handshake IFC's quarterly journal on public-private partnerships Q) SEAPORTS: From containers to concessions AIRLINES: Saying goodbye to Swissair TRADE LOGISTICS: Liberian reform INTERVIEW: Virgin's Sir Richard Branson DEBUT COLUMN FROM INFRASTRUCTURE JOURNAL: London's Olympic-sized infrastructure woes AIR International Finance Corporation WorId Bank Group handsha IFC's quarterly journal on public-priv RENEWABLE ENERGY: Wind &Solar | Lessons from an investor ENERGY EFFICIENCY: Green buildings I Approaches for every market, clim GREEN FINANCE: Infrastructure finance I East Asia's new investment er CLIMATE CHANIGE International Finance Corporation FL U C W.dd Bank Goup handshake IFC's quarterly journal on public-private partnerships C) SEAPORTS: Realistic PPP strategies AIRLINES: Saying goodbye to Swissair TRADE LOGISTICS: Liberian reform INTERVIEW: Virgin's Sir Richard Branson DEBUT COLUMN FROM INFRASTRUCTURE JOURNAL: London's Olympic-sized infrastructure woes AIR International Finance Corporation WorId Bank Group IN PARTNERSHIP WITH Australia * Austria * Brazil * Canada * Catalonia (Spain) * Flanders (Belgium) * France * Ireland * Italy Japan * Kuwait * Netherlands * Norway * Sweden * Switzerland * United Kingdom * United States * Public-Private Infrastructure Advisory Facility (PPIAF) * Global Partnership for Output-Based Aid (GPOBA) * Private Infrastructure Development Group (PIDG) * African Development Bank * Asian Development Bank * Brazilian Development Bank (BNDES) * Caribbean Development Bank * Central American Bank for Economic Integration * European Investment Bank * European Bank for Reconstruction and Development * Inter-American Development Bank * Infrastructure Consortium for Africa * Islamic Development Bank handshake Issue #6-July 2012 IFC's quarterly journal on public-private partnerships IFC Advisory Services in Public-Private Partnerships 2121 Pennsylvania Avenue, NW *Washington, D.C. 20433, USA * +1 (202) 458 5326/7 * ifc.org/ppp Editorial Tanya Scobie Oliveira * Alison Buckholtz Art & Design Jeanine Delay * Victoria Adams-Kotsch Outreach Chrysoula Economopoulos Disclaimer This journal was commissioned by IFC, a member of the World Bank Group, through its Advisory Services in Public-Private Partnerships department, which helps governments improve access to basic public services through public-private partnerships in infrastructure, health and education. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Cover photo @ Grzegorz Petrykowski/istockphoto & Kickers/istockphoto Air and sea transport power the global economy. Since the vast majority of trade is physical, it must travel by plane or ship to reach its market. In fact, high value, time-sensitive goods usually fly through at least two airports, and almost every container passes through at least two seaports. When ports are efficient, people receive the goods they're waiting for, sellers receive payment, and global economic development is strengthened. Public-private partnerships (PPPs) push this O development forward with greater speed and richer benefits. In this issue, Handshake turns its attention to air and sea transport (expect a companion issue on road and rail in Octo- ber 2012). In the air, we deconstruct myths surrounding airport PPPs, learn brutally honest lessons from experiences in airline privatization, and revisit the liberalization of African skies. For seaports, we examine private investment, glimpse the post- concession era, and witness the PPP evolution. Infrastructure vW Journal editor John Kjorstad takes us to London, narrating the U.K.'s race toward a winning logistical support structure as the summer Olympics approaches. And Sir Richard Branson reminds us that sustainability must be at the forefront of our thoughts, no matter how high stakes the race, when he outlines Virgin Atlantic's progress with biofuels. "I've always loved a chal- lenge," he tells Handshake editors. Olympics or not, the world craves that competitive spirit more than ever. Laurence Carter, Director Tanya Scobie Oliveira, Editor IFC Advisory Services in Public-Private Partnerships MI [" In this issue........... Seaports Airports Ever-evolving seaports 10 Mythbusters 34 Destination anywhere 14 Crowning glory 46 Shipping Preparing for pilgrims 48 To ship or transship 24 Great gateways 50 Green sea Airlines Anchoring sustainability 28 Dare to fail 54 Stewards of the sea 32 If the Swiss can't 58 Liberalizing African skies 60 2| IFC.ORG/HANDSHAKE .............................. C o lu m n s PERSPECTIVE Green air Of ports rprofits 106 Sustainability takes off 162 MONEY TALKS Branson on biofuel 66 Up, up, and aweigh |108 COMPASS Private investment in seaports |118 LEGALEASE Ports |22 Contract matters |42 IJ INSIGHT Conenmentary on current events Going for gold |138 Logistics The logstics of trade 68 Trade finance 170 The 4 C's of trade logistics 72 IFC |13 Contributors Waleed.A. Youssef A Robert Aaron on John Crothers Decontee T King-Sackie Georgina Baker Jeff Delmon is the Director of IFC's Trade and Supply Chain. is a Senior Infrastructure Specialist in the Finan- Christopher Boyce cial Solutions Unit of the Finance, Economics is an associate in the Projects (Finance and and Urban Department and a member of the Infra-structure) Group at international law Global Expert Team on PPPs at the World Bank. firm Gide Loyrette Nouel. Victoria Delmon John Crothers is a Senior Counsel in the World Bank Legal is a senior partner in the Projects (Finance and Vice Presidency. Infrastructure) Group at international law firm Katherine Downs Gide Loyrette Nouel, leading the PPP team. is a Principal Equity Specialist in IFCs Manu- Vickram Cuttaree facturing, Agribusiness, and Services Investment is a Senior Infrastructure Economist and Public- Division; she was formerly a Managing Director Private Partnership (PPP) Coordinator for at the AG-GE Capital Latin American Infra- the World Bank's Sustainable Development structure Fund where she made equity invest- Department-Europe and Central Asia. ments in ports and shipping companies. 41 IFC.ORG/HANDSHAKE Alexander N. Jett Andy Ricover is the Task Team Leader of the Private Participa- is an independent air transport specialist with tion in Infrastructure Database, focusing on experience in air transport economics, privatiza- transport PPPs in the Finance, Economics tion, aviation policy, traffic forecasting, regula- and Urban Development Department of the tion, due diligence, and valuation. World Bank. Brian Samuel Marc Juhel owns Island Boats Limited, a tourism and is the Sector Manager for Transport in the consulting business based in Grenada. In 2007 Sustainable Development Network of the he retired after 20 years with IFC, where he spe- World Bank. cialized in aviation financing and privatization. Brad Julian Charles E. Schiumberger is Principal of Julian Associates LLC, an inde- is the Lead Air Transport Specialist of the pendent consulting firm providing operational Transport, Water and Information and and financial analysis, management consulting Communication Technologies Department and transaction advisory services to port infra- of the World Bank. structure, maritime and transportation industries Jordan Z. Schwartz around the world. is Lead Economist for Sustainable Development Decontee T. King-Sackie in the World Bank's Latin America and Carib- is the Assistant Minister for Revenue in the bean Region and also serves as the Head of the Liberian Ministry of Finance; she was formerly World Bank Group's Global Expert Team on Commissioner of Customs and Excise of Liberia. Trade Facilitation and Logistics. John Kjorstad Heidi Stensland Warren is the Editor of Infrastructure Journal, a global is a Private Sector Development Specialist in the online news and data resource providing infor- Investment Climate Department of the Finance mation and analysis across key sectors within and Private Sector Network of the World Bank project and infrastructure finance. Group. C. Bert Kruk was Lead Port Specialist at the World Bank until his retirement in 2008; he is now a port SPECIAL THANKS TO consultant. consutant.Alexandre Leigh Michael Kurdyla Investment Officer, Advisory Services in is a Trade Finance Analyst in IFC's Trade and Public-Private Partnerships, IFC. Supply Chain Department. Ramatou Magagi James Morley Senior Investment Officer, Advisory Services is an Investment Officer at IFC, based in in Public-Private Partnerships, IFC. Hong Kong. IFC 15 0il I, Or Oits TO.E By Jrdan Z Schwart: If there were a Prayer for Competitiveness, In contrast to decades past, trade is no longer it would go something like this: "May your defined by cheap inputs for industrial pro- imports arrive safely and your exports flow forth. duction in Organisation for Economic Go- May your ports turn vessels and cargo around Operation and Development countries in one with the speed and of summer lightning." direction, and wealthy country exports to the This plea is now echoing across the develop- developing world in the other direction. Bilateral ing world. As tariffs and quotas have dropped, trade flows between low income countries (LICs) the physical barriers to the movement of goods and the major emerging economies have tripled remain the greatest bottleneck to trade. Global since 1990 and are now greater than LIC trade trade now accounts for nearly 50 percent of with industrialized countries. In fact, the ability global economic output, according to the World of most of the developing world to weather the Bank's Global Development Horizons (2001). last global financial crisis and to rebound quickly Unclogging those barriers is crucial for countries was greatly aided by that trade. to connect to the global economy. 61I IFC.ORG/HANDSHAKE PERSPECTIVE SEAPORTS AND AIRPORTS: with which cargo is securely moved from a vessel or cleared from a plane, the ease and accuracy KEY TO COMMERCE with which it is tracked, and the turnaround Since the vast majority of trade is physical, goods times of the ships and planes carrying that cargo must pass through gateways on their way from together define the economics of the maritime farmgate and factory to markets and distribu- and aviation industry. Private operators, spurred tors. These gateways are primarily seaports and on by the profit motive, have changed the stan- airports. In fact, over 70 percent of the world's dards of acceptable performance for these crucial trade by value and 80 percent by volume travels gateways to trade. by ship. Nearly every ton of the world's com- modities, and every container in global supply ON A CRANE AND A PRAYER chains, must pass through at least two ports- and often three or four-before reaching its country of destination. Similarly, the highest can mean to entire economies. For example, value and most time-sensitive goods move by Latin America got its first container crane 20 air-again, passing through at least two airports years ago. That same year, an entrepreneur in on the way. Cartagena, Colombia bought a piece of water- Increasingly, these movements are defined by the prae as from the porto growing share of developing country trade in Nwreas,dshiped t to Coom rs- global trade. According to International Mon- semble, urned t to a small etary Fund data, 13 out of the top 25 bilateral privae ctaine ternl and snt a s ale maritime and aviation trading pairs involve at through the region's maritime industry. Not long leastafter, the public ports of Colombia were conces- Pricewaterhouse Coopers LLP forecast, that ratio s will grow to 21 out of 25 by 2030. By then, the comettive cesowi ste t oud value of China's maritime and airborne trade coptivseieswhfaerunrud valu ofChin's aritme nd arbone tade times for both cargo and vessels. In three years, with Nigeria will be greater than trade between vcontaier movement productivity increased the United States and the United Kingdom. nearly 70 percent and the loading and unloading With developing country trade growing at nearly of bulk materials improved five-fold. 14 percent per year, the efficiency of port and Success stories like this prove that innovative airport activity becomes key to unlocking com- public-private partnerships can in fact improve merce. While these services were traditionally viewed as public infrastructure, concessionaires sapor i cncy, cangn the and private terminal operators are increasingly the answer to the Prayer for Competitiveness. being called upon to induce change. The speed IFC 1 7 MONEY TALKS Up, up, and aweigh: Port & airport PPPs By Jeff Delmon Against my better judgment, I have been asked cosdrd"hpigmlswtarlne,a to provide some substance related to the topic moieunalarttllods at hand, rather than the usual opinion unfet- Aiprsadotsloofealrgydla- tered by plebian concepts such as facts or actual bsdrvnesra a es o nentoa analysis. So in this issue's column, we will srie) aiiaigacs ogoa iaca discuss financing airport and seaport public-a d private partnerships (PPPs); the companion oreinasthnedfrgvnmttoel column next quarter will examine PPPs for roads,migaefrgnxcnersk bridges, and rail. Read together, both entries willThtudrod,wcanwdevdeprio parse the most pressing elements of the transport teipiain fti usto rnpr Ps PPP trinity, breaking down the public, private, and partnership elements. But first, it's important to note some basic points"PBI about ports and airports, which offer a complex Lk od n al oenetuulypoie commercial context with a variety of services orpyfrcetipojtast.Frarot, and sources of revenues. They are more of an goenntfenpvisruwyadtx- asset on the corporate finance model-looking wy "isd"ast)ta r loue o te at existing demand and revenues as well as future proe,sc smltr,plc,o ece h revenues-compared to roads and rail, which prvtseorensofcuonldieast, tend to focus on future revenues and have a far lietrnasprkglo,adhtl.Inot, more limited scope for associated commercial goennttndoprvemaiesvcs oppotuntie. Fr exmpl, arpots ae oten (pmoniker ufa moir to tlad ns(ras mearket and frign currpiency, debt.cThs) redue e Il miiaefoeg xhag ik That - unesod wecnnwdlv0eprit theO imlctos ti ube ftanpr Ps Lierasan al oermn salypoie or pay fo0eti rjc ses o iprs govenmen ofe*rvdsruwy nai was(arie"ast)tataeas0se o te puross,suc a mlitry plic, r esce.Th prvt0etrtnst ou nlnsd ses lietrmnl, aknglt, n otl.Inprs goverment 00n0t 0rvd main serice oporuite. o ea pl,aiprt reote pioag,tus moin) hnerad iks(oas 8 *|IF.OR/HNDSAK superstructure (dredging, breakwater, quays). "PRN SH " This leaves infrastructure (cranes, gantries, equip- Tentr fteprnrhpbtenpbi ment, warehousing) to the private sector. adpiaei iprsadprsas ifr Given their stronger traffic and revenue profile, fo ayohrtasotPP.Tasoti airports and ports rely much less on government nral oue ngtiggosadpol demand risk mitigation like traffic guarantees. fo oB ipr n otoeain nov More often, airports and ports involve sizable acopesrisfmvmntarsshegb. revenue sharing arrangements: some combina- Te aeadrc mato cnmcgot tion of up-front concession fees, fixed periodic anjosriigdstclypiialestvte. fees, usage based fees, and gross revenue sharing.Clsnarodevnakyrtilln,isb; aln privt in airport an portlo diffsers Govenmets ae otensnormaly fouedrnettigos areot nmd eol fryo Aotol .airports and ports opton involvey temptdtotakekey ecison Teyiin have af diretimat oandseconsomicarowt out~~an jobiat ads hs rs ingvdistinty politicauli ensiiiis. Cosbing ar rad,is even antkey ailin, uinad 9~~~~~~~~~~~~h pr O O9 O9OO9coigat port or airort angled tony disase Govrnm nt arerd oftenrnetradcnto "PRIVATE"andeiinmknpoesitdneprve Airports and ports require a mix of commercial invto n netv oivs namne skills from the private sector, along with anreuedtmaeh poctascs. important need to focus on the core operation Goenntsulivstnthbac,te of the facility. It is tempting for investors to lose mnmmnee omk h rjc ok focus and prioritize other revenue opportunities. adlaetepiaeivso od h et In particular, operators of airports and ports are wihcernetvstomktepojta often linked or even tied to airlines or ship- sucsfoalinlvd ping lines, making certain conflicts of interest trymi to conro aipoteadpotsoorae.e Thethi result ine govrnmnt usingths publicr fundsin certaithi affrd thenel governmentcibroadGocontrol needrqure to mak ther proec ah success.nstoan minmu neede touaio maketheprojctlork and l wihcericetvst0ae h rjc succss or al ivolvd. 