Period and Penalties

B. Period and Penalties

There is always the risk that either the port or the private sector will not achieve the objectives set out in the contract. Two methods for mitigating the risk are by limiting the period of the agreement and by including penalties for early termination. Both public ports and the private sector have shown

a preference for long-term agreements. The private sector is interested in building a market for its services and expanding the range of services offered. Port officials are interested in agreements that do not require frequent re-bidding or review and that yield the largest monetary return.

There is a minimum period for the private sector to recover its investment. Short-term agreements are possible where there is limited investment, there are a limited number of

47 This is similar to the approach that the private sector would take in arranging project finance. In this situation, the government would not provide a sovereign guarantee but would transfer the assets to a limited liability company that would borrow the money. 48 Depending on the structure of this company, the government might have a contingent liability. This is currently under litigation in a dispute filed by one of the investors in one of the original concessions.

services, the market for these services already exists and commercial risks are limited. A longer period may be required to recover the costs for establishing an effective organizational structure and for developing market share. Still longer periods are required where the agreement concerns the establishment of a new business, includes substantial capital investment or requires the payment of a large initial fee.

Shorter period agreements can introduce a political risk. If the period does not extend well beyond the normal period between changes in government, then newly appointed ministers and port chairpersons will be tempted to change the terms of the existing agreement or to push for early termination in order to have greater control over the private party. Even if the private party has been successful in meeting the objectives of the contract, there is the strong possibility that the new government will not extend the contract or will introduce additional costs to obtain the extension. Long-term agreements can provide protection from political vicissitudes.

Longer term agreements introduce very little commercial risk to the private sector if the agreement is not profitable, there are several options for early termination without significant financial penalty. The private party may have other contracts with the port which will discourage this action, but is generally footloose and willing to leave the port if there are better opportunities elsewhere.

For the public port, the risks associated with longer term agreements are more substantial. These include:

• The contractual agreement may not provide for the needs of a changing shipping market. • The private party may not be able to respond to new sources of competition from outside

the port. • Port assets may be under-utilized. • There may be better alternative uses for the port assets. • The private sector may capture the enhanced value of the port land and assets through

subcontracting or transfer of ownership of the concession.

A public port has more difficulty in terminating an unsuccessful contract because of government approval procedure and because the port has on-going contracts with other private parties who would react to the early termination. The port can mitigate this risk by breaking the contract period into an initial period and a number of extensions. These extensions can be conditional on the level of performance of the private party. For countries that do not permit extensions but require re-bidding, a long-term contract can be devised which requires periodic reviews with options for early termination based on these reviews. This serves the interests of both the port and private sector by allowing the contract to adapt to the changing nature of the market.

Penalties are introduced in contracts to penalize the parties to the agreement for failing to meet their contractual obligations or to discourage early termination of the agreement. The effectiveness of these penalties is often limited because the parties will disagree as to the circumstances leading to the request for penalty. The civil justice system is usually slow in Processing these claims and its judgements are frequents influenced by political and monetary Penalties are introduced in contracts to penalize the parties to the agreement for failing to meet their contractual obligations or to discourage early termination of the agreement. The effectiveness of these penalties is often limited because the parties will disagree as to the circumstances leading to the request for penalty. The civil justice system is usually slow in Processing these claims and its judgements are frequents influenced by political and monetary