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DEVELOPMENT OF DRY PORT THROUGH

PUBLIC PRIVATE PARTNERSHIP (PPP) MODE

Capacity Building Workshop

Organized by United Nations ESCAP (UNESCAP)

Venue: Bangkok

Date: May 24-26, 2016

2

DISCUSSION POINTS

1 Dry Port Definitions and Characteristics

2 Responsibility of Capital Investment

3 Deciding Number of Operators

4 Allocation of Demand Risk

5 Land Ownership Structure

6 Customs Clearance Responsibilities

7 Tariff Determination

8 Allocation of Revenue Rights

9 Applicability of Fiscal Incentives

10 Key Provisions in a PPP Contract

11 Termination Provisions

12 Hand-back Provisions

13 Contract Management Tasks

14 Bid Process Management

DRY PORT CHARACTERISTICS















Development of Dry Port through PPP Mode 4

DEFINITIONS OF DRY PORT

An early definition by United Nations

“An inland terminal to which shipping companies issue their own import bills of lading for import

cargoes assuming full responsibility of costs and conditions and from which shipping companies

issue their own bills of lading for export cargoes.”

A more recent definition by UNCTAD

“A common user facility with public authority status, equipped with fixed installations and offering

services for handling and temporary storage of any kind of goods (including containers) carried

under customs transit by any applicable mode of transport, placed under customs control and

with customs and other agencies competent to clear goods for home use, warehousing,

temporary admissions, re-export, temporary storage for onward transit and outright export.”


KEY CHARACTERISTICS OF A DRY PORT

Located inland, at some distance from the sea port

Directly connected to the sea port through multi-modal

transport network

Transfer of goods between various transport modes (rail,

road, water) takes place

Facility for customs clearance services

Facilities and procedures for door-to-door transport

Facility for handling of both containerized and bulk cargo

(Difference from Inland Container Depot)

Overall cost and time savings for customers

Concept of a Dry Port


OUTPUT SPECIFICATIONS

Facilities and Equipment Utilities and Infrastructure Services Provided Transport Mode

Container Yard (CY)

Container Freight Station (CFS)

Access roads, Railway link or

sidings, Inland Water Transport

(IWT) berths

Break-bulk receiving and storage

area

Bulk receiving and storage area

Administrative office with space

for banks, forwarders and cargo

agents

Customs office

Container light repair facility

Secure fence and entry point

Cargo handling equipment

(RTGs, RMGs, reach-stackers,

empty lifters, forklifts, container

chassis, prime movers etc.)

Power Infrastructure including sub-

stations

Water supply and sewerage

system

Solid Waste Management (SWM)

system

Drainage Network

Internal Roads

Telecommunication Infrastructure

(including OFC network and Mobile

towers)

Rail heads and internal / external

rail links

Container handling and storage

Container stripping and stuffing

Break-bulk cargo handling and

storage

Bulk cargo handling and storage

Customs inspection and

clearance

Container light repairs

Freight forwarding and cargo

consolidation services

Banking / insurance / financial

services

Rail / road transport services

Line-haul: Rail (most), Road

(some) and Inland Water

Transport (where applicable)

Local feeder: Road


BENEFITS FROM A DRY PORT

Reasons for development of a dry port

Unavailability of land near sea port

Higher cost of land near the sea port for further expansion

Presence of high demand centers (import and export) in hinterland area

Benefits from a dry port

Increased capacity and productivity of sea port

Reduced congestion at sea port and in sea port cities

Reduced risk for road accidents

Reduced road maintenance costs and lower environment impact

Economic development of region near the Dry Port


KEY CHALLENGES FACED BY DRY PORT

Requirement of huge capital investment would result in investors seeking

higher rate of return from the project

Insufficient railway tracks may have adverse affect on the project

High dependency on single mode of transport could be riskier for the project

Determining the tariff could be tricky task

Higher cost for importing/exporting goods through dry port (than directly through

sea port) would result in lower demand for the dry port

Lower tariff would anyway make the project unviable

RESPONSIBILITY OF CAPITAL INVESTMENT















In a dry port, huge investments required under two heads:

Facilities and Equipment

Utilities and Infrastructure including rail heads and

internal/external rail linkages

Investments on Facilities and Equipment are of recurring nature

due to shorter life span of Equipment – putting additional burden on

the private sector partner

There could be two options for Capital Investment:

Private sector partner making the entire investment

Public sector financing and developing the Utilities and

Infrastructure portion of the total investment


CAPITAL INVESTMENT

Capital Investment in Dry

Port Projects

Moorebank Intermodal

Freight Precinct project:

Private sector partner

would invest around USD

1.5 billion over 10 years.

Niger Dry Port project:

Private sector partner shall

make total investment of

approximately USD 78

million in equipment and

civil works.


