PORT REFORM TOOLKIT - PPIAF | a multi-donor technical...

THE WORLD BANK

LEGAL TOOLS FOR PORT REFORM

M O D U L E 4

PORT REFORMTOOLKITSECOND EDITION

© 2007 The International Bank for Reconstruction and Development / The World Bank

All rights reserved.

The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of Public-Private Infrastructure Advisory Facility (PPIAF) or the Board of Executive Directors of the World Bank or the governments they represent.

Neither PPIAF nor the World Bank guarantees the accuracy of the data included in this work. The boundaries, colors,denominations, and other information shown on any map in this work do not imply any judgment on the part of PPIAF or theWorld Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

The material in this work is copyrighted. Copyright is held by the World Bank on behalf of both the World Bank and PPIAF.No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including copying,recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank.The World Bank encourages dissemination of its work and will normally grant permission promptly.

For all other queries on rights and licenses, including subsidiary rights, please contact the Office of the Publisher, World Bank,1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected].

ISBN-10: 0-8213-6607-6ISBN-13: 978-0-8213-6607-3eISBN: 0-8213-6608-4eISBN-13: 978-0-8213-6608-0DOI: 10.1596/978-0-8213-6607-3

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MODULE FOUR CONTENTS1. Introduction and Overview 131

1.1. National Ports Commission 1322. General Approach for Drafting a Ports Law 132

2.1. Preface 1342.2. Definitions 1342.3. Objectives and Functions of a Port Authority 1362.4. Corporatized Ports—Special Considerations 1382.5. Implementation Problems 138

3. Port Authority and Terminal Operations 1393.1. Licensing 1403.2. Marine Management 1403.3. Financial Issues 1423.4. Violations 1433.5. Appealing Port Authority Regulations 1433.6. Liability for Damages 143

4. Port Regulations 1454.1. Port Operating Regulations 145

4.1.1. Vessel Traffic Management 1454.1.2. Pilotage 1464.1.3. Order and Safety in the Port 1464.1.4. Reporting and Communication 1464.1.5. Dangerous Cargoes: Transport and Handling 1464.1.6. Pollution and Reception Facilities 1494.1.7. Regulation of Other Port Functions 149

5. Port Competition Modalities 1505.1 Legal Structure of Port Competition Regulation 151

6. Full Concession Agreements 1546.1. Full Concession, Leasehold, and Land Rent 1546.2. Full Concession and BOT Schemes 1546.3. Full Concession Agreement Structure 156

6.3.1. Preconcession Documents 1576.3.2. Definitions 1576.3.3. Conditions Precedent Sample 161

6.3.3.1. Part 1—Conditions Precedent to be Fulfilled by the Operator 1616.3.3.2. Part 2—Conditions Precedent to be Fulfilled by the Port Authority 162

6.3.4. Term of the Concession Agreement 1636.4. Concession Parties 1636.5. General Rights and Obligations of the Operator 1646.6. General Rights and Obligations of the Port Authority 1656.7. Transfer of Rights, Obligations, and Assets 1666.8. Performance Parameters 168

6.8.1. Productivity Targets 1696.9. Transfer of Employees 1716.10. Force Majeure 1716.11. Lease of Facilities 1736.12. Site Access 1756.13. Governing Law 175

6.14. Freedom to Set Tariffs 1756.15. Taxes 1756.16. Concession Fee 1766.17. Insurance and Indemnity 1766.18. Physical Security 1766.19. Unclaimed Cargo and Carriers 1786.20. Information and Communication 1786.21. Termination and Prolongation 179

6.21.1. Termination Due to Noncompliance 1796.21.2. Termination Compensation 1796.21.3. Option to Continue 1806.21.4. Bankruptcy 181

6.22. Expiration of Concession 1826.23. Arbitration 1826.24. Costs 1836.25. The Tender Process and Transaction Preparation 1846.26. Miscellaneous Conditions 186

7. BOTs and Construction 1867.2. BOT and BTO Arrangements 1877.2. BOOT Arrangements 1887.3. Functional and Technical Design under a BOT Arrangement 1887.4. Design and Construction Flaws 1907.5. Building Conditions 1907.6. Construction Program 1917.7. Zero Date 1917.8. Drop Dead Date 1927.9. Extension Events 1927.10. Completion Tests and Take-Over 1927.11. Hand-Back and Transfer of Facilities 1937.12. Lender Security 1947.13. Change in Law 194

Annex I—Checklist of Concession/BOT Agreement Provisions 196

BOXESBox 1: Singapore: Transforming a Service Port into Landlord Port 133Box 2: Panama: Enabling Legislation for a Concession 134Box 3: Eastern Europe: Decentralizing Port Management 134Box 4: Latin America: Allowing Private Stevedoring Operations 136Box 5: Object of Port of Rotterdam, Ltd. 136Box 6: Caution: Single National Ports Authority can be Hazardous to Economic Health 137Box 7: Functions of Corporatized Port Authorities 137Box 8: Division of Shares in Corporatized Port Authority 138Box 9: Violated Neutrality: A Port Director with Two Hats 140Box 10: Maritime Domain: A Potential Impediment to Port Development 141Box 11: Marine Management Tasks to be Separated from Corporatized or Privatized Port Tasks 142Box 12: Harbormaster’s Powers and Functions 142Box 13: Reference Clauses on General Regulations of the Authority 144Box 14: Reference Clauses on Specific Regulations of the Authority 144

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Box 15: Reference Clauses on Damages 144Box 16: Reference Clauses on Liability 145Box 17: Reference Clauses on Port Safety and Environmental Protection 147Box 18: Reference Clauses on Reporting 148Box 19: Reference Clauses on Loading and Discharging Dangerous Cargoes 149Box 20: Reference Clauses on Waste Management 150Box 21: The Buenos Aires Case 152Box 22: Sample Port Competition Act 153Box 23: Full Concession, Lease, and Rent Contracts—Landlord Port 155Box 24: Main Schedules to a Concession or BOT Agreement 157Box 25: Reference Clause on Term of Concession 163Box 26: Reference Clause on Nomination of Operator of a Container Terminal 164Box 27: Reference Clauses on General Rights and Obligations of the Operator 165Box 28: Reference Clauses on General Rights and Obligations of the Port Authority 166Box 29: Reference Clauses on Permitted Activities 167Box 30: Reference Clauses on Newly Built Assets in the Concession Area (BOT arrangement) 167Box 31: Reference Clauses on Transfer of Assets 169Box 32: Reference Clause on Productivity Targets 171Box 33: Reference Clauses on Selection and Transfer of Personnel 172Box 34: Reference Clauses on Force Majeure 172Box 35: Reference Clauses on Lease of Facilities 173Box 36: Reference Clauses on Site Conditions 173Box 37: Reference Clauses on Access to the Site 175Box 38: Reference Clause on Governing Law 175Box 39: Reference Clause on Price Discrimination 176Box 40: Reference Clause on Taxes 176Box 41: Reference Clauses on Concession Fee 177Box 42: Reference Clauses on Insurance and Indemnity 177Box 43: Reference Clauses for Security 178Box 44: Reference Clauses on Unclaimed Cargoes 178Box 45: Reference Clauses on Information and Communication 179Box 46: Reference Clause on Termination by the Port Authority 180Box 47: Reference Clause on Termination by the Operator 180Box 48: Reference Clauses on Termination Due to Noncompliance 181Box 49: Reference Clauses on Prolongation 181Box 50: Reference Clauses on Bankruptcy 181Box 51: Reference Clauses on Expiration of Concession 183Box 52: Reference Clause on Arbitration 184Box 53: Reference Clause on Costs 185Box 54: Clauses on Miscellaneous Conditions 186Box 55: Reference Clauses on Construction and Maintenance (Landlord Port Situation) 187Box 56: Reference Clauses on Scope of a Concession Agreement (including a BOT arrangement) 189Box 57: Reference Clauses on Construction Program 190Box 58: Reference Clauses on Infrastructure Design 191Box 59: Reference Clauses on Technical Design and Construction Problems 191Box 60: Reference Clauses on Site Conditions 192Box 61: Reference Clauses on Construction 192Box 62: Reference Clauses on Zero Date 193

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Box 63: Reference Clauses on Drop Dead Date 193Box 64: Reference Clauses on Extension Events 193Box 65: Reference Clause on Take-Over Tests 193Box 66: Reference Clauses on Hand-Back of Facilities 194Box 67: A Case of Legal Limitations Adversely Affecting a Port Concession 195Box 68: The Case of St. Maarten 196Box 69: Reference Clause on Lender’s Security 197Box 70: Reference Clauses on Law Changes 198

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Acknowledgments

This Second Edition of the Port Reform Toolkit has been produced with the financial assistance of a grant fromTRISP, a partnership between the U.K. Department for International Development and the World Bank, for learningand sharing of knowledge in the fields of transport and rural infrastructure services.

Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure TrustFund (Netherlands Ministry of Transport, Public Works, and Water Management) for the enhancement of theToolkit’s content, for which consultants of the Rotterdam Maritime Group (RMG) were contracted.

We wish to give special thanks to Christiaan van Krimpen, John Koppies, and Simme Veldman of the RotterdamMaritime Group, Kees Marges formerly of ITF, and Marios Meletiou of the ILO for their contributions to this work.

The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technicalcontributions of the following organizations.

The Public-Private Infrastructure Advisory Facility (PPIAF)PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the qualityof their infrastructure through private sector involvement. For more information on the facility see the Web site: www.ppiaf.org.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

International Maritime Associates (USA)

Mainport Holding Rotterdam Consultancy (formerly known as TEMPO), Rotterdam Municipal PortManagement (The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

United Nations Economic Commission for Latin America and the Caribbean (Chile)

PA Consulting (USA)

The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel,Ronald Kopicki, Cornelis “Bert” Kruk, and Bradley Julian of the World Bank Transport Division.

Comments are welcome.Please send them to the World Bank Transport Help Desk.Fax: 1.202.522.3223. Internet: [email protected]

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1. INTRODUCTION AND OVERVIEW

Transformation of port structures often requires new legislation. Thismodule identifies fundamental points to consider when developingsuch legislation, with examples from existing port reform regimes,

although the examples provided should be used for reference purposes only.Because every country has a unique legal and institutional context, it isimpossible in practice to present a model law that fits the wide variety offundamentally different legal systems. With such a diversity of legal andpolicy regimes worldwide, the exact purpose of a port law may vary fromcountry to country. Sometimes an existing law is changed to accommodatenew institutional structures that were made necessary because of changedsocioeconomic conditions. Other times, a law lays the groundwork for thepublic sector to participate in port development and infrastructure invest-ments, or enables the private sector to carry out port activities that previous-ly resided in a public sector monopoly. The reference provisions presented inthis module are not meant to cover completely each and every issue. Theyhave been derived from a large variety of laws, regulations, and contracts. Theyare meant to be used as tools for port reform to shape the legal foundation formarketable and bankable regulatory and contractual arrangements.

4Legal Tools for Port ReformSECOND EDITION

MODULE

The examples are derived from a variety ofinstitutional structures covering not only tasksand responsibilities of port authorities, butalso related institutions such as a nationalports council (or commission), a port fund,

and others. In the case of a port authority thatis part of a municipality, no specific law is nec-essary because the legal basis of such authorityis part of municipal legislation. However,the fundamental elements of this module

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might still be considered in drafting suchlegislation.

It is often thought that the sole purpose of aports law is to create an institutional frame-work to develop and manage seaports. Itshould, however, be emphasized that a portslaw should also establish a flexible businessframework that enables a port authority tocompete successfully in national and interna-tional transport markets.

A ports law often creates one or more portauthorities, as well as a host of other port-relatedbodies, such as a ports council/commission orsimilar advisory or regulatory body. It might alsoset operational conditions for private operators.Finally, such a law may regulate organizationaland financial relations between public organs(such as the state, regional governments, ormunicipalities) and the maritime administration.

There are various legal acts that relate to portspolicy, port management, and port operations.Therefore, when discussing port laws in thismodule, the expression “port law” includesamong other policy laws, port competitionlaws, port privatization laws, harbor regula-tions, and statutes of (public) port enterprises.

1.1. National Ports CommissionParticularly in countries where the port sector isstill under development, the national govern-ment has an important role to play. This rolemay be expressed in a national ports policyformally authorized by the parliament. Thepreparation and implementation of this policyusually is the responsibility of a transport orport ministry.

Sometimes, to involve major sectors of theports community in the development, anational ports commission (or ports council) isestablished by law. Generally, the commissionhas an advisory role. The general objective of anational ports commission is to provide inputto the development of a national ports policy.Generally, the commission provides this adviceto the council of ministers through the ministerof transport.

Commissions may be asked to contribute to thedevelopment of the national ports policy byoffering advice on:

• The prioritization of policies that willmaximize private participation in the portsector.

• The preparation of a national ports (restruc-turing and investment) plan based on anobjective evaluation of project proposalsreceived from the port authorities.

• The allocation of public sector fundingfor port development.

• The administration of an investment fundestablished specifically to finance portdevelopment.

• Measures to prevent monopolistic practicesin the ports and to encourage competition.

• The role of the maritime sector in theoverall national transport strategy andnational export policies.

The president and or chairman and the membersof the commission should be appointed fromamong persons with extensive experience inport management; shipping; inland transport;commercial, financial, or economic matters;applied science or the organization of workers;or have demonstrated their ability in other fieldsof port-related operations (including the fishingand the shipbuilding industries, in particular).

If a country decides to institute a ports commis-sion, it should be empowered with the necessarytools to function effectively. Therefore, a portscommission should be assisted by an executivesecretary and a small professional staff. Membersof the staff should receive remuneration in accor-dance with applicable conditions for civil servants.Finally, the costs of the commission should beborne by the state to ensure its independent status.

2. GENERAL APPROACH FORDRAFTING A PORTS LAW A port authority is usually established by a spe-cific ports law, either as a public or commercialentity (for example, joint stock or limited liability

Legal Tools for Port Reform

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company). The following two examples illustratesome key juridical attributes to be considered.

The ports law in Singapore states:

There is hereby established a body to beknown as the Maritime and Port Authorityof Singapore, which shall be a bodycorporate with perpetual concession and acommon seal, by that name, be capable of: a)suing and being sued; b) acquiring, holding,and developing or disposing of property, bothmovable and immovable; and c) doing andsuffering such other acts or things as bodiescorporate may lawfully do and suffer.

Some countries have opted for a corporatizedport authority. To that end, the Polish ports actstates:

Joint Stock Companies, administering portsof fundamental importance to the nationaleconomy, are established under this Act andoperate on the basis of the CommercialCode, unless otherwise provided for by thisAct.

Companies mentioned in paragraph onehave a public service character.

The Belgian main ports (Antwerp, Ghent,Oostende, and Zeebrugge) are regulated by theFlemish Port Decree, 1999 (Official Gazette No.99/992). The relevant provisions (Article 4) are:

(i) Port authorities are public entities. They pos-sess the exclusive powers to deal with portissues. These issues cannot be transferred, eitherin whole or in part.

(ii) Entities participating in port authoritiesshall have a public character.

(iii) Port authorities are subject to corporatelaw, unless incompatible with the provisions ofthis decree or other legal acts.

In Asia and Africa, the institutional structuresof many ports were often patterned after theirEuropean counterparts. The vast majority werepublic service ports responsible for all port serv-ices. Dockers were employed by the public port

authority or port trust. In these countries, newport laws are aimed at converting service portsinto landlord ports, requiring the separation ofpublic landlord responsibilities from cargo han-dling activities (see Box 1). New port laws regu-lating the tasks and responsibilities of a (public)landlord port authority have been combined


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Port into Landlord Port

Auseful example of a port authoritystructure change is represented by twolaws enacted in Singapore. Prior to the

change, the port functioned as a publicservice port. As the port authority increasinglybecame engaged in terminal operationsabroad and other commercial activities, publicfunctions and commercial functions wereseparated. A new statutory board (theMaritime and Port Authority of Singapore[MPA]) was set up. The commercial andmarine activities of the original Port ofSingapore Authority were corporatized. Twoacts implemented the changes, one providingfor the dissolution of the Port of SingaporeAuthority and the other establishing the MPA(Singapore Acts 6 and 7, 1997). The prefacesof these laws are, respectively:

• “An Act to provide for the dissolution of thePort of Singapore Authority and for thetransfer of its property, rights, and liabilitiesto a successor company and others, tomake financial arrangements for that com-pany and for matters connected therewith,to repeal the Port of Singapore Act(Chapter 236 of the 1985 Revised Edition)and to make consequential amendments toother written laws. Be it enacted by thePresident with the advice and consent ofthe Parliament of Singapore, as follows...”

• “An Act to establish and incorporate theMaritime and Port Authority of Singapore,to provide for its functions and powers, andfor matters connected therewith; and torepeal the National Maritime Board Act(Chapter 198 of the 1985 Revised Edition)and to make consequential amendments tocertain other Acts. Be it enacted by thePresident with the advice and consent ofthe Parliament of Singapore, as follows...”

Source: Author.

recently with the establishment of private oper-ating companies in accordance with the nation-al commercial code.

Some situations require a law to specifically reg-ulate the development and construction of a ter-minal by a private operator through authorizingthe award of a concession contract (see Box 2).

A ports law may be very detailed or merely setforth basic principles of port management andoperation. Regardless of the form adopted forthe port’s regime, to create a solid basis forclearly delineating port functions and responsi-bilities, a core set of provisions should beincluded. These provisions and their key fea-tures are described below.

2.1. Preface A preface states the objective of the law andsome general conditions. The approach adoptedis a function of the underlying legal system. Forexample, some countries use a combination ofstatute and implementing regulations; others passa decree that applies a privatization or conces-sion law to a port or ports. The objective mightbe to create new port authorities or to reform anexisting port authority. Also, the preface shouldindicate whether transfer of rights to private par-ties (for example, lease, concession, or build-operate-transfer [BOT]) is permitted. It might benecessary in such instances to make correspon-ding changes in laws governing public property(for example, in the case of the “Maritime

Domain”). Finally, the law should regulate theorganizational, financial, and fiscal relationsbetween the related public organs (such as thenational government, regional governments, andmunicipalities) as well as with regulators, such asthe maritime administration, the fiscal authority,and the competition commission.

Two approaches have been developed for draft-ing the preface of a typical port law: a prefacestating only the objective of the law (see Boxes 3and 4), or a preface of general conditions, elabo-rating on the objective and a number of bound-ary conditions. In several cases, the definitionsused in the law are included in the first section.

2.2. Definitions The second element of a ports law should com-prise definitions of the main terms used in thelaw. The port business, especially as a specificmix of public and private interests and financiers,will require that the interplay of these interestsbe balanced and result in well-circumscribedfunctions. The law should likewise define mar-itime and port infrastructure, identifying which


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Box 2: Panama: Enabling Legislation for aConcession

In Panama, a concession contract was con-cluded between the state and a privateoperator. The text of the contract was

included in a specific law authorizing its con-clusion. The opening text of the law is: “Lawof 1995, whereby Development, Construction,Operation, Administration, and ManagementContract of a container Terminal in the NorthCoco Solo Area, Province of Colon, betweenthe State and the Corporation ColonContainer Terminal, S.A. is approved.”

Source: Author.

Box 3: Eastern Europe: Decentralizing PortManagement

In the past, Eastern European ports weremanaged mainly by centralized authorities.After the introduction of market reforms, it

became necessary to decentralize port man-agement and modernize former state-domi-nated structures. More independent portauthorities were established, often with someform of state participation. The prefaces ofthe relevant laws reflect these changes:

• “The Act regulates the principles for estab-lishing governing bodies for ports, theirorganizational structure, and their opera-tion. The limits of port areas are stipulatedin separate regulations. The Act is notapplicable to naval ports.” (Port Law ofPoland, December 20, 1996)

• This Act establishes principles of operationand management of ports and the safety ofnavigation within port areas.” (Port Law ofLatvia, June 22, 1994)

Source: Author.

are under the authority of the state and whichare under the authority of a port authority.Sometimes it may be necessary to designate sev-eral types of ports, such as “ports of nationalinterest” and “ports of regional interest,” or asin the French Ports Law of 1965, PortsAutonomes and Ports d’Intérêt National, witheach exhibiting its own definition.

It is highly advisable to precisely define criticalfunctions, features, and port administrationbodies. In the port field, investors and lenderswill review definitions of a port law closely todetermine if there are ambiguities that mayaffect security interests or lender rights. Becausethere is no internationally accepted terminology,the following list is only an illustrative compila-tion of the most commonly used terms.

Often words used in legal agreements arecapitalized to indicate they have been defined.

Aids to navigation: All floating, stationary, andon-shore objects dedicated to assisting sea-goingand inland vessels in the safe navigation at seaand in inland waters including buoys, beacons,lighthouses, vessel traffic systems, tidal measur-ing systems, and fixed objects and markers.

Authorized pilot: A pilot employed or author-ized by a competent authority to pilot vessels.

Basic infrastructure: Sea locks, breakwaters, piers,sea walls, and other protective works not directlyinvolved in the transfer of goods; maritime access-es and canals; primary roads to and from theports; and also railway tracks, pipelines, andbuffer zones situated at the borders of the port.

Concession: An agreement entered into by aperson with the port authority in which suchperson becomes entitled and obliged to provideport and marine services in a specified area of aport, or in a port in its entirety, including orexcluding the right to construct, alter, andmaintain basic and operational infrastructure,superstructure, and equipment, subject to theterms and conditions set out therein.

Concessionaire: Any person who has concludeda concession agreement with the port authority.

Dues: Port dues, cargo-related dues, andpilotage dues.

Harbormaster: The harbormaster appointed bylaw and such harbormaster’s appointees, repre-sentatives, deputies, or delegates appointed inaccordance with such law.

Marine services and facilities: All servicesperformed in port areas and the approachesthereto, in respect to towage, mooring ofvessels, sounding of navigable waters, the liftingof sunken vessels, salvage of vessels, fire fightingaboard vessels, and all related activities aswell as the provision of facilities, vessels, andequipment to perform these activities, but notnecessarily including pilotage.

Maritime access: Fairways, dredged channels,and other waters providing access to ports,equipped with aids to navigation for commer-cial sea-going and inland vessels.

Operational infrastructure: Port facilities andconstructed works dedicated to commercialhandling of sea-going and inland vessels, suchas quay walls, piers, jetties, roll-on roll-off facil-ities, berthing aids, and also secondary connect-ing roads within the port area, including allappurtenances and components thereof.

Pilot: Any person not belonging to a vessel whohas the conduct thereof.

Port authority: Every port undertaking agencyestablished under the subject law.

Port (or seaport): One or more port areas form-ing an autonomous functional and economicentity, of which the boundaries are establishedby authority of the relevant government bodyand whose activities are governed in accordancewith national or other relevant law.

Port dues: Dues levied on a vessel for entering,using, and leaving the port.

Port infrastructure: All infrastructure locatedwithin the seaport or in the land and sea access-es containing basic infrastructure, operationalinfrastructure, and superstructure.


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Port services and port facilities: Port terminalservices and facilities for handling, storage, andtransportation of goods on port land and forhandling of passengers carried by vessels.

Public license: A license granted under a portact and for the purposes of the act; a publiclicensee shall be construed as the recipient of apublic license and subject to its terms and con-ditions.

Superstructure: Sheds, silos, warehouses, andhoused facilities of all kinds, and all infrastruc-ture and equipment not identified under basicand operational infrastructure.

Vessel: Includes ships, boats, air cushioned vehi-cles, or floating rigs or platforms used in anyform of operations at sea or in port, or anyother description of a vessel.

2.3. Objectives and Functions of aPort Authority The third section of a ports law should delineatethe objectives and functions of a port authority.Usually, a port authority exercises jurisdiction overa port territory, which should constitute an eco-nomic and functional unit. The establishment of aport authority as this legal entity is one of themajor elements of a ports law (Box 5). The lawprovides the legal status for the port authority,

which might be a public entity or a corporateentity under the commercial code of the relevantcountry, such as a joint stock company. The lawshould also indicate which public entity has theright to establish a port authority in the eventthat the state is not doing so. This might be aregion, province, city, or a combination.

In the case of corporatized or privatized portauthorities, linkages will be needed to the mer-cantile, corporate, or commercial code.Provisions should be included on shareholding,for example, or conforming changes made tocommercial or corporate laws.

There is an important point affecting portauthorities established as joint stock companies.Generally, port authorities are responsible for


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Box 4: Latin America: Allowing PrivateStevedoring Operations

Until the 1980s, Central and SouthAmerican ports were usually part of thestate and managed as public service

ports. During the 1990s of the last century,many countries in the region have changedtheir port structures to allow private stevedoringoperations. The general conditions of theMexican ports law (1993) describe theobjectives of such a law: “This Act has a publiccharacter and shall be observed in the entireterritory of the State. The objective of the law isto regulate ports, terminals, marinas, and portinstallations, their construction, use, acquisition,exploitation, operation, and ways of administra-tion, as well as the execution of port services.”

Source: Author.

Box 5: Object of Port of Rotterdam, Ltd.

The Port of Rotterdam, Ltd. (HavenBedrijf Rotterdam N.V.), established in2004, has the legal structure of a

limited liability company according to theDutch Commercial Code. No other specificports legislation is applicable. Article 2.1 of itsstatutes reads as follows:

• “The object of the enterprise is to exerciseor cause to be performed the port businessand within this framework the furtheranceof strategic position of the Port ofRotterdam within the European perspective,both on short and long term.

• More specifically, the purpose of the enter-prise is:

~ The furtherance of an effective, safe, andefficient vessel traffic management, theresponsibility for maintaining order andsafety in the port area and the power toact as competent authority therein.

~ The development, construction, manage-ment, and exploitation of the port andindustrial area of the Municipality ofRotterdam.

~ Contributing to the city’s development,development of port areas located there-in, and the improvement of living condi-tions within the city and the Rotterdamregion, even in case such activity is (ini-tially) not profitable.”

Source: Author.

operating the entire port. In the event of alandlord port situation, a corporatized orprivatized port authority must ensure a levelplaying field among many terminal operatorsand other service providers. To avoid conflictsof interest, the law should explicitly regulate thepowers and duties of the port authority inrelation to private operators with respect toinvestments and share participation.

Powers and duties of a port authority regardingland management require specific attention inthe law. A landlord port authority is responsi-ble for land management and overall portdevelopment. Special attention should be paidto the regulation of ownership and use of portland under the law. A port authority may ownthe land or have a perpetual or time-specificright to use the land. Powers to act as a land-lord may need to be specifically elaborated, aswell as the limitations of such powers, such asthe interdiction of the sale of port land. Whilethe authority is engaged in, or provides for,construction of operational infrastructure, themaintenance of such infrastructure constitutesa duty for the authority. The ports law shouldspecify the exact responsibilities of the portauthority and those of the state with respect toinvestments in basic and operational infrastruc-ture, maritime accesses, port access roads, andrail and waterway infrastructure as well ashinterland connections.

Generally, the objective of a port authority is toefficiently and economically manage the port. Ina public landlord port, its objectives should bealigned with the macroeconomic goals of thestate and the needs of the region, such as thecreation of jobs, strengthening of the economicstructure, and so forth (see Box 6).

Fundamental port functions that should be con-sidered in the law include (see also Box 7):

• Administration, management, and physi-cal development of the port area.

• Maintenance, rehabilitation, renovation,and construction of basic and operationalinfrastructure.

