2009
Lisbon Port Expansion
Francisco Furtado Pedro Sim천es Raul Pires
1
Table of Contents 1.
Introduction ............................................................................................................................ 1 1.1. Report structure................................................................................................................... 1 1.2. Our role ................................................................................................................................ 1
2.
Port sector overview ............................................................................................................... 2
3.
Assumptions ............................................................................................................................ 3 3.1. Location of the port ............................................................................................................. 3 3.2. PPP proposition .................................................................................................................... 5
4.
Planning, activities and resource allocation ........................................................................... 6 4.1. List of activities .................................................................................................................... 6 4.2. Gantt chart ........................................................................................................................... 8 4.3. Resources, Costs and Durations......................................................................................... 11 4.3.1. Tendering Process ....................................................................................................... 11 4.3.2. Construction................................................................................................................ 13 4.3.3. Operations and Maintenance ..................................................................................... 16 4.3.4. Observations ............................................................................................................... 17
5.
Finance/Economical assessment .......................................................................................... 18 5.1. Total Costs .......................................................................................................................... 19 5.2. Base case, fixed TEU price approach ................................................................................. 20 5.3. Variable TEU price approach (scenarios A, B and C).......................................................... 21 5.4. NPV variation with demand ............................................................................................... 22 5.5. Observations ...................................................................................................................... 24
6.
Risk Assessment .................................................................................................................... 24 6.1. The risk-sharing contract ................................................................................................... 24 6.2. Risk identification............................................................................................................... 24 6.2.5. Planning ...................................................................................................................... 26 ii
6.2.6. Design and construction ............................................................................................. 26 6.2.7. Licenses, expropriation and environmental risk......................................................... 27 6.2.8. Accessibility ................................................................................................................. 28 6.2.9. Maintenance and repairs ............................................................................................ 28 6.2.10. Technological risk...................................................................................................... 28 6.2.11. Demand and market competition ............................................................................ 29 6.2.12. Financial .................................................................................................................... 29 6.2.13. Legal .......................................................................................................................... 30 6.2.14. Political and unilateral modification of contract ...................................................... 30 6.2.15. Force majeure ........................................................................................................... 31 6.3. Other risks .......................................................................................................................... 31 7.
Conclusions ........................................................................................................................... 32
8.
Bibliography .......................................................................................................................... 35 8.1. Sites .................................................................................................................................... 35 8.2. Papers ................................................................................................................................ 35
iii
1. Introduction The present work, in the domain of the discipline of Project Management and Large-Scale Integration, outlines the many aspects involved in the planning process, since the tendering process until the end of the concession period, to develop the new Lisbon Seaport Terminal. We chose the seaport sector due to its (unnoticed) importance in worldwide economy and, inevitably, the Portuguese economy.
1.1. Report structure We start by giving a brief overview of the port sector and its importance in the worldwide economy followed by a description of our role in the whole process and the assumptions that we did. We then describe all the planning steps involved by identifying the comprised activities, resources allocation (that we get to great detail in some activities, but not all), deadlines and milestones in the tendering, construction, operation and maintenance phases of the project. Next, we determine the economic/financial viability of the project, analyzing the cash flows, the net present value (NPV), internal rate of return and breakeven point of the whole life cycle of the project. We also conduct a sensibility analysis on the obtained results. Taking all this information in mind, we present the risks involved in a project of this dimension and afterwards we draw our conclusions. All this planning and management were performed using the Microsoft Excel and Microsoft Project software.
1.2. Our role We had to opt on what would be our role in this process and so we decided to act as a concessionaire. Considering the administrative chain, we are in third place, after the State, and after the Port Authority (PA). Basically, we are a service provider (under a contract) of the PA.
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2. Port sector overview According to Rodrigue et al. (2006), about 96% of the world trade is carried by sea, making shipping one of the main pillars of globalization. In fact, maritime transportation is the only viable transport mode between a large number of the world’s destinations and, even when alternative modes of transportation are available, it is the one with the lowest cost and CO2 emissions per moved tone (Carvalho, 2007). Seaports, as main elements of the maritime transport chain are critical for its efficiency. As it is often said, “seaports are important because they allow countries (and regions) to trade”. This saying emphasizes one (probably the most!) important reason for the existence of ports. However, it should not be forgotten that additional dimensions, such as national defence and cohesion, touristic utility and passengers’ transportation exist and must be considered in any analysis. The importance of this sector in world economy broadly incentivises the analysis of this sector. Moreover, our history through naval entrepreneurship (thanks to their naval achievements in the 15th and 16th centuries) highlights the utility of this study. First, the geographic position allows Portuguese Ports to gather additional cargo volumes through the creation of turntable hub terminals as an alternative to the Northern European Ports (Hamburg – Le Havre range) in handling the ever increasing flow of seagoing cargo that comes in and out of the European Continent. Second, Portuguese ports can also benefit from the development of Short Sea Shipping networks in the European Union. With the inclusion of the port systems in the Trans-European Networks there is a growing interest in the promotion of a modal shifting from land to sea transportation. This is so because there is significant congestion in some land trade routes such as the Pyrenees crossing. Increasing Short Sea Shipping was the designated solution towards alleviating traffic pressure over the road infrastructure and simultaneously benefit from environmental gains. Considering the volume of intra-EU trade in the total imports and exports in small economies like Portugal (76.6% of exports and 75.4% of imports have EU provenience) (AICEP, 2008) the caption of this maritime cargo can be of crucial importance for port development. In addition, the countries have insular territories which increase the
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importance of the port sector through the maintenance of national cohesion and the promotion of internal trade between the main land and the insular regions. Moreover, in a globalised competitive environment shipping lines can choose from more than one port for their door-to-door cargo movements so that each port faces the permanent risk of losing its customer base (Wang et al., 2005). This created higher inter port competition
3. Assumptions 3.1. Location of the port Figure 1 contains the container/dry bulk terminals of the Port of Lisbon as well as the planned and existing logistic platforms in the Lisbon area. Also, it contains the main accessibilities by rail and road that either exist or are planned in the near future.