Advantages Disadvantages

• No financial burden on the public sector

Entire investment risks lie with the private

sector

• Lesser liability on the public sector

Responsibility of utilities and infrastructure

remains with the private sector

• Higher risk for the private sector partner in

procuring utilities and infrastructure

• Lesser value for money of the project

Private sector would seek higher rate of

return from the project because

uncertainties are extremely high in a dry

port project

CAPITAL INVESTMENT OPTIONS

ONLY PRIVATE SECTOR INVESTMENT



• Less riskier for the private sector as capital

investment risks get shared Public

sector would invest in utilities and

infrastructure whereas private sector would

invest in facilities and equipment

• Better value for money Private sector

would seek lesser rate of return from the

project

• Some financial burden on the public sector

Public sector would have to invest in the

utilities and infrastructure including rail

heads and internal/external rail linkages

• Better planning and coordination needed

o Delay in provision of rail heads and

internal/external linkages would make

all other investments futile

CAPITAL INVESTMENT OPTIONS

COMBINED CAPITAL INVESTMENT


CAPITAL INVESTMENT

KEY PROVISIONS IN MODEL AGREEMENT

Preferred Option: “Combined Capital Investment”

Key Provisions in the Model Agreement:

Authority shall provide Infrastructure Support to the Special

Purpose Company (SPC)

SPC shall pay to the Authority such charges as are determined

by Authority or the relevant agency providing Infrastructure

Support

SPC shall construct the Mandatory Capital Works in

accordance with the approved Development Plan latest by

Scheduled Commercial Operations Date (COD)

Infrastructure Support by

Public sector

Railway Infrastructure

including Railway lines,

coaches, shunting facilities,

rail siding facilities/activities

for smooth inter modal

movement of cargoes

External and internal road

networks

Water supply, Sewerage

and Drainage network

Electrical supply and

Telecommunication network

Street Lights

Landscape and Green/open

area

NUMBER OF OPERATORS















Separate set of facilities and equipment (sheds, stacks, fork lifts

etc.) required for different services (container handling and

storage, bulk cargo handling and storage, customs inspection

and clearance, container light repairs etc.)

Entire set of facilities and equipment could be managed either

by a single operator or by multiple operators

Single Concessionaire Model – Preferred in a green field dry

port project

Multiple Concessionaire Model – Mostly used in a brown field

project that requires expansion or addition of facilities and

equipment


NUMBER OF OPERATORS

Number of Operators in Dry

Port Projects

Jawaharlal Nehru Port

Trust (JNPT) awarded

separate PPP contracts for

container handling facility

and 4th container terminal

to M/s DP World Pvt Ltd

and PSA Bharath

Investment respectively.

Niger dry port project was

awarded to a single

operator – Bolloré Africa

Logistics (BAL) for a 30

year concession period.


MULTIPLE CONCESSIONAIRE MODEL


• Easier to terminate contract of non-

performing assets and substitute its private

sector partner

• Lesser investment requirement

• Lower demand risk in case of brownfield

project

• More number of bidders for each

component/project

• Increased revenue share for the public

sector

• Higher transaction cost due to multiple

transactions involved

• Different concession period coupled with

coordination issues amongst private sector

partners may hinder smooth operation and

maintenance of the project

• Contract management would become a

difficult task for the public sector


SINGLE CONCESSIONAIRE MODEL


• Lesser transaction cost involved One

time effort to award the contract

• No coordination issues

• Easier to monitor and manage a single

contract

• Less number of bidders for the project

More investment and demand risk for the

private sector partner

• Huge dependency on the private sector

partner

• Termination of the contract would have

larger financial implications on the public

sector

Preferred Model: “Single Concessionaire Model”

ALLOCATION OF DEMAND RISKS















Location of the dry port – Proximity to demand centres would result

in higher demand

Standard and capacity of facilities and services – Value added

services may improve the demand (For example, container repair

services can increase the demand)

Efficiency in operations – Less cargo dwell time more will be the

demand

Pricing of various services (tariffs / fees / user charges) – Total cost

for door-to-door transport in a dry port project should be less than

the door-to-door transport in case of a sea port

Long term cargo commitments from users (shipping companies)


FACTORS AFFECTING DEMAND

Allocation of Demand Risks

in Dry Port Projects

Nhava Sheva

International Container

Terminal (NSICT) project:

Demand risk is borne by

the private sector partner.

However, the private sector

partner mitigated the

demand risks by having

long term cargo

commitments from users.

