Difference between revisions of "Case Studies: Piraeus Container Terminal"
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Contents
Introduction
Piraeus is the largest port in Greece, located only a few miles from the capital Athens. It handles around three quarters of the country’s container trade, and is the main hub for domestic shipping services to the Greek islands.
It is also the only port in Greece with large amounts of transshipment traffic, which in 2007 – the year in which the PPP was tendered - accounted for 37% of its throughput. At the beginning of the decade Piraeus had been one of the largest container transshipment hubs for the East Mediterranean, but by the time of the tender it was facing growing competition from newer ports such as Suez Canal East (Egypt) and Ambarli (Turkey).
Figure 2: Importance of Transshipment Traffic (‘000 TEU)
Source: Pallis & Psaraftis (2012)
The project included the concession of Piraeus port Pier II to a private operator on condition that part of the cash flow was used to fund investment in Pier III (not yet existing). The capacity of Pier II was also to be increased from 1.7m TEU to 2.7m TEU p.a., mainly through equipment upgrades and an increase in the container stacking density.
At the time the Piraeus concession was tendered, the port had two container terminals. Pier I, the original container terminal, was quite small with equipment coming up for renewal. Pier II was larger and more modern, and had greater scope for expansion, with the site of the proposed Pier III lying immediately adjacent. Pier I continues to be operated by the port authority, and actively competes with the concessioned terminal at Pier II.
Table 1: Piraeus Container Terminals at the Time of Tender
Pier 1 Pier II Pier III (proposed) Quay length (m) 680a 2,307 600e Water depth (m) 12a 12-18 14-18 Storage capacity (TEU) 4,090 30,500 n.a Estimated annual capacity 0.8m TEUc 1.7m TEUd 1.0m TEU Notes: (a) subsequently increased to 820m (b) subsequently increased to 18m for 500m of quay (c) subsequently increased to 1.1m TEU p.a. (d) with scope for further expansion to 2.7m TEU (e) tender requirement Source: Piraeus Port Authority
The PPP for Piraeus container terminal was closely linked to a similar project at Greece’s second largest port Thessaloniki, which handles less than one fifth of the container traffic of Piraeus. Most of this is for the local market in Northern Greece, but there is also a significant amount of transit traffic for Hungary and Romania. In contrast Piraeus handles very little transit traffic. The other Greek ports with facilities for handling containers – Astakos, Heraklion and Patras – have fairly small container throughputs. Most of the container traffic for the Greek islands is discharged in Piraeus, and either stripped there or transferred to trucks for onward transport to the islands in ferries.
Shortly after the concessioning of Piers II & III, it was decided to expand Pier I (operated by the port authority), increasing its capacity from 0.8m TEU to 1.1m TEU. The extension, which was expected to cost EUR 160-170M, increased the maximum water depth as well as the quay length, making Pier I a serious competitor to the PPP concession at Pier II. In spite of concerns about the port authority’s ability to raise finance, the Pier I expansion was able to secure a EUR 80M loan from EIB.
Since the concession agreement was signed Piraeus Port Authority (OLP) has invested significant amounts of money in expanding its own terminal, and is marketing it quite aggressively. By 2011 OLP had increased its own share of Piraeus container traffic to 36%, largely by attracting back to Pier I MSC, the previous main user of Pier II.
The Contracting Authority (Public Party)
Although the contracting authority is Piraeus Port Authority, the history of port reform in Greece has resulted in central Government playing a leading role in the procurement process. Options for PPPs at Piraeus and Thessaloniki were studied intensively in 1998 by their respective port authorities, and various schemes were identified for sub-dividing them into terminals to create conventional landlord port structures. However fears about job losses led to these schemes being abandoned in favour of the corporatisation of each port authority in 1999. This was supposed to devolve responsibility for their management to autonomous local entities, but in practice produced few changes apart from separating their financial transactions from those of the State. New laws in 2001 created ‘master concession contracts’ between the two port authorities and the Greek State. These gave each port authority more control over the way it used its facilities in exchange for a yearly concession fee of 1% of the port’s gross turnover for the first three years (excluding extraordinary income and earnings from interest), and 2% thereafter. This was followed by the flotation of 25.5% of the shares in each port authority. The Thessaloniki flotation (August 2001) raised EUR 15M and the Piraeus flotation (July 2003) EUR 55M. The money raised went straight to the Greek Treasury, leaving both ports struggling to fund future investments directly from cash flow and borrowings. Interest in PPPs was re-ignited by the 2004 Greek elections, which replaced the previous left-leaning Government with a more conservative one keen to embrace private finance. This time the lead was taken by central Government, specifically the Ministry of Merchant Marine. This was partly because the container terminal project was above the EUR 200M limit foreseen by 3389/2005 Greek Legislation on PPPs. So although Piraeus Port Authority is the public sector counter-party in the PPP, it played a relatively small role in the procurement process, which was driven largely by central Government. Piraeus Port Authority acts as the landlord and regulator, and provides a range of common services. It is responsible for the dredging and maintenance of the access channel to the port, navigation aids and navigation safety, and the provision of marine services (pilotage and towage), whilst Cosco Pacific (the concessionaire) is responsible for the construction and maintenance of terminal infrastructure, the provision of mechanical equipment (some of it transferred across from Piraeus Port Authority) and the provision of cargo handling services.
