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ID Logistics Indonesia consistently offer sustainable logistics solutions Posts a growth of 700% from 2007 to 2014
CONTENTS
MAIN TOPIC
32
30 SHANGHAI WORLD EXPO EXHIBITION AND CONVENTION CENTER
GCC SUPPLY CHAIN & LOGISTICS CONFERENCE 2015 Sultanate of Oman
12 - 29 REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay .1ST IRF ASIA 40-56 REPORT REGIONAL CONGRESS AND EXHIBITION,Nusa Dua - BALI.
74
INFRASTRUCTURE
China interested in Singapore-Malaysia high-speed rail, Chile ports: Xinhua
60-73
AIR TRANSPORT
News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators
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Note’s From Publisher Dear readers, Welcome to the twenty-five EDITION. We never forget to always thank you to the Lord of His protection to you and us. Yess, it is not adult yet but in its journey ilo JOURNAL Magazine will always try to be more mature with update and useful informations for readers. Main topic of this november - december 2014 is
“ ID
Logistics Indonesia consistently offer sustainable logistics solutions Posts a growth of 700% from 2007 to 2014” We invite you to see our others interesting topics such as Logistics, Ports & Terminals, Sea Transport, Air Transport, Railways,and etc. We expect that these informations will helpful and meet your requirement. We are always try to give you the best informations, trustworthy and fastest. You are welcome to visit our website www.indonesialogisticsonline.com every time for updating news. Your suggestion and criticism are appreciated.
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www.indonesialogisticsonline.com | vol. # 14 | XIV | DECEMBER - JANUARY 2014
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MAIN TOPIC ID Logistics Indonesia consistently offer sustainable logistics solutions Posts a growth of 700% from 2007 to 2014 Jakarta,
ID Logistics Indonesia, a part of ID Logistics Group of France that arrived in Indonesia in 2007 to serve customers through sustainable logistics solutions posted agrowth of 700% over 7 years of operation. This growth resulted from continuous and consistent service to customers rooted in knowledge and global experience as part a French based global group supported by information technology on Warehouse Management System (WMS) and Transportation Management System. Eric HEMAR, Chairman & CEO ID Logistics Group of France stated, “ID Logistics Group, based in Franceand founded in 2001 today continues to expand its business and has been running business operations in 14 countries, including Indonesia. Following recorded revenues of 559 million Euros in 2012, last year in 2013 we recorded an 31,5% growth in business and recorded revenue of 735 million Euros, or about 11 trillion rupiah, and in 2014, the growth of our business through the third quarter has recorded revenues of 640 million Euros with a growth of 23.8%. Eric further explained, “We’ve been in Indonesia, since seven years ago or more precisely in 2007 we started the business here. From 2007 to 2014, ID Logistics Indonesia managed to record growth of 700%, this is an encouraging business condition and we perceive good economic prospects in Indonesia. So we aim to strive to maintain this attained growth and continue to improve our business in Indonesia.” ID Logistics Indonesia, which was founded in 2007 currently has 40.000 sqmstorage warehouses in three locations, supported by over 400 employees who are part of the ID Logistics Group’s 13,000 employees spread across the world. Vincent Holley, General Manager –ID Logistics Indonesia said, “We try to examine and immerse ourselves into the requirements of customers for a logistics solution that can meet the needs in Indonesia.We have the support of ID LOGISTICS group so that it can integrate various existing technology with local needs.” Furthermore, “ID Logistics has developed a sustainable solution through a cost efficient system but environmentally friendly. This is important because the current business growth in Indonesia, particularly in the logistics industry faces no easy challenge, that is, limited infrastructure which causes high costs caused by congestion coupled by an increase in fuel oil, which is the main energy source for transportation. In addition, Indonesia has poor air quality or pollution levels are high, sooner or later regulation would be needed to encourage efforts to improve air quality, which means one of them is environmentally friendly transportation.” The publication of the World Bank on Logistics Performance Index (LPI) shows that Indonesia is ranked 53, from a previous ranking of 59 in 2012. While the Environment Performance Index or EPI noted that Indonesia was ranked 112 out of 178 countries. Vincent said, “In addition to these challenges, we should also note that at this time the consumer is also changing in terms of buying process. We can see more and more retail stores are springing up closer to housing areas in efforts to save time and avoid congestion, also more and more people are shopping online, and this induces an increase in e-commerce. In future competition the demands are to combine retail and e-commerce “. Indonesian Ministry of communication and Information noted that during 2013 the total e-commerce transactions in Indonesia
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MAIN TOPIC reached IDR 130 trillion in 2013 and is predicted to reach 71% growth. “Given the challenges that exist, retail businesses needs to improve their logistics and partner with third party logistics companies or 3rd Party Logistics service-3PL,” said Vincent. “ID Logistics Indonesia currently provides Smart Logistics services, that combine dedicated architecture, cutting-edge technology, operational efficiency, innovative capability with a strong commitment to sustainability designed according to the needs of the business cycle of the industry, retail and e-commerce” Vincent added. Transportation ManagementSystems or TMS ID Logistics is also managed by information technology systems that optimize the flow of goods, secure and sustainable with the presence of measuring CO2 calculator. While warehousing is managed by Warehouse Management System which optimizes the flow of goods, increase the value of goods and easy to trace its existence. ID logistics also provides retrieval and distribution service called Unit Picking and distribution unit.”We are also in the process of proposing to use environmentally friendly Truck Green Truck fuel or gas that has low CO emissions, as our commitment to sustainability or sustainability at the same time cost efficiency,” explains Vincent.In 2013 the group acquired CEPL a French company, leader in unit picking, that enhances not only ID Logistics capability to serve customers on luxury goods, cosmetics, cultural goods and high tech market but also to traditional manufacturing and retail customers Currently ID logistics serves various types of consumers; industries, retailers and e-commerce. Start of Hyper and Supermart, specialty retail, consumer goods, heavy industry such as pharmaceutical, automotive and others. “Our focus to consumers and we have a commitment to quality, cost efficiency, flexibility and speed in responding, innovation and sustainability, “ said Vincent.***** About ID Logistics Group and ID Logistics Indonesia ID Logistics, an International group of companies engaged in the field of contract logistics was founded in 2001, to develop and implement the best solutions according to the needs of customers in the supply chain process. With more than 13,000 employees and operates in 14 countries, the group ID Logistics serves customers around the world both from retail, manufacturing, unitpicking and e-commerce / online storesectors. The main principle is upheld to develop smart logistics by combining techniques specific architecture, cutting-edge technology, the efficiency of the operation and the ability to constantly innovate with a strong commitment to sustainability ID Logistics Indonesia has been established in Indonesia since 2007. It currently has a 3-point location with an area of 40,000 m2 warehousing and supported by 400 employees. ID Logistics Indonesia has global expertise with cutting-edge IT systems and provides the best solution. With a strong involvement and a deep understanding of the local culture, and supported by a team of international start-ups, ID Logistics Indonesia is ready to deal with and support each operational launch / new activities, incorporating specific local needs. R & D team of local experts we also focus on the development of environmental protection solutions such as cost efficiency and environmentally friendly oriented approach (Go Green). For further information, please contact: Vincent Holley General Manager – ID Logistics Indonesia Telp. 021 576 5337 and 576 5338 -Email: vholley@id-logistics.com www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Legal fight chills China metal trade after port fraud probe As global banks and trading houses fire off lawsuits over their estimated $900 million exposure to a suspected metal financing fraud in China, the tangled legal battle to recoup losses is set to drag on for years and hinder a swift recovery in metal trade. HSBC is the latest bank to launch legal action since Chinese authorities started a probe into whether the firm at the center of the allegations, Decheng Mining, used fake warehouse receipts to obtain multiple loans. Several banks had already ditched their commodity trading divisions due to low returns. The scandal, centered on the eastern port of Qingdao, means those remaining in the commodity financing business will have to consider their future, or at least bring in new controls on lending requirements. It has also acted as a warning over murky business practices in China and highlighted the difficulties of navigating the Chinese legal system for foreign companies, some of which have since frozen new financing business.
Qingdao case could entail long legal battle in China Among the many banks launching legal action, following the Qingdao case in China, is HSBC. The bank is starting a probe into Decheng Mining, the firm caught in the eye of the allegations, to find whether it used fake warehouse receipts to obtain multiple loans. An estimated $900 million exposure involves banks and trading houses in this suspected metal financing fraud in China. It is expected that the legal battle will be dragged over years and there are fears that it will hinder the recovery in metal trade. Those in the commodity financing business will have to introduce newer and better controls on lending requirements to ensure their future is not effected. The scandal is also expected to negatively impact the commodity financing market and it is said that there might be reduced lending on metal collateral in the next six to twelve months. It’s reported that China’s imports of refined copper, which is most widely used metal in financing, fell 8 percent in June from a year earlier to hit a 13-month low as banks reduced lending for metals imports following the probe. Further the lawsuits will drag for years as there are multiple claimants over cross-country jurisdictions. Plus it also involves state-owned entities and a separate corruption probe on Chen Jihong, the chairman of Decheng’s parent firm. As China recognizes international arbitration awards, a recoup of losses with the help of arbitration is possible. But that too takes at least two to three years. It’s still unclear how the full financial impact of the Qingdao case will impact the commodity financing market. But publicly traded banks and trading firms have been forced to disclose potential losses. Some of these such as HSBC, Standard Chartered, Citi, Standard Bank , Mercuria Energy Trading and Citic Resources have more than $880 million of exposure.
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Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT Amid huge Singapore-based competition in commodity finance, solutions are sought to mitigate risks of inventory finance There is heightened competition in Singapore’s commodity trade finance sector, given a continuous growth in commodity trade flows into Asia along with banking regulations. All of this is boosting the increased use of structured inventory financing in the region that is further driving the traditional commodity financiers to make a comeback even as newer Asian entrants make headway. Commodity finance has been largely dominated by large European commercial banks in the past. However, post European sovereign debt crisis in 2011, which led many European banks to rein in their lending, new entrants such as DBS Group and more recently, China’s ICBC, Bank of China and China Construction Bank have forayed into the commodity trade financing business. Meanwhile European banks are also making a comeback and trying to capture the future growth in Asia. For instance, ABN Amro and Rabobank have already commenced their dedicated structured inventory financing desks in Singapore in the second half of 2013. Stuart Smith, Deutsche Bank’s head of commodities in Asia “estimates that the inventory market is growing at between 5-10 per cent a year, and that there is US$15-20 billion of such financing at any one time.” Commodity inventory financing includes traders who pledge a warehouse receipt for a secured loan as well as repurchasing transaction where the ‘bank takes over the ownership of commodities for a short period of time’. The latter - the ‘ownership model’ has become very popular because of the benefits it presents to both the client and the bank. This model increases bank’s security as well as requires allocation of less capital under regulatory requirements and allows optimization of capital allocation while offering alternative financing. Further, ownership of goods also helps banks to stay clear of legal complications. The new ABN Amro desk adopts this ownership model by using a special purpose vehicle. From a commodity trader’s vantage point, the ownership model ensures just-in-time delivery, better management of balance sheet and access to more liquidity. Further, it also helps to reduce the cost of the loan by between 10-50%. This is particularly true for smaller trading firms that have lower credit rating with banks. However, in recent years there have been a number of problems with frauds using warehouse receipts and inventory finance, and most recently the Qingdao scandal, indicates losses of hundreds of millions of dollars, affecting a number of large international banks and also a major international trading house.
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Mr. Nick Brown, Head of Inventory & Structuring Structured Trade Finance - Australia & New Zealand Banking Group OVERVIEW
1. What were the banks and traders financing?
QINGDAO WAREHOUSE FRAUD
2. Documents used 3. Legal issues
Warehouse, Cargo & Structured Commodity Finance Summit Singapore
4. Politics and port authorities
November 2014 5. Focus on Qingdao 6. Conclusion
Nick Brown Head of Inventory & Structuring 2
1. WHAT WERE THE BANKS AND TRADERS FINANCING?
1. WHAT WERE THE BANKS AND TRADERS FINANCING?
PORT
Onshore bank: D Onshore USD LC provider
PRODUCER
USD LC
SHIP
USD cash
CNY deposit
Onshore entity: B Demander of financing deals
TRADER Onshore
PORT
USD LC
The issuance of LC from D and the swap of USD for CNY between B and D is now being targeted by SAFE’s new regulations
USD cash
Offshore
BUYER Offshore entity: A Owner of copper in bonded warehouse
WAREHOUSE 3
China’s short-term FX lending and copper bonded stocks increased five-fold 2009-2013 800
450 400
700
350
600
300 500 250 400 200 300 150 200 100 100
50 0
0
$bn; ’000t
Jan 08
Jan 09
Jan 10
Jan 11
FX short term trading
Jan 12
Jan 13
Bonded copper inventory (kt, rhs)
2. DOCUMENTS USED
Bills of Lading Customs Form
• Used to move goods from ship to warehouse
Storage Form
• Warehouse form for load-in of goods
Warehouse Receipt
• Not a document of title • Merely represents a right to take delivery from the warehouse keeper • Transfer of a warehouse receipt requires stamp by the warehouse keeper • Pledge of warehouse receipt requires entering into a pledge agreement or endorsing the warehouse receipt with “Pledged” • Pledge of warehouse receipt ≠ Pledge of physical goods
Source: CEIC, Goldman Sachs Global ECS Reseach estimates, CRU, NBS
5
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Offshore entity C: B’s offshore subsidiary
4
1. WHAT WERE THE BANKS AND TRADERS FINANCING?
Jan 07
USD cash
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Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT 3. LEGAL ISSUES
3. LEGAL ISSUES
Difficulties of attaching assets in China
What can go wrong in pledge in PRC?
Limitations of Chinese legal system
• •
• •
Foreign judgments are not recognized in China Arbitration awards are recognized but obtaining an award is slow No provisional measures to support a foreign arbitral proceeding/foreign litigation Provisional measures are available to support Chinese litigation/arbitration
Problems in case of fraud
• • • •
Pledge over Goods
Pledge over WR
No actual physical possession
Not publicly known, easy to have multiple WRs issued for same goods
Goods are not separated and identifiable
Authorities seal warehouses involved No reliable data on what is there Difficult to get Chinese courts to attach assets Criminal cases before civil cases
Transfer of WR requires warehouse keeper’s acknowledgment which is often difficult to obtain
No control over the movement of goods
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8
4. POLITICS & PORT AUTHORITIES
5. FOCUS ON QINGDAO
Where is Qingdao?
Information in the Public Domain
Ports in China
Chen Jihong
Dezheng Resources Holdings Co Ltd
• Metal stored at Dagang bonded storage facility Qingdao and at Penglai • Used by various companies associated with Chen Jihoing as collateral • Forged/duplicate receipts used to obtain multiple loans • Estimated 300,000 tonnes of alumina, 20,000 tonnes of copper and 80,000 tonnes of aluminium ingots • Estimated RMB20bil owing to Chinese banks and up to USD1bil owing to foreign banks • Chen Jihong detained/warehouses sealed
Qingdao Decheng Mining Co Ltd
Zhong Jun Resources (S) Pte Ltd 10
9
5. FOCUS ON QINGDAO
5. FOCUS ON QINGDAO
What happened in onshore finances in Qingdao?
Qingdao fallout
Bank 2 Pledge of WR
Company A
Proceedings against Chen Jihong and companies
Proceedings against the Qingdao Port in China
SCB v Chen
Citic Resources v Qingdao Port subsidiaries
HSBC v Zhong Jun Resources (S)
Company B
Company C Pledge of WR
Bank 1
6. CONCLUSION
ABN AMRO v Chen Shanxi Coal v Dezheng Resources
Pacorini Logistics v Qingdao Port
Shanxi Coal v Qingdao Port
Proceedings between banks/traders
Citi v Mercuria
ABN Amro v Citic Australia Shanxi Coal v Citic Australia Shanxi Coal v Sinosteel (arbitration)
Monitoring over the life of the facility • • • • •
Do the numbers make sense? Are there discrepancies? Are there all the documents expected? What is the underlying reality of the “paper transactions”? What is the relationship between the collateral manager and borrower? • What is the relationship between the bank staff and borrower?
What security over the assets has been established? Insurance cover
• Is ‘All Risks’ really all risks? • Establishing the metal exists
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Dan Day-Robinson, Executive Director Swiss Futures & Options Association Content
Content
1. 2. 3. 4. 5. 6. 7.
1. 2. 3. 4. 5. 6. 7.
What could go wrong in Inventory finance? CMT Singapore conference "Warehouse, Cargo & Structured Commodity Trade Finance" 13 November 2014 , Singapore
Overview Brief history Warehouse receipts in a financing context Enabling legislation Risk Summary Your rights Structure snapshot
Overview Brief history Warehouse receipts in a financing context Enabling legislation Risk Summary Your rights Structure snapshot
Dan Day-Robinson, Director GT Group, Geneva
Elements supporting inventory finance • Sound legal and regulatory framework • For public warehousing, an exchange-regulated supervisory framework
• Custom in practice in a common law environment • Warehouse receipts legislation in a civil code environment
Warehouse Receipts – what are they? Should (but only may!) provide evidence of title/control:
Warehouse receipts
Warehouse Warrants
LME Warrants
Rather like:
Basic features Lender
Borrower
Buyer
Bills of Lading
Railway Bills
Brief History Warehouse
1. Bank and borrower enter agree financing 2. Borrower deposits goods in warehouse
7. Offtaker pays into the bank collection account 8. Bank releases receipt 9. Offtaker redeems receipt at warehouse for goods
3. Warehouse issues receipt 4. Borrower pledges receipt as collateral 5.Loan is drawn down 6. Borrower sells to buyer/offtaker
North America
It’s as old as the hills! Japan – Dojima Rice Exchange in late established in late
1600’s. Merchants met, graded rice & negotiated market prices.. After 1710 spot trading expanded into issuance and negotiation of WR’s. Later, when there was currency devaluation, rice WR’s became a medium of exchange. Rice sent to Osaka covered by WR’s which could be sold. 1749 – 110,000 bales traded (only 30,000 in existence).
More recently:
Wheat, corn, barley rye & oats trade in mid-west 1848 – Illinois-Michigan canal. Farmers in hinterland
Lending against collateral: old as the hills… 1980’s
Most EU regulatory regimes give 20% weighting to loans secured against LME warrants
Chicago exchange developed rules for grading,
1990’s
UN, EBRD, KHF & others try to recreate the US model of Warehouse Receipts Financing in CIS, Africa, with marginal results
1992
Basel I gives improved (20%) risk weighting to LC’s ‘collateralised by the underlying transaction’ or 0% risk weighting for LME warrants provided lender is an ‘Expert Bank’.
2004
Warehouse Receipts fall under “Object Finance” under Basel II Specialised Lending Protocol under ‘Commodities Finance’
delivered to merchants along canal.
storage, standards & inspections – traders sold cash and forward grain and delivered using physical grain or WR’s (representing physical grain) as a basis for negotiation and sale/purchase…
Resulted in development of US “Uniform Warehouse Receipts Act (handout)
Enabling Legislation A Warehouse Receipts Act evidences enabling legislation
Independent schemes, or national schemes must be supported by national legislation too Ergo - the law in the country needs to recognise a warehouse receipt as a document of title
Handout: 1906 – The US Uniform Warehouse Receipts Act
Operated for nearly a century until updated in 2000
Was a key development and became a basis for understanding components of warehouse licensing & supervision
UWRA is still used as a template for developing countries…
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Inventory finance: what is a warehouse receipt? “A document issued by a warehouse keeper stating that the goods identified on the warehouse receipt are held in the warehouse for (i.e. at the disposal of) the person named on the warehouse receipt.”
WR’s in Europe – 1877/1878 Advent with industrial revolution in England.
London Corn Trade Association 1878 – became GAFTA later - licensed storage facilities until 1988. WR’s precursor of futures…
LME origins 1571 – but in 1877 warrants for metals in store negotiated by importing merchants
Warehouse receipt redefined: Two more useful ways of describing:
At the minimum level, a warehouse receipt is a document which shows goods have been delivered into a warehouse. Period.
As a financing proposition, a document giving proof of
ownership of goods stored in a warehouse. The receipt may be a title document (depending on legislation) and it may be either negotiable or non-negotiable. A negotiable warehouse receipt is deliverable to the bearer or to another party named; a nonnegotiable receipt specifies the unique person to whom the stored goods are deliverable. As a financing/collateral management proposition we need to examine enabling legislation
UWRA key features What can and cannot be inserted on a receipts (ensuring non-impairment of warehouseman’s duty of care obligation)
Negotiability or non-negotiability
Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT
UWRA key features: Obligation of warehousemen to: Deliver; to be able to justify the delivery and accept liability for misdelivery.
To cancel receipts when delivered, or mark them when part delivered.
To care for goods and to keep them separate (unless they
UWRA Key features
Criminal Offences
Regarding negotiation of receipts;
Issue of receipt for goods not received Issue of receipts containing false statement Issue of duplicate receipts not so marked
Negotiation by delivery Negotiation by endorsement
etc..
are fungible)
Administer lien correctly
UNIFORM WAREHOUSE RECEIPTS ACT (EXCERPT) Act 303 of 1909
443.50 Warehouse receipts; issuance for goods not received, penalty.
Sec. 50. A warehouseman, or any officer, agent or servant of a
warehouseman, who issues or aids in issuing a receipt knowing that the goods for which such receipt is issued have not been actually received by such warehouseman, or are not under his actual control at the time of issuing such receipt, shall be guilty of a crime, and upon conviction shall be punished for each offense by imprisonment not exceeding 5 years or by a fine not exceeding 5,000 dollars, or by both.
US Act provides for enforceable standards of storage & control of goods, & transfer of title of a specified volume & quality of a commodity…
How do I establish the legal nature of my Warehouse Receipt? There may be no rights • If you fail to appreciate the true legal nature of the warehouse receipt Whatever rights you have • How effectively can those rights be enforced? • (Non exchange-traded, where custom not established your rights relate to the jurisdiction in which the warehouse/goods are situated (lex situs)
Issues of title and security – legal principles
SO, WHAT IS A WAREHOUSE RECEIPT?
“Custom” in practice LME warrants covered by Act of Parliament Otherwise in common law served by custom and
• No international legal definition
covered by case legislation
South Africa example – silo receipts are negotiable
• Cannot assume equivalent to a bill of lading
instruments and can be used for financing as well as delivery on the JSE in Jo’burg.
• Depends on local law, enabling legislation • Except where there is a custom in practice….
How do I establish the legal nature of my Warehouse Receipt?
Using commodity stocks as collateral security – some basic areas of concern: Risks relating to physical control of security • Location and condition of commodity (does it exist?)
• Local law and legal system • Rights under security over commodity • Rights under the warehouse receipt
• Location, condition and security of warehouse • Reliability of warehouse operator
• Co-mingling
• Quick and effective enforcement of above rights
Documents of title: negotiability
What is a document of title?
Documents of title
Essence of negotiability:
Personal v proprietary interests
Represents entitlement Transferable by: – delivery; or – endorsement and delivery
Examples: – bills of lading – negotiable instruments (cheques etc.) – negotiable securities (bearer shares etc.)
Security – types of security – pledges – perfecting security interests – enforcement 25
26
27
More on pledges
Security: Pledges (1) Security: Pledges (2)
Requirements: – Intention to pledge (pledge agreement?)
Enforcement of Pledge must be in the location of the goods & law of Pledge is country specific
Constructive Possession:
– Goods identifiable (problems of commingling)
by party holding asset/document of title as agent for pledgee
– Possession: » actual » constructive 28
Russian Law Pledge:
by holding documents of title
Pledge typically ‘up country’ – ie ‘very’ local courts
Requires court-approved auction of pledged goods
Historically a disappointment to foreign creditors
Brazilian Law Pledge
Pledge typically ‘up country’ – ie ‘very’ local courts
Multiple registrations, notices, acknowledgements & registration of same required
Creditor may be able to sell goods but proceeds usually paid into court
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Pledges continued:
Warehouse Finance- Risk Summary 1 Object Risk
Pledge over Goods
Will it last?
German Law Pledge:
Will it burn/ flood/ moulder/ propagate/ infest?