Demand risk can be shared between the public sector and the

private sector partner by guaranteeing minimum traffic to the


In projects where the public sector is investing in infrastructure,

they expect the private sector to assume the entire demand risk

There are three options for structuring demand risk in a PPP

contract

Borne by the public sector

Borne entirely by the private sector partner

Shared between public sector and the private sector partner


DEMAND RISKS – KEY CONSIDERATIONS

Allocation of Demand Risks

in Dry Port Projects

Inland Container Depot

(ICD), Dadri: Demand risks

are shared among partners

of the JV - Ameya Logistics

Pvt. Ltd. (a JV of CMA

CGM France and Container

Marine Agencies, Mumbai)

and a railway PSU

CONCOR.



Revenue rights lie with the public

sector

Less incentive for the private sector

partner to improve services

Lower growth in traffic volume

Investment or annuity payment would

put a burden on the public sector

DEMAND RISKS SHARING OPTIONS

BORNE BY THE PUBLIC SECTOR



Improved services to the customers to

attract more customers

Increased traffic volume because of

improved services More revenue

for the private sector

Shared investment or investment by

the private sector partner

Revenue rights lie with the private

sector partner

Less attractive to the private sector

partner


BORNE BY THE PRIVATE SECTOR



More attractive to the private sector

partner and lenders because of

minimum guaranteed traffic

Not much incentive to improve

services

Public sector might have to pay in

event of low demand


SHARED BETWEEN PUBLIC AND PRIVATE

Preferred Option: “Borne by the Private Sector”

LAND OWNERSHIP STRUCTURE















In most PPP projects, land ownership completely lies with the

public sector

Only limited rights in form of lease or license is transferred to the

private sector partner during the concession period

In Joint ownership, both public sector and private sector partner

lease their part of the land to the project company for the entire

duration of project

However, there are very few cases of joint ownership of land in

PPP projects


ISSUE OF LAND OWNERSHIP

Land Ownership Structure in

Dry Port Projects

Moorebank Intermodal

Freight Precinct project:

Two-thirds of the land is

owned by the

Commonwealth

Government of Australia

and other third of the land is

owned by the Sydney

Intermodal Terminal

Alliance or SIMTA (a

consortium of 67 per cent

Qube and 33 per cent

Aurizon)


JOINT LAND OWNERSHIP


Less upfront investment by the public sector in

purchasing of land

Difficult and riskier for the private sector partner

to acquire or purchase contiguous land adjacent

to the public sector land

Total project cost would increase as land

acquired or purchased by the private sector

partner will be costlier

Private sector land will have to be transferred to

the public sector Making land valuation upon

termination a tricky task and termination

compensation an additional burden on the public

sector


LAND OWNERSHIP – PUBLIC SECTOR


Public sector best able to control land acquisition

or purchase

Reduced risk for the private sector partner

Project would not get stuck because of non-

availability of land

Lesser total project cost as no land is acquired

or purchased by the private sector partner

Easier termination as there is no need to deal

with land

More upfront investment by the public sector in

purchasing of land

Preferred Option: “Public Sector Land Ownership”

CUSTOMS CLEARANCE RESPONSIBILITIES















Dedicated customs examination area in each Dry Port for examination of containers and

bulk goods by the customs

The basis function of a dry port is to receive import containers arriving on trains, to unload

and stack them, inform the importer, carry out the customs examination, and after

completion of the paperwork, load the container onto a road vehicle for delivery to the

importers’ premises

For exports, containers usually arriving by road vehicle are stacked and upon completion of

export customs formalities, are dispatched by rail to the sea port with a combined transport

document (CTD) issued by the shipping line or multi-modal transport operator

All paperwork is completed at Dry Port and the exporter or importer needs to do nothing at

the sea port


CUSTOMS CLEARANCES

Traditionally, when goods crossed territory of one or more states in the course of

international carriage by road, the customs authorities in each state applied national control

and procedures

National control and procedures frequently involved inspection of the load at each national

frontier and imposition of national security requirements, resulting in considerable expenses

and delays

Multi-modal transport system in a dry port aims at reducing transit time and cost

However, potential benefits of multi-modal transport system will not be realized until

customs procedures are simplified


CUSTOMS CLEARANCES

CHALLENGES AND SOLUTIONS

The basic custom transit procedures is the national procedure which is subject to national

law and involves the use of national documentation and guarantees

Customs inspection is necessary for national security reasons, hence, it is suggested that

responsibility of customs procedures in a dry port remains with the public sector

Private sector partner, on behalf of the public sector, should be responsible for levying and

collection of any duties, tariff or charges for customs clearances as per country’s law and

regulations

Revenue collected from customs fees / charges should be given to the public sector


CUSTOMS CLEARANCES

CHALLENGES AND SOLUTIONS

Authority shall on best endeavour basis initiate institutional, administrative and regulatory

frameworks that are favourable to the development and smooth operation of the Dry Port,

including procedures for regulatory inspection and the execution of applicable customs

control and formalities in line with the national laws and regulations

Authority shall deploy adequate number of the Custom personnel for performing the

administrative and regulatory customs function and formality required at the Dry Port


CUSTOMS CLEARANCES


TARIFF DETERMINATION















Pricing of the services or tariff is a crucial factor on which volume of

traffic in a dry port depends Lesser the tariff rates more will be the

traffic volume and vice versa

Responsibility for setting tariffs and charges in a dry port project

determines the attractiveness of the project to investors

A project would be more attractive to investors if the private sector

partner has the rights to set tariffs and user charges for services

provided by them



Tariff Determination in Dry

Port Projects

In India, only minor ports

have the flexibility to

determine tariff for their

respective ports. Tariff for

major ports in India is

governed by the Tariff

Authority of Major Ports

regulations.


