CONCESSION AGREEMENTS AND MARKET ENTRY IN THE CONTAINER TERMINAL INDUSTRY

Author(s): Pallis A.A., Notteboom T. & De Langen P.W.

Submitted to Dr. B. Swaminathan

Submitted by Bharath .H MBA-PSM

11999051003

Introduction

Definition: Series of contracts that define the relationship between the Government and the private sector regarding the right to exploit port land and facilities as well as the obligation to construct port infrastructure and superstructure. In simple, it is a contract between the government & the private party which enables the private to render port services to the public. The entry of private firms into the seaport is through concessions. Even though private terminal operators provide terminal services in most of the seaports, governments retain the planning initiatives & act as a facilitator. The seaports of UK & NZ are an exception, with predominantly private port development initiatives.

THE DOMINANT MODE OF ENTRY IN SEAPORTS

 By the advent of containerisation & the development of the container terminals a trend has been accelerated by concessions. Financial investment in port market is of the main reason for increasing involvement of private actors; these involvements has been organised through concessions. The World Bank Private Participation in Infrastructure (PPI) Database reported 299 port projects involving private participation for the period 19902006. This number includes 151 direct concessions, 107 Greenfield projects (several of which involved land concessions), 23 management and lease, and 18 divestiture projects. Of the 59 seaport projects reported in 2006, 40 were concessions.

PROCEDURES FOR CONCESSIONS

DIRECT NEGOTIATIONS

Under this, Government authority either receives an unsolicited proposal; i.e. an uninvited proposal from the private agency to render the services. Or, Its suo moto enters into the negotiations with an identified agency; government on its own identifies a private agency & hands over the concessions to the private agency.

COMPETITIVE BIDDING

CB route is the most preferred route of grant of C.A. Two stage process of competitive bidding-

First stage: Request for Qualification (RFQ) Qualification is based on proven business experience, technical efficiency & financial strength. This stage reduces the maxis portion of the competition.

Second & final stage: Request for Proposal (RFP) In this stage, a DPR will be submitted to the government containing technical & financial proposals of the selected bidder.

BARRIERS TO ENRTY

1. Economic Entry Barriers Highlights more on-to the cost for container handling; if the entrant is unable to compete with the prices of the other terminal operator he is as good as eliminated.

2. Legal & Institutional Entry Barriers Highlights more on towards the countries laws, legal frames, existing political system, onerous tax regimes etc act as the barriers. 3. Location Entry Barriers Unavailability of the land for an entrant would act as the location entry barriers.
CONCESSIONS FAVOURING GLOBAL TERMINAL OPERATORS

In this era of containerisation, terminal operators have expanded internationally; mainly through concessions. Following analysis will show that global terminal operators are well positioned & favoured due to concession agreements First, C.A. reduces the protection for local terminal operators (LTO). Before the entry of GTO, the LTO did not face any sort of threat from GTO; this policy acts as a protection & gave them incontestable advantage. In the best case scenario, LTO would engage in a Joint Venture to operate the concessions. In other cases, local players are taken over by the GTO.

Secondly, port liberalisation has facilitated the expansion of well funded global players. The scale of operations which they operate globally generates the highest yield & the surplus monetary

resources will enable them to outperform rival companies in the financial bidding procedures.

Third, in current market situation, the GTO are best placed to meet high capital requirements & competition for concessions. For e.g. PSA first built a strong household in Singapore, its home base, before taking the step in global scale & coverage. Once the company had established itself as an international benchmark, company went global backed by a sound financial position.
CONCLUSIONS AND POLICY DISCUSSION

C.A. are the most important tool available to landlord P.A. dealing with terminal operator industry. First, through specifications in concession agreements, port authorities can shape the structure of the terminal handling business in the port area. To widen the private sectors participation and provide competition, the PA can stipulate that an operator may not participate in more than one contract at the same port. In smaller ports, a concession agreement could state that no other stevedore may handle containers over berths in the same port.

Secondly, port authorities can set the term of a concession. The duration of the agreement is of crucial importance to both terminal operators and port authorities.

 Long-term agreements allow private port operators to benefit from learning-by-doing processes and to achieve a reasonable ROI.

Thirdly, the landlord PA can indicate upfront a minimum throughput to be guaranteed by the concessionaire (especially in the case of existing berths/terminals). Throughput guarantees a reasonable level of productivity.

Finally, there is the issue of concession fees. High fees, royalty payments, and revenue sharing stipulations are detrimental to the terminal operators ROI and could decrease the investment potential & Low payments could negatively affect the revenue base of the PA.

Concession Agreements are the most important tool available to landlord Port authority dealing with terminal operator industry.