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DEVELOPMENT OF DRY PORT THROUGH
PUBLIC PRIVATE PARTNERSHIP (PPP) MODE
Capacity Building Workshop
Organized by United Nations ESCAP (UNESCAP)
Venue: Bangkok
Date: May 24-26, 2016
2
DISCUSSION POINTS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
DRY PORT CHARACTERISTICS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Development of Dry Port through PPP Mode 4
DEFINITIONS OF DRY PORT
An early definition by United Nations
“An inland terminal to which shipping companies issue their own import bills of lading for import
cargoes assuming full responsibility of costs and conditions and from which shipping companies
issue their own bills of lading for export cargoes.”
A more recent definition by UNCTAD
“A common user facility with public authority status, equipped with fixed installations and offering
services for handling and temporary storage of any kind of goods (including containers) carried
under customs transit by any applicable mode of transport, placed under customs control and
with customs and other agencies competent to clear goods for home use, warehousing,
temporary admissions, re-export, temporary storage for onward transit and outright export.”
Development of Dry Port through PPP Mode 5
KEY CHARACTERISTICS OF A DRY PORT
Located inland, at some distance from the sea port
Directly connected to the sea port through multi-modal
transport network
Transfer of goods between various transport modes (rail,
road, water) takes place
Facility for customs clearance services
Facilities and procedures for door-to-door transport
Facility for handling of both containerized and bulk cargo
(Difference from Inland Container Depot)
Overall cost and time savings for customers
Concept of a Dry Port
Development of Dry Port through PPP Mode 6
OUTPUT SPECIFICATIONS
Facilities and Equipment Utilities and Infrastructure Services Provided Transport Mode
Container Yard (CY)
Container Freight Station (CFS)
Access roads, Railway link or
sidings, Inland Water Transport
(IWT) berths
Break-bulk receiving and storage
area
Bulk receiving and storage area
Administrative office with space
for banks, forwarders and cargo
agents
Customs office
Container light repair facility
Secure fence and entry point
Cargo handling equipment
(RTGs, RMGs, reach-stackers,
empty lifters, forklifts, container
chassis, prime movers etc.)
Power Infrastructure including sub-
stations
Water supply and sewerage
system
Solid Waste Management (SWM)
system
Drainage Network
Internal Roads
Telecommunication Infrastructure
(including OFC network and Mobile
towers)
Rail heads and internal / external
rail links
Container handling and storage
Container stripping and stuffing
Break-bulk cargo handling and
storage
Bulk cargo handling and storage
Customs inspection and
clearance
Container light repairs
Freight forwarding and cargo
consolidation services
Banking / insurance / financial
services
Rail / road transport services
Line-haul: Rail (most), Road
(some) and Inland Water
Transport (where applicable)
Local feeder: Road
Development of Dry Port through PPP Mode 7
BENEFITS FROM A DRY PORT
Reasons for development of a dry port
Unavailability of land near sea port
Higher cost of land near the sea port for further expansion
Presence of high demand centers (import and export) in hinterland area
Benefits from a dry port
Increased capacity and productivity of sea port
Reduced congestion at sea port and in sea port cities
Reduced risk for road accidents
Reduced road maintenance costs and lower environment impact
Economic development of region near the Dry Port
Development of Dry Port through PPP Mode 8
KEY CHALLENGES FACED BY DRY PORT
Requirement of huge capital investment would result in investors seeking
higher rate of return from the project
Insufficient railway tracks may have adverse affect on the project
High dependency on single mode of transport could be riskier for the project
Determining the tariff could be tricky task
Higher cost for importing/exporting goods through dry port (than directly through
sea port) would result in lower demand for the dry port
Lower tariff would anyway make the project unviable
RESPONSIBILITY OF CAPITAL INVESTMENT
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
In a dry port, huge investments required under two heads:
Facilities and Equipment
Utilities and Infrastructure including rail heads and
internal/external rail linkages
Investments on Facilities and Equipment are of recurring nature
due to shorter life span of Equipment – putting additional burden on
the private sector partner
There could be two options for Capital Investment:
Private sector partner making the entire investment
Public sector financing and developing the Utilities and
Infrastructure portion of the total investment
Development of Dry Port through PPP Mode 10
CAPITAL INVESTMENT
Capital Investment in Dry
Port Projects
Moorebank Intermodal
Freight Precinct project:
Private sector partner
would invest around USD
1.5 billion over 10 years.
Niger Dry Port project:
Private sector partner shall
make total investment of
approximately USD 78
million in equipment and
civil works.