Requires map of warehouse with ring around area covered by the pledge
Volume of goods to be inserted inside the ring
Should be regularly updated to be effective
Requires enforcement via courts
In an insolvency, priority creditors (notably the workforce…) get 50% of proceeds of pledged assets despite 100% pledged to a lender
‘Fix’ is employee-less SPV to take ownership of goods and then pledge to lender
Regulatory
Some jurisdictions (eg France) have specific rules covering pledge of “strategic inventories”
Post- various explosions, many jurisdictions have specific rules covering the storage and transport of hazardous/ flammable materials (eg oil)
Restrictions on disposals/exports apply to certain commodities (eg Enriched Uranium, Grain…)
Political Risk
Confiscation, Expropriation, Nationalisation, Deprivation, Contract Frustration
Transfer Risk (if goods/asset is onshore)
Fiscal Liquidation of Asset is taxable?
Where is it?
Any physical vulnerabilities? (Fire, Flood, Tempest, Civil Commotion etc)
What are operational local legal requirements to maintain validity of the legal structure?
Who is liable to pay warehouseman? (note: Warehouseman’s Lien)
What are mechanics for enforcement of rights? Does the jurisdiction favour repossession/ enforcement of contractual rights?
What is the jurisdiction?
Dilution Risk on assignment/ sale of Receivables
Is pledge/ sale/ assignment legally binding, valid and enforceable?
What “robust mechanisms” are there to ensure the collateral is what it is meant to be , where it is meant to be? Also that collateral manager is not over-ruled/ circumvented?
What “knowledge of the transaction” does the lender have?
Is the collateral sufficient? Does it deteriorate?
Collateral Management versus Collateral (Stock) Monitoring Collateral Management is a mechanism which allows movable assets belonging to a Borrower to become eligible as collateral security in the context of a loan agreement, by virtue of the Borrower surrendering possession of the Goods to a Collateral Manager acting on behalf of the Lender (giving “constructive possession”) = custody Collateral (Stock) Monitoring is a mechanism which allows movable assets belonging to a Borrower to become eligible as collateral security in the context of a loan agreement, by virtue of the Borrower giving oversight of the Goods to a Collateral Manager acting on behalf of the Lender (giving “constructive possession”) ≠ custody
Both of these are tripartite arrangements (sometimes quadripartite)
• • • • • •
Events prior to reception of the Goods Theft Inherent vice and related events Cases of Force Majeure Normal handling and storage shrink Court or other legitimate authority order
Limitation of the collateral manager’s responsibility
• Insured value of the Goods, to the exclusion of indirect damages. • Due to negligence or wilful misconduct of the Collateral Manager. Burden of proof rests on the claiming party. • The collateral manager is always indemnified if his actions are in relation to the lenders instructions
Case Study
Dan Day-Robinson, GT Geneva
• •
•
Price volatility
Legal Risk
CMA limitations: CMA exclusions
Can the goods be sold easily?
Who operates the warehouse?
Collateral Risk
You need a local lawyer…
Should be publicly notified (notices on/in each warehouse/factory)
WF- Risk Summary 3
Market Risk
Warehouse Risk
Belgian Law Pledge
WF- Risk Summary 2
Environmental
In case of disaster/ spillage/ pollution etc, who is liable?
Payment Risk
Who is buying the goods? Risk on receivable counterparty
CMA fees •
Structure & cost • Monthly • One month deposit • Ad hoc variances
•
Amounts • Percentage of the value of the Goods, based on peak stocks for the month and subject to an absolute minimum.
•
Who pays • Depositor or bank
•
Guarantees or Lien • Right to sell
•
Penalties • Interest for late payment
CMA risk mitigation The CMA offers strong risk mitigation only in a complete structure
Few reliable providers Costs Administratively heavy
CMA financing advantages: BALANCE SHEET FINANCING
FINANCING WITH CMA
Recourse on: • Corporate • Goods?
Recourse on: • Goods (Independent possession) • Insurance • Collateral Manager
Operational Risk: • Minimal (standard documentation)
Operational risk: • Somewhat increased (more complex / diverse docs
Case Study
RISK.....
.....RECOURSE ON
Default
Goods (claim, possession, sale)
Fire, natural disaster
Goods Insurance (cover?)
Theft
Goods Insurance (insured?)
Misappropriation
Goods Insurance (covered?)
Other Force Majeure
Insurance (political risk?)
Unexplained Losses • Overstated deliveries • Understated releases
Collateral Manager
Wrongful Release
Collateral Manager
CM’s Negligence/Fraud
Collateral Manager
Outline
Involving a UK company, an Austrian borrower, an E. Europe warehouse operator and a Czech bank
Claimant: Komercni Banka AS
Case heard in the English High Court
BCL Trading GmbH - Vienna
Defendant – Stone & Rolls Ltd & its director Others: Donkhleboprodukt – Rostov-on-Don
Details of Claim (handout) • 28 letters of credit opened from July 1998 and August 1999 – with defendants, S&R, as named beneficiaries
• S&R to receive monies for sales of agricultural produce (sunflower seeds, grains, soybean oil) to the borrower, BCL
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Documents required under the LCs • Commercial invoice in one original signed and stamped
• Confirmation of insurance assigned in favour of the bank
• Original “warrant list” indicating LC number, total quantity of goods, unit price, stating goods only held in favour of the claimant (handout)
www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
The Seller
• S&R was a UK company allegedly storing goods in a Russian warehouse – the UK
company had a very old & established name
Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT The Structure Funds paid into Buyers account at thereby increasing funds for the opening of further LCs
Applied for Opening of LCs
LCs issued
THE BANK
Russian Warehouse
The “Fall Out”
The Scheme
BCL
Civil Proceedings
Hallmarks of other fraud cases
Hungary, Austria, UK, Isle of Man, Ireland, Czech Republic.
Buyers & sellers acting in collusion
Criminal Investigations/Proceedings
Rotation of funds
Network of Corporates
Austria, Croatia, Hungary, Ireland, Czech Republic, Russia, Switzerland, UK, United
Non-existent Provided warrant lists
Discounted proceeds to related parties
LCs issued for $89m
States
(1) Underlying transactions (2) Collateral
STONE & ROLLS
Discounters...
BNP Paribas (Suisse) Bank Austria
Banco Bilbao Vizcaya
BAWAG
Bank Winter & Co.
HSBC
Close Brothers
Royal Bank of Scotland
Central Wechsel-und Creditbank AG, Vienna
United European Bank, Geneva
Privredna banka, Zagreb
Anglo Irish Bank Corporation plc, London
Vereins-und Westbank, Hamburg
UBS AG Zurich
Reflections
Donau-Bank AG, Vienna Nedcor Bank Ltd, London
United European Bank, Geneva
Standard Bank London Ltd, London
Argentaria, Caja Postal y Banco Hipotecario S.A., London
BCI SODITIC, London
National Bank of Kuwait, London Gulf Bank KSC, Kuwait
Fortis
Hellenic Bank, Cyprus
Zagrebacka
ABN Amro Bank RT, Budapest
CSOB a.s., Prague
Westdeutsche Landesbank Girozentrale, Hamburg
BB Aval GmbH, Cologne
Raffeissen bank a.s.
Raffeissen Zentralbank Osterreich AG
Bayerische Hypotheken u. Wechselbank, Munich
Central European International Bank Ltd, Budapest
Trigon Bank AG, Vienna
Erste Bank AG, Vienna
Credit Lyonnais, Frankfurt
ING Bank N.V., Bratislava
ING Bank, London
Do the documents stand up to scrutiny? What is their legal basis? Know: (1) your client
(2) your transaction Collateral management – a cost worth paying?
Mr. Jean Saint-Geours, Economi Trade and Competitiveness International Finance Corporation (IFC) CHALLENGES IN AFRICA
WAREHOUSE RECEIPTS REQUIREMENT
WAREHOUSE RECEIPT FINANCING AGRICULTURAL FINANCING CHALLENGES IN AFRICA
2014 Converted by UseOffice .Net trial. Get a licenseNovember for the component.
WORLD BANK GROUP APPROACH
• Existence of Warehouse Receipts (WHR) law and regulations is a key to implement the program; • Licensing and inspection of warehouses; • Central registry • Security interest (e.g. Pledge); • Commodity exchange; • Indemnity fund; • Enforceability; • Banks active participation is needed in order to foster market competition; • Banks capacity to lend against warehouse receipts; and • Borrowers good understanding of the instrument.
Financing (Credit Line or Risk Sharing Facility)
World Bank/IFC is currently working on the introduction of warehouse receipts in Senegal.
Technical Assistance to introduce legislation and regulatory framework
Commodity Depositors
Commodities
Access to Finance
Warehouse Operator
Security Interest
Enforceability
Warehouse Infrastructure
Indemnity Fund / Performance Guarantee
Commodity Exchange
IFC introduced warehouse receipts by working with the Ethiopia Commodity Exchange (2011).
• There are not so many countries in Africa which have Warehouse Receipts (WHR) law and regulation; • Lack of warehouse infrastructure; • Lack of central registry; • Weak enforcement of products; • There are not so many countries which have functional commodity exchange or indemnity fund; • Banks agri lending is less than 1%; • Lack of local banks capacity to lend against warehouse receipts; and • Lack of learning opportunities for borrowers.
3
World Bank/IFC is currently working on the amendment of warehouse receipts law in Kenya.
Sustainable Advisory Services World Bank/IFC is currently working on the introduction of warehouse receipts in Malawi.
Advisory Services for Farmers & Warehouse Operators
Advisory Services for Bank and MFIs
IFC has initiated a process to introduce warehouse receipts with the State Bank of Pakistan (2012).
ADVISORY SERVICES
GWFP FIMBank – warehouse finance training
World Bank is currently working on the introduction of warehouse receipts in Sri Lanka.
Warehouse finance forum in Ethiopia and bank training
Warehouse receipt finance workshop (State Bank of Pakistan
Warehouse finance – assessment for 6 banks
GWFP BICIS – warehouse finance assessment
Warehouse receipt finance forum in India (2014)
GWFP Mali Cotton – weather index insurance (Global Index Insurance Facility)
World Bank/IFC is currently working on the introduction of warehouse receipts in Cote d’Ivoire.
Warehouse Receipts Warehouse Receipts
Central Registry
TRANSFORMATIONAL IMPACT IN LEGISLATION
Financing
Bank
Warehouse licensing and inspection
2
Trade and Competitiveness Global Practice Global Warehouse Finance Program
WHR Laws and Regulations
GWFP Mali Cotton – Better Cotton Initiative – improving the farmers productivity IFC’s third warehouse finance training (Malawi) (2014)
IFC introduced warehouse receipts by working with the COFTRA (Indonesia) (2007).
IFC’s first warehouse finance training (Kenya) (2013)
IFC’s second warehouse finance training in Cambodia (2013)
GWFP CRDB Tanzania – assessment of collateral manager operations
GWFP Techcom bank – risk assessment and collateral managers operation improvement
Warehouse finance bank training in Indonesia
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore RESULTS AND DEVELOPMENT IMPACT
IFC’S GLOBAL WAREHOUSE FINANCE PROGRAM
CASE STUDY - ETHIOPIA
• IFC’s Global Warehouse Finance Program (“GWFP”) was established in 2010 to support banks when lending to the agricultural enterprises against warehoused commodities.
• In Ethiopia, the Warehouse Receipts laws and regulations were implemented by IFC in 2009-2010. • In the year of 2012/2013, the total of 42 borrowers used warehouse receipts as collateral to access to bank financing by utilizing 122 warehouse receipts with 114 disbursements. • The commodity market has expanded from $1.5 billion to $3.5 billion. • The country has 55 warehouses in 17 locations with 250 remote electric ticker boards where producers are able to check the commodity price on a daily basis. • Producers are getting 65% of final sales price compared to 35% four years ago.
• IFC supports the agriculture sector by facilitating warehouse financing through banks, by providing liquidity for on-lending or risk mitigation solutions.
Type
Results
Transaction Volume
US$ 5.1 billion
NPL under program
0%
Commodities financed
Coffee, Cocoa, Rice, Wheat, Grain, Sugar, Cashew Nuts, Sesame seeds, Vegetable Oil, Soy Beans, Maize, Cotton, Sunflower Seeds, Cassava, Rubber, Fertilizer, etc
Countries
Angola, Burundi, Burkina Faso, Ethiopia, Malawi, Niger, Sierra Leone, The Gambia, Uganda, Rwanda, Senegal, Cote d’Ivoire, Togo, Benin, Ghana, Guinea Conakry, Cameroun, Nigeria, Tanzania, Guinea Bissau, Kenya, Ethiopia, Mozambique, Paraguay, Guatemala, Ukraine, Moldova, Croatia, Russia, Bosnia, Vietnam, etc
Underlying Instruments
Warehouse Receipt, Collateral Management Agreement (CMA), Stock Monitoring Agreement (SMA), Forwarders’ Certificate of Receipt (FCR), Warrants, Silo Certificate, Inventory Certificate, Commodity-backed Promissory Notes, etc
Farmers reach
381,969
Food Security
5 million
• IFC has two products: 1) Credit Line IFC will offer a short term loan to a bank which will on-lend the funding to commodity depositors against WHR or equivalent as collateral such as Collateral Management Agreement (CMA). 2)Funded/Unfunded Risk Sharing IFC will guarantee up to 50% of short term loans extended to commodity depositors against WHR or equivalent as collateral.
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8
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KEY DEAL STRUCTURE REQUIREMENT Global Warehouse Finance Program (GWFP) •
Stock as collateral
(Warehouse receipts, Collateral Management Agreement, Stock Monitoring Agreement, Forwarders’ Certificate of Receipts, Silo Certificate, Inventory Certificate, Commoditybacked Promissory Notes, etc) •
Collateral Managers
•
Quality Inspection
•
Loss Payee for Insurance
RISK MITIGATION OPTIONS
RISK MITIGATION FRAMEWORK
•Borrowers better understanding of the product
Farmer Financing Facility (FFF) •
Offtake Agreement
•
Fixed Price Contract
•
Collection Account
•
Crop Insurance
Financing (Credit Line or Risk Sharing Facility)
Collateral
(Professional Indemnity, Cargo Insurance)
•
Quality Inspection
•
Low Loan-to-Value
•
Warehouse Operator
•
Margin calls/Top up clause
•
Collection Account
(Professional Indemnity Insurance, Security Guard, etc)
•
Others
Bank -
Others
11 -
10
-
Financing
Bank
(Fixed assets, Guarantee, Joint Liability, General Assembly resolution, Stock for post harvest, etc)
•
Commodity Depositors
Pledge Banks’ Capacity of Stock Financing Haircut Margin call / Top up clause Collection Account Monitoring
Commodities
• CRDB Bank has the largest agribusiness lending portfolio in Tanzania with 813 clients including SMEs.
• The Bank has 14 years of warehouse financing operations since 2000 using WHR or Collateral Management Agreement (CMA), and has the largest warehouse financing portfolio in Tanzania in the coffee, cashew nuts, and cotton sector.
•Central registry
Instruments Enforceability Central Registry Commodity Exchange Indemnity Fund
•Security Interest (e.g. Pledge)
•Enforceability •Standardization •Commodity flow monitoring •Cash flow monitoring (e.g. collection account, etc)
Warehouse
Warehouse Receipts
CASE STUDY: GWFP CRDB BANK TANZANIA • The Warehouse Receipts Act No. 10 of 2005 was introduced in Tanzania in 2005 and the Warehouse Licensing Board was formed to regulate the warehouses and control the issuance of WHR.
-
Global Warehouse Finance Program
(Weather Insurance, Yield Insurance) •
•Local banks commodity-backed lending skills
Investment Climate
-
Warehouse Receipts
•Assignment of Sales Contract •Assignment of Receivables
Insurance Quality Inspection
•Insurance •Indemnity Fund •Commodity Exchange
Warehouse Operator
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CASE STUDY: MALI COTTON
Type
Bank Credit Line
Amount
US$25 million
Tenor
One year renewable twice up to 3 years
Commodity
Coffee, Cashew, and Cotton
Eligible Underlying Instrument
Warehouse Receipts (WHR), Collateral Management Agreement (CMA)
Collateral Managers for CMA
MFSCO, ACE
• IFC signed US$75 million support 13 facility including GWFP in 2014.
Ginnery Farmers
Cotton
Cotton
Port Warehouse
Financing
Warehouse Receipts issued Stocks controlled by
Financing Advisory Services
Local Banks Onshore Tranche
Cotton
International Buyers •IFC participated in the offshore tranche of PreExport Financing Facility for CMDT, Compagnie Malienne pour le Developpement du Textile (CMDT), a sole cotton exporter in Mali. •The Facility was arranged by HSBC. •IFC is providing advisory services for farmers.
Repayment
Payment
Collection Account
Participation
Participating Banks
14
WHY AFFECTED BY FRAUD - EXAMPLES •Poor handling of paperwork and electronic
INVENTORY FINANCE
•Documentation
•Mismatch between borrowings and pledged inventory
RISKS AND MITIGANTS
•Failure to act on client default or exceeding the borrowing limit/LTV ratio •Deficient or inadequate use of market information •Lack of understanding or failure to act in relation to WHR procedures and rules
TYPE OF RISKS IN INVENTORY FINANCING •Structuring Risk •Commodity Risk
•Warehouse Risk •Underlying Instrument Risk •Legal Risk •Operational Risk •Market Risk
•Government Risk
2
November 2014
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Offshore Tranche Cote d’Ivoire Senegal
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Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT
STRUCTURING RISK
COMMODITY RISK
Risk item
Mitigation factor
Risk item
Mitigation factor
Loan Structuring
Loan structure needs to match physical flow of commodities in terms of duration, value, and volatility
Commodity price fluctuation
Pre Warehouse and Post Warehouse Background information about production as well as account receivable information postWarehouse would be important to understand the entire commodity flow
Conservative LTV ratio with reliable market information source is critical; and where possible, contracts with fixed price can mitigate the commodity price risk
Certification of quality and quantity of commodity
Quality inspection is key to determine the value of commodity; grading has a big impact on price; accountability in weight recording
Loan amount
Based on company’s capacity and historical commodity price data, banks need to determine appropriate loan size
Standardized and liquid character of the commodity
The commodity should be traded without restrictions on a secondary market
Volatility of commodity in combination with tenor of transaction
The volatility of commodity needs to be considered when deciding the tenor of transaction
Perishable character of commodities
Easily perishable commodities should be preferably avoided
Revaluation of commodities value
Frequent revaluation of commodities value (weekly or bi-weekly) would be recommended
Loss Given Default
It is recommended to use a tested Loss Given Default for each commodity and structure in each jurisdiction 5
4
WAREHOUSE RISK Risk item Track record of warehouse operator
UNDERLYING INSTRUMENT RISK Mitigation factor
Risk item
Mitigation factor
Operational track record, integrity and financial stability of the warehouse operator should be considered. The preferred partner is an independent group having years of experience in the respective country with similar types of transactions. Existing claims, incidents and litigations, if any, should all be analyzed and justified
Type of Instruments
The WHR should be issued by the regulated warehouse operator. In the case of CMA or SMA, the documentation needs to be checked thoroughly. The liabilities and duties of the collateral manager versus the bank are described in a very precise way
Overall quality of legal environment - Enforceability
There should be well-functioning rule of law. The level of enforceability needs to be embedded in the Loss Given Default
Title or possession - WHR
The exact legal status of the WHR should be determined in terms of priority and possession right, rank order in case of bankruptcy. Ideally, the WHR grants access to physical possession of the goods and enjoys an absolute priority over all creditors and can be easily executed and this is confirmed in a special WHR Act
Type of warehouse
The warehouse is preferably regulated and licensed. Private warehouses are selectively accepted depending on the track record
Insurance policy
The insurance policy should provide a strong coverage (fire, theft, acts of war, internal or external fraud, loss of value of commodities because of mistakes warehouse operator)
Security arrangements, accessibility
The access to the warehouse should be well secured and only allow access to the operator’s staff
6
MARKET RISK Risk item
Mitigation factor
State intervention (Confiscation, Expropriation, Nationalisation, Deprivation, Contract Frustration)
The bank is encouraged to have adequate crop diversification in the WHR financing portfolio as much as possible, and implements prudent credit policies
Transfer Risk
If the transaction is onshore, the commodities involve transfer risk. Insurance in transit is recommended
Security Interest
It is recommended that inventory or WHR be pledged and be registered at central registry
OPERATIONAL RISK Risk item
Mitigation factor
Credit policy & Procedures
The Bank needs to have a solid credit policy and procedures for warehouse financing
Track record and satisfactory loss history
The Bank should have a good track record and minimal loss history
Loss Given Default
The Bank is recommended to have the tested Loss Given Default for each commodity and structure in each jurisdiction
MIS Reporting System
In order to follow the commodity price movement, a good MIS system in the middle office with a functioning reporting mechanism is required.
Risk Management
The Bank is recommended to have solid risk management system and mechanism in place (e.g. margin calls, top up clause, etc)
Selection of Collateral Managers
The Bank is required to have an established eligibility criteria to select the collateral managers
Ability to assess warehouse facilities
Eligibility criteria to approve warehouse facilities need to be in place
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WAREHOUSE CHECK LIST
COLLATERAL MANAGERS CHECK LIST
Sufficient warehouse infrastructure (electricity, moisture, height, safety, fire extinguisher, heating, insect infestation, fungi, mould, etc)
Good track record and reputation
Satisfactory security and facility arrangement to avoid theft, fire, loss, flood and deterioration Regulated, licensed or bonded warehouses Warehouse operational staff suitably qualified and well-trained Quality and quantity measurement capacity (weight recording) Uploading and unloading skills (weighbridge quality) Inventory monitoring capacity (frequency)
Ability to measure the quality and quantity of commodities
Legal arrangement for warehouse financing should be precise and enforceable Good MIS system to monitor the stock delivery Strong insurance coverage or established indemnity fund
Warehouse operational staff have access to the facilities Frequent physical inventory monitoring practice Satisfactory reporting mechanism in place
Insurance coverage 11
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BANK OPERATIONAL CHECK LIST
UNDERLYING INSTRUMENT CHECK LIST
Experienced management, good track record and history of warehouse financing
Banks need to have an established eligibility criteria for underlying instrument (WHR or CMA/SMA)
Possess the ability to assess the borrower’s credit risk (including the ability to meet margin calls)
Solid risk management mechanism and system in place
Commodities are specifically mentioned including grade and weight
CONCLUSION – HOW TO AVOID FRAUD •
Thorough legal due diligence
•
Conservative structuring
•
Middle Office operation is key for monitoring
Loss Given Default data for each structure in each jurisdiction
Issuer is an authorized and licensed Warehouse Operator (in the case of WHR) or a Collateral Manager is one of the signees (CMA or SMA)
•
Risk Management Framework
Designated staff to value commodities and monitor commodity prices
Proven enforceability by local jurisdiction
•
Watch out for early warning signs
Ability to assess the risk of underlying instruments (e.g. product, type of warehouse, legal infrastructure including title or possession, and pledge over insurance agreement)
Security Interest (e.g. Pledge)
•
Periodical review is critical
•
Market changes
Ability to assess the risk of warehouses (e.g. capability of warehouse operator, liabilities and duties of collateral manager, insurance policy, security arrangement and accessibility), policy to pay a visit to warehouses for inspection
Indemnity Fund or insurance coverage
Hedging is desirable where possible
Thorough legal due diligence
Conservative Structuring
Monitoring by Middle Office
Periodical Review
Early Warning Signs
Market Changes
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Dr.Yasmin Saadat, Product Lead Structured Trade Finance, Global Trade & Supply Chain Solution International Finance Corporation (IFC) Mauritania: Revolving Secured Syndicated Commodity Backed Facility of USD 400MM
Structured Trade- Commodity Backed Facilities
An 18- month facility to cover all energy imports of Mauritania; Security package including commodities, receivables and pledge of collection account.
Facilities to support large size cross-border & domestic trade of strategic commodities (e.g. energy, soft commodities, agricultural inputs), which are used as collateral supporting financing of lower income – crisis countries;
Energy Financing Challenges in Africa
Yasmin Saadat, Product Lead, IFC
Warehouse, Cargo and Structured Commodity Finance
Off-shore
Facility US$ 400 MM; Collection Account with Agent
Funded or unfunded co-financing or risk participations with experienced partner banks, who can manage payment flows, collateral, covenants on obligors, insurance, etc…
A 3-year facility for the borrower, an oil distribution and trading company in Ghana, to cover the growing energy needs in the country; Security package including commodities, receivables and pledge of collection account.
