Case Studies: Valencia Cruise Terminal

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Project Overview
Valencia1.png
Figure 1: Impression of Valencia Cruise Terminal
Valencia Cruise Terminal, Spain
Project Type: Both
Contract duration: 25 Years (estimated)
Budget: EUR 59.6 M (Public sector investment is EUR 33.2M, and private sector investment EUR 26.4M.)
Project Time Line
Project conceived: 2007;
Start of construction: 2009;
Tender for PPP: 2013;

Introduction

The port is one of Valencia’s most important institutions for both the city and the region. Historically, port activities have been responsible for the economic growth of the region through trade exchanges, passenger movements and maritime services from which the modern city of Valencia has developed. Through the years, the Port of Valencia has grown and changed. The port has grown towards the sea creating breakwaters and other protection works making possible the construction of new basins. At the same time, some already-existing inner basins have been reshaped for urban related activities such as yacht clubs or the premises hosting international competitions like the 32nd America’s Cup or the Formula 1 Valencia Street Circuit.

Over the last decade, and especially during the last five years, the Port of Valencia has succeeded in attracting a new market of international cruise passengers. The city of Valencia is becoming an attractive tourist destination by itself so the Port of Valencia has the opportunity to become an essential call for cruises liners operating in the Mediterranean. This fact would have a significant economic impact on both the city and the region with a feedback effect on the tourist sector.

Old docks currently used by passenger ferries are suitable only for relatively small ships. Therefore, operating with large cruise ships requires building new port facilities, which should be both suitable in engineering terms and attractive to the final users. This motivates investment in the project for the new Valencia Cruise Terminal.

North America continues to be the clear leader of the sector. However in the last five years the European market has experienced significant growth while Asia has kept its relatively low growth rates and small presence in the industry.

Although the European market will probably keep on growing at similar rates in the medium and long term, additional new challenges must be faced. According to the World Tourism Organisation, the number of tourists in Europe will grow by 3.1%, the forecast for 2020 being 717 million visitors to the continent. All destinations will need to take into consideration the total number of tourists when planning and making decisions concerning new cruise packages.

The main home ports are Barcelona, Genoa, Civitavecchia and Piraeus, where there are few opportunities to increase capacity as they suffer limitations in terms of port configuration, location and use of existing docks. Barcelona for instance, may have only one more chance to build one more terminal in the coming years.

New high value destinations may be able to sell new cruise itineraries that will help to alleviate congestion in certain key Mediterranean ports. In this context, Valencia needs to position itself with infrastructure capable of competing as a home port, providing additional capacity which complements that of Barcelona.

Figure 2 shows the cruise passenger traffic in Valencia from 2000 until 2011. The traffic has grown significantly over the last decade and reached 400,000 passengers in 2011. Before constrution of the new cruise terminal, the Port of Valencia had five berths where cruiseships could call, but two were located in freight terminals.

Given the traffic forecasts, the number of berthing points needed in 2027 would range from 4 in the low case scenario (organic growth) to 7 in the most optimistic scenario (Valencia as home port for the international market).

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Figure 2. Evolution of the number of cruise passengers in Valencia

Figure 3 displays the traffic forecast of the number of cruise passengers in Valencia for two different scenarios. In the base case, Valencia serves as a home port only for the regional Spanish and European markets, whereas in the high case it attracts longer-distance international calls.

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Figure 3. Forecast growth of cruise passengers at Valencia 2000-2040

After exhaustive analysis and definition of a master plan for the new cruise terminal in Valencia, the final specifications of the project (see figure 4 and also figure 1) include a 1700 metre long berth line with a draught of 14 metres and a surface area of 5.3 hectares. Four additional berthing points will be dedicated to cruise ships calls and a new cruise terminal will be built.

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Figure 4. Proposed cruise terminal layout

The cruise terminal at Valencia will operate in a competitive environment. There are several other main and secondary ports competing with Valencia in Spain and this competition is influencing its opportunities both as a home port and as a port of call. The main competitor for home port operations is Barcelona, this port being complementary to Valencia as a port of call (given the distance between both ports and vessel speeds in Western Mediterranean itineraries). Other competing ports are Palma, Malaga and Ibiza for home port calls, and Alicante, Cartagena, Almería and Castellón as ports of call within the same itinerary. Each of the ports has specific characteristics that makes it an attractive destination for different cruise lines, depending on market segment, itinerary and cruise brand.