Development of Dry Port through PPP Mode 11
Advantages Disadvantages
• No financial burden on the public sector
Entire investment risks lie with the private
sector
• Lesser liability on the public sector
Responsibility of utilities and infrastructure
remains with the private sector
• Higher risk for the private sector partner in
procuring utilities and infrastructure
• Lesser value for money of the project
Private sector would seek higher rate of
return from the project because
uncertainties are extremely high in a dry
port project
CAPITAL INVESTMENT OPTIONS
ONLY PRIVATE SECTOR INVESTMENT
Development of Dry Port through PPP Mode 12
Advantages Disadvantages
• Less riskier for the private sector as capital
investment risks get shared Public
sector would invest in utilities and
infrastructure whereas private sector would
invest in facilities and equipment
• Better value for money Private sector
would seek lesser rate of return from the
project
• Some financial burden on the public sector
Public sector would have to invest in the
utilities and infrastructure including rail
heads and internal/external rail linkages
• Better planning and coordination needed
o Delay in provision of rail heads and
internal/external linkages would make
all other investments futile
CAPITAL INVESTMENT OPTIONS
COMBINED CAPITAL INVESTMENT
Development of Dry Port through PPP Mode 13
CAPITAL INVESTMENT
KEY PROVISIONS IN MODEL AGREEMENT
Preferred Option: “Combined Capital Investment”
Key Provisions in the Model Agreement:
Authority shall provide Infrastructure Support to the Special
Purpose Company (SPC)
SPC shall pay to the Authority such charges as are determined
by Authority or the relevant agency providing Infrastructure
Support
SPC shall construct the Mandatory Capital Works in
accordance with the approved Development Plan latest by
Scheduled Commercial Operations Date (COD)
Infrastructure Support by
Public sector
Railway Infrastructure
including Railway lines,
coaches, shunting facilities,
rail siding facilities/activities
for smooth inter modal
movement of cargoes
External and internal road
networks
Water supply, Sewerage
and Drainage network
Electrical supply and
Telecommunication network
Street Lights
Landscape and Green/open
area
NUMBER OF OPERATORS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Separate set of facilities and equipment (sheds, stacks, fork lifts
etc.) required for different services (container handling and
storage, bulk cargo handling and storage, customs inspection
and clearance, container light repairs etc.)
Entire set of facilities and equipment could be managed either
by a single operator or by multiple operators
Single Concessionaire Model – Preferred in a green field dry
port project
Multiple Concessionaire Model – Mostly used in a brown field
project that requires expansion or addition of facilities and
equipment
Development of Dry Port through PPP Mode 15
NUMBER OF OPERATORS
Number of Operators in Dry
Port Projects
Jawaharlal Nehru Port
Trust (JNPT) awarded
separate PPP contracts for
container handling facility
and 4th container terminal
to M/s DP World Pvt Ltd
and PSA Bharath
Investment respectively.
Niger dry port project was
awarded to a single
operator – Bolloré Africa
Logistics (BAL) for a 30
year concession period.
Development of Dry Port through PPP Mode 16
MULTIPLE CONCESSIONAIRE MODEL
Advantages Disadvantages
• Easier to terminate contract of non-
performing assets and substitute its private
sector partner
• Lesser investment requirement
• Lower demand risk in case of brownfield
project
• More number of bidders for each
component/project
• Increased revenue share for the public
sector
• Higher transaction cost due to multiple
transactions involved
• Different concession period coupled with
coordination issues amongst private sector
partners may hinder smooth operation and
maintenance of the project
• Contract management would become a
difficult task for the public sector
Development of Dry Port through PPP Mode 17
SINGLE CONCESSIONAIRE MODEL
Advantages Disadvantages
• Lesser transaction cost involved One
time effort to award the contract
• No coordination issues
• Easier to monitor and manage a single
contract
• Less number of bidders for the project
More investment and demand risk for the
private sector partner
• Huge dependency on the private sector
partner
• Termination of the contract would have
larger financial implications on the public
sector
Preferred Model: “Single Concessionaire Model”
ALLOCATION OF DEMAND RISKS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Location of the dry port – Proximity to demand centres would result
in higher demand
Standard and capacity of facilities and services – Value added
services may improve the demand (For example, container repair
services can increase the demand)
Efficiency in operations – Less cargo dwell time more will be the
demand
Pricing of various services (tariffs / fees / user charges) – Total cost
for door-to-door transport in a dry port project should be less than
the door-to-door transport in case of a sea port
Long term cargo commitments from users (shipping companies)
Development of Dry Port through PPP Mode 19
FACTORS AFFECTING DEMAND
Allocation of Demand Risks
in Dry Port Projects
Nhava Sheva
International Container
Terminal (NSICT) project:
Demand risk is borne by
the private sector partner.
However, the private sector
partner mitigated the
demand risks by having
long term cargo
commitments from users.
Demand risk can be shared between the public sector and the
private sector partner by guaranteeing minimum traffic to the
private sector partner
In projects where the public sector is investing in infrastructure,
they expect the private sector to assume the entire demand risk
There are three options for structuring demand risk in a PPP
contract
Borne by the public sector
Borne entirely by the private sector partner
Shared between public sector and the private sector partner
Development of Dry Port through PPP Mode 20
DEMAND RISKS – KEY CONSIDERATIONS
Allocation of Demand Risks
in Dry Port Projects
Inland Container Depot
(ICD), Dadri: Demand risks
are shared among partners
of the JV - Ameya Logistics
Pvt. Ltd. (a JV of CMA
CGM France and Container
Marine Agencies, Mumbai)
and a railway PSU
CONCOR.