Payment from the Borrower’s Collection Account to suppliers [60-90 days credit]
Borrower:
A 2-year facility to support imports of crude oil of Cote d’Ivore and supply of refined products to the domestic and regional market; Security package including, stock of crude/products, receivables and pledge of collection account: Offshore Onshore in Cote d’Ivoire
A 1-year facility to discount sales of petroleum products by a trading company, awarded the 3-year fuel supply contract for Ethiopia; Security package including commodities, pledge of collection account.
Transfer Euro equivalent for payment under LC1.
Borrower: (A trading company Discount of the EPSE receivables at 30 days from B/L
IFC Risk sharing with banks on distributors’ behalf
supplier to IPG
Issuance of SBLC
Agent Bank
Offshore Collection Account with Offshore Agent
Issuance of PRA at BL
Facility IFC, agent bank and other lenders
International Offtakers
Moldova: Syndicated Pre-Export Agri Commodity Backed Facility of USD 155MM
Payment flow Product flow
Offshore On-shore
Payment flow Payment
Sales to local offtakers
Local and Regional distributors
6
5
Going Forward
Challenges for IFC
IFC team pushing the program to new regions/commodities (e.g. different energy products, such as natural gas)
Local Jurisdiction: lending against pledged commodities, receivables - strength of laws/enforcement of security
International off-takers
IFC linking short term collateralized financing to promote Capex financing in key strategic companies in high risk regions
Credit Risk of obligors: typically not highly rated/low capitalization, making credit risk challenging
makes payment before taking possession of commodities
Typically, strategic commodities involve SOEs in the EM world; IFC can consider SOE on a case by case, as against IFC’s mandate of private sector promotion 7
IFC continue to finance deals originated by global banks but also looking at originating/structuring deals in markets with significant dislocation/market failure in line with IFC’s role
SOE: governance & transparency challenging Environmental and Social Standards of IFC: quite strict norms, challenging to apply completely the standards to trading companies active in EM
Supplier’s Payment Account with Local Agent Bank
Supplier
Sales to international offtakers
Product flow
Partnering up with the right bank: given nature of the deals - and the bespoke solutions, which require expertise of markets & structures- only handful of banks active in markets of interest to IFC; Global banks’ expertise to assume agency role
A 1-year facility for a leading grain and seeds trading and processing company in Moldova, to cover its peak season pre-export funding needs; Security package including agri commodities, receivables and pledge of collection account.
Disbursement based on borrowing base report
Borrower
deliver crude oil
L/C flow
4
Commodities shipped
Crude Oil Suppliers
Payment flow
L/C flow
Borrower
Local Collection Account with Local Agent
payment under LC*, € or US$
Oil offtaker in Ethiopia
Pay at B/L+150 days
Payment flow Product flow
Commodities inland moved to port, ownership transferred
3
Cote d’Ivoire Revolving Secured Syndicated Commodity Backed Facility of USD 300MM
Ethiopia: Revolving Secured Syndicated Commodity Backed Facility of USD 450MM
Retailers
(a Oil Distributor)
Facility Collection Account with Offshore Agent
Oil Sales: 90-day receivables (confirmed LC) assigned to Lenders
Oil Flow
Payment to Supplier in cancelation of SBLC at B/L +30 days
Payment from retailers to the Borrower’s collection account with Agent [15-21 days credit]
L/C flow
Discharge
Eligible Local Buyers, LCs issued by local banks and confirmed by international bank
Storage in Mauritania
Cash Flow
Fuel Delivery Refined petroleum products sold
L/C extinguishes
L/C request
Oil
2
Ghana: Revolving Secured Commodity Backed Facility of USD 150MM
60-90 days L/C
Borrower: (A trading company)
SNIM
Converted by UseOffice .Net trial. Get a license for the component.
Exporters/ Suppliers
On-shore Mauritania
$$ from local buyers in 90 days after Sale.
12-13 November,2014 - Singapore
Agent and Issuing Bank Facility for the Borrower
US$ for the Borrower (Trader) to pay to its supplier
Internally IFC requires sector expertise along with structuring experience to successfully close transactions
to domestic farmers Payment flow Product flow
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Matthew Cox, Partner Dentons PART 1 – WAREHOUSE FINANCING
WAREHOUSE FINANCING The issues and solutions
PART 1
WAREHOUSE FINANCING
13th November 2014
PART 2
SECURITY, CONTROL AND MONITORING
PART 3
ALTERNATIVE OWNERSHIP STRUCTURES
Warehouse Financing - what is it? Financings for production, processing, storage and sale of commodities Particularly soft commodities (agricultural produce) but also applies to metals, oil
warehouse or storage facility (oil tanks)
Matthew Cox Partner Dentons UKMEA LLP 10 Collyer Quay #26-06 Ocean Financial Centre Singapore 049315 D +65 6420 0001 E-mail: matthew.cox@dentons.com
Similarities to financing of cargo on ships
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Bank's customer borrows against security over stocks in traditional
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Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT PART 2 – SECURITY, CONTROL AND MONITORING
Warehouse Financing Structure INDONESIA Supplier
SINGAPORE
2. COAL 5. COAL
Buyer
3. Pledge of COAL
Borrower
PART 2
SECURITY, CONTROL AND MONITORING
PART 3
ALTERNATIVE OWNERSHIP STRUCTURES
A first ranking valid security interest •on the Goods
Collection Account in Singapore
4. Loan
(Poorer credit risk)
WAREHOUSE FINANCING
(Good credit risk)
6. Purchase Price
1. Pay the Supplier
Lender wants:
PART 1
and/or •on the Warehouse Receipt
Ability to enforce security easily without challenge and sell Efficient control and monitoring of the Goods
Bank
FACTS ON THE GROUND ARE CRUCIAL 40028604
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Creation and perfection of security
5
Constructive Possession = Valid Pledge
How is security created and perfected?
Bank
•In most jurisdictions warehouse security is created by Pledge either over the Goods and/or the Warehouse Receipt (Mortgage or Charge less common) •Possibility to pledge future Goods? If not, new security required for each shipment… •Floating security available? If not, only identified Goods (and not volumes) may be covered… •Registration system for security? If not, priority cannot be established…
• Bank has gold bars in its vault
Constructive possession • Bank appoints agent to hold commodity on its behalf
Control helps demonstrate possession…
Bank does not want physical possession Delivery of Warehouse Receipt (if Document of Title)
The warehouser is an independant third party
Agency
•The Borrower cannot gain access to, or authorise the release or sale of the Goods
Warehouser/Collateral Manager (Bank's Agent)
Seller
Buyer
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Buyer
Enforcement of security
• Reality: in many jurisdictions there is no self-help and enforcement is required to be effected through a court sanctioned process and with sale by public auction
More difficult to establish control - Bank must find other solutions
•No commingling of goods in storage?
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LME & LIFFE WAREHOUSES
Usually, as the name suggests:
• Ideally: immediate right of possession coupled with power to dispose without challenge on the open market
pledge
•Attach signs to stocks evidencing pledge?
Collateral Manager = BANK Possession = Valid Pledge
Status of Warehouse Receipt?
What methods of enforcement are available?
the
•Taking leasehold interest over the warehouse?
Warehouse Receipt = BANK Possession = Valid Pledge 40028604
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•The warehouse owner acknowledges and accepts to take instructions only from Bank
The warehouser is the Borrower
Seller
or • Bank has physical possession of a Warehouse Receipt which is a document of title representing the Goods under local law
6
Control = Possession
Bank
•Valid Pledge depends on evidencing POSSESSION (actual or constructive) Actual possession
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• Commodity exchanges have designated warehouses
Warehouse Receipt = "just" a receipt! In a few jurisdictions (eg Brazil, Kazakhstan, Serbia & Ukraine): Warehouse Receipt = Document of Title (whoever holds the Warehouse Receipt has possession or ownership of the physical Goods)
• Time consuming
• Specific warehouse receipt legislation
• Expensive
• Existence of Goods guaranteed by local government or commodity exchange
• Open to challenges from the pledgor or its liquidator and other creditors
• State compensation fund
• Problematic when dealing with perishable or degradable goods
• Government vetting of warehouses and collateral manager
• Stocks in warehouse represented by tradeable electronic "warrants" in commodity exchange
• Warrants are akin to "title" within commodity exchange for buying and selling • Warrants are NOT documents of title for security law! • LIFFE warehouse rules permit pledge of warrant and prohibit pledge of physical stocks
• European Bank for Reconstruction and Development Warehouse Financing Framework
Often in default scenario: • No commodity being produced • The warehouse is empty • Fraud may be alleged
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On / Off Balance Sheet ?
Ownership Financing - why do it? • Commodity Traders - want financing during period they own commodity
PART 1
• Takes asset and liability off balance sheet
Bank
• Issues with off balance sheet financing since Enron and Lehman Brothers
PART 2
SECURITY, CONTROL AND MONITORING
PART 3
ALTERNATIVE OWNERSHIP STRUCTURES
TRUE SALE
Loan $
• Alternative if customer cannot create security (eg. negative pledge)
Customer Repayment Obligation
• Take care on why the financing is being made • Structural issues • is it a true sale? • recharacterisation risk
Bank
Purchase Price $
Sale
Ownership
Customer
Ownership
"Owing" means the commodity must exist!
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Customer's balance sheet shows:
Customer's balance sheet shows:
1.Commodity asset 2.Repayment obligation for loan
1.No commodity asset 2.Purchase price cash 3.But repurchase obligation (maybe)
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Trying to achieve a true sale
Good Example: Export from Africa to Western Europe
• English law looks to intention of Parties
DEVELOPED MARKET WESTERN EUROPE
• Acceptance of form over substance • If parties write the transaction as a sale it will not automatically be “recharacterised” as a loan even if you could achieve the same effect with a loan
HIGH SEAS
EMERGING MARKET AFRICA
EMERGING MARKET AFRICA
BILL OF LADING
WAREHOUSE RECEIPT
TRANSPORT RECEIPT
15
Historical Problems Repos used for concealing liabilities from balance sheet at key points in financial reporting calendar Lehman Brothers - Used "105s" repo deals to conceal losses
LME/LIFFE WARRANT
- At each quarter end LB sold investments for cash using short term repos and bought back
- US GAAP treated repos as secured finance if purchase & repurchase price between 98 & 102 percent of market price. If price fell outside this band purchase & repurchase not reported as linked transactions
• It must be a “true sale” and not just the appearance of a sale • Evidence that Risk/Reward passed to Bank • English law not the only relevant law if transaction is cross border
- LB sold securities worth $105 for $100 and entered into forward contract to repurchase for $100 securities worth $105
RECHARACTERISATION as a loan: Leaves Bank as unsecured creditor!
Import Port
- Sale recorded as credit of $100 cash
Export Port
- In 2008 LB hid USD50 billion assets using repo 105s to improve leverage. Colossal impact to balance sheet
Taking security at all stages is very difficult. Ownership structure is ideal
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LOAN
• Helps liquidity for a commodity owner
WAREHOUSE FINANCING
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Conclusions
Owing Vs Taking Security Loan + Security
• Due diligence of local laws on security creation and enforcement and warehouse operation is of vital importance
Repo
BANK has limited power to sell on default
BANK has unlimited power to sell
Impediments to enforcement of security eg Chapter XI or Moratorium on insolvency
Usually no restrictions on owner selling assets
Duty to get best price
Owner can sell at any price
• Enron and Lehman Brothers have given off balance sheet and SPV Structures bad name
On default accelerate loan
On default claim damages for breach of repurchase obligation
• Be alert for potential misuse
Duty to account for "excess" on enforcement
Owner can keep "profit" on sale
Hard to transfer ownership on enforcement
Easy to transfer ownership on sale
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• Think around problems
• Many advantages to owning assets instead of taking security over them
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Introduction • Structured Trade Finance has good record of performing compared to other types of finance
COMMODITY FINANCING
Default case studies - what can go wrong
CASE STUDY: FRAUDULENT SALE OF SECURED ASSETS BANK
• But deals can go wrong due to:
Country & Political risk (Emerging Markets) 13th November 2014
Loan
Commodity price risk
Borrower
Fraud
Fraudulent
Buyer
Sale of Secured Asset
Producer performance risk Offtaker default Matthew Cox Partner Dentons UKMEA LLP 10 Collyer Quay #26-06 Ocean Financial Centre Singapore 049315 D +65 6420 0001 E-mail: matthew.cox@dentons.com
Commodity
Legal risk Result: Obvious Event of Default
Question: Who has title to the Commodities? 40028625
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CASE STUDY: FRAUD & MONITORING
CASE STUDY: FRAUD & MONITORING
CASE STUDY: FRAUDULENT SALE OF SECURED ASSETS
Other Banks
BANK
• If Buyer is part of fraud = breach of contract & criminal • If Buyer is innocent ("bona fide purchaser for value without notice) then the rules are complex
3
Payment into Collection Account
Loans
Delivery of : BLs Invoices Cargo Manifest
Loan to fund production
BANK A Loan
Goods
Borrower
• How prevent this? - Take pledge ?
SOFT COMMODITY
Borrower
Offtaker
SHIP CARGO
- Register Security?
Offtaker
Diversion of Bank A's Loan proceeds into unauthorised purpose
TROPHY ASSET?
Bank carries out: Site visits Monitoring & Reconciliation
What can Bank do? : 1) Sue for breach of Representation
Regular Payments into Collection Account
2) Resulting trust over misused funds (This is why there is a "purpose" clause in a Facility Agreement)
Problem: All not as it seems!
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CASE STUDY: BANK DEFAULT - KAZAKHSTAN Lenders
6
• Absence of law or guidance on what to do with insolvent Kazakh bank!
Unsecured USD bank loans to fund "trade finance"
OFFSHORE
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CASE STUDY: LEGAL RISK: Remember that tedious process agent letter CP?
Result: Alliance Bank default
Lenders
Lenders
5
KAZAKHSTAN
LONDON
• Special restructuring law drafted by law firm acting for Government and rushed through Parliament AFTER restructuring started!
Borrower
• No-one knew how it worked
Bank
• Key issue: (i) Does "Trade Debt" get preferential treatment? (ii) What on Earth is "Trade Debt"? (offshore loans did not make the cut!)
Alliance Bank Trade Finance Loans
• 75% majority creditor vote bound the 25% minority
LOCAL BORROWERS
Assets Loan is English law and disputes to be resolved in London courts
• 2008/2009 - 80% haircut - Debt converted to long term bonds • 2014 - Another restructuring
Problem: Bank forgot to ensure Borrower appointed UK process agent Result: Bank unable to start court enforcement proceedings in London for 12 months
2008: Financial Crisis: Large negative currency fluctuations
The English courts refuse to give Bank "leave to serve out of Jurisdiction"
Alliance Bank loan book stopped performing 40028625
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CASE STUDY: RECHARACTERISATION RISK
CASE STUDY: SHIPPING FRAUD
9
Secured Loan OR True Sale? Secured Loan
Factoring & Invoice Discounting Transaction BANK SELLER (Singapore)
SELLER
Goods
INDONESIA
Goods
Seller
Goods
BUYER (Hong Kong)
Assignment
$90
$100
Bank
$100
Seller
Buyer
Security Assignment
Loan $90
$100 (360 days) Goods £ debt
BUYER
True Sale
$100 Receivable
$100 Receivable
Buyer
True Sale Assignment
Purchase Price $90
$100
Bank
Purchase Price
Normal course: Bank pays against receipt of BLs Bank has valid pledge of cargo and releases BL against payment from Buyer
Result:
BANK
But!: Shipping company and Seller are fraudsters They turned the ship around!
Buyer Seller Bank
: Goods on credit : More sales : $10 Margin for taking Buyer risk
Bank recourse to Seller Loan and Receivable ON balance sheet Security created Register security?
Bank NO recourse to Seller (But repurchase events) No Loan and Receivable OFF balance sheet No Security created No registrations (probably)
Is your shipper a reputable shipping company? 40028625
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Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT Our locations
True Sale & Recharacterisation Risk Key Test: Does Bank have recourse to Seller? (Repurchase Events?) Repurchase Events = NOT inconsistent with True sale
Key
But…If too Wide = Recharacterisation risk
l
Offices
l
Calgary
Atlanta
l
Barcelona
l
Bratislava
Accra
l
l
Beijing
Associate offices
l
Edmonton
Boston
l
Berlin
l
Bucharest
u
Algiers
Amman
l
Hong Kong
Facilities
l
Montréal
l
Chicago
l
Brussels
l
Budapest
u
Bissau
l
Beirut
l
Shanghai
u
Associate firms
l
Ottawa
l
Dallas
l
Frankfurt
l
Istanbul
u
Bujumbura
l
Doha
l
Singapore
l
Toronto
l
Kansas City
l
Madrid
l
Prague
l
Cairo
l
Dubai
l
Vancouver
l
Warsaw
u
Cape Town
Kuwait City Manama Muscat
= Looks and smells like secured lending
Canada
+ Special alliance firms
Banks' natural desire to make Repurchase Events as wide as possible: Resist temptation! True Sale or Secured Loan = Legal Question
United States
l
Los Angeles
l
Paris
Miami
u
Zurich
New Orleans
l
New York
l
Phoenix
l
San Francisco
l
Short Hills
l
Silicon Valley
l
St. Louis
l
Washington, DC
On or Off Balance Sheet = Accounting Question
13
Central and Eastern Europe
Africa u
Middle East
u
Casablanca
l
u
Dar Es Salaam
l
u
Johannesburg
u
Kampala
u
Kigali
Russia and CIS
u
Luanda
Riyadh
u
Lusaka
u
Maputo
u
Nairobi
u
Nouakchott
Central Asia
l
London
l
Kyiv
u
Port Louis
l
Milton Keynes
l
Moscow
u
Praia
Almaty
l
l
Ashgabat
l
St. Petersburg
l
Baku
l
Tashkent
u
São Tomé
u
Tripoli
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Asia Pacific
Abu Dhabi
+ Lagos
United Kingdom
Nothing to do with Legal Vs Equitable assignment!
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Europe
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Andre Soumah, Chairman ACE Group -Audit Control & Expertise SA Collateral Control The longer the value-chain and the cash-conversion cycle is – the greater the risk of loss in the control and monitoring of goods.
WAREHOUSE, CARGO & STRUCTURED COMMODITY FINANCE
The Bank’s Middle Office and Collateral Controller should ensure that throughout the value chain the inventory & receivables serving as collateral should match accordingly to the credit approval and the terms and conditions of payment of the goods that is represented in the Letter of Credit and under the full Possessory Control of the Collateral Controller up to release.
COLLATERAL CONTROL – INTRODUCTION
The commodity is endorsed to the bank via the bill of lading and under the strict supervision of the collateral controller appointed exclusively by the Bank . ACE Global Depository is able to successively accomplish this, through the following :
– Field Warehousing:
• method whereby a borrower’s trading assets are used as security at the borrower’s own premises for a loan or financing. • It is a security instrument that enables the borrower, to deliver to the Bank legally valid documents of title and to grant a possessory pledge over goods stored in the borrower's own plant, mill, refinery or warehouse .
• Via the legal principle of Bailment. 2 EUROPE
Converted by UseOffice .Net trial. Get a www.ace-group.net license for the component.
1
Warehouse Receipt
Main Types Of Warehouses
Collateral Control • “Bailment”- The transfer of the possession of Goods by the owner (bailor) to another (the bailee) which shall thereafter maintain notorious, continuous and exclusive possession of all the Goods, for particular purposes such as hiring, financing, pledge of goods, and the delivery of Goods for carriage, safe custody or repair. • Notorious possession is evidenced by numerous conspicuous signs placed at the storage premises.; • Continuous and exclusive possession is assured by the fact that the collateral has one of its employees or agents or representatives on duty at all times when the premises are unlocked and that anyone permitted to enter the premises does so only at the will of the collateral controller or with its consent.
•
3
| MENA | EURASIA | WEST AFRICA | EAST AFRICA | SOUTHERN AFRICA | SOUTH ASIA | FAR EAST | LATAM
The foregoing steps accomplish an effective change in the possession of the goods and premises. Thereafter, warehouse receipts may be issued at the borrower’s premises in respect of stored Goods and constructive possession of the Goods is maintained by Collateral Controller for and on behalf of the Bank till Goods are released.
•
Field Warehouse • Created within the field, on the borrower’s own premises used for storage/ processing. Inventory serving as collateral is kept physically segregated from other inventory - strictly supervised by a third party collateral controller with possession and control of collateral (existing inventory or a new consignment).
•
Public Warehouse • Warehouse owned and operated independently by a independent warehouseman / storage company - No ownership interest in the stored goods - provides service for a set fee.
•
Terminal Warehouse • Warehouse separate and distinct and usually serving a number of different businesses - set at a separate location owned and operated by an independent warehouse company.
•
Bonded / Customs Warehouse • Secured facility supervised by customs authorities- dutiable landed imports are stored pending re-export, or release on assessment and payment of import duties, taxes, and other charges.
Evidence of the relationship which exists among the parties to a storage transaction.
•
What is a storage transaction? - A commercial relationship just as is a sale or a loan.
•
There are two types of warehouse receipts (a) Negotiable and (b) Non-Negotiable.
•
Negotiable Warehouse Receipts: •
Use is mainly limited to the storage of goods which are traded on the commodity exchanges.
•
Why? - A negotiable warehouse receipt is one that can be given, for value, to another without the need for any formal assignment of right or transfer of interest.
6
5
4
Warehouse Receipt
Warehouse Receipt •
•
Non- Negotiable Warehouse Receipts:
•
A Non-Negotiable Warehouse Receipt is made out in the name of the lender.
•
Indicates specifically that the goods called for are deliverable only to the order of the party named thereon.
•
If partial releases are to be made, a release order from the registered holder of the Receipt is always required.
•
IT IS NOT a certificate of or proof of ownership in the stored goods.
•
Then what is it? It is evidence of the fact that the warehouseman has received the goods and is holding them subject to the instructions of the named party.
•
The Field Warehousing Receipt, like the trust receipt and the factor’s lien may be looked at as a remarkable security devise which came into being in the late nineteenth century (over 100 years ago!)
•
PURPOSE? Designed to make secured inventory financing possible
•
Discovered as a means of recording intake and possession of collateral offered as security and using warehouse receipt as a financial instrument to perfect the lending process.
CASE STUDY FOR PAKISTAN:
COMMODITY FINANCING AND COLLATERAL CONTROL IN PAKISTAN BY ANDRE SOUMAH EXECUTIVE CHAIRMAN ACE GLOBAL DEPOSITORY
9
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7
Background- Pakistan’s Agricultural Commodity Sector
Conditions in Pakistan
Conditions in Pakistan
• Pakistan’s agriculture commodity sector suffers from a compound problem of a lack of both infrastructure and market structure.
• The farmer community in Pakistan primarily constitutes small and marginal farmers, with an average holding of under 14 acres.
• The resulting inefficiencies impact all market participants and keep the sector from becoming competitive.
• These farmers rely on borrowing money for input financing and repay their debts from the proceeds of their harvest, with no holding power to benefit from price realization due to liquidity and infrastructure limitations.
• On the infrastructure side, there is a lack of warehousing and storage facilities. • In the market, there is a lack of grading & standardization, independent verification, collateral management, commodity financing, and transaction data.
• The result is an opaque and illiquid market where there is a lack of financing, trading opportunity and significant produce wastage.
• The informal credit sector, is managed through ‘Aarthis’ (middle men), who provide sizeable credit to agriculture sector but their cost of credit often exceeds 50% and is much higher than the average 20% charged by Banks.
• Consequently, a need is present to develop and offer products and services that can effectively convert farm produce into collateral. • Such services and products can lead to extensive changes in the agri- sector, which would include setting up of contractual rules and regulations, quality standards, new warehouses and warehousing receipts
• Encouraging the set up of warehouses by the private sector across the Country, which would enable any farmer to hold his produce after the harvest instead of selling it immediately, and sell later at favorable prices.
• The small and medium traders in the agri sector, in the absence or lack of audited balance sheets, rely on their own liquidity or informal credit sector, to fund their activities.
• At the base of the value chain, farmers are most harmed by wastage, price fluctuations, and an inability to access formal finance.
