lay off some staff. Who should bear the redundancy cost in this case?