0 enei th sector Ths 4ik r losrnts o ee,esrn cetanke4cintlefr0h4fciiy.Goenmn ned0ob wr ofth ro ndcnst mn ag h staio raciey IFC0|0 More than 90 percent of the world's trade in volume -and about 60 to 70 percent of its value-is carried by sea, according to the United Nations Conference on Trade and Development. But although seaports are critical to countries' economic development, they must continually evolve to meet a variety of needs from a number of players. Public-private partnerships (PPPs) for container terminals are becoming increasingly popular globally, and particularly in emerging markets, as a way to introduce efficiency and innovation into port operations. *~~~~~~ _4m - * * * e - * * . - . K _ i.. - * * - * - SEAPORTS From containers to concessions, changes ahead Photo V Marc Sala SEAPORTS One of the most spectacular developments in THE SECOND REVOLUTION the international transport of goods was the introduction of the container in the 1950s. As technology pr e cnas re in Containers are boxes (most made of steel) that form acti Bathe 3,0 TE axiU come in standard dimensions of length, width, vesse a reache 3,000 TEU e(aoTEU and height. The first container vessels could representaith taard dimesionsho carry up to a few hundred containers and main- a 2fot or apac waimed by the tained services among a number of United States veels th or beam, hich reanat2 ports, Hawaii, and some Caribbean destinations. meallow phsage thu th e Pana Containers caught on fast because they drasti- Cana is eaed t e cally increase cargo handling capacity (in terms of tons per hour), and also protect goods from In the mid-1980s, the shipping line APL damage and pilferage. designed a number of vessels with a width of more than the Panama beam. This was successful HAm A AP T c a a t s ,vessels -..moe the ama b seam. Thise atucces WHA4ISA EAPRT Seaports carry a weighty burden. They must be able to safely receive and handle ocean-going asildlbrfre vessels, ensuring that the vessels can be loaded Thpotmsaloavsufcetanarao and unloaded as fast and efficiently as possible. soeo rcs h motadepr od Most critically, they provide the facilities for the duigterasrprodnpr.Thslo transfer of goods to other maritime transport, reueshayqip ntndkledab, road, rail, inland waterway, pipeline, conveyor inldgthefcetprvsoofalkdsf belt, or air transport. s s as c ip o ( c o To do this, ports must provide deep enough sann) n aeyadscrt evcs water in the entrance channel and the port to Assaotfuilalofheerqrmns,hy guarantee the safe navigation of vessels, includ- ing guidance (pilotage) and other marine services - such as towage (or tugging) and mooring and oeain aeatl nteevrnet h unmooring facilities. The loading and unload- ing must be executed in the shortest possible aistreuepltoncaedboen-ig tim snceveses hvehih dil oeraioa strensorprcstimot and expor goodsins d g tsp d p T a requiresS ~ 5 hev eqimn an 4kle labor, including 4 th*efcin prvso of al knso services - - - such - asustms inpcin (pyia or scanning), 5 4 ~ and saet an seurt serics As. - 4 *- sepot fufl al of ths reurmnt,te must -S- also ac as goo stwa -4r the envron ment. 4 5 Becaus ocangon taspotadpr because APL's main trading area was the Pacific and required quay length to aliow the vessel to Ocean, moving among a number of Asian and berth immediately upon arrival. Following this, a U.S. West Coast ports, with no need to transit number of larger ports on the Asia-Europe route the Panama Canal. Many of the larger ship- may see much of their transshipment cargoes ping lines followed suit. By the end of this year, shift to other ports in the region and thereby be Maersk Line will launch the first 18,000 TEU "demoted" to feeder ports status. Ultimately, the vessel, known as the Triple-E Series. smaller ports will then be faced with the arrival Even amid such progress, however, the maritime of larger vessels. transport world also faces significant problems, These shifts and changes will affect the Carib- such as: bean basin, Arabian Peninsula, Southeast * Over-capacity in container vessels; Asia, the Mediterranean, and Western Europe. * Piracy in a few regions of the world result- y g ing n hghe inurane pemims;threats of terminal overcapacity from the slowed ing in higher insurance premiums;momentum of terminal expansion and invest- * More severe environmental constraints; ment plans resulting from the global recession. * The financial crisis, leading to decreasing In some cases, regional terminal utilization may trade flows and shifting of countries of reach over 90 percent by 2016. origin and destination; * High fuel prices, resulting in vessels moving MOVING FORWARD with lower speeds ("slow sailing"); and In the face of these changes, one fact remains * The new Panama Canal, which allows the clear: ports and terminals that wish the very large transit of larger vessels, forcing smaller ves- container vessels to call will require top-of-the- sels that currently transit the Canal to shift line facilities and services. This not only requires to other trade routes. huge investments in port facilities, quay walls, equipment, and systems, but also the right skills All of these elements impact ports, provid- and management. Excellent trade facilitation sys- ing a glimpse into their further evolution. For tems such as customs, inspection, e-commerce, example, as very large carriers (which will mainly safety, and security round out the new list of sail the Asia-Europe route via the Suez Canal) must-haves. will call at fewer ports and load and unload But it's unlikely that traditional ports in many more boxes per call, a certain percentage of these countries can provide these. For this reason, containers will have to be transported to regional most of the larger (and some smaller, with ports (this is known as transshipment) already a throughput of 50,000 TEU) and efficient handling containers arriving from regional ports. state-of-the art terminals are now managed and The high costs of these large vessels will pressure operated under PPP contracts. With these part- the ports to have state-of-the-art handling equip- nerships, port authorities have adopted a new ment and systems, along with the required depth landlord role focusing on infrastructure assets 12 1IFC.ORG/HANDSHAKE Container vessel capacity development: Maximum capacity built each year (Clarksons 2004, Wikipedia, and others) 20000 18000 16000 14000 0 12000 Ma 10000 D 8000 LI '- 6000 4000 2000 0 management and market regulation, in addition These terms relate to obligations to decrease to their regular statutory functions. hinterland road transport, increase rail and barge Recent container terminal concession contracts transport, increase throughput performance over have yielded a number of lessons about this latest time, and decrease pollution. Failure to achieve leap forward for the industry. For example, limit- these obligations results in penalty payments ing the number of variables on which potential from the concessionaire to the landlord, and bidders base their bid to about two or a maxi- reaching or surpassing them results in a reduc- mum of three makes the bid evaluation easier, tion of charges levied on the concessionaire. faster, and more objective. In addition, pre-bid These and other iterations of PPP contracts will conferences and road shows can help inform and continue to change the way port operations are develop the market of potential bidders. Self- conducted. But even as new technology and regulating contracts protect the private investor global realities require port operations, policies, and the transaction from the whims of a national and partnerships to evolve even further, these regulator. Finally, yearly tariff adjustments for islands of world trade will continue in their inflation (using a national index or a basket of age-old role: shaping regions economically and major international indicies) avoid long and dif- culturally, and connecting countries with noth- ficult negotiations. ing more in common than the body of water More recent contracts (such as in the Port of between them. Rotterdam) include Bonus-Malus conditions. 1FC 113 1I mala s"m. pg A a - G MM DOCt 00 '44 DestiationDefining Photo © Ingrid Taylar 141 |FC.ORG/HANDSHAKE DESTINATION PORTS are historical ports made more efficient by concessioning terminals to private operators. SANTOS, BRAZIL KARACHI, PAKISTAN IFC is providing financing for a new container As part of the Government of Pakistans ports terminal in the Port of Santos-Brazil's main privatization program, in 2002 the Karachi port and the largest in Latin America-that will Port Trust (KPT, the Port Authority) awarded a help address congestion and strengthen Brazil's 21-year Build-Operate-Transfer (BOT) port sector. This is critical for competitiveness sion to Pakistan International Container Limited because about 90 percent of Brazil's international (PICT) for the development and operation of a trade is handled through ports. The new termi- container terminal at Karachi Port. IFC financed nal will help address capacity constraints and the three phases required, as well as a fourth will remediate an existing landfill at the project phase driven by higher than anticipated growth site. The company that will develop and oper- in container traffic. IFC provided total loans ate the new container terminal, Brasil Terminal of about $33 million and assisted in raising the Portuirio S.A. (BTP), will employ around 3,000 remainder of the debt financing. PICT was the workers during construction and is expected to second container terminal to be built in Karachi, create about 1,500 direct jobs and 9,000 indi- after Karachi International Terminal. The two rect jobs during operations. IFC structured the facilities compete directly with Port Muhammad financing and is providing a long-term loan of Bin Qasim, Pakistan's original container port, $97 million to BTP, and also mobilized $582 located only 35 kilometers to the east. Karachi million for the $908 million project through its Port Trust terminals now handle roughly 60 syndication program. The financing represents percent of traffic between the two ports. IFC's largest syndication and port investment When the market is large enough to support globally. BTP will spend about $105 million to tamable operations, this multi-terminal approach clean up the landfill at the project site, providing can provide competition so users have several a significant environmental benefit to the area. options, and the private operators are compelled Brazil granted the first private container conces- to provide good service to retain customers. sion in the Port of Santos in 1997, and today Multi-terminal operators also ensure that there there are six private operators with container is price competition, and often this diminishes concessions. Volumes have grown from 772,313 the need for the government to regulate prices, TEUs in 1996 to more than 2.9 million TEUs since the market can accomplish this instead. in 2011. 7T 1 TRANSSHIPMENT PORTS result when private concessionaries take advantage of locations on major trade routes. MANZANILLO, PANAMA COLOMBO, SRI LANKA Manzanillo International Terminal-Panama By the mid-I 990s, growth at the large deep S.A. (MIT) operates the Manzanillo container water port of Colombo was slowing due to inef- terminal, adjacent to the Colon Free Trade Zone ficiencies and delays caused by outdated systems on the Atlantic side of the Panama Canal, under and equipment. Projections showed traffic a concession agreement. Prior to MIT's entry as volume leveling off, and estimates at the time a container terminal in 1995, the former U.S. indicated that around 40 percent of west-to-east seaplane base was utilized as a storage facility for traffic was being diverted from Colombo Port handling cars for distribution in Panama and to more competitive ports outside of Sri Lanka. Latin America. MIT's investment and manage- Colombo Port was slowly losing its competitive ment transformed the facility into a key trans- edge to newer, more modern port facilities. shipment hub for shipping lines. MIT's efficient To remain competitive, the South Asia Gateway operation allows shipping lines to concentrate Terminals (Private) Limited (SAGT partnership) their calls at Manzanillo and use smaller, less was created by the Sri Lanka Port Authority and expensive feeder vessels to transport cargo from several private companies to improve, expand, Manzanillo to their final destinations. The operate, and manage the Queen Elizabeth Quay resulting hub-and-spoke system provides greater (QEQ) terminal through a 30-year BOT market coverage and lower transportation costs, sion. IFC and three other institutions financed critical components to increasing trading activity. $144 million in loans, and construction for the IFC provided long-term financing with a back- expansion of QEQ was completed in August of ended repayment schedule that was not available 2003.'Throughput for QEQ increased by 350 Byrthethed-1990scigrowthrketthe largeidee tpercent from 2000 to 2004, leading to a 30 percent increase for Colombo Port. Colombo's geographical position boosts its usefulness as a transshipment hub because it is located on the trade lanes between China and the Middle East/Europe. It also serves as a trans- shipment hub for India because Indian cabotage laws prevent non-Indian shipping lines from carrying intra-Indian cargo. 16st IFC.ORG/HANDSHAKE SPECIAL ECONOMIC ZONES AND SIMILAR PORTS can anchor economic development. SUAPE, BRAZIL etbih In 1978 the government of Brazil's thaState of Pernambuco embarked on an ambitious multi-year plan to develop a new port and industrial zone. In 1999, IFC was s l aengaged to bring in a private firm to finance and manage a dedi- cated container terminal in the port. The successful transaction m A d attracted $98 million in invest- AQABA, JORDAN ment, and TECON Suape, the The Aqaba Special Economic Zone (ASEZ), container terminal, is now an efficient operator est enthat employs over 400 people and contributes etatbiersd in , Irae,ancldes 27udi km c t $9.4 million annually to the government. The thatcbodes EgyptIsr, aconadir Aerbina container terminal contributes to the productiv- incde an insaport, aontaninterina ity and competitiveness of the firms in the area; tional open-skies airport, land resources, water sent o ntin s rlan d 80 km to a he porta supplies, and tourist attractions. The ASEZ ofnd Salvaortadin drourand 0n 0 to the ost Authority gives the SEZ autonomous powers, of ia vaatinre frm regulatory independence and controls, customs, taxation, business registration, environmental Annual movement capacity at TECON Suape regulation, land use, and building regulation. It has increased from 75,000 to 400,000 contain- reports to the Prime Ministry with five com- ers in seven years, transcending predictions, and missions (Administration and Finance, Revenue in 2006, Suape was certified as one of the safest and Customs, Investment and Economic Affairs, ports in the country. In this case, a well-struc- Land Infrastructure and Services, and Environ- tured public-private partnership has profound ment and Heath Control). The seaport alone economic development effects when conducted has attracted nearly $235 million in expansion as part of an integrated plan: the port was critical investment and directly employs over 700 for bringing in raw materials for the manufactur- personnel. ing industries and for their export. p 1FC 117 Photo @ Evan Leeson Private investment commitments (hereafter, investment) in seaports in low and middle 1999), when brownfield projects accounted for income countries has increased significantly from 58 percent of investment in seaports. (Conces- 2000 to 2011, peaking at $8 billion in 2007 sions as defined by the PPI databases are com- and averaging $4.2 billion per year. Most of monly referred to as "brownfield projects.") In the growth was due to investment in greenfield fact, by number of projects, there were still more seaport projects. In the last 11 years, greenfield brownfield projects (49 percent) than greenfield projects accounted for 55 percent ($23.8 billion) projects (43 percent) in the last 11 years, indicat- of private investment in seaports, followed by ing a trend toward large greenfield seaports. brownfield projects at 39 percent ($17.1 billion). 