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REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Warehouse Receipt Financing
STATE BANK OF PAKISTAN- PILOT PROGRAM
STATE BANK OF PAKISTAN- PILOT PROGRAM
Warehouse receipt financing is a collateralized commodity transaction where the goods themselves provide security for the loan.
Financial Inclusion Program (FIP) is a GBP 50 million grant program sponsored by the Department of International Development (DFID) of the United Kingdom.
•
This type of financing allows lenders to immediately sell off a very liquid asset, namely the commodities they grow, if a farmer defaults on the loan.
•
•
The underlying collateral is usually a soft commodity like wheat, rice, maize, cotton and other grains.
•
Warehouse receipts and other collateralized lending are means of accessing post harvest finance for working capital needs. As a result, the financing cycle begins after harvesting the commodities (or goods).
•
The commodities are stored in a licensed warehouse that issues a receipt proving that the commodities are physically in the warehouse. This receipt forms the basis of the financing.
Warehouse Receipts: Facilitating Financing and Commodity Markets •
The warehouse receipts system, can facilitate financing for inventory or products held in storage.
•
These receipts, sometimes known as warrants, when backed by legal provisions that guarantee quality, provide a secure system whereby stored agricultural commodities can serve as collateral, be sold, traded or used for delivery against financial instruments including futures contracts.
•
While a warehouse receipts system can both reduce uncertainty and increase efficiency in agricultural markets, there are some essential critical pre-conditions for its success.
Objectives of Warehouse Receipt Financing System Pilot
Goal of the FIP is inclusive economic growth and improved livelihood opportunities for poor and marginalized groups in Pakistan. Purpose of the FIP is improved access to financial services for poor and marginalized groups and for micro, small and medium enterprises in Pakistan. the Focus of FIP is micro, small and rural enterprises.
•
ACE Global Depository through its subsidiary ACE Global Depository Pakistan, has been appointed by the State Bank of Pakistan to help facilitate the implementation of the Warehouse Receipt Financing program on Promoting Innovative Rural and Agricultural Finance under the aegis of UK’s Department for International Development (DFID) –funded Financial Inclusion Program
• • •
• •
Warehouse Receipt System : Pre-Conditions
• • •
•
To create a liquid and fully secured warehouse receipts market and promote commodity financing To inspect & accredit warehouse / storage facilities in the private and public sector To provide comprehensive collateral control and risk management services To provide accurate, timely and objective transactional loan protection to enhance and support our clients loan decision making To provide due diligence and advisory services To provide loss prevention and management services To provide Inventory Appraisal, Credit Support Risk Assessment and alternate financing solutions To provide advisory and training services on financing goods and managing commodity value chains
ACE GLOBAL’s Role
•
A viable storage industry: Returns on storing commodities should be market-determined, so that farmers and traders store in expectation of higher prices or rush goods to market when spot markets are especially tight (and prices are high).
AGD Pakistan, being the first warehouse receipts depository in Pakistan would be responsible for the following:
•
An appropriate legal environment: Warehouse receipts must be functionally equivalent to stored commodities. They must specify the quality and quantity of the goods stored. The rights, liabilities, and duties of each party to a warehouse receipt (producer, bank, warehouse, and so on) must be clearly defined.
• • • • •
•
Performance guarantees: For warehouse receipts to be accepted by traders and banks there must be a performance guarantee for warehouses. This guarantees that the goods stored exist in quantities specified by the receipt and the quality is the same or better than that on the receipt. Without such guarantees farmers and traders will be reluctant to store crops and banks will be unwilling to accept receipts as collateral for financing agricultural inventories.
• • • •
•
Inspection and licensing: Governments should develop a system of warehouse licensing and inspection of warehouse facilities so that they met basic standards, both financial and physical
Development of warehousing standards for adoption by warehouses and potential Collateral Managers Inspection and accreditation of warehouses Crop handling (acceptance, handling, testing storage and dispatch of agri-produce) Determining quality, weight, and quantity of agri-produce being accepted for storage and dispatch Issuing Warehouse Receipts Monitoring the agri-produce stored Release of produce against Bank issued Release Orders Provision of periodic information to bank via E5C
Contractual Flows Sequence of Events
Advantages
Advantages
The strength of WHRs hinges upon making agricultural output, eligible quality collateral, for availing financial credit.
•
The revenue streams will be generated by enabling financial institutions to lower their spreads due to the lower risk attached to individual deals, and therefore necessitating less set-aside from the financiers. This will liberate more capital for the banks, and enable them to increase their business volume, contributing therewith to the global growth of Pakistan’s economy.
•
Markets transparency is another crucial element that comes along the proposed scheme. Through the incorporation of PMEX and the development of secondary market, all players will be able to know and act on the National Spot Prices. In the future, and with the development of complex derivative products, actors will likely use future pricing, options management and other technical trading tools.
Particularly benefiting the small farmers who find it difficult to approach banks for credit to do non availability of basic collateral requirement of banks; this system has the capability of transforming the agriculture sector in the following manner:
26
•
The Warehouse Receipt system will be utilized by banks to extend financing, as it has enabled banks / lenders to create a charge on the commodity balances through the depository; the charged collateral is then immobilized in the warehouse till the lien is lifted.
•
Real time access to the location and quantity of the commodity and providing a comfort that the commodity of a stated type, quality and quantity through the Warehouse Receipt system does exist duly charged to it for its financing /credit flow
www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT Steve Capon, Regional Manager, Political Risks & Credit, Asia Pacific ACE Group Markets
ACE Asia Pacific
World Map
Trade Credit & Political Risk Asia: A Global Market & Global Reach Warehouse, Cargo & Structured Commodity Finance Conference 12th November 2014, Singapore
Will Singapore match London?
3
1
Where is there a role for PRI & Credit Insurance?
Historic Claims: 2008 to 2014
Commodity Trading
Commodity Price Volatility
Foreign Exchange Volatility
Operational: Rogue Trader
Credit Risk
Export Embargoes
Non-Repo
Expropriation
Funding Risk
Physical Damage (War/PV)
Political Risk
Currency Inconvertibility
Rapid and uncontrolled expansion
Synthetic L/cs
Pre-Export
Over leveraged
Embargoes
Sharp commodity price adjustment
Stretched liquidity/funding mismatches
War/Civil War
Poor collateral management/monitoring and an inability to enforce security
Andre & Cie Petroplus
Stemcor
Outlook
•Cheap funding through 2016…or even 2017?
•Excess Capital in the Insurance Market
Commodity Volatility
www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
27
REPORT .Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore Mr. Chris Sturgess, DirectorJSE Limited Makiko Toyoda, Product Lead, Global Warehouse Finance Progr International Finance Corporation (IFC) Commodity exchange initiatives on the continent
Developments in Africa
Developments in silo receipts, commodity exchange infrastructure in Africa. How bankable are warehouse receipts in Africa?
Abuja / EAX
ECX
Chris Sturgess | Director: Commodities | Johannesburg Stock Exchange, South Africa| 12 November2014
EAX+ others
EAX
ZAMACE
ACE
JSE
OPPORTUNITIES AWAIT YOU ! The development of the derivatives market in South Africa
We have been called many things in the past, however we strive to be South Africa’s most transparent and effective price risk management platform !
Commodity derivatives market established in 1995 due to the deregulation of the grains market by SA Government and introduced a number of physically settled agricultural products Physical delivery is facilitated via a warehouse receipt Established its own clearing house to guarantee all transactions In 2001 bought out by the Johannesburg Stock Exchange (JSE) In 2007 established a currency derivatives market trading major currency pairs In 2009 introduced cash settled commodity products traded under license from the CME Group: Corn, Soybean Complex, SRW, HRW, Crude Oil and metals. 2014 all product area’s consolidated under a single business unit called Capital Markets to further enable cross market evolution
www.jse.co.za
4
Commodity Derivatives 2014 Statistics
Some Commodity Statistics…
Commodity Products Traded on the JSE Physically deliverable agricultural products: • White and Yellow maize • Wheat • Soya beans • Sunflower seeds • Sorghum Cash settled commodity products: • Crude oil, gold, platinum, copper, silver, corn, soybeans, sugar, cotton, coffee, cocoa, natural gas… • Quanto futures also available
Total Contracts Traded From 2003-2014 (10mths) 3,500,000
3,000,000
2,500,000
No of contracts
2,000,000 Options
1,500,000
Futures
1,000,000
500,000
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
• Futures contracts traded down 2.5% for 2014 • Options contract volumes up 5.5% for 2014 • Overall Commodity Derivatives down 1.7% in terms of contracts traded • Open interest up 22% • ADV : ranges between 9,000 and12,000 contracts depending on the trading period • Physical deliveries between 1-3% of all contracts traded, that said approximately 20% of the total grain crop is processed through the exchange
2014
Year
Enhancements to the CCP
The JSE CCP guarantees all derivative transactions
Clearing Member
Broker/Member
Client A Client B Client C
Trade
Clearing Member
(6)
Broker/Member
(48)
Client X Client Y Client Z
(12,000)
In 2012, FSB officially deemed JSE Clear to be an IOSCO compliant Qualified CCP, this is reviewed every 2 years (commences again Q4 2014) Included in this application was the creation of a R500m Default Fund including liquidity lines into the Central Bank Margining methodology also recently enhanced Application to European Securities and Markets Authority (ESMA) to be recognised as a Third Country CCP to further assist with trade flow from Europe
10
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www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
Commodity Derivatives - what’s in it for the Banking Sector ?
Enables commodity finance as there is a secure platform to hedge out price risk and no longer only finance based on balance sheet of the client Linked to input finance, can encourage client hedging to reduce the price risk for the client Requires secure storage infrastructure with a robust process in play to ensure integrity around the issue and trading of warehouse receipts A daily mark-to-market to value your exposure Revenue from the risk of acting as clearing member to the wider market Opportunity to act as brokers to a broader client base and thereby attract the client to a broader range of the banks services
Bourse Africa
Warehouse, Cargo & Structured Commodity Finance Summit -Novotel Singapore Clarke Quay Singapore. REPORT Physical delivery process takes place within a well defined framework and crucial to the integrity of the derivatives market
Ability to make physical delivery and at the same time ensure guaranteed “quality and quantity” keeps the price discovery platform in check !
Regulation, Regulation and more Regulation!
• JSE currently has a total registered storage capacity of 16.1 million tons with 253 registered delivery points, the breakdown is as follows: • • • • •
Maize – 222 registered delivery points Sunflower seed – 178 registered delivery points Sorghum - 43 registered delivery points Soya- 144 registered delivery points Wheat – 170 registered delivery points
• 17 registered Storage Operators • In a single month this year the division processed physical deliveries of 714 450 tons with a basis premium processed of USD $156,670 for the month • JSE introduced a platform to trade basis premiums for stock held in registered warehouses 13
JSE Derivative Rules Derivative Directives Detailed agricultural contract specifications Financial Markets Act no 19 of 2012 Formal client and clearing agreements Defined dealer qualifications (www.saifm.co.za) Members regulated by the JSE, Clearing Members by the Central Bank The World Economic Forum (WEF) has ranked South Africa first among 144 countries in regulation of securities exchanges for the fifth consecutive year.
NO WAREHOUSE ACT IN SOUTH AFRICA – we rely on a storage operator agreement in order to secure operators obligations to honour warehouse receipts issued. 15
Paving the way for a South Africa and Zambia partnership – work in progress!
Developing the Zambian production base
Linking Zambia and South Africa with price risk management tools
A trading operation for Zambia that provides market participants with a price determination mechanism and a price risk management facility through which they can manage their exposure to adverse price movements on the underlying physical market in Zambia and where performance by both counterparties to the contract is guaranteed IF YOU WANT TO GO FAST, GO ALONE IF YOU WANT TO GO FAR, GO TOGETHER
•Focus on enabling agricultural policies to increase the production base maintaining own food security •Zambia becomes the regional supply centre with focus to develop deep sea exports ? • Critical to the region becoming a global supplier of core commodities •Consistent application of agricultural policies. •Seize the opportunity ! Maize Soya Rice Wheat Sorghum TOTAL
AFRICAN PROVERB
2013/2014 3 350 671 214 179 49 000 201 504 11 507 3 826 861 tons
10 MILLION TONS ?
18
Support from Zambian Government critical to it’s success !
Continuously evolving the commodity exchange….
• Mini (10 ton) maize contract with a market maker providing liquidity to enable access to the smaller maker participant • Exploring a beef contract for price risk management purposes • A tradable commodity index providing investors easy access to commodities • A more efficient diesel hedge contract that allows for physical delivery • Exploring a soybean meal contract • Expanding the basis premium trading platform to include basis futures contracts
“Financing and mitigating risks for commodity cargoes in transit or in store in Asia, Africa & Europe”
There is heightened competition in the commodity trade finance sector, given a continuous growth in commodity trade flows into Asia along with banking regulations. All of this is boosting the increased use of structured inventory financing in the region that is further driving the traditional commodity financiers to make a comeback even as newer Asian entrants make headway. In recent years there have been a number of problems with frauds using warehouse receipts and inventory finance, and most recently the Qingdao scandal resulting in hundreds of millions dollar losses, affecting a number of large international banks and also a major international trading house. This conference – a first in Asia, especially timed after the Qingdao scandal covers areas such as collateral management, warehouse receipts and related issues. Leading structured commodity trade financiers share key insights on how banks facing huge challenges in financing commodities in warehouses or in-transit can mitigate fraud risks.
Official Media Partner
SHANGHAI WORLD EXPO EXHIBITION AND CONVENTION CENTER
“Intermodal Asia will become the focal point and vital platform for all those interested in Asia’s shipping and container industries. This event reflects the rise of the Asian shipping industry and the global standing of China in this and manufacturing as a whole. After the tremendous success of the inaugural Intermodal Asia in 2014, we are looking forward to the future of Intermodal Asia and to continuing our support for this exciting event” Mr Mai Bo Liang, Chairman of the CCIA (China Container Industry Association), and President of CIMC (China International Marine Containers)
CIMC lend full backing to Intermodal Asia Intermodal Asia will once again benefit from the full support of the world’s largest container manufacturer, CIMC (China International Marine Containers). CIMC will host various divisions of the CIMC corporation on their stand, providing an ideal opportunity for visitors to find out more about the company’s product range.
Intermodal Asia Conference The free-to-attend conference features some of the intermodal transport and logistics industry’s biggest names sharing their knowledge. With over 40 sessions, covering the complete intermodal supply chain, the conference is a must attend for any intermodal professional. The full conference programe will be available in Autumn. Please click below to register your interest and the team will then ensure you are kept up to date and alert you when the conference programme is released.
Who should attend? You should attend Intermodal Asia if you are part of the complete intermodal supply chain; -Shipping/lines/ocean carriers -Shippers/Manufacturers -Container professionalsINTERMODAL -Ship Operators/Ship owners -Ship Agents -Rail Freight Professionals -Supply chain professionals -Freight Forwarders -Transport and logistics professionals
-Finance/insurance -Surveyors/classification societies -Associations/Governments -Ports and terminals
intermodal-asia.com
SHANGHAI WORLD EXPO EXHIBITION AND CONVENTION CENTER Is there a difference between LCL and Consolidation? There are cases where shippers don’t have enough cargo to fill a full container and they have only small parcels. They deliver these small parcels to the shipping lines Container Freight Station. These small parcels are known as LCL which stands for Less than Container Load. The shipping line collects these small parcels and make up a Full Container Load. In these cases, although there is a full container load, as the shippers are many, the shipping line would issue their individual bills of lading to the various shippers. These bills will be the direct line bills of lading and will have a term CFS/CFS mentioned. This means that the shipping lines responsibility begins at the CFS (Container Freight Station) in port of load and ends at the CFS in port of discharge. The freight charges for these are charged by the line directly to the shippers in proportion to the amount of cargo they have received from the shipper. In some countries however, the shipping lines do not offer LCL shipping services and these services are handled by Groupage Operators. In these countries, the LCL cargo is delivered by the client to a warehouse for packing into a container. The act of collecting the LCL cargo from the various shippers and packing into a container is known as Consolidation. The entity that handles such operations are known as Consolidators (Groupage Operators). In the case of consolidation cargo, the consolidators issue their House Bills of Lading to the shippers and secure a Master Bill of Lading from the shipping line for the container which is booked with the line as an FCL and which will show them as a shipper on the lines bill of lading. Depending on the contract with their customers the House Bill of Lading maybe termed as CFS/CFS or Door to Door. The consolidators responsibility and delivery terms will depend on these terms mentioned on the bill of lading. The freight charges for these are charged by the Consolidator to the shippers in proportion to the amount of cargo they have received from the shipper.
Media Partner
GCC SUPPLY CHAIN & LOGISTICS CONFERENCE 2015 - Sultanate of Oman
13 - 16 April 2015 Al Bustan Palace, A Ritz Carlton Hotel Muscat, Sultanate of Oman
The Official Transport Event in the Sultanate of Oman Welcome to the 2nd GCC Supply Chain & Logistics The 2nd GCCSCL Conference is one of the important events of its kind, bringing together senior executives and professionals from various industries within the region and international to share insights and views on how to drive logistics and supply chain operations forward. The conference will also highlight emerging opportunities in Oman’s world-class ports, airports and free zones and its important role in the Gulf region and Indian Ocean rim its terms of trade flow. The event will feature leading industry experts from top global brands and a list of luminaries who will share their thoughts and practical ideas on how to be innovative within your business. Whats New for 2015? -Market Brief & Outreach Seminar Program -Site Visits -Business Matching Meeting -Transport Ministers Round Table Meeting -Gala Dinner & Cocktail Reception -Dedicated Exhibition Area To know more about the conference, please call us on +968 2470 0656 or email: sales@alnimrexpo.com
Why Invest in Oman
Oman is a smart, dynamic and welcoming nation that offers a quality of life unparalleled by any other country
in the Gulf, providing a true community with world class amenities for businesses and people. Oman’s cost of living is lower than many of its regional competitors, and a combination of market access and economic diversity provides the resources a company needs to flourish. The Sultanate’s unique character can be attributed to its people, location, infrastructure, collaborative business community, government support, and an unprecedented array of cultural and sporting activities. We boast some great reasons why you should invest, move, relocate and study here. Indeed, there are a host of economic reasons to move your business to Oman, coupled with the many advantages of an Oman lifestyle.
Sultanate of Oman - GCC SUPPLY CHAIN & LOGISTICS CONFERENCE 2015
Steering Committee
A special committee is formed to help steer the general direction of the conference. This committee will also assist in the development of the conference programme and making it a valuable event for those involved in the supply chain and logistics sectors. Key committee members are:
Honorary Chair: H.E. Said bin Hamdoon Al Harthy, Undersecretary for Ports & Maritime Affairs, Ministry of Transport & Communication, Oman
Steering Committee Members: -Jan Meijer, Advisor to the Secretariat of the Supreme Council for Planning, Oman -Abdulraheem Al Harami, Advisor to the Minister on Meteorology and Chairman of the Committee for Exhibition and Conference, Ministry of Transport & Communication, Oman -Peter Young, SOLs Project Manager, Ministry of Transport & Communications, Oman -David Gledhill, Chief Executive Officer, Port of Salalah -Andre Toet, Chief Executive Officer, Port of Sohar -Rien Van de Ven, Chief Executive Officer, Port of Duqm -Abdulrahman Al Hatmi, Chief Executive Officer, Oman Rail -Warith Al-Kharusi, Chairman of the Oman Logistics & Supply Chain Association -Sherwin Sevillena, Conference Director, Al Nimr Expo
Programme at a glance
alnimrexpo.com Media Partner
The Peninsula Manila, The Philippines Thursday 12 and Friday 13 February 2015 Hosted By
• Technical Site Visit • 50 International Exhibition Stands • 30 International Conference Speakers • 400 International Decision Makers • Networking Welcome Dinner • Special Offer: Conference Delegate Registration for Shipping Lines; Port Authorities And Terminal Operating Companies at only GBP595! Save GBP400! • FREE Conference Delegate Registration for Shippers/Beneficial Cargo Owners (BCOs) • KEY SPEAKERS.... PLUS MANY MORE! 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
34
Atty. Tomas A. Riveral
President and General Manager, Oriental Port and Allied Services Corporation (OPASCOR), The Philippines
Richard Barclay
Chief Executive Officer, Manila North Harbour Port Inc., The Philippines
Sean Perez
Vice President – Commercial & Marketing, Asian Terminals Inc., The Philippines
Terry OÊConnor
Chief Executive Officer, Darwin Port Corporation, Australia
Erry Hardianto
Managing Director, Maersk Filipinas Inc., The Philippines
Daniel C Ventanilla
General Manager, NYK Line (Philippines), NYK Fil-Japan Shipping Corporation, The Phillippines
HIGHLIGHTED TOPICS • Economic & maritime trade outlook for the Philippines and the BIMP-EAGA Region
• Future Container Freight Demand in BIMP-EAGA Region • The Maritime Agenda for the Philippines and the BIMP-EAGA Countries • Outlook on Container Activities in BIMP-EAGA Region and the Impact on Ports Activities • Global Trade Patterns in Asia and the Impact on BIMP-EAGAÊs Container Shipping Lines • Opportunities and Challenges in Financing Infrastructure Development Projects in the
Herman Pals, Director
Philippines and the BIMP-EAGA Region
Director – Advisory Group Maritime & Waterways, Royal HaskoningDHV, Indonesia
Truong Bui
Project Manager, Roland Berger Strategy Consultants, Singapore
• The Role of Technology and Solutions in Improving the Dynamic of Ports and Container
Jason Chiang
Terminals Operation
Director, Drewry, Singapore
Phillip Emmanuel
Regional Director – Asia Pacific, TT Club, Hong Kong
Dr. Jonathan Beard
Vice President – Global Lead Port and Logistics, ICF International, Hong Kong
Dr. Simon Su
Director & Chief Economist, BMT Asia Pacific, Hong Kong
• • •
Sustainable Port Initiatives and the Impact on Container Shipping Operations Improving Connectivity and Competition among BIMP-EAGA Opportunities for New Ports Development in the Philippines and BIMP-EAGA Region
www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
For more Information or to Register
Tel. + 60 87 426 022
Fax. + 60 87 426 223
Email: enquiries@transportevents.com
Website: www.transportevents.com
Bonifacio Drive, South Harbor, Port Area, Manila 1018, Philippines, P.O. Box 436, Manila, Philippines Tel. No. (0632) 527-8356, Fax No. (0632) 527-4855, http://www.ppa.com.ph
13 January 2014 Dear Colleague, To understand the substantial commercial opportunities currently presented in The Philippines, you are invited to participate in the biennial 8 th Philippine Ports and Shipping 2015 - now in its 8th successful year - taking place from Wednesday 11 to Friday 13 February 2015. This event is the largest biennial Container Ports and Terminal Operations Exhibition and Conference B2B trade event in The Philippines and one of the largest throughout the ASEAN region. This trade Exhibition and Conference is honoured to be endorsed and hosted by the Philippine Ports Authority. The event will be a two-day gathering of 350 senior executive decision-makers from the world’s leading regional container shippers, cargo owners, shipping lines, freight forwarders, logistics, port authorities, importers/exporters, terminal operating companies, railway operating companies, haulage companies, container terminal equipment and services suppliers operating throughout Australasia. There will be an Exhibition of 50 international shipping lines, container ports, logistics companies, IT companies, container terminal equipment, services providers and event sponsors. A two-day concurrent Conference will feature 25 world-class conference speakers analysing latest global and regional transport and logistics issues facing shipping lines and cargo owners. There were 350 participants from 23 countries at the last event in Manila in 2013. We welcome you to our beautiful country rich in history and cultural diversity in what is one of the largest archipelagos in the World. We encourage your participation and look forward to the pleasure of your valued company at the largest biennial Container Ports and Terminal Operations Exhibition and Conference in the Philippines. Yours sincerely,
JUAN C. STA. ANA General Manager
By 2010, PPA shall have met the international standards in port facilities and services in at least ten (10) ports in support of national development.
We commit to provide reliable and responsive services in our ports, sustain development of our port communities and the environment, and be a model corporate agency of the government.
Wednesday 11 February 2015 TECHNICAL SITE VISIT 9am 10am 10 45am 11 30am 12 30pm 1pm 3pm 4pm 6pm
Depart from The Peninsula Manila Hotel Arrive at Manila International Container Terminal for presentation and tour Arrive at Manila North Harbour Port Inc. for tour Arrive at Asian Terminals Inc. Presentation and light lunch kindly sponsored by Asian Terminals Inc. Depart to Batangas Port Arrive at Batangas Port for formal welcome and proceed to Batangas Container Terminal Depart to The Peninsula Manila Hotel Arrive at The Peninsula Manila Hotel (approx.)