TARIFF DETERMINATION OPTIONS

Option Advantages Disadvantages

Tariff

determination by

the public sector

Less chances of monopoly and

providing preference to few

customers

Low fluctuation in prices

Less attractive to the private

sector partner due to uncertainty

over tariff

Tariff

determination by

the private sector

partner

More attractive to the private

sector partner who bears demand

risk

Chances of monopoly

Few customers may be given

preference

Prices might be highly fluctuating

Preferred Option: “Tariff determination by the private sector partner”

SPC shall, subject to Applicable Laws, have the sole and exclusive right to demand, collect

and appropriate Tariff from the users after completion of Mandatory Capital Works and

during the concession period, as per prevailing market rates

SPC shall collect all cesses and charges, if any levied on the users as may be requested by

the Authority, on behalf of the Authority and remit the same to the Authority

SPC shall, subject to any related Applicable Laws, create and launch its website and shall

publish all the applicable rates/fees/charges on the SPC’s website at least 30 days before

levying such fees/charges from the users of the Dry Port




ALLOCATION OF REVENUE RIGHTS















There are several options for allocation of revenue rights in a PPP project

In one approach, revenue rights entirely lie with the private sector partner whereas in another

approach, revenue rights entirely lie with the public sector

In later case, public sector bears the demand risks and makes a fixed periodic payment to the


However, between these two extremes, lie two approaches designed to share revenue risk,

namely revenue-sharing model and least present value approach

Revenue sharing model – Revenue rights lie with the private sector partner throughout the

concession period

Least present value approach – PPP contract will end when the project company has received

a certain amount of revenue from users


ALLOCATION OF REVENUE RIGHTS


REVENUE RIGHTS OPTIONS


Revenue sharing

approach

Revenue sharing with the public

sector avoid excessive returns

for the private sector partner

Less administrative control on the

project by the public sector

Least present

value approach

No windfall gain by the private

sector partner in case of increased

traffic during contract period

Least attractive to the private

sector partner

No incentive for the private sector

partner to improve service levels

Difficult to estimate and may lead

to disputes

Preferred Option: “Revenue sharing approach”

In revenue sharing approach, the private sector partner enjoys the revenue rights of the project

and will be incentivized to improve service levels in a project

At the same time, this approach ensures that the public sector is also benefitted to some extent

in case of excessive returns from the project; This approach works well for both the public

sector and the private sector partner

A variant of this approach is revenue share along with some fixed payment to the public sector -

Fixed payment could be the lease rentals of the land or any amount fixed by the public sector

based on its assessment of the project This approach ensures that the public sector at least

receives the fixed amount in worst case scenario.


REVENUE SHARING


EXAMPLES OF REVENUE SHARING

Revenue sharing in Port projects in India

1. Development of standalone container handling facility at Nhava Sheva International Container Terminal (NSICT)

Terminal

The work order issued to M/s DP World Pvt Ltd on December 31, 2012 at 28.09% Revenue Share. The concession

agreement was signed on June 19, 2013.

2. Construction of Deep-draught coal-berth at Paradip Port Trust for handling coal on Build Operate and Transfer (BOT)

basis

Concession agreement has been signed on November 10, 2009 with M/s Essar Paradip Terminal Ltd with 31% revenue

share to Paradip Port Trust.

3. Conversion of berth no- 8 as Container Terminal at Chidambaranar Port Trust (Tuticorin)

Letter of Award (LOA) issued to M/s Dhakshin Bharath Gate way Terminals Pvt Ltd on August 7, 2012 with a revenue

share of 55.19%. Concession agreement signed on September 4, 2012. Work is in progress.

4. Development of NCB-IV for handling thermal coal and copper concentrate at Chidambaranar Port Trust (Tuticorin)

Letter of Award issued in favour of M/s Transstroy OJSC Consortium at a revenue sharing of 30%. Special Purpose

Vehicle (SPV) formed in the name of M/s Transstroy North cargo Berth III Port Pvt Ltd. The concession agreement signed

on February 7, 2014.

