Case Studies: Piraeus Container Terminal

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Project Overview

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Photo from http://www.pct.com.gr/

Figure 1. Piraeus Container Terminal
Piraeus Container Terminal, Greece
Project Type: Both
Contract duration: 30 years, with an automatic extension option of 5 years conditional on completion of the Pier III investment programme
Budget: EUR 153,6M (620 M including equipment costs)
Project Time Line
Project conceived: 1998;
Piraeus flotation: 2003;
Revising PPP concept: 2004;
Aborted tender: 2005;
Tender: 2007;
Contract Award: November 2008;
Legal ratification: March 2009;
Re-negotiations: 2009;
End of strike action: November 2009;
End of co-management of terminal by port authority and concessionaire: March 2010;
Final date of construction/equipment delivery: 2015

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).

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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 also one of the largest container transhippment hubs of the Eastern Mediterranean and included in TEN-T:

  • Core Network node
  • Seaport node of the Orient / East-Med TEN-T Core Network Corridor
  • Important for Motorways of the Sea [Priority Project (PP) 21]
  • 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.

With regard to force majeure, in accordance with the contract, the Concessionaire will bear the financial consequences of a force majeure event to the extent that the Concessionaire has procured for adequate insurance with respect to risk inherent thererin. The State shall compensate the Concessionaire for any financial consequences of any force majeure event in excess to those be borne by the Concessionaire.

The most serious social risk has been the loss of business due to industrial action. This appears to be 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 (or lack of action) of OLP.

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Figure 3: Container Throughputs at Piraeus and Thessaloniki (‘000 TEU) Source: CI Online

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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 significant recovery in traffic volumes, 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. Actual traffic in Pier II greatly exceeded forecasts, rising sharply from 1,2 million TEUs in 2011 to 2.2 million TEUs in 2012 and reaching 2,6 million TEUs in 2013, with capacity utilization of over 80%.

Project Outcomes

Despite initial controversy surrounding the project, the investment now ranks as one of the most successful Greek PPPs. .Since its commencement, the Port of Piraeus has reported remarkable growth in container throughput, and is fast becoming one of the major trashipment hubs in the Mediterranean, giving a much needed boost to Greece's crippled economy at times of crisis. The concessionaire's strong capacity to meet financial commitments, its direct links to a booming target market, such as Asia, and its ambitious vision for the port will contribute significantly to the viability of the project. The following Critical Success Factors can be identified:

  • The dominant position of Piraeus in the Greek and Mediterranean container market.
  • The strong financial position of the concessionaire, which has the resources to absorb several years of losses if necessary;
  • Links between the terminal operating company and the major Cosco shipping line, which will increase its ability to meet the throughput guarantees.
  • The ratification law granted Cosco Pacific various income tax exemptions in terms of VAT and depreciation obligations, whcih are more favourable compared to the standard obligations of a Greek corporation, including OLP’s.Also, accumulated losses could be offset against the taxable profits of later periods without any time constraint.
  • Incentive of OLP and consesionnaire equally sharing profits if an IRR of 16% is exceeded.
  • Cosco's capability for long-term planning ( further plans to expand—moves that the company expects will boost volumes to more than six million containers by 2016). It should be noted that it ordered 12 ERTG cranes (above its contractual obligations), allowing for an additional increase of 1.1 million TEUs in the capacity of piers II and III (4.7 million TEUs in 2015 instead of the 3.7 million TEUs originally planned).
  • Chinese cultural attitudes, which seek to avoid the loss of face associated with failure. The political support provided by the Chinese Government may also be a significant success factor, either facilitating the renegotiation of the contract at some later stage, or providing Cosco Pacific with incentives to continue operating the terminal primarily for political reasons.
  • Now in competition with Cosco, the port authority operating Pier I terminal has increased productivity and improved operations and services, reporting a 27.5 % increase in container throughput from 2011 to 2012. Previously inefficient and with outdated infrastructure, the port struggled to secure financing (even from the EIB).

The main barriers to implementation appear to have been union opposition, and lack of understanding of the PPP process on the part of the politicians. Implementation was also complicated by the timing of the PPP, which coincided with the start of the current global recession.