SESSION 2 Sponsored by Financing and investment opportunities in ports and container terminals in the BIMP-EAGA Region
Thursday 12 February 2015 Opening Ceremony 8am
Conference delegate registration and refreshments served in the exhibition sponsored by
11 50am
9am
OrganiserÊs Remarks Rory J. Doyle, Managing Director Transport Events Management Malaysia
Evaluating port investment PPP opportunities in the Philippines and SE Asia Dr. Jonathan Beard, Vice President – Global Lead Port and Logistics ICF International Hong Kong
12 10pm
Leading the modernization of ports and terminals via investments – IFCÊs experiences Jesse Ang, Resident Representative International Finance Corporation Philippines (invited)
9 05am
9 15am
9 30am
Welcome Address Juan C. Sta. Ana, General Manager Philippines Ports Authority The Philippines
SESSION 3 Sponsored by
12 30pm
How shippers benefit from the increasing vessels size and mega-alliances? Erry Hardianto, Managing Director Maersk Filipinas Inc. The Philippines
12 50pm
Questions and answers followed by conference delegates networking lunch sponsored by
2pm
Intra-Asia trade challenges for carriers Tim Wickmann, Chief Executive Officer MCC Transport Singapore Opportunities for container shipping lines in the Philippines and BIMP-EAGA region Daniel C Ventanilla, General Manager NYK Line (Philippines) NYK Fil-Japan Shipping Corporation The Phillippines ShipperÊs perspective – how ports and terminal operators can improve efficiency Eric Leong, Executive Director Mer Lion Metals Pte. Ltd. Singapore Questions and answers followed by conference delegates refreshments served in the exhibition
Exhibition opening ceremony and tour of the exhibition by the VIP group followed by delegates refreshments
Maritime Trade Outlook in Philippines and the BIMPEAGA Region - 2015 and Beyond ChairpersonÊs opening remarks Hector Miole, Corporate Board Secretary and Asst. General Manager for Special Projects Philippine Ports Authority The Philippines
2 20pm
10 30am
An overview of ASEAN port developments and outlook Jason Chiang, Director Drewry Singapore
10 50am
Latest maritime trade trends and development in BIMP-EAGA region Truong Bui, Project Manager Roland Berger Strategy Consultants Singapore
2 40pm
11 10am
How ports and terminal operators in Southeast Asia respond to the changing global market trends Dr. Simon Su, Director & Chief Economist BMT Asia Pacific Hong Kong
3pm
Reducing accidents and insurance claims for ports and terminals Phillip Emmanuel, Regional Director – Asia Pacific TT Club Hong Kong
4pm
11 30am
Oriental Port and Allied Services Corporation
Unpacking the Philippines and BIMP-EAGA supply chain industry – ShippersÊ and shipping linesÊ focus
Keynote Address Honourable Joseph Emilio Aguinaldo Abaya, Secretary Department of Transportation and Communications The Philippines
SESSION 1 Sponsored by
10 30am
O PA S C O R
SESSION 4 The Future of Intra-Asia Trade Flows and Logistics Connectivity
Supporting Media
Developing efficient & effective logistics network in ASEAN countries Mark Millar, Managing Partner M Power Associates Hong Kong
4 20pm
Port congestion, policies and impacts on the logistics sector Enrique C. Ike Castillo, President and Chief Operating Officer Fast Logistics The Philippines
SESSION 5 Sponsored by Port Equipment and Technology for Maximizing Maritime Trade Productivity in the BIMP-EAGA Region 4 40pm
Reinvented RTG: BOXHUNTER Kimmo Nyman, Sales Director, Port Cranes APAC Konecranes Singapore
5pm
Modern Energy Guiding Systems for Port-Cranes Peter Sebastian Pütz, Key Account Manager, Business Development Tsubaki Kabelschlepp GmbH Germany
5 20pm
Questions and Answers followed by ChairpersonÊs closing remarks
SESSION 7 Promoting Sustainable and Smart Ports in the Asia Pacific Region 12pm
7pm - 9 30pm Filipino Cultural Gala Dinner for all participants and spouses.
Transport will depart from the Peninsula Manila at 7pm sharp and will return back to the hotel at approximately 9 30pm. Smart Casual Attire. Generously sponsored by
Friday 13 February 2015 8am
Conference delegate registration and refreshments served in the exhibition
9am
ChairpersonÊs opening remarks Dr. Mark Yong, Business Development Director BMT Asia Pacific Hong Kong
9am
Sustainable port development in the ASEAN region Melissa Pizana-Cruz, National Coordinator and Advisor for CSR and Management Systems Franca Sprong, Project Director, ASEAN-German Technical Cooperation German Federal Enterprise for International Co-operation (GIZ) GmbH The Philippines
SESSION 8 Best Practices in Container Ports and Terminal Operations in the Philippines and BIMP-EAGA Region 12 20pm
TransnetÊs experience in promoting investment and development of ports infrastructure in South Africa Tau Morwe, Chief Executive Officer Transnet National Ports Authority South Africa
e-chainsystems® for cranes & Heavy Duty applications Jens Göbel, Industry Manager Cranes & Materialhandling e-chainsystems® igus® GmbH Germany
12 40pm
Challenges and opportunities in strengthening trade ties between Australia and the BIMP-EAGA region Terry OÊConnor, Chief Executive Officer Darwin Port Corporation Australia
9 20am
Electrification of RTGs, ports of the future run on electric power Klaus Schilling, Regional Director - Service MHE Demag (S) Pte. Ltd. Singapore
1pm
Questions and answers followed by conference delegates networking lunch sponsored by
9 40am
Activate efficiency – Automate it mateys! John S. Dunlop, International Development Solon Software Turkey
2pm
Developing ManilaÊs maritime transport gateway Richard Barclay, Chief Executive Officer Manila North Harbour Port Inc. The Philippines
2 20pm
Developing further terminal efficiency in Manila ports Sean Perez, Vice President – Commercial & Marketing Asian Terminals Inc. The Philippines
2 40pm
Reducing congestion in Manila ports Christian Gonzalez, Head of Asia Region International Container Terminal Services Inc. (ICTSI) The Philippines
3pm
Subic Bay Freeport – Helping to alleviate Manila port congestion Roberto V. Garcia, Chairman and Administrator Subic Bay Metropolitan Authority The Philippines
3 20pm
Questions and answers followed by ChairpersonÊs closing remarks and conference delegates refreshments served in the exhibition
10am
Questions and answers followed by conference delegates refreshments served in the exhibition
11am
Avoiding bottlenecks by forecasting the coming terminal operation - become pro-active Holger Schuett, Managing Director ISL Applications GmbH Germany
SESSION 6 New Ports and Maritime Infrastructure Development in the Philippines and BIMP-EAGA Region 11 20am
Ports infrastructure challenges in the Philippines Herman Pals, Director – Advisory Group Maritime & Waterways Royal HaskoningDHV Indonesia
11 40am
Potential and infrastructure challenges of the Philippine ports Atty. Tomas A. Riveral, President and General Manager Oriental Port and Allied Services Corporation (OPASCOR) The Philippines
Supporting Trade Organisations
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Keynote Speech DR. A. HERMANTO DARDAK
“Roads, a Common Goods Across the Region”
President of REAAA
First of all, on behalf of the Road Engineering
Association of Asia and Australasia, please allow me to express my sincere appreciation to the committee of the International Road Federation for hosting this important international event in Bali, Indonesia. As an Indonesian participant in some previous IRF world congress, I am also delighted that this 1st IRF Asia Regional congress can now be held in Bali, Indonesia in cooperation with the Ministry of Public Works & Public housing accordingly. It is indeed a privilege and a great pleasure for me to welcome all participants who join this event and to address the topic requested by the committee on “Roads, a Common Good across the Region.”. This topic relates well to the congress theme: Building the Trans-Asia Highway. Through this event, it is expected that the region’s stakeholder together identify new and innovative resources to bridge the current funding gap, while also sharing case studies, best practices, and new technologies that can all contribute to making the Trans-Asia Highway a reality.
Roads and Region
Road infrastructure plays an important role in facilitating social needs and economic activities. Roads build economic competitiveness by connecting production sources to markets, which in turn contribute to the significant creation of business opportunities and associated employments, and demonstrates multiplier effect to the local and regional economic development. As we define the context of region in discussing road infrastructure, we may be flexible to define region as a division within a country or beyond one country, all of which are brought together by geographic proximity. The existence of road infrastructure plays a big role in strengthening the functioning of a region. For example, Sumatera region with an area of 443 thousand Km2 or 22% of the area of Indonesia. We presently preserve and improve about 6000 km existing National roads and has just started the development of the Trans-Sumatera Highway of about 2700 km, which will adopt expressway specification. In a larger scale, the Southeast Asia region or the Asia region, can also be examples of how road infrastructure plays a role in their respective functioning. ASEAN region covers a land area of 4.46 million km2 with population of about 600 million people or about 8.8 % of the world population. At the 5th ASEAN Transport Minister meeting in 1999, the ASEAN Highway network was agreed to formalise the strategic route configuration and the uniform technical design standards of ASEAN highway network and to intensify cooperation in the facilitation of international road traffic throughout the South-East Asia region. Asian region covers a land are of about 44,5 million km2 or about 30.6% of world land area. Having about 4,42 billion people, Asia region host 66% of the world population. In relation with Asian regional development, road network can function as a tool for gathering the various products within the region, such as the ancient Silk Road in the Asian region that served as a great trade route originating from Xian, China in the east and ending at the Mediterranean in the west. The ancient Silk Road passed through many settlements to transform the isolated continents into independent global community, all spanning the length of approximately 8,000 km. This major ancient trade route which was named after silk as the major traded product, not only circulated goods, but also exchanged the splendid cultures of China, India, Persia, Arabia, Greek and Rome. The Trans Asia Highway initiated in 1959 by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) aimed at promoting the development of international road transport in the region. Agreements have been signed in 1992 by 32 countries to allow the highway to cross the continent and also reach to Europe and the Intergovernmental Agreement on the Asian Highway Network with the length of about 141.000 km was adopted in the year 2003. In the 1990s, I had the opportunity to represent Indonesia in attending past UNESCAP meetings to discuss Asian Highway routes. In the last decade, as director general of Highways, then as the Vice Minister of Public Works, I have also had several dialogues with Japan, Korea, China, and Malaysia on infrastructure development and I have always raised the progress of Asian Highway in these discussions. Nevertheless, this great regional initiative is not without its own challenges, and if I have to discuss the challenges, it would fit perfectly with the use of the term common goods that is the topic of my speech today. From a philosophical perspective, common goods are shared assets and be beneficial for all those within the regional community. Nevertheless, the current challenge we face due to the lack of conformance to the specific minimum standard or for those which suffer from excessive demand over the road capacity, have led us to define roads as common goods from an economics perspective. In contrast to public goods which possess the characteristics of being non-excludable and have low rivalry in its usage, roads have today become common goods where it may still be non-excludable but have high rivalry in its usage. www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
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Roads as Common Goods
The high rivalry arises from the fact that the addition of road users have led to a situation that reflects negative externalities. The usage has reached an excessive level, in which the incremental addition of user has reduced the availability of road space for other users, and create congestion that reduces the benefit to al the road users. This gives rise to a problem called the Tragedy of the Commons where individual action to maximize their self profit would result in the greater society’s depletion of resources in the long term. Since negative externalities arise from the absence of financial consequence or the unpaid price for actions that cause such common loss, solutions often include creating a pricing regime such as the polluter pays or through other regulatory solutions. Economic growth and regional development give rise to the numbers of vehicles that is not accompanied by corresponding increase in road capacity and length due to constraints in government budget. In turn, congestions caused by this overcapacity leads to longer travel time and the inefficient consumption of fuel, which leads to greater burden to our environment. As well put by Hardin in 1968 to address the issue of the Tragedy of Commons, “We can avoid tragedy only by altering our values.”. Within the context of road sector, an alteration of conventional values may be needed to solve this complex challenge. The fact that road infrastructure challenges have implications to environmental sustainability, leads us to define the solution to this problem as part of the greater paradigm in creating a sustainable road development strategy.
Policy on Sustainable Road
If we return to the core issue surrounding the Tragedy of Commons in road infrastructure, it is basically arising from the high level of rivalry in the consumption or usage of the roads. Addressing or managing the level of rivalry is thus at the center of this sustainable road development strategy. Sustainability in road development is more and more crucial to be implemented. Many Asia Australasia nations are of developed economies while others are growing rapidly. These countries are regionally and globally influential. These countries have adopted sustainability as key principle in their countries infrastructure development. With sustainability as the key principles, green infrastructure is becoming a central aspect. As an example, Australia through its state and territory government (such as VicRoads) has stated sustainability as key aspects on their road development. Korea’s Ministry of Land, Infrastructure and Transport through its vision: Livable Territory, Convenient Transport, while Indonesia’s Ministry of Public Works and Housing key strategy on infrastructure development, including pro green. The desire from many countries to pursue sustainable road development is indeed well shown, and the key challenge would be on achieving both environmental sustainability through energy efficiency and attending to the growing demand for roads. The convergence of both this goal allows the use of a strategy that mainly seeks to attain eficiency by managing the level of user rivalry.
Strategies to Create Sustainable Road Infrastructure
Allow me to give an example of how the convergence of goals mentioned earlier as an implementation of the sustainability concept have been put into practice. Firstly, TDM (also called Mobility Management) is a strategy to achieve efficient transportation. It emphasizes the movement of people and goods, rather than motor vehicles, and so gives priority to more efficient modes (such as walking, cycling and public transit). To achieve the targeted goals, TDM must be implemented in line with other measures such as land use management, public transport, transit oriented development and congestion pricing. Improving and encouraging public transport uses and implementing transit oriented development will curb private cars uses thus minimizes pollution emission. Moreover, effective spatial management based on spatial planning and its carrying capacity is crucial. In developing countries, urban sprawl is becoming more apparent and to cope with this problem, the principles of Smart Growth is an applicable solution. Smart Growth principles incorporate higher density and mixed land uses, access to frequent transit service, and opportunities for short pedestrian and bicycle trips can help to achieve sustainability. The next policy that has been implemented is efficient road network in the form of ring and radial concept to distribute traffic load and support area development in a better way. For example, in Jakarta there is a concept on developing 4 ring roads with 8 radial roads, while in Beijing 5 ring roads with 15 radial roads. Other implementation to support sustainable road in urban areas is developing elevated corridor on the existing right of way for expressway and railway to minimize social impacts of land acquisition. These measures can be combined with other infrastructure sectors, to allow the achievement of optimum benefit such as in case of Jakarta City, developing giant sea wall as flood prevention together with toll road (expressway), utilities, as well as area development. In order to support and to leverage the above engineering interventions, we can also adopt innovative delivery of financing in the form of Public Private Partnership (PPP) and its other derivative modalities since financing issue is also part of sustainable development in the economic sphere. PBAS (Performance Based Annuity Scheme) is a breakthrough concept aimed at improving our PPP projects implementation by making the project more attractive for the private companies to invest, and at the same time leverage from the private sector expertise to bear risk in maintaining the level of service throughout the life of the road asset.
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REAAA Mission In closing, I would like to underline REAAA vision to be the most effective regional road organization; providing members with technology interchange, technology transfer, and technology services, to promote a better future in road related engineering. REAAA intends to meet the needs of members for professional and organizational understanding and cooperation both within and beyond this region. Several initiatives are being undertaken such as developing technical knowledge and technological practice in road sector by the Technical Committee which has 8 sub technical-committees. These sub-committees cover topics of Network Management, Pavements, Road Furniture, Asset Management, Road Safety, Green Technologies, Public-Private Partnership, and Structures & Bridges. Global empirical experiences have shown that reliable road infrastructure is prerequisite to accelerate national development as well as the region. IRF and REAAA are both leading international road associations which have potential to be actively involved and make valuable contribution to the global road development. Therefore Iencourage all participants from member countries of IRF and REAAA to strengthen their partnership to create a more sustainable road development which goes synergistically and mutually with regional development and global partnership. This synergy is of paramount importance in promoting better solution for roads as common goods across the region to give optimum support for the region’s prosperity. I deeply appreciate this event and would urge all of the delegates to make full use of their participation in this event in advancing dialogues and partnerships as well as the exchange of knowledge and best practice. I hope we will have a fruitful congress and exhibition, and gain benefits in advancing our technological and road-related managerial knowledge. Thank you, Bali, 17th November2014 President of REAAA Dr. Ir. A. Hermanto Dardak
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Building Regional Prosperity on Connections Landmark IRF Asia Regional Congress Opens BALI, Indonesia — More than 700 industry professionals representing 52 countries took part in today’s opening of the 1st International Road Federation Asia Regional Congress & Exhibition, a regional summit for road and transportation stakeholders held in Bali, Indonesia. The IRF Asia Regional Congress is articulated around policy roundtables and technical sessions developed in partnership with a network of 23 supporting organizations, representing all major stakeholders in the region. Highlighted issues include regional connectivity investments forming part of the Trans-Asia Highway, as well as methods to improve highway program delivery, strengthen regional capacity and tackle road traffic injuries, responsible for 500,000 deaths in the region every year. “Roads are Asia’s first social network. They are fundamental building blocks for human and economic development whose impacts transcend national borders,” noted IRF President & CEO C. Patrick Sankey in his opening address. “Our host country, Indonesia, is itself a remarkable example of this drive towards greater connectivity, with investments worth US $104 billion in transport infrastructure investments over the next five years.” Waskito Pandu, director general of the Indonesian Ministry of Public Works & Housing stated, “During this congress, we will share our knowledge and experiences to draw a better vision on road technology development. The Ministry of Public Works and Housing sees a great opportunity to establish better road planning, management and technology thanks to the IRF and the wealth of expertise gathered today.” The 1st IRF Asia Regional Congress & Exhibition runs November 17-19, 2014. Live updates are available from IRF’s social media channels (@ IRFhq #AsiaRC). ### The International Road Federation, founded in 1948, is a not-for-profit, non-political organization with the mission to encourage and promote development and maintenance of better, safer and more sustainable roads and road networks. With a membership network in 90 countries across six continents, the IRF believes it can make a difference by providing best practices and expert advice to today’s multi-faceted world of transport. irfnews.org
Official Media Partner
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INFRASTRUCTURE China interested in Singapore-Malaysia high-speed rail, Chile ports: Xinhua
China is keen to help build a Malaysia-Singapore
involvement in South American construction projects, Xinhua high-speed rail link and also to get involved in Chilean and said. Australian railway and port projects, Li also met with Australian Prime Minister Tony Abbott and state media and the government cited Premier Li Keqiang told him China would support its firms in investing in Australia’s railway and airport projects to promote as saying on Monday. regional economic cooperation, according to China’s The interest, expressed at meetings with the leaders of foreign ministry. Chinese railway companies have been ramping up efforts Malaysia, Chile and Australia on the sidelines of a gathering of Asia-Pacific Economic Cooperation leaders, to win contracts overseas, particularly in the area of comes amid growing efforts by China to export its rail high-speed rail. On Friday, the sector was dealt a blow when Mexico canceled a $3.75 billion high-speed rail technology and take part in overseas projects. billion contract from a China-led consortium, which had Li told Malaysian Prime Minister Najib Razak China was been a key first win. willing to “actively participate” in the Singapore-Malaysia high-speed rail, the official Xinhua news agency reported. The Chinese government on Saturday said it would contribute $40 billion to set up a Silk Road infrastructure It did not provide details. fund to boost connectivity across Asia. Singapore and Malaysia said in February last year that Last month, it unveiled a $50 billion China-backed Asian they planned to build a high-speed rail link by 2020 that Infrastructure Investment Bank. would cut travel time between the city-state and Kuala (Reporting by Brenda Goh; Editing by Robert Birsel) Lumpur to 90 minutes, without giving a cost estimate. In a separate Monday meeting with Chile’s President Michelle Bachelet, Li said China was keen to take part in reuters.com Chile’s rail, ports and utility projects and also to widen its www.indonesialogisticsonline.com | vol. 25 | I. XXV| NOVEMBER - DECEMBER 2014
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INFRASTRUCTURE Indonesian Government Offers 27 Infrastructure Projects to Private Sector One of the major problems which is blocking Indonesia’s economic growth is the country’s infrastructure. The lack of quality and quantity of
Indonesia’s infrastructure causes logistics costs to rise steeply and thus makes investors (particularly the foreign ones) hesitant to invest as high logistics costs imply a weakening of the country’s competitiveness. The problem of Indonesia’s infrastructure is both ‘hard’ infrastructure (roads, airports and electricity supply) and ‘soft’ infrastructure (social welfare and health care). In the latest edition of the World Economic Forum global competitiveness index (GCI, 2013-2014), Indonesia ranks 61st out of 148 economies when it comes to the state of the country’s infrastructure. The positive news is that Indonesia jumped 17 places from the GCI, 2012-2013 edition due to increased government planning and spending on infrastructure projects, but the negative news is that there is still much progress to be made. It is a sad fact that infrastructure development has been lacking in Southeast Asia’s largest economy because if the country would possess decent infrastructure, the GDP growth rate could accelerate to 8 percent instead of 6 percent. In light of much-needed job creation and poverty eradication, this would be a good development. The main problems that hinder infrastructure development in Indonesia are the lack of financial resources, land acquisition, bureaucracy, and a weak regulatory environment (including weak legal certainty). Regarding the lack of financial resources, the Indonesian government intends to enhance cooperation with the private sector to overcome this issue. Through public-private partnerships (PPPs) within the Masterplan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), it aims to develop the country’s infrastructure. The MP3EI was launched in 2011 but has not resulted in many successful PPP projects yet. For the private sector infrastructure projects are usually not attractive as it entails large investments while it can take many years before investors see profits. Particularly in a riskier environment (weak legal certainty), such as Indonesia, investors will think twice before participating in such projects. Nontheless, the Indonesian government offers 27 infrastructure projects (with a total value of USD $47.3 billion) to the private sector. Groundbreaking of these project is hoped to be conducted in 2014. Infrastructure Projects Offered to Private Sector: Railroad Soekarno-Hatta Airport Integrated Railroad Gedebage Bandung Terminal Revitalization Train Station Yogyakarta & Pedestrian Path Malioboro Development Aceh City Sunda Strait Bridge & Strategic Areas Toll Road Manado Bitung Toll Access Tanjung Priok Harbour Toll Road Balikpapan-Samarinda Toll Road Kayu Agung-Palembang-Belitung Drinking Water Infrastructure Pondok Gede
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USD $2.57 billion, USD $133 million USD $1.6 billion USD $1.6 million USD $25 billion USD $353 million USD $612.5 million USD $1.2 billion USD $836 million USD $20 million
INFRASTRUCTURE Drinking Water Infrastructure South Bali Waste Processing Depok and Bogor Waste Processing Surakarta Hydropower Karama South Sulawesi International Harbour Maloy East Kalimantan Expansion Tanjung Priok Harbour, Cilamaya, Karawang Expansion Harbour Tanjung Sauh, Batam Bali Airport Development International Airport Kulon Progo Mining Railroad Baai island-Muara Enim Monorail South Sumatra MRT Surabaya Monorail Bandung Toll Road Cisumdawu (West Java) Toll Road Pasir Koja-Soreang Bandung Toll Road Pandaan-Malang Sewage Treatment Jakarta Total
USD $218 million USD $40 million USD $30 million USD $1.3 billion USD $1.7 billion USD $1.1 billion USD $805.8 million USD $510 million USD $500 million USD $3 billion USD $550 million USD $1.1 billion USD $2.8 billion USD $1 billion USD $210 million USD $420 million USD $173.5 million USD $47.3 billion
indonesia-investments.com
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AIR TRANSPORT
News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators
News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators
Lithium Batteries Risk Mitigation Guidance for Operators Effective 1 January—31 December 2015
1st Edition Montreal – The International Air Transport Association (IATA) announced the publication of the first edition of the Lithium Battery Risk Mitigation Guidance for Operators. This free online guidance material provides airline operators with critical information related to the safe handling and transport of lithium batteries by air.