The Contracting Authority (Public Party)

The regulatory framework for the Spanish Port System is defined by Law 27/1992, Ports of the State and the Merchant Marine, which established the current State-owned ports’ organisational model. It was this Law that created the Port Authorities which manage the ports. Furthermore, it created “Puertos del Estado”, a public body reporting to the Spanish Ministry of Public Works with overall responsibility for the coordination and operational efficiency of the entire port system.

The legal framework established by Law 27/1992 is as follows. Port Authorities have complete management autonomy for port development, investment, commercial policy, and organisational and human resource policies, although personnel issues are subject to private labour law. They develop activities based on goals and business management procedures, and promote global strategies to develop competitive advantage, with maritime and land activities managed as a whole. Port Authorities manage the port public domain, provide infrastructure and regulate basic port services, and are responsible for providing basic services in the absence of private initiatives.

The Port Authorities’ main functions are: planning land use and investments; investing, mainly in infrastructure; managing the port public domain; coordinating other public entities involved in the port, including the city council; controlling private entities operating in the port.

On 26 December 1997, Law 62/1997 was passed, amending Law 27/1992 on Ports of the State and the Merchant Marine. Law 62/1997 regulated the role of the autonomous regions in the structure and organisation of general-interest ports. According to this Law, autonomous regions are responsible only for designating the President and defining the composition of the Board of Directors of the Port Authority. Consequently, this Law reinforces the autonomy of the Port Authorities and the control and coordination role of Puertos del Estado.

Six years later on 27 November 2003, Law 48/2003 (Economic Regime and Service Provision in General-Interest Ports) was passed. This Law provides a consistent legal framework for the Spanish port system in respect of its economic, financial and tax regimes. The Law changed the regulation of port services and the port public domain. Traditional port services were no longer to be offered by the Port Authorities and were to be entrusted to private companies in conditions of free competition.

At present Law 33/2010, amending Law 48/2003, is in force. This Law provides the Spanish ports system with a stable framework and greater legal certainty, since it has been agreed with the main opposition political group. The new regulatory framework for the Spanish ports system is defined by three basic principles: greater self-financing capacity, more management autonomy, and an economic and financial control system based on the criteria of rationality and equilibrium.

According to the President of Puertos del Estado in an interview published in Las Provincias newspaper (23 June 2010), the main goals of the new Law are as follows:

  • Greater freedom for setting tariffs: Port Authorities are allowed to set vessel, passenger and goods’ port fees according to their economic situation;
  • Strict economic and financial control, under which the Spanish ports system is committed to achieve an annual profitability of 2.5%;
  • Attraction of private investment: Opportunities to attract private investment will be promoted in the transport and logistics sectors;
  • Maintenance of free competition in the ports, ensuring free access for the provision of port services;
  • Positioning of Spanish ports amongst the most competitive in the global economy: Port Authorities will have more freedom to apply discounts to port fees in order to achieve this objective;
  • Promotion of schemes to increase port quality and efficiency in order to rationalise investments in infrastructure and maximise the use of existing equipment and facilities;
  • Commitment to the development of ports’ socio-economic environment: Port Authorities are encouraged to strengthen their ties with local businesses and with the cities in which they are located;
  • Increased significance of the role of the President of the Port Authority;
  • Integration of ports in the global transport system: The aim here is to deepen inter-operability between road and rail routes that converge at ports in order to enhance intermodality;
  • Increased environmental sustainability: The Port Authorities will be required to submit an annual sustainability report assessing environmental commitments.

The new legal, regulatory and institutional environment allows and encourages the Port Authority of Valencia to promote a project such as the construction and concession of a new cruise terminal. This is an initiative demanded by the Valencia Municipality and is strongly supported by local businesses and the Valencian port cluster, as it will attract private investment to the port and the city in general.

The Concessionaire (Private Party)

Before proceeding to the tender stage, the Port Authority of Valencia approached most cruise terminal operating companies and cruise liners that could have an interest in the project and informed them about the characteristics of the infrastructure and the tendering procedures. It has held discussions with them to assess the level of private sector interest in the concession. These meetings have been only a first step in the process, and their main aim has been raising the interest of potential bidders in the project. A competitively tendered concession call will be launched in the second semester of 2013.

