GLOBAL PORT DEVELOPMENTS

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1 GLOBAL PORT DEVELOPMENTS AUSTRALIAN GRAINS INDUSTRY CONFERENCE 29 JULY 2015 Alex Kyriakoulis Partner, International Infrastructure Group T:

2 HFW ports and terminals map

seeking corporatisation Efficiency, commercial agility, etc.

3 Global port development 1: continuing port reform Starting point: ports owned and operated by state / port authority Preliminary reform: some remaining trust ports seeking corporatisation Efficiency, commercial agility, etc. Amsterdam, The Netherlands The 'Major Ports', India Financial self-sufficiency Jersey, Channel Islands

Global port development 1: continuing port reform Subsequent reform: PPP / privatisation prevalent globally (except in the United s) PPPs still the preferred method for port development Port

4 Global port development 1: continuing port reform Subsequent reform: PPP / privatisation prevalent globally (except in the United s) PPPs still the preferred method for port development Port authority and private operator enter into concession agreement Concessionaire mobilises private funding to construct / operate port and Port authority retains ultimate ownership of port land Port authority typically retains responsibility for various matters (incl. access channel, pilotage / towage, emergency response, etc.)

5 Duration on concessions Port Project Port Said, Egypt Tender Duration 30 years + 5 years Port Duration Operations Award of 30 years + 30 years + Tanjun Pelepas, Malaysia and 30 years Concessions Management Salalah, Oman 30 years London Gateway, UK Indefinite Shanghai, PRC 50 years Petkim Port, Turkey 28 years Khalifa bin Salman Port, Bahrain 25 years + extension as agreed Tema Port, Ghana 20 years Mumbai, India 30 years Freeport of Monrovia, Liberia 25 years + 5 years Khalifa Port, Abu Dhabi, UAE 30 years + 30 years Zeebrugge, Belgium 36 years Qingdao, PRC 35 years Tianjin, PRC 30 years * Private and confidential

6 Global port development 1: continuing port reform Drivers for privatisation of existing ports: Debt reduction requirement Thessaloniki, Greece (dry bulk, liquid bulk, containers) Piraeus, Greece (bulk, containers, RoRo, cruise terminal) Limassol, Cyprus (dry bulk, containers, etc.) Fremantle, Australia (general cargo port) Funding for other projects Melbourne (containerised and general cargo) Full v partial privatisation Very few full privatisations Even 'privatised' port authorities may themselves have commitments to the state through e.g. master concession or be subject to regulatory oversight (see later)

7 Degrees of privatisation Project Tender owned Model "Suitcase" Stevedores Port Regulations Land Area Award of Concessions Landlord Ports Operations and Management Fully Privatised Leased Terminal Concession Agreement BOT Concession Private Private Terminal Infrastructure Terminal Operator Private Terminal Superstructure Rented from Port Authority Terminal Operator Terminal Operator Private Port Operations Private stevedores Terminal Operator Terminal Operator Terminal Operator Private

Global port development 1: continuing port reform Privatisation not universally welcome Labour force or existing concessionaire opposition Local community interests

8 Global port development 1: continuing port reform Privatisation not universally welcome Labour force or existing concessionaire opposition Local community interests Long-term private monopoly risks Mitigants for privatisation concerns: Transitional period commitments for employees, etc. PSOs (public service obligations) Regulation

9 Impact of port reform / competition rules s may expressly reserve rights as part of the privatisation, including: enacting future laws affecting operation of relevant port establishing (if not already in existence) ports regulator demanding unbundling of a port's services and functions (price transparency, facilitate new entrants, etc.) Requirement for Master Plan and Port Development Plans Need to be updated every 5, 6, etc. years Non-compliance may result in termination of right to operate terminal Most importantly, privatised ports (in the EU) subject to competition rules, including obligation not to abuse dominant position, by e.g.: refusing to supply (port services) without objective justification proposing unreasonably conditions (i.e. less favourable than those it gives to its own services)

10 Concession provisions / exclusivity Also, concession agreements include obligation for terminal to be open to all i.e. "common user terminals" However, concession agreement may allow concessionaire to: "provide selective tariff discounting or rebating in order to optimise its long term profitability in accordance with Good Industry Practice" Required because terminal operators often want / need exclusivity or minimum volume commitments from terminal users: Port projects increasingly financed through third party debt: need to make the port project "bankable" Concessions won through competitive processes: relatively high minimum volume commitments agreed to by port operator in concession agreement need to be satisfied

Concession provisions / exclusivity At the same time affiliated port operator and shipping line links are becoming weaker: Port operators are