• Maintenance, rehabilitation, renovation, andconstruction of operational infrastructure(usually the construction of basicinfrastructure is a responsibility of the state).

• Establishment of contractual (concessionor lease) and other conditions (publiclicense) for private operators to provideport services.

• Coordination of berthing and unberthingof vessels.

• Ensuring public order in the port area.

• Safeguarding the port environment.

• Port marketing.

• Port security.


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Box 6: Caution: Single National PortsAuthority Can be Hazardous to EconomicHealth

Since ports generally compete amongthemselves both in the international andnational transport markets, a national

ports authority, comprising all ports of acountry, is not a preferred option.Occasionally, a national ports authority isestablished on the grounds that there is onlyone major port in a country with a number ofsmaller ports with a regional function.However, even in such a case, a more effec-tive system could consist of an autonomousport authority for the major port, and a sec-ondary ports directorate within the ministry oftransport that exercises the overall tutelageon the national port system.

Source: Author.

Box 7: Functions of Corporatized PortAuthorities

The Polish ports law chose a straightfor-ward landlord model for its corporatizedport authorities. The functions of the enti-

ties managing the ports include the following:

• Managing land and infrastructure.

• Forecasting, scheduling, and planning portdevelopment.

• Construction, development, modernization,and maintenance of port infrastructure.

• Acquisition of new land for port use.

2.4. Corporatized Ports—SpecialConsiderations If a port authority is established as a joint stockcompany, matters of share issuance and capital-ization arise. The ports law should includeclauses pertaining to the way this is handled,consistent with the provisions of relevant com-mercial, mercantile, and securities laws.

One key consideration is whether a government,national or local, intends to exercise direct influ-ence in the port authority via its shareholder’srights (for example, the nomination of the chair-man of the board or the port director). In theevent of a corporatized authority, the govern-ment or other public body usually owns 100percent of the shares. In some countries, theshares are divided between a national govern-ment, local government, and other public orprivate shareholders in such a way that theinvolved public entities retain a majority votingposition. In some corporatized situations, vot-ing shares can be allocated to private investors.Once private investors have a majority votingposition, the port authority can be consideredas being privatized (see Box 8).

In general, due to the (semi) monopoly positionof landlord ports and the public interestsinvolved, it is not advisable to allocate shares toprivate investors. This may cause serious con-flicts of interest; private investors mainly seek toincrease shareholder value whereas the publicsector may take considerations of general inter-est into account. Also, flotation of all or part ofthe stock is not considered a viable option forthe same reason.

Capitalization can be effected through transferby law of all relevant properties to the new portauthority. These might include all operationalinfrastructure, related land, and superstructure,including such assets as equipment and otherrolling stock. When a landlord port is createdtogether with a new corporatized port authori-ty, one or more separate operating companieswith the legal structure of a limited liabilitycompany might be set up to take title to thesuperstructure and equipment. The value of the

initial shares could be determined on the basisof their book or market value, whichever is less.

Depending on the port policy of the countryconcerned, limits can be imposed on the sale ofshares. In many cases a government may wantto retain the right to determine port policy. Thisrequires the possession of the majority of thevoting shares, or of “golden shares.” A clausein the law guaranteeing such majority positionshould then be considered.

2.5. Implementation Problems Implementing a new ports law presents awide variety of issues and often results in


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Box 8: Division of Shares in CorporatizedPort Authority

One example of a government seekingto be directly involved in port manage-ment is Poland. Under the new ports

law, the Polish state retains 51 percent of theshares of its corporatized national ports, thusexercising control over the board of directors,and gives these shares preferential treatmentin the event of liquidation of a port enterprise.The relevant clauses are as follows:

• “A joint stock company named ‘PortAuthority of Gdansk S.A.’ shall be estab-lished by the State Treasury, which willretain at least 51 percent of the company’sshares whilst the Municipality of Gdanskwill hold at least 34 percent of the shares.”

• “A joint stock company named ‘PortAuthority of Gdynia S.A.’ shall be estab-lished by the State Treasury, which willretain at least 51 percent of the company’sshares whilst the Municipality of Gdynia willhold at least 40 percent of the shares.”

• “A joint stock company named ‘Port Authorityof Szczecin-Swinoujscie’ S.A. shall be estab-lished by the State Treasury, which will retainat least 51 percent of the shares, whilst theMunicipalities of Szczecin and Swinoujsciewill each hold 24.5 percent of the shares.”

• “The shares owned by the State Treasuryand the Municipalities are registered sharesand have a preferential nature, establishingpriority rights to port authority assets in theevent of liquidation.”

Source: Author.

disagreements among the parties involved. Themajor issues encountered in implementing newports laws are described below.

Effects of port reform on the existing workforce. Port reform is often triggered by over-staffing at ports and restrictive labor practices.However, the objective of a new ports law isnot labor reform, but port reform. Laborreform may be a by-product when a port mustrationalize its workforce to improve efficiencyand reduce costs. A ports law might set condi-tions for the transfer of personnel from theexisting port authority to the new one. Sinceport reform is often accompanied by a reduc-tion of the size of the port’s workforce, theports law may establish and regulate a portworkers fund to soften the impact of laborforce reductions. The fund can be used forredundancy payments or retraining programs.

Valuation of assets and the capitalization of anew port authority. A valuation should be con-servative. Often, ports in the process of reformhave to dispose of a large variety of outmodedequipment and poorly maintained port infra-structure and buildings. This obsolescence andmaintenance backlog must be fully taken intoconsideration when assessing the value of theport’s assets. Otherwise, private sector bids inport privatization may reflect significant dis-counts as the bidders take into account the needto pay for the substantial investments that willbe required to modernize and upgrade the infra-structure.

Replacing top management. Ports functioningwithin the framework of competitive marketsrequire a different management ethic to lead thedifficult reform process and steer the new portauthority safely through the shoals of competi-tion and other commercial activities.

Creation of a clear definition of the port area.This definition should be established at the out-set of reform and not be postponed to a laterdate (for example, until later decree of a councilof ministers). Significant differences of opinionoften arise with port cities as to which areas arepart of the port and which areas are part of the

city. If a decree is required by the ports law, itshould be enacted at the same time as the lawitself.

3. PORT AUTHORITY ANDTERMINAL OPERATIONS One important issue to be considered in portlaws is the relationship between a port authorityand port services providers, in particular thecargo handling companies operating in theport’s territory. Generally, it is undesirable for apublic port authority to be directly involved interminal operations. A port law may explicitlyprohibit a port authority from providing cargohandling services. A further step to avoid con-flict of interest issues would be to prohibit aport authority from being a shareholder in aterminal operating company located in its portarea. Notwithstanding potential conflicts ofinterest, a port authority with the overallresponsibility to develop the port area maysometimes opt to make strategic investments todevelop a sector of the port business (see Box 9).There is an increasing trend for port authorities,particularly in the event that there is only onemajor terminal in a port, to acquire minorityshareholding (say 10 percent) in the special pur-pose vehicle (or operator) constructing a termi-nal under a concession or BOT agreement.There are commonly two reasons for takingshares:

• The port authority wants to participate inthe future profits of the terminal, and thisequity participation partially offsets someconcession fees.

• By acquiring shares, the port authorityhas the legal right to get inside informa-tion on the accounts and profits of theterminal operator. This is useful whenpart of the income depends on throughput(concession or TEU [twenty-foot equiva-lent] fees), which is usually the case inconcession agreements (see Box 9).

The situation becomes more complicated whena port accommodates more than one majorterminal competing against each other. In ordernot to compromise its independent position as


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the landlord, a port authority should eitherpossess shares in all terminals or in none at all.

3.1. Licensing A port authority might be authorized to exer-cise licensing and regulatory functions withrespect to marine and port services and facili-ties. Regulation of marine activities is related tothe harbormaster’s function, as well as to thetransport of dangerous goods and protection ofthe environment (such as rules pertaining to dis-charge of ship wastes into port waters, tankcleaning, and the use of port reception facili-ties). The licensing power of the port authoritywith respect to port services can be extensive

because it usually has the legal power to revokelicenses for violations without administrativeappeal.

The law may authorize the issuance of publiclicenses to operate terminals. Because publiclicenses require extensive oversight by the portauthority and reporting by the licensee, theirutility should be balanced against the bureau-cratic burden for the port authority and theport licensees. The same goals may be betterachieved through concession or leaseholdcontracts, as these are more flexible for bothparties. However, in the event of inclusion of apublic license authority in a ports law, rulesshould be set for transfer, renewal, andcancellation of a license. Unlike for a concessionor lease, where breaches are matters ofcontract and law, license breaches fall underadministrative (or even criminal) processes fortheir resolution.

In this regard, the following reference text maybe used:

No person shall provide: (i) any marine serviceor facility; or (ii) any port service or facility,unless he is authorized to do so by a publiclicense granted by the port authority.

Every public license granted by the authorityshall be in such form and for such period andmay contain such conditions as the authoritymay determine.

Usually, a corporatized port authority does nothave the power to grant a public license. It canonly set conditions for the provision of portservices under commercial contracts (such asleases, rent contracts, or concessions) with portservice providers.

3.2. Marine Management Marine management tasks form part of either anational maritime administration or of a publicport authority. Marine management, which isessentially a public safety task, should beperformed separately from a corporatized or pri-vatized port authority to prevent a conflictingmix of commercial and safety objectives. A ports


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Box 9: Violated Neutrality: A Port Directorwith Two Hats

In 1998, the shareholders of Rotterdam’slargest container terminal, ECT (EuropeContainer Terminals), decided to put the

company up for sale. Agreement was reachedwith Hutchison Port Holdings from HongKong to buy the terminal. To protect Dutchinterests, the Municipal Port Authority, togetherwith the Dutch ABN-AMRO Bank, retained themajority of the shares, although Hutchisongained operational control of the terminal. Theport director of the Rotterdam Municipal PortAuthority was nominated as a member of theSupervisory Board of ECT, apparently in amove to exercise as much local influence aspossible. This, however, clearly violates theneutrality of the port authority because theport director:

• As a public servant must represent theinterests of the entire port.

• Must advise the municipality on mattersinvolving competing container terminals inthe port.

• Has the legal task as a board member ofECT to represent and defend the interestsof the company and its personnel.

• Has to advise the municipality about publicinvestments, including those regarding theECT terminal.

The combination of potential conflicting func-tions may result in loss of confidence by thelocal port community.

Source: Author.

law should make that separation of objectivesclear. Because of overriding safety concerns,which may run counter to the profit-makingobjectives inherent under this type of portauthority, combining marine management taskswith managing a corporatized or privatized portmay not be the best option for managing navi-gational port safety (see Boxes 10 and 11).

The function and duties of a port authorityregarding marine safety and environmental pro-tection are:

• To regulate and control navigation withinthe limits and the approaches to the port.

• To disseminate nautical and other rele-vant information to ships and all otherinvolved parties.

• To control maritime transport and load-ing and discharging of dangerous goods.

• To exercise regulatory functions for theprotection of the marine environment.

• To discharge or facilitate the discharge ofinternational obligations of the portauthority with respect to marine safetyand protection of the environment.

• To promote measures for the safety ofpersons who work at or visit the port.

• To combat or to provide for combatingmarine accidents in the port, includingfire fighting and ambulance services.

• To secure public order in the port areaand to exercise police functions in coop-eration with the civilian police authority.

• To play an important role in the provi-sion of security within the framework ofthe ISPS (International Ship and PortFacilities Security) Code.


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AEuropean country enacted a ports law in1996 that included port land and eveninland terminals as the “Maritime

Domain.” This concept developed amongMediterranean countries to protect local coast-lines from undue commercial exploitation.However, the inclusion of ports has potentiallyfar-reaching negative effects for the commer-cialization of port operations and may seriouslyimpede the reconstruction of the national portssector.

Proposals are under consideration to putthe port sector on a normal commercial foot-ing, but the current law is still valid. The mainissue to be resolved is the current law’s provi-sion that no private property is allowed in theMaritime Domain. Relevant articles from thebasic provisions included in the MaritimeDomain are listed below.

Article 48: “The Maritime Domain is the publicestate of interest to the Republic of ..., is underits special protection, and shall be used and/orexploited under the conditions and in the man-ner prescribed by law.”

Article 49: “The Maritime Domain includes theinternal waters and the territorial sea, itsseabed and subsoil, as well as parts of the dry

land that are by their nature intended for publicmaritime use or are declared as such.

In respect of these Articles, the followingshall be considered as the Maritime Domain:the seashore, ports and harbors, breakwaters,embankments, dams, sandbars, rocks, reefs,mouths of rivers flowing into the sea, seacanals, and live and inanimate naturalresources (fishes, minerals, etc.) in the sea andin the marine subsoil.”

Article 51: “There is no property or other pro-prietary rights in the Maritime Domain on anybasis.

Anyone is free to use and/or to be benefitedby the Maritime Domain according to its natureand purpose in conformity with the provisionsof this law.

Special use and/or economic exploitation ofa part of the Maritime Domain may be conced-ed to physical and legal persons (concession)provided that such use is not in contradictionwith the interests of the Republic of ...

Special use of the Maritime Domain is anyuse that is not general use or economicexploitation of the marine domain.”

Source: Author.

Box 10: Maritime Domain: A Potential Impediment to Port Development

If the harbormaster’s function forms part of anational maritime administration, its powersand duties are usually regulated in a MaritimeCode. Often, however, the harbormaster (portmaster or port captain in some jurisdictions) ispart of a port authority’s organization. If so, theports law or relevant port bylaw should includea section dealing with the specific powers andduties of this function. Generally, the harbor-master may issue general and specific directionsto shipping within the framework of its powers.The harbormaster is usually the operationalcommander responsible for marine safety andfor combating the effects of incidents involvingships or terminals. At the same time, the har-bormaster is involved in regulating traffic andacts as the main nautical adviser to the portauthority’s governing board (see Box 12).

3.3. Financial Issues It is very important to regulate a port authori-ty’s financial powers and have them conformwith applicable fiscal and public administrationlaws. A port authority, whether public or private,may do very well in attracting investment,especially from private sources, if it is managedlike a commercial business. Many ports, however,are part of an overall state, regional, ormunicipal structure and subject to the same

financial rules and regulations as other parts ofthe public administration. This is particularlythe case for a public service port authority,where the administrative costs of burdensome


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Box 11: Marine Management Tasks to beSeparated from Corporatized or PrivatizedPort Tasks• Control and coordination of vessel move-

ments in the port and the port approaches.

• Monitoring of the pilot organization.

• Dissemination of nautical and operationalinformation to all concerned parties.

• Provision of safe berthing practices.

• Control of handling and storing dangerouscargoes and control of safe loading anddischarging practices.

• Keeping law and order (together with theregular police).

• Combating marine accidents and coordina-tion of search and rescue operations.

Source: Author.

Box 12: Harbormaster’s Powers andFunctions The statutory powers and duties of the har-bormaster are the focus of a port authority’ssafety function. They can be incorporated in aports law or be included under a MaritimeCode with a cross reference in the ports lawto such provisions.

The harbormaster may:

• Ensure compliance with laws and regula-tions on nautical safety and internationalconventions aboard a vessel, including fish-ing vessels and other categories of vesselsregardless of flag and affiliation.

• Provide for verification of vessel documentsand of necessary qualifications of the crew.

• Regulate, restrict, or prohibit the move-ments of vessels in the port and in theapproaches to the port.

• Register a vessel’s arrival in and departurefrom the port.

• Direct a pilot service and when necessaryassign a pilot to a vessel in regions notrequiring compulsory pilotage.

• Direct where any vessel may be berthed,moored, or anchored and the method ofanchoring (only when dealing with publicquays).

• Give directions to a vessel or terminalto ensure safe transport, loading, anddischarging of dangerous goods in the port.

• Inspect a vessel within the framework ofPort State Control.

• Ensure the keeping of law and order in theport area.

• Coordinate the combating of marine orother incidents.

• In the event of any risk for loss of humanlife or damage to any property, direct theremoval of any vessel from any place in theport area to any other place and the timewithin which such removal is to occur.

• Declare berths, locations, anchorages, andfairways that may be used by vessels and theareas that are prohibited or restricted areas.

Source: Author.

procurement procedures can be high, as forexample when a cabinet of ministers is the onlybody authorized to approve the purchase ofquay cranes or other high-cost equipment.

Another issue that may hamper efficient portmanagement is a legal provision that requiresapproval of long-term concession agreementsby a council of ministers, or even a parliament,as is the case for instance in Croatia andYemen. A central government may define ageneral policy with respect to concessionagreements in the port sector, but shouldnot interfere in the detailed negotiations onconcession agreements, which should (prefer-ably) be conducted by a port authority. Thisobviously also applies not only to service portsbut also to landlord ports.

Since a port is a functional and economic entitythat often operates in a competitive market,clear financial powers for port managementshould be included in a ports law. These includethe powers to:

• Levy charges, rates, and fees.

• Make a reasonable profit.

• Take loans and issue bonds and securities.

• Establish its own procurement rules.

• Keep financial records and to presentannual audits conducted by independentaccountancy firms.

Examples of legal language used to define cer-tain aspects of financial authority include:

• Ship and port dues and charges andincome from real estate, whatsoever theirnature, arising in the port domain, areearned and destined for the port authority,with exclusion of all other authorities.

• The tariffs are determined by the portauthority. The proceeds of the tariffs shallbe sufficient to meet the financial needs ofthe port, including operational expenses,the maintenance of assets, the payment ofinterest, allocation for depreciation ofassets, and other standard commercial

elements (including shareholders’dividends and a reasonable profit).

• The port authority can take loans andissue bonds and securities.

3.4. Violations A ports law may explicitly list a number ofspecific administrative, civil, and criminaloffenses and empower the public port authorityto assess fines for their violation, subject toadministrative or judicial appeal. Such offensesmay pertain to:

• Damage to port authority property.

• Unlawful operation of port services.

• Evasion of dues.

• Unsafe operation of vessels.

• Pollution of the marine environment.

3.5. Appealing Port AuthorityRegulations In most ports, safety and security regulationsare spelled out in port bylaws. Regulations inthe bylaws have a public character and bind alloperators in the port area. However, a portauthority may decide to issue specific regula-tions in addition to those which can be found inthe bylaws. In that case, the operator shouldhave an opportunity to appeal the applicationof such regulations, especially if their applica-tion will result in significant economic harm tothe operator.

Provisions of the concession agreements mayfurther provide the operator with the opportu-nity to request an expert opinion binding bothparties. Pending the decision of the experts, thecontested regulation of the port authoritywould be suspended. The general rules for arbi-tration of disputes contained in the concessionagreement may also apply to this section (seeBox 13 and Box 14).

3.6. Liability for Damages The respective liabilities associated with occu-pancy and use of the site must be clearly pre-sented in leases and concessions. Generally, the


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operator pays for all damage caused to the siteby mooring or unmooring of vessels or duringcargo handling operations. In a landlord port,the port authority is responsible for maintenanceof the quay wall. The responsibility for damageis therefore limited for a mutually agreed periodafter a vessel arrives at the quay wall (or pier).Damage to the port authority’s property by avessel can usually be recouped from a marineinsurance company. The operator may berequired to pay for damage even if acting pur-suant to orders or instructions of officers (suchas pilots) of the port authority (see Box 15).

If a port authority carries out marine services,such as pilotage, towage, and other relatedactivities (for example, vessel traffic [radar]services), liability for the effects of default, neg-ligence, or any other wrongful act should belimited as much as possible. Therefore, the lawmight contain a clause outlining such a limita-tion. Examples of such a clause are:


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Box 13: Reference Clauses on GeneralRegulations of the Authority

When using the site, the Operator shallobserve all regulations given by theAuthority and/or any other compe-

tent government entity:

• For promoting safety in general.

• To avoid and combat fire in particular.

• To avoid danger, damages, injury, or nuisance.

• To avoid pollution of or damage to the envi-ronment and excess taxation of the soil.

Source: Author.

Box 14: Reference Clauses on SpecificRegulations of the Authority

Should the Operator object to the regula-tions given by the authority in respect tothe use of the concessioned/leased

property as referred to in the previous para-graph, and which are not given by virtue of anypower or obligation contained in a governmentregulation or port bylaw, then the decision ofthree experts shall be binding in respect of thequestion whether, or to what extent, those reg-ulations are necessary and reasonable. Theprovisions on Arbitration mentioned in Section[number] are equally applicable.

The Operator may invoke the decision byexperts within six weeks after the day of dis-patch of the letter with which the Authoritynotified the Operator of the regulationsreferred to above.

Pending the decision of the experts, theimplementation of the regulation given by theAuthority in respect of the use of the conces-sioned/leased property shall be suspendedwithout releasing the Operator from the finan-cial or other consequences arising out of thenoncompliance with the regulation.

The costs of the aforesaid experts shall befor the account of the party who is held to bein the wrong, while, if the parties are bothheld to be in the wrong on one or morepoints, these costs shall be divided by theexperts in a fair and reasonable manner.

The experts shall be notified of the provi-sions of this agreement to the extent that hav-ing them is important for the conduct of theirwork. By accepting his appointment, an expertsubjects himself to the aforesaid conditions.

Source: Author.

Box 15: Reference Clauses on Damages

The Operator shall be liable to pay for alldamages that are detected in the prop-erties of the Port Authority during the

time that the berth is used by a vessel or dur-ing the three months thereafter. The Operatorshall only be released from that obligation ifand to the extent that he proves that thisdamage can be attributed to a cause otherthan the one referred to.

The Operator shall also be liable to pay forall damages that are detected at a later stage,which may have been caused to any PortAuthority property as a result of such use,without it being able to invoke that he did notact contrary to any order and/or instructiongiven by officers authorized by the PortAuthority to do so.

If, in the opinion of the Port Authority, as aresult of any use of the site, including thequay wall, damage is caused to the site, thebank protection or port works and/or thesites, or bank protections or port works in thevicinity of the leased property, the Operatorshall pay the repair costs of such damage.

Source: Author.

• Notwithstanding the grant of any publiclicense, the port authority shall not beliable in any circumstances for any injury,loss, damage, or cost sustained by anyperson as a result of any default or omis-sion of any public license or any agent oremployee of the licensee.

• The port authority shall not, where, with-out its actual fault or privity, any loss ordestruction is caused by any vessel or toany goods or other thing whatsoever onboard a vessel, be liable for damagesbeyond an aggregate amount [currencyof country] for each ton of the vessel’stonnage.

Inclusion of such provisions should be consid-ered in light of the overall goals for port devel-opment. For example, limitations of liabilitymay have a chilling effect on some investors,who would have to seek someone other thanthe port authority to assume liability risks thatexceed the limit. Therefore, the port authorityshould be provided with the power to waivesuch liabilities or readjust the liability limit.

Another liability to consider is concerns the lossor damage of goods. The concession or leaseagreement should hold the operator liable forgoods deposited in its custody during port oper-ations. The operator should indemnify the portauthority against liability for goods at the ter-minal (see Box 16).

4. PORT REGULATIONS

4.1. Port Operating Regulations Port regulations (port bylaws) are usually issuedby a public port authority and have a legalbasis either in a specific law such as a MaritimeCode (as in Azerbaijan), a port law (as inSingapore), or a municipal law (as inRotterdam). Port bylaws are generally wellconsidered and provide very detailed regulationsrelating to the conduct of vessels, safety, andorder in the port area; the protection of theenvironment; the use of pilots; documentationof disembarking passengers; loading anddischarging of goods; and crisis management.

Because port regulations are dependent on spe-cific local circumstances, development of gener-ally applicable port regulations is not feasible.Therefore, in this section only a selection of themost important issues is discussed.

4.1.1. Vessel Traffic Management

Vessel traffic management focuses on the safepassage of vessels through the port area. Trafficdensity in a major port—especially in the caseof sea-going and inland vessels using the sameport waters—may require an elaborate systemof traffic regulation and management. Thissystem comprises four principal elements:

• The vessel with all its sophisticated com-munication and positioning equipment,such as satellite communication and anti-collision radars.

• The available port facilities, such as ves-sel traffic systems and modern aids tonavigation, often with advanced featuressuch as centralized digital radar displays,collision prediction, and CCTV (closedcircuit television) as well as pilot boats,patrol boats for traffic control, tugs, andmooring boats.


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Box 16: Reference Clauses on Liability

The Operator shall be deemed to be incharge of goods deposited in its cus-tody as from the time that:

• It has taken the goods from the shipper orany person acting on his behalf up to thetime the goods are shipped or otherwisedisposed of.

• The goods are discharged from ships up tothe time of delivery to the consignee orany person acting on his behalf or until finaldisposal.

• Transshipment containers/goods arereceived up to the time they are reshipped.

The Operator shall indemnify the Authority inrespect to any liability the Authority may incurfor loss and/or damage to goods in custodyof the Operator.

Source: Author.

• Clear traffic regulations consistent withInternational Maritime Organisation(IMO) conventions (if applicable) aswell as long-established communicationprocedures.

• Well-motivated and trained pilots, trafficand radar operators, patrol boat crews,tug crews, and other shore personnel.

Provisions regarding these issues are found notonly in port regulations, but also in pilotagelaws and regulations, vessel traffic regulations,and IMO conventions.

4.1.2. Pilotage

The sea or harbor pilot is the first representa-tive of a port encountered when a sea-goingvessel enters port waters. The pilot acts asadviser to the captain during the ship’s transit.The efficiency of the pilot service is of majorimportance both for port safety and efficienttraffic management.

4.1.3. Order and Safety in the Port

Since it is not feasible to mention all port regu-lations on port safety, only those provisions thatare of general application are listed here. Themain subjects are:

• Berthing requirements.

• Manning of a vessel when at berth.

• Shifting of ships.

• Use of anchors.

• Use of stern- or bow-thrusters whenalongside.

• Air pollution from vessels.

• Repairs aboard and alongside ships.

• Transport, handling, and storage of dan-gerous, hazardous, or harmful goods.

• Reporting and removing substances andobjects floating in port waters.

• Fumigation of ships.

• Ships causing serious danger, damage orhindrance (see Box 17).

Generally, the harbormaster (or port captain) isresponsible for maintaining good order in theport area, often in cooperation with specializedport police, and, in emergencies, with the regu-lar police, fire brigade, and ambulance services.

4.1.4. Reporting and Communication

Part of reporting and communication with theharbormaster (or port captain) is standard, suchas vessel entry and departure. Expected time ofarrival at the port is usually reported at least 24hours prior to arrival and regularly updated.Departure of a ship from berth is usually reportedto traffic control three hours before unmooring.There are special procedures for reporting danger-ous or noxious substances carried by the ship.Border police and customs require a host of docu-ments. In the event that a country is a member ofthe Port State Control Agreement, the portauthority controls ship documentation to preventsubstandard ships from using the port. Rulesshould be made by ports for captains or agents toinform the harbormaster or Captain’s Room in atimely manner about goods loaded or dischargedat the terminals, especially with respect to danger-ous and noxious cargoes. Reports must also bemade to the appropriate authority concerning anyaccidents or incidents that occurred on the vesselwhen calling at the port or alongside a berth.

Reports are usually made to the Captain’s Roomof the port or marine authority responsible fordisseminating the relevant information to allparties concerned, such as the terminal of desti-nation, the tug company, the boatmen, customsand immigration, ship chandlers, and others.Information is often entered into a port systemserving the entire port community (see Box 18).Data communication between ship and portauthorities is increasingly conducted electroni-cally via satellite communication devices (GPS orInternet). Modern ports increasingly acceptmessages only in digital format.

