Concession in Container Port Terminals
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There are several reasons behind awarding concessions in container terminals. It helps in preventing entry barriers for new firms in container terminals. The entry barriers can be economic entry barriers, legal entry barriers and entry barriers on location. Firms with high capital base would have a higher capital advantage since they will be able to cover structural costs and switching costs more easily. Furthermore, the firms with large financial base would most likely have qualified personnel and thus they would prevent new private firms from investing in container terminals (Notteboom, 2010). Concessions have also facilitated global terminal operators to conduct businesses efficiently. This is because genuine concession procedures help to reduce the protection of local terminal operators by port authorities. Initially, local port authorities would give local players protection and thus these players would use this advantage to practice unfair competition and make huge profits. If global players participate in a concession, they help in bringing their huge financial resources and expertise to local terminals (Siemonsma Nus, and Uyttendaele, 2012). Their financial resources would thus help in expanding the local terminal and increasing trade in this area. This would further improve the seaport technology in these terminals. Most global operators manage more than one container terminal in a given sea port region and thus they help in faster redistribution of cargo.
Awarding concessions in container terminals has also helped in ensuring that the bidding process is fair and that it selects the most efficient bidder. This is because all the bidders have to specify the minimum throughput per year and if the bidder fails to reach this minimum threshold, the bidder will have to withdraw from the concession. Throughputs are important since they help ensuring the growth of the terminal and improvement of its share of the market. If the bidding process of a concession happens to set a high throughput, then only firms that can shift high cargo volumes will win the concession. These companies also have adequate container volumes thus they will easily attract qualified shipping companies. The bidding process also helps in selecting a company that has a good relationship with shipping companies and other terminal operators (Lee and Lee, 2012). If a firm has a good relationship with these two players, then it would generate great transaction volumes with many shipping lines. Furthermore, the quality and productivity of its services will improve. This is because they will attract cargo to the terminal more easily.
Awarding concessions in container terminals enables minimization of port risks so that the bidding firms are able to generate maximum investment returns. Investments in port terminals face many risks such high expenses due to mooring equipment and fenders, construction of quay-wall and maintenance, dangers due to land reclamation works and handling terminal equipments. The authorities that award concession give concession contract to the companies that can manage the risk most efficiently. Before it awards a concession to a company, the concession authority checks the rate of inflation, the availability of credit facilities and GDP growth rate in order to ensure that the company getting the contract would not face financial risks (Notteboom, 2010). The concession authority also helps in making splitting and phasing decisions of the port. It has to decide whether to split the plot of the land in two parts or more than two parts. If it splits the port in more than two phases, it needs to make a decision on whether to auction the phases in two different competitive bidding processes or to auction the ports to one buyer. This decision is better made during concession since the people who conduct the bidding first identify all the possible results and they then select the most suitable alternative.
Main types of Concession Agreements and their Advantages and Disadvantages
There are several types of concession agreements. These agreements include build-operate-transfer, build lease transfer and short-term concession agreement. In build-operate-transfer (BOT), a private firm receives the concession from the public sector or the private sector in order to design, construct or finance a particular activity that the two parties have signed in a given contract. The project proponent then later recovers the amount invested from the returns on this investment. It is mostly preferred in infrastructure projects such as building or renovating a port and in public-private partnerships. In this concession, the port authority grants a private firm the right of designing operating and maintaining container terminals for a specific period (Notteboom, Theys, Phallis and De Langen, 2009). When the concession agreement expires, the company transfers the ownership of the container terminal to the port authority.
The advantage of this method of concession is that the private party earns all the revenues during the period of concession agreement. Furthermore, the government supports this project by providing land to the project and initiating the project (Siemonsama and Nus, 2012). It also receives large financial support from banks and commercial banks. This is because these projects receive financing on non-recourse basis. It may also receive quality assistance from other companies by subcontracting some of its activities. The disadvantage of this type of agreement is that the private firm bears most of the risks. It has to bear the financial risks due to fluctuation of interest rates or foreign exchange fluctuations. Furthermore, it has to incur technical risks associated with the breakdown of equipments.