Figure 1 -Existing and planned infrastructure (Lisboa, 2007)
Taking this data in consideration, we considered 3 possible sites to where the port of Lisbon could expand: 3
•
Option 1 – Old Lisnave Shipyard. This is an old shipyard that was owned by Lisnave and that was abandoned in 2000. It has an infrastructure in place but main concern with this location is related with the accessibilities of the port.
•
Option 2 – Barreiro. This location is on the old CUF naval yard. This site has, like Option 1, an existing infrastructure in place. There are strong environmental aspects related with the chemical plants and warehouses that exist in the site. This site has the advantage of being located close to the future 3rd bridge over the river, which will have rail connection besides road, and also, a good advantage is the fact that is located near the Barreiro logistic platform.
•
Option 3 – Algés (Doca Pesca). This location also has some infrastructure in place and the main advantage is its proximity to the sea also the fact that it can take advantage of the existing accessibilities.
Given these scenarios, we are assuming that the Barreiro option was the one chosen by the government and therefore our analysis is done based on this location. As it was said before, it has the advantages of good future accessibilities as it is close to the new planned 3rd bridge (which includes road and rail) and also has the Barreiro logistic platform nearby. The fact that also has some environmental benefits associated to it, i.e., the cleaning of old chemical plants, is also considered an advantage in terms of revitalizing that area. Although it has some infrastructure in place we are assuming that it will have to be removed and rebuilt. Figure 2 gives a closer look on the location.
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Figure 2 - Possible locations
3.2. PPP proposition For this project we are considering, as the private entity we are, a PPP with the State to ensure that the best value for money is ensured for all the parties involved. We understand this partnership as the best solution to provide the highest levels of efficiency, safety and cost effectiveness service to such a strategically important sector to the country. Bearing this in mind, we considerer that the adequate PPP is one that is along the following lines: •
If we are awarded the contract, we will finance the project development phase.
•
We will be responsible for the construction phase and will support all the finance requirements associated with it.
•
When construction is finished we will be the sole operators of the Port for the period of 20 years. The price of operations will be set by us according to the existing regulation with the possible exception if demand goes below the defined threshold in the tender. In this case, we propose two options to be defined in the contract: 5
o We will be able to defined the prices for the operations without any restrictions (except those imposed by the market) or o The State will, in the form of subsidies, cover the difference of the existing demand to the predicted threshold. •
Accessibilities connecting the new port with the highway network, rail and logistics platforms will be financed by State and constructed by the State itself. The accessibilities will be defined in the project in conjunction with the State.
•
Dredging operations will be done and financed by State. Other maintenance operations related with port operations will be done by us.
•
It is our contractual responsibility to maintain a level of service regarding port operations defined in the tender proposal.
•
After 20 year concession period, there will be a new tendering. If maintain the defined level of service of the tender we will be awarded the new concession, otherwise we will compete with other operators.
4. Planning, activities and resource allocation 4.1. List of activities In this section, we will list the activities that compose our planning schedule in the several phases. The activities considered include, besides the ones within construction, operation and maintenance, which are the ones that we are financially and operationally responsible for, the activities related with the tendering process in itself as well as the previous phase that we called Previous Evaluation and Preparation. We also include these two phases and the Accessibilities one, far away from our responsibility, since they are an important part of the process and have influence in the whole planning, at least at an internal level. Figure 3 displays all the activities we considered relevant.
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Figure 3 - List of Activities
7
The precedence of the activities is very straightforward and self explanatory and the majority of them respect the Finish-to-Start precedence. The general phases (Tendering, Construction and Operations & Management) can only start after each of the previous one has ended. For a better financial performance all activities (this applies more to the construction phase were not all precedence’s are FS) start as late as possible. Still these poses some issues and a slack should be considered since the duration of activities is of a probabilistic nature and not deterministic, and with no slacks we have a high risk of not complying with the defined deadlines.
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4.2. Gantt chart
Figure
4
and
9
Figure 5 display our Gantt chart. The first figure displays the all planning deadlines and activities, including the 20 years operation and maintenance. The second figure displays the activities involved in the phases prior to the operation and maintenance one (which basically has all the activities occurring at the same time for the 240 months), providing this way a more clear understanding on how they relate to each other.
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Figure 4 - Project planning for all phases 11
Figure 5 - Planning detail prior Operations & Maintenance phases 12
4.3. Resources, Costs and Durations After defining the Activities involved in the implementation of our Project, setting their precedence relations and the required deadlines, we need to allocate resources to the activities we are responsible for. We have deadlines to meet at the minimum possible cost to assure the Project Financial viability, with this in mind we will determine the best possible resource allocation and decide what activities we should outsource or directly manage. We are dealing with a PPP, and it will be the Private side to Design, Finance, Construct and Operate the new Terminal. So almost all activities after the Tendering Process will be our responsibility, with the exception of the Accessibilities for which the state is responsible and Dredging that is the responsibility of the Port Authority (PA), although we will pay to the PA a share of the Dredging costs.
4.3.1. Tendering Process In the tendering process we are responsible for the fallowing activities: • • • •
Application Of Private entities; Bidding phase (Project development); Negotiation Phase; Project development, detail specifications.
This is a determinant phase of the project. Wining the tendering and presenting the best option to the State is a sine qua non condition to implement the all Project, but besides that the Finance and Design options taken at this stage will frame all the subsequent project management and viability. It is a delicate phase were both confidentiality and technical proficiency are key. So it was the shareholders options to: • •
Have a “in house” team responsible for all the steps of this phase and have it working on the Project from the beginning; Outsource only very specialized projects/studies.
