Ted Williams, Esperence Ports Sea and Land -Contemporary Application of a BOOT Infrastructure...

AJMs Global Iron Ore &

Steel Forecast Presentation

Ted Williams

11 & 12 March 2014

Multi User Iron Ore Facility

BOOT MODEL FOR

ESPERANCE EXPANSION

Commercial in Confidence 2

Key Messages

• Esperance is strategically important for long term state

growth in the Yilgarn and South West

• There is an increasing need and role for private finance

in the development of economic infrastructure

• Risk allocation is a key concern

• A Build, Own Operate and Transfer (BOOT) is an

appropriate procurement model and a sound process

delivers optimal outcomes

• Supply chain interaction must be understood even if not

managed completely

• Access and Pricing regime is core to protection of public

interests (ports are potential natural monopolies)

Commercial in Confidence

Overview of Esperance Port

Strategic deep water port mainly iron ore and –with container

export traffic rising

Current iron ore exports over berth 3 around 11 million tonnes

per annum (Koolyanobbing operations of Cliffs Asia Pacific)

An expansion may be largely achieved within existing logistic

parameters.

MUIOF contemplated to meet demand from emerging Yilgarn

miners

Demonstrated ability to expand from 1-11 Mtpa iron ore exports

over the past 15 years

4

Exports by Major Port (Tonnes6)

5

Why Esperance

Opportunities

No channel congestion

Existing SG rail

Operating port

Underutilised berth

Access to Yilgarn iron ore

province

Port actively seeking expansion

Cape class berth is underutilised

Challenges

Extra sailing days to north Asia

23 tonne axle load

Long road/rail mine connections

Numerous small miners

Multiple products

Limited port storage in sheds

Has followed State sanctioned

procurement model taking longer

Commercial in Confidence

7 Commercial in Confidence

Port Access Corridor

Esperance –underutilised cape class port

9

Standard Gauge rail connection

But at 23 t axle load

MUIOF and Port expansion challenges

12

Each port is unique

Common challenges in expansion projects:

– Existing commercial arrangements and rights of existing users

(potential sterilisation)

– Demand risk

– Revenue risk

– Environmental / social matters

Port expansions are not just about the port. With multiple users

and vast distances to projects, port expansions need to consider

the total supply chain.

Global Export Cost Curve

13

Rio & BHP

Est Yilgarn region Miners

Situation at end of 2011

Yilgarn Miners clamouring for port access to catch

market high prices for iron ore of US$ 180/t

Esperance port input limited by input through a Rotary

Car Dumper owned by the only principal customer

Deloitte had concluded a study of un met port demand of

~ 20 Mtpa over next 20 years between Esperance and

Kwinana

Recommended Market Sounding study

Ministerial announcement in January 2012 nominating

Esperance to be the port for the Yilgarn supported by

State

14

Funding on a sustainable basis in WA

How will port infrastructure be funded on a sustainable basis in WA?

Government has moved from traditional development funded from

budget to

– Recycling capital; sale of one berth to fund another or

– Long term lease or

– PPPs or

– Landlord port or

– Full Privatisation

Role for the Private sector emerging as

– Long term lessee

– Owner

15

Funding and development options

16

Privatisation

Brownfield concession (‘asset

recycling’) without port sale

Build, Own, Operate and Transfer

(BOOT)

Design, Build, Operate and

Maintain (DBOM) / Build, Operate

and Transfer (BOT)

Service contracts

Design and Construct (D&C)

PPP

models

Deg

ree

of

ris

k t

ran

sfe

r to

pri

va

te s

ec

tor

Risk transfer and private sector involvement

Availability PPP

Off balance

sheet

opportunity

Funding responsibility and risk allocation depends on the procurement model used for

infrastructure development

What is the role of Government in developing economic infrastructure?

Facilitation of trade

Regional development – port as gateways

Management of monopoly asset

Regulation of access and pricing (critical)

Establish a process

Ultimately, should Government be taking on development, demand and

revenue risk to fund economic infrastructure or can this be managed by

the private sector more efficiently?

17

Role of Government

Role of Port Authority

Facilitation of trade.

Commercial focus – should be entitled to make a

profit and generate a return on assets.

Recover full cost of port infrastructure including

operational costs and return on capital.