SPC shall also pay to the Authority an annual fee (as fixed %age of projected revenue) for

each Year during concession period

The Annual Fee shall be payable in twelve equal monthly instalments

SPC shall from time to time {cause the Escrow Bank to} make payment to the Authority

In the event that in any quarter the actual Revenue exceeds the projected Revenue, then

SPC shall pay to Authority the additional Annual Fee attributable to such difference between

the actual quarterly Revenue and the projected quarterly Revenue


REVENUE SHARING


APPLICABILITY OF FISCAL INCENTIVES















In developed economies, trade logistics costs account for less than 10% of the GDP

whereas its contribution in even more in developing economies

In India, trade logistics account in excess of 13% of the country’s GDP

Reduction in logistics costs by any means would result in huge amount of savings for a

nation Dry port plays a critical role in reducing logistics cost through multi-modal transport

system

Governments can encourage the establishment of dry ports through a range of incentives:

Provision of low cost land – Nominal lease rental

Tax holidays or waivers

Provision of preferential freight rates


FISCAL INCENTIVES

Provision of low cost land is normally under the public sector’s (the Authority’s) control

However, incentives such as tax holidays or waivers and preferential freight rates for key

commodities shall be applicable as per rules and policies of the government at a higher

level in country

In some countries, incentives of industrial park or Special Economic Zones (SEZs) are also

applicable to a dry port area

It has been already proposed that the public sector shall provide land and develop utilities

and infrastructure including rail heads and internal/external rail links for the dry port projects

It is further suggested that the public sector endeavour to keep the fixed lease rental for the

land as low as possible This will incentivize the private sector partner and would increase

value for money of the project


FISCAL INCENTIVES

KEY PROVISIONS IN A PPP CONTRACT
















KEY CONTRACT PROVISIONS…1/4

• Selected Bidder / Consortium members to maintain at least 51% total voting

and economic shareholding till 2 years from the Commercial Operation Date

(COD)

Change in

Control

• Step-in rights or right of substitution for Lenders by execution of the

Substitution Agreement

• Lenders shall have the right to nominate an entity to replace the SPC and

perform the SPC's obligations immediately upon the issue by Authority of the

Notice of Intention to Terminate

Substitution

Agreement

• Authority – Execution of Escrow Agreement and Lease Deed; Appointment of

Independent Engineer; Review and approval of Development Plan

• SPC - Execution of Escrow Agreement and Lease Deed; Submission of

Performance Bond; Obtaining all required approvals and clearances;

Achievement of Financial Closure

Key

Conditions

Precedent

(CP)



• Authority and SPC shall execute Escrow Agreement as a part of Conditions

Precedent

• Escrow Account shall have five sub-accounts – Receivables account,

Proceeds account, Proceeds account, Statutory dues account, Authority Fee

and Lease rent account, and Surplus account.

Escrow

Agreement

• SPC shall submit an unconditional and irrevocable bank guarantee of

required amount

• Liquidated damages for delay in completion of construction – 0.5% of the

Performance Bond for each week of delay can be invoked (subjected to a

maximum of 10% of the Performance Bond)

Performance

Bond

• Authority – Non-achievement of Infrastructure Support; Suspension of

services in respect of Infrastructure Support for a period exceeding 30 days

• SPC – Suspension of services for a period exceeding 30 days; Default under

financing documents; non-achievement of Mandatory Capital works; Failure

to maintain insurance; etc.

Key Events

of Default



• SPC to sub-lease and license any part (but not whole) of the Dry Port Assets

[excluding the Dry Port Site] to third parties

• SPC shall retain at all times the overall operation and management of the

Dry Port

Sub-

contracting,

Sub-leasing

and

Licensing

• SPC shall select at least 3 out of 6 engineers nominated by the Authority – 1

will be selected as Independent Engineer, whose costs will be borne by the

Authority

• Expert shall be appointed 6 months prior to completion of the construction to

oversee operations and management of the dry port

Independent

Engineer

and Expert

• An upfront fee of required amount on or before the Effective Date

• Revenue share (% of revenue) during the concession period

• Amount received from customers as customs fee and any other such fees /

charges

Fees

payable to

the Authority



• SPC shall have the sole and exclusive right to demand, collect and

appropriate Tariff from the users, as per prevailing market rates

• SPC, on behalf of the Authority, shall collect and transfer the amount

received as customs fees and any other such fees/charges to the Authority

Tariff

• The Parties shall use their respective reasonable endeavors to settle any

Dispute amicably

• Any dispute, controversy or claim arising out of or relating to this Agreement,

or the breach, termination or invalidity thereof shall be settled as per

Arbitration under UNCITRAL Rules

Dispute

Resolution

• Termination and Hand-back provisions are discussed in subsequent slides

Termination

and hand-

back

TERMINATION PROVISIONS















Termination provisions (TPs) in a PPP contract are at the heart of the risk sharing

arrangement between the public sector and its private sector partner, and are important value

for money drivers for the public sector

Without clear cut Termination Provisions (TPs), it would be extremely difficult to attract any

investor (i.e. private sponsor, equity investor and lender) for a PPP project

Normally, there could be three situations in which a PPP contract can be terminated:

Public sector’s default and voluntary termination

Private sector partner’s default

Force Majeure events

Key considerations while drafting termination provisions:

Itemized list of the event of default including catch-all provision

Full compensation to lenders in any situation for bankability of the project

Fair compensation to equity investors

Amount and timing of the termination compensation should be such that the private

sector partner is neither better off nor worse off as a result of the early termination


TERMINATION SITUATIONS


TERMINATION – PUBLIC SECTOR DEFAULT

Termination Compensation

Estimation Method in Public

sector Event of Default

Except in Bulgaria, Italy and

Spain where Book value

compensation approach

prevails, most other

European countries have

adopted Financing-based

compensation approach.

Method Advantages Disadvantages

Book value

compensation

Simple approach Easy

to calculate compensation

amount

Compensation calculation

may be problematic

because accounting rules

may change over time

Risk of underpayment or

overpayment

Financing-

based

compensation

No risk of underpayment

or overpayment

No dependency on

accounting rules

Public sector needs to

have a good

understanding of financing

arrangement before

financial closure

Public sector may have to

pay for additional costs

such as hedging cost

Preferred method:

“Financing-based

compensation”



COMPENSATION METHOD – EQUITY INVESTOR


Original return

approach

High degree of certainty and

simplicity

Doesn’t take into account actual project

performance till termination date

Poses risk of Voluntary termination by the

public sector in case of high performing

projects

Market value

approach

Fairer than Original return approach

as it takes into account actual

performance of the project till

termination date

May lead to disputes as establishing a

market value can be a difficult process

Less certainties to the contracting parties

Future return

approach /

Fair-value

method

Relatively straight forward to

implement

Takes into account the actual project


In case of over performance before

termination date, private sector partner will

be deprived of its benefits



COMPENSATION AMOUNT – FAIR VALUE METHOD


Party to be

Compensated Lenders Equity Investors

Amount Calculation i. the loans outstanding at the date of

the prepayment;

ii. interest due up to the date of the

prepayment;

iii. any delayed interest, penalty on late

payments and unpaid fees; and

iv. Breakage costs associated with the

hedging agreements and fixed-

interest rate loans minus any profits

due to early termination of hedging

agreements

Net Present Value (NPV) of the

investor’s future equity cash flows

projected in the base case cash flow

projections agreed at financial close


TERMINATION – PRIVATE SECTOR DEFAULT

COMPENSATION METHOD – LENDERS

Termination Compensation

Estimation Method in Private

sector Event of Default

Market value approach has

been adopted in England,

Netherlands, and Belgium

whereas Book value

approach has been

adopted in Italy, Germany,

and Spain.

France and Turkey has

adopted Debt approach to

calculate the compensation

in case of the private sector

partner’s default.

Recently, United Kingdom

has adopted a more

balanced approach known

as “Fair value

compensation” approach.

Market value approach – Compensation is driven by the market value

of the contract at the point of termination.

Book value approach – Compensation is based on the actual

investment costs incurred for the construction of the project.

Debt approach – Compensation is calculated by reference to the

senior debt outstanding at the time of termination.

Fair value approach - Compensation is determined through the net

present value of the future cash flow of the PPP contract over its

remaining life (to which “rectification and other such costs” are

deducted). This is another form of Market value approach in case

there is no liquid market for the project.



COMPENSATION METHOD – LENDERS


Market value

approach

In-principle the fairest approach Re-tendering to find market value will be costly

Volatile market may yield unfavorable results

Book value

approach

Relatively simple to apply and

entails minimal cost

Compensation calculation may be problematic

because accounting rules may change over time

Risk of underpayment or overpayment

Estimation of rectification cost may lead to

disputes

Debt

approach

More attractive to lenders

No dependency on accounting rules

Relatively simple to apply and

entails minimal cost

Public sector may have to pay for additional

costs such as hedging cost

Doesn’t take into account actual project


Fair value

approach

Takes into account the actual

project performance till termination

date

Estimation of future cash flows complex and

may lead to disputes

In case the NPV of future cash flows is sufficient

to pay senior debts, senior lenders will have less

incentive to rescue an ailing project



COMPENSATION AMOUNT – DEBT APPROACH


Party to be



the prepayment;


prepayment;







agreements

Nil


TERMINATION – FORCE MAJEURE EVENTS

COMPENSATION AMOUNT


Party to be



the prepayment;


prepayment;







agreements

Equity contribution (without any return)

minus Insurance Cover

Authority Event of Default

Authority shall take back the possession of the Dry Port Site and acquire all of SPC’s rights, title and

interests in and to the Dry Port Assets, on payment within 6 months of Transfer Date, (i) 100% of the

