No way to do business
It hits you right in the eye and begs that question – again – how can they do it?
Where is the commercial rationale?
What are we talking about? The winning bid for the new Callao, Peru container terminal concession just awarded to DP World/P&O. DP World bid $144m for this concession, some $95.5m more than the second bidder, International Container Terminal Services Inc (ICTSI), and over $100m in excess of the third bidder, the Spanish group Dragados together with the liner operating group CSAV.
DP World is the clear winner by a mile, although clearly various parties feel that this is one of those occasions where the adage “the winner is not a winner” applies.
And this is not just down to the huge difference between the DP World bid and those of the other parties, but also because the 30-year concession contract offered for a new terminal development has other features to it that make realising a profit a virtual impossibility.
Firstly, the terminal handling charges able to be levied in conjunction with the concession are dictated by government within a certain range – $69 to $90 per teu for a full cycle move from hold to gate and vice versa. Bidders had to fix a charge within this range as the initial part of the bid process and realistically to stand a chance of winning the concession the $69 level was seen as the tariff that had to apply; indeed it was adopted by the first, second and third ranked bidders.
It is very significant, however, that other bidders who up until then had been part of the bid process, decided to withdraw when this scale, and particularly the $69 bottom level of it, was appreciated. Parties such as US-based Stevedoring Services of America, HHLA of Germany and APM Terminals, part of the Moller Group, all withdrew publicly stating that the minimum tariff was not enough to sustain the project.
Hutchison was eliminated in the first round with a proposed per teu tariff of $75.13.
Secondly, the upfront bid cost is not the only cost associated with the concession – there are other significant costs that have to be met. There are terminal development costs in the order of $250m and within the first three years of securing the concession $30m has to be spent on general improvements at the port – notably dredging the manoeuvring basin to 14m draught and rebuilding damaged breakwaters.
In the case of DP World, therefore, the “get-in” price for the project is close to $400m with its hands largely tied on earning power through government set handling charges.
NO ECONOMIC RATIONALE Paying this sort of money, informed sources suggest, has absolutely no economic rationale to it whatsoever. The annual port volume is only around 900,000 teu and the only rationale thus vaguely discernable is a geopolitical one, i. e. Dubai Inc sticking flags in the ground!
Certainly, it appears fair to say that were DP World to have public shareholders – as has been suggested in the media that it might – they would have little reason to be impressed with such an acquisition. In pure profit terms, there is zero profit potential visible.
If there is any doubt left regarding this then it only has to be further appreciated that the new container terminal will not be an exclusive facility, it will have to compete with the existing public container terminal which is expected to be modernised using funds sourced from the DP World bid.
In effect, DP World’s largesse promises to assist its direct competition!
There is no doubt about it the Callao new container terminal concessioning process – for a terminal with a minimum berth length of 600m served by four quayside gantries and with a back-up area of 22ha – is a most telling story. A story that some insiders believe points to an effective undermining of the normal rules of engagement in bidding for this type of concession and which, in turn, points to an approach that is serving to distort the market overall.
Callao New Container Terminal Bid Results Ranking Company Financial Bid ($ million) 1P&O/DP World 144 (awarded) 2 ICTSI 48.5 3 Dragados/CSAV 40.84