The Concessionaire (Private Party)
Piraeus Container Terminal S.A. (http://www.pct.com.gr/) is an SPV owned 100% by Cosco Pacific. This is a large State-owned Chinese terminal operator with an AAA credit rating. Cosco Pacific is a sister company of Cosco Container Lines (CCL), the world’s fourth largest container shipping line, and CCL is the largest single customer of Piraeus Container Terminal S.A, which is operated as a common user facility. At the time of the tender Cosco Pacific was a stakeholder in container terminals in 18 other ports, mainly in China but also in Singapore, Antwerp and Port Said (Egypt), where the Suez Canal East container terminal was one of Piraeus’s main competitors for transshipment traffic.
Users
Users of the terminal are container shipping lines, importers/exporters and freight forwarders generating container traffic.
Key Purpose for PPP Model Selection
At Piraeus the main reasons for embarking on the container terminal PPP included securing additional funding for a new container terminal (Pier III), attracting additional transshipment traffic, and improving terminal productivity, which was low by European standards. Piraeus Port Authority (OLP), for example, estimated its operating costs in 2005 to be as much as 40% higher than those of efficient competing ports. The desire to expand container capacity by building a new Pier III was supported by the unions, but port management was reluctant to commit public funds to the project because it felt that most of Pier III’s future throughput would be transshipment traffic, which could easily move to another port. A PPP also seemed to offer a way around problems the port was having with the EU Competition Directorate about the preferential treatment given to its largest customer (MSC) in order to retain its existing transshipment traffic. Several other reasons for the PPP were put forward in a speech by the Minister of Merchant Marine on 6 June 2007. This affirmed the need for a concession that would: Limit the financial risks; Pass the market risks to the terminal operator; Shorten the time for completing the Pier III investment programme; Lower administrative and operational costs; Provide the port authority with a net annual income of at least EUR 60M.; Create jobs by expanding the port and port-related activities; and Triple the port authority’s capitalisation at the stock market, helping the Government to sell a further stake in the port authority via an IPO immediately after the announcement of the tender results.
Project Timing
Serious discussions began in 2004 along with the second wave of infrastructure PPPs, leading to an aborted tender in 2005, before a new round of competitive bidding in 2007 resulted in the award of a container terminal concession to Cosco Pacific in 2009. Immediately after, the award was followed by re-negotiations and legal suits from the labour unions.
Project Locality and Market Geography
The port is located in an urban environment, densely built with limited land development potential. Simultaneously, its operation as a transshipment port gives it an international character. Local traffic (around one third of the current total) has some impact on the urban road network. Plans for rail access to the terminal may slightly increase its future catchment area. The Port of Piraeus is not a Priority Project of the TEN-T. However, it is important for the MoS [Priority Project (PP) 21] and is adjacent to PP7 [Motorway axis Igoumenitsa/ Patra- Athina –Sofia -Budapest] and PP22 [Railway axis Athina–Sofia–Budapest–Wien–Praha–Nürnberg/ Dresden].
Procurement & Contractual Structure
Tendering
Before proceeding to the tender stage, the Ministry of Merchant Marine had already approached several terminal operating companies, including Cosco Pacific, HPH, DP World, APM Terminals, MSC, and Ζim, and held discussions with other governments (China, Korea) that had expressed interest in investing in port facilities at Piraeus and Thessaloniki. This gave the Government a reasonable feel for the level of private sector interest in the two container terminal concessions, but also delayed the process by opening up opportunities for a negotiated rather than a competitively tendered concession. As the port’s domestic container traffic was relatively small and the PPP was exposed to competition from the container terminal operated by the port authority (Pier I), the throughput guarantees to be provided by the concessionaire effectively limited competition for the concession to shipping lines with access to “captive” transshipment traffic or large independent operators with the ability to attract transshipment traffic from several different lines Although Piraeus and Thessaloniki came under the same Ministry, and developed their PPPs at roughly the same time, the processes were largely independent of each other. Concerns were raised, however, when the two tenders attracted the same bidders - Cosco Pacific and HPH at both ports, plus DP World at Thessaloniki – leading to fears that both terminals could end up in the same hands, even though competition between them is fairly small and occurs mainly in Northern Greece. Although the Government eventually committed itself to open competitive tendering, in line with best international practice, there were fears that the port might end up with the “wrong” partner – the Government had spent several years negotiating with Cosco Pacific on a non-competitive basis, whilst HPH – the clear winner at Thessaloniki and a close second at Piraeus – was already proving to be a tough negotiator; its willingness to walk away from the Thessaloniki concession put additional pressure on the Greek Government to conclude an early agreement with Cosco Pacific. One of the main award criteria for the concession was the percentage of gross revenue offered: Cosco Pacific offered 21% for the first 8 years and 24.5% thereafter, with the second bidder offering 19.0%.