18 p IFC.ORG/HANDSHAKE COMPASS Private Investment in Seaport Projects (2000-2011*) 16- in Developing Countries, by Region and Contract Type 14- 12- o 10- u~8- 0 6- 4- 2- 'J&. I M 1 JIM . .'[1 a ilIA1 2 - """"""" U Concession EGreenfield project MZDivestiture U Management & lease contract *Only First Semester data available in 2011 Courtesy: World Bank and PPIAF, PPI Project Database For an investor, the risk profile of a greenfield cent, $13.8 billion) and Latin America and the project is usually considered higher than for a Caribbean (26 percent, $11.4 billion). In East brownfield project, where a revenue-generating Asia, China accounted for 70 percent of regional asset already exists. A closer look at the data by activity, while Brazil accounted for 38 percent in region reveals underlying trends that explain how Latin America. Development of seaports was also greenfield projects have become the most com- strong in South Asia, with $8.6 billion. Approxi- mon form of public-private partnerships (PPPs). mately 63 percent ($20.5 billion) of the invest- ment in these regions was in greenfield projects. REG IONAL INVESTMENT On a global scale, the most active countries The majority of investment was concentrated were the emerging economies of Brazil, China, India, and Nigeria. China led with 20 percent in two regions: East Asia and Pacific (32 per- IFC 19 of new projects, India with 13 percent, Nigeria global activity. The UAE's Dubai Ports (DP) with 10 percent, and Brazil with eight percent. World invested in 19 of these projects, making The large amount of activity in Nigeria was due it the second most active sponsor of the last mostly to a program in which Nigeria's Bureau decade. DP World's projects during this period of Public Enterprises (BPE) tendered 19 brown- had investment commitments of $3.8 billion. field seaport concessions in 2005. For the other DP World closely followed Denmarks AP top countries, greenfield contracts were in the Moller Maersk, the top sponsor, with 21 of Den- majority mark's 22 new projects. Denmark at 10 percent Thegolsofhepnvativt the seond mowas atcpnsr the gols of~~~a th oenetwe eeoinvestmentil comtenpotsf$.8blin SOUTH-SOUTH INVESTMENT was followed by the Philippines and Brazil with lseven percent each, and finally by Singapore with CHINAsix percent of new projects. The top six sponsor countries (Brazil, China, Denmark, Philippines, Singapore, and the PACIFIC PORTS IN LATIN United Arab Emirates) had at least 15 percent of the equity in 57 percent of global seaport projects. Perhaps not surprisingly, following the Investment in greenfield seaports in Brazil, number of seaport projects in China, Chinese China, and India could perhaps be explained by sponsors were the most active globally with their growing economies, but other countries in a market share of 16 percent, investing in 35 Latin America have also experienced increasing seaport projects (again, mostly in China). Hong investment in greenfield seaports. A need by Kong's Hutchison Whampoa Ltd. was involved Asian exporters to bring their goods to market in 13 of these deals and was China's top sponsor. without passing the Panama Canal has spurred As with China, the top sponsoring countries had investment in ports on the Pacific coast. a single pre-eminent sponsor with the exception Notable among such ports is the 830,000 TEU of Brazil, which had many strong local play- Callao South Dock Terminal in Peru. This ers. The United Arab Emirates (UAE) followed greenfield seaport was developed by DP World China with 24 new projects and 11s percent of and had a total investment of $439 million; it 20 P IFC.ORG/HANDSHAKE became operational in October 2010 and was Post-Panamax vessels, and the government financed entirely by DP World and a group of intended it to become the main entry point for private banks. Other Pacific greenfield ports Asian companies. However, in February 2009, include Colombia's TC Buenaventura, a $224 Hutchison Ports Holdings pulled out due to million greenfield port financed by IFC and disagreements with the Ecuadorian government Lazaro Cardenas in Mexico. regarding investment obligations, and the project was canceled. CHALLENGING TIMES As this example demonstrates, the goals of the Plans for such ports are not without their chal- private investor do not always match the goals lenges, however. In 2006, the Ecuadorian port of the government when developing greenfield of Manta awarded a tender for a $523 million seaports. There can be synergies in PPPs, but deep water seaport with a $55 million contri- p p bution from the government. With a natural well-defined goals in order to seal an effective depth of 30 meters, Manta could accommodate pgn TOP~~Asa companies. However,Rin Ferur 2009,CUNR (00-01 16%Hutchison ua Ports Holing P Mller det disagreemed, nwith thMcaragernmen LmtdChnArardiginvtestmn obigtinathrojc ICTSI, ~ as cranceled.Crp AsPilpie Patisa ple deosrtSinhegoalsofe <>~~~ SS,Bai seaports0.0~ Thr c s e the ublc ad te pivat setor ned Ft 21v LEGALEASE Ports: Legal and policy issues By Victoria Delrnon Private investment in the port sector is as old as prvtoeaormsguanethtisld ports themselves, starting with the port and land pre scerydfndadta hr r la concessions granted to private companies under treaty by colonial powers. Today, the range of ofitrencordsuindetoahrdpty typical public-private partnership (PPP) models Eahoteoproswilikynedpcfc in this sector is broad, though most countries rihsoacesvrcmonldorah adopt a landlord port approach. This refers to a ote'lad port where the public sector owns the port and Moebadyinstradfnncrsnnw retains responsibility for common facilities such potfclienedoesuehyhaeufcet as the breakwater and entrance channels, utili- tiltoheanonwchhefiiisartob ties, and road and rail access. The public entity bul,tgiehmowrsp-ralatsc- then enters into PPP contracts for a number of riyntes-nthnwast.Onhepbc individual terminals within the port. This may sd,gvrmn ed ohv il nteln take the form of a concession or Build-Operate- (raqiei)adb bet rn ufcetln Transfer agreement for a new terminal, or even a ttet h prtrpirt omneeto management contract for existing assets. wr ne h otat Exceptions to this approach include ports in China and Indonesia, where it is common to have public-private joint ventures for develop- Ovrl,pttunondimsaectclfra ing ports, and in Turkey and the U.K., where pr omiti t opttv de ie a privately run and financed multi-purpose ports besjctoanuerfohrfcosotid are common. It's not surprising that with so thopro'scnollieutmsrcs- many models, legal and policy considerations ig fiin ioaeadtwg evcs n in port PPPs span a range of issues. seeoigcfccc.Teoeao ilawy L 5 LAD_R POT see asuacs frmgvrmnSo hrcs A port is a busy place with many different acs oadfo ot activities and competing interests. In a landlord Ti cesi h e ocmeiieesadwl port, where there are likely to be a number of hv infcn mato h prtrsrtr privat~ ~ ~ ~~~~~~~ah fte operator s will likelywrkr, h n nesmn. hp need spb al t e iic rights o acesoercmoNan othr' lad Moebody*nvsosadfnacesi0e port facil~~inedtenuetehaesfiet tilIoteln oIhc h ailte r ob bult togv-hmonrhi-ra eseu ti -oth oprao proocmmneeto wokudrth otat ACCE0 AD N Ovrl,pr*uraon ieIreciia o pott*mitiIiscmpttv-eg.Tie a be ubjct o anumer f oherfacorsoutid thIprto' otrl-ie utm-poes in,efcetpltg0adtwg evcs n stevedorin efiiny0h peao ilawy sekasrne fro goenen nte0rcs tie,aogwihtems mpratise acest* n fro a prt Ths ccssi te eyt cmptiivnssan wl hav a0infcn imato 0h prtrsrtr private operatos as well as pulic workers, th onivsmn.Sisnedt 0eal ogtit 22 | FC.OG/HANSHAK the port in a timely manner; for this to happen, ivsigi e i n a emnlo h dredging of the port and maintenance of the unesadgthtllheolndaswldb breakwater and channels is key. Cargo must then canldtruhta emnl fteoeao be transferred inland, so road and rail access weetntofdthtarvlemilwsbig needs to be sufficient to avoid congestion at the bulashrditnewy,hscodudrme port. The operator will seek clear guarantees thcomrilvaltyftepojt.Ahug from the port landlord that this infrastructure teoeao ek xlsvt,i a ei h is in place and is maintained. itrs ftegvrmn opooecmei CO PTITION AND RGLATION dfndpro n nywti eti ra Tariff regulationsAtargoaleethsbcmsoedifut In countries with healthy competition among froeaost aae ssismyb iln ports, there is limited regulation of tariffsimrvdptfalteshr. because it's assumed that market forces will take care of this. However, in the case of country or Ifteprisevngaeioorldocd regional port monopolies, government will as a conrebyndteoaalour,thlvl matter of policy wish to regulate tariffs. Potential o utm uislve ngosi on ob investors will need to be sure that these tariff antecoetiuise.Ismeonre,th restrictions do not cause the port operation to pltclrs a es ihta prtr a fail to meet revenue forecasts.seksmfomfgurnefomovnet Space and turnaround A number of ports in developing countries have LAO huge space and turnaround problems because LaoisaentvesuenprtPsbcue the ports function as container storage depots. mn xsigtriashv noie ok While some of this is due to access issues, low fre n etitv okn rcie.Ivs pricing at the port can also result in customers tosmyhefrepfrtolktogenid using the port as a convenient storage facility. souinwhrteeisoextngokfc. Government can manage this risk by ensuring Weelbrtase ragmnsne ob that tariffs are properly balanced, and by lookingpuinlaethoerorwltyclyloko at storage alternatives such as inland container thgoenntoudrakayrsrcuig depots which can divert some of the activities protoheP,haernsredoitnlte from the port and reduce congestion. nme fsafrqie,adhv h oen Competition and customs dutiesflxbltinrtninaderncmtofsf. Governments must carefully consider whether toAnteopinstoactlmttosonfrg allow new ports that compete with each other. safi xhnefrardcdlaefe This is a key challenge that requires careful navgaton Fo exmpe, magneanperto Moeunderstain tat all. theoldan. gapoulpb channele tto built shr ditac awy hsculnemn deie peidadol wti eti ara Atargoa*evlti eo esm r ifcl for pertor to man ge,as hip ma e wil n antercneniu isue I soecutis0 h poiialrs ayb0o ihtatoeatr0a see soefomo gurnee0o goenmn on hi0isue LAO Lao0 sasniieisei otPP eas foce.ndreticiv orin.ratie. nvs tosma heeor ree0t oo-o renil soutos hreter0i oxstn worfoce Whr*lbr rnse rrnemns ed0ob putinplce thoerto wiltpcll0 okt thegovrnmnt o uderakean resrutuin prort th-P,hv rnfre toi onyh nube o0taf euied adhae0h gven men rtrnc ay emindr Thsalw-o flxbltInrtninadrtecmn ftf navigatio. o exmpe Smgn an oprtr Mranomtotwwwrdakogpp IFC-| 2 To SHIPorTRANSSHIP A realistic strategy for port PPPs Some governments see the large volumes handled by transshipment ports and believe that convert- ing their port into a transshipment hub will bring economic benefits in the form ofhigh concession fees and royalty payments. But transshipment cargo may not be very good business for either a gov- ernment or for a private port operator. Transshipment only makes sense for ports located in places with ideal geographical and natural conditions where the ports can succeed with a "Supermarket" approach: very high volumes at a low price together with very high efficiency, which can generate an attractive return on investment despite low revenues per move. When governments first consider the concession "transshipment" cargo. (A TEU is a twenty-foot- of an existing or new port terminal to a private equivalent unit, an industry standard measure of operator, they often look with envy on a port shipping containers.) In this context, transship- like Panama's Manzanillo International Terminal. ment is the transfer of containers between a large Manzanillo, located on the Atlantic mouth of ship, usually coming from or going to a major the Panama Canal, grew from approximately port, and smaller ships, usually coming from or 160,000 TEUs per year in 1995 to 1.6 million going to smaller ports. Transshipment makes TEUs per year over 15 years by focusing on sense where a large ship may not be able to 241 IFC.ORG/HANDSHAKE SHIPPING enter small ports due to water depth or because it would be uneconomical for the large ship to D tas i make a series of stops at the smaller ports. s Governments may see the large volumes handled by transshipment ports (many upwards of 1 i- million TEUs per year) and believe that convert- " h s ing their port into a transshipment hub will c c o l m l bring economic benefits in the form of high vs w concession fees and royalty payments. However, v o what they may not realize is that transshipment f l i t i cargo may not be very good business for either a government or for a private port operator. By i d d o e ma4ke positioning their port as a transshipment hub v a n S e u o t in a concession auction, a government may risk actually scaring off many private operators. to a t l m They may be concerned about opposing views s r on developing the business, or the potential for w t o m r m l s unrealistic goals. Those operators who do bid s a c may offer less in the form of an upfront pay- c f o t d a Ihis ment or revenue sharing than if the port were positioned to handle primarily local "destina- o l - s w r i0 tion" cargo. CONDITIONS ARE IMPORTANT sp ln is t c It's counterintuitive that large volumes would not translate to high revenues, profits, and p t o rat s return on investment. But most ports simply do i not meet the requirements to become a trans- shipment hub. Shipping lines choose a port to transfer containers between large and small ships A deep harbor and entry channel to accom- for a variety of reasons, including: modate todays large vessels (Maersk's new * Low handling and ports fees. Triple-E class ships carrying 15,000-18,000 * Location on a major shipping route so channed whn f loade). there is little or no deviation between the cargo origin and destination (time is money Extremely high productivity in the form of in the shipping business), ultra-fast loading and unloading through 1FC 1 25 the use of large, modern, expensive con- ment containers to make the same revenue it tainer cranes and a very efficient workforce. would handling only destination cargo. Transshipment ports must have the ability to In addition, the capital costs for the equipment fight off competition, either by offering very low to compete for transshipment cargo may be tariffs or having a location (such as the entrance significantly higher than for equipment needed to the Panama Canal) that gives a major com- to handle destination cargo. For example, a port petitive advantage, with natural destination cargo of 200,000 TEUs per year may be able to pro- vide good service with mobile n f a p t cn m harbor cranes and other equipment costing less than o m a t $30 million in total. If that not be the best economc ssame port decides to pursue n r a p p large scale transshipment vol- umes, it may need to spend an additional $60-80 million or more for Post-Panamax Unlike cargo that is destined for areas near a port a ent dTyes, andspoten -for which a port has a natural monopoly- tialsdegigoft and aess an n transshipment cargo is highly discretionary and to accommoate arr hips. can be transferred at many different locations along a shipping route. Shipping lines are notori- Ultimately, the return on investment to pursue ous for seeking the lowest tariffs for transship- that highly volatile transshipment business may ment (not surprising, as the shipping business be negative, and the terminal operator (govern- is itself extremely competitive) so they regularly ment or private) may find that the only way to change their transshipment locations to ports break even is to increase tariffs for destination that can offer the best prices and service. cargo to subsidize the transshipment losses. This Even for ports that are able to meet the require-a ments to beco m a ransshimeent hub, this e port PPP, which is lower tariffs and improved not be the best economic strategy for a govern- ment or a private port operator. Because of the intense competition for transshipment cargo, the A NATURAL FIT rates to move one container may be as little as Transshipment does make sense for some ports, 25 percent of the rates typically charged to move especially in places with ideal geographical and a "destination" container. This means the port natural conditions-like Dubai; Manzanillo, must move four times the volume of transship- 261I IFC.ORG/HANDSHAKE Panama; Port Said, Egypt; Singapore; and Tangier, Morocco. Here, the ports succeed with a kind of "supermarket" Ge JOBS? approach: very high volumes, which together with very high efficiency can generate an attractive return on invest- Bi vle nubr ma y mve at toite top ment despite low revenues per move. gests that transshipment operations create fewer Other ports with a large destination jobs than similarly-sized ports that focus on des- cargo base, such as Colombo, Sri Lanka tination cargo. Destination ports require more and Manzanillo, Mexico have become staff for functions such as checking trucks at the successful transshipment centers because entry and exit gates, customs inspections, local the large local cargo volumes require the billing, customer service, and equipment opera- same modern equipment as a trans- tors. Here, more staff are needed for loading shipment hub. Those ports can use containers off and onto trucks than are needed transshipment business to fill in unused for loading containers off and onto ships using capacity without having to make todays high-technology gantry cranes. Destina- additional investments, thereby generat- tion ports may also generate jobs outside of the ing a good return on the incremental port in value-added businesses such as warehous- transshipment volumes. Shipping lines ing, redistribution of cargo, and container repair. also prefer to transship at ports that A comparison of two Caribbean ports shows have a large local cargo base as it means that Freeport, Bahamas (about 99 percent trans- less deviation from their natural cargo shipment), employs about 700 people to move routes, saving them money. 