4.1.5. Dangerous Cargoes: Transport andHandling

Over the last four decades, the IMO has beenrecognized as the principal forum for all matters


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affecting the safety of shipping. The transportof dangerous cargoes has been one of IMO’smain responsibilities since its founding in1958. Its rules, requirements, regulations,standards, codes, guidelines, and recommen-dations have been implemented by portadministrations all over the world and are fol-lowed and observed by both port authoritiesand the ports industry. Port regulations should

be consistent with IMO rules as much aspossible.

It is estimated that more than 50 percent ofpackaged goods and bulk cargoes transportedby sea can be classified as dangerous, haz-ardous, or harmful. Some of the substancestransported are dangerous or hazardous as amatter of safety and are also harmful to the


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Air Pollution

It is prohibited to allow smoke, vapors,fumes, dust, or steam to escape from a ves-sel, which cause or may cause danger, harm,

hazard, damage, or hindrance within or outsidethe port area.

The Port Authority shall publish the names ofsubstances that may cause unacceptablestench or hindrance when being loaded into ordischarged in bulk from a vessel. It is prohibitedto load or discharge such substances unlessthe Port Authority has issued a license to do so.

Removing Objects and Substances from thePort Water

When a person by fault or negligence intro-duces an object into port water, hereby caus-ing danger, hazard, harm, or hindrance withinor outside the port area, he shall ensure:

• That the harbormaster is informed withoutdelay.

• That the object or substance is removedfrom the water immediately, unless this isnot practically possible.

The port authority may issue further detailedregulations in order to prevent pollution of portwaters.

Execution of Repair Works on Board

It is prohibited to execute or cause to executeworks on board a vessel with respect to reno-vation, repair, or maintenance in the followingcases:

• When a ship is berthed in a PetroleumHarbor and the works cause open fireand/or sparks.

• When is ship is carrying dangerous goods orwhen it concerns a tanker for which nocleaning certificate has been issued.

• If the works are impairing a vessel’s readi-ness to maneuver.

• It the works cause danger, damage, or hin-drance.

The above shall not apply when a ship isberthed at a shipyard licensed to carry outsuch works.

The injunction shall only be imposed whenit has become apparent that conditionsimposed by the Authority have not been com-plied with or, in the opinion of the Authority, noeffective measures can be taken to prevent orend the situation of danger, serious damage,or serious hindrance to the port area and/orthe nearby population.

Fumigation of Vessels

It is prohibited to use or cause to be usedgases on board a vessel for the purpose ofdisinfecting ship and cargo without a licenseissued by the Port Authority.

A vessel that used gases for disinfectingship and cargo is prohibited from berthing orbeing alongside a berth unless a declarationfrom a licensed expert has been issued statingthat the vessel is gas free.

Danger, Harm, Damage, or Hindrance fromVessels

The Port Authority may impose an injunctionon the vessel to enter port, to berth, or toremain alongside a berth if the vessel, in theopinion of the Authority, causes or may causeserious danger, harm, damage, or hindrance tothe port area and/or the nearby population.

Reporting Data on Security

• International Ship Security Certificate (ISSC)number.

• Date of issue/expiry.• Name of organization issuing the ISSC.• Name of ship security officer.• Ship security threat level.

Source: Author.

Box 17: Reference Clauses on Port Safety and Environmental Protection

marine environment, other cargoes are haz-ardous only when carried in bulk, and somemay be considered harmful to only the marineenvironment. Between 10 percent and 15 per-cent of the cargoes transported in packagedform, including freight containers, bulk packag-ings, portable tanks, tank containers, roadtankers, trailers, unit loads, and others, fallunder the above categories.

Generally, port regulations may require a licensefor handling specific cargoes. With respect to ves-sels loading and discharging dangerous cargoes,port regulations usually include detailed provi-sions. The port authority may prohibit loading,handling, and discharging of dangerous cargoes inharbors where such activities would be especially

dangerous to the public. Often, handling liquidcargoes such as oil, oil products, gasoline, or dan-gerous chemicals may only take place in designat-ed harbor areas or zones that do not pose a threatto nearby population centers (see Box 19). Theentry and presence of dangerous, hazardous, andharmful cargoes in port areas and their attendanthandling should be fully controlled to ensure gen-eral safety. The passage of ships carrying danger-ous cargoes is a critical responsibility of the vesseltraffic system. Ships loading or discharging dan-gerous cargoes are usually regulated by an expert.

Cleaning of ship holds still containing residuesfrom dangerous cargoes may need to be sepa-rately regulated and controlled. Disposal of oiland chemical wastes should also be strictly


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Arrival and Departure

The Master of a vessel shall inform the harbor-master of:

• The ETA of the vessel at the port at least 24hours before arrival.

• The shifting of the vessel in port at leastthree hours prior to such event.

• The vessel’s departure from port at leastthree (two, one) hour before unmooring.

• Damage to the vessel, the equipment,machinery, and other items that may impairmaneuverability of the vessel and that mayendanger the safety of the port area and/orthe nearby population, directly upon occur-rence of such incident.

• Other data required by the harbormaster inconnection with the vessel’s presence in theport area.

Notifications shall be made in digital form tothe address determined by the Port Authority.

Dangerous Goods

The Port Authority may require reporting dataon dangerous cargoes loaded to or dischargedfrom vessels in the port, or from vessels thathave not been cleaned from such substances.

The Port Authority may also require whenand in what manner these data shall be pro-vided to the Authority.

Reporting Data on Dangerous Goods

The following data shall be provided by the

Master of a vessel:

• Name and call sign of the vessel and theInternational Maritime Organisation (IMO)identification number, if applicable.

• Nationality of the vessel.• Length, breadth, and draught of the vessel.• ETA in port or at the pilot station, as required

by the competent authority.• Expected time of departure (ETD).• Planned route.• The correct technical names of dangerous or

polluting goods, the UN (United Nations)identification numbers, where applicable theIMO hazard class in accordance withInternational Maritime Dangerous Goods(IMDG), International Bulk Chemicals (IBC),and International Gas Carriers (IGC) codesand the type of vessel as described in theInternational Code for the Safe Carriage ofPackaged Irradiated Nuclear Fuel (INFCode), and the quantities of the goods andtheir location on board. In the case suchgoods are transported in tank or cargo con-tainers; their identification marks and signs.

• Confirmation that a cargo list, manifest, andsuitable stowage plan is available on boardthat accurately lists the dangerous and pol-luting cargoes carried on board as well astheir location.

• The number of crew members on board.

Source: Author.

Box 18: Reference Clauses on Reporting

controlled and carried out through installationsowned or controlled by the port authority inaccordance with the International Conventionfor the Prevention of Pollution from Ships(MARPOL 73/78) on port reception facilities.

With respect to vessel management, the portauthority may regulate the navigation and placeof anchoring or mooring of vessels carryingdangerous goods. It also might regulate themode of utilizing, stowing, and keepingdangerous cargoes on board vessels and theconveyance within the port of any kind ofdangerous cargoes with any other kind ofgoods, articles, or substances.

Finally, a port authority should have full infor-mation about the type and amounts of danger-ous goods in the port area and about locationswhere those goods are stored or handled.Detailed regulations should be issued by theport authority or the competent environmentalagency with respect to location and segregationof dangerous cargoes on terminals or industrial

sites. In the event of industrial or chemical siteslocated in the port area, the port authorityshould also be fully informed about possibledangers and risks with respect to explosionsand damage to the environment.

4.1.6. Pollution and Reception Facilities

The goal of MARPOL is to prevent pollutionfrom ships. This has been widely adoptedthroughout the world. It obligates signatorystates to ensure the provision of adequate portreception facilities for waste that can be usedwithout undue delay. National legislation imple-menting the convention usually places responsi-bility for ensuring such provision on portauthorities. Many ports meet the obligation byallowing suitable, qualified waste managementcontractors to offer services. In such cases, theauthority is responsible for thorough qualitycontrol at the facility. Cleaning facilities for oiland oil wastes can often be economicallyexploited. However, cleaning facilities for chem-ical wastes generally do not offer by-productsthat can be extricated and marketed by a wastemanagement contractor.

An important issue to consider is whether theport will merely facilitate the provision of theseservices directly to ships through licensed, quali-fied contractors or provide the facilities itself(shore facilities and collection barges, if neces-sary). In the latter case, the port is responsiblefor the effective removal of waste materials(see Box 20).

4.1.7. Regulation of Other Port Functions

A variety of other aspects may be regulated by aport authority under a ports law, such as:

• Inquiries with respect to any case wheredamage has been caused by or to a vesselin port.

• Keeping and placing buoys, beacons, andother navigational aids as well as provi-sion and maintenance of lighthouses.

• The landing of personnel belonging to anarmed service.

• Cleaning of basins, works, and premises.


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Box 19: Reference Clauses on Loading andDischarging Dangerous Cargoes

The authority shall make regulations forthe transport, loading, handling, or dis-charging of dangerous, hazardous,

and/or harmful goods in the port and theapproaches thereto. Such regulations mayconcern, inter alia:

• Documents to be presented to the harbor-master.

• Berthing requirements, including tug assis-tance.

• Security and supervision.

• Fire prevention and accident control.

• Activities that may cause danger, hazard,and/or hindrance.

• Loading and discharging of cargoes.

• Incident reporting.

The Authority may prohibit loading, handling,or discharging of dangerous good at wharvesor docks where such loading, handling, anddischarging appears especially dangerous tothe public.

Source: Author.

• The use and manning of harbor craft(sometimes requires fire-fightingcapabilities).

• Provision and maintenance of pontoons.

• Manning and use of tugs and boats.

• Special police powers for patrol boat per-sonnel (may also be included in the har-bormaster’s function).

• Disaster control and emergency commu-nication procedures.

• Fire-fighting procedures and operations.

• Prohibiting the embarkation and disem-barkation of persons except at suchplaces as may be authorized by the portauthority.

5. PORT COMPETITIONMODALITIES There are three categories of port-related com-petition. Interport competition arises when twoports in the same or in different countries com-pete for the same cargo. The scale of interportcompetition often depends on the size of thehinterland of the concerned ports. For example,Rotterdam competes with Antwerp, Hamburg,and Bremen for cargoes destined for CentralEurope. Transshipment container trade compe-tition often concerns an entire region; for exam-ple, in the South Asian region, the port ofColombo is competing with Singapore, TanjungPelepas, Dubai, Salalah, Aden, and possibly inthe future with Vallarpadam. Intraport competi-tion refers to a situation where two or moreterminal operators within the same port areacompete for the same type of cargoes.Intraterminal competition refers to two or more(stevedoring) companies competing within thesame terminal. This situation is rare and usuallyonly exists within small ports operating under theservice port model with independent stevedores.

In general, intraport competition is favored byboth government and port users, but is notalways feasible. It depends on the volume of thecargo, which may not be sufficient to allowtwo or more operators to run a profitable and


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Box 20: Reference Clauses on WasteManagement

No person shall provide any waste han-dling facility-cum-collection serviceunless he is authorized to do so by a

public license granted by the Port Authority(or Environmental Agency).

Every public license granted under thissection shall be in such form and for suchperiod and may contain such conditions asthe Authority may determine.

A public license for the exploitation of awaste handling facility may include conditionsrequiring the public licensee:

• To comply fully with the requirements of theMARPOL 1973/78 on adequate port recep-tion facilities, especially with regard toAnnex I (Oil), Annex II (Noxious Liquids),Annex III (Packaging), Annex IV (Sewage),and Annex V (Garbage), if and when appli-cable.

• To prepare itself to deal with any emer-gency threatening the health of the popula-tion and the pollution of the environment.

• To comply with any rules, regulations, pro-cedures, and standards as specified in thelicense or which are given by a competentauthority.

• To allow control and inspection of facilitiesand administration by any competentauthority at all times.

Subject to this Section, the Authority may mod-ify the conditions of the public license granted.

Any public licensee aggrieved by the modifi-cation of conditions by the Authority under thissubsection may, within 30 days of the receipt ofit, appeal to [Court] (ask for arbitration).

The Authority may give directions for orwith respect to standards of performance andprocedures to be observed to ensure the reli-ability and the environmental friendliness ofthe facilities and the waste collection, as wellas the prevention of undue delay to vessels.

Any person who fails to comply with anydirection given under this section shall beguilty of an offense.

It shall be the duty of the public licensee toprovide environmentally acceptable, reliable,efficient, and economical services to the ship-ping community in accordance with the provi-sions of public license granted to it and thedirections of the Authority.

effective business. Establishing competition inthe port sector requires four steps:

1. Assessment of sector unbundling, espe-cially in the case of a public service port.This relates to the financial and economicfeasibility of creating more than one ter-minal handling the same commodity.

2. Implementation of the new port manage-ment structure, if and when required.

3. Conclusion of concession or lease agree-ments that include tariff regulation mech-anisms, if required by the absence ofintraport competition.

4. Introduction of regulatory oversight bythe government (port competition act),but only with respect to those tariffs thatrelate to a monopolistic market situation.

When intraport competition is muted orabsent, the terminal operators (whether publicor private) have an incentive to use theirmonopolistic market position to charge hightariffs (particularly for captive cargoes), whichmay justify regulation. The need for suchregulation may lead to the creation of anindependent port competition regulator. Thisregulatory function is usually instituted by law.

The main objective of the regulator is to ensurefair competition among competing operators inthe port; control monopolies (including publicones) and mergers; and prevent anticompetitivepractices. Generally, a port sector regulator haslegal powers to interfere in anticompetitivepractices such as:

• Use of a dominant position to prevent orlessen competition.

• Cross-subsidization from monopoly serv-ices to contestable services, where itthreatens fair competition.

• Price fixing among competitors.

• When a firm or a person providing portservices pursues a course that of itself hasor is intended to have the effect of restrict-ing, distorting, or preventing competition.

• Monopoly situations, which are most likelyto occur in medium size or smaller ports. Inmany ports, only one container or oil termi-nal exists. Generally, when a monopoly ormerger situation is not in conflict with thepublic interest, it may be permitted.

A port competition regulator should only beestablished in the event of serious threats tocompetitive behavior within the port. It shouldpreferably have the character of an arbitratorrather than a court of law, and be accepted bythe port community as being independent. Inthe case that boundaries between port authori-ties and terminal operators are vague or nonex-istent (when a port authority not only runs itsown container terminal but also owns shares ina competing facility, as is the case in Sri Lanka), aregulator might be a solution for guaranteeing alevel playing field for all port operators. Aregulator, however, should not jeopardize thelegal powers of port authorities to operatefreely in the market or the ability of a terminaloperator to negotiate tariffs with its clients.

Box 21 discusses the consequences of over com-petition in ports with insufficient volume, high-lighting the case of the Port of Buenos Aires.

In a landlord port model, the public portauthority itself is the first to exercise controlover excessive pricing by marine or port servicesproviders. A well-devised concession agreementstill constitutes the best means to prevent anoperator from misusing monopoly power.

In Module 6, a detailed analysis is providedconcerning port regulation, including competi-tion regulation. The next section emphasizes thelegislative aspects of such regulation.

5.1 Legal Structure of PortCompetition Regulation The introduction of a port competition act isonly deemed necessary in the event that inter-and intraport competition is absent or not suffi-ciently developed to prevent monopolisticbehavior, either by a port authority or a portoperator (see Box 22). Reasons for introducingregulation in this respect are:


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• A port authority not only functions as alandlord, but also provides stevedoringservices or operates a terminal. The latter isthe case in Sri Lanka, where the Sri Lanka

Ports Authority owns and operates theJaya Container Terminal, which competeswith the privately operated South AsiaGateway Terminals (SAGT) managed by


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In 1993, bid documents were issued by theArgentine government offering concessionsfor six terminals in Buenos Aires (Puerto

Nuevo). The bid was for six conventional fingerpiers of which two piers (numbers 1 and 2)could be bid as one. This resulted in five oper-ating concessionaires of which one had toclose down within 13 months after startingoperations. From the remaining four operators,one specialized in general cargo and bulk, andthree in container handling. The story ofBuenos Aires was told in September 1998 byTrevor H. Bryans of P&O Ports during a WorldPort Privatization Conference in London.

“Unbeknown to the Puerto Nuevo bidders atthe time of submitting the bid, another conces-sion was to be granted for container operations.A fourth container terminal, called Exolgan, wasdeveloped at Dock Sud, only 8 km from PuertoNuevo. This area falls under the Buenos AiresState Province jurisdiction, and not under theFederal government. The position then was thatthere were four container terminals in the Port ofBuenos Aires, to handle 500,000 containers, fur-ther reducing the size of the cake, and castingconsiderable doubt on the achievability of thecommitments made in winning the concessions.

The issue of competition, and how it isaddressed in government policy, is an issue,which is fundamental to the success of privati-zation. Competition becomes an obsession withport authorities planning for privatization. Portswith insufficient volume to support one efficientoperator, look to bid two or more concessions.

The Port of Buenos Aires is a perfect exampleof this obsession with competition, which has ledto overcapitalization, five concessions have beenlet, and there is only sufficient volume for two, orat the most, three efficient container terminals.

As mentioned previously, the operator whowon the concession of terminal 6 has gonebankrupt, mainly as a consequence of loweringtariffs to subeconomic rates to retain business,and since the early part of 1995 a savage pricewar developed, which has seen average-per-boxrevenues plummet from $400 preprivatization toless than $200 today, and they are still falling.

The current rate-of-return to terminal opera-tors in Buenos Aires is beneath average long-term cost of the provision of the services bysegmenting the market into four operators. Eachterminal incurs considerably higher costs thanthe combined average cost of one large opera-tor. The clients have been denied access toservices provided in the most effective mannerpossible.

Moreover, the three terminals operating inPuerto Nuevo suffer unfair competition by theoperator Exolgan at Dock Sud, operating at theProvincial Administration. It is estimated thatthe commercial advantage to Exolgan isapproximately $40 per box. The commercialadvantage to Exolgan arises from the following:

• The ‘Tasas a la Carga,’ payable byimporters/exporters to the terminal, which isthen passed on to the Federal government,does not apply at Exolgan. The ‘Tasas a laCarga’ is $3 per ton on import cargo, and $1on export cargo. It is collected by Exolgan,but not passed onto the Province.

• Under the terms of the bid in Puerto Nuevo,the Concessionaires had to absorb a pro-portion of the waterfront and AGP labor. Inthe case of TRP, this amounted to almost900 people, although the terminal onlyrequired 430. Reducing this labor to therequired number cost in excess of $10M.Exolgan was not required to absorb any ofthe redundant or surplus labor, although thatlabor was originally employed at Dock Sud.

• Volume commitments were made by thePuerto Nuevo terminals as part of the bid.Shortfalls in these volume commitmentsmust be paid for by the operators. No similarcommitments were required from the opera-tor at Exolgan.

• The rental fee payable to the Province byExolgan is payable for the quay area only;the remainder of the land is free-hold.

• Stringent performance guarantees and bondshad to be made by the operators in PuertoNuevo, and stipulated insurance costs cov-ered. This was not the case at Exolgan.”

Source: Author.

Box 21: The Buenos Aires Case

P&O Ports. In this case, a port competi-tion act was deemed necessary to preventpossible misuse by the port authority ofits dominant position because it was alsoresponsible for pilotage and towage serv-ices and creating an atmosphere of confi-dence for private port users andinvestors.

• There is only one terminal operator han-dling a specific commodity (often con-tainers). In Yemen, there is only one largecontainer terminal handling the entirenational container traffic. Therefore, the

government introduced competitionregulation provisions in the concessionagreement with the terminal operator,although it is only applicable to domesticcontainers. No restrictions were put inplace with respect to transshipmentactivities.

As indicated above, port competition regulationmay either be introduced by law or be part of aconcession agreement with a port operator.There is also the possibility of a merger betweentwo port operators, resulting in the creation ofa monopoly in the concerned port. In such a


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Hereinafter, the main provisions of a PortCompetition Act are mentioned.

The main recital of the Act may state the fol-lowing:

WHEREAS it has been deemed appropriate topromote and oversee competition in the portssector, ensure the equity of access to the portsof [country], and to create an atmosphere ofconfidence for port users and investors in com-mercial marine and port services and facilities.

NOW THEREFORE, be it enacted by theParliament of the [country] as follows:

Important are the functions of the port regula-tor and the powers to interfere in the market.An example of the relevant provisions are:

(1) The functions of the port regulator shall beto act as the economic regulator and com-petition authority for the ports sector in[country]:

(a) Upon complaint of any port user, toinvestigate and make orders in relationto complaints concerning alleged anti-competitive practices or abuse of adominant position.

(b) Upon complaint of any port user in relationto tariffs, to investigate whether those tar-iffs amount to or evidence an anticompeti-tive practice or an abuse of a dominantposition and to make an order thereon.

(c) Upon notification to the port regulator interms of [subsection (2)] hereof prior toany merger of:

(i) A marine service provider and a portservice provider.

(ii) A marine service provider with anothermarine service provider.

(iii) A port service provider with anotherport service provider.

(iv) Upon complaint of any port user priorto or upon such a merger, to decidewhether the merger situation is incom-patible with the promotion of competi-tion and to make an order thereon.

(d) On the application of the ports authorityunder section [number], to review thedraft of the concession agreement interms of the said section and advise theport authority on whether any provisionsthereof may be incompatible with thepromotion of competition, may amountto an anticompetitive practice, or mayresult in an abuse of a dominant position.

(e) In response to a complaint of any portuser, to investigate whether the occur-rence of cross-subsidization exists fromdominant services to contestable servic-es, and make an order thereon.

(2) The port regulator shall prescribe theinstances in which a merger notification isrequired to be given to it under paragraph (c).

The provisions above are an example of lightregulation, only upon complaint of the portauthority or the users of the port facility.However, the regulator has the option to makean order to modify the tariffs when it decidesthat a certain situation violates fair competitionin the concerned port or port sector.

Source: Author.

Box 22: Sample Port Competition Act

case competition regulation may be necessaryeither in terms of tariff regulation or in pro-hibiting the merger for being incompatible withfair competition.

6. FULL CONCESSIONAGREEMENTS More elaborately discussed in Module 3, con-cession agreements are a relatively new develop-ment in ports. Business opinions differ aboutthe legal nature of a concession agreement—aswell as its configuration. Some concessionagreements have more in common with a priva-tization model, while others resemble a leaseholdcontract. Because comprehensive privatizationconstitutes an unrestricted and irrevocable trans-fer of port land from the public to the privatesector, a concession agreement, with or withoutBOT types of arrangements, cannot be conceivedas being comprehensive port privatization, butonly partial port privatization. During the lastdecades, application of concession agreementshave gradually become the preferred method todevelop public-private partnerships and aremost successfully applied within the landlordport structure.

Concession agreements were originally devel-oped for service ports. Landlord ports usuallydid not need concession agreements, but usedleasehold agreements instead. Both types ofagreements have much in common and someconsider a leasehold contract to be a variant ofa concession. To avoid misunderstanding, theterm “full concession agreement” will be usedto describe a concession in its broadest form;that is, a series of contracts that define the rela-tionship between the government and the pri-vate sector regarding the right to exploit portland and facilities as well as the obligation toconstruct port infrastructure and provide super-structure.

In some aspects, a leasehold might be consid-ered a long-term rent contract. But contrary toa rent contract, a leasehold conveys a possesso-ry interest. Therefore, a leasehold can be trans-ferred or sold to another private party underthe conditions stipulated by the port authority.

This is a very important feature for advancingthe business plan of a private investor in a portterminal.

6.1. Full Concession, Leasehold,and Land Rent What differentiates a concession agreementfrom a leasehold? When would one instrumentbe preferable over another? Box 23 summarizesthe formal differences and similarities.

The main reason to apply a full concessioncontract is fiscal. In the 1980s, many ports(especially service ports) were in dire financialstraits: government-controlled, overmanned,badly maintained, without market orientation,and often not able to provide even essentialport services. This situation did not occur solelyin developing countries, but also in manydeveloped countries. In developing countries,however, the financial resources necessary tomodernize port facilities and to provide forredundancy payments for excess personnel wereusually lacking. Concession agreements provideda timely solution: private investors provided themoney to modernize port facilities and oftenwere willing to take over some port personnelliabilities. This freed up government resourcesfor use in other parts of the economy. For alltheir advantages, concession agreements dohave a price, most particularly the surrender bythe government of full and complete controlover port development.

6.2. Full Concession and BOTSchemes If the concessionaire obtains the right toconstruct significant parts of the operationalfacilities as well as the operational portinfrastructure (mainly quays and landreclamation works), a concession could becombined with a BOT arrangement. In thecase of legislation designating part of theinfrastructure to be of a public character, theconcession may be considered a public license.However, the part of the concession constitutinga public license is generally not negotiable.The government authority granting the license


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Box 23: Full Concession, Lease, and Rent Contracts—Landlord Port

Terms 25–35 years 10–25 years 10 years

License Maybe, depends on Maybe, depends on Maybe, depends onlegislation legislation legislation

Government Yes No Noguarantees (loan, taxes, exchange rate, and competition conditions)

Obligation to Often, depends on No Noassume port local situationpersonnel liability

Port assets may Yes Maybe, depends Nobe pledged as on legislationsecurity

Performance Yes Yes or no depending Nomonitoring by on the contractport authority

Traffic guarantee by Yes, depends on Usually not Noconcessionaire, contractlessee, or renter

Private investment Yes No Noin port infrastructure

Private investment Yes Yes Yesin port superstructure and equipment

Tariff control by Depends on situation No Nogovernment or port authority

Terminal Concessionaire or Lessee Rentermanagement his chosen operator

Payments Fixed and variable Lump-sum (fixed) Fixedor shared revenue

Legal character Joint venture, often Mainly limited Limited liability of private party including shipping line liability company company

Responsibility for Yes Depends on legislation Usually notenvironmental conditions

Business plan Yes Depends on contract Norequired conditions

Reversion of Yes Yes Yesuser rights after contract period

Compensation for Depends on contract To be transferred to Not applicablenewly built facilities new lessee or to be

removed

Source: Author.

Characteristics Full concession Leasehold Land rent

usually reserves the right to unilaterallymodify license conditions.

The most important BOT arrangements com-bine many variations of long-term leasing withpreagreed investment commitments. In portreform, the most commonly used models areBOT, BOOT (build-own-operate-transfer), BTO(build-transfer-operate), and WBOT (wrap-around BOT). These variations are described inmore detail below, and also later in this modulein “BOTS and Construction.”

BOT. Legal title to the newly constructed portinfrastructure, and sometimes other assets,remains with the government or port authorityuntil the end of the concession period. The con-cessionaire concludes a long-term leaseholdagreement, which conveys rights similar toholding title over the land. This agreement isusually attached as an annex to the concession.

BOOT. It is also possible that legal title for theland is acquired directly by the concessionaire.Under a BOOT model, the parties agree to havetitle over all assets that are passed to the gov-ernment at the end of the concession. For manylarge terminal operators, the BOOT model is apreferred option.

BTO. This arrangement addresses instances inwhich legislation forbids ownership by privateparties for what is considered public infrastruc-ture or part of the maritime domain. Ownershipmay be directly transferred to the governmentafter construction (for example, Costa Rica, andCroatia). The investor in the terminal facility willconstruct the terminal on privately owned landand subsequently transfers title to the governmentor port authority. Generally, this form of public-private partnership is considered more complicatedthan the more common BOT scheme, especiallywith respect to liability and increased governmentinvolvement. Under the BTO model, ownershipof port facilities becomes an issue for lenders andinvestors, particularly when fixed assets arerequired as collateral for financing. In such cases,lenders may require some form of governmentguarantee regarding adherence to the terms of theconcession agreement.