11 Concession provisions / exclusivity At the same time affiliated port operator and shipping line links are becoming weaker: Port operators are run as independent profit centres Shipping lines will not (officially) commit to long term use of new terminal operated by affiliated port operator

12 Australian port terminal access code Port Terminal Access (Bulk Wheat) Regulation 2014: Intended to re-balance the bargaining power of highly concentrated port terminal service providers (PTSPs) vis-a-vis exporters Replaces the previous wheat port access undertaking regime Imposes general obligation of 'good faith' (not clear-cut test but generally speaking does not prevent party from acting in its legitimate self-interest) Subject to certain conditions PTSPs must enter into / negotiate access agreements with exporters Exporters likely to seek long term ('take or pay') contracts - larger take or pay commitments will inevitably give those exporters more leverage Code enforces standard terms / reference prices but does not purport to control or restrict the precise nature of those terms and prices Code exemption are also possible (although PTSPs still subject to general Australian competition law will that be able to prevent vertically integrated entities from taking advantage of their position?)

13 Global port development 2: port M&A activity Port M&A refers to the sale and purchase of shares / interests in companies owning (usually) mature / operating terminals Numerous private M&A auction processes ongoing at the moment: In relation to single assets or multiple port portfolios Sellers may be seeking a return or may be exiting as unable to refinance debt or fund increased CAPEX requirements: Larger vessels require more dredging, bigger cranes, etc. see later slides 'Green' policy requirements (e.g. investing in cold ironing) see later slides Competition increased automation to reduce operating costs see later slides Purchasers looking for strategic investments (Louis Dreyfus acquisition of 500k-1m tons grain transshipment terminal in Rostov)

14 Global port development 2: port M&A activity Bidder universe becoming more diverse: Port operators (individually or in consortia) Infrastructure funds IFIs (EBRD, IFC, ADB, etc.) debt and equity Ports are a long term investment but private equity / funds starting to show interest as well Increased number of bidders in tenders leading to more competitive tension in auctions: Are bidders overpaying? (See earlier slide re minimum volume commitments)

Global port development 3: prevalence of JVs JVs between port authorities and port operators: Chinese PPP model Major port operators partnering up: Strategic considerations: Qinzhou port JV between

15 Global port development 3: prevalence of JVs JVs between port authorities and port operators: Chinese PPP model Major port operators partnering up: Strategic considerations: Qinzhou port JV between PSA, Beibu Gulf Port Group & Pacific Intl. Lines APMT & China Shipping: Zeebrugge, MoU for further European investments Risk sharing / financing: Increased Phase 2 developments / expansion requirements Tema Port, Ghana investments in port and access roads

16 Global port development 4: operational efficiency Port operators facing increased competition / pressure on productivity: increasing number of ports (Africa, Central America, etc.) economic and politic imperative to address bottlenecks (Canadian grain terminals, US east coast container terminals, etc) very experienced container terminal operators with low unit costs moving into other type of ports (general cargo, etc.) Developments we are seeing: grain terminals being developed closer to farms, reducing need for intermediate storage (Inkoo, Finland) emphasis on terminal design (e.g. train access at new north Vancouver grain terminal will enable three times as many train cars to be handled) OECD studies show that larger ports (including grain terminals) have higher efficiency score

Global port development 4: operational efficiency Investment in infrastructure / superstructures / equipment of existing terminals: port automation (including at grain terminals reduces handling

17 Global port development 4: operational efficiency Investment in infrastructure / superstructures / equipment of existing terminals: port automation (including at grain terminals reduces handling time, decreases wastage and infestation during storage) increased dredging / deeper draughts to accommodate larger vessels (third locks, etc.) IFIs providing strategic assistance for emerging country agribusiness development (Odessa grains trans-shipment terminal Dreyfus / local stevedoring company JV)

18 Global port development 4: green port initiatives Numerous initiatives: Emissions control EU requirement for ships to burn fuel of 0.1% sulphur content when within EU ports or within EU inland waterways US Emissions Control Area Cold ironing / shore power Zero emissions technology for port equipment and vehicles / sustainable power generation wind and solar Reducing / managing water run-off Environmental Ship Index (ESI) Discounts on port dues at Port of Rotterdam Effective dust suppression systems for dry bulk cargoes Dry fog, etc Recycled concrete and other green construction materials Some measures already mandatory at some ports (e.g. Shanghai port) and increasing emphasis in RFQs / RFPs for new ports

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PPSA WHERE ARE WE AND SUCCESS STORIES (AND TALES OF CAUTION)

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