Debt relatable to Dry Port Assets; and (ii) NPV of future Equity cash flow for unexpired period as

projected in base case Financial Model agreed with Lenders and submitted to Authority

SPC Event of Default


interests in and to the Dry Port Assets, on payment within 6 months of Transfer Date of 100% of Debt

in respect of the Dry Port Assets as recorded in the books of the SPC

Force Majeure Event


interests in and to the Dry Port Assets, on payment within 6 months of Transfer Date of 100% of Debt

and Equity [LESS Insurance Cover] in respect of the Dry Port Assets as recorded in the books of the

SPC


TERMINATION COMPENSATION


HAND-BACK PROVISIONS















For a long-term contract, the public sector is concerned about hand-back provisions because

conditions of the asset at the end of the contract have financial implications on the public sector

Different strategies have been used to mitigate the risk: Hand-back audit, Letters of credit, and

Maintenance reserve fund

Hand-back provisions are necessarily project specific because of the types of assets and

specific project characteristics involved in each agreement

In a dry port projects, there are two types of assets – utilities and infrastructure and facilities and

equipment So, there are two options for transfer of assets

In Complete handover, entire assets will be handed back to the public sector

In Partial handover, private sector partner shall have the rights to withdraw the facilities and

equipment at the end of the contract


HAND-BACK OF THE PROJECT


HAND-BACK OPTIONS


Complete

handover

(Preferred

Option)

Simple and tried approach

More attractive for the private sector

partner

Better value for money for the public

sector

Smooth operation during handover

period

Handover process would be more

time consuming as it would involve

entire assets

Partial

handover

Better maintenance of facilities and

equipment as it would offer more

incentive for the private sector

partner

Less attractive for the private sector

partner

Costlier affair for the public sector as

large investment would be required

in new facilities and equipment

Dry port operations may get

adversely affected

SPC shall in accordance with Good Industry Practice ensure that all property, assets, rights

and other items (constituting Dry Port Assets and Dry Port Site) which are vested in or

transferred to Authority shall be in good working order and in a good state of repair and that the

Dry Port Assets and Dry Port Site is transferred to Authority as a going concern in good

operating order

Authority shall appoint an Industry expert to conduct an audit of the assets being transferred

In the event any of assets are not fit for purpose/ in a good state of repair/ as would be

expected of an international world class Dry Port, as certified by such expert, then the cost or

capital expenditure required to be incurred to bring it to good state of repair of all such assets

shall be payable by the SPC to the Authority, and the same in case of earlier termination, may

be deducted from any Transfer Payment payable by Authority to SPC; and in case of expiry by

way of encashment of relevant amount from the Performance Bond


HAND-BACK OF ASSETS


CONTRACT MANAGEMENT TASKS














14 Bidding Criteria and Bid Process Management

Contract Management denotes all those activities that are required to be undertaken by the

Authority to administer, manage, govern and execute the project

Key objective of Contract Management is to ensure that the PPP project meets its objective

on continuous basis, while managing risks proactively and taking stakeholders together in this

process

Post-Award Contract Management commences upon Award of Concession and ends after

the completion of the Project and expiry / termination of Concession Agreement

Hence, post-award Contract Management involves four key phases, namely Development

period, Construction period, Operation & Maintenance and Handover


OBJECTIVES OF CONTRACT MANAGEMENT



Source: Guidelines for Post- Award Contract Management for PPP Concessions published by PPP Cell, Infrastructure Division, Department of Economic Affairs (DEA), Government of India


CONTRACT MANAGEMENT ACTIVITIES



Stage Key Contract Management Tasks Stakeholders

Development

Period

Submission and approval of the Development Plan Authority or Industry

Expert

Compliance with laws, approvals and clearances Independent Engineer

Land acquisition, R&R, Financial Closure, SPV

Formation Authority

Construction

Period

Adherence to Development standards and

requirements Independent Engineer

Managing change & law Authority


CONTRACT MANAGEMENT

Stage Key Contract Management Tasks Stakeholders

Operation &

Maintenance

Compliance with Operation and Maintenance

Standards and Requirements and other safety and

security and quality related obligations as set out

under the O&M Plan, Quality Assurance Plan,

Environment Management Strategy, Good Industry

Practices and Applicable Laws

Industry Expert

Revenue Share and other fee payment Independent Auditor

Dispute resolution

Authority through

amicable settlement or

Arbitration under

UNCITRAL rules

Handover

(expiry or

termination)

Audit of the assets being transferred Independent Expert

Termination Compensation Independent Auditor

Authority shall appoint a reputable concern of Independent Engineer at its own cost to

determine and ensure compliance with planning approvals and standards with respect to