WBOT. Finally, the WBOT concept packages aBOT with a privatization of the public infra-structure. Under a WBOT structure, existinggovernment-owned port facilities are expandedby the private sector, which holds title only tothe additional infrastructure. Under this model,a private operating company would then:

• Operate the entire port facility under aproject development agreement (PDA).

• Manage the government-owned portfacility under a management contract.

• Expand the facility under a concession orBOT contract.

• Have both the management contract andconcession or BOT contract wrap aroundthe PDA.

6.3. Full Concession AgreementStructure While the principal framework for the relation-ship between the port authority and the conces-sionaire is specified in the main concessionagreement, there are a number of other docu-ments that form part of the concession. Theconcession agreement and related documentscan be used in a number of circumstances,including when:

• A private operator concludes a conces-sion agreement for an existing publicterminal.

• A private operator concludes a conces-sion agreement with a BOT arrangementfor an existing terminal that mustundergo large-scale reconstruction and bethoroughly reequipped.

• A private operator constructs an entirelynew terminal under a concession agree-ment with a BOT arrangement (greenfieldproject).

Box 24 presents a short list of the importanttopics usually treated in a concession agreementand related documents, whereas Annex Ipresents a comprehensive potential list ofconcession and BOT agreement provisions.


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6.3.1. Preconcession Documents

Often, either pursuant to the terms of anaward, or for purposes of securing financingcommitments, the parties execute various pre-concession documents that either outline thefundamental terms of the concession or becomeincorporated into the concession itself. Amongthese documents are:

• Letter of intent (LOI): A preconcessionagreement stating the concessionaire orsponsor’s intention to design, construct, orrenovate a new or existing port facility, andthe port authority’s willingness to establishterms for a privately operated facility undera concession agreement and to cooperatewith the concessionaire or sponsor in com-plying with certain local requirements (forexample, permits, registrations, and qualifi-cations to do business). The LOI is pre-pared in accordance with draft functionalspecifications that were originally submittedas part of the bid documentation.

• Detailed project report (DPR): A docu-ment submitted to the port authority asan outline of the functional design orgeneral technical design and time sched-ules (milestones) for the various phases ofthe construction. Once approved by theauthority, the DPR would be incorporatedin the concession agreement, at whichpoint the milestones become binding.

• Joint development agreement (JDA): Anagreement among members of the spon-sor group that allocates project responsi-bilities (for example, shareholding,financing, construction, or tax advan-tages). This agreement might include aport authority or even a ministry.

• Technical operations agreement: Anagreement that specifies joint use of andresponsibilities for technical facilities,such as shore cranes or operational infra-structure.

6.3.2. Definitions

Every concession agreement includes a list ofdefinitions to delineate precisely both the sub-ject matter and the concepts used throughoutthe agreement. These definitions will vary fromcountry to country and legal system to legalsystem. Outlined below are examples of themost commonly used definitions. The capital-ization of a word within agreements often indi-cates the word is specifically defined within thedefinitions section of the agreement.


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Box 24: Main Schedules to a Concession orBOT Agreement a. Definitions

- Definitions

- Interpretation

b. Conditions precedent

- To be fulfilled by the operator

- To be fulfilled by the government

c. Authorized maps of development area

- Current terminal

- Extension works

d. List of current terminal personnelemployed

e. Identified permits

f. Functional requirements of the extensionworks

g. Design solution

h. Construction program

I. Milestone achievement dates and mile-stone sunset dates

j. Commissioning tests

k. Minimum insurance covers

- Precommissioning insurance

- Postcommissioning insurance

l. Maintenance policy

m. Transfer arrangements

n. Hand-back

- Hand-back requirements

- Expiry date inspection

- Form of hand-back certificate

o. Termination procedures

p. Throughput

- Annual throughputs

- Traffic and throughput information

r. Initial capitalization

Source: Author.

Agreement: The concession agreement, enteredinto between the Port Authority of [port orcountry] and the Operator, of which this sched-ule is a part, including all the schedules thereto,and as it may be amended, varied, or modifiedfrom time to time.

Applicable permits: Any and all permissions,clearances, licenses, authorizations, consents,no-objections, and approvals of or from anygovernmental authority of whatsoever naturerequired from time to time in connection withthe ownership, development, financing, con-struction, operation, and management of theterminal at the Port of [name], concessioned tothe Concessionaire, and for undertaking, per-forming, or discharging the obligations contem-plated by this Agreement or the Port ServicesAgreement and the Site Lease Agreement, as setout in Schedule [number] hereto.

Approved DPR: The DPR approved by the PortAuthority for the development of the variousphases of the site, the approved form of whichshall be signed for identification by the partiesto this Agreement and shall include any amend-ments to the DPR approved by the PortAuthority in accordance with this Agreement.

Bank: Every shore structure (excluding a quaywall), measured in each case from the crest lineof the ground to the bed line, and includingrelated artificial structures.

Basic port infrastructure: Immovable assets des-tined for general use of the port area, such as:

• Maritime access channels.

• Port entrance.

• Port basin(s).

• Protective works, including breakwatersand shore protection.

• Accesses to the port for inland transport(roads, rail, inland waterways, and tun-nels, and so forth)

Basic structures: All immovable property, withthe exception of such property that is subject tothe right to lease. Basic structures include all

pieces of stone, foundation remains, poles,pipes, cables, scaffolding, pavements, demarca-tions, and structures on or at the grounds thatwere founded, placed, or built by the portauthority or by the former users before thecommencement of the right of lease as part of aconcession.

Building contract: The contract or contractsentered, or to be entered, into between theBuilder and the Operator for the constructionof the works with respect to the [Name]Container Terminal or (port) facility, in a formthat contains provisions approved by the PortAuthority concerning its assignment to the PortAuthority or enabling the exercise of other step-in rights of the Port Authority.

Business plan: In respect of a financial year, a planfor the business of the Operator consisting of:

(a) The strategic and marketing objectives of theOperator for that financial year.

(b) The operating and financial targets of theOperator including monthly income, balancesheet, and cash-flow statement.

(c) Business and financial forecasts of theOperator for the 4 (four) financial yearsfollowing that financial year.

Change in law: The occurrence of any of thefollowing subsequent to the date of signing thisAgreement:

(a) The modification, amendment, variation,alteration, or repeal of any existing Law orDecree of any government authority.

(b) The enactment of any new Law or the impo-sition or issuance of any new Decree by anygovernmental authority.

(c) The commencement of any Law or Directiveor Decree that has not yet entered into effect atthe date of signing this Agreement.

(d) Changes in the interpretation, application,or enforcement of any law or judgment by anycourt within the [country] having jurisdictionover the government.


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(e) Any Applicable Permit previously granted,ceasing to remain in full force and effect forreasons other than breach or violation by or thenegligence of the Operator, or if granted for alimited period, being renewed on terms differentfrom those previously stipulated.

Conditions precedent: Shall mean the obliga-tions to be fulfilled by the Parties prior tothe Effective Date in accordance with Article[number] read with Schedule [number].

Credit agreements: The loan agreement(s)entered into, or to be entered into, between theLenders and the Operator to provide finance tothe Operator in order that the Operator mayfulfill its obligations under this Agreement.

Cargo handling services: Cargo terminalmanagement and operations including cargohandling services for stevedoring; landing;transporting; cargo consolidation; warehousingof general, liquid, or dry bulk cargoes.

Concession area: The port areas within the portof [name], known as [name], as more fullydescribed and delineated in Annex [number] tothis Agreement.

Concession fee: The monthly price per meter forthe use of leased property and, in addition tosuch amount, a Throughput Royalty to be paidin recognition of the port authority’s ownership(user) rights as specified in Section [number].

Container services: Container terminal manage-ment and operations, including container han-dling services for stevedoring, landing, trans-porting, and warehousing; stuffing and strip-ping; consolidation of containerized cargoes.

Debt: Any indebtedness of the Operator for thepurposes of financing the investment in andenhancement, development, design, construction,commissioning, and operation of the Terminalsand the Extension Works, or any other costs orexpenses in relation to the obligations of theOperator under this Agreement, related thereto.

Depreciated replacement value: Shall have themeaning assigned to it in accordance with the

[reference to appropriate document, accountingpractice, or method of depreciation].

Effective date: The date of fulfillment of all theConditions Precedent.

Financial closing: The fulfillment of all condi-tions precedent to the initial availability offunds under the Financing Documents andreceipt of commitments for the equity requiredfor (Phase 1 of) the project and immediateaccess to funds.

Financing documents: All loan agreements,notes indentures, security agreements, letters ofcredit, share subscription agreements, subordi-nated debt agreements, and other documentsrelating to the financing of the Project, as thesame may be amended, supplemented, or modi-fied from time to time.

Force majeure: An event or circumstance or acombination of events or circumstances beyondthe reasonable control of either party, whichmaterially and adversely affects the performanceby that party of its obligations under thisAgreement and that cannot reasonably be fore-seen or prevented (such as civil disturbance,armed conflict or act of foreign enemy, wars,blockades, insurrections, uprisings, sabotage,embargo, revolution or riot, action or inactionof public officials, expropriation, nationaliza-tion or confiscation of facilities, earthquakes,mudslides, lightning, typhoon, fires, storms,floods, epidemics or plagues, acts of God, andother natural disasters).

Good industry practice: As applicable to theOperator, its contractors, subcontractors, opera-tors, subconcessionaires, sublessees, and allother third-party agents of the Operator, prac-tices, methods, techniques, and standards, aschanged from time to time, that are generallyaccepted for use in international port construc-tion, development, management, operations,and maintenance, taking into account condi-tions in [country].

Grounds: The grounds given out in lease to theOperator under this Agreement.


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Hand-over: The process of providing peacefuland vacant possession of and access to theConcession Area and all cargo handling equip-ment as well as infrastructure and superstruc-ture by the Ports Authority for the conduct ofthe business of the Terminal as contemplated bythis Agreement, together with such access rightsas are described in the Site Lease Agreement.

Joint development agreement: The Agreementdated [date] between the Sponsors and, amongother things, allocating project responsibilitiesbetween the Sponsors as per Annex [number].

Law: Any applicable [country] law, statute,proclamation, bylaw, decree, directive, decision,regulation, rule, order, notice, judicial order,judgment, or delegated or subordinated legisla-tion, including directions or guidance, issuedpursuant to any legislation.

Lead sponsor: [Name] having a major EquityShare as per the Joint Development Agreement.

Lenders: Local or foreign financialinstitution(s), corporations, companies, orbanks providing secured and unsecured creditfacilities to the Operator, including lease andhire or purchase facilities to the Operator pur-suant to the Financing Documents.

Lenders direct agreement: The agreementbetween the Lenders (represented by [Name]Bank acting as Security Agent), theConcessionaire, the government and/or PortAuthority, including the rights of the Lendersunder the Concession Agreement, the PortServices Agreement, the ManagementAgreement, and the Site Lease Agreement,assigned to the Security Agent under theAssignment of Project Documents and chargedunder [the Commercial Mortgage] as well as theprocedures and obligations of the parties in theevent that the concession is terminated prior toexpiry.

Material adverse effect: Circumstances thatadversely affect: (a) the ability of the Operatorto observe and perform in a timely manner itsobligations under this Agreement; (b) the abilityof the Operator to avail the benefits of the

Concession Agreement in accordance with theterms of this Agreement; (c) as a result of whichthe Operator is unable to or is prevented fromcarrying on the Operations of the Terminal; or(d) its exclusive right to build, own, operate,and transfer the Extension Works at theConcession Area is diminished or impaired.

Operational port infrastructure: Infrastructureessential to port operations, to include any orall of the following items:

• Inner port channels including turning andport basins.

• Revetments and slopes.

• Roads, tunnels, bridges, and locks in theport area.

• Quay walls, docks, jetties, and finger piers.

• Aids to navigation, buoys, and beacons.

• Hydro and meteorological systems.

• Specific mooring buoys.

• Vessel traffic management system(VTMS).

• Port land (excluding superstructure, ter-minal road system, and paving).

• Access roads to general road infrastruc-ture, rail connection to general rail infra-structure, and marshalling yards.

Port equipment: Equipment (nonfixed assets)essential to the operation of the port, to includeany or all of the following items:

• Tugs.

• Line handling vessels.

• Specialized vessels for depth survey andfire fighting.

• Dredging vessels and equipment.

• Ship and shore handling equipment (suchas top cranes, gantry cranes, and grainelevators).

• Cargo handling equipment (apron andterminal), such as transtainers, top lifts,and trailers.


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Port services agreement: The agreement entered,or to be entered, into between the PortAuthority and the Operator for the provision ofmarine services by the Port Authority in relationto the Terminals to be operated by the Operatorpursuant to this Agreement in agreed terms.

Project: The development, financing, design,construction, operation, and maintenance of thesite in accordance to the provisions of servicesto the users.

Regulatory authority: Any authority (referred to inArticle [number]) constituted by law in [country].

Site: The wharves, piers or quays, buildings,and other infrastructure and superstructureleased or given in concession to the Operatorunder this Agreement.

Sponsors: The Consortium selected (through aprocess of competitive bidding in [month],[year]), led by the Lead Sponsor.

Terminal: The terminal facility proposed to bedeveloped in accordance with the terms of thisConcession Agreement by the Operator.

Transport infrastructure linkages: The road,rail, or water infrastructure linkages agreed toin the Approved DPR, identified as materialtransport infrastructure required for the devel-opment or operations of the [terminal, port].

Quay wall: A vertical or almost vertical shorestructure, including related support structures.

This list may be augmented with other items orthe definitions may be expanded depending onthe specific objectives of the concession andconsiderations of the national concession law.

6.3.3. Conditions Precedent Sample

Below are two sample conditions precedent, oneapplicable to the operator, and one applicableto a port authority.

6.3.3.1. Part 1—Conditions Precedent to beFulfilled by the Operator. Delivery by theOperator to the Port Authority, in form andsubstance satisfactory to the government (actingreasonably), of the following documents:

1. A duly certified copy of the Operator’sCertificate of Incorporation (and of anycertificate of incorporation on change ofname or certification on registration as apublic company).

2. A certified copy of the Memorandum andArticles of Association of the Operator, inthe form approved by all shareholders ofthe Operator and by the Lenders.

3. A duly certified copy of the Certificate ofIncorporation (and of any certificate ofincorporation on change of name orcertification on registration as a publiccompany) of the company holding themajority of the shares of the Operator.

4. A certified copy of the Memorandum andArticles of Association of the companyholding the majority of the shares of theOperator, in the form approved by allshareholders of the Operator and by theLenders (if any).

5. Certified minutes of a Meeting of theBoard of Directors of the Operatorevidencing:

(a) Consideration by the directors of:

i. A draft of this Agreement and the otherProject Documents.

ii. The Operator’s rights and obligationsunder the this Agreement and the othersubsidiary agreements.

iii.The legal capacity of the Operator toundertake the Project and enter into andperform the Project Documents and theauthority of the directors to exercise thepowers of the Operator to do the same.

(b) A valid resolution of the directors approv-ing the execution, delivery, and perform-ance by the Operator of each of theProject Documents, except the BuildingContract, which will be concluded with acompetent Builder subject to Article[number] not later than [number] monthsfrom the Effective Date or such later dateas agreed on between the parties.


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6. Documentary evidence of the executionand delivery of each of the ProjectDocuments and of the satisfaction orwaiver of any conditions precedent undereach of the Project Documents except theBuilding Contract.

7. Documentary evidence of the receipt bythe Operator of the Applicable Permits(and any applicable other Consents, ifany) as listed in Schedule [number].

8. Documentary evidence that the Operatorhas taken out the insurances required byArticle [Number] of the Agreement (otherthan those insurance relating to construc-tion that cannot be procured until afterthe Effective Date).

9. A certified document made out by theOperator stating that all Movable Assetsand Facilities, associated spare parts aswell as warrantees referred to in Article[Number] have been accepted by theOperator and the transfer value of $[number] million has been paid to thePort Authority, and that the Operatorholds harmless and indemnifies the PortAuthority and keeps the Port Authorityso indemnified against each and everyliability that the Port Authority mayincur to any person whatsoever andagainst any claims, demands, proceed-ings, damages, costs, losses, obligations,liabilities, and or expenses sustained,incurred, or payable by the PortAuthority with respect to the MovableAssets and Facilities and associated spareparts.

10. Confirmation of the Operator that it hassatisfied itself as to the nature and extentof the conditions of or affecting theConcession Area (including climatic,hydrological, hydrogeological, ecological,environmental, geotechnical, and seismicconditions), but only in respect of theexisting Terminals.

11. Execution of the Financing Documents byall parties to such documents.

6.3.3.2. Part 2—Conditions Precedent to beFulfilled by the Port Authority. Delivery by thePort Authority to the Operator, in form andsubstance satisfactory to the Operator (actingreasonably), of the following documents:

1. The execution by or on behalf of the PortAuthority of the Port Services Agreementand the Site Lease, in the form agreed bythe Operator, respectively, the Sponsorand the Port Authority prior to or on thedate hereof.

2. The receipt by the Operator of a legalopinion from counsel for the PortAuthority in a form and substance rea-sonably satisfactory to the Operator withrespect to the due authority, valid exis-tence, execution, delivery, and perform-ance of this Agreement, the Port ServicesAgreement, and the Site Lease, and con-firming that all necessary governmentapprovals, including the approval toenable the Port Authority to enter intosuch agreements, have been secured.

3. Documentary evidence that all ApplicablePermits currently in force at the [name]Terminal have been assigned by the PortAuthority to the Operator for the remain-ing duration of the term of such Permits.

4. Documentary evidence of the receipt bythe Authority of all other ApplicablePermits required to be obtained by it (andas listed in Schedule [number]) under law.

5. A Certificate from the [independentexpert], as Test Certifier, stating that theCommissioning Tests have been conduct-ed in a proper manner and to the satis-faction of the [independent expert].

6. The issuance of the CommissioningCertificate from the [independent expert],as Test Certifier, in accordance withSchedule [number] hereof.

7. A Certificate from the Port Authoritythat the ownership of the Movable Assetsand Facilities at the Terminals has beentransferred on the Actual Hand-OverDate, by the government to the Operator


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pursuant to the completion of theCommissioning Tests to the satisfactionof the Operator and/or the Sponsor.

8. Documentary evidence of the receipt bythe Operator of all new ApplicablePermits required to be obtained by it (andas listed at Schedule [number] under law)prior to the Actual Hand-Over Date.

6.3.4. Term of the Concession Agreement

The term of the agreement is a strategic issue. Itmainly depends on the respective amounts ofinvestment the port authority and the conces-sionaire have made or will make. In a landlordport, standard lease contracts that involve limit-ed investment on behalf of the concessionaireare typically 10–15 years. BOT-type agreementsare usually concluded for a period of 25–35years, with options to renew. Investments oflessors in superstructure and equipment oftenexceed those of a port authority by a large mar-gin; whether this is the case or not, both partieshave an interest in a mutually beneficial long-term relationship. This is especially true whenconcluding a full concession agreement with aBOT arrangement. Shorter term arrangements(10 years or less) are suitable for tool ports ormanagement contracts, but in general do notprovide much security or stability for the portauthority and offer no major incentives to theconcessionaire to improve performance or tointroduce innovative operations.

Concession documents must also indicate pre-cisely when the concession period actuallystarts, which can be a complicated issue. Someof the provisions come into force on signature,such as warranties, confidentiality provisions,and clauses relating to applicable law and dis-pute resolution. In the event of the transfer ofassets or construction of infrastructure under aBOT arrangement, relevant conditions comeinto force upon satisfaction of waiver of pre-existing conditions. Conditions precedent deallargely with delivery and proper execution ofcertain documents required to give effect to orsupport obligations under the concessionagreement.

The effectiveness of a full concession agreementis dependent upon the fulfillment of specifiedconditions precedent and evidence that no cir-cumstances exist that may result in the earlytermination of the agreed terms (see Box 25).

6.4. Concession Parties Parties under a full concession agreement usuallyconsist of a port authority and a sole sponsoror a consortium of sponsors (often called a spe-cial vehicle company or special purpose compa-ny [SPC]). The consortium may not necessarilybe identical to the operator, but may include theoperator as a consortium member.

The amount of share capital provided for a newventure is one indication of the consortium’sconfidence regarding the port’s prospects andfuture development. In developing countries, theInternational Finance Corporation (IFC) may bea source of share capital for the venture.Whether the port authority itself may takeshares is debatable, but preferably the portauthority should not be a shareholder because itcould create conflicts of interest due to its roleas a landlord port manager and regulator andcompromise its position with respect to otherport users. Based on the estimated incomeexpected during the concession period and theinfrastructure and superstructure to beconstructed during the concession period, the


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Box 25: Reference Clause on Term ofConcession

This Concession Agreement shall com-mence on the [day] of [month] of theyear Two Thousand and [year] and shall

end, in whole or in part, on [day] of [month] ofthe year Two Thousand and [year].

The Operator has the option to extend theduration of this Concession Agreement by aperiod of maximum [number] years, immedi-ately following the present period, taking intoconsideration the provisions given in Article[number]. Upon pain of lapsing of this right,the Operator shall notify the Authority in writ-ing at least [number] years before the exten-sion might commence that he wishes to availhimself of his right.

consortium should be expected to leverage itsinvestment with borrowed money from varioussources, usually from a syndicate of commercialbanks or through the issuance of bonds or othercapital market instrument under an indenture.

Finally, the consortium may conclude a manage-ment contract with a professional operatingcompany. Both the financing arrangements andthe management contract form part of the con-cession documents (see Box 26).

6.5. General Rights andObligations of the Operator The operator generally acquires leasehold rightsand obligations when assuming the control ofan existing facility under a concession agree-ment. The concession agreement generally limitsuse of the leased premises exclusively for port

purposes and for handling certain cargoes.Within these limits, an operator is free to developthe business. Detailed restrictions for cargohandling on the terminal should be avoided,with the exception of dangerous and pollutingcargoes.

There are many other critical subjects to beincluded in a concession agreement. Two issuesof main importance are:

• The right of the concessionaire to transferthe leasehold rights to a third party,including conditions under which suchtransfer can occur (the right to transfershould be sufficiently flexible to encour-age the financing of port improvements).

• The right to own all newly constructedbuildings and superstructure improve-ments on the premises during the leaseperiod, with compensation by the portauthority (lessor) after termination of theagreement, or, in the case of transfer to athird party, sale of such assets accordingto the terms of the finance agreements (insome jurisdictions it may be necessary torequire such sales to comply with localprocedures or applicable bulk transfernotice requirements).

Full concession agreements (including BOTarrangements) and lease agreements usuallystipulate that the fixed assets revert to the portauthority at the end of the lease. Transfer maybe effected with or without compensation,depending mainly on the duration of the con-tract and the investment value of the fixedassets. It is not unusual for a port authority topay the concessionaire or lessee the depreciatedvalue of the assets at the end of the concessionperiod.

Finally, a concession agreement may contain anexclusivity clause designed to prevent the con-cessionaire or operator and any of their sub-sidiaries from competing with other terminaloperators for the particular traffic for which theconcession was granted, within defined geograph-ical areas and for stated time periods, as the mar-ket situation and the scope of the investments


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Box 26: Reference Clause on Nomination ofOperator of a Container Terminal

This INDENTURE made and entered intoat [place] this [number] day of [month][year], by and between the Port

Authority of [name] a body corporate [a publicentity], incorporated under the [name] Act No[number] of [date] and having its Head Officeat [street], [city], in [country], (hereinaftercalled and referred to as “the Authority,”which term or expression where the contextso requires or admits, means, and includesthe said Port Authority and its successors orassignees) on the one hand, and the (name)Container Terminal Ltd., duly incorporated in[country] under the Companies Act of [date]and having its registered office at [name]street, no.[number], [city] in [country] (here-inafter referred to as “the Operator”), whichterm or expression shall where the context sorequires or admits, means, and includes thesaid Container Terminal Ltd. and its succes-sors and assignees), on the other hand,

Article...

The Authority hereby appoints the Operator toprovide cargo handling (or container) servicesat the port area(s) known as [name of area],under the terms and conditions specified inthis Agreement.

Source: Author.

may reasonably require. In any case, this timeperiod must remain short enough compared tothe length of the concession agreement, and notexceed a period of preferably five years aftercompletion of the building program in the caseof a BOT arrangement.

Generally, port infrastructure constructed by aconcessionaire through a BOT arrangementremains the property of the port authority. Withrespect to movable assets placed on the conces-sion area by the concessionaire, ownershiprights over these assets generally remain withthe concessionaire (with the right to pledgethese assets as collateral to financiers) through-out the concession period and may, dependingon the concession agreement’s terms, be trans-ferred to the port authority when the concessionterminates. Some legal systems allow a conces-sionaire or lessee to own buildings, installa-tions, and other immovable property located onport authority owned land (for example, in theNetherlands). Therefore, operators may usethese assets as collateral for bank or sharehold-er financing. In countries where the port areaconstitutes part of the Maritime Domain, pri-vate ownership of immovable property will beconsidered fixtures that cannot be owned inde-pendently from the Maritime Domain (forexample, in Croatia). In such cases, user rights(in some instances including the right to mort-gage—but not own outright—the asset) may beallowed under the concession. Whichever is thecase, the port authority should include in theconcession detailed provisions pertaining toownership or user rights over those assets thatare erected by the concessionaire in the conces-sion area (see Box 27).

6.6. General Rights andObligations of the Port Authority During the concession period, the port authori-ty often assumes dual roles. On the one hand,the port authority serves the public interest as aregulator monitoring performance under theconcession agreement. On the other hand, theport authority may possess a stake in the portenterprise as a participant in a public-private

relationship with a private sector port user.There is an increasing trend for port authoritiesto become commercial actors, interacting withprivate terminal operators as economic part-ners, rather than acting as regulators. This trendis born of necessity—the port authorities and


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Box 27: Reference Clauses on GeneralRights and Obligations of the Operator

Subject to other provisions of thisAgreement and its liability under any law,and without in any way limiting its ability,

the Operator hereby undertakes and bindsitself to the following at the Concession Area:

• To provide, inter alia, effective and efficientcontainer (cargo handling) services accord-ing to the performance parameters asdescribed in Annex [number].

• To ensure that facilities leased by theAuthority are operated with due care andskill and in accordance with the terms ofthis Agreement.

• To repair and make good to the satisfactionof the Authority all damages and breakagesto infrastructure and superstructure madeby the Operator or by third parties actingunder the responsibility of the Operator, fairwear and tear excepted.

• To ensure that the sites are kept clean, andthat the environment is fully protected.

• To draw up rules for safe systems of workand operational procedures to ensurehealth, safety, and welfare of all workforceand terminal users in compliance with theapplicable laws and regulations, interna-tional practices, and the authority’s guide-lines.

• To implement an effective safety and secu-rity system and to comply with the guide-lines of all competent Authorities.

• To ensure that any safety and securityremedial action requested by any compe-tent Authority is acted upon immediately.

The Operator shall apprise the Authority ofthe current work schedule, the previous day’svessel operations, and the following day’svessel planning and work schedule.

Any damage to the site’s environment shallbe assessed and restoration costs billed tothe Operator, who shall bear such costs.