So the resources employed are presented in the following table:
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Activity
Quantity Duration Unit Cost (€/month)
Costs
Tendering process Personnel Team Coordinator Law company Engineers Drawer Environmental expert Economist Accountant Secretary Coordinator/Assistant Other Expenses Representation expenses Office and material Outsourcing specialized projects/studies Contingency budget Total Cost
1 1 6 3 1 1 1 2 1
17 17 17 17 17 17 17 17 17
16.400,00 € 40.000,00 € 7.600,00 € 6.400,00 € 6.000,00 € 4.600,00 € 3.000,00 € 2.000,00 € 6.000,00 €
278.800,00 € 680.000,00 € 775.200,00 € 326.400,00 € 102.000,00 € 78.200,00 € 51.000,00 € 68.000,00 € 102.000,00 €
1 1 1 1
17 17 17 17
8.000,00 € 5.150,00 € 100.000,00 € 10.000,00 €
136.000,00 € 87.550,00 € 1.700.000,00 € 170.000,00 € 4.555.150,00 €
Table 1 – Description of the costs
The allocation of these resources to the Activities is presented in the Gant chart, but as we stated to all the Tendering Process Activities the full team was allocated. Based in the resources we used we calculated the costs of these activities: • Defined the type of resources needed, due to the nature of these activities it was mainly personnel to the “in House team” made up by a mixture of technical experts (in engineering, economics, law and other relevant areas), and administrative support staff. But also the financial resources needed for the outsourced projects, the office for the team and other expenses needed to successfully complete the assigned tasks; • Set the number/quantity of resources needed (in the situation of the “in house team”); • Defined the price per month of each resource (based in current market values); • Obtained the total price by multiplying the Resource price/month by the number of “units” employed and by the duration in which they were applied. Since the Activities are never simultaneous the total duration is simply to add the duration of each activity and it gives 17 months. For each Activity determining the cost is simply to multiply by the months that the chosen activity takes (see Table 4); • For economic/financial assessment purposes we divided the total cost for the 17 months in which these resources are applied, since we manage this directly the payments are made in the months in which the Activities take place with no delays.
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As can be seen in the Gant Chart these activities are not immediately subsequent so there lies the problem of what to do with the team in the intervals between activities (when the state is evaluating the proposals for instance). During that time the costs of the team are not allocated to this project and the personnel (while still fallowing this specific Project) are assigned to other priorities, returning full time when a new Activity in this venture starts. For this nature of work and resources it´s not possible (or it´s very difficult) to assign productivities, so the type and number of personnel assigned to the Tendering Process is made based on experience and taking in account the skills of each individual.
4.3.2. Construction The Construction Activities of our responsibility (all except the accessibilities) are the following: • • •
• • • •
Clean, demolition and deactivation of existing buildings; Land Movements; Berth: o Piles (deep foundation); o Infrastructure; o Protecting barrier (Rip rap); Rolling Way; Administrative buildings and warehouses; Equipment; Pavement.
The decision was taken of subcontract all the activities with exception of the first two, Cleaning and Land Movements which will be directly managed. For these Activities we will detail the resource allocation and costs calculation as showed in the next table (as we have already stated the duration was fixed in reasonable limits and the resources should be assign to meet those deadlines at a minimum cost):
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Activity Land movement Tasks Included : Removing of existing landfill in zones to remodel, with a height of 2.0m, including load, transportation and placement of debris and remaining products in deep and possible indemnifications.
Tasks and resources involved Excavation - 103000m2*2m = 206000 m3
Recompactation of the excavated surface
Quantity Units 103000 m2
Units Price(€/m2) 7,79 €
Quantity Units
teams
206000 m3 206000 m3 103000 m2 103000 m2
Excavator(BIG)* Truck* Foreman Cylinder* Water Truck*
Tasks and resources involved Buildings (walls) - 0,2 m thick - 20.000m2*0,2m = 4000 m3 1m2=>0,2m3
Pavement - 0,1 thick - 60.000*0,1 = 6000
Productivity(Quantity/day) Duration (days) Duration (rounding) Cost (€/day)
1440 181,7 72000 72000
28,61 28,34 29,00 1,43 1,43
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Quantity Units 80000 m2
Units Price(€/m2) 2,96 €
Quantity Units
teams
20000 m2 4000 m3 4000 m3
6000 m3 6000 m3
Indemnifications of deposits*** Personal expenses, lodging and food Indirect Cost Total Cost ***accounted in land movement activity * including operator
Number Teams
5 40 1 1 1
Indemnifications of deposits Draining during construction Personal expenses, lodging and food Indirect Cost Total Cost
Activity Clean, demolition and deactivation of existing buildings Tasks Included : Demolition of existing buildings and removing of existing pavement, including foundations and kerbstones,loads, transportation and placement of debris and remaining products in deep and possible indemnifications
Total Cost 802.033,00 €
Excavator with scissor and hydraulic hammer* Excavator(REGULAR)* Truck* Foreman Day Labor Rotomilling machine (Fresadora)* Backhoe (Retro Escavadora)* Truck*
29,00 29,00 29,00 2,00 2,00
960,00 € 320,00 € 300,00 € 400,00 € 240,00 €
31
40,00 €
Costs
139.200,00 € 371.200,00 € 8.700,00 € 800,00 € 480,00 € 20.000,00 € 100.000,00 € 57.040,00 € 104.613,00 € 802.033,00 €
Total Cost 236.946,00 €
Number Teams
Productivity(Quantity/day) Duration (days) Duration (rounding) Cost (€/day)
4 1 3 1 20 1 2 6
240 480 145,12
1200 208
30,75
20,83 8,33 9,19 20,00 20,00 5,00 20,00 4,81
Costs
21,00 9,00 9,00 20,00 20,00 5,00 20,00 5,00
1.280,00 € 720,00 € 320,00 € 300,00 € 60,00 € 1.600,00 € 280,00 € 320,00 €