1.1 million TEUs per year-a ratio of more than In considering a port PPP, it's critical 2,000 TEUs per employee. The port of Caucedo that governments be realistic in what in the Dominican Republic, which handles pri- they have to offer and what will best manly destination cargo, employs about 1,000 achieve their objectives. If their objec- people to handle 1 million TEUs per year-a tives are better service and lower costs ratio of 1,000 TEUs per employee. Both are for the country's importers and export- highly efficient operations under private conces- ers, they should think carefully about sion to two of the world's top port operators whether it is the right strategy to meet (Hutchinson Port Holdings in Freeport and their countrs goals. Dubai Ports World in Caucedo). However, due simply to the nature of their business, the trans- shipment port needs significantly fewer employ- ees to move the same volume of containers. Globalization, climate change, and escalating energy costs are a strategic nightmare for shipping companies and they all have one thing in common- fossil fuels. Martin Stopford, Clarksons 28 IFC.ORG/HANDSHAKE The shipping industry has been slow to respond to climate change, remain- ing reliant on bunker fuel, a highly polluting and dirty fuel. Because of this, just 16 of the largest ships can produce as much sulphur pollution as all of the world's cars. Without limits, carbon emissions from shipping could triple by 2050. But more efficient engines could reduce emission by 30 percent. Recent laws also now require emission controls on ships. Other ongoing initiatives are showcased below. Improving fuel efficiency * Liquid Natural Gas (LNG). Quebec's pas- * Fuel efficiency. Maersk believes its forth- senger ferry service, Socit6 des traversiers du coming 'Triple-E' vessels (Economy of scale, Qu6bec, recently announced the construc- Efficiency and Environment) will set new tion of two LNG ferries. The technology standards for size, fuel, and cost efficiency, as makes optimal use of LNG, using diesel fuel well as reduce CO2 emissions. The vessels are only to ignite the main charge of gas and air. scheduled for delivery between 2013-2015. The new technology will reduce greenhouse Optimal trim. Finnish shipping support gas emissions by 25 percent. Other environ- system provider, Eniram, has devised an mental features of the ferries include energy- automatic ship-based application known as efficient lighting, a heat recuperation system, DTA (Dynamic Trimming Assistant). This low-flush toilets, and garbage-separation system monitors a ship's position in the wa- facilities for onshore recycling. ter, informing the crew of the optimal trim * Windpower. The University of Tokyo for their vessel. Fitted ships can trim fuel recently unveiled a new cargo ship with sails costs while curbing emissions. that would reduce fuel use by at least 25 percent. A prototype will be ready by 2016. Sources: Sustainable Shipping Initiative, The CaseforAction, Forumfor the Future Green Marine, Alliance Verte, January 23, 2012; Focus Finland 2011; Mail Online, Daily Mail UK, "How 16 ships create as much pollution as all the cars in the world," November 21, 2009. 1FC 1 29 Making ports SUSTAINABLE Cold ironing. Plugging in ships is a big focus in port sustainability efforts. Many ports around the world have implemented shore-to- ship power, or are planning to do so soon. These include Antwerp, Barcelona, Bremen, Busan, Civitavecchia, Copenhagen, Gothenburg, Liibeck, Marseille, Oulu, Rotter- dam, Stockholm, Venice, and Zeebrugge in Europ Los Angeles, Long Beach, Juneau, San Diego, San Francisco, Seattle, and Vancouver in the rest of the world. Cold ironing systems allow savings of over 30 percent of CO2 emissions and 95 percent of nitrogen oxygen and particulate. This system also reduces noise pollution and improves air quality. According to James Corbett from the University of Delaware, the worldwide death toll from ship emissions is calculated to be about 64,000 a year. Plug-in ships could remove the emissions equiva- lent of 5,000 cars per year. Green energy. Several European ports have con- verted their power supply to CO2 neutral, wind- generated electricity sources. Among these are the ports of Algeciras, Rotterdam, and Zeebruge. In the United States, the Port of San Diego recently completed the installation of solar panels to power its administration building, part of an overall goal to reduce the port's operational energy use by at least 170,000 kilowatt hours per year. 30 IFC.ORG/HANDSHAKE Curbing CO2 emissions: APM Terminals Mumbai APM Terminals Mumbai established a target of reducing CO2 emis- sions by 10 percent by the end of 2012 from the 2009 baseline. It has achieved that goal and more, further reducing its emissions by 14.7 percent by the end of 2011. This was the result of a number of initiatives that have been imple- mented since 2009, based on the findings of an energy audit. Initiatives: Engine conversion. Two-speed engine conversions for rub- ber tyred gantry cranes (RTGs) enabled engines to run at idle speed when no lifting was performed. This resulted in reduced fuel consumption of over 742 thousand liters in 2010 and 800 thousand liters in 2011, with considerable reductions in CO2 emissions as well. Furthermore, plans are underway to equip all APM Terminals with electric-powered RTGs, either through retrofits or replacement. * Ecofriendly RTGs. Specially designed RTGs with variable speed generators were purchased. The engines in these RTGs adjust to the weight of the container resulting in reduced fuel consump- tion of more than 43,000 liters in 2012 and 112,000 in 2011. * Wind turbines. Replacing electrically-powered forced ventila- tion fans in shore-to-ship (STS) crane machine houses with wind turbine ventilators resulted in reduced electricity consumption. Savings amounted to more than 514,000 kilowatt hours (kWh) in 2010 and 616,000 kWh in 2011. * Energy efficiency. Special energy-saving panels were introduced to illuminate the yard area, allowing for a reduction in electricity consumption. This has led to further electricity savings of over 506,000 kWh since 2010. Source and photo: APM Terminals GREEN SEA Co al reon during port construciioni 32 |IFC.ORG/HANDSHAKE When Dubai Ports (DP) World began planning its port at Caucedo in the Dominican Republic, the required environmental assessment revealed 300 colonies of coral in the spot the com- pany needed to dredge. Community outreach also indicated that the area was popular with divers, drawing significant tourist income to a region with a high unemployment rate and little potential Replanted coral colonies now flourish. for other development. Though coral relocation was not an obligation or pre- condition by the Environment Ministry for the issuance of the environmental license, Caucedo developers arranged to move the coral in the safest man- ner possible-floated in underwater air balloons-before port construction began in 2001. The coral colonies were flourishing in their new location by the time operations began at Caucedo in late 2003. The delicate operation to A diver attaches coral to create a new colony. transfer coral was a first for the Domini- can Republic and DP World. The successful replanting has spawned new species of coral, which is now vis- ited by over 1,500 divers annually. "We have set an example for other compa- nies, showing that you can protect the environment while doing business," said Morten Johansen, Executive Director of DP World. Port of Caucedo, Dominican Republic. IFC 133 Airport PPPs By Jeff Delmon, Andy Ricover e' "IN TIME OF NEED, SELL THE FAMILY Vickram Cuttaree JEWELS." When fiscal space is tight, government budgets The myths surrounding airport are stretched and the economy has seen better public-private partnerships often days, there is a temptation to "sell" high value state assets in an effort to "release" value. An distract policymakers from the op- airport is a prime target with good revenues, portunities that these transactions access to foreign exchange, and a golden future. can offer But an open mind, com- It is tempting for decision makers to want to sell off an airport. This may not be the wrong deci- mercial awareness, and the use sion, but this is the wrong reason to make that of experienced advisers can cut decision. Careful analysis is needed. In particular, through the clamor would the government be better serviced by a 341I IFC.ORG/HANDSHAKE AIRPORTS share in revenues instead of an outright sale (not fic will increase. But this belief is not necessarily to mention control and incentive issues)? related to capacity concerns. It is a response to Buy low and sell high: the same logic applies wishful thinking: that because there has been to privatization. The analysis needs to be done an investment, a return may follow. Traffic will in a dispassionate, careful manner, considering increase only if an investment solves an opera- whether to sell now when improvements are tional restriction on the airside (runways, taxi- needed, or share in the profits later. ways, and apron). Stylish new terminal buildings will not alone increase traffic because passengers "THE MYTH OF THE HOSPITAL PASS." are not motivated by an airport to travel, but rather by business, tourism, or a visit to friends In the great game of rugby, a "hospital pass" and relatives. The traffic is the response to the involves chucking the ball to a teammate sec- market needs, and it exists apart from the airport onds before experiencing a near-fatal tackle by infrastructure. Investments in airport terminals the opposing team. (The tackle is likely to result are driven primarily by the need to provide a in a hospital visit.) Some see airport PPPs as the good level of service to users (passengers and "hospital pass" of the transport sector-a way to airlines), and at the same time they serve as a offload the difficult and expensive challenges of source of national pride. an airport to the private sector. While PPPs are a good way to get more help resolving such issues, "LEAVE WELL ENOUGH ALONE." it is worth remembering that the government it i woth rmemerig tht te goernent Private involvement is a huge undertaking. It is never steps out of the airport, it merely brings g g in a partner (hence the name "public-private eentrepare and eui e ey (to partnership"). Or, PPP might stand for "prepara- addre trencdeintere a tosel en tion, preparation, preparation," requiring careful Toeranpre om p re me thought and analysis before commencing the bid Teoeme wouldnpe to ao pi t process. The government needs to know exactly inovm tadcniueomdlelngBt procss.'Th govrnmnt eed to nowexatly it is a myth that these difficult decisions can be what it wants, where the risks lie, and how those risks will be allocated before starting a dialogue aoied. Whe the y r wor, withthese difficult issues need to be addressed. "BUILD IT AND THEY WILL COME." I A It is commonly believed that after the airport terminal expansion is completed, passenger traf- pultec torpacit airpor t auo ites a areons spcifcally stcus on heairot (unns, ax ways,and pron) Styish nw temina b ilding their management. This may limit attention to privileged geographical location, or by investing the commercial returns available for airports and heavily in infrastructure. To be a hub, an airport associated businesses. Yet PPPs leverage heavily needs to be chosen by an airline that wants to off of these commercial revenues. Developing base its operations there. For that to happen, an the commercial side of the airport is important airport needs an important concentration of on- to improve the quality of service for the pas- gin and destination (O&D) traffic of high-yield sengers, and to mobilize finance for infrastruc- passengers to subsidize the lower yield connect- ture. Decision makers need to understand this ing traffic. In other words, passengers have the dynamic, the detail of how those revenues will option to take direct flights, and choose routes be made, and when they should be shared with connecting through hubs due only to lower the government. fares. Passengers are generally willing to pay a premium for the convenience of direct flights. "IT HAS NOTHING TO DO WITH THE Airlines cannot operate profitably by transport- AIRPORT," a.k.a. "IT'S JUST A SHOPPING ing the majority of their passengers connecting MALL WITH AIRPLANES." between points other than its base. he large network of routes generated by the demand of The potential for non-aeronautical revenues can the O&D traffic makes it an ideal connection transform a marginally profitable airport into a center for passengers coming from other airports. gold mine, but beware the tendency to focus on Without a great deal of the traffic generating or hotels, conference centers, car parks, or property ending at the airport, and without an airline development. The government needs, first and arriving to exploit that traffic, the airport will foremost, a well-run airport. The investor needs never be a hub. to be looking at operating the airport first and making this extra money later. A focus on non- "IT WILL BE A CARGO HUB." aeronautical operations-in particular during the bidding criteria-can result in the selection Another common belief is that any available of less proficient airport operators, or bids that runway (even an abandoned airport) can be have not planned well for high-quality airport converted into a cargo hub. The great majority services. of world air cargo is shipped in the belly hold of passenger aircraft. It is actually the passenger "IT WILL BE A HUB." network system that allows cargo owners and shippers to distribute goods to a variety of Policymakers and airport managers often claim destinations. The economies of scale required to that they will attract more traffic to their air- make a cargo-only airport feasible are present at port by making it a hub. But an airport does a handful of airports worldwide-most of which not become a hub just by being blessed with a process cargo that is mainly origin and destina- 361I IFC.ORG/HANDSHAKE tion. While some perishable goods are often air WE WILL ATTRACT MROs (MAINTENCE, shipped in large volumes, generating substantial REPAIR, AND OVERHAUL)" full freighter activity, this is not enough to sup- port the operation of an entire facility. Unless Among the diverse fantasies many policymakers there are substantial levels of imports or exports have is that the development of an airport will originating from or destined for a particular be financed by MROs. This is grounded in the airport, the presence of better infrastructure is belief that dormant airports or airports with very not enough to develop a cargo airport. low activity can be used as maintenance facilities to repair airliners. Airlines use MRO facilities "IT WILL BE A LOW COST CARRIER to perform maintenance and repair for aircraft. AIRPORT." 