Development of Dry Port through PPP Mode 21
Advantages Disadvantages
Revenue rights lie with the public
sector
Less incentive for the private sector
partner to improve services
Lower growth in traffic volume
Investment or annuity payment would
put a burden on the public sector
DEMAND RISKS SHARING OPTIONS
BORNE BY THE PUBLIC SECTOR
Development of Dry Port through PPP Mode 22
Advantages Disadvantages
Improved services to the customers to
attract more customers
Increased traffic volume because of
improved services More revenue
for the private sector
Shared investment or investment by
the private sector partner
Revenue rights lie with the private
sector partner
Less attractive to the private sector
partner
DEMAND RISKS SHARING OPTIONS
BORNE BY THE PRIVATE SECTOR
Development of Dry Port through PPP Mode 23
Advantages Disadvantages
More attractive to the private sector
partner and lenders because of
minimum guaranteed traffic
Not much incentive to improve
services
Public sector might have to pay in
event of low demand
DEMAND RISKS SHARING OPTIONS
SHARED BETWEEN PUBLIC AND PRIVATE
Preferred Option: “Borne by the Private Sector”
LAND OWNERSHIP STRUCTURE
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
In most PPP projects, land ownership completely lies with the
public sector
Only limited rights in form of lease or license is transferred to the
private sector partner during the concession period
In Joint ownership, both public sector and private sector partner
lease their part of the land to the project company for the entire
duration of project
However, there are very few cases of joint ownership of land in
PPP projects
Development of Dry Port through PPP Mode 25
ISSUE OF LAND OWNERSHIP
Land Ownership Structure in
Dry Port Projects
Moorebank Intermodal
Freight Precinct project:
Two-thirds of the land is
owned by the
Commonwealth
Government of Australia
and other third of the land is
owned by the Sydney
Intermodal Terminal
Alliance or SIMTA (a
consortium of 67 per cent
Qube and 33 per cent
Aurizon)
Development of Dry Port through PPP Mode 26
JOINT LAND OWNERSHIP
Advantages Disadvantages
Less upfront investment by the public sector in
purchasing of land
Difficult and riskier for the private sector partner
to acquire or purchase contiguous land adjacent
to the public sector land
Total project cost would increase as land
acquired or purchased by the private sector
partner will be costlier
Private sector land will have to be transferred to
the public sector Making land valuation upon
termination a tricky task and termination
compensation an additional burden on the public
sector
Development of Dry Port through PPP Mode 27
LAND OWNERSHIP – PUBLIC SECTOR
Advantages Disadvantages
Public sector best able to control land acquisition
or purchase
Reduced risk for the private sector partner
Project would not get stuck because of non-
availability of land
Lesser total project cost as no land is acquired
or purchased by the private sector partner
Easier termination as there is no need to deal
with land
More upfront investment by the public sector in
purchasing of land
Preferred Option: “Public Sector Land Ownership”
CUSTOMS CLEARANCE RESPONSIBILITIES
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Dedicated customs examination area in each Dry Port for examination of containers and
bulk goods by the customs
The basis function of a dry port is to receive import containers arriving on trains, to unload
and stack them, inform the importer, carry out the customs examination, and after
completion of the paperwork, load the container onto a road vehicle for delivery to the
importers’ premises
For exports, containers usually arriving by road vehicle are stacked and upon completion of
export customs formalities, are dispatched by rail to the sea port with a combined transport
document (CTD) issued by the shipping line or multi-modal transport operator
All paperwork is completed at Dry Port and the exporter or importer needs to do nothing at
the sea port
Development of Dry Port through PPP Mode 29
CUSTOMS CLEARANCES
Traditionally, when goods crossed territory of one or more states in the course of
international carriage by road, the customs authorities in each state applied national control
and procedures
National control and procedures frequently involved inspection of the load at each national
frontier and imposition of national security requirements, resulting in considerable expenses
and delays
Multi-modal transport system in a dry port aims at reducing transit time and cost
However, potential benefits of multi-modal transport system will not be realized until
customs procedures are simplified
Development of Dry Port through PPP Mode 30
CUSTOMS CLEARANCES
CHALLENGES AND SOLUTIONS
The basic custom transit procedures is the national procedure which is subject to national
law and involves the use of national documentation and guarantees
Customs inspection is necessary for national security reasons, hence, it is suggested that
responsibility of customs procedures in a dry port remains with the public sector
Private sector partner, on behalf of the public sector, should be responsible for levying and
collection of any duties, tariff or charges for customs clearances as per country’s law and
regulations
Revenue collected from customs fees / charges should be given to the public sector
Development of Dry Port through PPP Mode 31
CUSTOMS CLEARANCES
CHALLENGES AND SOLUTIONS
Authority shall on best endeavour basis initiate institutional, administrative and regulatory
frameworks that are favourable to the development and smooth operation of the Dry Port,
including procedures for regulatory inspection and the execution of applicable customs
control and formalities in line with the national laws and regulations
Authority shall deploy adequate number of the Custom personnel for performing the
administrative and regulatory customs function and formality required at the Dry Port
Development of Dry Port through PPP Mode 32
CUSTOMS CLEARANCES
KEY PROVISIONS IN MODEL AGREEMENT
TARIFF DETERMINATION
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Pricing of the services or tariff is a crucial factor on which volume of
traffic in a dry port depends Lesser the tariff rates more will be the
traffic volume and vice versa
Responsibility for setting tariffs and charges in a dry port project
determines the attractiveness of the project to investors
A project would be more attractive to investors if the private sector
partner has the rights to set tariffs and user charges for services
provided by them
Development of Dry Port through PPP Mode 34
TARIFF DETERMINATION
Tariff Determination in Dry
Port Projects
In India, only minor ports
have the flexibility to
determine tariff for their
respective ports. Tariff for
major ports in India is
governed by the Tariff
Authority of Major Ports
regulations.