107.520,00 € 6.480,00 € 8.640,00 € 6.000,00 € 24.000,00 € 8.000,00 € 11.200,00 € 9.600,00 €
20
40,00 €
24.600,00 € 30.906,00 € 236.946,00 €
Table 2 – Description of the costs per activity
The steps and assumptions made to calculate the costs and assign the resources were as follows: • •
Each Activity was decomposed in tasks of different natures (for instance in the Land Movements we identified Excavation and compactation of the excavated surface) and the quantity of work was converted in different units (if necessary); For each task the necessary resources (Personnel and Equipment, materials are not very relevant for Activities of these nature with exception of fuel, but that is already taken in account in the price/day of the equipment) were assigned; 16
•
The productivity of the resources was calculated taking in account the conditions of the work, equipment and labour. For instance, for the Excavation task in the land movements Activity: We know that a medium-large excavator (like a Komatsu PC350) can excavate about 180m3 in one hour (the bucket useful capacity is about 1m3 an it takes about 20 sec to deliver a bucket load to a truck), we assumed 8h work days, so for a day the productivity is 1,440m3. Then we determined how much such excavators we needed to complete the work (206,000m3) in the given deadline (1.5 months, or 30 week days); o After knowing how many Excavators we need we determined how many trucks we should have to assure continuous work for the excavators. The productivity of a truck was calculated assuming that each truck as a capacity of about 13m3, and that for each load it as to wait that the excavator fills his load and them he must make the trip to the land/debris depot and come back. So he carries 13m3 in 13*20sec= 0.0722 hours (time necessary for the excavator to load one truck) and assuming that the depot is 15 min away he takes 0.5722 hours to carry the 13m3. In an hour he “produces” 22.72 m3, what gives us the value in the above table of 181.7m3per day. Than we adjust the number of trucks so that the Excavators are never idle; o The Foreman in necessary, and should be taken in account to calculate the costs, but his “production” is to assure that the above Productivities are indeed complied; The costs of the equipment were deduced from the cost per hour of these kinds of equipment in the market that already includes the price of the Operator, fuel and maintenance. For instance we assumed a price of 120€/h for a big excavator; 40€/h for a Truck and 30€/h for a Backhoe1 and so on. These are average prices in the market; The same procedure was followed for the other tasks and equipments2; Having the duration, the quantity of resources employed and their cost per day we simply have to multiply to obtain the costs; Besides these we also have to include other kinds of costs, the lodging for the workers, the indirect costs (we assumed a 15% figure) , payment for the depot and for the excavation task in the Land Movement the costs associated with draining for constructive purposes; o
•
• • •
1 2
Retro-Escavadora See the Excel file to see all the values
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• •
Adding all we have the price for each Activity and can also calculate the Price per Unit, for instance 2.96€/m2 for Cleaning and Demolition; Since these activities are managed directly we pay them in the month they are completed and with no delay.
For the Sub Contracted activities we apply only a monitoring team, whose cost is distributed by all the Activities (Indirect Cost). The cost and duration for these activities was based in other similar Constructions costs and durations for those activities, namely the new Alcântara Terminal of the Port of Lisbon (prices). 4.3.3. Operations and Maintenance Operations and Management Activities extend themselves for a 20 years period. We defined the necessary resources to sustain all the Operation and Management Activities and calculated an aggregated cost per year. To simplify we assumed these costs to be constant along the years (since we also assumed that demand would be constant), in the following table we present the resources and other costs associated with these activities: Operations&Management and Maintenance Crane Operations* Regular Cranes Post Panamax Cranes Stackers* Maintenance team Dock Personnel Materials/Contingencies Tugs** Dredging** Administrative personnel Management Technical Secretary/Clerk Payments to Port Authority Financial Costs, Debt interest
Quantity Costs(per month) Total Costs (per year)
3 1 10 5 5 1 4 1
35.000,00 € 46.000,00 € 8.000,00 € 1.500,00 € 3.000,00 € 50.000,00 € 60.000,00 € 90.686,27 €
1.260.000,00 € 552.000,00 € 960.000,00 € 90.000,00 € 180.000,00 € 600.000,00 € 2.880.000,00 € 1.088.235,29 €
2 3 5 1 1
5.000,00 € 2.500,00 € 1.000,00 € 500.000,00 € 83.333,33 €
120.000,00 € 90.000,00 € 60.000,00 € 6.000.000,00 € 1.000.000,00 €
Total Costs
14.880.235,29 €
**subcontracting * including operator
Table 3 – Costs of the operational and maintenance activities
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Like for the previous Activities the costs were determined based in current market values. We should note that we assumed that payments to the State would be fixed3 (a lump sum each year), and that dredging4 will take place all years (like we stated, although we are not responsible for it must pay a share of this activity costs).
4.3.4. Observations
The load diagrams are showed in Annex I (Project file), and resource allocation to each Activity can be seen in the Gantt Chart. All the quantities, prices and durations were checked taken into account market values, related works in similar projects and the new Alcântara Terminal project elements. The table below is a resume of our costs, in it we can also see in what period they will occur. This is very important for the Economic/Financial assessment since it isn´t simply how much you spend that matters, but also when they will occur (see Annex II, excel file).
3
4
To be more accurate there should be a minimum payment per year, plus a value per container moved. The cost for this was based in the expected costs of dragging for the Porto f Lisbon until 2042.