“Lithium batteries are safe to transport provided that they are designed, tested, manufactured and packaged in accordance with the global transport safety standards. Developed with the input of leading industry groups specialized in the area of handling potentially dangerous goods, the Lithium Battery Risk Mitigation Guidance for Operators represents an invaluable source of reference,” said Kevin Hiatt, IATA’s Senior Vice President for Safety and Flight Operations. In addition to being available free of charge, the Lithium Battery Risk Mitigation Guidance for Operators is copyright-free, allowing download and onward distribution to interested users. “Whether on passenger or cargo aircraft, operators can now rely on this guide, which will be updated and expanded as needed,” said Hiatt.
For more information, please contact: Corporate Communications Tel: +41 22 770 2967 Email: corpcomms@iata.org
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News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators AIR TRANSPORT NOTICE DISCLAIMER. The information contained in this publication is subject to constant review in the light of changing government requirements and regulations. No subscriber or other reader should act on the basis of any such information without referring to applicable laws and regulations and/or without taking appropriate professional advice. Although every effort has been made to ensure accuracy, the International Air Transport Association shall not be held responsible for any loss or damage caused by errors, omissions, misprints or misinterpretation of the contents hereof. Furthermore, the International Air Transport Association expressly disclaims any and all liability to any person or entity, whether a purchaser of this publication or not, in respect of anything done or omitted, and the consequences of anything done or omitted, by any such person or entity in reliance on the contents of this publication. © International Air Transport Association. All Rights Reserved. No part of this publication may be reproduced, recast, reformatted or transmitted in any form by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system, without the prior written permission from:
Lithium Batteries Risk Mitigation Guidance for Operators
Senior Vice President Safety and Flight Operations International Air Transport Association 800 Place Victoria, PO Box 113 Montréal, Québec Canada H4Z 1M1
Effective 1 January—31 December 2015
1st Edition
Lithium Batteries Risk Mitigation Guidance for Operators ISBN 978-92-9252-485-2 © 2014 International Air Transport Association. All rights reserved. Montreal—Geneva
Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
TABLE OF CONTENTS Scope .................................................................................................................................................. 1 Foreword............................................................................................................................................. 2 Introduction ........................................................................................................................................ 3 Background .......................................................................................................................................... 3 The Issue ............................................................................................................................................. 4 Airmail .................................................................................................................................................. 6 International Requirements.................................................................................................................. 7 Guide Structure .................................................................................................................................. 9 Chapter 1: Risk Assessment/Analysis .......................................................................................... 10 Introduction ........................................................................................................................................ 10 ICAO Safety Management Manual Risk Model ................................................................................. 10 Chapter 2: Outreach and Awareness ............................................................................................. 15 Engagement with Freight Forwarders ............................................................................................... 15 Engagement with Battery Manufacturers .......................................................................................... 15 Engagement with Designated Postal Operators................................................................................ 15 Warning Notices ................................................................................................................................ 15 Web Sites........................................................................................................................................... 17 Leaflets .............................................................................................................................................. 17 Arrival Videos ..................................................................................................................................... 17 Inflight Magazines .............................................................................................................................. 18 Training .............................................................................................................................................. 18 Other Publicity Material ...................................................................................................................... 18 Display Cabinets ................................................................................................................................ 19 Transit Vehicles ................................................................................................................................. 19 Airport Magazines .............................................................................................................................. 19 Recreational Press ............................................................................................................................ 19 Newspapers ....................................................................................................................................... 19 TV and Radio ..................................................................................................................................... 20 Story Lines ......................................................................................................................................... 20 Seminars ............................................................................................................................................ 20 Trade Press ....................................................................................................................................... 20 Schools .............................................................................................................................................. 20 Social Media ...................................................................................................................................... 20 Chapter 3: Cargo Acceptance and Handling ................................................................................ 21 Acceptance ........................................................................................................................................ 21 Loading .............................................................................................................................................. 21 Operator approval .............................................................................................................................. 22 General Cargo ................................................................................................................................... 22 Training .............................................................................................................................................. 22
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Chapter 4: Passenger/Crew Baggage ........................................................................................... 23 Requirements .................................................................................................................................... 23 General Requirements ...................................................................................................................... 23 Specific Requirements ...................................................................................................................... 24 Battery-powered Mobility Aids........................................................................................................... 24 Portable Medical Electronic Devices ................................................................................................. 25 Passenger Check-In.......................................................................................................................... 26 Onboard the Aircraft .......................................................................................................................... 26 Chapter 5: Training and Procedures ............................................................................................. 27 Safety Training for Flight Crew ......................................................................................................... 27 Cargo Aircraft .................................................................................................................................... 28 Lithium Battery Fires on the Flight Deck ........................................................................................... 28 Safety Training for Cabin Crew ......................................................................................................... 29 Overheat Event ................................................................................................................................. 29 Fire Event .......................................................................................................................................... 29 Fire in a baggage compartment (e.g. wardrobe or overhead locker) ............................................... 30 Lithium Battery Fire Prevention – Portable electronic device inadvertently crushed or damaged in electrically adjustable seats ........................................................................ 36 Considerations for operators of small aircraft ................................................................................... 37 Testing to Verify Understanding ........................................................................................................ 37 Further Guidance .............................................................................................................................. 37 Chapter 6: Future Developments................................................................................................... 38 Fire-resistant Containers ................................................................................................................... 38 In-container Fire Suppression ........................................................................................................... 39 Unit Load Device Penetration ........................................................................................................... 39 Fire Containment Covers .................................................................................................................. 40 Smoke Displacement Systems ......................................................................................................... 40 Quick-donning Full-face Oxygen Masks ........................................................................................... 41 Enhanced Packaging Standards ....................................................................................................... 41 Enhanced Security Screening ........................................................................................................... 41 Chapter 7: Future Information ....................................................................................................... 42 Passenger baggage .......................................................................................................................... 42 Cargo................................................................................................................................................. 43 Mail .................................................................................................................................................... 43 Emergency response ........................................................................................................................ 43 Testing............................................................................................................................................... 44 Advice to operators ........................................................................................................................... 44 Incidents ............................................................................................................................................ 44 Accident Reports ............................................................................................................................... 45 New initiatives ................................................................................................................................... 45 Miscellaneous guidance .................................................................................................................... 45
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News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
LIST OF FIGURES
Scope
Figure 1 Figure 2 Figure 3
This guide is designed to outline potential strategies airlines may wish to consider to reduce the risks associated with the transport of lithium batteries. These strategies address the carriage of lithium batteries as cargo on passenger and cargo aircraft as well as in passenger and crew checked and carry-on baggage. The strategies are primarily directed at an airline’s internal processes and procedures, although there are strategies for engaging with other entities in the supply chain, such as manufacturers of lithium batteries as well as shippers and freight forwarders.
Figure 4 Figure 5 Figure 6 Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 3.1 Figure 4.1 Figure 4.2 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 5.7 Figure 5.8 Figure 5.9 Figure 5.10 Figure 5.11 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Figure 6.5 Figure 6.6
Examples of lithium metal batteries ............................................................................ 3 Examples of lithium ion batteries ................................................................................ 4 Fire damage to a package of incorrectly packed lithium metal button cells, which occurred after unloading ................................................................................... 5 Example of a counterfeit lithium battery ...................................................................... 6 A non-compliant laptop battery ordered online and sent by airmail, which caught fire shortly after being unloaded from a passenger aircraft at London Heathrow Airport ............................................................................ 6 The Lithium Battery Handling Label ............................................................................ 7 Warning notice aimed at passengers produced by the Civil Aviation Safety Authority of Australia (see http://shop.casa.gov.au/products/dangerousgoods-lithium-batteries-poster-a2) ............................................................................ 16 Warning notice aimed at shippers, produced by IATA (see http://www.iata.org/whatwedo/cargo/dgr/Pages/lithium-batteries.aspx) ........... 17 Baggage tag produced by the Civil Aviation Safety Authority of Australia................ 18 Display cabinet at an airport ...................................................................................... 19 The consignment for this air waybill contained lithium batteries ............................... 22 Protecting the exposed terminals of a spare laptop battery with insulation tape .................................................................................................... 23 Collapsible lithium battery powered mobility aid ....................................................... 25 A burning laptop ........................................................................................................ 29 Determining the location of a fire in an overhead locker ........................................... 31 Discharging a fire extinguisher into an overhead locker ........................................... 31 A lap top being doused with water from the galley ................................................... 32 Applying water to a lap top computer without removing it from an overhead locker .................................................................................................... 33 A demonstration of the effect of applying ice to a burnng lap top (courtesy of the Federal Aviation Administration) ..................................................... 33 A lap top computer in a bag being submerged in water in a toilet waste bin…. ....... 34 which should be stowed in a bathroom ..................................................................... 35 A bar box made water-tight using a plastic bin liner ................................................. 35 A mobile phone crushed in an electrically adjustable seat ....................................... 36 The charred remnants ............................................................................................... 36 Fire-resistant containers ............................................................................................ 38 In-container fire suppression system ........................................................................ 39 ULD fire suppression system, showing penetrators at each ULD position ............... 39 An open pallet with a fire containment cover ............................................................ 40 A smoke displacement system (EVAS – Enhanced Vision Assurance System) ........................................................................................ 40 Quick-donning full-face oxygen mask ....................................................................... 41
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It should be noted that IATA has developed comprehensive guidance information for shippers, freight forwarders, ground handlers, airlines and passengers which may be found on the following web page: http://www.iata.org/whatwedo/cargo/dgr/Pages/lithium-batteries.aspx This guide will be updated as required based on input from member airlines, emerging technologies, new mitigations and changes to regulatory requirements or recommendations.
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Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Foreword
Introduction
This year marks a major milestone for aviation: 100 years ago, the first commercial flight occurred between St. Petersburg, FL and Tampa, FL in the Unites States. Since that pioneering flight, commercial aviation has become ever more accessible, attracting billions of passengers each year, all of whom rely on the industry to get them to their destination safely. Their safe passage is due to the tireless efforts of industry stakeholders, both public and private. Working together, we have made aviation the safest form of long-distance travel ever invented.
Background
th
As we celebrate this 100 anniversary, recent events remind us that emerging technologies have the potential to introduce new challenges to this impressive safety record. The proliferation of lithium batteries is one such challenge; it is estimated that each year, upwards of one billion lithium batteries are transported by air as mail, cargo or in passenger/crew baggage. This constitutes a safety hazard that must be managed in a clear and comprehensive manner. In an effort to facilitate this, IATA has collaborated with various industry bodies to develop this Lithium Batteries Risk Mitigation Guidance for Operators, document. Designed to address the risks associated with the handling and carriage of lithium batteries, this guide is the first of its kind in the world. It is created to be a repository of information and will be continually updated and expanded as a knowledge resource on all aspects of lithium batteries in air transport. I wish to thank the ICAO Dangerous Goods Panel (DGP), IATA Dangerous Goods Board (DGB), IATA Cargo Department, IATA Safety Group (SG), The Dangerous Goods Office Limited and IATA Safety for their cooperation and expertise which was essential for the creation of this document. Kevin Hiatt Senior Vice-President IATA Safety and Flight Operations
Lithium batteries power many portable electronic devices (PEDs), such as laptop computers, tablets and mobile phones; they have become the battery of choice due to their ability to power such devices for hours or even days. Very stringent international requirements apply to their manufacture, testing and transport. Providing these standards are complied with, lithium batteries are very safe. The legitimate lithium battery industry (i.e., those companies adhering to the international rules) has an outstanding safety record since these batteries started to be shipped by air in the mid-1970s. A lithium battery is two or more “cells” that are connected together, for example in a laptop battery. Some devices such as mobile phones and watches are powered by one or more individual lithium cells. For simplicity, the terms battery/batteries is used throughout this Guide, but any reference will apply equally to cells. For transport purposes, lithium batteries are grouped into two categories based on the battery chemistry: 1. Lithium metal batteries Sometimes referred to as “primary” batteries, lithium metal batteries are typically non-rechargeable and used in long-life applications such as watches, calculators and emergency locator beacons. Examples include:
AA cells
C32032 button cell
CR123A cells
Figure 1 – Examples of lithium metal batteries
The term “lithium metal” encompasses lithium alloy batteries and includes those containing sulfuryl chloride and thionyl chloride.
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Lithium Batteries Risk Mitigation Guidance for Operators 2. Lithium ion batteries Sometimes referred to as “secondary” batteries, lithium ion batteries are rechargeable and used in consumer electronics such as mobile phones and laptop computers, and in larger applications such as e-bikes and motor vehicles.
Mobile phone battery
Lithium batteries have become such a common, everyday item that they have been taken for granted by consumers, with little thought given to the precautions that need to be taken to ensure lithium batteries do not pose a hazard in air transport. This is an issue in passenger baggage (see Chapter 6 of this guide), but even more so in air cargo. Experience has shown that there are shippers who, either deliberately or through ignorance, do not follow the requirements. Consequently, incidents involving lithium batteries catching fire on board aircraft have occurred. It is not always possible to determine the cause of such incidents, but where a cause has been determined, they are invariably due to non-compliance with the requirements.
Laptop battery
E-bike battery
Figure 3 – Fire damage to a package of incorrectly packed lithium metal button cells, which occurred after unloading
Figure 2 – Examples of lithium ion batteries
There was a great deal of publicity surrounding the loss of three cargo aircraft due to onboard fires:
The term “lithium ion” includes lithium polymer and lithium iron phosphate batteries.
The Issue Because of the huge, worldwide demand for lithium batteries, billions of them are shipped annually in air cargo on both passenger and cargo aircraft. Volumes are expected to increase substantially over the coming years, with batteries becoming smaller and even more powerful. It is estimated that, on some routes, lithium batteries are present in at least 25% of cargo shipments; but this figure only takes into account lithium batteries that are known to be transported (i.e., those that have been declared to the operator). It cannot include “undeclared” shipments, the exact volume of which is unknown, but from the incidents that have occurred, “undeclared” shipments are clearly widespread.
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February 7, 2006: UPS DC-8, Philadelphia – aircraft landed safely, but was destroyed by fire which had started in the descent
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September 3, 2010: UPS Boeing 747, Dubai – the aircraft crashed during an attempt to return to Dubai due to a severe inflight fire; both crewmembers were killed
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July 27, 2011: Asiana Boeing 747, 130 km west of Jeju Airport, South Korea – the aircraft crashed into the sea following a severe inflight fire; both crewmembers were killed
It is known that all three aircraft were carrying lithium batteries as cargo, some of which on the UPS Boeing 747 were subsequently determined to have not complied with the regulatory requirements. However, the degree to which the lithium batteries were involved in these incidents (i.e., whether they were the cause or aggravated the fire) could not be determined.
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Lithium Batteries Risk Mitigation Guidance for Operators There is also the problem of low quality and counterfeit/fake (i.e., purporting to be genuine) batteries that have been the cause of incidents. It is often very difficult to distinguish fake batteries from the genuine article, as can be seen in the two examples below:
Consequently, it is recommended that operators carrying airmail should liaise closely with the NAA and DPO in their State.
International Requirements Lithium batteries are defined as dangerous goods by the United Nations, which specifies the very stringent manufacturing and testing requirements the batteries must meet. Specific requirements to ensure they can be carried safely by air in both cargo and baggage are determined by the International Civil Aviation Organization (ICAO) and these are then reflected in IATA’s Dangerous Goods Regulations.
The genuine article
The fake
Figure 4 – Example of a counterfeit lithium battery
Airmail The safety concerns are not restricted to baggage and cargo. Mail is carried extensively onboard passenger aircraft, both internationally and on relatively short domestic flights. Lithium batteries, whether on their own or packed with equipment, are not permitted in airmail. Nevertheless, numerous web sites advertise lithium batteries for sale with delivery by airmail as an option. Couple this with the fact that a number of such batteries may not comply with the regulatory requirements, it is not surprising that there have been a number of incidents involving lithium batteries in airmail.
The requirements differ for carriage of lithium batteries as cargo depending on the chemistry of the battery (i.e. lithium metal or lithium ion), and whether the batteries are shipped on their own or packed with or contained in equipment. Generally, lithium batteries are subject to all of the ICAO/IATA requirements for dangerous goods as cargo (e.g., marking, labelling, declaration, and training). However, small quantities of small lithium batteries are excepted from many of the requirements, e.g., Shipper’s Declaration, dangerous goods acceptance or inclusion on the written information to the pilot-in-command (NOTOC), but all batteries are subject to the testing requirements of the United Nations. Furthermore, even when small enough to benefit from the exceptions mentioned here, lithium batteries shipped on their own or with equipment (and when more than two batteries or four cells are contained in equipment in a package), the packages are required to be labelled with the lithium battery handling label and the consignment must be accompanied by an additional document that provides safety related information.
Figure 5 – A non-compliant laptop battery ordered online and sent by airmail, which caught fire shortly after being unloaded from a passenger aircraft at London Heathrow Airport
There are provisions for lithium batteries, when contained in equipment, to be sent by airmail providing the National Aviation Authority (NAA) has approved the Designated Postal Operator (DPO) of the State (country) in which the airmail is offered for carriage. However, in many parts of the world there is a lack of communication between the DPO and NAA and so the approval system may be absent. There may also be other problems, such as: •
The NAA may not have authority over airmail or the DPO, and is therefore unable to exercise the necessary oversight; and
•
The postal authority may not be subject to civil aviation regulations
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Figure 6 – The Lithium Battery Handling Label
The requirements applicable to lithium batteries have evolved over recent years to address safety concerns by reducing the quantity of lithium batteries permitted per package as well as enhancing hazard communication, including requiring more lithium battery shipments to be notified to the pilotin-command.
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News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators There remain however, a number of systemic problems with lithium batteries. Their ubiquitous nature means that people who are completely unaware of the dangerous goods regulations and the requirements for lithium batteries are shipping them as cargo and in mail. Worse still, unscrupulous individuals are prepared to flout the requirements and put passengers and crew at risk. Many passengers are similarly oblivious to the potential hazards of lithium batteries. The result is that there are safety risks from lithium batteries in baggage, cargo and mail. This guide has been produced to assist operators in determining their strategies for mitigating these risks.
Guide Structure This guide is organized as follows: Chapter 1: Risk Assessment Operators have an obligation to apply the principles of risk management to all activities where there is a perceived risk. This chapter looks at how this can be done in the context of lithium batteries. Chapter 2: Outreach and Awareness Passengers and those involved in the shipment and transport of lithium batteries must be made aware of the restrictions that apply, but this can be very difficult to achieve. This chapter looks at what initiatives to consider to raise awareness of the subject. Chapter 3: Cargo Acceptance and Handling In addition to the actions mandated by the international transport requirements of ICAO and IATA, operators may wish to consider additional measures that can contribute to mitigating the risk represented by the carriage of lithium batteries. Chapter 4: Passenger/Crew Baggage With the heavy reliance on lithium batteries around the world, passengers will inevitably carry them in their checked and carry-on baggage, and on their person. This chapter looks at which lithium batteries are permitted and where they must be carried. Chapter 5: Training and Procedures This chapter focuses on training for cabin and flight crew, and reflects the material contained in the ICAO Emergency Response Guidance for Aircraft Incidents Involving Dangerous Goods (known as the ‘red book’). Chapter 6: Future Developments Recent cargo fires on freighter aircraft have highlighted the vulnerability of the main deck cargo compartment to fires. As a result, there are a number of new technologies being pursued in the industry to address this area of vulnerability.
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Chapter 1:
The next step is to assign a degree of likelihood based on events related to the transport of lithium batteries, in accordance with the following table:
Risk Assessment/Analysis
Introduction
Table 2 – Likelihood Table
It is strongly recommended that operators conduct a risk assessment to identify all risks relating to the transport of lithium batteries in cargo, mail and passenger baggage. Risk management seeks to be proactive by identifying hazards and assessing risks before they become events. The objective of risk management is to minimize operational risk and maximize business opportunities. It may also be used to ensure regulatory compliance. Therefore, all activities where there is a perceived or potential risk should come under the scrutiny of the basic principles of risk management, and this certainly applies to the carriage of lithium batteries. However, risk assessments should not be limited to scenarios where it is known lithium batteries are present; the operator that has a policy of not carrying dangerous goods as cargo is just as vulnerable to carrying undeclared lithium batteries as an operator that carries dangerous goods. The risk assessment should be performed by a team of senior-level representatives from key areas, such as Cargo, Safety and Flight Operations (preferably personnel with appropriate knowledge on the subject). This risk assessment needs to consider the potential risk looking at all the points of entry for cargo, mail and passenger baggage, as applicable, and the types of aircraft being operated (passenger and/or cargo). Based on the risk assessment, an identification of potential risk mitigation strategies should follow.
Level
Descriptor
A
Certain/frequent
Likelihood Description Is expected to occur in most circumstances
B
Likely/occasional
Will probably occur at some time
C
Possible/remote
Might occur at some time
D
Unlikely/improbable
Could occur at some time
E
Exceptional
May occur only in exceptional circumstances
Multiplying the severity by the likelihood (e.g., 4 x E = 4E), gives us a “Risk Index” according to the following table: Table 3 – Risk Index Matrix (severity x likelihood) Severity
ICAO Safety Management Manual Risk Model
Likelihood
1. Insignificant
2. Minor
3. Moderate
4. Major
The ICAO Safety Management Manual (Doc 9859) contains comprehensive guidance for both industry and regulators on the subject of risk assessment. This guide will not reproduce large parts in this document, but it is useful to consider the basic elements of safety risk mitigation as it applies to lithium batteries.
A. Certain/frequent
Moderate (1A)
Moderate (2A)
High (3A)
Extreme (4A)
Extreme (5A)
Low (1B)
Moderate (2B)
Moderate (3B)
High (4B)
Extreme (5B)
Low (1C)
Low (2C)
Moderate (3C)
Moderate (4C)
High (5C)
A risk assessment seeks to identify potential hazards (what could happen) and consider the likelihood of them happening. This will give us the “risk” and by identifying these risks, it is possible to determine mitigation strategies to reduce them to an acceptable level. As with any risk assessment, the starting point is to determine the potential severity, or the “ultimate consequence”, of a lithium battery catching fire. ICAO provides the following “Severity Table”:
D. Uunlikely/improbable
Negligible (1D)
Low (2D)
Low (3D)
Moderate (4D)
Moderate (5D)
E. Exceptional
Negligible (1E)
Negligible (2E)
Low (3E)
Low (4E)
Moderate (5E)
B. Llikely/occasional C. Ppossible/remote
5. Catastrophic
Table 1 – Severity Table Level
Descriptor
Severity Description
1
Insignificant
No significance to aircraft related operational safety.
2
Minor
Degrade or affect normal aircraft operational procedures or performance.
3
Moderate
Partial loss of significant/ major aircraft systems or result in abnormal F/Ops procedure application.
4
Major
Complete failure of significant/ major aircraft systems or result in emergency F/Ops procedure application.
5
Catastrophic
Loss of aircraft or lives.
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Lithium Batteries Risk Mitigation Guidance for Operators The acceptability (tolerability) of the risk index must then be determined by using the following table: Table 4 – Risk Acceptability (Tolerability)
Likelihood – Experience has shown that undeclared, non-compliant lithium battery shipments originating from Hong Kong have been the cause of a number of incidents. Consequently, a fire in cargo is “possible” and likelihood should be Level “C”. Therefore, the risk index would be severity (5) x likelihood (C) = 5C “High”
Risk Index
Tolerability
Action Required (customize as appropriate)
5A, 5B, 4A
Extreme Risk
STOP OPERATION OR PROCESS IMMEDIATELY. Unacceptable under the existing circumstances. Do not permit any operation until sufficient control measures have been implemented to reduce risk to an acceptable level. Top Management approval required.
5C, 4B, 3A
High Risk
CAUTION. Ensure that risk assessment has been satisfactorily completed and declared preventive controls are in place. Senior management approval of risk assessment before commencement of the operation or process.
1A, 2A, 2B, 3B, 3C, 4C, 4D, 5D, 5E
Moderate Risk
Perform or review risk mitigation as necessary. Departmental approval of risk assessment.
1B, 1C, 2C, 2D, 3D, 3E, 4E
Low Risk
Risk mitigation or review is optional.
1D, 1E, 2E
Negligible Risk
Acceptable as is. No risk mitigation required.