4 Airlines prefer to repair their aircraft at airports where they normally fly, so they don't have to Another elusive, golden egg-laying goose is ferry the empty aircraft for repair. Of the four the low cost carrier (LCC) airport. The LCC different types of repair checks, only the most formula is based mainly on short haul flights, comprehensive (that occurs once every five or low cost facilities, high volumes of traffic, and six years) may justify flying an empty aircraft to minimum time on the ground, among other separate MRO facilities. Equally, MRO opera- features. For example, flights over five hours tors prefer to be based at active airports where create problems for LCCs due to longer turn- they can also take care of unexpected repairs of arounds, the need for in-flight catering, and scheduled flights, a line of business that can be in particular crew requirements (such as the very profitable. Most importantly, an MRO will need to station crew at one end of the segment). be based where highly skilled workers can be eas- Unless they come in large volumes, LCCs are ily found and trained, alongside laws favorable not great clients to airports: they need low cost to import duties and custom bonded inventories. facilities because they spend little time on the Available space and good infrastructure, while ground, they don't spend on aircraft parking useful for an MRO, is not enough to attract fees, avoid using boarding bridges, and hardly MRO operators. They need natural traffic activ- consume in-flight catering. Their passengers do ity, a concentration of home-based aircraft, and a not spend much money at the airport, and there good location close to skilled staff, services, and is limited dwell time since they don't connect. other potential customers. Ultimately, LCCs need a defined market- pas- sengers traveling between city pairs-on a high Adaptedfrom theforthcoming Airport develop- load factor basis throughout the year. Unless ment through public-private partnerships: A the airport can offer large volumes of traffic, the practical guide for policymakers (Ricover. Del- derived revenues from hosting a few LCC flights mon and Cuttaree, PPLAF and World Bank). may not be significant. IFC 1 37 GOING FOR LXj The U.K.'s quest for a winning logistical support structure By John Kjorstad Efficient, functioning ports and The issue is simply one of trade and competitive- airports depend on strong relation- ness. The problem is that the U.K. wants it both ships between the public and pri- ways, and on its own terms. The countrywants vate sector. Infrastructure Journal's to be an international hub, but it doesnt want to editor-in-chief explains what hap- increase runway capacity at its existing airports. pensBritain wants to attract tourists and international strained at a most inopportune time businesses, but it also has some of the tightest strine ata mst noportne ime border control restrictions in Europe. As a result, ........................................the U.K.'s logistical support structure is under Anyone flying into the British capital in the stress and testing itself with the whole world months before the London 2012 Olympics watching. could be forgiven for believing that the games Cracks have already appeared. Passport control had already begun. queues at all of London's four major entry points Politically, they have. The drive for austerity and have been horribly congested, with travellers controversial cuts to border agency staff have from outside the European Economic Area at kicked off a political football match ahead of the citys flagship Heathrow Airport enduring the United Kingdom's summer in the spotlight. the longest waits. The worst, according to BAA, Transportation and global connectivity are key the airport's private sector owner and operator, issues as the country's long established status as occurred on April 30 when arrivals at Terminal an international hub for business and tourism is 4 waited up to three hours to clear the border on the line. control. Politically and economically, this is an unacceptable failure well beyond the 45-minute tions are necessary to compete in a new century target set by the U.K. Border Force. of aviation. Airports that fail to deliver risk being What's happening in the U.K. underlines the overtaken by those that do. economic importance of efficient and function- Sustainable development, energy efficiency, and ing ports and airports-as well as the critical environmental concerns must also be considered. need for partnership between the public and As global air travel increases so do greenhouse- private sectors. Although not technically gas emissions, and the aviation industry must public-private partnerships (PPPs) by conces- adapt to the changing climate (pun forcefully sion, Britain's privately-owned airports certainly intended). But it's not just in the skies. New operate at the mercy of public departments like strategies on the ground and better designs for the U.K. Border Force and the political policies infrastructure-such as energy-efficient and set by government. If this relationship becomes LEED certified new buildings or retrofits of strained, everyone suffers, existing buildings-must also be adopted. The free worldwide movement of people and There are also national security issues to consider, goods is critical for global economic growth. and of course passenger safety. All of this costs However, the challenges facing ports and airports money and with many global economies suf- to unlock that potential are not easily or cheaply fering, scarce capital-notably debt-could be overcome. the most difficult challenge of all. The increas- ing cost of funding projects is a serious threat undermining many Wit th upomn Olm i games, new developments. i f K. s lra In early 2011, Infastructure Jour- nal (IJ) published a special report LE ef d- on global airport infrastructure. israderne Among the findings, IJ noted the vast appetite and potential for investing in airport infrastruc- ture-particularly in emerging Capacity constraints-either too few runways markets. It also highlighted the challenges to handle growing demand, or runways that are governments all over the world face in attracting too short for the next generation of jumbo jets- private capital. Some countries-like Brazil and threaten the viability of established routes and India-have internal capital market capacity able airports unable to grow and adapt. New termi- and willing to invest in airport infrastructure nals, new runways, and improved local connec- (with mixed results); others, like Nigeria, are cur- 40 e IFC.ORG/HANDSHAKE rently seeking foreign capital investment for their projects. Sourcing capital, structuring transactions, and finding the right business model are critical. Since the financial crisis escalated in September 2008, there have been success stories like Pulkovo Airport, which serves St. Petersburg in Russia. The rehabilitation of an existing airfield was a pathfinder within the former Soviet Union and hopes to be a model for airport PPPs worldwide. Private sector sponsors were awarded a 30-year concession with financing support from development banks-including EBRD, IFC, Vnesheconombank, Eurasian Development Bank, Nordic Investment Bank, and Black Sea Trade and Devel- opment Bank. With this much multilat- eral muscle in play, commercial project finance banks also stepped in to provide financing despite difficult debt markets. What Pulkovo illustrates best is that given the right business model, financial structure, sponsor group, and political willpower, deals can still get done and potentially have a huge impact on the local or even national economy. It may take years to measure, but the success of financing efficient and effective airport infrastructure is an achievement worthy of Olympic gold. x Photo I curt IFC |41 Contract matters: Legal considerations in airport PPPs By John Crothers &F Christopher Boyce International lawfirm Gide Loyrette Nouel based l in Paris, has worked on airport concessions for Mald ob bevn.Utmtl,temr bevn International Airport (Maldives) and Bamako thlayrtemoeifmdteywlbet International Airport (Mali), as well as airports inevrstgofhepjctadhemecpbl Tahiti, Tunisia, Congo, Saudi Arabia, and Mauri-thywlbeoprvdnceaiesuinso tius. As is the case in most public-private partner- polm htwl nvtbyaie ship (PPP) projects, the legal issues encountered fall into two broad categories: legal and institutional LEAAN ISTUIO L framework requirements, and contractual aspects of PPPs. This article examines these issues with a FA E OKRQ IEET particular focus on airport concessions.Inadtotobigfmlrwthhevain Airport projects offer lawyers different perspec- setrlgaadiosneigito icuinsn tives from the average traveler. Boutique shops inaiprPI'wllnetobcpbeofdvsg the airport terminal are observed from a revenue o ait flglaes nldn ulcpo stream perspective; passenger volumes and flightcuentadPPlw,omnya,prjt schedules are observed for competing airport fnne rpry n rirto.Dpnigo routes and growth potential; existing infrastruc- tejrsito,i scm o o nentoa ture and airport practices are observed so that frst ate ihlclfrss htte a comments can be fed into general project discus- adieo lcllwisu ,schsln,frig sios. n hor, itheah vsittotheprjec everystae ftheojc and theurmorecapabeion LG A NSTA H TL0 L FRAM WOR REQL- Inadto oben a iirwihteaito sectr,ega adiosetrn inodscsin on aiprIPs ilne o ecpbeIfavsn onavreyoIea ras nldn ulcpo cue en nIPPlas omay a,prjc fiac,poet,adarirto.D pnigo the juidcin it is como fo 0nentoa firm top rt e wt lo a i m o h tt e a adis on loa la isus 0uha ad oeg inet et.ndscrte0lgsain sin.I 0hr,wt eac vii to theproec 42| FCOG/ANSHK LEGALEASE The starting point for any project is asking: Aohrqeto htotnaie s"ow "What is the legislative framework required to nedaPPgnc?Thpu os,stbi- enable a PPP project?" If none exists, the grantor metan co p ecefangnyaral may ask: "Do we need a PPP law?" Severalimotncnsdrin.Suhae issrv approaches can be adopted, depending on the aste"niuio lmmryofawlrnPP political and commercial climate. These vary porm rvdn eore,bs rcie n from drafting a general PPP law, to including geeaex rts.H wv,bcueeeypojt PPP in a sector-specific law, or using existing i nqe h icsinms ecso ie public procurement legislation (even if not best t h niiulpoet n h etrseii adapted to PPPs). In some jurisdictions a special ex rt(mnsyofra pr,aiotag c) law to allow the single specific project maymutbonoad KEY ONTACTAL ASET Anoter qestciong htotesrsues is "o en yer, the ore inforeneeea PPP genc? rsotahe urons vestblshs will~ ~ ~ ~ ~ ~met bea vr tg fte piaaind competencte one any ae all imporoftant consraions mdisuha genee project and ~~a the "institutionalanmemory" of a welegcnainl rune PPPd they w ill be oprgram providing resources,mproebestelpractice , and aate that w il inevtablygenr all expertisne. H ver betr case deveryoprojec is uniqu the edsusson uto e custonmead In ny ven, he ega fameorkmus alow n tto the niilproject , aecndctessectorspecfi aexe (miisrof tanspnot, eaipr aency)to be n ceary.epoe ea o naiosfrfrcs -tapdgoen et sacneso yePPr, et more incesffom theye iha prn ametadapoi-hrn projuecet pad theog moe capablefecansm they wirboojpovdigtre atv s n r thtwl invta 0aie In an even, th lea 4rmwrkms4lo fo fi an trnprn- rcueetpoes Efetiey th -ea adio' iscnensol bet0raetepoe ea fonain for0 a PP prjectto e sccesfulfromthepre prcreet0hs thog th lietm of0 priatzaio isu. n te6nehad,an i contnuos reenu ste4.O th thrhad a trctprvaiztin a rsut n cshwid fall,whic ca beer atrcietodvlpn goen et fo obiu 4raos Th 4rbe ista4hepoedsg-oth oenmn0n not o th prjc.I hecneso vesu prvtzto4icsin i savsbet dp a leibeaproc ad otrman ede t0 stit ihe0r cnai.On ial0atrntv for csh-stappedgoverment 0sacneso wiha0ufot amntada rft0hrn For both brownfild and grenfield airport proj- ects, environmental issues must not be neglected.ofaexsigirrtrcranfutosae For brownfield projects, environmental audits bigtaserdfo n ipr prtrt are recommended to establish a baseline to cut teohr htpoiin hudb otie off responsibility between the Grantor and the inteccsiocnratoesuetbltyf new investor for pre-existing environmental oprtnsadopovefrmngmntf liabilities. For greenfield projects, there are dsue?Fnly h sa suso emnto numerous other issues that must be addressed adcmesto ntriain hnei at the start. Who owns the land on which the la,ndocmjerwiledtobcrfuy airport is to be constructed? Are there rights of cniee n eoitd way that need to be considered? Indeed, both of O ore iaca rvsosms lob these questions raise the issue of whether owner-unesodbthlgatamFrmheust ship of land by a private investor is possible, or oftepjc,avtinndo-vainchrs even necessary, mn an airport project. ne ob lal dniidadalctd From an operational perspective, there are cer- tain key issues that need to be considered. First, Icino esne ob nlddi h rjc the key performance indicators must be clearly cnrc.I diin owa xetsol In many developing countries, 1 ipr eeomn hre?I uhacag the international airport is the shudpytecag(heasner,ilns,o access point to the rest of the gatr?Adwosol eev h rces world. Reputations are rnade thgrnoorteorar?Calytesac or broken based on the per- ceived airport experience. b wr f n hudb iln oavs n stated (and must be attainable). Secondly, the frmacnatulpsetienld: penalties must be well calibrated to ensure thatAdutetoavtinfs they incenoivaneexistingotairport orocertain. functionstare 44 1 IF.RGHNDHK bengtrns0redfrmon4arprtopraor0 th ote,wa rvsos hudb otie in the cocsso cotatt nuesaiiyo opraiosan t0roid ormaaemnto disute? Fnaly, he sul isue ofterinaio andcom enstio ontr into,ch0 ei law an -oc maeewl. ed obaeul undrsoo b thSlga tam Frm6heouse oftepoecaito andno-ito chage need * * toblalyietfe an0loctd Provisions * 6* for th chrig0amn,adcl lection* 6* of fesne tobncue 0nteprjc conrat. n*ddtio, o watexentshul exaso an deeomn 0ot be 0oee grno)?Adwh hud eeveteprces * Triggers for capacity investment and hand-back requirenments with sufficient capacity at the end of the concession period. * Government support and guarantees. inte M TT R In~~~~~~~ 11Ceeopn ontig h Pht AeHc international~~IF |ipr 45teacc, on In 2007, Jordan' Queen Alia Interna- tionalAirport was named Deal ofthe Year by Euromoney Project Finance Interna- tional and Airport Finance Deal ofthe Year by Jane's Transport Finance 2007. It was thefirst successful airport public- G L O R Y private partnership (PPP) project in Jordan and the Middle East and remains Q ueen Alia International the largest private sector investment in Jordan to date. It continues to serve as Airport reigns in the region Jordan's model for launching a full-scale PPP program in infiastructure. Queen Alia International Airport, Jordan's principal domestic and inter- national airport since its construction in 1983, accounts for more than 97 percent of the country's air traffic. But from 2000 onward, it has been unable to meet the sustained growth in air traffic of 7 percent per year because of capacity constraints. To remedy this, the government invited private sector participation to expand and rehabilitate the airport, including the construction of a new 900,000-square foot terminal. This decision was part of a broader strategy by the government to liberalize air transport policies, restructure the civil aviation sector, and improve the competitiveness of Jordan's airports. IFC was the government's lead adviser for structuring and implementing a bal- anced transaction. 