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Activities
Price
Per Act
Dead Line(periods)
Tendering Process Application Of Private entities Bidding phase (Project development) Negotiation Phase Project development, detail specifications
Construction Clean, demolition and deactivation of existing buildings Land Movements Berth Piles (deep foundation) Infrastructure Protecting barrier (Rip rap) Rolling Way Administrative buildings and warehouses Equipment* Pavement
4.555.150,00 € 109.538.979,00 € 236.946,00 € 802.033,00 € 70.000.000,00 € 17.000.000,00 € 13.000.000,00 € 40.000.000,00 € 2.000.000,00 € 10.000.000,00 € 16.500.000,00 € 10.000.000,00 €
719.234,21 € 1.438.468,42 € 958.978,95 € 1.438.468,42 €
1 to 3 5 to 10 13 to 16 18 to 23 51 27 28 51 28 43 51 51 48 51 51
Operation** Tugs Reception and delivery of containers (land clients) Docking and undocking of ships Storage of containers for long and short term Administrative services Complementary services Ship repair and refuel
297.604.705,88 €
52 to 291
Maintenance Equipment renewal Cleaning and environmental risks monitoring Infrastructure maintenance Total
411.698.834,88 €
Notes: Only Activities For which we are Responsibles * In Equipment we include the price of the cranes for the terminal (3 regular and 1 for post panamax ships) **This cost is per year
Table 4 – Description of the costs of the all project
5. Finance/Economical assessment As a private entity it is our objective to have an operation that will cover the investment and also generate profit to our shareholders. With the evaluation performed in the previous section regarding all the costs involved for the whole project, we now make an economic viability assessment. Since the PPP agreement stipulates that we, as the private entity, finance the total project, we now concentrate on studying the main source of revenue, which occurs during the operations phase, of the project: the TEU’s loaded and unloaded from the ships. There are several other services provided by us which consequently generate revenues, but to simplify 20
the calculations, we made our analysis solely based on the revenues generated by the TEU’s movements in the port. We performed the following different analysis: 1. Base case, fixed price per TEU (based on a good market price, 128€), most likely demand and with that calculate NPV for the concession period assuming a 8% discount rate, the internal rate of return(IRR) and the breakeven point (payback period). 2. Compose 3 different demand scenarios (A-high demand, B-medium and C-low) and establish a fixed IRR of 8%. Then, determine the price per TEU to achieve this value. 3. With a discount rate of 8% and varying the demand, see the variation of the NPV.
Within these two approaches and in order to simulate the demand evolution during the whole concession period, all the demands were not fixed for the 20 years of the operation but instead we determined that it will have a fixed value for the first 4 years (start phase), then a value from the 4th to 10th (1st expansion phase) and finally a value from the 10th to the 20th ((2nd expansion phase). Next we will show information about the total costs projections for the project and afterwards we will explain the 3 different approaches in more detail and present the results.
5.1. Total Costs Performing the calculations, the total cost of the project is 411,698,834.88 €. This corresponds to the costs of construction and tendering phases and 20 times (years) the Operations/Maintenance costs.
Phase
Costs
Construction Costs Tendering Operations/Maintenance(per Year) Total Costs
109.538.979,00 € 4.555.150,00 € 14.880.235,29 € 411.698.834,88 €
€/month 239.744,74 € 1.240.019,61 €
Table 5 - Total Costs of project
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5.2. Base case, fixed TEU price approach As explained before, this approach consists in setting a fixed price by TEU and, assuming an 8% discount rate calculate the NPV and breakeven point then we also calculate the IRR. To determine a competitive TEU price we found out what was the average price that is used in each of the main ports in Portugal, Table 6. Port
TEU Price (containers)
Sines Leixões Setubal Sotagus Liscont Average
143,2 € 124,7 € 146,9 € 121,4 € 140,0 € 135,2 €
Table 6 - Market price by TEU in Portugal Ports
We considered a competitive price of 128€ and so this was the value we use to perform our calculations. As explained before, the demand has 3 periods, 90,000 TEU’s for the first 4 years, then
200,000 from the 4th to 10th and finally a 350,000 from the 10th to the 20th. Figure 6 displays the accumulated discounted cash flow for this base case besides the costs and revenues of the project during all phases. As we can see, we only reach the breakeven point in the last month of the concession. In Table 7 we present the results.
Demand (TEUs/year)**
Unit Price
IRR
NPV*
BreakEven***
175000
128,0 €
8,20%
2.188.029,1 €
19,4
* Discount Rate of 10% **Average ***Years after operations begin
Table 7 - Results for base case
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Figure 6 – Base case accumulated discounted cash flow
5.3. Variable TEU price approach (scenarios A, B and C) In this case we establish 3 different scenarios, A with high demand, B medium demand and C with low demand. Given this demand, we calculate what should be the price per TEU so that we can have the assumed IRR of 8%. The next table and graph show a resume of the results obtained. Periods
Scenario A
52 to 100 (1st 4 years) 101 to 172 (4th to 10th year) 173 to 291 (1oth to 20th year) Average Demand Price per TEU
Demand Scenario B
90000 275000 350000 275500 112,7 €
60000 150000 250000 182000 176,1 €
Scenario C 30000 100000 200000 136000 246,9 €
Note: discount rate 8%
Table 8 - TEU for each scenario
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Figure 7- TEU for each scenario
As can be showed the price for scenario B and C are clearly above the competitors prices (see Table 6).
5.4. NPV variation with demand In this approach we varied the demand from 200,000 to 350,000 TEU’s per year (always keeping 3 different demand growth stages) with a fixed price of 128₏ and a discount rate of 8%. The results are shown in the following table and graph.