Development of Dry Port through PPP Mode 35
TARIFF DETERMINATION OPTIONS
Option Advantages Disadvantages
Tariff
determination by
the public sector
Less chances of monopoly and
providing preference to few
customers
Low fluctuation in prices
Less attractive to the private
sector partner due to uncertainty
over tariff
Tariff
determination by
the private sector
partner
More attractive to the private
sector partner who bears demand
risk
Chances of monopoly
Few customers may be given
preference
Prices might be highly fluctuating
Preferred Option: “Tariff determination by the private sector partner”
SPC shall, subject to Applicable Laws, have the sole and exclusive right to demand, collect
and appropriate Tariff from the users after completion of Mandatory Capital Works and
during the concession period, as per prevailing market rates
SPC shall collect all cesses and charges, if any levied on the users as may be requested by
the Authority, on behalf of the Authority and remit the same to the Authority
SPC shall, subject to any related Applicable Laws, create and launch its website and shall
publish all the applicable rates/fees/charges on the SPC’s website at least 30 days before
levying such fees/charges from the users of the Dry Port
Development of Dry Port through PPP Mode 36
TARIFF DETERMINATION
KEY PROVISIONS IN MODEL AGREEMENT
ALLOCATION OF REVENUE RIGHTS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
There are several options for allocation of revenue rights in a PPP project
In one approach, revenue rights entirely lie with the private sector partner whereas in another
approach, revenue rights entirely lie with the public sector
In later case, public sector bears the demand risks and makes a fixed periodic payment to the
private sector partner
However, between these two extremes, lie two approaches designed to share revenue risk,
namely revenue-sharing model and least present value approach
Revenue sharing model – Revenue rights lie with the private sector partner throughout the
concession period
Least present value approach – PPP contract will end when the project company has received
a certain amount of revenue from users
Development of Dry Port through PPP Mode 38
ALLOCATION OF REVENUE RIGHTS
Development of Dry Port through PPP Mode 39
REVENUE RIGHTS OPTIONS
Option Advantages Disadvantages
Revenue sharing
approach
Revenue sharing with the public
sector avoid excessive returns
for the private sector partner
Less administrative control on the
project by the public sector
Least present
value approach
No windfall gain by the private
sector partner in case of increased
traffic during contract period
Least attractive to the private
sector partner
No incentive for the private sector
partner to improve service levels
Difficult to estimate and may lead
to disputes
Preferred Option: “Revenue sharing approach”
In revenue sharing approach, the private sector partner enjoys the revenue rights of the project
and will be incentivized to improve service levels in a project
At the same time, this approach ensures that the public sector is also benefitted to some extent
in case of excessive returns from the project; This approach works well for both the public
sector and the private sector partner
A variant of this approach is revenue share along with some fixed payment to the public sector -
Fixed payment could be the lease rentals of the land or any amount fixed by the public sector
based on its assessment of the project This approach ensures that the public sector at least
receives the fixed amount in worst case scenario.
Development of Dry Port through PPP Mode 40
REVENUE SHARING
Development of Dry Port through PPP Mode 41
EXAMPLES OF REVENUE SHARING
Revenue sharing in Port projects in India
1. Development of standalone container handling facility at Nhava Sheva International Container Terminal (NSICT)
Terminal
The work order issued to M/s DP World Pvt Ltd on December 31, 2012 at 28.09% Revenue Share. The concession
agreement was signed on June 19, 2013.
2. Construction of Deep-draught coal-berth at Paradip Port Trust for handling coal on Build Operate and Transfer (BOT)
basis
Concession agreement has been signed on November 10, 2009 with M/s Essar Paradip Terminal Ltd with 31% revenue
share to Paradip Port Trust.
3. Conversion of berth no- 8 as Container Terminal at Chidambaranar Port Trust (Tuticorin)
Letter of Award (LOA) issued to M/s Dhakshin Bharath Gate way Terminals Pvt Ltd on August 7, 2012 with a revenue
share of 55.19%. Concession agreement signed on September 4, 2012. Work is in progress.
4. Development of NCB-IV for handling thermal coal and copper concentrate at Chidambaranar Port Trust (Tuticorin)
Letter of Award issued in favour of M/s Transstroy OJSC Consortium at a revenue sharing of 30%. Special Purpose
Vehicle (SPV) formed in the name of M/s Transstroy North cargo Berth III Port Pvt Ltd. The concession agreement signed
on February 7, 2014.