46 I FC.ORG/HANDSHAKE AIRPORTS The key objectives for this project were to: to undertake certain predefined improvements * Increase the airport's capacity to handle to existing airport infrastructure, demolish the long-term traffic growth. existing terminal once the new one is built, and * Develop and enhance Queen Alia's position manage all airport services. as a regional hub airport. * Improve operations and service quality standards in line with international best practices. b t * Maximize the value of the project for the t p t g h government, both in terms of financial b c proceeds and quality. - O * Eliminate government budgetary support m I c to the airport. i o a a * Conclude a successful PPP project that 6 m could serve as a model for other infrastruc- ture projects in the country. - Through the prequalification process, six bidding c f a consortiums comprised of more than 25 inter- e f national investors were qualified. The bidding t s a o was structured in such a way that financial bids - were evaluated based on the payment of annual c a an concession fees as a percentage of gross revenues t dt to the government. The bidder with the highest f mr t 1 pc os financial bid would be declared the winner. n p a n 4 All bidders knew they would have to raise their h pj i e own financing within six months ofthe bid t $1 b award. The centerpiece of the project would m a l t t c o be the construction of a new 900,000 square n j o foot terminal based on preliminary designs by Foster+Partners. tThe bidders were also asked 1FC 1 47 4S NN k 01 Inerie by1w Alison Bukhlt Hodn,wih opeae MINa1110 Aipr4neKndmoSuiAai Swela10irot A :A inTrey uniqu, eorgchalln g aesonia Prunooning MednVAirportsaCheSreg Offer five years ago, Dr. Youssef served as Director at Abu Dhabi Airports Company and as Aviation Specialist at IFC He is immediate past Chairman of the World Economics Standing Committee at Airports Council International (ACI) and a member of the Committee on Airfield and Airspace Capacity and Delay at the U S. National Academy of Sciences' Transportation Research Board 48 IIFC.ORG/HANDSHAKE AIRPORTS On the uniqueness of the partnership behind Medina Airport: The project is the first full fledged public-private partnership (PPP), not only in the Kingdom of Saudi Arabia but in the entire Gulf Cooperation Council, which comprises several countries in this region. It is also the first infrastructure proj- ect undertaken on a non-recourse finance basis. On the challenges of running Medina: The passenger mix is highly seasonal, since the airport caters to temporal pilgrimage traffic. A large proportion of traffic is handled during a M i Ap i period of 50 or so days each year. Also because of p i S A T pilgrimage requirements, passengers who arrive i in Medina depart from Jeddah, and vice versa, a a $ b which could have a potentially adverse impact on a c f 4 m t 8 traffic and capacity. The sponsors have also vol- l p p y t c untarily agreed to hire all Saudi staff in order to mitigate social impacts. Lastly, there are output- t r o t r a n based performance requirements that translate t nx d e a wl i cp. into high service standards for passengers. t ove 2 ml p On the wider implications for private sector engagement in the development of core infrastructure in the Kingdom of Saudi Arabia: The successful financial close and immediate visible improvements in airport service standards will undoubtedly encourage the grantor to consider other airport and infrastructure PPPs. Overall, the project was very well structured, with IFC's assistance, and the bid process was efficient and highly transparent. t Ptxwa syseMsAr hsetoiplndfr IFC 49 AIRPORTS Robert Aaronson has 40 years of experience in the aviation sector, most recently as Director General at Airports Council International. During his career, he has had executive respon- sibility for the management and development of six major U.S. airports, and he also served as the top official in the U.S. FederalAviation Administration responsible for nationwide air- port standards, safety, and development. He has been President and ChiefExecutive Officer of the Air Transport Association of America and Executive Vice President and General Manager of Lockheed Air Terminal, which became Airport Group Inter- national and was one ofthefirstfirms engaged in worldwide airport development and operations. InterVi byiAlisI Buckholtz Photo 0sv What limits airport operations in the U.S. when compared to airports overseas? National legislation limits what American airports can and can't do, and this discourages innovative efforts to create new financial structures. U.S. government financial assistance for capital development requires that airports re-invest net rev- enue back into the airport. This not-for-profit model does not incentivize airports to invest heavily to maximize profits. But governments in other parts of the world have been open to alternative revenue models, including airport concessions, as long as certain concerns are taken into account and protections are put in place. So what can U.S. airports gain by looking outward? There are various non-financial benefits to being involved in the global airport business; you can give your staff more experi- ence and training and really open their eyes to how people conduct business. For example, the Houston airport system, which has years of experience working outside the U.S., has found a way to segregate income so they could make some use of it outside of the nonprofit model. Airports seem to be a source of national pride. How does this affect operations? National pride is absolutely linked to airports, so they are often built to be gateways, to be monumental. This can be a source of conflict with the airlines, which understandably are concerned with cost and efficiency. A focus on monumentalism leads to overbuilt, inefficient airports that charge high costs for usage and don't meet airlines' needs. There needs to be a middle ground. IFC 151 What's the middle ground? you, in general the oniy way to try to build up a hub without it happening as a result of natu- The ideal global model is an airport that oper- ral advantages is subsidizing it-and then the ates as a successful business without creating a economic benefit of having a hub doesn't exist! burden on taxpayers. In the 1970s, when I was involved in negotiations with the airline industry about a new terminal, we tackled this challenge. We wanted to build something that was more private investors or government than what they wanted. We worked it out by entities seeking to privatize an dividing the financial structure of the project airport ask before they start the into layers, like a cake. The airline costs were structured on the base costs of the airport-the process? bottom layer. The government provided sub- The kinds of questions that usually come from sidies for the top layer, and this functioned as the entities driving privatization are about the a one-time contribution to cover the cost of a marketplace: who's out there, who should we glamorous gateway. Both sides were happy. work with, what are the major pitfalls. My biggest advice is that it is not productive to get On the other side of the equation, involved in a privatization initiative without very is there an argument for airports strong political will and leadership. Without it, in developing countries to stay you're wasting your time, because there are too many barriers. All of the successful and failed small and not aspire to be hubs? privatizations bear this out. Second, it's very Should they remain limited in their services in order to be manageable and efficient? I is n The answer is more market-driven than strategy- t g i i a driven. We've seen in the last five years that there is a real limitation on how many hubs the p iniia airline industry can support. For a small airport to aspire to be a hub, it must be in a relatively undeveloped part of the world, have the right geographic position, and have the room on the ground to successfully develop as a hub. Panama a leadeshp City is a great example of that. Unless you have some particular geographic advantage going for 52 1 IFC.ORG/HANDSHAKE important to do due diligence on the individuals lots of resources. Also, most of these really great who actually carry out your project. The name of airports overseas were built with the very strong the company is not enough: it depends on their participation of consulting and advisory teams experience working in different environments, from the U.S. and Europe. They used western the expertise they have available to devote to an technology and experience to design great air- effort in another country, and who will be on the port terminals, learning from past efforts. team that implements the project. CC A focus on monumentalism leads to overbuilt, inefficient airports that charge high costs for usage and don't meet airlines' needs. ) You've long been an expert on the What's your persona favorite? airport industry, but you're also a The airport closest to my home in White Plains, passenger. As a passenger, what New York. It's small and convenient, with good are the signs to look for in a well- parking. X run airport? First of all, there should be a sense of cleanliness, orderliness, and safety, which in today's world translates into security. Beyond that, there's phys- ical attractiveness, clarity, and simplicity as you make your way through the airport, along with the availability of information and help. There is no substitute for uniformed airport personnel who are friendly and helpful. With these criteria, every global traveler's favorites are Hong Kong, Singapore, Beijing, and Shanghai. These have the advantage of starting with a clean slate, rather than being built up over decades, and they have 1FC 53 0I l &other lessons learned the hard way Across the world, many a fortune has been lost on airines-most ofit consisting of tax- payers' hard-earned money. Given the abysmal record of state-owned airlines the world over, consensus has finally emerged that governments have no business being in this business. Many countries have been exploring private sector ownership of their national airlines, and IFC Advisory Services in Public-Private Partnerships has worked on nearly a dozen such transactions. Some of these deals were successful; some failures; all were extremely difficult. The upside of IFC's vast experience at the sharp end of airline reform is that we can share the lessons learned. By Jae Mole & Bra Saue Phot © Kvin AIRLINES WATCH THE BOTTOM LINE (SLIP AWAY) The joke goes like this: How do you make a small fortune from airlines? You start with a large one. For a variety of deep-seated structural reasons, airlines have an amazing capacity to lose money. Some of the biggest problems include: * High fixed costs: The vast bulk of airline costs-fuel, staffing, capital costs-are fixed in nature and largely beyond management's control. * Overregulation: Bilateral agreements between governments prevent competition from functioning normally. * Leverage: National airlines invariably have excessive debt due to the exorbitant cost of purchasing aircraft plus years of unprofitable operations. In 2004, 70 percent of Samoa's budget deficit was due to losses at Polynesian Airlines. This served as a motivation for reform, but also a warning that success LESSON 1 would not be easy. USE YOUR POLITICAL CAPITAL Throughout the world, airlines are viewed as national treasures that deserve special prestige and a prime spot in a nation's heart. Working at an airline is seen as an honor, and government-owned airlines invariably become over-staffed by political appointees. With their fleets of old and uneconomical aircraft, most national airlines share three common characteristics: they are unprofitable, unreliable, and unsafe. In attempting to privatize under these circumstances, it is essential to have key champions within the government, and earn the confidence of the airline's management. LESSON 2 IFC | 55 CHEAP FLIGHTS MEAN MORE TRAVELERS Empirical evidence suggests that when a low-cost carrier (LCC) enters a market, : prices fall by an average of 20 percent over the first four years, resulting in traffic : increasing by about 50 percent over the same period. What does this mean for reforms? First, if reform brings competition to the aviation market, tourism numbers should grow, creating a powerful incentive for government to complete the transaction. In Samoa, although several hundred jobs were lost in the restructur- ing of the airline, an estimated 2,000 new downstream jobs have been created by new tourist arrivals-in a country with a total population of only 180,000. In three years, this transaction has taken several percentage points off the national unemployment rate-a significant impact. Enlisting support from other players in the tourism sector (hotels, travel operators, and the like) is an important way : of mobilizing support for reform. : The second lesson is that sometimes the most important consideration is not : the price at which the national airline is sold, but to whom. The strategic air- line partner must bring more to the table than just money-otherwise, the transaction may be completed, only to see the privatized airline go bankrupt LESSON 3 a few years later. COMPETITIVE BIDDING MAY NOT ALWAYS BE POSSIBLE It is international best practice for governments to implement reforms through competitive tenders. However, in the aviation sector there may be justification for suspending this rule. In airlines, the key objective is often finding a strong airline partner that can provide access to global networks and a lower cost base. The detailed terms are often more significant than the price paid, and are too voluminous and complex to encapsulate within a competitive bidding structure. In such situations, the country's interest may best be preserved by a process of "competitive negotiations" rather than by an outright bid. : LESSON 4 56 | IFC.ORG/HANDSHAKE DON'T BE AFRAID OF FAILURE Given the inherent economic difficulties of the global airline sector, plus the irrational attachment people and politicians have toward airlines, it is not sur- prising that more than half of all attempted airline privatizations globally have ended in failure. This is due primarily to a lack of "acceptable" buyers. Inevitably IFC has had its fair share of failures, even after customarily going above and beyond the call of advisory duty. We all have failures; the important thing is to learn from them. In Cameroon, IFC learned from its experience advising on the privatization of the chronically loss-making Camair. Against all the odds, IFC brokered a $15 million investment by SN Brussels to create a new national airline. The govern- ment ratified the deal; statements were released; everyone was happy. Well, not quite everyone: at the very end, the anti-reform faction within government played its trump card, cancelling the deal for a variety of trumped-up reasons. And so the cash cow Camair stumbled along, leaving a trail of missing millions under suspicious circumstances in its ever-widening wake. Lesson learned: LESSON 5: without a home-grown desire for reform, and a strong political champion, don't waste your time. Spread the GOOD NEWS TIhere have been many shining successes; all is not doom and gloom. Two of IFC's ground-breaking airline deals include: Kenya Airways Poly Blue Year 1995 Year 2005 Structure Sale 26% to KM subsequent Son Nairobi Exchange. Results Kenya Airways frequencies grew Rsls $. ilo oenetsb by 61%, developing Nairobi 0 o into a regional hub. Tour- ist arrivals grew 42% over 10 years. he airline has con- sistently been profitable, and is universally regarded as Kenyadsrvne numbers inrese 15%poannu-n AIRLINES The airline business is among the worst per- forming of any industry. In the last 10 years in the U.S., for example, the airline industry has cumulatively lost over $50 billion and numerous carriers have disappeared, either by bankruptcy or merger. Internationally, the picture is similarly gloomy, especially in mature markets like