The port’s corporatisation in 1999 and its partial flotation in 2003 had very little effect on its competitiveness, as it did not result in any significant changes to the management structure, or create a group of activist shareholders determined to modernise the port. Instead it increased the commitment of the management to continue in business as a terminal operator in order to generate more dividends and increase the share price. The creation of Piraeus container terminal PPP has been a highly politicised process, led by the national government. The managing body of the port was given limited freedom to develop port-specific guidelines designed to achieve its original objectives. As a result, insufficient attention was paid to changes, which would have improved productivity and driven down costs, thereby allowing the port to become more competitive in the East Mediterranean transhipment market. The prolonged industrial action associated with the PPP process led to a sharp drop in traffic and the loss of the major client, MSC, to other ports. Strong opposition by the port unions, industrial action and the election of a new government in October of 2009 forced the renegotiation of the contract in its first year of operation. As part of this process the unions won a major concession by requiring the port authority – which was still operating the terminal on behalf of Cosco Pacific during the transition period - to offer the same salary and working conditions to newly hired personnel as those already enjoyed by existing staff. This reversed a previous decision that allowed greater flexibility in employment conditions, and undermined one of the original objectives of the PPP, which was to reduce terminal operating costs. However, there has been more flexibility in respect of manning levels, with a move towards smaller gang sizes since Cosco Pacific took over. Pier II is now reported to employ four dockers per gang compared with 6-9 men per gang at Pier I. This is likely to strengthen the position of the PPP when it comes to competing against the port authority for new business. It remains to be seen whether the incentive for sharing profits if maximum IRR of 16% is exceeded, will be proven successful or not. Also, the provisions not included in the contract, but only in the law that ratified the concession, regarding various tax exemptions for Cosco Pacific (while OLP was not subject to these) raises the question of unfair competition. Finally, OLP is both landlord and competitor under worse conditions, raising acceptability issues.

Economic Impact

The project is believed to have largely contributed to rendering the port of Piraeus into one of the world’s fastest growing container ports, despite its modest size compared to other major ports. Only in 2012, Piraeus went up from number 77 to number 46 in the rankings of the top 100 global container ports, with its container throughput growing from 1.7 million TEUs in 2011 to 3.2 million TEU in 2013. Primarily because of Cosco’s involvement, the port is attracting the shipping routes from/to the Asian market, whose global share is also rising rapidly. Cosco itself is a major shipping company operating along this route and, hence, a key customer for the Piraeus port terminal. The above translate to additional revenues for the Greek state, as well as to strengthening the country’s strategic position and ability to attract other investors. Cosco is continuing to expand the port’s capacity above the contractual obligations, following its vision to turn Piraeus into the main container hub in the Mediterranean, and gateway for Chinese exports to Europe, which could only boost further the Greek economy.

According to estimates of the National Bank of Greece (2013), the value added from the projected increase in container handling in Greek ports, 90% of which is attracted by the port of Piraeus (to 4.7 million TEUs in 2015 from 3 million TEUs in 2013) is estimated to rise by around €0.8 billion, or 0.4 per cent of GDP by 2015. The long-term benefit could be much larger (€5.1 billion or 2.5 per cent of GDP by 2018), as the multiplier effect from the formation of a cargo-related cluster (mostly from suppliers) is potentially large.

Social Impact

Although the project has significant economic impact to the national economy, container port growth generates limited local economic value and employment.In addition, significant concerns have been raised with regard to the local labour standards.Finally, the controversy generated around Cosco's involvement and the entire PPP process has created an environment of mistrust and cultivated a general public opinion that the port is privatised.

Environmental Impact

The project has considerable negative environmental impacts, particularly given its location in a highly dense urban area:

  • Air quality due to vessels and equipment emissions contributing also to climate change
  • Water quality and marine environment degradation due to vessel activity
  • Heavy consumption of energy from machinery and equipment
  • Noise

The container terminal of Piraeus is bordering the Perama and Keratsini municipalities, which are exposed to the adversities of the ship exhaust emissions generated within the terminal.


References

  • S. Farrell, 2013, Piraeus Container 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
  • 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
  • Moraiti, P. (2015), “Piraeus Container Terminal” in Łukasiewicz, A., Roumboutsos A., Liyanage C., Pantelias A., Mladenovic G., Brambilla M., Bernardino J. and Mitusch K. BENEFIT Database, Deliverable of WP6, BENEFIT Business Models for Enhancing Funding and Enabling Financing of Infrastructure in Transport, Horizon 2020, DG Research and Innovation