BOTs and Construction
An operator managing a site under a concessionor lease agreement usually obtains the right toreconstruct the site, to erect buildings, andintroduce new equipment. When the site is constructedor reconstructed under a BOT arrangement,the operator also has the right to buildnew quay walls, to dredge channels, and createnew port land. In undertaking these activities,the operator assumes some duties previouslyundertaken by the port authority.
Every concession agreement contains lease conditionswhen ownership of the site formally remains with the port authority. When ownership is temporaryor definitively transferred to the operator(under BOOT or BOO arrangements), the concessionagreement may include a variety of clausespertaining to the use of the site, although suchclauses may be based solely on a public license, aport bylaw, or other enabling authority.
BOT arrangements in a concession agreementare spelled out in detailed provisions coveringconstruction, quality control, time schedules,milestones, and similar issues. One importantprovision deals with the granting of exclusivityrights, guaranteeing that the port authoritydoes not promote or permit any other competingfacility in the concessionaires port area fora certain time period (sometimes incorporatedinto a sponsors direct agreement) (see Box 55).
BOT and BTO Arrangements
BOT and BTO arrangements are frequently integralparts of concession agreements. The differencebetween these models is the time at which the operator transfers the newly constructedassets to the port authority. BTOs are employedwhen relevant legislation does not allow for theprivate ownership of port assets. Transfer is conductedimmediately upon the completion of constructionand the operator receives the equivalentof a management contract.
The distinguishing feature of the BOT arrangementis the legal form of user rights. The concessionagreement always sets out clauses thatclearly define such rights. The concession entitlesthe operator to a right to use and exploitport infrastructure and, in the case of an existingterminal, also to use the superstructure andavailable port equipment.
The scope of the concession agreement appearsin its preamble. The preamble typically consistsof three main elements:
- The right to construct new port infrastructureand superstructure.
- The right to use of the subject assets.
- The right to exploit the site during thetenure of the concession (see Box 56).
Most concessions have a term of 30 years ormore. Extension of the concession can usuallybe renegotiated at any time during its lifetime incase the operator plans a major investment inthe ports infrastructure in return for an adjustedtariff rate reflecting changes that may havebeen introduced pursuant to the extension. Incase no agreement for extension is reached bythe end of the 30-year term, the concession endsand the right to use and exploit the ports infrastructureand other assets reverts to the portauthority (or another government agency),preferably under a fixed-price formula.
BOOT Arrangements
Under a BOOT scheme, sometimes an operatoris allowed to own the site on which improvementsare to be constructed until the end of theconcession period. Usually, the concessionagreement specifies the value of the assets undera predefined formula (including an agreed-ondepreciation table). At the time of transfer tothe port authority at the end of the concessionperiod, the port authority pays the operator inaccordance with the residual value, calculatedon the basis of the established formula.
Functional and Technical Design under a BOT Arrangement
Generally, a port authority presents functionalspecifications for the facility to be constructedunder a BOT arrangement. When the authorityspecifies detailed construction works, it becomesvulnerable to delays, construction errors, and,perhaps, the application of wrong technology orprocesses relative to expected port functions.Many ports simply lack the required expertise toprepare detailed technical specifications formodern port construction works.
Since new facilities are to be transferred to theport authority in due time, it is useful to engagea technical consultant who represents the portauthority and reports on the progress of thework. The technical consultant can also observethe way in which the project is being constructedto meet the functional specifications and therequirement to use best practices for design,materials, and workmanship. The consultantmay also assist in evaluating alternative technicalsolutions and advise on the best technicaland cost-effective solutions.
A crucial point in the design phase is obtainingagreement on a timetable for completion of thedetailed technical design. The design shouldinclude an interface element to integrate the terminalinto an existing port area. The interfaceelement takes into consideration paving levels,drainage, fencing, design and routing of undergroundfacilities, reconstruction of existinginfrastructure within the concession area, andaccess through neighboring port areas and terminals.
Finally, the operator is obliged to provide theport authority with sufficient detailed benchmarkdata to allow for evaluating and monitoringthe development of the concession area aspart of the approved DPR and the agreed-onconstruction program (see Box 57).
Design and Construction Flaws
During every major construction job, designand technical problems will inevitably occur.Some of these issues can be easily resolved, butothers might influence the constructiontimetable or quality of the work. It is importantthat design and construction flaws be resolvedin good faith consultation with the operatorand its construction firm. The port authorityshould be ready to demonstrate flexibility withoutcompromising the requirement that work beperformed at a predetermined quality level.In some instances, part of the work may haveto be redesigned. The effects on constructiontime and cost of any redesigned element(s)should be ascertained by the port authority,which should also ensure that the operatoradheres to overall functional specifications (seeBox 58 and Box 59).