The selection of the private sector operator for Valencia cruise terminal will take place following the port’s normal procurement procedures.

The roles of the public and private sector in the cruise terminal concession are broadly similar to those found in other port concessions. The Port Authority of Valencia is responsible for building the breakwaters, dredging, building the docks, maintenance of the access to the port, navigation aids and navigation safety, and making sure that private companies will provide marine services (pilotage and towage), whilst the private operator is responsible for the construction and maintenance of terminal building, the provision of equipment, and operating the terminal during the concession period.

The new cruise terminal will face competition from the ferry terminal and another private cruise terminal operator. Minimum levels of traffic will be required from bidders, who will be expected to further develop the cruise market in Valencia.

Users

The project is to be used by cruise lines and cruise passengers.

Key Purpose for PPP Model Selection

The main reasons for embarking on the cruise terminal PPP have been securing funding for the construction of the new terminal building, attracting additional home port cruise calls, and offering international standards of service to cruise liners and passenger arriving at the city of Valencia. Given the economic crisis in Spain, drawing on private funds to finance the project is felt to be essential.

Additionally, in the event that the selected private operator is a cruise liner, further home port calls will be secured, passenger traffic will increase and the risk of losing traffic to a competing port will be lower.

In summary,the main reasons for choosing PPP as the project delivery solution were:

  • Limiting the financial risks of the operation;
  • Passing the market risks to the terminal operator;
  • Lowering operational costs;
  • Ensuring the cruise terminal operator will be able to offer high quality services;
  • Providing the port authority with a net annual income that will enable it to recover its investment in the project over a period of 7-13 years, depending on traffic and the terms to be agreed in the concession contract;
  • Creating jobs by expanding cruise related activities;
  • Generating a net positive socio-economic impact for the city and surrounding area due to the expected increase in the number of cruise passengers and the income produced by their expenditures on excursions, restaurants, shopping and entrance fees to city attractions.

Project Timing

The project was conceived in 2007-2008, at the end of the longest continuous period of economic boom in Spain since the 1970s. Its construction started in 2009 and the tendering process is taking place in 2013.

Spain is the 13th-largest economy in the world, the fifth-largest in the European Union, and the fourth-largest in the Eurozone, based on nominal GDP comparisons. However between 2008 and 2013 the economic boom that had taken place between 1997 and the beginning of 2008 was seriously reversed.

Spain experienced a property boom that lasted for more than a decade; at its peak in 2007, the construction sector accounted for 16% of Spanish GDP and employed 12% of the active population. However, the real estate boom entailed corresponding increases in personal debt, and the average level of household debt tripled in less than a decade. In 2008 Spanish government debt relative to GDP was well below the European Union average, and the government budget was in surplus. Four years later, in 2012, public debt had increased to 90.7% of GDP. This figure remains lower than in other European countries, with Spain's financial problems stemming from private debt equivalent to well over 200% of GDP and from high unemployment rates reaching well over a quarter of the active population in 2013.

Many Spanish ports, including the Port of Valencia, seem to be making it through the crisis rather unscathed. Although import flows have decreased, the export sector has compensated for these reductions as it has recovered to pre-crisis levels with a growth of 17.4% in sales since 2008. With a contribution of 1.1% to Spanish GDP, the export sector is contributing to bringing stability to the Spanish economy. The OECD ranks Spain in fifth place in the world in terms of exports of goods and services. Capital goods have been amongst the types of merchandise whose export flows have increased the most, and the export sector is expected to prolong its good performance in the medium term.

Concerning the tourist sector, during the last four decades Spain's foreign tourist industry has grown into the second biggest in the world, accounting for approximately 11% of Spanish GDP and generating employment for about two million people. In August 2012 Spain hit its own record of monthly arrivals, registering 7.9 million visitors.

The World Tourism Organisation (UNWTO) places Spain second only to the United States in terms of international tourism receipts. The cruise industry has been one of the sub-sectors that has grown the most within the tourism sector in Spain. Growth in the number of cruise passengers since 2000 has been in the double-digit zone for many Spanish ports, motivating the development of several cruise terminal construction projects in different ports.

Project Locality and Market Geography

Over the last decade, the city of Valencia has become an attractive tourist destination so the Port of Valencia has the opportunity to become an essential call for cruise liners operating in the Mediterranean.