SPC shall also pay to the Authority an annual fee (as fixed %age of projected revenue) for
each Year during concession period
The Annual Fee shall be payable in twelve equal monthly instalments
SPC shall from time to time {cause the Escrow Bank to} make payment to the Authority
In the event that in any quarter the actual Revenue exceeds the projected Revenue, then
SPC shall pay to Authority the additional Annual Fee attributable to such difference between
the actual quarterly Revenue and the projected quarterly Revenue
Development of Dry Port through PPP Mode 42
REVENUE SHARING
KEY PROVISIONS IN MODEL AGREEMENT
APPLICABILITY OF FISCAL INCENTIVES
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
In developed economies, trade logistics costs account for less than 10% of the GDP
whereas its contribution in even more in developing economies
In India, trade logistics account in excess of 13% of the country’s GDP
Reduction in logistics costs by any means would result in huge amount of savings for a
nation Dry port plays a critical role in reducing logistics cost through multi-modal transport
system
Governments can encourage the establishment of dry ports through a range of incentives:
Provision of low cost land – Nominal lease rental
Tax holidays or waivers
Provision of preferential freight rates
Development of Dry Port through PPP Mode 44
FISCAL INCENTIVES
Provision of low cost land is normally under the public sector’s (the Authority’s) control
However, incentives such as tax holidays or waivers and preferential freight rates for key
commodities shall be applicable as per rules and policies of the government at a higher
level in country
In some countries, incentives of industrial park or Special Economic Zones (SEZs) are also
applicable to a dry port area
It has been already proposed that the public sector shall provide land and develop utilities
and infrastructure including rail heads and internal/external rail links for the dry port projects
It is further suggested that the public sector endeavour to keep the fixed lease rental for the
land as low as possible This will incentivize the private sector partner and would increase
value for money of the project
Development of Dry Port through PPP Mode 45
FISCAL INCENTIVES
KEY PROVISIONS IN A PPP CONTRACT
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Development of Dry Port through PPP Mode 47
KEY CONTRACT PROVISIONS…1/4
• Selected Bidder / Consortium members to maintain at least 51% total voting
and economic shareholding till 2 years from the Commercial Operation Date
(COD)
Change in
Control
• Step-in rights or right of substitution for Lenders by execution of the
Substitution Agreement
• Lenders shall have the right to nominate an entity to replace the SPC and
perform the SPC's obligations immediately upon the issue by Authority of the
Notice of Intention to Terminate
Substitution
Agreement
• Authority – Execution of Escrow Agreement and Lease Deed; Appointment of
Independent Engineer; Review and approval of Development Plan
• SPC - Execution of Escrow Agreement and Lease Deed; Submission of
Performance Bond; Obtaining all required approvals and clearances;
Achievement of Financial Closure
Key
Conditions
Precedent
(CP)
Development of Dry Port through PPP Mode 48
KEY CONTRACT PROVISIONS…2/4
• Authority and SPC shall execute Escrow Agreement as a part of Conditions
Precedent
• Escrow Account shall have five sub-accounts – Receivables account,
Proceeds account, Proceeds account, Statutory dues account, Authority Fee
and Lease rent account, and Surplus account.
Escrow
Agreement
• SPC shall submit an unconditional and irrevocable bank guarantee of
required amount
• Liquidated damages for delay in completion of construction – 0.5% of the
Performance Bond for each week of delay can be invoked (subjected to a
maximum of 10% of the Performance Bond)
Performance
Bond
• Authority – Non-achievement of Infrastructure Support; Suspension of
services in respect of Infrastructure Support for a period exceeding 30 days
• SPC – Suspension of services for a period exceeding 30 days; Default under
financing documents; non-achievement of Mandatory Capital works; Failure
to maintain insurance; etc.
Key Events
of Default
Development of Dry Port through PPP Mode 49
KEY CONTRACT PROVISIONS…3/4
• SPC to sub-lease and license any part (but not whole) of the Dry Port Assets
[excluding the Dry Port Site] to third parties
• SPC shall retain at all times the overall operation and management of the
Dry Port
Sub-
contracting,
Sub-leasing
and
Licensing
• SPC shall select at least 3 out of 6 engineers nominated by the Authority – 1
will be selected as Independent Engineer, whose costs will be borne by the
Authority
• Expert shall be appointed 6 months prior to completion of the construction to
oversee operations and management of the dry port
Independent
Engineer
and Expert
• An upfront fee of required amount on or before the Effective Date
• Revenue share (% of revenue) during the concession period
• Amount received from customers as customs fee and any other such fees /
charges
Fees
payable to
the Authority
Development of Dry Port through PPP Mode 50
KEY CONTRACT PROVISIONS…4/4
• SPC shall have the sole and exclusive right to demand, collect and
appropriate Tariff from the users, as per prevailing market rates
• SPC, on behalf of the Authority, shall collect and transfer the amount
received as customs fees and any other such fees/charges to the Authority
Tariff
• The Parties shall use their respective reasonable endeavors to settle any
Dispute amicably
• Any dispute, controversy or claim arising out of or relating to this Agreement,
or the breach, termination or invalidity thereof shall be settled as per
Arbitration under UNCITRAL Rules
Dispute
Resolution
• Termination and Hand-back provisions are discussed in subsequent slides
Termination
and hand-
back
TERMINATION PROVISIONS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Termination provisions (TPs) in a PPP contract are at the heart of the risk sharing
arrangement between the public sector and its private sector partner, and are important value
for money drivers for the public sector
Without clear cut Termination Provisions (TPs), it would be extremely difficult to attract any
investor (i.e. private sponsor, equity investor and lender) for a PPP project
Normally, there could be three situations in which a PPP contract can be terminated:
Public sector’s default and voluntary termination
Private sector partner’s default
Force Majeure events
Key considerations while drafting termination provisions:
Itemized list of the event of default including catch-all provision
Full compensation to lenders in any situation for bankability of the project
Fair compensation to equity investors
Amount and timing of the termination compensation should be such that the private
sector partner is neither better off nor worse off as a result of the early termination
Development of Dry Port through PPP Mode 52
TERMINATION SITUATIONS
Development of Dry Port through PPP Mode 53
TERMINATION – PUBLIC SECTOR DEFAULT
Termination Compensation
Estimation Method in Public
sector Event of Default
Except in Bulgaria, Italy and
Spain where Book value
compensation approach
prevails, most other
European countries have
adopted Financing-based
compensation approach.
