Alternative dredging funding to the fore

Pay-as-you-go contracts could kick start a number of projects. Image: Jan de Nul Group

Economically viable dredging projects that have languished from a lack of funds could now get a kick start, as Stevie Knight discovers.

Work on Guayaquil’s access channel “won’t cost a penny to either the Ecuadorian government, the people, or the city,” former Mayor Jaime Nebot has told media. This assertion is despite cutting out the rock creating the infamous ‘Los Goles’ bottleneck while deepening the section directly outside the port to 12.5m, installing an up-to-date VTS – and keeping it all in the very best condition.

The reason for this confidence is a 25-year concession picked up by Jan de Nul, who will pay for it by exacting a toll of US$0.62 per gross registered tonne on all passing ships. A basic calculation confirms that a 55,000grt vessel call will generate US$34,100 in revenue when the project is completed and the charges are levied.

This size vessel translates into a typical 5,000teu box ship and it is possible to further assess the impact of these costs on the overall transport logistics chain. “Although this approach channel charge may put around US$10 to US$15 on a container arriving at Guayaquil, by looking at the map you can see it stands to save each one a truck journey of between 120km and 180km over routing to other ports,” says Johan-Paul Verschuure, Technical Director at WSP.

While he envisages bigger ships calling at larger facilities, Verschuure believes Guayaquil will still successfully retain most of its cargo, even when the new channel means, “it can deliver containers directly to the doorstep of a large part of the Ecuadorian population - and keep large numbers of trucks off the roads”.

There is one further point to make here. The toll could be detrimental to vessel calls from lightly-loaded big ships as the extra charge makes the channel fee relatively expensive for the number of boxes onboard.

For example, the biggest vessel to call at the port to date, mv CMA CGM Cochin, would have had to pay more than US$70,000 for the privilege of seeing Guayaquil again.

A tempting idea

The idea of a toll is tempting others. Santos Port Authority's CEO, Casemiro Tércio Carvalho, is looking for solutions that could alleviate the port's substantial dredging costs. Interestingly, he has already called for 'donations' of surveys and investigations as “a democratic way of structuring the concession so that the bid adheres as closely as possible to the needs of the port and community”.

That might be considered a new definition of 'democratic', and further, getting the figures to line up could be challenging given the substantial remit. This appeal already appears to embrace VTS and channel marking, mooring/turning areas, environmental monitoring and remediation, tug services and emergency response alongside the dredging.

Competition will help and Mr Carvalho already appears to be supportive of Chinese-sourced bargains. “Both the relatively cheap prices offered by Chinese companies and the new equipment they put in our local market are very important,” he recently told the Global Times.

Is size important

The opportunities outlined thus far are not limited to big ports in developing countries. So, could smaller projects also benefit? Mr Verschuure underlines the business model here is scalable and a port engaging in an appropriate draft revision may also find the gains are much deeper, more fundamental “than just adding extra capacity to the port’s land side... as an extra couple of metres could change the size and the type of vessels it handles” which in turn will make a difference to both its hinterland and market share.

However, predictions must demonstrate that there will be enough, stable traffic to swallow both the cost of the dredging and the necessary due diligence studies. In short, “dredging companies will be exposed to more market risk than they are currently used to”, says Verschuure, adding, “so they will require a return for shouldering this particular burden. As a result, bids will rest on far more than cubic metres and ship utilisation.”

Arriving at a viable business case may require a delicate balancing act. On the one hand, the deal must avoid unrealistically high traffic forecasts from the dredging company which will result in too low a fee to recoup the costs.

However, if they offer too bearish an outlook (if the bid is not undercut by a competitor) it could result in an unfeasibly expensive charge for local shippers. Verschuure adds that a port authority should always conduct its own analysis. “Run the projections and figures as if you were doing the dredging yourself, and if the answer you are getting is a long way from what’s being offered, be wary, you need to make sure you’re working from the same assumptions and expectations,” he warns.

However, ports in development hotspots may have a harder to evaluate issue on their doorstep - competition. Guayaquil is no exception here. Attracted by the region’s potential, DP World is creating Posorja, a deep-water coastal port that will almost certainly grab some of the cargo flow.

This inevitably impacts what’s on offer. However, a spread of proposals will tend to arrive at a realistic assessment and a competitive bid. Therefore, Mr Verschuure advises, “put in the effort to generate interest, make sure you have a good selection of highquality dredging firms involved in the tender process... but also, budget for a proper, unbiased consultation so you are on the right track before you start – it’s not a lot in the overall scheme of things and it does make a difference to be well prepared”.

Filling the gap

It should be pointed out that levy-based concession figures do not always immediately add up. But if they do not, there are other options available which could close a hole in the finance. “Governments may be willing to step in with some funds themselves if it can be seen to benefit the entire logistics chain,” says Mr Verschuure.

However, it must be noted that these sources are not always reliable. Take one of the earliest toll-charge dredging projects, a long traffic channel that aimed to open-up Parana port in Argentina and Nueva Palmira, Uruguay to Panamax-sized ships.

It was never envisioned that the (necessarily low) user fees would absorb the US$180m price tag, so the two governments agreed to help cover ongoing costs and capital returns. Partly because neither country was wholly responsible, the binational commission did not deliver on its promises and by 2003 the seven-partner consortium was owed US$11m.

As a result, all but one cut their losses and walked away. Jan de Nul finally picked up the pieces and gained a very lucrative contract – the renegotiated terms included a longer, 18-year concession to make up for the lack of a cash enticement.

Equity

There are other ways of structuring the contract if a toll-based concession is not an option and state aid is not forthcoming. For example, offering the dredging company a stake in the port itself.

This is an approach that’s being followed by Georgia’s mega-project at Anaklia, which will have a 16m access channel and where Van Oord is to provide ‘equity in kind’ to the value of US$5.2m, according to the development consortium.

Bringing additional finance to the table in this way could be the trigger some projects need, although it also has challenges. Firstly, as it is not a direct monetary exchange “you both must agree on what is a fair value for the stake” points out Mr Verschuure, and that can be difficult to agree upon.

It also requires a further layer of due diligence for both parties. For the dredging company, this will entail not just looking at the technical aspects, but at the port’s whole business case including the country’s macro-economic situation.

For its part, the port will have to consider the implications this relationship holds for future dredging contracts and securing competitive pricing.

Long-term gains

Despite the challenges, a great deal recommends these types of deferred finance. There is a guaranteed draft for the term of the concession and it offloads a lot of onerous documentation and project work.

Further, if the dredging companies attract the debt financing themselves, they will have to adhere to the stringent requirements attached to the rules set by the financial institutions, which means there will be a “much greater focus on, say, environmental compliance” says Mr Verschuure, adding that “it is a good way to bring in international standards and expertise”.

Finally, he believes interest in this kind of deal will rise. “Not all port authorities have the experience or backing to attract international finance, whereas the dredging companies are doing it all the time... and they can deliver the whole package.”

If they catch on – and there’s reason to believe they may - these pay-as-you-go contracts could reshape the industry’s physical and financial landscape.

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