Furthermore, once the Connecting Europe Facility 2014-2020 and new revised TEN-T Guidelines are approved, the Port of Valencia will be a TEN-T core network port.

It is already an important port for Priority Project 21 (Motorways of the Sea) and it will be connected to core network Corridor 3 (Algeciras-Valencia-other nodes-Budapest-Ukraine border). However, the new cruise terminal is out of the scope of the TEN-T Programme and as a project it will not receive any European Union co-financing.

Procurement & Contractual Structure

Tendering

Law 33/2010 amending Law 48/2003 (Economic Regime and Service Provision in General Interest Ports) governs the tendering process that will be followed in the case of the Valencia cruise terminal. An open call tendering process will be used.

Contract Structure

Although a first design for the terminal building has been drafted by the Port Authority, the private operator will be able to adapt that design to its specific needs in collaboration with the authority. The private operator is expected to look for the best way to finance the cost of building the terminal. The cruise terminal operator will also be in charge of constructing the terminal building, operating and managing it, and maintaining it. At the end of the concession contract the ownership will be transferred to the port authority.

The private operator will have to pay the following port charges to the Port Authority of Valencia:

  • “Tasa de Actividad”, a charge for using the port domain to generate private income. This will be 2% of turnover or 20% of the “tasa de ocupación”, whichever is highest, and is estimated as equivalent to EUR 0.13 per passenger in year 2;
  • “Tasa de Ocupación”: a fixed annual lease payment equivalent to EUR 0.39 per passenger in year 2;

The following rebates will be applied according to Law:

  • 95% rebate of “tasa de ocupación” during the construction period;
  • 15% rebate of “tasa de actividad” for good environmental practices;
  • 15% rebate of “tasa de actividad” for quality control certification.

Risk Allocation

The most relevant risk for the private operator will be the commercial/revenue risk as the cruise terminal will operate in a competitive environment, a minimum level of traffic will be requested in the contract, and there will be a fixed annual lease payment (the “tasa de ocupación). The Port Authority of Valencia will share part of this market risk as one of the most important port charges, the “tasa de actividad”, is directly linked to the annual turnover of the private operator.

A large part of the design and construction risk is assumed by the public authority in charge of building the new breakwaters, docks, berths and access roads to the new terminal. The private operator assumes the construction risk of the terminal building. The operating risk will be mostly private. The only risk the public authority will take will be if the private operator goes bankrupt and the concession needs to be rescued by the port authority (see figure 5).

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Figure 5. Risk allocation

A large part of the construction risk is assumed by the public authority, which is in charge of building the new breakwaters, docks, berths and accesses to the new terminal. The private operator assumes the construction risk of the terminal building. Financial risk will be linked to the amounts invested by each party. Regulatory risk affects both the private operator and the port authority as the port authority is highly unlikely to change the concession contract after its signature, so the only risk would be a change in national port regulations that would affect both parties.

Performance

Key performance indicators linked to operational performance, quality control and environmental practices are expected to be included in the concession contract.

References

  • M. del Carmen Juan, E. Pérez, 2013, Valencia Cruise Terminal In Roumboutsos, A., Farrell, S., Liyanage, C. L. and Macário, R, COST Action TU1001 Public Private Partnerships in Transport: Trends & Theory P3T3, 2013 Discussion Papers Part II Case Studies, ΙSBN 978-88-97781-61-5, COST Office, Brussels available at http://www.ppptransport.eu
  • Bermello Ajamil & Partners, Inc. Plan Maestro de Instalaciones de Cruceros. Puerto de Valencia. September 2012.
  • Cruise Industry News. 2012 State of the Industry Report.
  • Cruise Lines International Association (2013). 2012 Industry Update. CLIA.
  • European Cruise Council. 2011/2012 Report: Making a Real Social and Economic Contribution to Europe’s Economy. Ashcroft & Associates Ltd., London, 2012.
  • Spanish Law 27/1992 on Ports of the State and the Merchant Marine
  • Spanish Law 62/1997 of December 26, amending Law 27/1992 November 24 on Ports of the State and the Merchant Marine
  • Spanish Law 48/2003, of November 27, on Economic System and Services for General-Interest Ports
  • Spanish Law 33/2010 amending Law 48/2003, on Economic Regime and Service Provision in General Interest Ports