Method Advantages Disadvantages
Book value
compensation
Simple approach Easy
to calculate compensation
amount
Compensation calculation
may be problematic
because accounting rules
may change over time
Risk of underpayment or
overpayment
Financing-
based
compensation
No risk of underpayment
or overpayment
No dependency on
accounting rules
Public sector needs to
have a good
understanding of financing
arrangement before
financial closure
Public sector may have to
pay for additional costs
such as hedging cost
Preferred method:
“Financing-based
compensation”
Development of Dry Port through PPP Mode 54
TERMINATION – PUBLIC SECTOR DEFAULT
COMPENSATION METHOD – EQUITY INVESTOR
Method Advantages Disadvantages
Original return
approach
High degree of certainty and
simplicity
Doesn’t take into account actual project
performance till termination date
Poses risk of Voluntary termination by the
public sector in case of high performing
projects
Market value
approach
Fairer than Original return approach
as it takes into account actual
performance of the project till
termination date
May lead to disputes as establishing a
market value can be a difficult process
Less certainties to the contracting parties
Future return
approach /
Fair-value
method
Relatively straight forward to
implement
Takes into account the actual project
performance till termination date
In case of over performance before
termination date, private sector partner will
be deprived of its benefits
Development of Dry Port through PPP Mode 55
TERMINATION – PUBLIC SECTOR DEFAULT
COMPENSATION AMOUNT – FAIR VALUE METHOD
Method Advantages Disadvantages
Party to be
Compensated Lenders Equity Investors
Amount Calculation i. the loans outstanding at the date of
the prepayment;
ii. interest due up to the date of the
prepayment;
iii. any delayed interest, penalty on late
payments and unpaid fees; and
iv. Breakage costs associated with the
hedging agreements and fixed-
interest rate loans minus any profits
due to early termination of hedging
agreements
Net Present Value (NPV) of the
investor’s future equity cash flows
projected in the base case cash flow
projections agreed at financial close
Development of Dry Port through PPP Mode 56
TERMINATION – PRIVATE SECTOR DEFAULT
COMPENSATION METHOD – LENDERS
Termination Compensation
Estimation Method in Private
sector Event of Default
Market value approach has
been adopted in England,
Netherlands, and Belgium
whereas Book value
approach has been
adopted in Italy, Germany,
and Spain.
France and Turkey has
adopted Debt approach to
calculate the compensation
in case of the private sector
partner’s default.
Recently, United Kingdom
has adopted a more
balanced approach known
as “Fair value
compensation” approach.
Market value approach – Compensation is driven by the market value
of the contract at the point of termination.
Book value approach – Compensation is based on the actual
investment costs incurred for the construction of the project.
Debt approach – Compensation is calculated by reference to the
senior debt outstanding at the time of termination.
Fair value approach - Compensation is determined through the net
present value of the future cash flow of the PPP contract over its
remaining life (to which “rectification and other such costs” are
deducted). This is another form of Market value approach in case
there is no liquid market for the project.
Development of Dry Port through PPP Mode 57
TERMINATION – PRIVATE SECTOR DEFAULT
COMPENSATION METHOD – LENDERS
Method Advantages Disadvantages
Market value
approach
In-principle the fairest approach Re-tendering to find market value will be costly
Volatile market may yield unfavorable results
Book value
approach
Relatively simple to apply and
entails minimal cost
Compensation calculation may be problematic
because accounting rules may change over time
Risk of underpayment or overpayment
Estimation of rectification cost may lead to
disputes
Debt
approach
More attractive to lenders
No dependency on accounting rules
Relatively simple to apply and
entails minimal cost
Public sector may have to pay for additional
costs such as hedging cost
Doesn’t take into account actual project
performance till termination date
Fair value
approach
Takes into account the actual
project performance till termination
date
Estimation of future cash flows complex and
may lead to disputes
In case the NPV of future cash flows is sufficient
to pay senior debts, senior lenders will have less
incentive to rescue an ailing project
Development of Dry Port through PPP Mode 58
TERMINATION – PRIVATE SECTOR DEFAULT
COMPENSATION AMOUNT – DEBT APPROACH
Method Advantages Disadvantages
Party to be
Compensated Lenders Equity Investors
Amount Calculation i. the loans outstanding at the date of
the prepayment;
ii. interest due up to the date of the
prepayment;
iii. any delayed interest, penalty on late
payments and unpaid fees; and
iv. Breakage costs associated with the
hedging agreements and fixed-
interest rate loans minus any profits
due to early termination of hedging
agreements
Nil
Development of Dry Port through PPP Mode 59
TERMINATION – FORCE MAJEURE EVENTS
COMPENSATION AMOUNT
Method Advantages Disadvantages
Party to be
Compensated Lenders Equity Investors
Amount Calculation i. the loans outstanding at the date of
the prepayment;
ii. interest due up to the date of the
prepayment;
iii. any delayed interest, penalty on late
payments and unpaid fees; and
iv. Breakage costs associated with the
hedging agreements and fixed-
interest rate loans minus any profits
due to early termination of hedging
agreements
Equity contribution (without any return)
minus Insurance Cover
Authority Event of Default
Authority shall take back the possession of the Dry Port Site and acquire all of SPC’s rights, title and
interests in and to the Dry Port Assets, on payment within 6 months of Transfer Date, (i) 100% of the
Debt relatable to Dry Port Assets; and (ii) NPV of future Equity cash flow for unexpired period as