In the case of example 2, approval of the risk assessment is required if the operation is to continue. In both cases, a review of all risk mitigations in place should be undertaken and take account of: Preventative controls – an action, process or other activity that prevent a hazard (in this case, a lithium battery catching fire) from escalating into an unsafe event (an aircraft fire) which could, in turn, result in the ultimate consequence, loss of the aircraft. Escalation factors – factors (which may be latent) that could weaken the effectiveness of preventive controls. Escalation controls – an action, process etc. that can prevent an escalation factor from inhibiting a preventive control. In example 1 above, the following may apply: Preventive control – prohibition of spare lithium batteries in checked baggage; Escalation factor – passenger’s ignorance of the requirement;
We can use these tables to conduct basic risk assessments with respect to lithium batteries, for example:
Escalation control – Operator has a robust process to ensure that all passengers are made aware of the requirement (e.g. by questioning at check-in). In example 2 above, the following may apply:
Example 1: An operator of passenger aircraft within Europe wishes to risk assess the carriage of portable electronic devices (PEDs) in the cabin of their aircraft.
Preventive control – lithium batteries must comply with very stringent requirements before being offered for carriage by air;
Severity level – If a PED catches fire in the cabin, fire extinguishers will be readily available to cabin crew, who will have been trained in their use. Additionally, water, which is necessary to cool lithium batteries involved in an incident, will be at hand. Therefore, on the basis that an abnormal flight operations incident procedure would be applied (firefighting by cabin crew), with few other consequences, it may be appropriate to assign a severity level of 3 “moderate”. Likelihood – Given the propensity for portable electronic devices (PEDs) to be carried by passengers, it would be reasonable to assume that such an incident might occur at some time, and so the likelihood would be Level “C”. Therefore, the risk index would be severity (3) x likelihood (C) = 3C “Moderate”.
Escalation factor – shippers’ inadvertent or willful non-compliance with the requirements; Escalation control – Operator considers a system whereby lithium batteries will only be accepted from freight forwarders or shippers who have been vetted by the operator. Despite preventive controls being in place, there is always the possibility that an unsafe event (in this case a lithium battery fire) can occur. Consequently, “recovery measures” must be considered (i.e., what can be done to prevent the unsafe event developing into the ultimate consequence, the loss of life or the aircraft). However, as with preventive controls, recovery measures can also be weakened by escalation factors that need to be controlled.
Example 2: An operator of all-cargo aircraft wishes to risk asses the carriage of cargo from Hong Kong. Severity level – If cargo catches fire on the main deck of a cargo aircraft, this may become uncontrollable, resulting in a catastrophic situation. Therefore, the severity level should be 5 “catastrophic”.
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Chapter 2:
In example 1 above, the following may apply: Recovery measure – Halon fire extinguishers and water available to cabin crew; Escalation factor – fire extinguishers out of date, insufficient water carried; Escalation control – robust process in place to ensure an aircraft cannot depart with out-ofdate extinguisher or less than x litres of water. In example 2 above, the following may apply:
Outreach and Awareness
While there may be differing opinions with respect to how best to ensure lithium battery safety, all parties agree that effective outreach and awareness are key elements. With the advent of the Internet and social media, there are now more effective ways than ever of reaching passengers, shippers, etc. Furthermore, engagement with civil aviation authorities creates possibilities for outreach that would be difficult for an operator to achieve in isolation (e.g., regional seminars, advertising campaigns, etc.). This has the additional benefit of imparting information to civil aviation authorities that may not be as aware of the requirements as others.
Recovery measure – fire containment covers on all pallets or the use of fire-resistant containers;
Below are examples of outreach methods; some may be possible for an operator to implement alone, while others may require or benefit from the involvement of other parties such as civil aviation authorities, airport authorities, etc.:
Escalation factor – covers incorrectly applied, reducing their effectiveness;
Engagement with Freight Forwarders
Escalation control – covers only applied by trained personal and correct application verified by another qualified staff member.
Freight forwarders are an important interface between shippers and operators, but are largely unregulated. Engagement with freight forwarders, including advising them of the consequences of failure to comply with the requirements, can be very beneficial.
The above elements can be more easily demonstrated with a “bow-tie” risk diagram, many of which have been produced by operators and regulators with respect to lithium batteries. A particular strength of the bow-tie concept is that it can readily identify where preventive controls or recovery measures are missing. For example, both large and small aircraft will have passengers with PEDs in carry-on baggage and both may experience incidents. However, large aircraft may have a variety of equipment to use in dealing with an incident (e.g., oven gloves), while small aircraft may not and operators should consider providing some level of equipment for cabin crew. Determination of severity levels and likelihoods can be subjective, but is important that the safety culture of an operator embraces the concept that many activities associated with air transport, including the carriage of lithium batteries, involve risks that must be identified and mitigated to an acceptable level of tolerability.
Engagement with Battery Manufacturers One of the most frequent causes of battery incidents is the failure to protect against short circuit. Battery manufacturers are in the best position to educate purchasers by providing information on and in their packaging. Engagement with Designated Postal Operators Experience has shown that there is a great deal of ignorance among the public about what can and, more importantly, cannot be sent in the mail. ICAO requires that the appropriate civil aviation authority approve the procedures of Designated Postal Operators (DPOs) to control the introduction of dangerous goods into the mail. Therefore, it may be beneficial for operators and DPOs to work together in developing awareness strategies. Warning Notices Notices must be displayed at check-in desks at airports, warning passengers of the type of dangerous goods they must not carry. This is not ideal, since any warning at an airport is at a very late stage in the passenger’s journey. Furthermore, warning notices are often generic in nature and experience has shown that passengers often do not even see them. Even if they do, they may be reluctant to empty the contents of their baggage in the very public area of an airport terminal.
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Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Figure 2.2 – Warning notice aimed at shippers, produced by IATA (see http://www.iata.org/whatwedo/cargo/dgr/Pages/lithium-batteries.aspx)
Figure 2.1 – Warning notice aimed at passengers produced by the Civil Aviation Safety Authority of Australia (see http://shop.casa.gov.au/products/dangerous-goods-lithium-batteries-poster-a2)
Despite these limitations, warning notices have a role to play in raising awareness. Operators should consider specific warnings at airports where there are known problems, such as the prevalence of counterfeit and low-quality lithium batteries available to purchase at street markets. At such airports, warning notices may actually be more effective in the arrivals baggage reclaim area to warn passengers before they have an opportunity to purchase the batteries. Notices aimed at shippers have also been produced, but it is rare for shippers to offer items directly to operators. Consequently, such notices are best placed in the premises of freight forwarders or express courier companies where they are more likely to be seen by shippers.
Web Sites It is important to warn passengers about the restrictions that apply to baggage at the earliest opportunity, ideally before they leave home. There are requirements that on-line ticket purchases can only be completed once information about dangerous goods has been displayed and an acknowledgement made that this information has been understood. Similar requirements apply to online check-in. These requirements are not foolproof, as the person purchasing the ticket or checking in may not necessarily be the person travelling or may click that they have read information without actually reading it. Nevertheless, this information should cover specific information about lithium batteries. Beyond these requirements, web sites present other excellent opportunities to educate passengers on the limitations regarding dangerous goods in baggage, including the use of video. Leaflets Leaflets advising of the requirements in both baggage and cargo can be distributed at airport check-in areas, travel agents, freight forwarders, etc. These can be in paper or electronic format. Arrival Videos At the end of a flight, passengers may be shown a video about the city they are visiting. This provides a unique opportunity to inform a “captive” audience about the perils of purchasing cheap lithium batteries from market stalls, if that is relevant to the destination.
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Lithium Batteries Risk Mitigation Guidance for Operators Inflight Magazines
Display Cabinets
Although too late to prevent batteries from being carried in manners that do not comply with requirements, an article in an inflight magazine may help passengers be more careful when packing their baggage on a subsequent flight.
Display cabinets may be more eye-catching than warning notices and could contain examples of poor quality and counterfeit batteries, as well as examples of how to protect legitimate batteries against short circuit.
Training As the first point of contact between a passenger or shipper and the operator, it is important that sales and reservations staff be adequately trained concerning the requirements for the correct carriage of lithium batteries by air. Other Publicity Material Key fobs, drinks coasters, bookmarks and baggage tags have all been used to provide flight safety information.
Figure 2.4 – Display cabinet at an airport
Transit Vehicles Buses and trains used to transfer passengers between airport terminals often have the ability to display safety related information, including videos. Airport Magazines Figure 2.3 – Baggage tag produced by the Civil Aviation Safety Authority of Australia
Airports are increasingly producing their own magazines and often feature articles relevant to passengers. Recreational Press Magazines produced for specific recreational activities involving lithium batteries (e.g., radiocontrolled models) may publish articles provided by operators. Such magazines are guaranteed to reach the relevant audience. Newspapers Newspapers have the potential to be read by a very wide audience, but can be very expensive.
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Lithium Batteries Risk Mitigation Guidance for Operators
Chapter 3:
TV and Radio
Cargo Acceptance and Handling
Acceptance
TV and radio campaigns have the potential to reach a very wide audience and, if used as part of a wider campaign, can be very effective.
In addition to a comprehensive “acceptance check”, which seeks to verify as far as possible that all applicable requirements for packages (and documentation) have been met for fully regulated dangerous goods, ICAO and IATA require measures to be taken to ensure they are not damaged during transport and these are particularly relevant to lithium batteries. For example, packages must be:
Story Lines Many millions of people watch popular TV shows and movies. Producers are sometimes amenable to including a story line with a public interest message. For example, a character could be seen being told not to put a battery in their checked baggage. Seminars
•
secured in an aircraft in a manner that will prevent movement;
•
protected against damage:
Apart from the obvious benefit of providing learning opportunities, seminars have the ability to bring together many interested parties who may not normally come into contact with one another, thus facilitating an understanding of each other’s perspectives.
•
during flight, for example by the movement of baggage, mail, stores or other cargo; and
•
during their preparation for transport, for example during handling after acceptance and prior to loading.
Whilst an acceptance check is only required when fully regulated dangerous goods are first accepted for carriage by air, when packages are transhipped operators should verify that markings and labels are still intact (labels must be replaced by the operator if they have become lost, detached or illegible) and packages are free from damage.
Trade Press In many parts of the world, magazines and newspapers are produced for specific industry audiences (e.g., freight forwarders, shippers, travel agents, etc.).
Loading
Schools
There are no specific requirements addressing where lithium batteries should be loaded on an aircraft. Operators may wish to consider loading them in a “Class C” cargo compartment, i.e. one in which:
In some parts of the world, it has been possible to cooperate with education authorities to include a brief lesson for students who are shortly to leave school on what can and cannot be carried in baggage. As well as educating the students, this information is likely to be passed on to parents, friends, etc.
•
There is a separate approved smoke detector or fire detector to give a warning to the flight crew;
Social Media
•
There is an approved built-in fire extinguishing system controllable from the flight deck;
Travelers may “follow” an operator on Twitter, Facebook, LinkedIn, etc.
•
There are means of excluding hazardous quantities of smoke, flames or extinguishing agent from any compartment occupied by the crew or passengers; and
•
There are means of controlling ventilation and draughts within the compartment so that the extinguishing agent used can control any fire that may start within the compartment.
Furthermore, as an item of dangerous goods in Class 9 (miscellaneous dangerous goods), there is no requirement for packages of lithium batteries to be segregated from other types of dangerous goods. However, operators may wish to consider segregating packages of fully regulated lithium batteries from packages of other dangerous goods except those of classes 6, 7 or 9. The measures above may be achievable for lithium batteries which are declared to the operator by way of a shipper’s declaration. However, section II lithium batteries are not required to be accompanied by a shipper’s declaration and consequently operators may wish to consider the prenotification of such batteries, which may be achieved by an approval process (see below).
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Chapter 4:
Operator approval
Passenger/Crew Baggage
The incidents that have occurred have invariably been caused by non-compliance, but not all have been “undeclared” i.e. they may have been accompanied by a shipper’s declaration, but may not have been adequately protected against short-circuit. Consequently, operators may wish to consider accepting lithium batteries only from shippers and freight forwarders that they have approved. Such approval could seek to satisfy that requirements such as UN testing, protection against short circuit, the correct use of packaging and training have been complied with.
Requirements
General Cargo
General Requirements
Clearly, the above measures are not possible for lithium batteries that have not been declared to the operator. Therefore, efforts must be made to detect such batteries. These could include implementing:
General provisions applying to both lithium ion and lithium metal batteries:
•
•
enhanced cargo acceptance processes and training to better detect non-compliant shipments. This could include greater scrutiny of the descriptions of goods on accompanying paperwork. For example, items described on an air waybill as “electrical/electronic equipment” or “film crew and media equipment” may contain lithium batteries; additional training for cargo terminal personnel to increase awareness of the need to better detect damaged packages, remove damaged packages from the transport stream, etc.
The widespread usage of portable electronic devices (PED) means that all passenger aircraft will be carrying lithium batteries in baggage. On large aircraft, the number of PEDs on board could be in the hundreds. Although they are “dangerous goods”, the IATA Dangerous Goods Regulations permits certain types and quantities to be carried by passengers and crew.
•
It is recommended that PEDs containing lithium batteries be carried in carry-on baggage. However, if this is not possible and they are in checked baggage, measures must be taken to prevent their unintentional activation.
•
Batteries and cells must have successfully passed the tests required by the United Nations. Clearly, this would be very difficult, if not impossible, for passengers or check-in staff to determine. However, batteries obtained from reputable sources, such as the original manufacturer, as opposed to market traders, will have been tested appropriately.
Spare batteries (i.e., those not contained in a PED) MUST be: •
in carry-on baggage; they are forbidden in checked baggage (see below regarding actions to be taken at check-in).
•
protected against short circuit, such as by: •
leaving the batteries in original retail packaging;
•
placing them in a plastic bag, such as those supplied at airport security points for liquids and gels; or
•
taping the exposed terminals.
Figure 3.1 – The consignment for this air waybill contained lithium batteries
Training It is recommended that cargo personnel undertake additional, specific, training on the subject of lithium batteries so as to increase awareness of their hazards. Guidance on how to deal with damaged packages, including the possible need to remove them from the transport chain, should also be provided.
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Figure 4.1 – Protecting the exposed terminals of a spare laptop battery with insulation tape
There is no limit on the number of PEDs or spare batteries, below a specified size, that a passenger or crewmember may carry, but they must be for “personal use”. For example, a battery salesperson is not permitted to carry lithium batteries for commercial reasons.
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Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Specific Requirements Lithium batteries must not exceed the following specifications:
Some lithium battery-powered mobility aids are collapsible and are specifically designed to allow batteries to be removed by the user. For this type of mobility aid, the following additional requirements apply:
Lithium ion: a Watt-hour rating not exceeding 100 Wh.
•
batteries must be removed from the mobility aid according to the manufacturer’s instructions;
This provides for the vast majority of batteries contained in laptop computers, mobile phones and tablets. All new lithium ion batteries will be marked with the Wh rating.
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batteries must be carried in the passenger cabin;
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the battery terminals must be protected from short circuit by insulating the terminals (e.g., by taping over exposed terminals);
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the battery must be protected from damage (e.g., by placing it in a protective pouch provided by the passenger);
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the battery must not exceed 300 Wh;
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One spare battery not exceeding 300 Wh or two spares not exceeding 160 Wh each may also be carried;
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the pilot-in-command must be informed of the location of the batteries.
Watt-hour rating exceeding 100 Wh, but not exceeding 160 Wh. At their discretion, operators may approve the carriage of PEDs containing lithium batteries up to 160 Wh (with no more than two spares per passenger), subject to the general provisions above. It is important for operators to clearly state in their manuals, procedures, etc. what is required for such an approval and the person(s) or post holder(s) within the company responsible for granting the approval. Lithium metal batteries, a lithium content of not more than 2 grams (equivalent to AA size or below) Lithium metal batteries are non-rechargeable and are typically used in cameras, calculators and watches. Lithium metal batteries are not marked with the lithium metal content, but a AA lithium metal battery contains approximately 0.9 g of lithium. Battery-powered Mobility Aids Non-spillable batteries (i.e. not lithium ion batteries) power the majority of mobility aids for persons with reduced mobility. But, increasingly, passengers are requesting to travel with mobility aids powered by lithium batteries. When fitted to a non-collapsible mobility aid, there is no limit on the Watt-hour rating of lithium batteries. Some mobility aids may have lithium batteries with Watt-hour ratings of as much as 700 Wh. Therefore, operators will need to make a considered judgment as to whether they wish to carry such devices, taking legislation regarding the accessibility of persons with reduced mobility into account.
Figure 4.2 – Collapsible lithium battery powered mobility aid
The requirements for mobility aids powered by lithium batteries are as follows:
Portable Medical Electronic Devices
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Carriage is subject to approval of the operator;
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Batteries and cells must meet all standards of the United Nations Manual of Tests and Criteria;
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Operators must verify: •
the battery is securely attached to the mobility aid;
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the battery terminals are protected from short circuits (e.g. by being enclosed within a battery container);
• •
electrical circuits have been isolated (note: this does not necessarily mean that the battery has to be disconnected);
Portable medical electronic devices such as automated external defibrillators (AED), nebulizers, continuous positive airway pressure (CPAP), etc. containing lithium metal or lithium ion cells or batteries are permitted in carry-on baggage or on the person of the passenger, subject to the following conditions: they must be carried for medical use;
• •
batteries and cells must meet all standards of the United Nations Manual of Tests and Criteria
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each installed or spare battery must not exceed the following:
Carriage must be in such a way that the mobility aid cannot be damaged by the movement of other items in the hold.
for lithium ion batteries, a Watt-hour rating of not more than 160 Wh;
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for lithium metal batteries, a lithium content of not more than 8 grams.
no more than two spare batteries per passenger, which must be individually protected against short circuit.
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Lithium Batteries Risk Mitigation Guidance for Operators Passenger Check-In
Chapter 5:
As stated previously, spare lithium batteries are not permitted in checked baggage. Consequently, if there is a need for hand baggage to be loaded in the hold (e.g., because cabin baggage stowage areas are full), check-in, passenger handling staff or cabin crew should ask affected passengers whether their baggage contains spare lithium batteries and, if it does, the batteries must be removed and carried in the cabin.
Because of the prevalence of lithium batteries and their inherent properties, incidents may occur in baggage, cargo and mail whether through non-compliance with the air transport requirements, or through subsequent damage. Possibly the greatest mitigation factor, is the appropriate training of all staff to be able to intervene in an incident or, better still, prevent an incident from occurring.
Where passengers advise cabin crew that they have spare lithium batteries in their checked baggage, this must be brought to the attention of ground staff if the aircraft is still at the gate so that the bag can be retrieved. If the aircraft has commenced push back or is in flight the cabin crew should report the matter to the flight crew. This must be followed up by submission of an appropriate incident report in accordance with the operator’s procedures.
Staff are required to be trained “commensurate with their responsibilities” and it is important for operators to consider the extent to which staff need to be trained. With respect to lithium batteries, training is either: Preventative (i.e., to stop an incident from occurring) and is generally relevant to staff handling cargo, mail and baggage before flight (e.g., dangerous goods and cargo acceptance staff, loaders, passenger handling staff, etc.). Other staff (e.g., cabin crew) can also have a preventative role. Training should concentrate on detection of:
Onboard the Aircraft There have been a number of incidents where mobile phones have been dropped by passengers into the workings of their seat and crushed when the seat was moved.. This scenario is most likely to occur in electrically powered seats found in premium cabins. To reduce the likelihood of this happening it, is suggested that operators incorporate advice into the pre-flight briefing, such as: “If you are intending to sleep during the flight please make sure any small electronic devices such as mobile phones, mp3 players and tablets are stowed safely either in seat pocket, a bag or in an overhead locker so that they don’t fall into the seat mechanism where they may be damaged. If you do lose your electronic device in your seat, do not move the seat and contact a member of the crew.” Another occasion when lithium batteries could potentially cause an incident is when they are being replaced in onboard equipment such as credit card readers. While this is being done, care must be taken to ensure that neither the old nor the new batteries are dropped into inaccessible locations, where short-circuiting could occur and lead to a fire. More details on dealing with lithium battery incidents in the cabin can be found in Chapter 5.
Training and Procedures
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Damaged packages;
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Lithium batteries not in compliance with the requirements, for example: •
where indications on a package suggest a consignment of lithium batteries has not been declared to the operator;
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where batteries are carried improperly in baggage;
or Reactive (i.e., to respond to an incident involving fire, smoke or fumes) and is relevant to flight and cabin crew. It is essential that, in addition to general familiarization training, flight and cabin crew receive comprehensive safety training to cover the hazards presented by lithium batteries, including safe handling and emergency procedures. Safety Training for Flight Crew As with any cargo fire, the options available to flight crew are severely limited. Without being able to see a burning package, it is impossible for flight crew to know whether lithium batteries are involved, or indeed, whether the smoke/fire warning is genuine. It must be appreciated that the notification to Captain (NOTOC) will only detail fully regulated dangerous goods. It should not be assumed that, if lithium batteries are stated on the NOTOC, they are the source of the fire. Similarly, the absence of lithium batteries on the NOTOC does not necessarily mean that none are being carried; there is always the possibility of undeclared lithium batteries in cargo. Flight crew should be trained to respond to an emergency suspected of involving lithium batteries carried as cargo by following the standard operating procedure for smoke or fire events, the most important aspect of which is: LAND AS SOON AS POSSIBLE.
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Lithium Batteries Risk Mitigation Guidance for Operators Cargo Aircraft Flight crew of cargo aircraft have options not available to those of passenger aircraft. Experience has shown that once a fire has become uncontrollable, a catastrophic situation can develop quickly and it may not be possible to reach a suitable airport in time to land. Should a suitable airport not be within reach, it may be necessary to verify that the smoke/fire warning on the main cargo deck is genuine by visual inspection. Fight crew can also establish the extent and severity of the fire at this time. If this cannot be achieved from the flight deck (e.g., through a porthole), it may be necessary to investigate further. Ideally, someone other than a member of the operating crew should do this, but this may not always be possible (i.e., the operating crew may be the only occupants). If a closer visual inspection is required, this should be done with extreme caution. Flight crew may achieve this by opening the flight deck door as little as possible to obtain a view of the cargo compartment. However, if this is not possible, it may be necessary to access the cargo compartment using appropriate personal protective equipment (PPE) such as fire gloves and portable breathing equipment (PBE). It is important to close the flight deck door after entry into the cargo compartment. The following are the objectives of visual inspection: •
•
•
Determine whether smoke or fire is present. If there are no signs of smoke or fire, it must not be assumed that the warning was false, and the appropriate procedures, including landing as soon as possible, should still be followed. The situation should be monitored regularly for the remainder of the flight. If smoke is present, and a small fire is the obvious source, it may be possible to extinguish the fire using a portable on-board fire extinguisher. After the fire is extinguished, if it is apparent that lithium batteries were involved, they should be doused with copious amounts of water to cool them and prevent reignition. After this has been done, the crewmember should return to the flight deck and the appropriate procedures for smoke/fire on the main deck should be followed, with the affected cargo being regularly monitored for the remainder of the flight for any signs of smoke or fire.
There is no “one size fits all” procedure for dealing with a lithium battery fire on the flight deck as some aircraft may be more affected by water ingress than others. Operators are encouraged to consider this when developing their standard operating procedures for dealing with a lithium battery fire on the flight deck, which should be done in conjunction with the aircraft manufacturer. Safety Training for Cabin Crew Cabin crew are most likely to have to deal with an inflight lithium battery fire and as such, have a vital role to play. Because a fire in the cabin can quickly become uncontrollable, with potentially disastrous consequences, it is vital that cabin crew are trained to respond quickly, using the procedures and checklists published in the ICAO Emergency Response Guidance for Aircraft Incidents Involving Dangerous Goods, Doc 9481 (The “Red Book”) and IATA’s Cabin Operations Safety Best Practices Guide. These procedures have been developed by the IATA Cabin Safety Task Force in conjunction with ICAO and will be incorporated into the 2015 – 2016 edition of the Red Book, although it is strongly recommended the new material is introduced into cabin crew procedures with immediate effect. To assist in this process, details of the new material is follows: Overheat Event If an electrical smell from a portable electronic device (PED) is detected, or a PED is suspected of overheating, the passenger should be asked to turn off the device immediately. If the PED is plugged into the aircraft power supply the power supply should be disconnected if safe to do so and the in-seat power should also be turned off. Although a PED may be “off”, unstable batteries can still ignite and so the PED must remain off and monitored closely for the remainder of the flight. Fire Event
If it is apparent that a large fire is present, no attempt should be made to enter the main deck. In this instance, as well as following the appropriate procedures, consideration should be given to the possibility that continued flight may not be possible and other options (e.g., ditching, forced landing) may need to be considered.