Building Conditions
The construction company carrying out thework on behalf of the operator should berequired in most cases to inspect the buildingsite and the adjacent water area thoroughlybefore starting construction. Any obstacles inthe subsoil affecting the construction should bereported and taken into consideration whenexecuting the technical designs and obtainingpermits. It is customary for the port authority to agree to provide its cooperation in obtainingconstruction permits and approvals from governmentalauthorities, including environmentaloversight authorities.
Construction Program
Construction is based on a construction programthat outlines completion dates for the variousconstruction phases (milestones) as part ofthe approved DPR. This DPR is almost alwaysincorporated into the concession agreement.The port authority ordinarily requires that it benotified promptly of every delay that occurs atthe construction site, as well as the resultingcontingency plan devised to remedy the delay(see Box 60 and Box 61).
Zero Date
The zero date is an important event that marksthe start of construction work. By this date, allconditions precedent are fulfilled by both theport authority and the operator. Generally, theport authority fulfills all conditions necessaryfor the operator to commence work, while theoperator concludes all financial arrangementsand engages a construction firm to beginconstruction (see Box 62).
Drop Dead Date
During the preparation phase, events may occurthat result in delays or even cancellation of aproject. The port authority as well as the operatormay include provisions for termination of theconcession agreement once it becomes clear thatthe project will fail. Therefore, a drop dead dateis included in the agreement. In drafting such aclause, it is important to specify if any performanceguarantees will be drawn or canceled as aresult of the drop dead date (see Box 63).
Extension Events
In practice, construction of a major work rarelyproceeds according to the original plan. In casea delay is caused by action (or inaction) of theport authority itself, the operator is usually entitledto claim liquidated damages. A forcemajeure might also occur, causing delays in theconstruction process. Such possibilities areacknowledged in the concession agreement andprocedures included to change the milestonedates and compensation paid by the operatorwhen an extension event occurs (see Box 64).
Completion Tests and Take-Over
BOT schemes are mainly employed for the constructionof new port infrastructure and superstructure.When newly built facilities are completed,completion tests are carried out and atake-over certificate issued by a competentexpert or authority on the port authoritysbehalf. While verification of the civil works isrequired throughout the production process, itwill not be possible to verify solely at the conclusionwhether all work was completed in aprofessional manner and that proper materialswere used during the process. The port authorityshould use its expert to inspect all work atcompletion and to prepare a punch list of deficiencies.The construction company then has acertain period to rectify all deficiencies. Thefinal take-over is based on a test certificate issued by the certifier. After this, there is still adefect liability period during which the operatorhas the obligation to repair all deficiencies.
Take-overs of mechanical and electrical installationsare more complicated and require a varietyof tests including operational, safety, reliability,interoperability, and endurance tests(see Box 65).
Hand-Back and Transfer of Facilities
Under a BOT arrangement, the facilities aretransferred to the port authority at the end ofthe concession period, usually with (under aBOOT arrangement) or without (under a commonBOT arrangement) compensation. Thehand-back is concluded after a joint inspectionand assessment of any renovation works(if applicable). Hand-back requirements andprocedures depend on local practices. The mostsensitive issue is in the level of compensation tobe paid by the port authority (see Box 66).
Lender Security
The success of BOT arrangements is highlydependent on the ability of the operator toattract financing for the construction work.This issue is reviewed in greater detail inModule 3 and Module 5. In many cases, lendershave recourse only to certain assets or incomestreams to secure repayment of their loans.Sometimes there are legal considerations thatshould be addressed, particularly with respectto the creation and enforcement of securityinterests in the host country that limit or evenprohibit the granting of a lien over port assets.Such limitations present a significant stumblingblock for attracting private capital to portdevelopment.
As described in Box 67, legislation restrictionsmay also impede investors and lenders becauseof a lack of definition of property rights. Thesituation on St. Maarten is very different. Asnoted in Box 68, care has been taken to maximizethe lenders security.
In a concession contract with BOT arrangements,it is generally necessary to explicitly establishthe lenders rights with respect to the affectedassets. Providing for the lenders rights entirely inthe concession agreement is difficult because ofthe variety of financial structure options availableto operators. Most BOT arrangementsrequire debt financing by lenders (commercialbanks). To facilitate the lending process, the portauthority may enter into a direct agreement withthe lenders; however, only one direct agreementshall be effective at any time. In such a case, theconcession includes a clause obliging the portauthority to negotiate in good faith during theperiod commencing on the date of concessionand the effective date regarding the terms of thedirect agreement as may be reasonably requiredby the lenders in connection with the debtfinancing, including terms to enable the lendersto exercise their rights and remedies under thefinancing documents (see Box 69).
Change in Law
Operators under a BOT arrangement run aconsiderable risk of applicable legislationchanging during the concession period. Suchchange may affect operating profits and alteror negate the original exploitation conditions. Therefore, it should be expected that detailedprovisions in the concession agreement will benegotiated to minimize the effects of suchchanges (see Box 70).