projected in base case Financial Model agreed with Lenders and submitted to Authority
SPC Event of Default
Authority shall take back the possession of the Dry Port Site and acquire all of SPC’s rights, title and
interests in and to the Dry Port Assets, on payment within 6 months of Transfer Date of 100% of Debt
in respect of the Dry Port Assets as recorded in the books of the SPC
Force Majeure Event
Authority shall take back the possession of the Dry Port Site and acquire all of SPC’s rights, title and
interests in and to the Dry Port Assets, on payment within 6 months of Transfer Date of 100% of Debt
and Equity [LESS Insurance Cover] in respect of the Dry Port Assets as recorded in the books of the
SPC
Development of Dry Port through PPP Mode 60
TERMINATION COMPENSATION
KEY PROVISIONS IN MODEL AGREEMENT
HAND-BACK PROVISIONS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
For a long-term contract, the public sector is concerned about hand-back provisions because
conditions of the asset at the end of the contract have financial implications on the public sector
Different strategies have been used to mitigate the risk: Hand-back audit, Letters of credit, and
Maintenance reserve fund
Hand-back provisions are necessarily project specific because of the types of assets and
specific project characteristics involved in each agreement
In a dry port projects, there are two types of assets – utilities and infrastructure and facilities and
equipment So, there are two options for transfer of assets
In Complete handover, entire assets will be handed back to the public sector
In Partial handover, private sector partner shall have the rights to withdraw the facilities and
equipment at the end of the contract
Development of Dry Port through PPP Mode 62
HAND-BACK OF THE PROJECT
Development of Dry Port through PPP Mode 63
HAND-BACK OPTIONS
Option Advantages Disadvantages
Complete
handover
(Preferred
Option)
Simple and tried approach
More attractive for the private sector
partner
Better value for money for the public
sector
Smooth operation during handover
period
Handover process would be more
time consuming as it would involve
entire assets
Partial
handover
Better maintenance of facilities and
equipment as it would offer more
incentive for the private sector
partner
Less attractive for the private sector
partner
Costlier affair for the public sector as
large investment would be required
in new facilities and equipment
Dry port operations may get
adversely affected
SPC shall in accordance with Good Industry Practice ensure that all property, assets, rights
and other items (constituting Dry Port Assets and Dry Port Site) which are vested in or
transferred to Authority shall be in good working order and in a good state of repair and that the
Dry Port Assets and Dry Port Site is transferred to Authority as a going concern in good
operating order
Authority shall appoint an Industry expert to conduct an audit of the assets being transferred
In the event any of assets are not fit for purpose/ in a good state of repair/ as would be
expected of an international world class Dry Port, as certified by such expert, then the cost or
capital expenditure required to be incurred to bring it to good state of repair of all such assets
shall be payable by the SPC to the Authority, and the same in case of earlier termination, may
be deducted from any Transfer Payment payable by Authority to SPC; and in case of expiry by
way of encashment of relevant amount from the Performance Bond
Development of Dry Port through PPP Mode 64
HAND-BACK OF ASSETS
KEY PROVISIONS IN MODEL AGREEMENT
CONTRACT MANAGEMENT TASKS
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bidding Criteria and Bid Process Management
Contract Management denotes all those activities that are required to be undertaken by the
Authority to administer, manage, govern and execute the project
Key objective of Contract Management is to ensure that the PPP project meets its objective
on continuous basis, while managing risks proactively and taking stakeholders together in this
process
Post-Award Contract Management commences upon Award of Concession and ends after
the completion of the Project and expiry / termination of Concession Agreement
Hence, post-award Contract Management involves four key phases, namely Development
period, Construction period, Operation & Maintenance and Handover
Development of Dry Port through PPP Mode 66
OBJECTIVES OF CONTRACT MANAGEMENT
Development of Dry Port through PPP Mode 67
CONTRACT MANAGEMENT TASKS
Source: Guidelines for Post- Award Contract Management for PPP Concessions published by PPP Cell, Infrastructure Division, Department of Economic Affairs (DEA), Government of India
Development of Dry Port through PPP Mode 68
CONTRACT MANAGEMENT ACTIVITIES
Development of Dry Port through PPP Mode 69
CONTRACT MANAGEMENT ACTIVITIES
Development of Dry Port through PPP Mode 70
CONTRACT MANAGEMENT ACTIVITIES
Development of Dry Port through PPP Mode 71
CONTRACT MANAGEMENT ACTIVITIES
Development of Dry Port through PPP Mode 72
CONTRACT MANAGEMENT TASKS
Stage Key Contract Management Tasks Stakeholders
Development
Period
Submission and approval of the Development Plan Authority or Industry
Expert
Compliance with laws, approvals and clearances Independent Engineer
Land acquisition, R&R, Financial Closure, SPV
Formation Authority
Construction
Period
Adherence to Development standards and
requirements Independent Engineer
Managing change & law Authority
Development of Dry Port through PPP Mode 73
CONTRACT MANAGEMENT
Stage Key Contract Management Tasks Stakeholders
Operation &
Maintenance
Compliance with Operation and Maintenance
Standards and Requirements and other safety and
security and quality related obligations as set out
under the O&M Plan, Quality Assurance Plan,
Environment Management Strategy, Good Industry
Practices and Applicable Laws
Industry Expert