Europe. However, many countries around the globe continue to protect and support failing flag carriers that are often absorbing substantial amounts of public funds. Switzerland is a notable excep- tion, with lessons to teach the rest of the world. SWIS Lessons on letting go ofa national carrier 58 1IFC.ORG/HANDSHAKE Following the post-9/11 economic turndown, even when compared with the financial loss (not Swissair's assets lost value dramatically. The Swiss to mention the emotional sting) from the sale of national carrier was grounded in October 2001 Swiss to Lufthansa. and bankruptcy proceedings followed shortly thereafter. Most Swiss citizens and creditors were LETTING GO certain that the Swiss government would bail out the national airline-because that's what proud Most state-owned or legacy carriers that face governments do, right? financial troubles should not be considered for However, the Swiss government kept Swissair restructuring and/or privatization. They often alive r, have a complex history with many legal and was initiated. After that, the government funded the creation of the successor airline Swiss Inter- country, or passengers. Liquidation is usually national Air Lines ("Swiss"), which saw a former a better solution. It averts the problems that regional airline take over most of the former can come from existing generous benefits and Swissair's routes, airplanes, and staff. Three years an ckets fteo tse coe tot later, the new Swiss carrier was sold to Lufthansa, or ts nr,a d i the oto thare where it became the most profitable airline arlineosers the nt o mut fly w ith in th e g ro u p .co p a r wit th e f a a l oss ( n o The Swiss government chiose to let go of its to distant destinations, generating losses. national carrier because of the huge losses itaes th t e generated as a result of its complex and bulky Butoaltougher iqidtinumae te nmoss busnes stuctre.Swisaiowedultpleecnoicall therbes shonuld o be nsidereor ausi cSmuplted examples of failed privatizations or prolonged loss-making carriers, employed afunding of money-losing, state-owned carriers legal structure, and had taken on massive debt that absorb millions of dollars of public funds- to support its operations. Restructuring suchet t o e th an etit wa cosideed ar oo omplx,isk, cane which froulexisting generousen thern sectors. The Swiss government, faced with a and expensive. The fresh start that liquidation failing carrier, gave it wings to fly away, charting a course others should follow. t Photo © Mark Winterbourne r1C ski e Cs A look back at the airline experiment In Africa, poor roads, ports, and railway infra- By Charles E. Schlumberger structure often constrain the rapid and efficient Most of these African national carriers pursued transportation of export goods, as well as the a business model which consisted of using movement ofpassengers. The promise ofair profitable international routes to and from the transport includes a potential for growth and a territories of their former colonial masters to role for the economic development of the conti- cross-subsidize their costly yet extensive domestic nent by fostering trade and foreign investmnclts. rout network. This often resulted in the mainte- Though the intra-African market represents less nance of strict bilateral relationships on intercon- than one percent of the global market, African tinental routes, where capacity was limited and air rafic-itha ptental -naketof ore controlled, in order to maximize profitability. air traffic with a potential market of more The development of regional air services was seen than 12 percent of the world population-is as secondary, especially when a costly domestic expected to grow at 5.7 percent. But despite network had to be maintained. strong expected growth and a landmark liberal- izati10n algreement, somWe **l/@id matrkets Neetessfolwnthitrainl izaio ageeent smeintra -African mres example of the time, intra-African air transport still lack a true competitive environment. services also became regulated by the traditional ....................................... framework of bilateral air service agreements Prior to gaining independence, most African (bitaterals). The typical bilaterals of the 1960s countries' air services were based on European were based on the traditional-predetermination relationships and agreements. It was only in the model, under which market access and capacity early 1960s, when many former colonies became was predetermined. This model controlled the independent countries, that African states began market by effectively restricting competition. to negotiate and conclude their own agreements But although liberalization of air services has on air services. During that time, most of the been actively pursued in the U.S. and Europe newly independent African states also created since the 1970s and 1980s, African air services their own, mostly government-owned, national have remained generally restrictive, costly, and air carriers, many of which failed, inefficient. proitbl intrnaionlGruteAtoandfroKth FIN DING ITS WNING Sthfouonlbrlztogadlydeae. In the early days of African independence, air sinwsaotdn19,adAfcnmnser transportation was considered essential because repnilfocvlaitongedtoibaiz the existing road and highway network was acs oartasotmresi fia broken down into sectors that were distinct from each other. The road network was designed Hwvr nyafwcsshv enosre mainly to channel raw materials from theofteeecsofnwarrficigsrsuig interior to seaports, rather than being part of frmteY ouskoDcionThraos a network among countries to service regional wyrnefo o-mlmnaino eti development,.lmnso h eiin(o xml,etb However, also early on, the promise of African mcaim n noeainlmntrn air transport was threatened by dominating bd)t ipyinrn tb otnigt carriers from Europe and especially the U.S. This was because the main focus of African carriers in international air transport remained on intercon-Inrtopc,hetae ragyfcoeain tinental traffic, while the intra-African network aditgaino fia areswsdie remained far less developed,.oeb h edfrpa-fia oprto Gradually, the Economic Commission for maktfnirnet.Frte,chatae,ojc part of the United Nations' Economic and tvsadshmsamda ulitgaino Social Council, recognized that a new policy was teArcnartasotmre cmrsn needed to support the development of Africa's atlst4ofhe5Arinsaeswhnegt air transport sector. 'This eventually resulted in yas a noel miiu ol u ept the Lagos Plan of Action, which addressed the teoerahadwa ieiodo mlmn declining economic environment and the role oftainthYmosukoDcrtonetn the air transport sector in Africa. mto ute ntaie ie tlbrlzn This in turn initiated a stronger focus on the thAfiaartanptmrk,adgerly development of intra-African air services and enocdteoinwdlyhdtda:ht measures focused on closer cooperation among lbrlzto o h i rnpr etri African carriers, which later became the core Afiawsnetbl.( of the Yamoussoukro Declaration. Main tenets included a joint financing mechanism, coordi- Ecrtdfo pnSisfrArc:Ipe nation in scheduling air services, a centralized mnigteYmusur eiin(ol databank and research program, and the promo- Bn,21) tioniof the creationiof1sub-regionalicarriers.tBut repo silefo.ivl.vitin.gee.t.lbealz accsstoai.trnsor.mrkes.n.frca Howve,.nl.afe.cseshae.ee.oseve ofheexrcseofne.ar.rafi.rghs.esltn fro.te.amusouroDeison.Te.eaon why.range.from.non.implementation.o..certai ........elements.of.the.decision..(for.example,.estab. ...........lishing..competition..rules,.a.dispute..settlement ...............mechanism,...and..an.operational....monitoring. body).t.simpl.ignorng.it.b.contiuing.t agree...... to.ra itonl.esriciv.b laerls Inreropet,th.satdstatgyofcopeato and.nteraton.f.Arica.caries.ws.dive mor.b.th.nedforpa-Aficn.oopraio tha.te.ee.tocrat.amor.c mpt..v make nvrnmntA urR,thESedojc FINDNG ISWIGSyeas wacs an ovberlyzamtios godal.y Butrdepit In te ealy dys o Aficanindeendece,ta inl, themuhsn Yanoussoukro Declaainsti the xistng oad nd ighw ynewor wasremot in frhr cinitiaties am ed at liberalizn broen ownint setor tht w re istncthces Afrca air transport market an d geerall fromeachothe. Th roa netork asdsig enfHoreder on fwidaely hae teoay:rtha mainy tochanel awateralsfromtheoflib eraizatiof thew air transporigts eoring a neworkamon coutrie to erviereion Exceyrpne fom on-Sipees tto for Afia:Ipe-ti develpmen. elmentg the amoussoukror Decision (World Bean m an200).toalmoiorn tion ofcathe reain so rein carriers But international~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~F 61 rnpr eando ntro-I erset h tae taeyo oprto SU A 62|| FC.ORG/HANDSHAKE Photo©(DNorihito Nakae The aviation industry has a dispropor- tionately large impact on the climate system given its size: it accounts for four to nine percent of the carbon emissions responsible for climate change. The industry grew tenfold in the past 40 years, and according to the International Air Transport Association's (JATA) Vision 2050, in the next 40 years the number of passengers flying is expected to rise from 2.4 million to 16 million. Clearly, action is urgently needed to mitigate the impact of climate change. Some promising initiatives are showcased below. LOWERING CO2 * Biofuels. According to IATA, sustainable * Efficiency Southwest Airlines is the U.S. biofuels for aviation could reduce CO2 emis- Environmental Protection Agencys Blue sions 80 percent on a full carbon lifecycle Skyways Collaborative Partner and operates basis. The focus is on biofuels sourced from one of the most efficient fleets in the world. second or new generation biomass, par- Over 90 percent of its fleet is equipped ticularly algae. These fuels can be produced with winglets, and Southwest is in the sustainably to minimize impacts on food process of retrofitting its fleet with advanced crops and fresh water usage. avionics to support Required Navigational * Technology has the best prospect for re- Performance, the cornerstone of the U.S. ducing aviation emissions. The industry is Federal Aviation Administration{s Next making great advances in this area, including Generation Air Traffic Control System. revoutioaryplan deigns ne comos-Southwest also recently unveiled the "Green revolutionary plane designs, new compos-y ite lightweight materials, and radical new Plane," a test environment for the latest engine advances. The most recent example environmentally-friendly cabin materi- is Airbus' new A380 jetliner. The most als. The focus is on materials that contain environmentally-friendly commercial jetliner a high percentage of recycled content and in operation today, it has 20 percent less fuel lighter-weight products. This translates into consumption per seat, the result of a new reduced fuel consumption and increased fuel wing design and composite materials, efficiency. Source: LATA, Airbus, Southwest 1FC 1 63 CAN AIRPORTS HELP FIGHT CLIMATE CHANGE? Findings from a 2012 U.S. Depart- ment of Agriculture study indicate that airports possess unrealized potential for the production of alterna- tive energy. Airports are often surrounded by vast, empty areas of land where limits to wildlife preservation are not only acceptable but also neces- sary as wildlife pose risks to aircraft. There are over 44,000 airports in the world, many of them with substantial land available. Several airports have already implemented renew- able energy technologies to offset their own energy demand. At Fresno Yosemite International Airport in California, for example, 12,000 solar panels produce 4.2 megawatts of power, or 60 percent of the annual electricity consumption of the airport. And in Europe, Gatwick International Airport just became the first airport in the U.K. to install a solar array. The 50 kilowatt photovaltaic system installed just 150 meters from the main runway includes 212 panels that are expected to save 25 tonnes of CO2 a year with the electricity generated being used at the airport. Source: "Airports offer unrealized potentialfor alternative energy production,"Environmental Management (2012); Treehugger.com. 641 IFC.ORG/HANDSHAKE Delhi airport LEEDs Terminal 3 at Delhi's Indira Gandhi International Airport, which opened in July 2010, is the first airport terminal to earn a Leader- ship in Energy and Environmental Design New Construction (LEED NC) gold rating. A cutting edge construction, the terminal is the eighth largest passenger terminal and 24th largest building in the world. It has the capacity to handle 34 million passengers annually. The terminal consolidates under one roof the services previously offered at two different terminals. This will enable Delhi to complete as an international hub. Features that allowed Terminal 3 to win the certification include: * Energy efficiency and reduced CO2 emissions through a design that allows natural light to illuminate the center of the building, and decentralized cooling units. * Electric vehicles for moving travelers among terminals, and 215 electric charging stations installed in the parking facilities. " A water management and treatment program featuring more than 300 rainwater harvesting pits, which recharge Delhi's aquifer. * Use of materials with high percentages of recycled content. Delhi International Airport Limited (DIAL) is a consortium of the GMR Group, Fraport AG and Malaysia Airports, India Development Fund, and the Airports Authority of India. HOK and Mott MacDonald designed the project, which included renovating and extending the existing international and domestic terminals. The project has won several awards, including the Airport Service Quality Award from Airports Council International, Best International Project from the British Construction Industry, and Most Noteworthy New Terminal Design from Passenger Terminal World. Source and photo: HOKI Mott MacDonald ranson on ,.Innovator outlines the future ofsustainable air travel Sir Richard Branson founded % Virgin in 1970 as a mail order record retailer. Since then, the Virgin Group-200 companies in over 30 countries-has expanded into leisure, travel, tourism, mobile, broadband, TK radio, music festi- vals, finance, and health. Branson's vision to transform the airline industry by enabling planes to fly on renewable fuels prompted 2008's history-making Virgin Atlantic flight, when a commercial jumbo jet powered partly by biofuelflew from London to Amsterdam. Through the NJIDEO Virgin Green Fund, the company continues to invest in renewable energy and resource efficiency. ill 1 661 IFC.ORG/HANDSHAKE GREEN AIR In 2008, a Virgin Atlantic jumbo How do you respond to those jet made history as the first flight concerned that biofuel production by a commercial airline to be will have a negative impact on powered partly by biofuel. Why the environment and food prices are biofuels important to you, and worldwide? How sustainable are why is sustainability important for the initiatives you are pursuing? the airline industry? There are real sustainability concerns around There are a number of clean technologies and biofuels, which is why Virgin Atlantic is work- clean business solutions that I'm passionate ing with the Roundtable on Sustainable Biofuels about, but with regards to transportation and to require that the biofuels they purchase be air transport specifically, the options for reduc- certified sustainable. Some of the more advanced ing the environmental impact are somewhat technologies are enabling the production of fuels limited. With airplanes, it's important we make from waste. Virgin Atlantic is working with a air transportation more efficient but we also need wonderful company called Lanzatech, which sustainable biofuels since we won't have fuel cell produces fuels from steel mill emissions. or electric planes any time soon. People often say that your ideas You have invested heavily in bio- are far-fetched. What keeps you fuel initiatives worldwide. Last motivated when others say it can't year, you said that you aimed to be done? have 100 percent clean burning I've always loved a challenge. We absolutely fuels by 2020 and that the airline havetotransitionawayfromfossilfuels.There industry could become one of the are huge challenges facing advanced biofuels, cleanest sectors. How close are but also huge opportunities. Our airlines, the you and the industry to achieving Carbon War Room, and all our companies those goals? and partners are working hard to ensure the success of the most promising and sustainable The advanced biofuels industry is ready to take technologies. X off. The economic crisis has slowed and now the Photo @ Virgin Atlantic key challenge is the finances needed to build commercial scale production capacity. 