Contract Structure
The contractual regime was based on a fairly standard form of concession agreement, but involved more investment in new facilities than would normally be found in a concession for the management of an existing terminal. It can therefore be regarded as lying midway between a brownfield operating concession and a greenfield BOT contract. As in many port PPPs, a hybrid form of contract was adopted which does not fit easily into any of the standard classifications used for other modes of transport. Most of the envisaged investment – including the construction of Pier III - takes place in the first six years of the 30-year concession. After that, the remaining investment will be mainly for asset replacement and equipment upgrades, and will take place on an incremental basis as and when needed. At the time of the tender, the estimated cost of upgrading Pier II and building the new terminal at Pier III was just under EUR 500M. Around half of the costs not covered by the terminal’s operating cash flow are expected to be covered by equity contributions, the other half by debt. Like most of the other large international terminal operators, Cosco Pacific is likely to use corporate debt – bonds or senior loans secured by parent company assets – rather than project-specific non-recourse financing. The concession fee structure comprises: A lump sum fee of EUR 50 M, of which EUR 2.9M was for the transfer of the terminal’s spares inventory; A percentage of gross revenue increasing from 21.0% in Years 1-8 to 24.5% from Year 9 onwards, to be paid in monthly instalments. This is subject to minimum payments based on throughput guarantees; An annual lease payment linked to the length of quay available (EUR 1,800 per metre); An annual lease payment linked to the container yard area (EUR 4.00 per m2). Both of the lease payments increase over time at an annual rate which is 2% higher than the Greek Consumer Price Index. Prior to concessioning, Piraeus container terminal accounted for almost 75% of the port authority’s revenues and 50% of its earnings before interest, tax and amortisation (EBITDA). The OLP Accounts show that concession fees in 2011 accounted for approximately EUR 30M out of a total operating revenue of EUR 105M. The Annual Report for Piraeus Container Terminal SA for 2011 (which is probably more accurate), shows the concession fees as amounting to EUR 26.6M.
Risk Allocation
The Piraeus container PPP faces a high level of market risk because of its dependence on transshipment traffic. However there is only limited competition for domestic traffic, mainly from Thessaloniki for the Northern Greece market; even during the severe industrial unrest in 2008 Thessaloniki was able to capture only around 100,000 TEU p.a. from Piraeus, equivalent to around 15% of its domestic traffic.
Market risks are shared to some extent through the “percentage of gross revenues” component of the concession fee. However the majority of the market risk is held by the terminal operator, due to the existence of challenging throughput guarantees and fixed annual lease payments.
Financial risks are also held largely by the operator, due to the existence of a fixed construction programme and limited scope for reductions in operating costs after the operator’s freedom to alter conditions of employment was curtailed in response to union demands.
Strong opposition by the port unions, industrial action and the recession are other key risks facing the PPP. The risk of loss of business due to industrial action is held largely by the operator, although there is provision for the concession agreement to be extended (to up to 42 years, when OLP’s own master concession agreement expires) if terminal operations are disrupted by the actions of OLP.
Figure 3: Container Throughputs at Piraeus and Thessaloniki (‘000 TEU)
Source: CI Online
Figure 4: Risk allocation
Performance
The contract contains no operational performance requirements and there are no penalties for non-performance except (possibly) for failure to maintain the assets in good condition and complete the required investment programme in line with the agreed timetable.
The prolonged industrial action associated with the PPP process led to a sharp drop in traffic between 2007 and 2008 when MSC – which controlled 90% of the port’s transshipment traffic – transferred most of it to other ports. This was compounded by the early effects on the global financial crisis, and MSC’s acquisition of financial stakes in competing transshipment hubs at Marport (Turkey) and Gioia Tauro (Italy).
Since then there has been some recovery in traffic volumes since, helped by the decision of Cosco Pacific’s sister company Cosco Container Line to relocate some of its transshipment business to Piraeus, and the return of MSC to Pier 1.
References
- Psaraftis H.N & Pallis A.A Concession of the Piraeus container terminal: turbulent times and the quest for competitiveness, *Maritime Policy & Management, Vol 39, No.1, January 2012
- Piraeus Port Authority Annual Financial Report 2011
- Container Terminal Piraeus SA Annual Report 2011