Dry Port development

Authority shall, six months prior to completion of construction of Dry Port Assets, appoint an

Industry expert at its own cost to undertake and ensure that the operation and maintenance

of the Dry Port Assets comply with O&M Standards and Requirements and other safety and

security and quality related obligations as set out under the O&M Plan, Quality Assurance

Plan, Environment Management Strategy, Good Industry Practices and Applicable Laws

Authority shall appoint an Independent Auditor at its own cost to monitor the payment of

applicable fee to the Authority from the escrow account

Authority shall appoint an Industry expert to conduct an audit of the assets being transferred


CONTRACT MANAGEMENT


BIDDING PROCESS MANAGEMENT
















BIDDING PROCESS

Bid Security 0.5% of the Total Project Cost (TPC)

Bidding Process 2 stage bidding (RFQ and RFP)

Selection Basis Maximum revenue share or Minimum Grant (as the case may be)


RFP - ELIGIBILITY CRITERIA

Minimum Net Worth of 25% of the Total

Project Cost (TPC) in preceding financial year

Financial Capacity

Implemented eligible projects worth at least

200% of the Total Project Cost (TPC) during

last 7 years

Eligible project would comprise of:

Development of container handling facility

at a port / dry port / Inland Container

Terminal

Construction of berth at a port

Construction of Container Freight station /

cargo handling and storage facility

Each eligible project should not be less than

10% of the TPC

Technical Capacity

Incase of a consortium, the combined Technical & Financial capacity of the Lead member (having equity stake of at least 51%) in the SPV shall satisfy the

above conditions.

CASE STUDIES

1 Moorebank Intermodal Freight Precinct

Project

2 Niger Dry Port Project

3 Nhava Sheva International Container Terminal

(NSICT) Project

4 Inland Container Depot (ICD), Dadri Project

Location: Moorebank in south-west Sydney, Australia

Linkage: Direct access to Port Botany via the Southern Sydney Freight Line (SSFL)

Sydney Intermodal Terminal Alliance (SIMTA) will build and operate the project

Moorebank Intermodal Company (MIC), an Australian government business, will oversee

development of the project

Model Adopted: “Combined Capital Investment” and “Joint Land Ownership”

Commonwealth contribution: Around $370 million for development and 158 hectare of land

SIMTA contribution: Around $1.5 billion over the first 10 years for the terminal infrastructure

and warehousing and 83 hectare of developable land

Both Commonwealth land and SIMTA land will be leased to SIMTA for 99 years

Expected operations start date: Late 2019


MOOREBANK INTERMODAL FREIGHT

PRECINCT PROJECT

Location: Dosso and Niamey Rive Droite, Niger

Linkage: New railways project between Benin (Port of Cotonou) and Niger

Project has been awarded to Bolloré Africa Logistics (BAL) on a 20-year concession

The concession agreement was signed on October 28, 2014

Payment to the Authority: BAL would pay an upfront fee of $2 million and a fixed fee (land

lease) payable by sqm and variable fees payable per ton of cargo for an estimated minimum

$48 million over the life of the concession

Minimum mandatory investment of $50 million divided in four phases

Through the Concession, the Authority would be able to leverage between $50 to $78 million

in private investments in operating equipment and civil works.


NIGER DRY PORT PROJECT

Location: Jawaharlal Nehru Port, Mumbai

India’s first private container terminal and one of the most modern container terminals in India

Project awarded to a consortium led by M/s. P & O Ports, Australia on BOT basis for a period

of 30 years, expiring in 2027

Selection basis: Highest Net Present Value (NPV) of royalty offered

NSICTPL required to pay royalty to JNPT for guaranteed traffic

The ownership of the land, reclaimed sea and water in the licensed premises remained with

JNPT

With regard to pricing, the licensee had to collect prescribed rates and charges not exceeding

the minimum rates published in the JNPT Port Tariff Schedule and Scale of Rates as

approved by the Government of India


NHAVA SHEVA INTERNATIONAL

CONTAINER TERMINAL (NSICT) PROJECT

Location: Dadri, NCR Delhi

To address the logistic imbalance, Container Corporation of India (CONCOR), launched

Asia’s largest Inland Container Depot (ICD) at Dadri, the plan of which began in 1997 as an

ideal hub point for link with spokes avoiding Delhi

Total cost of development was around $46 million (INR 313 crore)

Project awarded to the CMA CGM Logistics Park Dadri, which is a JV between Ameya

Logistics Pvt. Ltd. (a JV of CMA CGM France and Container Marine Agencies, Mumbai) and

the Railway PSU CONCOR


INLAND CONTAINER DEPOT (ICD), DADRI

PROJECT

THANK YOU!

83

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