Source: Author.

terminal operators need each other. Therefore,it is a major challenge to find the proper bal-ance between the regulatory relationship andthe commercial interests of both parties. In thiscontext, rights and obligations of the portauthority have been modeled within the frame-work of a landlord port model.

Investments and capacity calculations are pri-marily based on traffic and throughput fore-casts. In the case of a BOT arrangement requiringsignificant outlays by a concessionaire, the portauthority (or the national government) mightobligate itself not to concession, promote, orcommence another competing terminal (or aterminal aggregating more than a certaincapacity) in a nearby port area. If, unexpectedly,new capacity were to be created, the feasibilityof a project might well be in jeopardy. There isoften, especially in smaller ports, room only forone or two terminals handling a specific com-modity. If the port authority is too preoccupiedwith intraport competition, terminal operatorsmight end up in cutthroat competition, resultingin the bankruptcy of some of them at a timewhen the government’s goal is to encouragesound private sector participation in the portsector (see Box 28).

In many concession agreements, the port author-ity constructs a list of activities that are permit-ted to be performed at the site. These activitiesshould be construed as broadly as possible sothe operator has maximum flexibility to developthe business and generate revenue (see Box 29).

6.7. Transfer of Rights,Obligations, and Assets When an operator acquires an existing (formerpublic) port facility, rights and obligations ofthe public sector owner transfer, along with theuse (but not ownership) of the assets, to the pri-vate sector operator. When a new facility is con-structed under a BOT arrangement, the newoperator commissions the facility after success-ful commissioning tests or surveys have beenconducted by an independent expert, usually atest certifier, who issues a commissioning certifi-cate (see Box 30).

When taking over an existing facility, thefollowing rights and obligations of the operatorare usually included in the concessionagreement.


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Box 28: Reference Clauses on GeneralRights and Obligations of the Port Authority

Subject to other provisions in thisAgreement, the Authority shall exerciseregulatory functions in respect of the

conduct of port operations as detailed in thefollowing subsections:

• Allocate berths at the request of theOperator, in accordance with established portpolicies, in order to satisfy the Operator’swork program in the best overall interest.

• Chair Port Operations Meetings with one ormore representatives of the Operator and ofother port users.

• Set productivity targets and monitor theOperator’s performance against set param-eters (as per Annex [number]).

The Authority hereby undertakes and bindsitself to:• Provide and maintain the necessary basic

infrastructure such as maritime approaches,canals, turning circles, breakwaters, aids tonavigation, access roads, and so forth.

• Provide marine services including vesseltraffic management, pilotage, towage,berthing, unberthing, and shifting of vessels.

• Ensure safe, orderly, and timely movementof vehicles and pedestrian traffic along theaccess roads.

• Maintain the security of all land and seaentrances to the port area (those existingpresently and in the future).

• Provide and maintain all perimeter fencingaround the port area.

• Provide any services not listed herein andon which both parties will agree by thisAgreement or by any other subsequentagreement.

When providing services listed above, theAuthority, in line with the operational plansand work schedule of the Operator, willensure that all such services are provided in anondiscriminatory way and in accordancewith the Operator’s needs to enable him tomeet the performance targets and otherobjectives to be achieved.

Source: Author.

Rights:

• To succeed to and to carry on the busi-ness of the port facility and supportingservices of the port authority, as estab-lished under the port law.

• To succeed to the ownership, rent, orlease of certain properties, movable andimmovable, located on the terminal inthe port or used by the port facility andsupporting services.

• To succeed to certain rights, powers,privileges, and interests of the portauthority pertaining to cargo handlingoperations and supporting services onthe terminal.

Obligations:

• To succeed to certain liabilities of theport authority pertaining to cargo han-dling and supporting services carried outat the terminal.

• To receive and maintain all books,accounts, and documents relating or


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Box 29: Reference Clauses on PermittedActivities

Without a written consent from theAuthority, which refers to this provi-sion, the site may only be used for/as:

• Loading and discharging of general cargo,dry bulk/liquid cargo, or containers.

• Transport and storing of general cargo, drybulk/liquid cargo, or containers.

• Handling of other cargoes, only if necessaryand on a limited basis.

• Stuffing and stripping.

• Controlling and guarding of general cargo,dry bulk/liquid cargo, or containers.

• Operating equipment necessary for theabove.

• Repair and maintenance of containers.

• Repair and maintenance of equipment.

• Repair and maintenance of buildings.

• Providing accommodation for personneland administration.

• Providing services to vessels.

• Providing services to customs and othergovernment agencies.

• Providing services and accommodation toancillary services such as, pilots, agents,ship handlers, and so forth.

• All other activities necessary to conductefficient cargo handling operations.

The Operator is obliged to continuouslyexploit the site during the duration of theConcession Agreement.

A strip of one meter wide alongside thequay wall shall not be planted or built on,shall not contain roots or foundations, andshall only contain cables, pipes, roads, andrails.

The Authority may reduce the maximumpermitted load(s) if, in its opinion, the condi-tion of the quay wall provides a reason fordoing so.

Permitted use shall also be taken toinclude the construction of the necessarybuildings and/or installations for the benefit ofthe business of the Operator, with the excep-tion of (service) home(s). The number, nature,and location of these constructions and/orinstallations shall be subject to the approvalof the Authority.

Source: Author.

Box 30: Reference Clauses on Newly BuiltAssets in the Concession Area (BOTarrangement)

Operational infrastructure constructedby the Concessionaire/Operator in theConcession area, in furtherance of its

business, shall be and shall remain theproperty of the port authority, withoutany claim for or reimbursement from the PortAuthority/Lessor for the cost of valuethereof.

Port superstructure and movable assetsconstructed and/or installed by theConcessionaire/Operator, in furtherance of itsbusiness, shall remain owned by theConcessionaire/Operator. At the end of theConcession period, the aforementionedassets shall either be transferred to the PortAuthority after payment to the Concessionaireof the written down value of those assets, orbe demolished or removed from theConcession Area.

Source: Author.

pertaining to the terminal and supportingservices.

• To offer employment to officers andemployees of the terminal and supportingservices.

• To succeed to contracts and agreementsentered into for the purposes of and relat-ing to the business of the terminal andsupporting services; usually, these con-tracts are specified in a schedule annexedto the concession agreement.

• To succeed to all actions and proceedingsinstituted by or against or relating to theterminal (it is not uncommon for theoperator and port authority to negotiatean indemnity for liability incurred as aresult of certain proceedings).

The transfer of assets to the new operator undera concession agreement requires thoroughinspection and the determination of whatrepairs or backlog maintenance, if any, areexpected to be carried out by the port authorityprior to the transfer. Existing assets formingpart of the operator’s leasehold and their atten-dant condition and quality will be reflected inthe concession fee. The highest concession fee(relative to value of assets transferred) is usuallyaccorded in jurisdictions allowing for the own-ership of superstructures to be transferred to theoperator.

When building terminal facilities under a BOTarrangement, the operator has to design andconstruct the terminal, including quay walls andother infrastructure works. The design has to becarried out in accordance with functionalrequirements and design solutions set out in theapproved DPR as well as under the construc-tion program included in the agreement. Majoraspects of the construction process will havebeen identified for completion by stated times,and if these milestones are not met the portauthority usually has the right to assess penal-ties or terminate the concession. In practice,technical problems should be expected to arise.Although the operator may not alter the con-struction program without approval of the

authority, reasonable requests for changes to theprogram are usually approved. The port authoritycustomarily reserves the right to appoint a con-struction observer, usually an engineer.Commission or transfer of the new assets isconcluded on the basis of a commissioningcertificate issued by an independent test certifier,according to the relevant provisions of theconcession agreement.

The construction program included in the con-cession agreement is in principle binding. Thecompletion of relevant parts of the program isindicated by the milestone achievement date.The construction, however, cannot extendbeyond the milestone sunset date, unless waivedor extended as a result of a force majeure event.Such date constitutes a termination event forthe port authority; in other words, the portauthority may terminate the concession whenthe operator is not able to finish the construc-tion within the agreed-on time (see Box 31).

6.8. Performance Parameters Concession agreements often include perform-ance parameters to measure the success of theoperator in managing the port or terminal. Aport authority may want to highlight perform-ance indicators and incorporate certain ones intothe concession. These parameters can relate to:

• Realization of a agreed (minimum)number of ship calls.

• An agreed (minimum) quantity of cargopassing through the terminal.

• Efficient utilization of the terminal.

• Service quality.

Generally, from the port authority perspective,there may be a tendency to overregulate per-formance by imposing very detailed and strictparameters. This tendency appears to be moreof a problem in the case of new terminals orterminals with a low level of current through-put. Detailed parameters require extensive con-trol and limit an operator’s flexibility. Also, theport authority must devote resources to theiradministration. Performance parameters that


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are most likely to succeed are those set at alevel that a port authority believes will result inthe agreed-on concession fee being paid. Whenrequired levels are exceeded, a positive financial

incentive should be given to the operator,because extra traffic and throughput results inextra revenue for the port authority.Performance parameters have produced the bestresults when they were established with the ideaof not controlling the operator but creating awin-win situation for both parties.

There are no standard performance criteria forhandling various commodities. Situations differwidely from country to country and from termi-nal to terminal. Much depends on labor condi-tions, the attitudes of labor unions, and factorssuch as the size and age of vessels, consignmentsize, and timely availability of information.Therefore, performance criteria ordinarilyreflect local conditions and take into account thereality of all relevant local factors influencing aport.

A vast majority of concession agreements relateto container terminals. In this field, many itemsare standardized, resulting in the developmentof internationally accepted, detailed perform-ance criteria.

6.8.1. Productivity Targets

Productivity targets are usually designed in aphased manner, taking into consideration theemerging problems that a container terminalwill face during the first years of its operation.For the purpose of the concession or leaseagreement, two phases are usually defined.Phase 1 constitutes the start-up period, fromthe date operations commence to a later pointone to two years later. During this time, thenew management and the workforce have anopportunity to structure operations, developcommercial policies, and engage in trainingvarious categories of personnel. Phase 2 iswhen the terminal is expected to work at peakefficiency, with professional management and awell-trained workforce in place. The followingtypes of productivity targets can be includedin the concession agreement’s performanceprovisions.

Crane productivity: Crane productivity measuresthe number of equivalent container movements


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Box 31: Reference Clauses on Transfer of Assets

The present Agreement relates to the[name] Terminal at [name] Port withassociated buildings and storage area,

as more fully described in Annex [number] tothis Agreement, which shall form an integralpart of this Agreement, and which may bemodified from time to time by mutual agree-ment between the Authority and the Operator.

A list of facilities, buildings, equipment,and others together with a detailed inventoryof the contents thereof leased/transferred tothe Operator is shown in Annex [number].

A joint survey of the facilities, buildings,equipment, and contents thereof shall beeffected before the time of take over, with theobjective that the site should be delivered tothe Operator in good working condition.

Before commissioning, the Operator mayrequire major improvements and modificationsto be effected on infrastructure, superstructure,or facilities concessioned/leased by the author-ity to the Operator, which he deems to be in aninsufficient technical condition. The Operatorshall submit such requests to the Authority forconsideration. The Authority is obliged either tocarry out the requested improvements andmodifications at its own cost or take the insuf-ficient technical condition of infrastructure,superstructure, or facilities into account whennegotiating the Concession Fee.

All major modifications and improvements,as above, to infrastructure and facilities con-cessioned/leased to the Operator under thisAgreement, which the Operator deems to benecessary to improve its services, shall besubject to written approval of the Authorityand the costs thereof shall either be borne bythe Operator or be reflected through a read-justment of the Concession Fee.

In cases where repairs or other works mayhave to be performed by the authority, priorto the start of operations, the Authority shallbe responsible to meet the costs of repairs orother works, unless these are due to thenegligence of the Operator.

Source: Author.

per crane working hour. It is calculated by divid-ing the number of equivalent container move-ments handled by a crane by the number of hoursthe crane operated. Crane productivity is usuallyexpressed as either the equivalent containermoves per gross crane working hour or the equiv-alent container moves per net crane working hour(deducting all nonoperational and idle time expe-rienced by each crane). Equivalent containermoves are usually calculated as the sum of:

• Each container discharged.

• Each container loaded.

• Each container shifted to gain access toanother container—counted as one moveif the container is shifted within thevessel, but as two moves when it isshifted via the quay.

• Each container moved to another posi-tion on the request of the ship operator(a restow)—counted as one move if it isrestowed directly to another location inthe vessel and as two moves when therestow involves discharging to the quayand later reloading to a new position onboard the vessel.

• Each container lifted in error andreturned to the ship—counted twice.

• Each hatch cover lifted to the quay andreplaced by the quayside gantry cranes(or ship mounted cranes)—two moves forevery cover removed.

Ship productivity: Ship productivity is the out-put achieved per ship working hour and is usedto measure the efficiency of ship operations. Itis the most important indicator to ship opera-tors and a valuable means for measuring year-round terminal performance. It is recorded andexpressed in four categories:

• Equivalent container moves per ship-hourin port (calculated by dividing the totalequivalent container moves by the timespent in port, measured in hours).

• Equivalent container moves per ship hourat berth (calculated by dividing the total

equivalent container moves by the timethe vessel spent alongside the berth,measured in hours).

• Equivalent container moves per grossworking hour (calculated by dividing thetotal equivalent container moves by thetime the vessel is worked, measured fromthe start of the work to the terminationof the work).

• Equivalent container moves per net shipworking hour (calculated by dividing thetotal equivalent container moves by thegross working time, minus the nonopera-tional time and the idle time).

Two other categories are nonoperational time,the period when the berth is not scheduled tobe worked (for example, meal breaks) and idletime, the period when work has stopped forunexpected and unscheduled reasons (for exam-ple, equipment breakdown).

Quay productivity: Quay productivity measuresthe throughput in equivalent container movesper unit of time per meter of quay length. Thiscriterion is included to encourage the operatorto successfully promote and market the terminalfacilities and to increase traffic. The targets maybe different for each applicable phase of theproject.

Terminal productivity: Terminal productivityexpresses activity in terms of the number ofcontainers handled per square meter or hectareof terminal area per time unit. It is calculatedby dividing terminal traffic, measured in TEUs,by the total terminal area in square meters orhectares. The targets may be different for eachapplicable phase of a project.

Dwell time: Dwell time is a measure of the timespent by containers in the terminal. It is a majorindicator of the efficient use of the terminalarea. It measures the period from the time acontainer is lifted off the ship to the time itdeparts the container yard. An appropriate indi-cator of quality of service is also the truck turn-around time from entry to exit in the terminalarea when delivering or picking up a box, with


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15–20 minutes being the common efficiencybenchmark.

Labor productivity: Labor productivity figuresrelate traffic and terminal throughput to thetotal number of people employed by the termi-nal operator. This indicator is included toenable the operator and the port authority tomonitor labor productivity and, indirectly, ter-minal operating costs. Labor productivity indi-cators may be based on the total number ofhours worked by the total number of or certaincategories of employees in the terminal.

Utilization measures: This category of indica-tors measures the intensity of the use of termi-nal resources by the operator. It includes twoimportant indicators, the berth working indexand the yard utilization index. The berth work-ing index compares the total time vessels wereworked at the quay with the total time thatsuch vessels were berthed. The yard utilizationindex compares the number of storage slotsoccupied to the total number of available slots,and is typically calculated daily.

Performance parameters are best included in anannex to the concession agreement, with a sec-tion in the agreement referring to the detailedannex (see Box 32).

6.9. Transfer of Employees When concluding a concession agreement for anexisting terminal, it is common practice toengage all or part of the employees alreadyworking in the terminal or to extend an offer tojoin the new venture. This area is highly sensi-tive and should be handled with great care evenbefore the concession is awarded. Module 7deals with labor issues in greater detail. Anotheruseful resource on this topic is the World Bank’sLabor Issues in Infrastructure Reform: AToolkit.

Often, as a result of years of neglect, unfavor-able working conditions, and outdated equip-ment, workers lack the motivation to performat an acceptable level. Often, they were mem-bers of unions that fought aggressively for thepreservation of their jobs, sometimes resisting

any change that they feared could have endan-gered the continued employment of the work-force. New operators taking over an existingterminal must therefore anticipate a start-upperiod for motivation of new workers as well asfor retraining. Otherwise they may face theinefficiencies of an underemployed workforce.The reference clauses should be considered onlyas an indication of how to approach the issue.Whether existing employees should transfer intoa new operator’s service on terms and condi-tions no less favorable than those enjoyed bythem immediately prior to their transfer is amatter of negotiations among labor, the newoperator, and the government (see Box 33).

6.10. Force Majeure An operator cannot be held responsible forfully achieving performance goals when unfore-seen and uncontrollable events intervene (forcemajeure). However, such events should notautomatically excuse the concessionaire fromits financial obligations payable under a


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Box 32: Reference Clause on ProductivityTargets The operator binds itself to:

• Use its best efforts to reach or exceed theminimum productivity targets specified inAnnex [number], which is an integral part ofthis Agreement and which may be modifiedfrom time to time by agreement betweenthe parties.

• Participate in a Monitoring Committee, tobe jointly established by the authority andthe Operator.

• Provide the authority with monthly reportson performance and productivity in a for-mat to be agreed between the authorityand the Operator, and provide the authoritywith any special report that, in exceptionalcircumstances, the authority may reason-ably request.

In the event that the Operator fails to meetthe performance targets as set out in Annex[number] (one) year after commencement ofoperations, the authority may levy a penaltyon the Operator at a rate of $ [amount].

Source: Author.

concession agreement. The operator should beencouraged to obtain insurance to coverthe risks of such events as much as possible(see Box 34).

A force majeure event is any event or circum-stance or combination of events that:

• Is outside the control of and unexpectedby the affected party.

• Could not be avoided, prevented, over-come, or mitigated with reasonable fore-sight, prudence, diligence, or otherwisetaking action according to good interna-tional practice.

• Results in the temporal or permanenttermination of operations.

• Materially prevents, hinders, or delaysperformance of a party’s obligationsunder the concession.

In most concessions, the main force majeureevents are the following:

• Acts of God.

• Nuclear explosion and radioactive, bio-logical, or chemical contamination.

• Landslides, earthquakes, tsunamis, andsevere weather such as hurricanes ortyphoons that result in closure of the port.

• Epidemic, plague, or quarantine.

• Blockade or closure of the port.

• Curfews or restrictions on travel withinthe port’s country resulting from any ofthe matters mentioned in this list.

• War (whether declared or not), civilwar, invasion, embargo, military coup,


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Box 33: Reference Clauses on Selection andTransfer of Personnel

The Operator shall engage professionalmanagement personnel (including topmanagement) for the efficient and effec-

tive operation of the Terminal Area. Themanagement personnel shall be selected fromamongst persons presently in the service of[name of present terminal]. In the event thatthe Operator is unable to select sufficient man-agement personnel from amongst the [termi-nal’s] staff, the Operator is allowed to appointsuitable management personnel selected fromoutside the [terminal’s] organization. When forcertain functions no suitable candidates can befound in [the relevant country], the Authoritywill allow the Operator to select expatriatepersonnel. (Sometimes the provision ofexpatriate staff is an obligation—this is particu-larly the case when a transfer of expertise is amajor objective of the concession agreement).

The Port Authority shall use all reasonableendeavors, upon request of the Operator, toobtain work permits, long-term nonimmigrantvisas, and tax clearance certificates for allexpatriate personnel appointed by the Operator.

The Operator shall select its labor forcefrom amongst persons presently employed bythe [terminal]. These persons will be selectedby the Operator based on their skills andsuitability in the discharge of their duties.Selected persons will have the option to enterinto the fixed service of the Operator.

Notwithstanding the foregoing provisions,in the event any persons appointed fromamong the [terminal’s] personnel are found tobe incompetent, unsuitable, or unfit in dis-charging their duties within a period of oneyear, the Operator shall be entitled to termi-nate the services of that person, subject tothe provisions of any employment contract.

The terms and conditions to be drawn up bythe Operator shall take into account the salariesand terms and conditions of service, includingany accrued rights to leave, enjoyed by the per-sons transferred to the service of the Operator.

Source: Author.

Box 34: Reference Clauses on Force Majeure

Upon the occurrence of a Force Majeureevent, the party so affected is relievedof performance under this Agreement

for the duration of the event. Notwithstandingthis, the occurrence of a Force Majeure eventshall not excuse the Operator from makingpayments due hereunder in a timely manner.

Parties agree to use all reasonable endeav-ors to mitigate the effects of any ForceMajeure event.

Source: Author.

revolution, or armed conflict on a nationalscale.

• Sabotage, criminal damage, terrorism,but only when the terminal is affected.

• Riot, civil commotion, or insurrectionwith effect on a massive or national scale.

The occurrence of a force majeure event mayresult in the extension of the term of the conces-sion or the extension of the construction periodafter the force majeure event has subsisted.

6.11. Lease of Facilities At many ports (for example, Antwerp,Rotterdam, and Hamburg) the operator may bebest able to perform under a straightforwardlease contract. In a concession, with or withouta BOT arrangement, lease conditions form partof the overall concession. The reference clausescontained in Box 35 and Box 36 can thereforebe used under both types of contracts. Leasearrangements present a number of strategic


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Box 35: Reference Clauses on Lease ofFacilities

The lease refers to allotment(s) of landmarked Lot [number], and Lot [number],demarcated in red and depicted in Plan

No: [number], dated [date], made by the ChiefHydrographic Surveyor and belonging to theAuthority, situated at [location] within theMunicipal limits of [city name] and boundedon the North by [area], on the East by [area],on the South by [area] and on the West by[area], containing in extent [number] hectares,[number] acres.

The quay walls and the banks below theground level (yet not underground), as well asin the case of the banks, the body of waterabove it, are not included in the right of lease,but remain in the ownership of the Authority.

The Operator is entitled to sublet the build-ings and the ground in whole or in part to athird party, or to give these in use in any othermanner, only after having obtained prior con-ditional or unconditional permission from theAuthority.

Source: Author.

Box 36: Reference Clauses on SiteConditions The following conditions are applicable:

• The site is determined to be [number]square meters.

• The site is unencumbered by other limitingrights or claims, nor by other qualitativeobligations and/or perpetual clauses otherthan those mentioned in this Agreement.

• The site is accepted by the Operator in thestate in which it is found on the date thelease commences.

• Cables, pipes, and pipelines of third partiesthat are situated on the ground are notincluded in the lease.

• The authority is not liable for damages as aresult of defects in cables, pipes, pipelines,and so forth.

• The Operator is liable for damages thathave been caused to cables, pipes,pipelines, and so forth as a result of anyuse of the ground.

• The Operator shall at all times allow accessfor the benefit of the owners to the cables,pipes, pipelines, and so forth in the leasedproperty for maintenance and repair work.

• The site includes quay walls and banks withfoundations and piles, constructed by theAuthority. The Authority is not liable for thepresent suitability of the quay wall con-struction.

• The Authority is not liable for damages ofwhatever nature, which might arise for theOperator from the condition of the leasedproperty, especially not for damagescaused by basic structures, pieces ofstone, foundation remnants, poles, pipes,cables, anchors, sunken vessels, or anyobject whatsoever that may be present onor in the leased property or in the surround-ing area, and/or works and/or materials orsubstances on or in the leased property orin the surrounding area. The ground isleased with a bottom level alongside thequay wall being part of the main yard of[number] meters below [reference] level andalongside the quay wall of the [name ornumber] pier of [number] meters below [ref-erence] level. The Authority will ensure thatthe water depth along the quay walls willremain at the agreed level. In the event thatthe water depth is less than the agreed

issues for consideration, the most important ofwhich are:

• Ownership of assets: Generally, a newoperator will invest in superstructure andequipment. Under a BOT arrangement,operational infrastructure, such as quaywalls, also forms part of the investment.If the relevant legal system allows privateownership of such assets, which is notalways the case, their transferabilitybecomes a critical issue. If private owner-ship is not allowed, an agreement shouldbe reached on how to compensate, at theend of the period, the operator for invest-ments made. If it is legally impossible tocompensate the operator or the transferthe assets to a third party, the duration ofthe agreement remains the only vehicleavailable for creating a bankable arrange-ment. Within the framework of a bal-anced public-private partnership, the portauthority may allow the operator to ownsuperstructure on the site, as well asgrant the right to transfer such assets tothird parties under certain previouslyagreed-on conditions, regardless of theinalienability of other port property.

• Maintenance: Concession terms applicableto maintenance of assets, especially infra-structure, are considered very carefully by

operators and their investors. If the assetsrevert to the port authority at the end ofthe lease period, maintenance standardsshould be set by the port authority toavoid deterioration during the final partof the period. Maintenance of operationalinfrastructure is usually the responsibilityof the port authority. Such infrastructureis a strategic asset and should not beallowed to deteriorate. That risk exists,however, especially if an operator is infinancial difficulty, since maintenanceoften becomes the first victim of an oper-ator trying to cut costs. However, inmany concession agreements provisionshave been included obliging the operatorto maintain all assets of the terminal,including the operational infrastructure.This requires the port authority to setmaintenance standards, which are usuallyincluded in one of the schedules.

• Level of control by the port authority:Even if legal title over assets remains withthe port authority, full use and easyadaptability of the assets should be guar-anteed. While the port authority shouldexercise some form of control, such con-trol should be based on clear standardsand be flexible to permit the operator toquickly respond to market requirements.Prompt modification and extension of thesite and the superstructure may be possi-ble based on a previously agreed-onprocedures. Moreover, control standardscould be uniform for the entire port areato create a level playing field for all portoperators.

• Subletting: To allow flexible portdevelopment, the port authority shouldallow the subletting of ground and assetsunder specified conditions.

The specific content of any lease is very depend-ent on the site conditions and local factors. Thelease usually presents in detail the responsibili-ties and liabilities allocated to each party. Whenan existing site is leased or concessioned, condi-tions should be enumerated clearly to give


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Box 36: Reference Clauses on SiteConditions (Continued)

depth, the Authority will not be liable fordamages as a result of this situation. TheOperator cannot invoke the right toredredging as long as the bottom has notrisen to [number] below [reference] level ata certain location along quay wall(s). TheAuthority is obliged to carry out redredgingwithin a reasonable period (but not longerthan three weeks) after the Lessee has sub-mitted a request to that purpose. If theAuthority fails to do so, it shall be liable forall damages resulting from the insufficientwater depth along the quay wall(s).

Source: Author.

lenders certainty of outcomes under particular“what if” scenarios.

6.12. Site Access Clauses should be included in the concessionagreement to fence off the site, while still allow-ing sufficient, unimpeded access to the site toenable the port authority to perform inspections(see Box 37). The port authority usually takesresponsibility for all common areas, includingroad connections and pedestrian areas. Anoperator will seek to hold the port authorityliable for all undue delays in road trafficdestined for the terminal.

6.13. Governing Law Most often, the governing law of the concessionagreement is the national law of the countrywhere the terminal is located. Some foreignlenders, however, require that documentation begoverned by U.K.[BCJ7] or U.S. law. Issues relat-ing to governing law, submission to jurisdiction,

and dispute resolution should be addressed atan early stage of the negotiation between theport authority and the operator, particularly inthe case of a concession involving a BOT agree-ment (see Box 38).