Build lease transfer is a form of concession agreement for containers terminal. In this form of agreement, the private entity would construct all the facilities required for the port terminal and then lease the complete project to the government. Due to this, the transfer of ownership of the project transfers from the private entity to the lessee. During the leasing period, the ownership of the asset remains with the private entity but the government incurs the operational costs (Lee and Lee, 2012). After the lease period expires, the ownership of the asset and the operational responsibility diverts back to the government. However, the government has to pay a certain fee agreed at the beginning of the concession agreement before it receives back full ownership. The advantage of this method of concession agreement is that the private entity retains the ownership of the constructed project during the leasing term. Furthermore, the government incurs all the operating risks. These risks include financial risks such as currency fluctuations and operational risks such as high maintenance costs. The disadvantage of this agreement is that the salvage value of the project may be too low and thus the private firm may not realize all the money he/she expected to earn at the end of the contract.
Short concession agreement is another type of concession agreement for containers terminal. These agreements last for less than eight years. Most companies prefer this form of agreement in countries that have unstable economic or political conditions. This is because of the high risks of financial losses associated with these countries (Roumboutsos and Pallis, 2010). Furthermore, if the period of concession happens to be increased, the private firms will only pay a small fee in order to continue with the concession agreement. It also helps in reducing entry barriers for other private firms since opportunities for market entry are readily available. The disadvantage of this form of concession agreement is that it does not allow for a significant amount of investments in immovable assets. This is because investment in these projects only lasts for a short time.
Distinct Phases of a Concession Procedure
The distinct phases of a concession procedure are pre-bidding phase, awarding phase and post-bidding phase. In the pre-bidding phase, the port authority makes necessary preparations that would be taken into account during the processes of awarding the concessions. It is very vital for the port regulation authority to take into consideration the relevant legal conditions in the country to identify whether rules have changed. It should also take into consideration the qualification criteria that all the candidates participating in the bidding should attain (Notteboom, Theys, Phallis and De Lang, 2009). This may include the financial threshold or the experience. It should also define the duration that the concession should take after carrying out a feasibility study to determine the most appropriate time to end the concession agreement after achieving a desired return on investment ( Netteboom, Phallis and Farrell, 2012). Furthermore, during this phase, the awarding authority also informs the private firms participating in the bidding process the criteria that it will use to select the candidates and the procedure that each party has to follow.
The next phase of the bidding process is the awarding phase. In this phase, the awarding authority screens the candidates participating in the bid. It determines whether all the candidates have all the necessary documents stipulated in the concession agreements. Furthermore, the port authority determines the record of accomplishment of all the private firms participating in the bidding process to determine whether any of the parties have contingent liabilities facing them. The port authority then evaluates the bids by examining the capacity calculations of each company that seeks the concession agreement (Notteboom, 2010). Furthermore, it checks the marketing plan for each company to find out which company among all the companies participating that has the marketing plan that seems to generate the maximum amount of sales. It should also determine whether the bidders have attained minimum throughput per year. If a bidder fails to reach the minimum throughput then it should be removed from the concession. The port authority should also consider the financial history of all the companies applying for the concession. Only companies that reach the minimum financial threshold should be awarded the concession since they are the most likely companies that would manage the container terminal more effectively. After considering all the parameters defined in the pre-bidding phase, the port authority should select the most suitable bidder to award the concession
The last stage of the concession procedure is the post-bidding phase. In this phase, both parties sign a legally binding contractual agreement with the candidate who succeeded in winning the bidding process of the concession. In some instances, the port authority monitors how the private firm that won the concession performs its activities (Notteboom, Theys, Phallis and De Langen, 2009). This is to find out whether the company performs its activities as they are defined in the contract. If the company fails to perform its duties inefficiently, then the port authority would advise it on how to improve its activities.
To conclude, it is important to award concessions in container terminals. Concessions help in preventing entry barriers for new firms in container terminals. Furthermore, they have enabled global terminal operators to conduct businesses more efficiently. It has also ensured fair bidding processes and thus the port authority selects a firm that is most has the most efficient management for container terminals. The main types of concession agreements are built operate transfer, build lease transfer and short term concession agreement. Most companies prefer BOT since through this method private firm can acquire huge financial support from financial institutions. Build lease transfers have a disadvantage since the salvage value of the project from the lease concession may not fetch a lot of money in the market. The distinct phases in the concession procedure are pre-bidding phase, awarding phase and post bidding phase. In the past ten years, several ports have entered into concession agreements with different companies. These ports include Rotterdam that entered into an agreement with APMT, Constanta Port that entered into a concession with Queenco Leisure International Limited and Port of Barcelona that entered into a concession with Grimaldi.