1FC 1 67 7he loitics of TRD Byjoran . Schwart Economists and business analysts have employed every methodology imaginable- from gravity models to general equilibrium models, from freight flow simulators and regressions to supply chain analyses-to understand the impact of logistics bottlenecks on trade. The results are unambiguous: trade is impacted by logistics. The term "logistics" encapsulates the hard that govern the use of infrastructure and services. infrastructure in the transport networks-ports, These rules range from weight restrictions for airports, roads and rail, as well as the soft services trucks to customs clearance procedures, border needed to move goods-shipping, trucking, inspection, phytosanitary requirements, and freight forwarding, warehousing and inventory port tariff regulations, along with competition management, customs clearance and border and anti-trust rules that govern land and ocean crossings-over that hard infrastructure. The shipping and cargo handling practices. But still: hard and the soft elements of logistics are bound when there are so many basic challenges together by a third, more ephemeral, but equally to development, why spend time worrying important element: the rules and regulations about logistics? 68 1 IFC.ORG/HANDSHAKE LOGISTICS In many challenging markets, there is no access to finance for trade. This creates a gap between the funding needs of entrepreneurs and small business owners and what they are actually able to obtain in the market. Trade finance can fill this gap and facilitate global commerce at all stages of the supply chain, especially in developing countries. Logistics matters because of firms' competitive- punished by inefficient logistics costs. The Cen- ness and the ultimate impact on the poor. For tro Logistico de Latinoamerica found that firms years, the World Bank and other development with turnover of less than $5 million per year agencies have sought to understand the sources spend 42 percent of their income on warehous- of economic growth and poverty alleviation ing, inventory management, transportation, and to help client countries improve opportunities distribution costs, while larger firms spend closer for employment and citizens' quality of life. to 18 percent. ntuitively, we recognize some factors of develop- F developing countries spend two to ment-education, health, basic service provi- four times as much as firms in Organisation sion-as pillars of this struggle. Other factors are for Economic Co-Operation and Development more subtle, but also create the foundation for countries on logistics as a share of the final rice growth and poverty alleviation. Logistics is just of goods. g ogod.Logistics costs function like a regres- such a factor of development. sive tax in cases like these, hurting the poorest consumers and smallest firms the most. So for a A CLOSER LOOK variety of businesses of the developing world, a Logistics impacts firm productivity, drives eco- reduction in logistics costs would translate into nomic competitiveness, and determines the cost productivity gains and greater room for growth of delivered goods. A recent World Bank analysis and employment. found that the logistics costs of delivered food Now let us return to the question of why logis- products represent 20 percent to over 50 percent tics matters. For the poor, who may spend up to of the delivered price of food, depending upon 70 percent of their income on food, a reduction the product and the trade route-about seven in the logistics burden equals disposable income. times greater than tariffs on imported foods. As food imports soar as a share of consumption In fact, as traditional barriers to trade-tariffs for the poor, logistics bottlenecks often center and duties-have steadily declined across the around ports. This is where road meets rail and developing world in recent years, the physical both meet the ocean. At these ports, customs, cost of moving products has risen as a share of phytosanitary, and security inspections cross the final price of goods. Small companies- with bonded warehousing, storage, and cargo which are the engines of growth and the primary handling. At these ports, trailers find chasses and drivers of employment-are disproportionately containers are stripped, stuffed, and sent on their way to the people in need on the other end. 1FC 1 69 Photo @ Ayse Nazli Deliormanli By Georgina Baker &' Michael Kurdyla In many challenging markets, there is When companies trade, they grow. And when limited access to finance for trade. This they grow, they reinvest in the communities creates a gap between the funding around them by hiring new employees. But in needs of entrepreneurs and small busi- many challenging markets, access to finance ness owners and what they are actually for trade can be hard to come by, leaving a gap able to obtain in the market. Trade between the funding needs of entrepreneurs and finance can fill this gap and facilitate small business owners and what they are actually global commerce at all stages of the able to obtain in the market. supply chain, especially in developing Without adequate financing to support their countries. international trade, the small and medium enter- Trade is the lifeblood of economic development: ofisos in an emrin markets fc erious countries import and export food, raw materials orkin cat lmi ,ging teir and finished products, capturing the value of gr hnd even their sval. their financial, economic, and human capital in the process. 70 1 IFC.ORG/HANDSHAKE LOGISTICS WHY TRADE FINANCE? FUTURE PROSPECTS In the developed world, most goods and services Developing countries, especially those with are paid for after delivery. However, in emerging less-diversified economies, face growing threats markets, exporters demand third-party verifica- to the suppiy of credit provided by global banks. tion of creditworthiness and payment up front A recent International Monetary Fund report as soon as goods are shipped. Too often, though, noted that European banks, which provide banks are hesitant to provide financing to little- almost 80 percent of global trade finance for known companies in distant, riskier markets. commodities, may sell off as much as $3.8 tril- "When you are in Africa, no one wants to work n assets by the end of 2013 to meet stricter with you without a confirmed letter of credit," capital requirements under Basel 111. As belts says Ashu Gulati, group finance director at are tightened, trade loans and emerging market Synarge Group, an auto-parts importer in Dar portfolios are among the first assets cut, separat- es Salaam, Tanzania. The reluctance of banks to ing local firms from opportunities abroad. extend credit to successful businesses like Syn- But while European banks are withdrawing, arge dampens trade volume and stifles opportu- economists and politicians are looking at these nities for expansion-both at the firm level and same markets to lead the way back to sustained throughout the entire economy. global growth. The most effective way to stimu- Emeringmaret bsinsse tha loatenew late these economies is to ensure the continued Emerging market businesses that locate new customers overseas and find themselves short of availability of trade finance. export financing often have difficulty filling large As a group, developing countries have led global orders and paying for international shipments trade growth in each of the past three years - in because of their working capital constraints. many cases by looking to one another as trading Many local commercial banks have limited or partners. The World Bank projects that within no tailored financial products for suppliers and 10 years, goods shipped from one emerging exporters to finance sales not backed by letters of market to another will represent up to half of credit. all global trade, up from less than a quarter of IFC has stepped in to fill this gap through its global trade in 1997. Global Trade Finance Program, which since Trade finance is the engine of an estimated 2005 has grown to include nearly 500 confirm- $14 trillion in annual global commerce and is ing and issuing banks in its global network. fundamental to the movement of goods at all Through this initiative, which issued $5.9 billion stages of the supply chain, especially in develop- in trade guarantees in fiscal year 2012, IFC ing countries. Trade helps increase the size of the is expanding access to financing for emerging economic pie, providing the most direct route to market firms to promote job creation and spur growth and prosperity-whether for individual economic development, firms or for entire economies. Trade finance is essential to make that happen. n 1FC 1 71 Simple, accountable, a-nd efficien trade procedures support economic growth; create jobs, attract private investment, and promote trade. Re- forming existing trade procedures is particularly important for countriest facing economic challenges. ibteria's government workktwith IFC 's Trade Logistics Advisory program to reduce 'and cut cumber,ome and redundant16 import and export procedures. Throughout the process, ibterian Customs idenuified the components necessar for successful trade logistics reforms. 72rl'F. f.HANDSH Fourteen years of civil conflict has devastated Liberia's economy, as well as its public finance and physical infrastructure. Now, the country depends on food and fuel imports, but is currently increasing its exports of natural resources. International trade accounts for over one-third of the Liberian economy, and it is essential for the country to continue to find ways to attract foreign direct investment and stimulate local growth. To support these objectives, officials have undertaken the following reforms. Between 2008 and 2011, Liberia's government reduced: * Customs user fees by half, from 3 percent to 1.5 percent. * Economic Community of West African States trade levy from 1 percent to 0.5 percent. * Luxury taxes on vehicles. * The number of security agencies at the main port. abolished * Vehicle import permit clearance. * Collateral requirements for vehicle imports. * The tallying of container discharge with ship manifest. * Ministry of Agriculture import/export permits. * Forestry Development Agency export licenses. introduced * Shift work for customs officers, and new extended hours for its main port. * Document approval at the port and not the ministry, requiring fewer signatures. * Single location clearance for cargo preliminary risk- based inspections, doing away with 100 percent import checks. * Border cooperation with the Guinean customs service. Through simplification and harmonization of procedures, intro- duction of risk management, and automation and improvement of border clearance procedures, the number of days to export from Liberia was reduced from 20 days to 15 days from 2008 to 2012. The time to import to Liberia was reduced from 17 to 14 days during the same period. Photo @ St. A IFC 173 The 4 C's As with any change, clear communication is essential for a successful reform pro- cess. It is particularly important in trade reforms, given the many agencies involved in import and export processes. Communication campaigns that highlight the benefits and possible savings from reforms will minimize resistance to change. Lack of clear and concise communication may lead target audiences to assume negative consequences of the reform and increase their resistance to change. Communications outreach is not a one-time, one-size-fits-all undertaking. Con- tinuous training and ongoing campaigns to raise reform awareness in the business community will ultimately ensure adaption of and commitment to new processes. .... - ..... ..... C O M M I I I NT . Successful reformers typically share a common characteristic: strong political and financial commitment from the highest level of the government, which drives the reform process in partnership with private sector stakeholders and trade practitio- ners. These approaches must bring together actors from across the political spec- trum, as well as from the industry and trade sectors, in order to ensure sustained momentum for reform across administrations. In Liberia, sustained political support from key senior government officials, includ- ing the minister of finance and key regulatory ministries and agencies, has been key to reform success. The public and private sectors were mobilized through the creation of the Trading Across Borders Working Group. The group identifies and implements reforms, meets regularly to discuss timely and efficient implementation of trade logistics reforms, and helps ensure stakeholder commitment. 741 IFC.ORG/HANDSHAKE COSITENCY Consistent application of laws, regulations, and procedures is necessary to build trust and promote compliance in the private sector, while enhancing transparency in trade transactions processes. Compared to large firms, small and medium enter- prises are more affected by inconsistencies and lack of transparency in systems and services. Information technology solutions can help make trade logistics processes more consistent and transparent, as well as more efficient. *.. . . . . - _ _ _ _ .. .. -- .. . . . ....... C- 0 LLB RATION Common standards and removing barriers to cross-border and interregional trade translates into new or more open markets for trading goods and services. Traders that deal with border crossing procedures in several countries with little harmoniza- tion are faced with particular challenges. For example, in Rwanda, cargo moving in and out of the country usually passes several border crossings before reaching its final destination. Regional and international collaboration may contribute to improved logistics infrastructure and services which will attract investments and improve trade. Although trade logistics reforms can be challenging, the potential benefits are sig- nificant. According to recent research, even a 10 percent reduction in time to export and import potentially increases trade in Sub-Saharan Africa by over 6 percent, and in South Asia by just under 6 percent. It can also enable significant savings for private firms through reduced charges, lower inventory levels, and fewer incidents of pilferage and damage. IFC 75 FAST FACTS CO2 (in grams) emitted per metric tonne of freight per km of transportation Aircraft 500-950 (air cargo) Modern ship (sea freight) P 10-40 mm Minimum emission Maximum emission Source: The Low Carbon Leaders Project, developed under the umbrella of the UN Global Compact's Caring for Climate Initiative and in cooperation with World Wildlife Fund. of global CO2 emissions created by the are created by transport with airline industry. of world trade is carried by the One large 9 l0% international ship emits as 90 % shipping industry. much sulphur as 50 million cars. Average lifespan: 1 YEARS 30 YEARS Sources: A. P Moller Maersk Group, Dailymail. co uk, IATA, International Energy Agency, International Maritime Organization, andWired. 761 IFC.ORG/HANDSHAKE Subscribe: ix fc.org/handshake Connect with us: f facebook. co m/if cinf rastru ctu re twitter. co m/ife_a dv iso ry S. scrb.cmipp FSC* Recycled International Finance Corporation July 2012 World Bank Group "CTransport is one of the key sectors that play crucial roles in achieving goals in poverty eradication and sus- tainable development. The transport sector is very much linked and influ- ences development in other sectors of the economy. Indeed, it affects attainment of all eight Millennium Development Goals.)) -United Nations Economic and Social Council for Africa IFC 77 Subscribe: ix fc.org/handshake Connect with us: f facebook. co m/if cinf rastru ctu re twitter. co m/ife_a dv iso ry scribdds.cokmifpprp S. %C:12N- CH International Finance Corporation July 2012 IN a World Bank Group