6.14. Freedom to Set Tariffs To respond to market competition, operatorsshould have the freedom to set their ownprices. The operator should be expected tonegotiate periodically with its customers andmay provide quantum rebates in return forincreased throughput. Only in a situation whenthe operator is in a monopoly position mightthere be a reason for government interferencein tariff setting. To avoid conflicts of interestwith the port authority, an independent portregulator is usually given authority to overseetariff regulation (see Module 6 for a full discus-sion on economic regulation). The mere factthat competing ports in the country offer lowertariffs may not be a reason for regulation oftariffs. When it can be proven that competingports offer lower prices as a result of distortinggovernment subsidies, the competent authori-ties should take measures to eliminate suchsubsidies, such as through a complaint to acompetition authority. Thus, prices should onlybe regulated in case of abuse of a monopolisticposition by an operator, such as in predatorypricing (see Box 39).

6.15. Taxes National or local taxes for the leased site(s) areusually paid by the operator. At times, toencourage port development, certain promo-tional rates or tax holidays are extended to theoperator during the initial phases of operation.Such incentives are a function of national fiscalpolicy (see Box 40).


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Box 37: Reference Clauses on Access to theSite

Free access to the site and the buildingson the site shall have to be granted at alltimes to the officers and employees of the

authority, including police officers and/or otherpersons who are authorized by the Authority,who may have been or may be appointed forthe supervision of compliance with regulationsand the lease conditions, or for carrying outrepairs. The Authority’s representatives shallhave access to any of the facilities andpremises to inspect and examine theircondition, provided that, unless in cases ofemergency or when circumstances so justify,the Operator will be informed of such inspectionand that such inspection, whenever possible,shall not disturb the Operator’s operations.

Free mooring opportunity must be allowedalong leased quays, berths, and other moor-ing places for service and dredging vesselsused by Port Authority employees or personsauthorized by the Authority in the execution oftheir duties. Mooring of such vessels shouldnot unduly disturb cargo operations.

Source: Author.

Box 38: Reference Clause on Governing Law

The Agreement shall be construed andgoverned by the law of theRepublic/Kingdom of [name].

Source: Author.

lsanchez

Inserted Text

6.16. Concession Fee There is no generally accepted standard for aconcession fee. This fee is usually determinedas the sum of a fixed fee for the use of theareas under administration of the authority andor a variable fee in the form of a throughputroyalty for the right to perform cargo handlingservices. The fee amount is a function of localcircumstances. The fixed portion may representthe infrastructure costs (and superstructurecosts, if applicable) of the terminal, includingfinancing costs. The structure and level of theconcession fee is a primary element for analysisby project lenders. The variable fee is often a

function of the market position of the portoverall (that is, what the market can bear) andother considerations, such as the creation of afund for excess port workers. An importantissue is the indexation of the concession fee(TEU fee). This fee is usually expressed in U.S.dollars, euros, or other hard currency. Since theterm of the concession might well be more than30 years, it is evident that there is a seriousinflation risk. A concession agreement shouldtherefore include a specific clause on indexa-tion. Indexation should be applied to bothfixed and variable fees. The easiest option isadjusting the fee periodically on the basis of abasket of currencies, such as a combination ofthe U.S. dollar, the euro, and the yen; theexample in Box 41 is somewhat more compli-cated. Sponsors and operators are often notwilling to provide for total compensation ofinflation and try to put the risks as much aspossible on the port authority.

6.17. Insurance and Indemnity Insurance for employees, equipment, and vesselscovering injury and damage within the conces-sion area is typically specified in a concessionagreement. Moreover, the operator is expectedto indemnify the port authority against a varietyof incidents pertaining to port operations andother events (see Box 42).

6.18. Physical Security A concession agreement usually contains claus-es pertaining to security in the port area.Generally, these issues fall under a port author-ity’s jurisdiction, although a terminal operatoralso bears part of the responsibility. Since theratification of the ISPS Code (InternationalShip and Port Facilities Security Code) by mostmaritime countries, security has improved con-siderably. The code applies to all commercialvessels undertaking international voyages aswell as all port facilities. The concession shouldoblige the operator to apply the relevant provi-sions of the code and to cooperate with theport authority and the harbormaster within theframework of the required port security plan(see Box 43).


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Box 39: Reference Clause on PriceDiscrimination

The Operator agrees that the charges forhis services rendered in connection withhis operations on the concessioned

premises shall be competitive within the portand with other competing ports having suchfacilities and services. The Operator shall,however, at all times have the right to increaseor decrease such charges and modify therelevant rules and regulations, in accordancewith sound business practices.

In the event the Port Authority (or port reg-ulator, if applicable) receives a complaint orcomplaints of discrimination on the part of theOperator of the concessioned premises andthe Port Authority (port regulator) concludesafter thorough investigation that there are rea-sonable grounds to believe that discriminationhas been practiced by the Operator, then theOperator, upon written notice to him by thePort Authority (port regulator) shall cease anddesist from such practices.

Source: Author.

Box 40: Reference Clause on Taxes

The Operator shall reimburse the PortAuthority for all taxes, dues, concessionfees, and public levies under whatever

name, including the surcharges, which thePort Authority has to pay because of theleased property or the buildings thereon.

Source: Author.


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The concession fee exists of two elements:

• A Lease Rent, related to the amount of squaremeters of port area leased by the Operator.

• A Throughput Royalty (or TEU Fee), related tothe amount of cargo/number of containers han-dled on the concession area by the operator.

A fixed sum of $ [amount] per annum shall bepaid by the Operator as the Lease Rent. Thisrent shall be paid in advance in four equalinstallments on January 1, April 1, July 1, andOctober 1 into account number [number] with[name] Bank in [place] in the name of [name]Port Authority. If the period for which the right tolease is granted does not commence on one ofthese dates, then the Lease funds incurred overthe period between the commencement and thebeginning of the next quarter will be paid on thefirst upcoming date mentioned above.

The amount owed to the Authority in accor-dance with the right to lease shall be paid infull and without any discount or debt compen-sation, regardless of nature.

All adjustments shall be calculated by multi-plying the rent sum, which applied mostrecently by a fraction of which:

• The numerator is formed by the price indexfigure as given by [name of agency], which is

published in the seventh calendar monthpreceding the time of adjustment.

• The denominator of which is formed by thesame price index figure, which applied in thesame month a year earlier.

Should the details referred to in the previousparagraph cease to be available, then theauthority is entitled to calculate the Lease Rentadjustment on the basis of any other similarindex or methodology. This adjustmentrequires mutual agreement. If such agreementcannot be reached, then this shall be deter-mined in the manner given in Section [number]on the basis of the advice of three experts.

The Operator will pay to the Port Authorityan annual Throughput Royalty in the amount of$ [amount] per ton cargo throughput/TwentyFeet Equivalent Unit (TEU) container handled inthe concession area, regardless the manner inwhich it is handled or which mode of transportis used, payable in two installments after everysix months (within 30 days after the end ofeach period). The Throughput Royalty willincrease every year in accordance with theprice index figure given by [name of agency](or any other mutually agreed index).

Source: Author.

Box 41: Reference Clauses on Concession Fee

The Operator undertakes to provide thenecessary and relevant insurance covers,in respect of its employees, equipment,

and vessels being serviced for injury, damageto the terminal, vessels, and/or cargo whenthey are, at all material times, considered to beunder control of the Operator.

The Operator hereby holds the Port Authorityfree and harmless from any and all liabilities andclaims for damages and suits for or by reasonof any death or injury to any person or damagesto property of any kind, whether the person orproperty of the Operator, its subcontractors,agents or employees, or third persons, arisingout of negligent or intentional act or omission ofthe Operator in connection with this Agreement,and the Operator shall indemnify, save, andhold harmless the Port Authority from all liabili-ties, charges, expenses (including reasonableattorneys’ fees), and costs on account ofclaims, suits, and losses arising therefrom.

The Port Authority hereby holds theOperator free and harmless from any and allliabilities and claims for damages and suitsfor or by reason of any death or injury to anyperson or damages to property of any kind,whether the person or property of the PortAuthority, its subcontractors, agents oremployees, or third persons, arising out ofnegligent or intentional act or omission of thePort Authority in connection with thisAgreement, and the Authority shall indemnify,save, and hold harmless the Operator from allliabilities, charges, expenses (including reason-able attorneys’ fees), and costs on account ofclaims, suits, and losses arising there from.

The Operator indemnifies the Port Authorityagainst all claims due to noncompliance by theOperator with the provisions relating to thesite, which have been given by the competentpublic bodies.

Source: Author.

Box 42: Reference Clauses on Insurance and Indemnity

6.19. Unclaimed Cargo andCarriers Often, cargo at the port is not claimed by therightful owners. In cases of complex customslegislation or port bylaws, warehouses filledwith unclaimed cargoes may burden the opera-tor’s ability to manage the terminal and meetperformance targets. Therefore, the operatorwill expect to set clear rules with respect tosuch cargoes and who bears removal responsi-bility and costs in conformity with custom’s reg-ulations (see Box 44).

6.20. Information andCommunication It is essential that a port authority is able to gainaccess to recent, relevant, and direct informationon all aspects of port operations, including


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The Port Authority confirms that unlessotherwise agreed under this Agreement,it shall, at its own cost and expense, pro-

vide security at the Port, generally for the pre-vention of terrorism, hijackings, sabotage,and/or similar acts or occurrences.

The Port Authority shall be responsible forthe provisions and maintenance of all perime-ter fencing around the Port and the generalsecurity within the Port, having full regard tothe provisions of the ISPS Code and the law.

The Operator shall be responsible for the pro-vision and maintenance of perimeter fencingaround the Concession Area and for its ownsecurity arrangements within the Area in order tomaintain the proper and orderly conduct of itsbusiness and the general security thereof.Furthermore, the Operator shall abide by andimplement any instruction issued by the PortAuthority aiming at enhancing the security meas-ures within and around the Concession Area.

Subject to the rights granted to theOperator above, all organizations authorizedunder the ISPS Code shall be entitled, if andwhen deemed necessary by the Port Authorityand/or the authorized organization, to deploytheir security personnel in the Concession Areaand the Operator shall not be entitled to anycompensation for any disruption of its opera-tions or loss or damage resulting from the Port

Authority’s actions or the actions of any otherorganization authorized under the ISPS Codeother than those resulting from its willful orgrossly negligent acts or omissions.

Subject to the rights granted to the Operator,the Port Authority shall be entitled to inspectand search all vehicles and other modes oftransportation including vessels entering theConcession Area or departing there from andsimilarly to search or question any person enter-ing the Concession Area or departing therefrom, without unduly or unreasonably disruptingthe operations of the Terminals.

The Parties agree to establish, review, andimplement procedures as may be requiredfrom time to time under the ISPS Code.

The government agrees that it shall, at therequest of the Operator, provide and procurethe services of security forces of the relevantauthority as may be necessary to prosecutepersons for any offense committed within theConcession Area.

Any security forces ordered into theConcession Area for the purpose of protectionof the persons and the property and vesselspresent in the Area, shall be allowed by theOperator to perform their task and duties underthe supervision of the competent authority.

Source: Author.

Box 43: Reference Clauses for Security

Box 44: Reference Clauses on UnclaimedCargoes

All containers, packages, and cargodeposited in the terminal and notremoved at the expiry of a period of

[number] days or [number] days in case oftransshipment containers, may be disposedof by public auction, in conformity withSection [number] of the [name] Act, No.[number] of [year].

As regards to unclaimed containerscontaining perishable or hazardous goods,the operator shall dispose of such goodsaccording to the requirements set down bythe relevant authorities and as per nationalregulations in force.

Source: Author.

marine operations and cargo throughput. Theport authority should be informed promptlyabout all incidents occurring in the port area sothat it can undertake appropriate measures inresponse. The agreement includes a requirementfor the operator to provide such information(see Box 45).

6.21. Termination and Prolongation Termination clauses of a concession agreementare of prime importance for the relationshipbetween the port authority and the operator,especially under a BOT arrangement. The conces-sion agreement represents a negotiated balancebetween the interests of the port authority (anefficient and economic use of the port land) andthe operator (provision of cargo handling serviceson a profitable basis). Both parties are tiedtogether in a long-term symbiotic relationship

where the fortunes of one directly bears uponthe results obtained by the other. That contrac-tual relation, therefore, should not be terminat-ed without good cause.

The way termination clauses are conceivedreflects the power balance between the two par-ties. An operator with alternative port locationsavailable will not easily accept harsh termina-tion clauses. On the other hand, a port authori-ty should be aware that an operator might failin the market, and valuable port land may layunused for years if the right to terminate theconcession is not clearly defined. Finally, lendersto the operator should be very careful in theiranalysis of these provisions to ensure theirinterests are protected (see Box 46 and Box 47).

6.21.1. Termination Due to Noncompliance

In the event the operator fails to comply withits obligations, a port authority will ordinarilyhave the option to terminate the agreement.Termination for cause is very serious, especiallyfor financing parties, and should be avoided asmuch as reasonably possible. The operatorshould be given a reasonable period to demon-strate compliance with the terms of the agree-ment and resolve noncompliance events.However, an operator may be in financialdistress, for example, and unable to pay theconcession fee. In this case, the port authoritymay not directly terminate the agreement, butconsider the seriousness and likely duration ofthe problem. If it is determined to be temporary,the port authority, perhaps in concert with theoperator’s lenders, may come to an understandingwith the operator (for example, a deferredpayment scheme) that avoids termination of theagreement (see Box 48).

6.21.2. Termination Compensation

As discussed above, every concession includesclauses on termination compensation, irrespectiveof the reason. The port authority or the operatormay terminate the concession before expirationin the event that the other party is in materialdefault of the agreement. Moreover, a concessionmay be terminated by mutual agreement after a


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Box 45: Reference Clauses on Informationand Communication

The Operator shall install and maintain anefficient information and communicationsystem and shall provide online informa-

tion to the authority on all aspects of opera-tions necessary for providing marine servicesand for monitoring.

The authority and the Operator will agree,in writing, on the type and flow of extra infor-mation that may be communicated to theauthority on request.

The Authority and the Operator shallimmediately inform each other of any matterthat may affect the operational performanceof the Operator under this Agreement, includ-ing but not limited to:

• Fire within the terminal or within theAuthority’s area of responsibility.

• Damages/stoppages caused by severeweather conditions.

• Industrial disputes with risks of work stop-pages.

• Major damage to facilities, premises, and/orequipment.

• Pollution of the environment within theAuthority’s area of responsibility.

Source: Author.

force majeure event such as a tsunami or earth-quake. In either case, the port authority is liableto pay a termination compensation to the oper-ator since all fixed and movable assets of theterminal are transferred back to the authority.The main issue, however, is how to assess thevalue of the assets.

6.21.3. Option to Continue

Many concession agreements provide an optionto extend the term of the concession. This feature

becomes more important in concessions withshorter terms. One may expect that concessionagreements with a duration of 10 years orshorter will not generate significant investment.When there is an option to continue under bal-anced conditions, an operator might be temptedto take more investment risks. It is therefore inthe interest of the port authority to includeoptions to continue the agreement.

Generally, the port authority, when there is amutually beneficial relationship between theparties, may favor extending an agreementunder new conditions. Significant time andexpertise may be lost if a new operator has tobe found and terminal operations have to berestarted under new management. Judgmentsabout agreement extensions depend on, amongother things, the position of the port in the


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Box 46: Reference Clause on Termination bythe Port Authority

The following (unless as a result of aForce Majeure or change in law thatresults in consequences set out in Article

[number] or a default of the Port Authority)shall constitute Operator Events of Default:

• A material breach of a material provision ofthis Agreement by the Operator.

• Repudiation of this agreement by theOperator or the evidencing of the intentionby the Operator not to be bound by theterms of this Agreement.

• Appointment of a provisional liquidator pro-viding for winding up of the Operator, afternotice to the Port Authority and due hear-ing, unless such appointment has been setaside within [number] days.

• The Operator is ordered to be wound up bya court or files a petition for voluntary wind-ing up except for the purpose of amalga-mation or reconstruction provided that theproperty, assets and undertakings of theOperator are transferred to its successor.

• The Operator abandons the construction oroperation of the terminal/port and the facili-ties for a continuous period of [number] days.

• Persistent failure on the part of theOperator to operate and promote activitiesat the terminal/port and provide terminalusers with services in accordance withgood industry practice and in accordancewith the provisions of this Agreement.

• Failure to pay the concession fee for a con-secutive period of 6 months.

• Failure to comply with lawful directive givenby a statutory authority connected with ports.

Source: Author.

Box 47: Reference Clause on Termination bythe Operator

The following (unless as a result of aForce Majeure or change in law thatresults in consequences set out in

Article [number] or a Default of the Operator)shall constitute Authority Events of Default:

• Commission of a material breach of amaterial provision of this Agreement by thePort Authority.

• Repudiation of this Agreement by the PortAuthority or the evidencing of the intentionby the Operator not to be bound by theterms of this Agreement.

• Dissolution of the Port Authority and occur-rence of any structural changes within thepresent constitution of the Authority thathave a material adverse effect on the rightsand obligations of the Operator under thisAgreement, or the transfer of the PortAuthority’s undertaking and statutory pow-ers or any material part thereof, unless suchdissolution or structural change or transferis in connection with privatization or otherrestructuring of all or any substantial part ofthe Port Authority, and the Port Authority’ssuccessor is able to perform the PortAuthority’s obligations under thisAgreement.

Source: Author.

overall market and the alternatives available tothe operator (see Box 49).

6.21.4. Bankruptcy

The port authority will usually insist on theright to terminate the agreement in case of thebankruptcy or insolvency of the operator.Sometimes an operator will be provided anopportunity to resolve such insolvency petitionswithin a limited period of time (see Box 50).

There are various methods, but in general thebasic principle for assessing termination com-pensation is the fair value of all the assetsbrought into, created, or installed at the conces-sion area, including:


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Box 48: Reference Clauses on TerminationDue to Noncompliance

Without prejudice to the conditions ofSubsection [number], theConcession Agreement may be ter-

minated by the Port Authority on the groundsof noncompliance by the Operator with one ormore obligations under this Agreement. ThePort Authority shall send a notice of termina-tion to the Operator by registered mail, indi-cating the date of termination and the reasonsthereof. There must be at least [number] ofmonths between the day of sending the letterand the termination date.

If the Operator complies with the terms ofthis Agreement before the termination date,the decision of the Authority to terminate theConcession/lease shall become ineffectiveand shall be deemed not to have been taken.

If the Concession is terminated on thegrounds of the provisions given in this Article,the Operator shall, as are result of the merefact of the termination, forfeit a fine amount-ing to [number] times the sum of the annualConcession Fee owed by virtue of the provi-sions of Section [number], which appliedmost recently, and all rights of whatevernature to everything which is built on orplaced in the site shall pass over to theAuthority, without compensation for damages,and without prejudice to legal proceedings forcompensation of damages.

Source: Author.

Box 49: Reference Clauses on Prolongation

At least two years before the expirationof the concession, the Operator mayrequire the Port Authority to take a

decision concerning the extension of theperiod for which the concession is granted,as well as concerning the concession fee andthe provisions, which shall apply for the dura-tion of its renewal or extension. The Operatorshall approach this in the manner stipulated inthe following paragraphs.

The Operator shall send a written requestto the Port Authority by registered mail. Therequest shall indicate the number of years forwhich the extension is requested, with amaximum period of 10 years, and theproposed concession fee. The Port Authoritywill inform the Operator in writing of itsdecision and the reasons thereof within sixmonths after receiving the request.

The request of the Operator shall expire ifhe has not reached agreement with the PortAuthority with regard to the extension, theamount of the concession fee, and the provi-sions within three months after receiving aresponse mentioned in the previous subsec-tion. In that case, the Operator has the optioneither to have the concession agreementexpire or to revert to arbitration as mentionedin Section [number].

(optional) In determining the ConcessionFee for the duration of the extension, noconsideration shall be given to the value ofthe buildings or structures in theConcession Area constructed by theOperator.

Source: Author.

Box 50: Reference Clauses on Bankruptcy

If the Operator is declared bankrupt, appliesfor a moratorium, or loses his status as alegal entity during the concession period,

the Port Authority may summarily terminatethe Concession Agreement.

In the event that more than one legal entityacts as Operator, each of them shall be sepa-rately liable for fulfilling all obligations arisingfrom this Agreement.

Source: Author.

• The movable assets and facilities trans-ferred to the operator (whether renewedor replaced).

• All other movable assets, (including intan-gible assets such as software and terminalmanagement systems, subject to the termson which they have been licensed, whetherrenewed or replaced, whether fixed orattached to the ground, created, installed,or provided by the operator at the termi-nals, including at the extension works.

• All related documentation and manuals(such as the maintenance manuals,operation and management manuals, andso forth).

• All quays and storage infrastructure thathave been created or brought into theconcession area and all other opera-tional port infrastructure and super-structure created and constructed at theterminal.

The fair value is usually determined by an inde-pendent appraiser who acts as an expert, not asan arbitrator, and should have the power toobtain relevant information from the parties tomake an independent assessment. In no circum-stances shall the appraiser apply any earnings-based valuation methodology, or take intoaccount any goodwill in the business of theoperator for determining the fair value of theassets at the concession area. The fair valuewould normally be subject to addition ordeduction depending on which party was indefault.

There are many methodologies for determiningfair value. Examples include the basis of bookvalue of the assets minus depreciation orreplacement value or using the going concernmethod of calculating lost future cash flow ofthe entity. Obviously, the contractual clauses onfair value are an important issue for negotiationbetween the port authority and the prospectiveoperator when concluding a concession agree-ment. The methodology of determining fairmarket value should be agreed on and includedin the concession agreement.

6.22. Expiration of Concession Upon expiration of the concession period, thefacilities built on the site and any title thatpassed to the operator as part of a B(O)OTarrangement will be transferred back to the portauthority. In some contracts, the site may haveto be restored to its original state, which couldmean that the operator must demolish struc-tures and installations that were built on thesite during the concession period. Equipmentwould be transferred or retained as a matter ofcontractual obligations; it may be compensatedat book or market value, or it might beremoved from the site by the operator for saleor for use elsewhere. An obligatory free transferof equipment to the port authority is not rec-ommended due to the maintenance require-ments for such equipment. If an operator knowsthat it may have to transfer equipment at theend of the concession period, the operator maycut back on maintenance as much as possible tosave money toward the end of the period.

The concession agreement should specify thecondition of the basic and operational infra-structure at the time of transfer. The portauthority should monitor thoroughly the infra-structure maintenance (life cycle maintenance,routine maintenance, and reactive mainte-nance), and, if applicable, the superstructurethroughout the concession period. Any deficien-cies found during the joint inspection prior tohand-back should be corrected by the operator.

The authority should expect to receive all con-struction documentation for installations, powerand water lines, sewerage systems, and any othersystems that have been constructed undergroundat the site during the concession period. The oper-ator should also remove all remnants of piles,foundations, and similar civil works before leav-ing the site. When the site is to be handed over inits “original condition,” all later restoration costsshould be borne by the operator (see Box 51).

6.23. Arbitration Many concession agreements include a provi-sion for arbitration. Sometimes, reference ismade to International Chamber of Commerce


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(ICC) arbitration (which is the preference ofmost lenders) or to a local arbitration institute.Often, a specific procedure is presented in theagreement. Arbitration is often a preferredoption in case of a conflict between parties. Thereference clauses in Box 52 are meant for decid-ing on increases of the concession fee, if parties

cannot come to an agreement. This type of arbi-tration can also be applied to other conflictsthat may arise during the concession period.

6.24. Costs Costs pertaining to the use of the concessionedsite are usually paid by the operator, including


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Not less than [number] months prior tothe date of expiration of this agreement,the Port Authority and the Operator shall

conduct a joint inspection of the facilities.Such inspection shall be in accordance withthe requirements of the hand-back schemeincluded in Annex [number].

The Operator shall ensure that on the date ofexpiration of the Agreement, each element of thefacilities complies with the requirements of thehand-back scheme included in Annex [number].

The Operator shall at the expiration of thelease period peacefully and quietly leave, sur-render, and yield up the site to the PortAuthority or to its agents without any claim forcompensation in respect to any improvementeffected by the Operator on the site and shallbefore leaving, demolish, at the request of thePort Authority, some or all buildings constructedby the Operator and remove any equipment,machinery, or appliances installed therein,which otherwise will be vested in the PortAuthority without compensation. Moreover,other items have to be removed such asstumps of piles, piles, foundations, materials,substances, and the like.

The scope of the hand-back of assets shallinclude all assets prevailing at the site as atthe date of transfer, and shall, inter alia,include:

• All land and buildings.

• Plant and machinery.

• Spare parts.

• Such deeds and documents as may be nec-essary for effectively transferring rights, title,and other interests under this Agreement infavor of the Port Authority free of all encum-brances.

• The benefits of all rights and interest in allunexpired insurance, guarantees, and con-tractor warrantees, if so desired by the PortAuthority.

• All documents, manuals, records, and soforth as may be required for the efficientoperation of the terminal/port.

The hand-back (and compensation) shall relateonly to tangible assets and such intangibles(such as capital dredging) identified for thepurpose of the Article in the Approved DPR.

If there are piles in the site that have beenplaced there by the Operator and/or by otherparties, the Operator shall submit a full andclearly specified drawing thereof to theAuthority. The Authority shall decide how thesepiles should be removed and to which depth.The Operator shall strictly comply with theinstructions that are given by the PortAuthority. The Port Authority is entitled therebyto prescribe that one or more piles are leftbehind in a good condition, without theOperator being able to claim any form of com-pensation for the piles that will be left behind.

In the absence of clearance within threemonths after the end of the lease period thefences, buildings, mooring sites, installations,and in general everything that is still situatedon or in the site, shall revert to the Authority.

If the site is not handed over in its originalcondition, after removal of everything that hasbeen built thereon, placed therein, or broughtthereto by the Operator and/or his predeces-sor(s) and leveled at the proper height, allcosts that the Authority will incur in order torestore the site to its original condition shall berefunded by the Operator.

(optional) The Operator shall, at the expira-tion of the lease period, sell back to theAuthority the existing quay walls and all othernew mooring facilities constructed during theConcession Period. In the event that partiescannot agree on a price, the price will be deter-mined by an Arbitration Commission appointedin the manner given in Section [number].

Source: Author.

Box 51: Reference Clauses on Expiration of Concession

the case in which the port authority holds legaltitle over the port land (see Box 53).

6.25. The Tender Process andTransaction Preparation Under a concession, the long-term use andexploitation of port land and assets are trans-ferred to private parties through tender. Theprocess to achieve this transfer in an optimalmanner has to be both effective and transpar-ent. This requires taking a sequence of steps

that are logically interrelated and lead to con-cessioning of terminal activities under the bestpossible conditions for the government and portauthority. The steps are explained below.

Marketing strategy: The first step is to ensurethat a company profile reaches a reasonablenumber of relevant bidders (“reasonable” refer-ring to both creating sufficient competition andavoiding large costs). The company profile com-prises the most relevant information on such


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In the event that the parties do not reachagreement on a new concession fee beforethe new period commences, the fee shall be

determined by the parties in the manner givenbelow on the basis of the advice of anArbitration Commission consisting of threearbitrators.

In that event, the Port Authority and theOperator shall appoint one arbitrator, and thetwo arbitrators thus appointed shall appoint thethird arbitrator; if a party fails to appoint thearbitrator within [number] days of receipt of arequest to do so from the other party, or if thetwo arbitrators fail to agree on the third arbitra-tor within [number] days of their appointment,the appointment shall be made, upon applica-tion of a party, by the [name] Court. The arbi-trators shall be notified of the provisions of thisagreement, to the extent that these are impor-tant for them, by the parties who appoint them.By accepting his appointment, an expert sub-jects himself to the aforesaid condition.