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Demand(1st 4 years)
Demand(from 4 to 10 years)
Demand(last 10 years)
116667 113333 110000 106667 103333 100000 96667 93333 90000 86667 83333 80000 76667 73333 70000 66667
269231 261538 253846 246154 238462 230769 223077 215385 207692 200000 192308 184615 176923 169231 161538 153846
350000 340000 330000 320000 310000 300000 290000 280000 270000 260000 250000 240000 230000 220000 210000 200000
Demand (average)
209103 203128 197154 191179 185205 179231 173256 167282 161308 155333 149359 143385 137410 131436 125462 119487
NPV 33.335.097,5 € 26.798.477,7 € 20.261.858,0 € 13.725.238,2 € 7.188.618,4 € 651.998,6 € -5.884.621,2 € -12.421.241,0 € -18.957.860,8 € -25.494.480,6 € -32.031.100,4 € -38.567.720,2 € -45.104.340,0 € -51.640.959,8 € -58.177.579,6 € -64.714.199,4 €
Table 9 - NPV for: 8% DR, 128€/per TEU
Figure 8 - Graph for NPV for: 8% DR, 128€/per TEU
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As we can see, if we have an average demand, with a time distribution as explained before, lower than 178635 TEU/year, it will not be possible to have a profitable operation within the 20 years concession period.
5.5. Observations To look at the details of these calculations please see the Excel file in annex 2 (digital version).
6. Risk Assessment 6.1. The risk-sharing contract Project Management Institute (PMI) defines the project risk as “[‌] an uncertain event or condition that, if it occurs, has a positive or a negative view of the project. The risk has a cause and, in such case, a consequenceâ€?. Thus, a risk is an uncertain event that can occur (more or less likely) that can translate itself into an opportunity or a "cost" to the Parts of the contract. A project is subjugated to various financial and business risks. It is generally accepted that a contract must be based on adequate balanced sharing of risk between grantor and concessionaire, taking each one the responsibility for the risks that has more appetite to deal with.
6.2. Risk identification
Table 10 presents the risks identified as relevant to a container port terminals concession. Based on this list, we tried to evaluate their way of charging the players of the contract. In the following sections we describe the elements contained in this table with more detail.
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General risks Planning and conception
Examples of risk exposure Defining the layout of the terminal; modal integration; conflicts with other operators; matching infrastructure and objectives.
Construction
Delays in the project; differences in costs estimations; lack of constructive quality; uncertainty about the geological and environmental conditions.
Licenses and expropriation
Acceptance of expropriation; permits for construction and operation.
Environmental
Negative
environmental
impacts
resulting
from
construction and operation. Safety
Accidents during the construction and operation.
Accessibilities
Availability of adequate access (road and rail); Maintenance of adequate depth in the areas of channels and bays
Maintenance and repairs
Initial state of facilities, maintenance and replacement of gateways to platforms; RTG's and other park equipment, repairs to the infrastructure during the operation.
Operational risk
Quality of the plan of operations of the terminal.
Technological risk
Implementation of new processes and techniques; obsolescence of equipment and infrastructure, more stringent regulations.
Performance and capacity
Uncertainty about the quality of service (time of loading, dweller teams) Limitations of the stock of containers; the availability of berthing areas.
Demand and market competition
Threat of new competitors (new port concessions), uncertainty about demand, modal split of demand (road and rail).
Financial
Uncertainty about the growth of the CPI; changes in the 27
General risks
Examples of risk exposure financial burden and risk of insolvency partners.
Legal risk
Impact of new legislation on the cost structure of the project and operations of the terminal.
Political
risk
and
unilateral Sudden changes to the plan that gives cause for economic
modification of contract
rebalancing. Changes in policies on public funding of ports; change of government.
Force majeure
Natural disasters; vandalism; war. Table 10 - Key-risks identified in the container terminal operation
6.2.5. Planning The decision to concession or not a new port terminal is typically a responsibility of the grantor, being the amount of preparation of the concession contract. The definition of the model most appropriate award should be based on the strategic vision of each port authority for the development of its port, the level of demand recorded and assessment of potential stakeholders. The expansion of already existing infrastructure can be the initiative of either the port authority or from one of the existing operators; the risk can be shared between the contracting parties or made individually by one. Any of these situations requires the conclusion of a new dealership agreement or an addendum to the concession contract, which studied the contracts do not constitute references to the terms of exploitation of these areas of possible expansion. The contract may be set the conditions under which that expansion should be addressed (e.g. saturation of the existing terminal).
6.2.6. Design and construction Of the contracts examined, the majority requires the completion of works of improvement or expansion of the terminal concessionaire. These may be smaller, as in Alc창ntara, which provides the place (the dog) in the final coating of asphalt concrete embankment of the area 28
"or very large, as in Sines, where it is expressed "is the responsibility of the concessionaire to build and develop the terminal XXI", which discriminated the different phases of construction and their dates of availability. Thus, responsibility for execution of construction work is in the dealer, and it charged all the risk. All contracts reviewed refer to the grantor (the Port Administrations) responsible for maintaining accessibility to the sea berth to discharge, which although it can be seen as a risk associated with construction will be discussed in the topic on accessibility.
6.2.7. Licenses, expropriation and environmental risk The general rule for licensing is done by the following: the Port Authority take responsibility for issuing all licenses required within their area of jurisdiction, and the remainders in the Concessionaire domain. Generally, the development of a proposed expansion/construction of a port terminal require a number of licensing bodies outside the administration port, including the caps with jurisdiction over the port in question, licensing and comrades of the ministry of the environment. At the environmental level, some contracts emphasize the responsibility of the concessionaire on all the direct causes that might provoke environmental damages by operating the concession. So, the environmental monitoring may be under the responsibility of the concessionaire, using a monitoring plan established in the concession contract and the development of locally contingency plans, in order to tackle environmental risks associated with their activity. However, the role of the concessionaire is much more linked to prevention and more monitoring than intervention in case of any pollutant discharge or other abnormal occurrence. Its liability is restricted to the environmental risk that are directly attributable to the business of cargo handling, which are generally less significant when compared with those resulting from the cargo handling by sea. For safety issues, commonly, the concessionaire is responsible for matters relating to the enforcement of laws and port regulations in force about to fire and explosions, security in the storage and cargo handling (dangerous or not) and security against theft and intrusion. 29
6.2.8. Accessibility The security of access by land and by sea in a container terminal is essential for its viability. For maritime accessibility, generally, the concessionaire is responsible for the maintenance of the operating basin bottom and the dock of berthing of the terminal concessioned and the channels of access, providing the maintenance dredging regularly. If the access channels are common areas, it makes all sense that the responsibility for its maintenance in proper conditions of navigability should be assured by the authority with jurisdiction over that port, that is, the PA. The contract can, and should, establish a interdependence relationship between the adequate availability of maritime access and the operation of the terminal.