Revenue Share and other fee payment Independent Auditor
Dispute resolution
Authority through
amicable settlement or
Arbitration under
UNCITRAL rules
Handover
(expiry or
termination)
Audit of the assets being transferred Independent Expert
Termination Compensation Independent Auditor
Authority shall appoint a reputable concern of Independent Engineer at its own cost to
determine and ensure compliance with planning approvals and standards with respect to
Dry Port development
Authority shall, six months prior to completion of construction of Dry Port Assets, appoint an
Industry expert at its own cost to undertake and ensure that the operation and maintenance
of the Dry Port Assets comply with O&M Standards and Requirements and other safety and
security and quality related obligations as set out under the O&M Plan, Quality Assurance
Plan, Environment Management Strategy, Good Industry Practices and Applicable Laws
Authority shall appoint an Independent Auditor at its own cost to monitor the payment of
applicable fee to the Authority from the escrow account
Authority shall appoint an Industry expert to conduct an audit of the assets being transferred
Development of Dry Port through PPP Mode 74
CONTRACT MANAGEMENT
KEY PROVISIONS IN MODEL AGREEMENT
BIDDING PROCESS MANAGEMENT
1 Dry Port Definitions and Characteristics
2 Responsibility of Capital Investment
3 Deciding Number of Operators
4 Allocation of Demand Risk
5 Land Ownership Structure
6 Customs Clearance Responsibilities
7 Tariff Determination
8 Allocation of Revenue Rights
9 Applicability of Fiscal Incentives
10 Key Provisions in a PPP Contract
11 Termination Provisions
12 Hand-back Provisions
13 Contract Management Tasks
14 Bid Process Management
Development of Dry Port through PPP Mode 76
BIDDING PROCESS
Bid Security 0.5% of the Total Project Cost (TPC)
Bidding Process 2 stage bidding (RFQ and RFP)
Selection Basis Maximum revenue share or Minimum Grant (as the case may be)
Development of Dry Port through PPP Mode 77
RFP - ELIGIBILITY CRITERIA
Minimum Net Worth of 25% of the Total
Project Cost (TPC) in preceding financial year
Financial Capacity
Implemented eligible projects worth at least
200% of the Total Project Cost (TPC) during
last 7 years
Eligible project would comprise of:
Development of container handling facility
at a port / dry port / Inland Container
Terminal
Construction of berth at a port
Construction of Container Freight station /
cargo handling and storage facility
Each eligible project should not be less than
10% of the TPC
Technical Capacity
Incase of a consortium, the combined Technical & Financial capacity of the Lead member (having equity stake of at least 51%) in the SPV shall satisfy the
above conditions.
CASE STUDIES
1 Moorebank Intermodal Freight Precinct
Project
2 Niger Dry Port Project
3 Nhava Sheva International Container Terminal
(NSICT) Project
4 Inland Container Depot (ICD), Dadri Project
Location: Moorebank in south-west Sydney, Australia
Linkage: Direct access to Port Botany via the Southern Sydney Freight Line (SSFL)
Sydney Intermodal Terminal Alliance (SIMTA) will build and operate the project
Moorebank Intermodal Company (MIC), an Australian government business, will oversee
development of the project
Model Adopted: “Combined Capital Investment” and “Joint Land Ownership”
Commonwealth contribution: Around $370 million for development and 158 hectare of land
SIMTA contribution: Around $1.5 billion over the first 10 years for the terminal infrastructure
and warehousing and 83 hectare of developable land
Both Commonwealth land and SIMTA land will be leased to SIMTA for 99 years
Expected operations start date: Late 2019
Development of Dry Port through PPP Mode 79
MOOREBANK INTERMODAL FREIGHT
PRECINCT PROJECT
Location: Dosso and Niamey Rive Droite, Niger
Linkage: New railways project between Benin (Port of Cotonou) and Niger
Project has been awarded to Bolloré Africa Logistics (BAL) on a 20-year concession
The concession agreement was signed on October 28, 2014
Payment to the Authority: BAL would pay an upfront fee of $2 million and a fixed fee (land
lease) payable by sqm and variable fees payable per ton of cargo for an estimated minimum
$48 million over the life of the concession
Minimum mandatory investment of $50 million divided in four phases
Through the Concession, the Authority would be able to leverage between $50 to $78 million
in private investments in operating equipment and civil works.
Development of Dry Port through PPP Mode 80
NIGER DRY PORT PROJECT
Location: Jawaharlal Nehru Port, Mumbai
India’s first private container terminal and one of the most modern container terminals in India
Project awarded to a consortium led by M/s. P & O Ports, Australia on BOT basis for a period
of 30 years, expiring in 2027
Selection basis: Highest Net Present Value (NPV) of royalty offered
NSICTPL required to pay royalty to JNPT for guaranteed traffic
The ownership of the land, reclaimed sea and water in the licensed premises remained with
JNPT
With regard to pricing, the licensee had to collect prescribed rates and charges not exceeding
the minimum rates published in the JNPT Port Tariff Schedule and Scale of Rates as
approved by the Government of India
Development of Dry Port through PPP Mode 81
NHAVA SHEVA INTERNATIONAL
CONTAINER TERMINAL (NSICT) PROJECT
Location: Dadri, NCR Delhi
To address the logistic imbalance, Container Corporation of India (CONCOR), launched
Asia’s largest Inland Container Depot (ICD) at Dadri, the plan of which began in 1997 as an
ideal hub point for link with spokes avoiding Delhi
Total cost of development was around $46 million (INR 313 crore)
Project awarded to the CMA CGM Logistics Park Dadri, which is a JV between Ameya
Logistics Pvt. Ltd. (a JV of CMA CGM France and Container Marine Agencies, Mumbai) and
the Railway PSU CONCOR
Development of Dry Port through PPP Mode 82
INLAND CONTAINER DEPOT (ICD), DADRI
PROJECT
THANK YOU!
83