The third arbitrator will act as Chairman ofthe Arbitration Commission. The ArbitrationCommission shall, together with a well-moti-vated statement of their considerations andarguments, give its decision as to the extent towhich the Concession Fee must be reviewedin relation to the Fee, which was charged dur-ing the last year of the concession period.

In doing so, the Commission shall compare:

• The situation and the condition of the areawith that of the other port areas, without tak-ing into account the nature of the use or thefact that they are built on.

• The conditions under which ConcessionAgreement(s) concluded with other parties inthe port area.

• Special circumstances under which theConcession Agreement has been concludedwith those of other parties in the port area.

• In the event that within the last two yearsprior to the end of the concession period noother sites have been issued in concessionwithin the area of the Port Authority, theCommission shall decide on the adjustmentof the Concession Fee under observance of:

~ The situation and the condition of the site.

~ The conditions under which the site wasconcessioned.

~ The special circumstances under whichthe site was concessioned.

~ The increase or decrease of the uservalue of the site concerned as a result ofexternal circumstances.

~ The increase or decrease of the value ofmoney.

If all three experts, or two of them, agree on anew Concession Fee, the Commission shallinform parties in accordance therewith in writ-ing. If all three differ in opinion, then the newfee shall be established by the Commission athalf of the total of the two estimates, whichhave the smallest difference between them. Ifthe difference between the lowest and themiddle estimate is the same as the differencebetween the middle and the highest estimate,then the fee shall established by theCommission in accordance with the middleestimate.

A change in the fee by virtue of the provi-sions in this article shall, if one of the partiesexpresses the desire thereto, be laid down in aseparate deed.

Source: Author.

Box 52: Reference Clause on Arbitration

issues as core activities of the offered prospectand future perspective of these activities. At thesame time, the financial, operational, strategic,and other contributions expected from the bid-ders are specified (prequalification criteria).Further, the profile refers to the existence of aninformation memorandum that is available toparties that are interested in making a serious bidand are able to comply with selection criteria toqualify for negotiations. The informationmemorandum should include strategic, economic,and financial information on the relevant portor terminal, the main provisions of the conces-sion agreement to give prospective biddersinformation on the institutional and legalbackground of the port sector, as well as theselection criteria.

Selection (prequalification): Reactions to theprofile are screened in accordance with the pre-qualification criteria. The obtained “long list”will then be put to a further test and probablynarrowed down to a “short list,” to ensure thatonly serious bidders submit proposals.

Interfacing: The short listing process, with itssubmission of concise information to a long listof bidders, and the need felt by the latter groupto know more, will almost certainly invoke inter-actions between prospective bidders and stake-holders in the government or port authority. Thismay result in a bidders conference (pretendermeeting), workshops, road shows, investor tours,one-on-one meetings, or similar events.

Managing the transaction to its conclusion(bidding stage): After short listing, thecandidates are obliged to carefully review theinformation memorandum, which shall containinformation on an array of issues. These issuesare listed in the relevant task sheet. The infor-mation memorandum will then be sent to thoserequesting it and prequalifying. They are invitedto respond to it in a prescribed standardmanner. Standardizing the bids ensures rationalcomparison, scoring, and ranking, and also makesthe whole process transparent and defendable.

After the bids have been submitted, comparing,scoring, and ranking sessions should be heldunder the advisory guidance of a professionalport consultant. At this stage, bid standardiza-tion achieved by the identical informationmemoranda sent to the bidders will prove to becrucial to finalizing the selection process in atransparent and effective manner, leading tobest results for the port authority. The selectionprocess includes several phases:

• Formation of an evaluation team: Thisteam might comprise representatives ofseveral relevant ministries and the portauthority. The evaluation team should beassisted by a professional port consultant.

• Arranging the evaluation session:Experience suggests that a thorough eval-uation session of the bids will take atleast two weeks, depending on the num-ber of eligible bids received. The biddingenvelopes should be opened in the pres-ence of the press and their contents veri-fied. The documents should then becopied and distributed.

• Evaluating the bid: First step in the scor-ing process is to design a bid evaluationchart. On the chart, an unambiguous listof evaluation criteria and a scoring rangewill be drawn up, later to be used by theevaluation team during the scoringprocess. Most importantly, scoring crite-ria will have to be agreed-on to sort thebidding information of the various bidsinto categories. For each of the categories,


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Box 53: Reference Clause on Costs

Where this Agreement determines thatcosts, damages, taxes, and otherlevies by public bodies and the like

are for the account of the Operator, the lattershall pay the amount stated by or on behalf ofthe Port Authority and shall at the same timestate the reason for the payment, immediatelyupon the first request, without awaiting noticein default or court intervention.

All costs incurred for this Agreement andsupplementary agreements shall be for theaccount of the Operator.

Source: Author.

and the subcategories derived from them, apredetermined number of points or a frac-tion thereof can be awarded, depending onwhether or not and to what degree thecriteria have been met.

• Scoring process: The scoring process itselfwill consist of filling in one bid evaluationchart per evaluation team member per bid-der. These individual results will then begrouped on a bid evaluation results list,showing how many points the evaluationteam as a whole has awarded to each bid-der per category, per subcategory, and as agrand total. The ranking of the bidders willautomatically emerge from this exercise.

Negotiations (political approval and contract-ing): Since concession agreements are usuallyvery complicated, particularly when a BOTarrangement is included, the port authority’snegotiation team should be professional andfully authorized to conduct the negotiations andbe assisted by an (external) international portlawyer. In the event that many governmentdepartments are involved, it is advised to agreeon a mandate for the negotiation team (negotia-tion guidelines), including the (minimum) posi-tion on important issues that constitute themain part of the concession. These issues usuallyare:

• Lease rent and TEU fee, minimumguaranteed throughput, and indexation.

• Term of the concession.

• Termination compensation (establishmentof fair value).

• Lender security and lender’s directagreement.

• Liabilities.

• Transfer of port workers in case of theconcessioning of an existing terminal.

• Construction program, milestone achieve-ment dates, and milestone sunset dates inthe case of a BOT arrangement.

In practice, negotiations may take a long time,ranging from one month to one year.

6.26. Miscellaneous Conditions The concession agreement may contain provi-sions to cover a number of miscellaneous condi-tions and activities in the port, including environ-mental conditions, construction and maintenanceof a fence around the site, advertisements, anddumping of liquids in port waters (see Box 54).

7. BOTS AND CONSTRUCTION An operator managing a site under a concessionor lease agreement usually obtains the right toreconstruct the site, to erect buildings, andintroduce new equipment. When the site is con-structed or reconstructed under a BOT arrange-ment, the operator also has the right to buildnew quay walls, to dredge channels, and createnew port land. In undertaking these activities,the operator assumes some duties previouslyundertaken by the port authority.

Every concession agreement contains lease condi-tions when ownership of the site formally remains


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Box 54: Clauses on Miscellaneous Conditions

If, when carrying on businesses or whenbuilding, expanding, or changing construc-tions and/or installations, an environmental

license or another license is required, not onlythis (these) license(s), but also a separate per-mission from the Authority shall be requiredby virtue of this article.

The Operator shall have to fence off thesite to the satisfaction of the Authority andkeep it fenced off from the public road andfrom the adjoining land at all times.

The partitions, buildings, mooring sites,and/or installations may only bear advertising,legends, announcements, signs, and the likerelating to the business of the Operator, andalso those that are prescribed by or on behalfof the government. All other advertising andthe like, including that which is put up againstthe will of the Operator, shall be removedimmediately by the Operator.

With the exception of rainwater, dumpingof solid substances and liquids into the port isnot allowed unless the Authority has givenpermission in writing to do so. This permis-sion may include conditions.

Source: Author.

with the port authority. When ownership is tem-porary or definitively transferred to the operator(under BOOT or BOO arrangements), the con-cession agreement may include a variety of claus-es pertaining to the use of the site, although suchclauses may be based solely on a public license, aport bylaw, or other enabling authority.

BOT arrangements in a concession agreementare spelled out in detailed provisions coveringconstruction, quality control, time schedules,milestones, and similar issues. One important

provision deals with the granting of exclusivityrights, guaranteeing that the port authoritydoes not promote or permit any other compet-ing facility in the concessionaire’s port area fora certain time period (sometimes incorporatedinto a sponsors direct agreement) (see Box 55).

7.2. BOT and BTO Arrangements BOT and BTO arrangements are frequently inte-gral parts of concession agreements. The differ-ence between these models is the time at which


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The maintenance of the site at its presentlevel shall be carried out by and for theaccount of the Operator.

The maintenance, the repair, and the reno-vation of the foundations and piles of the quaywall, the electricity channel with brush contactgroove, and the connection pits for light, water,and telephone supply and appurtenancesthereto, and also of the visible concrete worksof the quay wall, shall be carried out by and forthe account of the Port Authority.

The Operator is obliged to maintain the build-ings, installations, fences, roadways, mooringsites on the site in a proper manner and, if nec-essary, to renew them in due time. Buildings thatare run down and no longer used for businessoperations shall be demolished. All this shall bedone to the satisfaction of the Port Authority.

All costs for the construction and mainte-nance of roads, sewers, electricity lines, gasand water pipes, and lighting on the site arefor the account of the Operator.

If objects, liquids, or materials are present inthe water, or in or on the bottom of the port orin the vicinity of the site, which, in the opinion ofthe Authority, do not belong there and haveoriginated from the site or from vessels mooredalongside a quay wall owned by the Operator,the Operator shall pay the Port Authority thecosts that arise from the removal thereof, unlessthe Operator proves that the objects, liquids, ormaterials originate from another source.

The Operator shall indemnify the Port Authorityfor all claims of third parties in respect of dam-ages that arise from the presence of the saidobjects, liquids, or materials, to the extent thatthey do not originate from a source other than isreferred to above. This indemnification does not

apply to objects, liquids, or materials that origi-nate from vessels moored alongside a quay wallowned by the Operator, which are owned by, orcarrying out services on behalf of the Authority.

The Operator shall further be obliged to takesuch measures as shall be necessary in theopinion of the Port Authority to enable dredgingand placing and removing any mooring postsand the like in the vicinity of the leased proper-ty, which entails, among other things, the factthat the Operator shall allow means of anchor-ing, mooring, and dredging vessels to beinstalled, used, and maintained by or on behalfof the Port Authority in the shore strip of thesite, this at places which shall be indicated byor on behalf of the Port Authority.

For that purpose the Operator shall, at hisown expense, carry out such work to its fences,buildings, mooring sites, installations, and thelike as shall be deemed necessary in joint con-sultation with the Port Authority in order to avoiddamages that could arise from the work or pro-visions which are to be carried out by or onbehalf of the Port Authority. If, as a result of workor provisions carried out by the Port Authority,damage is inflicted to fences, buildings, mooringsites, installations, and the like of the Operator,such damage shall still be for the account of theOperator, unless the Port Authority can be heldresponsible for gross fault or negligence.

Without prejudice to other provisions in thisagreement, the Operator shall contribute to thecosts, to be borne by the Port Authority, ofcleaning the surface water in the harbors andabove the sloping embankments in proportionto the area of the sites bordering the harbor,and the length of the waterfront.

Source: Author.

Box 55: Reference Clauses on Construction and Maintenance (Landlord Port Situation)

the operator transfers the newly constructedassets to the port authority. BTOs are employedwhen relevant legislation does not allow for theprivate ownership of port assets. Transfer is con-ducted immediately upon the completion of con-struction and the operator receives the equiva-lent of a management contract.

The distinguishing feature of the BOT arrange-ment is the legal form of user rights. The con-cession agreement always sets out clauses thatclearly define such rights. The concession enti-tles the operator to a right to use and exploitport infrastructure and, in the case of an exist-ing terminal, also to use the superstructure andavailable port equipment.

The scope of the concession agreement appearsin its preamble. The preamble typically consistsof three main elements:

• The right to construct new port infra-structure and superstructure.

• The right to use of the subject assets.

• The right to exploit the site during thetenure of the concession (see Box 56).

Most concessions have a term of 30 years ormore. Extension of the concession can usuallybe renegotiated at any time during its lifetime incase the operator plans a major investment inthe port’s infrastructure in return for an adjust-ed tariff rate reflecting changes that may havebeen introduced pursuant to the extension. Incase no agreement for extension is reached bythe end of the 30-year term, the concession endsand the right to use and exploit the port’s infra-structure and other assets reverts to the portauthority (or another government agency),preferably under a fixed-price formula.

7.2. BOOT Arrangements Under a BOOT scheme, sometimes an operatoris allowed to own the site on which improve-ments are to be constructed until the end of theconcession period. Usually, the concessionagreement specifies the value of the assets undera predefined formula (including an agreed-ondepreciation table). At the time of transfer to

the port authority at the end of the concessionperiod, the port authority pays the operator inaccordance with the residual value, calculatedon the basis of the established formula.

7.3. Functional and TechnicalDesign under a BOT Arrangement Generally, a port authority presents functionalspecifications for the facility to be constructedunder a BOT arrangement. When the authorityspecifies detailed construction works, it becomesvulnerable to delays, construction errors, and,perhaps, the application of wrong technology orprocesses relative to expected port functions.Many ports simply lack the required expertise toprepare detailed technical specifications formodern port construction works.

Since new facilities are to be transferred to theport authority in due time, it is useful to engagea technical consultant who represents the portauthority and reports on the progress of thework. The technical consultant can also observethe way in which the project is being construct-ed to meet the functional specifications and therequirement to use best practices for design,materials, and workmanship. The consultantmay also assist in evaluating alternative techni-cal solutions and advise on the best technicaland cost-effective solutions.

A crucial point in the design phase is obtainingagreement on a timetable for completion of thedetailed technical design. The design shouldinclude an interface element to integrate the ter-minal into an existing port area. The interfaceelement takes into consideration paving levels,drainage, fencing, design and routing of under-ground facilities, reconstruction of existinginfrastructure within the concession area, andaccess through neighboring port areas and ter-minals.

Finally, the operator is obliged to provide theport authority with sufficient detailed bench-mark data to allow for evaluating and monitor-ing the development of the concession area aspart of the approved DPR and the agreed-onconstruction program (see Box 57).


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WHEREAS Article [number] of the PortsAct of [date] gives the port authorityof [name] the exclusive right to

develop, construct, and maintain basic andoperational infrastructure in its port area.

WHEREAS it is the policy of the govern-ment/Port Authority to have the new terminalconstructed and operated by a commercialoperator (or have the existing terminal knownas [name] be reconstructed and operated by acommercial operator) under a [BOT, BOOT,BTO] arrangement.

WHEREAS the Authority has invited bids in[month] [year] for the Project, and through aprocess of competitive bidding selected in[month] [year] the Consortium of [name] asSponsors, hereinafter referred to as the“Operator,” led by [name], a company whoseregistered office is at [location], (the “LeadSponsor”), as identified in the JointDevelopment Agreement for developing theterminal/port of [name].

WHEREAS, subject to the provisions of thisAgreement, the Sponsors and its designatedOperator shall have the right and the obligationto finance, design, construct, equip, test, com-mission, operate, and maintain theterminal/port known as [name].

WHEREAS the Authority awarded a Letterof Intent (LOI) dated [date], [year], to theSponsors to finance, design, construct, equip,test, commission, operate, and maintain theterminal/port [name] on [BOT, BOOT, BTO, andso forth] basis, (and has agreed to grant alicense to the Sponsors under the [name] Act,No. [number], dated [date], for financing,designing, constructing, equipping, testing,commissioning, operating, and maintaining theterminal/port [name]).

(optional) WHEREAS the Authority has beenreimbursed by the Sponsors for the cost asso-ciated with site specific technical studies thatwere undertaken by the Authority [at the timeof approval of the Detailed Project Report] [atthe time of International Competitive Bidding].

WHEREAS the Sponsors have executed aJoint Development Agreement dated [date],[year], allocating project responsibilities amongSponsors, pursuant to which the Sponsorspromoted the Operator to finance, design,construct, equip, test, commission, operate,and maintain the terminal/port [name] on [BOT,BOOT, BTO, and so forth] basis and transfer

the Site and the assets thereon to theAuthority on termination of the ConcessionAgreement.

WHEREAS a Detailed Project Report (DPR)has been prepared and submitted by theOperator, in accordance with the terms of theLOI, to the Authority on [date], [year], and hasbeen approved by the Authority. The DPR withsuch modifications shall be referred to as theApproved DPR (annexed hereto as Annex[number]), and shall be treated as a part of thisAgreement.

WHEREAS the Concession Area requiredfor the development of the terminal/port[name] and the minimum area of land requiredto be leased to the Operator for the com-mencement of the construction have beenidentified in the Approved DPR. The Operatorhas agreed to construct the Contracted Assetson the Site in accordance with Annex [number]of the approved DPR.

WHEREAS on the signing of the LOI, theOperator provided a Development Guaranteein favor of the Authority for $ [amount], whichunless otherwise agreed to, shall remain inforce and effect until the Zero Date.

WHEREAS at the signing of the LOI, theSponsors provided a Development Guaranteein favor of the Authority for $ [amount], whichunless otherwise agreed, to shall remain inforce and effect until the Zero Date.

WHEREAS the parties hereto have agreedto render all necessary cooperation and assis-tance and take appropriate action for givingeffect to the terms of this ConcessionAgreement.

WHEREAS the Operator, being dulylicensed to operate in the port, has applied forappointment to start container/generalcargo/bulk services at the above mentionedterminal on the Date of Commencement ofOperations.

WHEREAS the Authority is satisfied that theOperator is qualified in this field.

WHEREAS the Authority grants theOperator the right of usufruct[BCJ11]a overoperational infrastructure, superstructure, andother assets by way of this Concession for theperiod of (30) years.Source: Author.aA legal term describing a situation wherein a person orcompany has a temporary right to use and derive incomefrom someone else’s property.

Box 56: Reference Clauses on Scope of a Concession Agreement (including a BOT arrangement)

7.4. Design and ConstructionFlaws During every major construction job, designand technical problems will inevitably occur.Some of these issues can be easily resolved, butothers might influence the constructiontimetable or quality of the work. It is importantthat design and construction flaws be resolvedin good faith consultation with the operatorand its construction firm. The port authorityshould be ready to demonstrate flexibility with-out compromising the requirement that work beperformed at a predetermined quality level.

In some instances, part of the work may haveto be redesigned. The effects on construction

time and cost of any redesigned element(s)should be ascertained by the port authority,which should also ensure that the operatoradheres to overall functional specifications (seeBox 58 and Box 59).

7.5. Building Conditions The construction company carrying out thework on behalf of the operator should berequired in most cases to inspect the buildingsite and the adjacent water area thoroughlybefore starting construction. Any obstacles inthe subsoil affecting the construction should bereported and taken into consideration whenexecuting the technical designs and obtainingpermits. It is customary for the port authority


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The Construction Program is set out inSchedule [Number] in detail for allphases of the Extension Works. These

phases comprise the following:

• Phase 1 comprises the upgrading of the cur-rent Operational Infrastructure and Facilitiesas to enable the Operator to handle anAnnual Throughput of [Number] million TEU.

• Phase 2 comprises the construction of anadditional quay structure with a total lengthof [number] meters and the construction ofOperational Infrastructure and Facilities as toenable the Operator to handle an AnnualThroughput of [number] million TEU.

• Phase 3 comprises the construction ofOperational Infrastructure and Facilities as toenable the Operator to handle an AnnualThroughput of [Number] million TEU.

Subject to Article [number] and [number], theOperator shall ensure that the Extension Worksare carried out:

• According to the Construction Program,subject to compliance by the Port Authoritywith the Dredging Program.

• So that the Milestone Achievement Date foreach Milestone shall occur by the relevantMilestone Sunset Date.

The Construction Program may not be materi-ally varied without prior approval of the PortAuthority such approval not unreasonablywithheld, provided always that the Operatorshall provide the Port Authority with evidence

reasonably satisfactory to the Port Authoritythat the Milestone Sunset Dates shall still beachieved and any such approval shall be with-out prejudice to the rights of the Port Authorityto terminate this Agreement for failure toachieve the Milestone Sunset Date.

If the actual progress of the ExtensionWorks does not comply with the ConstructionProgram, then the Port Authority shall be enti-tled to require the Operator either:

• To submit to the government a report identi-fying the reasons for the delay.

• To prepare and submit to the government itsproposals for a revised ConstructionProgram, showing the manner in which theExtension Works shall be carried out toensure each Milestone Achievement Dateshall be achieved by the relevant MilestoneSunset Date.

The government shall give written notice to theOperator from time to time giving details of theperson appointed from time to time by thegovernment to be the Construction Observer.

The Construction Observer shall at all timeshave the right to visit the Concession Areawithout prior notice. The Operator shall havethe right to accompany the ConstructionObserver during his attendance in theConcession Area. The Construction Observershall have no authority to delay or hinder anywork taking place in the Concession Area.

Source: Author.

Box 57: Reference Clauses on Construction Program

to agree to provide its cooperation in obtainingconstruction permits and approvals from gov-ernmental authorities, including environmentaloversight authorities.

7.6. Construction ProgramConstruction is based on a construction pro-gram that outlines completion dates for the var-ious construction phases (milestones) as part ofthe approved DPR. This DPR is almost alwaysincorporated into the concession agreement.The port authority ordinarily requires that it benotified promptly of every delay that occurs atthe construction site, as well as the resultingcontingency plan devised to remedy the delay(see Boxes 60 and 61).

7.7. Zero Date The zero date is an important event that marksthe start of construction work. By this date, allconditions precedent are fulfilled by both theport authority and the operator. Generally, theport authority fulfills all conditions necessaryfor the operator to commence work, while theoperator concludes all financial arrangementsand engages a construction firm to beginconstruction (see Box 62).


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Box 58: Reference Clauses on InfrastructureDesign

The Operator shall design and constructthe terminal/port facilities in accordancewith the functional design set out in

Annex [number] to this Agreement.

Without affecting the obligations under thepreceding provision, the Operator shall com-ply with the design and construction methodsset out in Annex [number] to this Agreement.

The Operator represents, warrants, andundertakes that:

• The technical design solution satisfies thefunctional design.

• Each item of the facilities (quay wall, termi-nal area, superstructure, and other assets)will be fit for its respective purposes.

The Operator shall complete the detailedtechnical design of the facilities so as to com-ply with the Construction Program as set outin the time table for design completion (Annex[number]).

The Operator shall submit to the Authority allinterface design data, including all calculations,designs, design information, specifications,plans, programs, computer software, drawings,graphs, sketches, models, and samples.

If in the opinion of the Authority any inter-face design data does not comply with therequirements of the Agreement, it shall beentitled to require the Operator to amend therelevant interface design data so as to complywith these requirements.

The Authority shall be entitled to monitorthe development and other aspects of thetechnical design and the Operator shall pro-vide it with all relevant data promptly. TheOperator shall not be obliged to adhere topossible comments of the Authority, but shallgive due consideration to such commentsmade by or on behalf of the Authority. Anycomment or approval of the Authority shallnot be construed as transfer of responsibilityfor compliance with the Functional Designfrom the Operator Company to the Authority.

Source: Author.

Box 59: Reference Clauses on TechnicalDesign and Construction Problems

If the Operator and/or the construction firmresponsible for carrying out the workbecome aware of any failure to comply with

the Functional Design and/or other provisionsconcerning design and construction of thefacilities, they shall:

• Immediately notify the Authority of the situ-ation and provide details of the problem.

• As soon as possible provide the Authoritywith a written statement giving a full state-ment for the reasons of the problem.

• Describe in full the measures taken or to betaken to cure the problem and/or to miti-gate the consequences.

• Assess the effect(s) of the problem on theConstruction Program.

In case the Operator is not able to complywith the Functional Design and/or the provi-sions concerning the technical design andconstruction of the facilities, a full statementof the proposed changes including cost esti-mates and effects on the ConstructionProgram shall be submitted to the Authority.

Source: Author.

7.8. Drop Dead Date During the preparation phase, events may occurthat result in delays or even cancellation of aproject. The port authority as well as the opera-tor may include provisions for termination of theconcession agreement once it becomes clear thatthe project will fail. Therefore, a drop dead dateis included in the agreement. In drafting such aclause, it is important to specify if any perform-ance guarantees will be drawn or canceled as aresult of the drop dead date (see Box 63).

7.9. Extension Events In practice, construction of a major work rarelyproceeds according to the original plan. In casea delay is caused by action (or inaction) of theport authority itself, the operator is usually enti-tled to claim liquidated damages. A forcemajeure might also occur, causing delays in theconstruction process. Such possibilities areacknowledged in the concession agreement andprocedures included to change the milestone

dates and compensation paid by the operatorwhen an extension event occurs (see Box 64).

7.10. Completion Tests and Take-Over BOT schemes are mainly employed for the con-struction of new port infrastructure and super-structure. When newly built facilities are com-pleted, completion tests are carried out and atake-over certificate issued by a competentexpert or authority on the port authority’sbehalf. While verification of the civil works isrequired throughout the production process, itwill not be possible to verify solely at the con-clusion whether all work was completed in aprofessional manner and that proper materialswere used during the process. The port authori-ty should use its expert to inspect all work atcompletion and to prepare a punch list of defi-ciencies. The construction company then has acertain period to rectify all deficiencies. Thefinal take-over is based on a test certificate


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Box 60: Reference Clauses on SiteConditions

The Operator shall be deemed to havethoroughly inspected the ConcessionArea and its surroundings, and have

satisfied itself as to:

• The nature and extent of the conditions ofor affecting the Concession Area, includingclimatic, hydrological, ecological, environ-mental, geotechnical, seismic, and archeo-logical conditions.

• The adequacy of the rights of access andegress to and from the Concession Area.

• The possibility of interference by persons ofany description whatsoever (other than theAuthority) with access to, use of, or rightsconcerning the Concession Area and its sur-roundings, including adjacent landowners.

• The precautions, times, and work methodsnecessary to prevent any nuisance or inter-ference, whether public or private, beingcaused by persons whose interests may beaffected by the performance of theOperator’s/Vehicle Company’s obligationsunder this Agreement.

Source: Author.

Box 61: Reference Clauses on Construction

Throughout the period from the effectivedate of this Agreement until the actualcommissioning date for the last of the

planned facilities, the Operator shall keep theAuthority fully informed about the progress ofthe works. In that regard, the operator shall:

• Provide the Authority with monthly progressreports, in such form and containing suchinformation as the Authority may reason-ably require from time to time.

• Hold regular progress meetings to reviewperformance of the work and discuss anycoordination issues.

• Fully cooperate with the Authority’sObserver, who shall be entitled to be pres-ent at any time during the performance ofthe work and to have reasonable access toall parts of the concession area and to allrecords and materials of the Operator con-cerning the work including attendance atthe progress meetings of the work. TheObserver shall be entitled to disclose allsuch information to the Authority and itsadvisers.

Source: Author.

issued by the certifier. After this, there is still adefect liability period during which the operatorhas the obligation to repair all deficiencies.

Take-overs of mechanical and electrical installa-tions are more complicated and require a vari-ety of tests including operational, safety, relia-

bility, interoperability, and endurance tests(see Box 65).

7.11. Hand-Back and Transferof Facilities Under a BOT arrangement, the facilities aretransferred to the port authority at the end ofthe concession period, usually with (under aBOOT arrangement) or without (under a com-mon BOT arrangement) compensation. Thehand-back is concluded after a joint inspectionand assessment of any renovation works(if applicable). Hand-back requirements andprocedures depend on local practices. The mostsensitive issue is in the level of compensation tobe paid by the port authority (see Box 66).