Clearly, the presence of fire on board an aircraft is an extremely stressful situation for flight crew, which can be made worse should smoke penetrate the flight deck. Consequently, practical emergency training should address the difficulties that will be encountered in continuing to control an aircraft if there is smoke on the flight deck. Lithium Battery Fires on the Flight Deck There are a number of pieces of equipment on the flight deck that are powered by lithium batteries, for example, electronic flight bags and emergency torches (flashlights). In addition, the crew may have a number of personal electronic devices. In the event of one of these items failing and causing a fire, it is understandable that there may be reluctance to introduce liquid into the flight deck. However, if the battery is not cooled with water (or other non-flammable liquid), the fire may continue to propagate. In addition, cabin crew (or indeed, flight crew) may be severely injured when trying to move a burning lithium battery without first dousing the flames and cooling it with water.
Figure 5.1 – A burning laptop
As with any fire occurring in the cabin, the use of personal protective equipment (PPE) such as fire gloves and portable breathing equipment should be considered, but it is important this does not delay the response to the incident. Although following guidance presents a sequence of tasks, some of these actions occur simultaneously when carried out by crewmembers.
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Lithium Batteries Risk Mitigation Guidance for Operators 1. Identify the item It may not be possible to identify the item (source of fire) right away, especially if the fire has started in a seat pocket or the device is not readily accessible. In this case, fire-fighting procedures should be applied as a first step. Once it is possible to do so, identify the item after the fire is under control. If the item is contained in baggage, the crew’s actions would be similar to the actions for a device that is visible or readily accessible. Caution: In order to avoid injury from a flash fire, it is not recommended to open the affected baggage when there is any indication of smoke or flames. However, in certain situations cabin crewmembers may assess and deem it necessary to slightly open baggage to allow entry of the extinguishing agent and non-flammable liquid. This should be done with extreme caution and only after donning appropriate protective equipment, available on the aircraft. 2. Apply fire-fighting procedure
Figure 5.2 – Determining the location of a fire in an overhead locker
Any occurrence concerning a fire in the cabin should be notified immediately to the pilot-incommand who should be kept informed of all actions taken and of the effect. It is essential that the cabin crew and the flight crew coordinate their actions and that each are kept fully informed of the other’s actions and intentions.
After first considering the use of PPE, a fire extinguisher should be discharged into the locker:
Appropriate fire-fighting and emergency procedures must be used to deal with any fire. In a multicabin crew operation, the actions detailed in the fire-fighting procedure should be conducted simultaneously. On aircraft operated with only one cabin crewmember, the aid of a passenger should be sought in dealing with the situation. Halon, Halon replacement or water extinguisher should be used to extinguish the fire and prevent its spread to additional flammable materials. It is important to wear available protective equipment (e.g. protective breathing equipment, fire gloves) when fighting a fire. If fire develops, cabin crew should take prompt action to move passengers away from the area involved and, if necessary, provide wet towels or cloths and give instructions for passengers to breathe through them. Minimizing the spreading of smoke and fumes into the flight deck is critical for the continued safe operation of the aircraft, therefore it is essential to keep the flight deck door closed at all times. Crew communication and coordination is of utmost importance. The use of the interphone is the primary means of communication unless the interphone system fails. Fire in a baggage compartment (e.g. wardrobe or overhead locker) If fire or smoke is seen coming from a baggage compartment such as a wardrobe or overhead locker, passengers should be moved and asked if they are carrying anything that could be the cause. The exact location of the fire should be determined by checking for heat with the back of an ungloved hand.
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Figure 5.3 – Discharging a fire extinguisher into an overhead locker
The compartment should be closed and a few seconds allowed for the extinguishant to take effect. Further extinguishant should be discharged until it is safe to fully open the compartment, when the cause of the fire must be located.
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Lithium Batteries Risk Mitigation Guidance for Operators 3. Remove power It is important to instruct the passenger to disconnect the device from the power supply, if it is deemed safe to do so. A battery has a higher likelihood of catching fire due to overheating during or immediately following a charging cycle, although the effects may be delayed for some period of time. By removing the external power supply from the device, it will be assured that additional energy is not being fed to the battery to promote a fire. Turn off the in-seat power to the remaining electrical outlets until it can be assured that a malfunctioning aircraft system does not contribute to additional failures of the passengers’ portable electronic devices. Visually check that power to the remaining electrical outlets remains off until the aircraft’s system can be determined to be free of faults, if the device was previously plugged in. The removal of power may occur simultaneously to other cabin crew actions (e.g. obtaining water to douse the device). Depending on the aircraft type, in-seat power may have to be turned-off by the flight crewmembers. Caution: Do not attempt to remove the battery from the device.
Figure 5.5 – Applying water to a lap top computer without removing it from an overhead locker Note – Liquid may turn to steam when applied to the hot battery.
Caution: i.
Do not attempt to pick-up or move the device; batteries may explode or burst into flames without warning. The device must not be moved if displaying any of the following: flames/flaring, smoke, unusual sounds (such as crackling), debris, or shards of material separating from the device;
ii.
Do not cover or enclose the device as it could cause it to overheat; and
4. Douse the device with water (or other non-flammable liquid) If the PED is not in a bag or it is an a bag which is not intact it should not be moved but cooled in situ by flooding it with water (or other non-flammable liquid) to prevent the spread of heat to other cells in the battery. If water is not available, any non-flammable liquid may be used to cool the device. If a PED is contained in an intact bag and no flames can be seen, the bag should be removed and placed in a watertight container (or one made watertight by using a bin liner) and flooded with water.
iii. Do not use ice or dry ice to cool the device. Ice or other materials insulate the device, increasing the likelihood that additional battery cells will reach thermal runaway.
Figure 5.6 – A demonstration of the effect of applying ice to a burnng lap top (courtesy of the Federal Aviation Administration)
Figure 5.4 – A lap top being doused with water from the galley
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Lithium Batteries Risk Mitigation Guidance for Operators 5. Leave the device in its place and monitor for any re-ignition A battery involved in a fire can re-ignite and emit flames multiple times, as heat is transferred to other cells in the battery. Therefore, the device must be monitored regularly to identify if there is any indication that a fire risk may still exist. If there is any smoke or indication of fire, the device must be doused with more water (or other non-flammable liquid). 6. When the device has cooled (after approximately 10-15 minutes) The device can be moved with caution once it has cooled down and if there is no evidence of smoke, heat, or if there is a reduction in the crackling or hissing sound usually associated with a lithium battery fire (after approximately 10-15 minutes). The waiting period may vary, based on the device and its size. The waiting period may vary based on the device and its size. The different circumstances (e.g. types of devices, phase of flight, etc.) should be addressed in the operator’s training program. A suitable empty container, such as a pot, jug, galley unit or toilet waste bin, must be filled with enough water or non-flammable liquid to completely submerge the device. It is important to wear available protective equipment (e.g. protective breathing equipment, fire gloves), when moving any device involved in a fire. Once the device is completely submerged, the container used must be stowed and, if possible, secured to prevent spillage.
Figure 5.8 – which should be stowed in a bathroom
Not all containers are watertight, so plastic bin liners should be used if necessary;
Figure 5.9 – A bar box made water-tight using a plastic bin liner Figure 5.7 – A lap top computer in a bag being submerged in water in a toilet waste bin….
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Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Battery Fire Prevention – Portable electronic device inadvertently crushed or damaged in electrically adjustable seats There have been reported incidents by airlines related to incidents on board as a result of the inadvertent crushing or damage of a portable electronic device (PED). As a result some have caught fire.
Due to the design of some electrically adjustable passenger seats, it is possible for a PED to slip under a seat covering and/or cushion, behind an armrest or down the side of a seat. Passengers and cabin crew should not move the seat electrically or mechanically in order to attempt to retrieve the passenger’s PED. The seat movement may crush/damage the PED’s lithium battery and potentially result in a lithium battery fire. In the event that the situation develops into a lithium battery fire, cabin crew should apply the following as per their respective airline procedures: •
Lithium battery fire-fighting procedures
•
Post-event procedures (on board); and
•
First point of landing offloading procedures
After landing, the crew must advise ground staff where the device is stowed and make an appropriate entry in the technical log. The PED must be removed from the aircraft, as lithium batteries that are damaged are forbidden for carriage. Devices involved in a fire should be retained on the ground to enable investigation by competent authorities. Figure 5.10 – A mobile phone crushed in an electrically adjustable seat
Figure 5.11 – The charred remnants
Small portable electronic devices (PEDs) such as mobile phones, smartphones, mini-tablets, e-readers or MP3 players etc. can become a potential fire hazard if they inadvertently slip or are dropped between the mechanical parts of an electrically adjustable seat and are crushed or damaged. These types of seats are primarily installed in premium class cabins such as First Class and Business Class. Due to the design of some electrically adjustable passenger seats, it is possible that a PED can slip under a seat covering and/or cushion, behind an armrest or down the side of a seat. Cabin crew should not move the seat electrically or mechanically when attempting to retrieve the passenger’s PED. The seat movement may crush/damage the PED’s lithium battery and potentially result in a lithium battery fire.
Considerations for operators of small aircraft The guidance provided above is based on a large transport aircraft with access to a number of cabin crew. However, smaller aircraft may have only have one or two cabin crew and so some of the actions may need to be combined and/or the assistance of passengers may be needed. Additionally, consideration will need to be given as to what items are available to use in the event of an incident. It is suggested that all aircraft, as a minimum, should carry the following equipment additional to that usually on-board: •
fire/heat resistant gloves;
•
heavy duty plastic bin liners; if the aircraft has no suitable container that something the size of a lap top computer can fit in, these can be filled with water before placing the device in it;
•
suitable receptacles e.g. jugs, to transfer water from the galley or bathroom should insufficient bottled water be carried.
Passenger awareness on how to use and stow their devices while in flight can help mitigate these incidents. (See Chapter 3).
Testing to Verify Understanding
Recommended Practice
All staff required to take dangerous goods training are also required to be tested in order to verify their understanding. In the case of cabin crew, it is suggested that this should include a practical demonstration of their competence to deal with a lithium battery incident in the cabin.
To prevent crushing of the PED and reduce the potential fire risk to the device and the surrounding area, cabin crew, and/or passengers must not use the electrical or mechanical seat functions in an attempt to retrieve a PED. Cabin crew should always advise the flight deck of the situation. Ask the passenger concerned to identify the item, and where they suspect it may have dropped or slipped into, and if they have moved the seat since misplacing the PED. Move the passenger and, if applicable, the passenger seated next to the affected seat from the area. If available, don fire gloves before trying to retrieve the item. Do not move the seat! If unable to retrieve the item, it may be necessary to move the passenger to another seat.
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Further Guidance Further guidance on the use of portable electronic devices in the cabin may be found here: http://www.iata.org/publications/Documents/guidance-use-expansion-peds.pdf
Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Chapter 6:
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In-container Fire Suppression
Future Developments
The UPS and Asiana accidents highlighted the vulnerability of cargo aircraft to main deck cargo compartment fires and, in particular, how quickly a situation can become catastrophic. In the UPS accident, only four minutes elapsed between the first warning of smoke on the main deck and fire damage to the flight controls. The aircraft crashed some 25 minutes later. The Asiana aircraft crashed only 16 minutes after the crew declared an emergency due to fire onboard. Consequently, a number of new technologies are being investigated by industry and regulators to enhance fire protection, particularly on cargo aircraft as these may not have the same level of fire suppression as passenger aircraft. However, it would be wrong to believe that such measures are necessary only when it is known that lithium batteries are being carried. Undeclared shipments are commonplace; therefore, such provisions should be applied even when no consignments of lithium batteries have been declared to an operator. Future developments include:
Tests are currently being carried out on fire resistant containers, fitted with their own self-contained fire suppression systems that automatically activate when fire or smoke is detected.
Fire-resistant Containers Containers constructed of fire resistant material, similar to that used in body armor, have demonstrated their ability to contain an internal fire of up to 650°C (1200°F) for at least four hours. They also have the advantage of being lighter than conventional, aluminium, containers, with some offering a weight savings of as much as 30kg (65lb).
Figure 6.2 – In-container fire suppression system
Unit Load Device Penetration This system utilizes penetrators located above each ULD position to automatically pierce the roof of a container from where excessive heat is detected, and deploy fire extinguishant directly into it.
Penetrators
Figure 6.1 – Fire-resistant containers
Figure 6.3 – ULD fire suppression system, showing penetrators at each ULD position
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Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Fire Containment Covers
Quick-donning Full-face Oxygen Masks
Not all cargo is carried in closed unit load devices, much is carried on open pallets. Some operators have implemented use of fire containment covers (FCCs) on pallets whilst others are considering their use. Some FCCs currently in production can contain a fire of up to 815°C for four hours. Like the fire resistant containers, these covers provide protection from an adjacent fire as well as from one within.
Unlike traditional flight crew oxygen masks, which require two hand to don, new face masks can be donned with only one hand and in only a couple of seconds. These new masks can be used in conjunction with smoke displacement systems.
Figure 6.4 – An open pallet with a fire containment cover
Smoke Displacement Systems A smoke-filled cockpit can restrict or completely block a pilot’s view of the outside and essential cockpit instruments. Vision can be restored by smoke displacement systems, which use selfinflating transparent plastic envelopes to provide a clear space of air through which a pilot can see flight instruments and the outside world.
Figure 6.6 – Quick-donning full-face oxygen mask
Enhanced Packaging Standards Enhanced packaging standards for lithium batteries are being evaluated by regulators and packaging manufacturers. However, while this will make compliant consignments even safer, it will have no effect on the biggest danger (i.e., non-compliant, undeclared batteries). Enhanced Security Screening The algorithms of X-ray machines used in security screening are currently set to detect explosives automatically. Research being conducted by the United Kingdom Civil Aviation Authority is exploring the feasibility of detecting lithium batteries in cargo using existing x-ray technology.
Figure 6.5 – A smoke displacement system (EVAS – Enhanced Vision Assurance System)
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Chapter 7:
Future Information
Cargo IATA
Passenger baggage IATA
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“What’s your type – Information for Airline Passengers on Lithium Batteries”: http://www.iata.org/whatwedo/cargo/dgr/Documents/passenger-lithium-battery.pdf
Main site for lithium battery advice: http://www.iata.org/whatwedo/cargo/dgr/Pages/lithium-batteries.aspx The 2014 edition of the lithium battery guidance document: http://www.iata.org/whatwedo/cargo/dgr/Documents/Lithium-Battery-Guidance-2014.pdf
United States Federal Aviation Administration (FAA) “Travelling safely with batteries and battery powered devices”: http://safetravel.dot.gov/whats_new_batteries.html
Lithium Battery Shipping Guidelines: http://www.iata.org/publications/Pages/lithium-battery-guidelines.aspx
UK Civil Aviation Authority (CAA) “One team, one goal” guidance on the carriage of battery powered mobility aids (video) http://www.youtube.com/watch?v=IFyEVckQEjc “Lithium batteries – Guidance for crew members” (video) “Lithium batteries – Guidance for cargo and ramp personnel” (video) “Lithium batteries – Guidance for passenger handling staff” (video) http://www.youtube.com/user/UKCAA
Mail UK Royal Mail: Guidance to business customers: http://www.royalmail.com/sites/default/files/DangerousGoods_BusinessCustomerBooklet_J uly2013_0.pdf Guidance to the public: http://www.royalmail.com/sites/default/files/International-prohibitions-and-restrictionsleaflet-consumers_0.pdf
Civil Aviation Safety Authority (CASA) Portable Electronic Devices containing Lithium Metal or Lithium Ion Cells or Batteries http://www.casa.gov.au/scripts/nc.dll?WCMS:STANDARD::pc=PC_100484 Passengers warned of lithium battery safety risk http://www.casa.gov.au/scripts/nc.dll?WCMS:STANDARD::pc=PC_100547
Emergency response IATA
Dangerous goods that may be carried by passengers and crew http://www.casa.gov.au/scripts/nc.dll?WCMS:STANDARD::pc=PC_90372 Dangerous Goods Lithium poster http://www.casa.gov.au/wcmswr/_assets/main/dg/luggage/lithium_battery_poster.pdf Cathay Pacific: General advice to passengers: http://www.cathaypacific.com/cpa/en_INTL/helpingyoutravel/batteries#I
Guidance on Handling Dangerous Goods Incidents and Lithium Battery Fires in the Passenger Cabin http://www.iata.org/whatwedo/safety/Documents/Guidance-on-Handling-Dangerous-GoodsIncidents-and-Lithium-Battery-Fires-in-the-Passenger-Cabin.pdf
United States Federal Aviation Administration (FAA) Extinguishing In-flight Laptop Computer Fires (video) http://www.fire.tc.faa.gov/2007Conference/session_details.asp?sessionID=26 UK Civil Aviation Authority (CAA) CAA Paper 2003/4 – “Dealing With In-Flight Lithium Battery Fires In Portable Electronic Devices” http://www.caa.co.uk/docs/33/capap2003_04.pdf Transport Canada Service Difficulty Alert – “Procedures For Fighting Fires Caused By Lithium Type Batteries In Portable Electronic Devices” http://www.tc.gc.ca/eng/civilaviation/certification/continuing-alert-2009-06-698.htm
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News Brief: IATA Launches Lithium Battery Risk Mitigation Guidance for Airline Operators AIR TRANSPORT Lithium Batteries Risk Mitigation Guidance for Operators
Lithium Batteries Risk Mitigation Guidance for Operators
Testing FAA
Accident Reports DOT/FAA/AR-06/38 – Flammability Assessment of Bulk-Packed, Rechargeable Lithium-Ion Cells in Transport Category Aircraft: www.fire.tc.faa.gov/pdf/06-38.pdf DOT/FAA/AR-04/26 – Flammability Assessment of Bulk-Packed, Non-rechargeable Lithium Primary Batteries in Transport Category Aircraft: www.fire.tc.faa.gov/pdf/04-26.pdf DOT/FAA/AR-09/55 – Flammability Assessment of Lithium-Ion and Lithium-Ion Polymer Battery Cells Designed for Aircraft Power Usage: http://www.fire.tc.faa.gov/pdf/09-55.pdf
Advice to operators Boeing
General Civil Aviation Authority of the United Arab Emirates Boeing 747-44AF, N571UP, Dubai, 3 September 2010: http://www.gcaa.gov.ae/en/ePublication/admin/iradmin/Lists/Incidents%20Investigation%20 Reports/Attachments/40/2010-2010%20-%20Final%20Report%20-%20Boeing%2074744AF%20-%20N571UP%20-%20Report%2013%202010.pdf Korean Aircraft and Railway Accident Investigation Board B747-400F, HL7604, 130 km West Of Jeju International Airport, 28 July 2011: http://araib.mltm.go.kr/LCMS/DWN.jsp?fold=/eaib0401/&fileName=Interim+Report%28Asia na+Airlines+Cargo+Flight+991+Accident%29.pdf National Transportation Safety Board (United States) McDonnell Douglas DC-8-71F, N748UP, Philadelphia, Pennsylvania, 7 February 2006: http://www.ntsb.gov/doclib/reports/2007/AAR0707.pdf New initiatives
“Lithium battery cargo awareness” http://www.fire.tc.faa.gov/pdf/systems/Nov12Meeting/Boeing-1112LithiumBatteryCargoAwareness.pdf
UPS
“Fire Protection: Cargo Compartments: http://www.boeing.com/commercial/aeromagazine/articles/2011_q2/3/ FAA
Safety Alert for Operators 10017: http://www.faa.gov/other_visit/aviation_industry/airline_operators/airline_safety/safo/all_saf os/media/2010/SAFO10017.pdf
UK CAA Flight Operations Department Communication (FODCOM) 30/2010 – The Carriage Of Lithium Batteries As Cargo: http://www.caa.co.uk/docs/33/FOD201030.pdf
Details of fire resistant containers: http://www.pressroom.ups.com/Press+Releases/Archive/2013/Q3/UPS+Pioneers+Aviation +Safety%2C+Implements+New+Fire-Resistant+Shipping+Containers
Flight Safety Foundation Article on cargo fire suppression systems: http://flightsafety.org/asw/nov09/asw_nov09_p39-43.pdf?dl=1 Miscellaneous guidance Flight Safety Foundation Flight Safety Foundation article on cargo safety: http://www.flightsafety.org/asw/nov06/asw_nov06_p28-33.pdf?dl=1
Incidents FAA
“BATTERIES & BATTERY-POWERED DEVICES Aviation Incidents Involving Smoke, Fire, Extreme Heat or Explosion”: http://www.faa.gov/about/office_org/headquarters_offices/ash/ash_programs/hazmat/aircar rier_info/media/Battery_incident_chart.pdf
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GLOBAL New transport scenarios for China, India, Latin America highlight role of cities in combatting climate change International Transport Forum at OECD releases projections for modal shares, emissions at Lima
COP20 conference Transport in the urban centres of emerging economies is becoming a major battleground for combatting climate change. Big cities in China, India and Latin America with over 500 000 inhabitants will more than double their share of world passenger transport emissions by 2050 to 20% (2010: 9%), if current urban transport policies remain unchanged. 38% of the total growth in world surface transport passenger emissions to 2050 will come from big cities in these three regions in such a business-as-usual scenario. These new projections, released today by the International Transport Forum (ITF) at the OECD during the COP20 climate change negotiations in Lima, Peru, highlight a critical choice for policy makers: whether to pursue urbanisation based on public transport or on private transport with cars and two-wheelers. Sustained policies that promote either private or public urban transport lead to very different mobility futures, as projections for modal shares in 2050 show (see chart 1 below): Chart 1: Impact of alternative policies on urban mobility
(passenger-km, 2050 projection)
In India, u a private transport-oriented policy for cities would lead to two-thirds (67%) of urban mobility being covered by car traffic, with motorised two- and three-wheelers (17%, 5%) and public transport (11%) accounting for only a third; u with pro-public transport policies, the share of buses and other public transport forms could be almost four times as high and reach 39% - practically on par with car travel (40%). Two- and three-wheelers would cover 12% and 9% respectively. In Latin America, u a public transport-oriented policy would result in a 50% share for public transport, 44% for cars, and 7% for two-wheelers in big cities. u private transport-oriented policies would lead to an 82% share for cars, 11% for public transport, and 6% for two-wheelers.
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In China, u an urban policy with few new roads and stringent expansion in car ownership restrictions would lead to a 44% share for cars and a 34% for public transport; with two-wheelers taking 10%. u in absence of these measures, cars would account for 78% of urban mobility, with two-wheelers representing 13% and public transport only 9% of the modal split. These alternative scenarios have profound impacts for the contribution of urban transport to global emissions, according to the ITF projections (see chart 2 below): u In India, policies that favour car use could increase emission growth by 47%. Policies that favour public transport could reduce it by 37% (see chart 1). Chart 2: Emission growth under three urban transport scenarios
u In Latin America, policies that encourage private transport would add 35%, while public transport-driven urbanisation could reduce emissions growth by 31%. u In China, emissions would grow by 19% above 2010 levels if cities were to support individual transport, but fall by 26% assuming a shift to public transport. Understanding context, drivers, and effects of policies is crucial to achieving the desired results. For instance, if a ban on motorised three-wheelers in Indian cities reduced their number by 80% by 2050, this would lead to a mere 4% reduction in CO2 emissions as people switch to two-wheelers. Reduced mobility for others would impose a social cost. The ITF Urban Transport Model now allows testing policies that focus on avoiding unnecessary mobility and shifting mobility to modes that emit less (“avoid-shift”), rather than on the effects of improved technology for emissions mitigation. “One of the biggest challenges for a global mitigation framework is to encompass a wide range of coherent transport interventions while moving towards better methodologies for measuring, reporting and verification”, commented José Viegas, Secretary-General of the International Transport Forum at the OECD. “It is desirable that countries develop their mitigation actions as part of a wider urban sustainable policy strategy instead of expecting all other externalities to be automatically reduced as a co-benefit of CO2 mitigation.” internationaltransportforum.org
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