6.2.9. Maintenance and repairs Since the operational responsibility of the container terminal is almost always in the concessionaire domain, it stipulates that "the company will install the equipment needed to operate the concession and the replacement of those who, by destruction, failure, wear or technical obsolescence is appear inadequate for the purpose intended to ensure continuous operation of the services. This obligation is extended, based on Decree-Law No. 324/94, all goods which are the establishment, i.e. "the infrastructure, facilities and equipment used by the grantor to the terminal and all it embodied or installed by Concessionaire. Grantor to it, as already mentioned, the continued elevation of the channels of access and berth funds of the terminal, and the land accessibilities (could be the responsibility of entities other than the grantor) as well.
6.2.10. Technological risk Technological risk is together with situations that, the emergence of new procedures for cargo handling or increasing of requirements to provide the service, there is a need to restructure the operational process or the equipment used, to avoid market losses or overruns. An excellent example of technological risk is the increasing size of container ships, with the consequent need 30
for investment in terms of cargo handling equipment. It is necessary to also make a distinction between technological change and ensuring operational efficiency, advocated by the principle of better technology.
6.2.11. Demand and market competition The risk associated with demand is by definition of the concession contract, if attributable to the concessionaire. However, there are mechanisms to mitigate this risk, particularly through the breakdown of fees payable to the grantor in terms of levels of demand recorded. For example, in Setubal, the variable component of the fees payable, which is the number of containers handled, has 3 bands, which correspond to different search figures collected by the grantor. The same happens in Sines, where the annual fees, according to the number of TEUs handled are also growing. For the concessionaire, this system allows the cost of granting relief in case of reduction in demand or the start of operation of the terminal. The competition between operators, but is wanted by authorities, is a source of great uncertainty for dealers, given the volume of investment that the concessions and imbalances imply that the emergence of new players can bring to the grant. Thus, it can be considered the contract a clause that seeks to defend the concession of unexpected changes to the market that was considered in Base Case of concession.
6.2.12. Financial The funding necessary for the development of the outsourced activities is responsibility of the concessionaire, by nature of the contract of concession contracts. The grantor is not subject to any obligation, nor assumes any liability or risk with regard to funding for the development of integrated activities in the concession. The concessionaire generally uses the funds from banks or other financial institutions to accomplish the obligations arising from the concession contract. In ensuring the funding for the project generally is established an attachment on the movable property of the concessionaire. However, this pledge requires the approval of the Port 31
Authority. Similarly, for the financial institutions involved will have a direct interest in the project in case of default of the obligations of the Concessionaire and / or replace the Concessionaire by another appropriate organization can be constituted pledge on the concessionaire actions, as collateral for financing the project. In this situation, the consent of the Grantor is required, since this opportunity to steep in of the donors (for the position of dealer in case of default) is only possible if there is a document attached to the proposal that certify the existence of a prior agreement between the grantor and the donors. The sensitivity of economic-financial balance of the concession be affected by changes in macroeconomic indicators is also safeguarded in contracts, as for payments to be made to the grantor (the concession fees) is generally expected that they are updated based on values the CPI recorded. Similarly, some contracts also stipulate that the tariff applied to the provision of cargo handling, which requires the approval of the grantor, may be updated, regardless of this approval, based on the annual change in prices: "if the grantor does not approve the draft update of the charges made by the concessionaire, it will have the right to update the rates in accordance with the CPI.
6.2.13. Legal In few cases, contracts have reviewed references to the legal aspect. The provision differs from the generally prescribed for the sector (general legislation in force) by the exclusion of legislative and environmental components, which in the case of amendments to the particular law also give rise to economic-financial rebalance of the concession. This situation also fits in the domain of unilateral changes of contracts.
6.2.14. Political and unilateral modification of contract In case of unilateral modification of the contract, the concessionaire can claim the economicfinancial balance of the concession. The effects of policies changes of state that are not included in the base case assumptions of the concession and, in some way, interfere with the operation of service, it will be the responsibility of the concessionaire. 32
6.2.15. Force majeure In the definition of force majeure fits all "unforeseeable and irresistible event, outside the Concessionaire and the effects of which will produce regardless of personal circumstances and of the same (e.g., acts of war, terrorism, earthquakes and trade embargoes). The concession contracts foresee the possibility of the grantor temporarily assumes the operation of services of the concession, and, in this situation the period of concession is suspended. If the grantor does not assume the control of the concession, the concessionaire is exonerated from the responsibility for incompliance of the obligations arising from the contract that are affected by the occurrence of force majeure. The occurrence of force majeure results in the replacement of the economic-financial balance of the concession, because of the unexpected loss that leads to the dealer. In case of an insurable risk, the economic -financial balance for the excess of losses results from the activation of the insurance.
