Making finance available
A consortium making a bid for an availability payment contract is more likely to be more interested in the longevity of port equipment
Boudewijn Jansen, Berend Paasman and Joe Seliga discuss the benefits of availability payments
In our view, port authorities should consider entering into availability payment-based public-private partnership (P3s) agreements to address their capital expenditure funding gaps and improve the quality of maritime infrastructure, especially with respect to “common user facilities”, such as breakwaters, access channel dredging, connecting roads and bridges, and port expansion projects.
Seaborne trade volumes have recovered after the sharp reductions in 2008 and 2009 and many ports are dusting off their expansion plans. However, some authorities have struggled to secure financing for these projects. Typically port authorities consider two alternatives to finance their new port expansion plans: applying public capital or through long-term terminal concessions or full privatisation.Availability payment P3s are an alternative contracting mechanism that can address the challenges facing port authorities. This model enhances the value for money of the project and is an alternative to solve funding gaps faced by port authorities.
Under the availability payment P3 model, also referred to as a “DBFM” contract, the private sector builds the infrastructure, attracts debt financing and maintains the infrastructure. The public side commits to make predetermined payments (availability fees) to the private party during a certain period (often 20-30 years). These payments are only due if the construction has been completed and if the infrastructure is “available” to use under quality/service levels agreed to in the contract. In this model no (or reduced) public funding is needed to deliver the project.In other infrastructure sectors, such as roads, availability payment P3 contracts have been regularly used by public authorities with a long track record of successfully implemented projects. In the 1980s, availability payment P3 contracts became popular first in the United Kingdom and then in other European countries, and then Australia and Canada. The contracting method has been applied to many rail, road and other projects around the globe.
To understand the workings of an availability payment P3 transaction this article compares it with the more traditional or classic infrastructure project procurement mechanism utilised by public authorities. In the classic approach, the authority hires a contractor to build the port asset or port project. The contractor is paid before and during construction by the authority and thus the authority is financing the project. After completion of construction, the authority procures one or more maintenance contracts with maintenance contractors.
In the availability payment P3 or DBFM approach, the authority selects a consortium (SPC) that will design, build, finance and maintain the asset. The SPC will attract debt financing from banks, which are used for the construction of the asset.
From a public authority’s perspective, the availability payments under a DBFM contract are constant (or partially increasing with inflation) for the term of the contract. In the classic approach, the payments fluctuate; large during construction with an irregular pattern of maintenance costs during the operational life of the asset - depending on the maintenance cycle, many assets need large maintenance every five to seven years.
The port authorities should however carefully consider the following consequences.A DBFM procurement process is more complex to implement, especially the first time, it will require time to prepare project design and tender documents, staff resources from the authority for monitoring asset availability and the retention of experienced advisers for financing expertise. Transaction costs will be higher under the availability payment model.
Authorities should also take note that the DBFM contract model could limit future flexibility; DBFM contracts are relatively long-term contracts.
That said, DBFM contracts can be suitable for maritime infrastructure assets, including dykes, and capital dredging of navigation channels or port basins; connections related to landside port infrastructure, such as access roads, tunnels and bridges; and port expansion projects.
For DBFM to be a worthwhile consideration the asset life should be long (+20 years), and the size of the project should be at least E75m ($107m) to be economical. Assets that need intensive maintenance over their lifetimes have more potential to bring value due to the life cycle cost benefit.
Boudewijn Jansen (boudewijn.jansen@rebelgroup.com) is a consultant at Rebel Advisory specializing in the port sector. Berend Paasman (berend.paasman@hsh-nordbank.com works in the infrastructure finance group of HSH Nordbank out of London. Joe Seliga (jseliga@mayerbrown.com) is a partner at the law firm Mayer Brown specializing in infrastructure transactions.
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