Payments to the Port

B. Payments to the Port

The private party pays to the port some combination of up-front fee, annual rent, and royalties based on volume of traffic or gross revenues. 41

The initial payment may be described as a guarantee, payment for the assets transferred to the private party, a franchise fee or a combination of the three. The financial cost to the private sector of this payment is much greater than the financial benefit to the port. This payment has a similar effect as the capital investment at the beginning of a contract. It represents a large negative cash flow in advance of generating any positive cash flow. It adds to the commercial risk and can create difficulties in obtaining financing unless there is a large cash inflow relatively soon afterwards. Initial payments should be avoided for contracts that involve new businesses or businesses that must capture market share from existing competitors.

The annual rental payment to the port can be either fixed or escalating. A fixed rental offers a greater upside reward for the private sector but also a higher downside risk. An escalating rental payment can be used for new businesses (during the pioneer period) or where there is a significant up-front investment. The escalation can be used to yield a higher financial

41 These are in addition to existing tariffs collected by the private party and passed on to the port. A pricing structure based solely on current costs discourages capital investment or improvement in the quality of services.

return to the port, as measured in Net Present Value, and less commercial risk to the private sector.

The royalty charge collected by the port can be computed on the basis of the physical amount of cargo handled or as a percentage of the revenue collected. The latter is more difficult to enforce. The replacement of a rental with a royalty reduces the private sector’s overall level of commercial risk and, other things being equal, offers the greatest opportunity for commercial

success. 42 The royalty offers the port a higher upside reward for the port but also a greater downside risk. This charge can be bounded by a minimum payment to reduce the port’s downside risk and/or a maximum payment to reduce the private party’s upside risk. It can also incorporate a sliding rate that decreases with volume so as to reduce the marginal charge as an incentive to increase traffic.

The port and the private sector may also share some of the tariff revenues collected from specific tariffs. The port authorizes the private sector to collect these fees. This is not common because of difficulties in auditing the collection activity of the private sector. A notable exception is the passenger tax for cross-channel ferries in Le Havre which are collected by the terminal/ferry operator

The amount paid to the port is determined through the bidding process or is stipulated by the port in the tender document. In the former case, each bidder estimates the operating costs and revenues for the projected level of traffic and determines what to offer the port after deducting a sufficient profit to make the arrangement viable. In order to offer the highest amount to the port, the bidder will attempt to minimize the operating costs and also, where possible, optimize the revenues. Without price regulation or competition as a moderating force, this can lead to higher charges to the user. With competition or price regulation, the market will determine the value of the agreement thereby increasing the chances for commercial success.

Where the port stipulates the amount to be paid as part of the tender, then the bidders financial offer contains the rates to be charged to the port users for basic services. The lower the amount, the better the chance of winning. Again, the bidders estimate their operating costs and revenues and then add the amount of these payments. Where there is no competition, a bid based on the lowest charge to the user improves the chance for commercial success. This procedure provides more benefits to the port users, but the level of benefits will depend on the amount to be paid to the port. If the port chooses to collect monopoly rents, then this will be reflected in higher port charges which reduce the volume of traffic. Most agreements involve more than one type of service and different levels of quality making it difficult to compute a single average charge on which to base the bid evaluation.