6.3. Other risks Until now, we did not develop any topic relating to operational risk and performance and capacity they are closely associated with the operation of the terminal and, as such, are the sole responsibility of the concessionaire. Regarding the risk of accidents during the construction and operation (safety risk), this is exclusively within the concessionaire responsibility, in all that respects to the terminal concessioned. They may, indeed, occur situations in which third parties have also to take responsibility for mistakes or accidents arising from their work, such as the case of freight forwarders in circulation within the terminal, the towing company or even pilots service of the PA at the dock vessels or civil construction companies outsourced by the concessionaire (In table 1 is summarized the risks allocation).
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Table 11 - Matrix allocation of risks
7. Conclusions To make a detailed and reliable study of the viability of such a large and complex problem requires further study and more detailed information. Still, the activities identification and duration was developed regarding the help of an expertise in this sector, so the considerations are reliable and present. The omission information required us to make some assumptions, although the cost of the all project seems to be fair when it was compared to the project of similar projects (e.g. Alcântra New Terminal). Some of those assumptions/simplifications were:
•
Fixed payments from the concessionaire to the state, and fixed costs of operation/maintenance per year;
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•
Profits were reduced to a value per TEU moved when there are other sources of income (like storing the containers…);
•
Assuming an IRR of 8% for the project as a benchmark for part of our sensitivity analysis required further justification;
•
Demand estimates for the 20 year operation phase were split in three parts, early beginning(first 4 years, with lower values), expansion period(from 4th to 10th year, bigger values) and full maturity (last 10 years, with Port Terminal performing at his maximum for the different scenarios);
•
Values were based on experience in similar projects, still each site and project as its own specificities, so a more focused analysis on the concrete investment to be made is necessary.
But, even with this assumptions/simplifications the order of magnitude of the values shown in this report are accurate. And with some sensibility analysis some conclusions can, and should be done. The amount of expected demand is key for determining the viability of this project, even more then some eventual increase in cost of construction. Given the fact that this new terminal will be set up in the middle of the biggest economic crisis in the last 60 years, and that a recent terminal (Sines-Terminal XXI) is aggressively competing for the same (almost) market share it is extremely risky to assume that demand will be high and maximum capacity will be reached. In our base scenario the break-even point would only be reached in the end of the project, the 20th year of operations… The IRR is 8,2%, what is a good value if the assumptions hold, but allows very little buffer for risk and the NPV is 2.188.029,1 €, so the project is economically viable, but it requires for a huge financial commitment (in period 105, 4 and ½ years after the start of operations, the accumulated discounted cash flow is of -91.606.132,4 €!). Fixing the IRR in 8%, at a price of 128€/TEU, and varying the demand we see that for an average demand (across the three stages in the Terminal evolution) of less than 178635 TEU/year the NPV is negative. And with a medium and low demand scenario (B and C) the
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required price/TEU to keep the project viable (at a 8% IRR) is much higher then what his competitors do. With a concession of 30, instead of 20 years the numbers would look better bet than this, but uncertainty would be even higher about demand… So this is a Project that is viable for more optimistic scenarios and that carries huge risks, in a nutshell it as a questionable robustness. From the numbers we conclude that the choice of making this project cannot be made exclusively taking in account the return it will provide, and any Private Partner that will be brought in would only do so if it can count on sources of income other than the container movement5. Since there is still capacity available in the Port of Setubal and Sines there is no bottle neck on the rest of the economic sectors to have a Port, necessarily in the city of Lisbon, with increased capacity. Therefore this can only be justified as a national (at most regional) strategic choice, to make the Port of Lisbon a big contender in the Iberian Market, bearing the above signaled risks and associated costs. Thus now the question is if the Port of Lisbon is the place to make that bet? Is there space to develop there a large logistical platform? Is there space to house nearby new complementary Industries that take advantage of the Port proximity? Is it the place that offers the best conditions to optimize efficiency and productivity in operations? If the answer to this questions is yes than the expansion should go forward, if more suitable places exist in the great Lisbon area they should be seriously be taken in account, namely the Port of Setubal and Sines. In a nutshell, the choice to make this investment must be made taken in account all the regional/national economic strategy and the Ports (either Lisbon, Setubal, Sines, Portimão, or even Leixões) big options/investments should be seen in the context of a system were all the existing Ports are complementary instruments in a pursuit of a National purpose and not as small feuds at the service of their own interests or third parties… At least in a situation like this were the investment is only justifiable as a Strategic National/Regional objective.
5
Or even production port activities...
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Final important remark as to do with cost flexibility, and overall infrastructure/operational capability to be flexible in the face of shifting and unpredictable demand/technical trends. We are in the beginning of a crisis with historic proportions and that should be taken in account. Is it possible with low infrastructural investment to best manage the 20 Km water front at the disposal of the Port of Lisbon? Can the already existing infrastructures be better managed (maybe shifting some functionality from one zone of the Port to other?)? Can productivity and capacity expand optimizing existing resources? Answering this last questions and implementing the responses seams a best option for the Port of Lisbon than embarking in a high financial cost enterprise with a high economic, and above that, financial risk.
8. Bibliography 8.1. Sites Lisboa, P. (2007). Retrieved from http://www.portodelisboa.pt http://www.portodelisboa.pt/portal/page/portal/PORTAL_PORTO_LISBOA/AUTORIDADE_PORT UARIA/GOVERNO_SOCIEDADE/PLANO_ESTRATEGICO/PEDPL%20%20BROCHURA_Portugues.pdf
8.2. Papers Rodrigue, J., Comtois, C. and Slack, B. (2006). The geography of transport systems. Routledge: New York. Carvalho, M. (2007). Performane Evaluation of Portuguese Seaports. MSc thesis, Instituto Superior Técnico, Technical University of Lisbon, Portugal. AICEP (2008): Statistical Bulletin – 2007, Agência para o Investimento e Comércio Externo de Portugal, Lisbon.
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Wang, T., K. Cullinane, and D. Song (2005): Container Port Production and Economic Efficiency, Palgrave Macmillan, New York.
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