Sector:

Transport – ports

Name of Agreement:

Agreement relating to the Concessioning of a Port between a Port Authority and Special Purpose Company (the Concessionaire)

Type of Agreement:

Concession Agreement

Region (if known):

South Asia

Comments by:

Robert Phillips, LEGPS

Purpose and Context:

This agreement is to be read in the context of the Ports Authority Act. It was intended to bring in regulation for tariffs which was to be consistent with the Concession Agreement. There is also a lease and a Port Services Agreement which forms part of the overall transaction A further agreement relating to investment protection is the Implementation Agreement between the Concessionaire and the Government.

Circumstances where this contract may be appropriate:

Where the State wishes to improve port services by the introduction of private sector expertise and funding.  This is a useful document to form the basis of a port concession agreement. However provision is made for passenger services as well as freight but it is not clear whether this would include Cruise Liners. The ambience required for Cruise Liners will be higher than for passenger ferries.

Drafted for common law/ civil law jurisdiction:

Common law, but could be adapted to civil law jurisdiction

Main Issues:

(a) In addition to lease payments there is a levy based upon a guaranteed throughput from the third operational year.  Whether this is appropriate depends upon the level at which it is fixed and the general circumstances. The private sector has little or no control over landward surface access- nor over macro economic events. However the intent is that the port should be for transshipment so there may be a much wider area over which the risk of macro-economic changes can be spread.

(b) There is a balanced approach between the construction period and the operational period. The Port Authority  secures under the agreement continuing use of the  IT systems (such as might be used to track cargo, complete customs returns and provide relevant  government departments with statistical information) for a period of 12 months following termination and the Concessionaire is to use best endeavours to secure the rights for the Port Authority thereafter on the same terms as available to the Concessionaire. There is a recognition of the requirements for access both seaward and landward and some detail as to how prioritization of access to the quays should work but how much more is set out in the Port Services Agreement is unknown. The Harbour Master has certain over-riding rights and he remains a public sector officer.

(c) Failure to insure gives right to the Port Authority to effect its own insurance and to recover from the Concessionaire. However provision should be made to address circumstances where a failure to insure may arise as a consequence of there being no market for that type of insurance or the premium levels no longer being available at commercial rates. The insurance provisions do recognize that the cover may be for a sum less than the losses actually sustained and there is provision for the Port Authority to make up the loss and depending upon the amount of the loss there are rights for the Concessionaire and at a higher limit for both parties to terminate.

(d) Although the Concession is for phase 1 there is an understanding that Government will proceed with a breakwater which will allow for phase 2. If Government does elect to proceed then there is a period of time to agree either a new concession agreement or an extension in both time and scope to the Concession Agreement. In default of agreement a non binding mediation is embarked upon  and if the parties cannot then agree, the Port Authority may within a stipulated time terminate although the compensation is reasonably generous to the Concessionaire which might affect the balance of commercial strength during the negotiations.  

(e)  An issue for the public sector is that moveable equipment may not transfer to the public sector on termination of the Concession where the Concessionaire is insolvent. Some equipment such as gantry cranes may not be easily and quickly replaceable. However the Agreement provides other than in limited circumstances for the Port Authority to rank pari passu with the Lenders so it may be contemplated that the Port Authority itself will be a party to security documentation.

(f) The Concession is for 30 years from Handover so the construction period for phase 1 is part of the concession period.

(g)The model form assumes that no third parties such as freight forwarders, shipping lines etc will require offices or other premises at the port. If that assumption is not correct then provision should be made for a grant of rights to occupy to those third parties preferably on the basis that they can continue to occupy when the Concession comes to an end so that the business of the port can continue. The position is not so relevant if the Concession is of a terminal rather than the whole port. Protection would have to be built in to avoid the Concessionaire from requiring a large premium from the third party rather than an economic rental but that is not unusual for these types of arrangement.

(h) There is a Construction Observer appointed by the Concessionaire but with no apparent power, a Test Certifier appointed by both parties  ( with a nominator if no agreement) and an Expert to whom certain disputes are to be referred and in the case of Construction Disputes the Test certifier will act as the Expert. Decisions of the Expert are final and binding. Otherwise disputes are to be referred to UNCITRAL Arbitration.

(i) Port Authority to hold 15 percent of shares in Concessionaire and assets held by Port Authority are to be treated as subscription in kind up to fifty percent of the value of the shares to be issued to the Port Authority. If assets have higher value then balance to be paid in cash by Concessionaire.

(j) As a consequence of the juxtaposition of the transshipment port with other ports in the area there are onerous provisions relating to ownership of competing ports in the region through connected persons.

Possible additional provisions that it might be appropriate to include:

Without sight of remaining suite of agreements difficult to tell how they all hang together. However for the change in law compensation provisions it might be helpful if there was a financial model against which to measure the effect of the change.

In addition it might be useful to have an asset condition register against which measure the state of facilities including equipment.

Although the agreement was initialed in 1998 the provisions as to records and access to records do not really reflect the position then and now with regard to electronic data.

Depending upon the location it may be appropriate to have provisions to deal with archeological  finds and the like.

Provisions that may not be advisable to replicate/ may need further thought:

Provisions of wider general use:

Experience Since Coming Into Force (including any amendments)/ if draft form, whether it has been applied:

Not known

Tracking Number:

Port Concession 2