Transparent access and pricing regime.

Minimize disruption to existing port users.

Not inhibit expansion.

18

The Build, Own, Operate and Transfer (BOOT) model chosen for Esperance

19

BOOT procurement regimes

– Private sector assumes price and

volume risk

Private sector assumes D&C and

operations risks

– Interface and other risks

Access and Pricing contracted

regime

– No Priority rights of access

– Safety net under negotiate arbitrate

Optimal ‘whole-of-port’ management

and future expansions

– Probable demand growth

– Strategy for future infrastructure

development

– Existing commercial arrangements may

inhibit infrastructure growth

Port Expansion

Viable?

Investor Appetite

Risk allocation

Time of Delivery

User needs

Options at Other Ports

Global Customer Demand

Portside Constraints

Commodity prices

BOOTs require private sector proponents to navigate complex issues to ensure

commercial viability and bankability

Government supported and facilitated


21 Esperance Ports Sea and Land © 2014 Deloitte Touche Tohmatsu

and provided a process

2011 2012 2013 2014

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Deloitte Forecast Demand

Market Sounding

EOI & Shortlisting

Request for Proposal

Assessment and Announcement

Process provides a better outcome

Improved knowledge of the market

Identifies risk and risk transfer

Distils serious players from “tyre kickers” on both

proponent and customer sides

Avoids misdemeanours of the past

Promotes multiple users

But it takes time!


EPSL MUIOF as a BOOT

23

The EPSL MUIOF has been designed to be flexible, while having regard

to Government policy and National PPP guidelines

Flexibility required due to:

– Brownfield and existing stakeholder complexities

– User ability to provide certainty / guarantees to facilitate private

sector investment (i.e. demand and revenue risk)

– Supply chain issues – mine gate to customer

The MUIOF procurement process is about creating competitive tension,

driving innovation and delivering a commercial and value for money

outcome

The MUIOF did not seek a fixed price, fixed design bid at this stage

which would have been costly for the private sector and a likely detractor

Concept designs were requested informed by reference design

developed by the Port.

EPSL MUIOF as a BOOT

24

The MUIOF sought to assess bids that:

– Do not disadvantage the port and existing users

– That have fair and reasonable access and pricing conditions – EPSL

provided a proposed Third Party Access Regime to consortia to

guide their thinking

– Demonstrate certainty around financing ability and commitments

(debt and equity)

– Clearly demonstrate how the MUIOF will be delivered in a timely

manner, having regard to the complex issues noted above

The private sector bid back:

– Committed commercial positions (EPSL provided draft legal documents)

– proposed concept design

– Project development and implementation plans

– Estimated capital costs

– Term

Investor seeking a “Deal”

Long Term sustainability

Singular opportunity to access limited market

Receive reasonable and fair return on

investment

The investor was also able:

– Brings operational skills

– Demonstrated supply chain management ability

25

Conflict in the supply chain

Supply as pieces of a jigsaw


In Competitive world - I AM


My piece is bigger!


And more important


Contrast with port operator


Owner favours rural railroad


Follows the hills up and down


Bad news for the train operator

Burns heaps of fuel and so costs more

Train operator flat or downhill


Pieces all together


All pulling together

Dealing with Monopoly assets

39

Access and Pricing

40

Ports are gateways and are critical to regional development

There is a key role for the private sector, given the limitations on

Government funding

However, ports are monopoly assets and this risk needs to be actively

managed

Access and Pricing options:

– Regulated; has it been effective in the Pilbara, is it timely

– Negotiate and arbitrate; provides a safety net

Complex issues that must be considered when considering private

sector investment in ports.

For MUIOF Safety Net will be included in contract between proponent

and Port

Negotiate and Arbitrate

Concept of sharing cost of resources used by customers

Typically an access fee and a throughput charge

components

Provides a safety net

Incorporated in contractural obligation in agreed Access

and Pricing regime

Issues around startup and ramp up while throughputs

are well under funding assumptions and even further

under facility capacity

41

Capacity – what is it?

Likely to be viewed differently by the players in

the supply chain

And the supply chain should be considered as

including mine to customer (and so includes

shipping)


The straw the breaks the camel‘s back

Ted Williams, Esperence Ports Sea and Land -Contemporary Application of a BOOT Infrastructure...

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