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Box 62: Reference Clauses on Zero Date

The Zero Date shall mean the date onwhich all the conditions precedent setout in Article [number] have been satis-

fied and the following conditions have beenfulfilled:

• The environmental permit of the Ministry of[name] has been received.

• The following milestones necessary for thecommencement of construction stated inthe Approved DPR are complete: [mile-stones to be identified].

• Financial Closing has been achieved.

The Zero Date shall be achieved within [num-ber] months from the Effective Date (namely,signing of this Agreement).

Source: Author.

Box 63: Reference Clauses on Drop DeadDate

In the event Zero Date is not achieved within[number] months from the Effective Date,this Agreement shall stand terminated and

the parties to the Agreement shall have no lia-bility of any nature whatsoever, subject to theclauses below.

If Zero Date is not achieved on account offailure to achieve Financial Closing, theDevelopment Guarantee may be invoked bythe Authority.

In the event the Authority has not fulfilledthe covenant set forth in Article [number]within a period of [number] months after com-pletion of inspection of facilities as per Article[number], the Operator shall be entitled toterminate this Agreement in accordance withArticle [number] and the DevelopmentGuarantee shall stand discharged and shallbe returned to the Operator.

Source: Author.

Box 64: Reference Clauses on ExtensionEvents In the event that the Operator fails to:

• Complete construction (or cause construc-tion to be completed) within the scheduledconstruction period.

• Achieve any intermediary milestones asmay have been agreed to between the par-ties, subject in both cases to agreed exten-sion.

The Operator shall pay the authority liquidat-ed damages of $ [amount] for each day ofdelay up to a maximum period of [number]months. The amount of such liquidated dam-ages will be linked to the Concession Feepayable by the Operator to the Authoritybased on an annual cargo projection in theApproved DPR, and shall, if so required, berealized by invoking the ConstructionGuarantee.

Source: Author.

Box 65: Reference Clause on Take-OverTests

An actual commissioning date shalloccur when the “Test Certifier” issues acertificate that completion tests for civil

works and installations (if any) have been suc-cessfully carried out.

Source: Author.

7.12. Lender Security The success of BOT arrangements is highlydependent on the ability of the operator to

attract financing for the construction work.This issue is reviewed in greater detail inModule 3 and Module 5. In many cases, lendershave recourse only to certain assets or incomestreams to secure repayment of their loans.Sometimes there are legal considerations thatshould be addressed, particularly with respectto the creation and enforcement of securityinterests in the host country that limit or evenprohibit the granting of a lien over port assets.Such limitations present a significant stumblingblock for attracting private capital to portdevelopment.

As described in Box 67, legislation restrictionsmay also impede investors and lenders becauseof a lack of definition of property rights. Thesituation on St. Maarten is very different. Asnoted in Box 68, care has been taken to maxi-mize the lender’s security.

In a concession contract with BOT arrange-ments, it is generally necessary to explicitly estab-lish the lender’s rights with respect to the affectedassets. Providing for the lender’s rights entirely inthe concession agreement is difficult because ofthe variety of financial structure options avail-able to operators. Most BOT arrangementsrequire debt financing by lenders (commercialbanks). To facilitate the lending process, the portauthority may enter into a direct agreement withthe lenders; however, only one direct agreementshall be effective at any time. In such a case, theconcession includes a clause obliging the portauthority to negotiate in good faith during theperiod commencing on the date of concessionand the effective date regarding the terms of thedirect agreement as may be reasonably requiredby the lenders in connection with the debtfinancing, including terms to enable the lendersto exercise their rights and remedies under thefinancing documents (see Box 69).

7.13. Change in LawOperators under a BOT arrangement run aconsiderable risk of applicable legislationchanging during the concession period. Suchchange may affect operating profits and alteror negate the original exploitation conditions.


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Box 66: Reference Clauses on Hand-Back ofFacilities [Number] months prior to the expected dateof expiry of this Agreement the Hand-BackExpert shall conduct an inspection of all ele-ments of the Terminals including theExtension Works (the “Initial Inspection”).Such inspection shall comply with therequirements set out in the Hand-BackRequirements applicable to the respectiveelements of the Terminals.

Within [number] Business Days after thecompletion of the Initial Inspection, the Hand-Back Expert shall provide the Operator andthe Port Authority with a notice (the “Hand-Back Proposals”) setting out:

• A schedule of major dilapidations on thecondition of the Terminals including theExtension Works, normal wear and tearexcepted.

• Determination as to the maintenance worksor repair required to be carried out inrespect of the Terminals including theExtension Works, in order to procure that,on expiry of the Term of the Concession,the Terminals including the ExtensionWorks shall comply with the Hand-BackRequirements (the “Renewal Works”).

• Determination as to the Program (the“Renewal Construction Program”) for carry-ing out the Renewal Works over the remain-der of the Term of the Concession.

• Determination as to the cost of carrying outthe Renewal Works (the “RenewalAmount”).

• The Operator shall ensure that the RenewalWorks are carried out in accordance withthe Renewal Construction Program.

On the day on which this Agreement expires,the Hand-Back Expert shall conduct a furtherinspection of the Terminals including theExtension Works (the Expiry Date Inspection).The inspection shall comply with the require-ments set out in Schedule [number] applica-ble to the relevant element of the Terminalsincluding the Extension Works.

Source: Author.

Therefore, it should be expected that detailedprovisions in the concession agreement will benegotiated to minimize the effects of suchchanges (see Box 70).


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The main elements of recent ports legislationin a European country included the following:

• Ports are part of the maritime domain as men-tioned in Article 49 of the Maritime Code (MC)of the country. According to the same law, amain characteristic of the maritime domain isthat within this domain there are no property orproprietary rights whatsoever (Article 51 MC).In the law, the definition of a port is as follows(Article 5 MC): A port is a water area, and withwater directly connected to a land area withbuilt-up and non-built-up wharf structures,breakwaters, equipment, installations, andother facilities intended or designed forberthing, mooring, and sheltering sea-goingships; loading and discharging of materials;embarkation and disembarkation of materialsand passengers; warehousing and other cargohandling operations; production, refinement,and processing of goods; and other economicactivities in connection therewith, concerningmatters of business, traffic, or technology.

• Since no property rights exist within the mari-time domain and subsequently within the portareas, all economic exploitation has to bebased on a system of concessions (Article 51MC) granted to companies. The MC containsdetailed rules with respect to such conces-sions (Articles 59–72). It should be mentionedthat this system is not only applicable to portoperations such as stevedoring activities, butalso to industrial activities in the port areas(refineries, chemical plants, and so forth).

• The national port management system isfully enumerated in the Seaports Law, 1995(SL). The law sets out further rules for issu-ing concessions. Concessions for a periodlonger than 10 years shall be granted by thecabinet of ministers, while concessions for aperiod of longer than 33 years can be grant-ed by the parliament. Concessions with aduration of not longer than 10 years can begranted by a port authority. All concessionsmust be publicly tendered. The formersocially owned enterprises acting both asport authorities and port operators in theprevious period have the right to be issued apriority concession with a duration of 12years (Article 63 SL). There is no freedom toset tariffs. Port construction is primarily atask of the parliament. Moreover, the lawlays down a very detailed planning system.

The above outlined port management systemhad a disastrous effect on the development ofthe country’s ports. Main competence prob-lems arose between the new port authoritiesand the former socially owned enterprises.Throughput of the country’s main port fellfrom some 7 million tons per annum to amere 2 million tons. No major investors werewilling to risk their money under the aboveinstitutional conditions. Presently, proposalsare being developed to make the SeaportsLaw more market oriented to attract foreigninvestors.

Source: Author.

Box 67: A Case of Legal Limitations Adversely Affecting a Port Concession

ANNEX I—CHECKLIST OFCONCESSION/BOTAGREEMENT PROVISIONS (Related to a concession for the management andoperation of an existing terminal and possibleextension)

1. Introduction and recitals: Parties to the agree-ment, general considerations.

2. Definitions: Definitions are important andshould be thorough. Usually they are includedin a schedule to the agreement.

3. Conditions precedent: Those conditions thathave to be fulfilled by the concessionaire and

the port authority before the main provisionsof the concession take effect.

4. Grant of concession: This provision sets out theexclusive right of the concessionaire to enterupon, occupy, possess, enjoy the benefits of,and use of the terminal.

5. Term of the agreement: The term of the conces-sion is usually between 30 and 35 years for aBOT agreement. In case of a concession with-out BOT, the term may be in the order of 10 to15 years.

6. Employment: Provisions regulating the positionof employees of the port authority who willbe taken over by the new terminal operator,


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The island’s bay has sufficient depth toaccommodate cruise ships, which visitthe island in vast numbers. Tourism (and

especially cruise tourism) constitutes a majorsource of income for the island. Economicbenefits are estimated at $200 million per year.Some one million cruise tourists visit the islandannually.

In September 1995, the island was hit by hurri-canes that seriously damaged the port’s facili-ties. This resulted in cruise ships having toanchor in the bay and transport their passengerashore with small tenders. This solution wasonly accepted by the cruise lines on a tempo-rary basis. In 1997, the government concludedan agreement with the lines charging $5 per pas-senger to (partially) finance a new cruise terminal.Plans were made to expand the terminal anddredge the bay up to a depth of 10 meters.

Reconstruction of the cruise terminal l becamepart of a corporatization scheme. TheSt. Maarten Cruise Terminal N.V. (joint stockcompany) was established as a subsidiary of theSt. Maarten Holding Company N.V., jointly ownedby the government of St. Maarten and the Dutchgovernment via the Participation Company forthe Netherlands Antilles NV. (NPMNA).

The main features of the concession agree-ment between the island government and theSt. Maarten Cruise Terminal N.V., which has aBOO character, are:

• Limited construction risk: A turnkey contracthas been concluded with an experienced

construction firm (Ballast Nedam CaribbeanNV). Its Dutch parent company (one of thelargest in the Netherlands) acted as mainsponsor and provided a subordinated stand-by facility during the construction period. Italso acted as a guarantor of the obligationsof the construction firm under a fixed-priceconstruction contract.

• No political risk: Elimination of political riskswas achieved through extended politicalrisk cover of the Netherlands CreditCompany (NCM) (95 percent, coveringamong other things, breach of contract bythe St. Maarten government and forcemajeure events).

• No hurricane risk: This risk is covered underthe commercial insurance policy of NCM.

• Proven cash flow: Financing is based uponan already existing cash flow and a no-growth scenario. After completion, the debtservice reserve and the maintenance reserveaccounts will be funded up front, guaranteedby the St. Maarten government and coveredby NCM. Direct payment from the cruiselines is facilitated by an offshore escrowaccount of the St. Maarten Cruise TerminalN.V. Payment is approved only by the agentbank pursuant to a cash flow waterfall.There is also significant involvement by theDutch government, including providing equi-ty and a subordinated loan as well asappointing a board member.

Source: Author.

Box 68: The Case of St. Maarten

especially with respect to salaries, pensionrights, and retrenchment (if any). This provi-sion obviously only applies to a situation wherean existing port authority owned terminal isbeing concessioned.

7. Transfer of assets: This applies to the transferof full rights and ownership, as well as lease-hold or license interests (if any) in all themovable assets and facilities in the case of theconcessioning of an existing terminal.

8. Hand-over of the terminal: The port authorityshall hand-over the concession area, the opera-tional port infrastructure and movable assetsand facilities, and books and records in relationto the operations of the terminal (if any) bygiving the sole, exclusive, and vacant posses-sion thereof to the concessionaire.

9. Exclusivity: After the completion of the con-struction of a new terminal under a BOT, thenew operator may be granted exclusivity rightsfor a limited period, usually three to five years.These rights allow the concessionaire to buildup business without being directly confrontedby a competing facility.

10. Project: This provision gives a general descrip-tion of the project. This might be the manage-ment and operation of an existing terminal aswell as a possible extension.

11. Project document compliance: The concession-aire is not allowed to materially vary theproject documents. Project documents are theconcession agreement, the site lease, the portservices agreement, the financing documents,the design contract, and the building contract.The concessionaire may vary the buildingcontract under certain conditions.

12. Project finance: The government or portauthority acknowledge the necessary financingof the project by lenders such as commercialbanks or the IFC. The government or portauthority usually conclude with the lenders alenders direct agreement. This agreement regu-lates the rights and obligation between thegovernment or port authority and the lendersin the event that the concession is terminatedby the government or the lenders exercise theirrights under the security documents.

13. Lenders security: The concessionaire is allowedto create forms of security over any movableassets or facilities owned or leased by the con-cessionaire, or other property rights formingpart of its interest in the project in favor of anylender for the duration of the debt financing.

14. Functional requirements: The functional require-ments of the extension works comprise main char-acteristics of the terminal (transshipment/domestic,


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Box 69: Reference Clause on Lender’sSecurity

For the sole purpose of financing itsimplementation of the Project and thefulfillment of its obligations under the

Project Documents, the Operator may assign,by way of security, the benefit of, or its inter-est in, this Agreement and any of the otherProject Documents according to the require-ments of any of the Financing Documentsand create other forms of security over anymovable assets or facilities, owned by theOperator, Collateral Warranty, or other proper-ty rights, forming part of its interest in theProject in favor of any Lender for the durationof the Debt financing, only, provided that:

(a) The Lenders shall rank ahead of conces-sion fee and lease rental payments in caseof Force Majeure under Article [Number](political events and omissions of the PortAuthority).

(b) The Lenders and the Port Authority shallrank equally in all other cases.

The Operator shall be entitled to create overits assets:

(a) An encumbrance that (i) arises out of titleretention provisions in a supplier’s stan-dard conditions of supply of goods thatare acquired by the Operator in the ordi-nary course of its business and (ii) appliesonly to the goods so supplied.

(b) Rights of set off or liens arising solely byoperation of law in the ordinary course ofbusiness.

(c) Any security interest for the purpose of or inconnection with the securing of working cap-ital facilities provided to the Operator in theordinary course of its business provided thatthe total extent of liability arising upon suchsecurity shall not exceed the lower of theTermination Compensation payable to theOperator or [ % ] of the net book value of theassets of the Operator. The Operator shallalways procure the discharge of SecurityInterests upon termination of this Agreement.

Source: Author.

multiuser/dedicated), and the main constructionelements such as quay lengths, types of gantries,depth alongside, and so forth.

15. Design solution: Comprises design and con-struction methods.

16. Design development: The port authority shallreceive all calculations, designs, design infor-mation, specifications, plans, programs, draw-ings, graphs, and so forth in relation to theextension works and the operations and hasthe right of control of such documents.

17. Design flaws: Procedures to be followedwhen the concessionaire becomes aware of

any failure of the design solution or thedesign data.

18. Applicable permits: The provision includesthe willingness of the government or portauthority to assist the concessionaire inobtaining the permits, licenses, and so forthto operate or build the terminal or terminalextension.

19. Concession area conditions: Before starting theconstruction, the concessionaire is deemed tohave inspected the concession area. The gov-ernment or port authority shall reject all liabilityfor claims.


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Change in law shall mean the occurrenceof any of the following events after theEffective Date of the Agreement:

• The enactment of any new applicable law.

• The modification, repeal, or reenactment(other than reenactment that merely consoli-dates or codifies existing applicable law) ofany existing applicable law.

• The commencement of any applicable lawwhich had not at the Effective Date yetentered into effect, except to the extentsuch applicable law was enacted prior to theEffective Date with a commencement dateafter the Effective Date and such applicablelaw takes effect on that commencementdate without material amendment.

• A change in the interpretation or applicationof any applicable law by a judicial or otherauthority (including a court, tribunal, or anyother regulatory authority) having the authorityto interpret or apply such applicable law orany interpretation of any applicable law bysuch authority that is contrary to the existinggenerally accepted interpretation thereof.

• The revocation or cancellation (other than forcause) of any permit.

• To the extent that such Change in law has amaterial adverse effect on the rights and obli-gations of the Operator under this Agreement,and that such event has not been caused dueto fault of negligence of the Operator.

Notwithstanding anything contained in theclause above, Change in law shall not includeany change in tax laws or change in a law ofgeneral applicability, but which solely has aneconomic and financial impact on the Operator.

The Operator shall, on the occurrence of aChange in law, give notice of such change tothe Authority in accordance with the provisionsof this Article as soon as it may be reasonablypracticable. The notice served pursuant to thisclause shall provide, inter alia, precise detailsof the Change in law and the effect thereof onthe Operator.

In the event that a Change in law rendersimpossible the exercise by the Operator of anyof its material rights or performance by theOperator of any of its material rights and obli-gations—unless such obligation is waived by aperson having the power to do so under thisAgreement, the Operator may serve a noticefor termination of this Agreement (TerminationNotice) provided that, prior to service of theTermination Notice, the parties shall consult ingood faith for a period of [number] days tomitigate the material adverse impact of theChange in law. In the event that parties areunable to agree to changes in the Agreementto mitigate the impact of the Change in lawduring the [number] day period, either partymay refer the matter to dispute resolution, insuch case the Termination Notice shall standsuspended until such matter has beenresolved in accordance with Article [number].

The parties hereby acknowledge and agreethat the Operator shall be entitled to serve aTermination Notice on the Authority, providedthat the Change in law results in the physicaland legal impossibility of performance of theOperator’s obligations or exercise of its rightsunder this Agreement. The parties shall bearthe respective impact of any economic conse-quences of the Change in law.

Box 70: Reference Clauses on Law Changes

20. Archaeological items or geological items: Allfossils, minerals, antiquities, wrecks, or struc-tures of particular geological or archaeologicalinterest on or under the concession area shallbe deemed to be the absolute property of thegovernment or port authority.

21. Building contract: The concessionaire shallhave the right to and responsibility for selectingthe designer and the builder and agreeing onthe provisions of the design contract and build-ing contract, without the approval of the portauthority.

22. Construction program: The construction pro-gram is an important part of the concession. Adetailed construction program, including mile-stones and milestone achievement dates, isincluded with one of the schedules. Everyrelevant part of a construction program has amilestone sunset date, which is defined as thelatest date to achieve a milestone that is part ofa construction program under a concessionagreement. Nonachievement of a milestonesunset date constitutes a termination event forthe port authority (see number 25 below).

23. Progress reviews: A provision with respect tomonthly progress reports.

24. Extension events: An extension event preventsor delays the concessionaire from complyingwith the obligations of the concession duringthe design and construction period of the ter-minal. If an extension event occurs, the con-struction time will be extended.

25. Sanctions for late completion: The projectelements should be completed by the relevantmilestone achievement dates. Nonachievementof a milestone sunset date constitutes a termi-nation event for the port authority.

26. Commissioning of the project phases: Anappointed test certifier conducts commissioningtests during project phases that must be passedto allow the project to continue.

27. Operator’s operational functions and activities:All the operational functions and activitiesallowed under the concession are listed indetail.

28. Port authority’s port services: The port servicesof the port authority such as pilotage, towage,vessel traffic management, mooring andunmooring, provisions of water, and so forthare listed. Details of these services are usually

included in a separate port services agreementwith the port authority.

29. Berthing priorities: These priorities mightbe agreed upon between the port authority(harbormaster) and the concessionaire, butmust be nondiscriminatory and subject alwaysto such rules and regulations as may be madefrom time to time under applicable laws.

30. Security: Provision with respect to the tasksand obligations of both the concessionaire andthe port authority, within the framework of theISPS code.

31. Use of the terminals: The operator has the soleright to carry out the port operations and con-struction activities within the concession area.Also in this article, the issue of multiuser versusdedicated use of the terminals should be regu-lated.

32. Operator’s operational performance standards:A port authority may set performance stan-dards such as a minimum number of cranemoves per hour, a minimum berth hour pro-ductivity, or a maximum vessel turn aroundtime, and so forth.

33. Maintenance of movable assets, facilities, andinfrastructure: In view of the fact that the ter-minal will be handed over to the port authorityafter termination or expiry of the concession,maintenance standards both for equipment andinfrastructure maintenance should be included.

34. Operational subcontracting: The concessionaireor sponsor is usually given the right to concludea management contract with a qualified opera-tor, subject to approval of the port authority.

35. Tariff regulation: The provision may be neces-sary in case of the requirement to regulate thechanges to tariffs for handling of domesticcargoes in the event of a dominant position ofthe concessionaire in a certain port or a seriesof competing ports.

36. Tariff setting: The concessionaire has the rightto freely set tariffs without interference of thegovernment or port authority, subject to possi-ble competition regulation

37. Site lease: Main characteristics of the site leaseare included in this article, such as price andnumber of square meters of the area. The sitelease itself is a separate document that is partof the concession. The lease rent should beindexed for inflation.


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38. TEU fee: The fee is usually expressed in dollarsor other hard currency for each TEU (otherthan restows) handled over the ship’s rail. Thisarticle establishes the (variable) price per TEUper annum the concessionaire pays to the portauthority during the term of the concession.The TEU fee should be indexed for inflation.The structure of TEU fee payments mightinclude (number of) minimum guaranteedthroughput levels.

39. Bank guarantee: The port authority mayrequire a bank guarantee of the concessionairewith respect to the minimum guaranteedthroughput levels.

40. Refinancing: The port authority may requireapproval in case of refinancing of the project.Instead of a bank guarantee, the port authoritymay require a performance bond for thethroughput guaranteed and the overall obliga-tions within the concession by the concessionaire,which is often based on the business plan submit-ted by the concessionaire in the bid proposal.

41. Release from rents, taxes, levies, and otherobligations and dues: Sometimes the govern-ment or port authority grants the concession-aire release from taxes during a certainperiod. The terminal may also get a freezone status, which implies considerable taxadvantages.

42. Payments to the government: Any paymentmade by the concessionaire to the port authorityshall be considered as a valid settlement of theoperator’s obligations under the concession.

43. Information supply: The concessionaire shallsupply specific information to the port authorityon throughput or vessels on a monthly andannual basis.

44. Legal compliance: The concessionaire shall atall times during the term of the concessioncomply with all applicable laws, directives, andthe conditions of all applicable permits.

45. Change in law: This article is necessary tomitigate the effect of a change in law thatmaterially affects the operations and financialposition of the concessionaire. It sets outdetailed provisions describing which changesin law apply, such as changes in taxation,institutional conditions, nationalization, andso forth. Under certain conditions the govern-ment or port authority compensates lossessustained by the concessionaire as result of achange in law event.

46. Force majeure: Any event or circumstance orcombination of events, whenever occurring,that is outside the control of the affected party,could not be avoided, prevented, overcome, ormitigated with reasonable foresight and materi-ally prevents, hinders, or delays performance ofa party’s obligations under the concession.Typical force majeure events are tsunamis,earthquakes, or other acts of God; nuclearexplosions; radioactive, biological, or chemicalcontamination; war, invasion, embargo, mili-tary coup, or revolution; and so forth.

47. Insurance: Insurance covers required by theport authority to be taken out by the conces-sionaire both for operations and for construc-tion of new terminal facilities.

48. Ownership of assets: This relates to the right ofthe concessionaire to own mobile assets and(sometimes) buildings in the concession area.

49. Option to continue: The port authority maygrant an option to continue or a right of firstrefusal after the expiry of the concession.

50. (Interim) termination by the government: Thisarticle comprises detailed events that may leadto termination of the concession by the govern-ment, such as a material breach of the conces-sions, nonpayment of fees, and so forth.

51. Termination by the operator: The concession-aire might terminate the concession when amaterial breach occurs by the government orport authority of their obligations under theconcession.

52. Termination procedure: In the event of termi-nation either by the port authority or theconcessionaire, a termination procedure isagreed on that sets out detailed provisions ofthe rights and obligations of the parties, suchas notice to terminate, remedial program, andinformation to the lenders of the concession-aire.

53. Rights cease: On termination or expiry of theconcession, all future rights and obligations ofthe port authority and the concessionaire shallcease and the site lease and the port servicesagreement shall also be terminated automatically.

54. Termination compensation: In case of termina-tion by one of the parties to the concession, theports authority shall pay termination compen-sation. Depending on which party terminatesthe agreement, the termination compensationconsists of a percentage of the fair value,


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established by an independent expert. There areseveral methods to used to determine the fairvalue, which should be stipulated in advance inthe concession agreement. Methods usedinclude historical cost, inflation adjusted histor-ical cost, depreciated replacement cost, opti-mized depreciated replacement cost or modernequivalent asset value, and optimized deprecia-ble value. The expert shall never apply anyearnings-based valuation methodology or anygoodwill in the business of the concessionaire.

55. Hand-back: After expiry of the concession, theconcessionaire shall hand back the entire termi-nal to the port authority. This article includesdetailed instructions and technical requirementsand procedures on how the hand-back shall takeplace. This is to assure the proper state of thefacilities when returned to the port authority.

56. Asset transfers on expiry or termination: It isnecessary to regulate the good cooperationbetween the port authority and the concession-aire regarding the hand-back of the facilities tothe port authority.

57. Information technology (IT) license: At the endof the concession, it might be necessary totransfer IT licenses to the port authority toguarantee uninterrupted operation on the ter-minal during transfer to a new operator.

58. No share or liability acquisition: This articlesets out the terms and conditions in case ofparticipation of the port authority in the capi-tal of the concessionaire or vehicle company.

59. Employees: At the expiry of the concession, theposition of the employees will have to be regu-lated. Usually they will be transferred to thenew operator with certain conditions such asthe continuation of earlier salaries and benefitsas well as accrued pension rights.

60. Conflict resolution: This article sets outdetailed procedures for conflict resolutionincluding international arbitration.

61. Waiver of immunity: It will be necessary for thegovernment and the port authority to waivemost forms of sovereign immunity to create alevel playing field with a private concessionaire.

62. Recognition of lenders’ rights: The port author-ity may include in the concession a specialrecognition of the lenders who will be deemedto be beneficiaries under the concession.

63. Performance monitoring: A general provisionin the event that a party fails in the perform-ance of its obligations under the concession.When that failure is capable of remedy, theaffected party may serve a notice on the otherparty requiring such other party (at its owncost) to remedy that failure.

64. Transfer committee: The committee, consistingof representatives of both the port authorityand the concessionaire, is responsible for thetransfer process at the termination or expiry ofthe concession.

65. Responsibilities: The port authority and the con-cessionaire shall be solely responsible for the per-formance of their functions and services and forall the acts, or failures to act, of itself and of itscontractors, subcontractors, suppliers, andagents.

66. Liabilities: Neither the government, the portauthority, nor the concessionaire shall be liableto the other for any loss, cost, liability, orexpense arising from any breach of the agree-ment other than for actual loss directly result-ing from the breach.

67. Confidentiality: The parties may agree to keepthe details of the concession confidential duringa certain period.

68. Disclosed data: Restriction by the governmentor port authority for the liability of discloseddata on the terminal or concession area.

69. Change in institutional structures: During theterm of the concession, the institutional struc-ture of the government or the port authoritymay change. The concessionaire agrees with thevariation of the concession, provided that suchvariation does not affect its rights, obligations,and liabilities under the agreement.

70. Variations: Variations in the project documentsshall only be valid if they are in writing andsigned by or on behalf of each of the parties

71. Applicable law: Establishment of the law appli-cable to the concession. This is usually the lawof the country where the terminal is located.

72. Notices: Elected domiciles for formal notices tobe served under the concession.


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